By Stuart Burns
Some members of the press (including us) have covered Glencore Xstrata’s (OTCPK:GLCNF) positioning of two senior division heads Gary Nagle, the boss of its alloys division, and Paul Smith, head of strategy and communications as non-executive directors on platinum producer Lonmin’s board as the merged mine-to-markets company taking control with a view to sell out.
Glencore inherited Xstrata’s platinum assets when it acquired Xstrata in May of this year. The combined company’s platinum assets include a 25% stake in the world’s third-largest primary platinum producer, Lonmin PLC, and a 74% stake in Eland, another platinum-producing asset in South Africa.
Referring to Chief Executive Ivan Glasenberg’s advice that the company’s platinum assets aren’t core to its business, the suggestion is that Glencore is about to unload the stake as a result – but we wonder whether this is a realistic picture.
The firm’s holding in Lonmin represents a sizable chunk of cash; for an owner-managed business like Glencore, that represents an investment that needs to be understood and, where possible, actively managed to maximize value and reduce potential risks.
How Glencore Sees Lonmin: Non-Core vs. Non-Value
Lonmin has its challenges, not least its worker relations in South Africa, but it also has enormous potential value – value that at the moment is poorly reflected in the share price, due to both the problems in South Africa and also the wider malaise in the platinum group metal [PGM] market.
There is no question Glencore will divest its holding. The philosophy running through the entire organization is one of total ownership of the supply chain from mine all the way down to refined-product consumer, facilitated by the firm’s sophisticated marketing division. Glencore has no PGM marketing operation to speak of, and as such, platinum is non-core – simple as that.
However, that doesn’t equate to non-value. The firm’s labor problems notwithstanding, the underlying platinum market has plenty of medium-to-longer term upside that should see Lonmin worth much more in a year or two than it is now.
RBC Capital Markets agrees, saying PGMs in general have strong medium- to long-term fundamentals; the platinum market is in a small deficit and, even on the last year or so of lackluster automotive demand, is likely to stay in deficit for the next few years.