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It's little surprise that Xstrata has walked away from its mooted £33 per share bid for Lonmin, given that the platinum price has dropped by a third during the past month to £1,000 per ounce. Even the unceremonious ejection of Lonmin chief executive Brad Mills - a patent sop to the previously-snubbed suitor - could not rescue the deal. Lonmin shares were already down to 2270p before Xstrata’s announcement, and are currently at 1890p, having almost halved within a month.
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Xstrata has kept its options open, however, as it chose to boost its holding on the open market to 24.9 per cent, leaving its average cost per share around 2545p. This blocking stake leaves it in prime position to make a counter-offer should anyone else be tempted to pick up Lonmin in the coming six months, during which Xstrata itself cannot bid unless there's a competitive situation.
There's no guarantee anyone will come in for the troubled platinum miner - Blue Oar analyst Alison Stent reckons that at $1000/oz platinum, Lonmin will only be breaking even. All of which throws into sharp relief the fact that many current City estimates for platinum miners are based on long-term platinum prices in the $1500-$1800 range. That implies earning estimates placing producers such as Lonmin and Aquarius on superficially attractive PE ratios are highly suspect. As one anonymous analyst said of his platinum price projection: "I've hidden under the table and tried to ignore it."
Ms Stent was notably more bearish than her peers even before the white metal's recent collapse, and is not changing her long-term price projection - applying from the beginning of 2009 onwards - of $1300/oz. If platinum remains markedly below this, then some of the 800,000oz of additional production she sees coming from junior miners by 2012 will be uneconomic and will disappear, eventually pushing prices higher again.
See also:
Withering hopes for commodity bulls
Platinum juniors look to consolidate
Xstrata tries platinum pick-up with Lonmin
White-hot platinum set to lose its lustre
Lonmin and Aquarius as high enough. Aim-quoted Ridge Mining, at 49p, looks best-placed to thrive in the new platinum reality. It's fully-funded for its Blue Ridge project, which is almost in production, and as a shallow-depth underground mine is less exposed to fuel costs and South African power outages. Cash operating costs were previously estimated at $623 per oz, and a fifth of platinum production is forward sold at around $1990 for the next four years.
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-IC-1.5.4a-prod - 31/10/2008 13:11:34 - carlos.princz
