Mining powerhouse Xstrata (XTA) wants to replace Lonmin's (LMI) board and management team and overhaul its business plan following the platinum miner's $817m (£513m) rights issue.
Lonmin's share price has fallen nearly 85 per cent over the past two years. Yet shareholders voted 91 per cent in favour of the rights offer and on Tuesday the shares began trading ex rights after the admission of 365m new shares (increasing the company's outstanding share count by approximately 180 per cent). That's because without the recapitalisation plan, Lonmin would have quickly breached its old debt covenants and possibly even defaulted on net borrowings of $550m.
But there's no such thing as money for nothing. Upon learning of the rights offer, Xstrata, Lonmin's largest minority shareholder, first tried to take control of Lonmin via a reverse takeover and then stated it wouldn't support the share issue unless Lonmin ceded management control to its own hand-picked team.
Daringly, Lonmin called the Anglo-Swiss miner's bluff and rejected both proposals outright. Knowing its investment would be worth little or nothing if it didn't support the rights offer, Xstrata conceded, but cautioned in a press release it will be "seeking change to the board and management promptly following completion of the rights issue". Xstrata chief Mick Davis reiterated the company's position by stating: "We cannot passively lend our financial support to a strategy that we believe is flawed". He said the company is prepared to call a general meeting of shareholders to make the changes should Lonmin refuse to co-operate.
Lonmin's board has not yet capitulated to Xstrata's demands but admitted it "will reflect on the comments made by all shareholders during the rights issue process".
There is certainly an argument to be made for Lonmin agreeing to an executive-level overhaul. Xstrata's management and operations team is widely regarded as one of the best in the world, and after the difficulties and value destruction Lonmin shareholders have endured these past few years, an executive shake-up would be welcomed by many.
Indeed, it seems likely some compromise will soon be made or forced through and this could dramatically alter Lonmin's faltering business strategy. It has been trying to increase production at its mines for years in order to lower operating costs by benefiting from economies of scale. But this requires a large increase in spending and investment, something the company doesn't have enough money to effectively carry out even after the recent rights issue.
