Avoid Lonmin (LMI:London) After Xstrata (XTA:London) Refusal

Posted August 7, 2008

"This isn’t good news for the platinum miner, which says it’s being grossly undervalued and Xstrata is just taking advantage of the recent slide in commodities prices to lowball Lonmin." — Stephanie Grimmett

by Stephanie Grimmett

Baltimore — (TFN): Xstrata (XTA:London) is loooking to buy, and it’s not too particular about how.

The British-Swiss mining company was just turned down in its initial 5 billion pound ($9.8 billion) bid for the world’s third largest platinum miner, Lonmin (LMI:London), but Xstrata remains undeterred. In fact, it made a deal with several of Lonmin’s investors last night and bought out 8% of the company.

This isn’t good news for the platinum miner, which says it’s being grossly undervalued and Xstrata is just taking advantage of the recent slide in commodities prices to lowball Lonmin.

Granted, commodities prices have fallen, and Xstrata is probably using the current lull to make a cheaper bid, but that doesn’t mean the platinum miner is worth much more than the offer.

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Lonmin just cut its production forecasts for the third time this year due to safety stoppages from accidents and a furnace shutdown. Plus, let’s not forget that the company’s mines are in South Africa, where electricity suppliers have decided that, instead of highering more trained workers, they’ll simply let power become hit or miss for the foreseeable future. And you can’t operate a platinum mine without electricity… well, you can, but it slows down the digging process considerably.

Lonmin is determined to try out a bunch of ideas from its shiny new management team, who’ve promised to turn things around at the company. But if those fail, which it looks like they may, Xstrata may be the platinum miner’s best option. And perhaps coming in a little underweight on price now beats what the company could sell for after another year of sliding production and expensive changes… or after Xstrata has managed a hostile takeover by making deals with the platinum miner’s major investors.

Lonmin should seriously consider stepping up to the bargaining table with Xstrata, but I don’t think it’s going to anytime soon.

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