Xstrata’s Bid for Lonmin Is Good News for Platinum Names

by: FP Trading Desk

Xstrata plc’s (OTC:XSRAF) $10-billion (£5-billion) bid for Lonmin plc (OTCPK:LNMIY) and its track record of deals with juniors to consolidate projects is encouraging news for several platinum group metals [PGM] names. Among them are TSX-listed Eastern Platinum Ltd. and Platmin Ltd. (PLNLF.PK), along with Platinum Australia Ltd. (OTC:PTNMF) and Ridge Mining plc (OTC:RDGMF), RBC Capital Markets analyst Leon Esterhuizen told clients. He highlighted Lonmin’s 20.9% ownership of South Africa’s Platmin, which has one project that comes into production in early 2009 and another beside a Lonmin project.

Xstrata’s hostile offer comes after its purchase of 8% of the platinum miner. And while the price tag represents a 42% premium to Tuesday’s closing price, Lonmin’s operational difficulties have hurt its valuation. But platinum prices are high and given its rarity and demand from the auto sector, they should rise further.

The fact that the offer is all-cash suggests Xstrata sees value in its current bid, according to Mr. Esterhuizen, suggesting there is room for a larger premium. Lonmin said it is an “opportunistic and entirely unwelcome attempt to acquire Lonmin at a price which undervalues its unique assets.”

Xstrata does not expect to encounter any regulatory or competition issues. Meanwhile, no other major miners seem suitable for such an investment and Brazil’s Vale may just want to hold off and buy Xstrata outright, the RBC analyst suggested.