THE struggles at Lonmin have battered the company’s valuation over the past week, over and above the general weakness in the platinum sector over the past couple of years as the metal struggled to gain any sort of upward momentum.
Talk of nationalisation too has done little to encourage any investment.
There is a R70bn gap between the world’s second-biggest platinum miner, Impala, and Lonmin, which occupies third spot. Anglo’s platinum unit, Anglo American Platinum, is the largest producer and is valued at almost R100bn more than the miner whose name will forever be tarnished by the Marikana tragedy last week.
While the events have no doubt further dented South Africa’s already poor image as a mining destination — despite the $2-trillion-worth of mineral wealth under its soil — the fact is that the sell-off in resource counters, and in particular platinum, from a value point of view, is attractive.
London-based Xstrata bailed out of a proposed $10bn bid for Lonmin in 2008 as it could not get enough support, settling instead for a 24,59% stake. In dollar terms, Lonmin is valued at about $2bn.
Just looking at those numbers, it seems a foregone conclusion that Xstrata CEO Mick Davis, who is said to have platinum as religion, will be thinking of making another play for the troubled miner. However, analysts say he has a lot less South African religion in him.
As a mining destination, South Africa has through poor political leadership in an already softening commodity cycle become a much riskier place to invest in. Resource stocks are actually rewarded for decreasing their exposure to the country.
In such an environment and despite the bargains that may exist in the platinum and other mineral sectors, Davis would find it very hard to convince his board and shareholders to make another play for the miner — which some analysts say may have to make a rights offer soon to service its debt.
While those analysts may be getting ahead of themselves, if it is true, a Lonmin rights issue would provide the opportunity for Xstrata to strike.
On Tuesday, the company said it was reviewing all options available to strengthen its financial structure‚ including possible access to the equity capital markets.
The Marikana tragedy, which highlights the grassroots problems of underdelivery by the government, will make board approval, let alone from shareholders, for a bid for Lonmin very difficult.
The politics of South Africa is now really hurting the country as an investment case, especially in a sector that could ease the problem of an unskilled workforce.
But a decision to bid for Lonmin may not lie solely with Davis and his board. There’s a potential "merger of equals" on the cards with Glencore and Xstrata. Shareholders decide on the deal next month.
If the deal is approved — no matter how unlikely it may look in Wednesday’s Financial Times — Glencore CEO Ivan Glasenberg has a different view of South Africa. In Tuesday’s conference call he was pro-South Africa and very proud to mention that while his rivals weren’t investing, he was in coal. The key differentiator is that Glasenberg isn’t as big a fan of platinum. So even if the proposed merger between the two does not go ahead, as a shareholder in Xstrata he may prove an obstacle if Davis does have an appetite to make a play for Lonmin.
Glencore owns about 34% of Xstrata.
Initially, as I ran through Lonmin’s valuation in comparison with its peers on the back of a plunging share price, I believed that at its current valuation there must be a handful of potential suitors. I mean, close to 80% of world platinum production comes from South Africa and Zimbabwe, and Lonmin is the third-biggest producer. Normally, bankers and lawyers should be salivating at the prospect, calling management with various proposals.
As a significant shareholder and a former interest acquirer, I figured Xstrata was more than likely to be the number most would be looking for. But after writing this piece, I’m not too sure there is any appetite.
Given the importance of mining to the future of the South African economy, one would hope that all stakeholders make sure that the tragedy becomes a watershed moment for labour relations for the entire industry.
If relations deteriorate even further and the risk of more skirmishes rises at other platinum mines and even gold mines, a bid for a piece of the South African commodity story as a whole will prove a hard sell for boardrooms in Johannesburg, London and New York. It’s an emergency, people.
Exxaro, which has recently spoken of its interest in entering the platinum sector, must be thinking again after Marikana.
More in this section
- SABC presenter Mbuli hailed as patriot and ‘zealous newshound’
- Guptagate report shows manipulation, collusion and illegal blue lights
- Iran ‘behind US cyber blitz’
- There just may be glitter in gold shares
- Sanral ‘refuses’ to disclose Winelands toll costs, says City of Cape Town
- Gym chains move up, down and into Africa