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Lonmin Rejects Xstrata Reverse Takeover for Lacking Premium

Lonmin Plc, the third-largest platinum producer, rejected two proposals by 25 percent shareholder Xstrata Plc, including a reverse takeover that would have seen Lonmin take on Xstrata’s platinum assets.

The Xstrata offers “had the effect of transferring effective control without an appropriate premium,” Chairman Roger Phillimore said today. Xstrata suggested on Oct. 12 Lonmin buy its platinum and alloy assets in South Africa and hold a $1 billion share sale fully underwritten by Xstrata, which would then own about 70 percent of Lonmin, he said.

Lonmin today reported a loss of $698 million for the fiscal year ended September. The Johannesburg-based company is offering investors $817 million of stock to help meet pledges to creditors as it restarts the Marikana mine, shut by a violent strike that claimed about 46 lives. Lonmin doesn’t know whether Xstrata will take up its share of the offer, acting Chief Executive Officer Simon Scott said.

“Xstrata’s participation in the future issue is not a certainty, but the recent offers suggest a conviction to remain in the business,” Liberum Capital Markets Ltd. said in a note. “If they do not subscribe they reduce their holding from 24.5 percent to 8.8 percent.”

The issue of nine shares for every five held is fully underwritten and priced at 140 pence, Lonmin said. That’s a discount of 69 percent to yesterday’s closing price of 452.8 pence and a 44 percent discount to the theoretical ex-rights price, Lonmin said.

Cut Debt

Proceeds will partly be used to cut debt that more than doubled to $550 million from Sept. 30 last year to Oct. 31. Lonmin rose 0.6 percent to 455.3 pence at the close in London, valuing the company at about 925 million pounds ($1.47 billion), after earlier falling as much as 5.8 percent.

The discount in the offer exceeds Investec Ltd.’s estimate of 50 percent, it said in a note. Lonmin has to sell more equity to black investor groups to meet South African requirements and that could “result in further dilution to existing shareholders,” BMO Capital Markets Ltd. said.

“Xstrata is likely to take a longer-term view on Lonmin and to support the issue, but we still think the shares will fall when investors wake up to the financial strain on the business,” John Meyer, an analyst at SP Angel Corporate Finance LLP, said in an e-mailed response to questions.

Second Proposal

Lonmin also yesterday rejected a second proposal from Xstrata in which the Zug, Switzerland-based company offered to support a rights issue on condition that Lonmin’s executive directors are replaced, Lonmin said today. Xstrata would have provided management services to Lonmin under the deal. Even so, Lonmin is “open to approaches,” Scott said.

Both Xstrata proposals “had the potential effect of destabilization,” Phillimore said.

Xstrata, whose South African alloys unit includes the world’s largest ferrochrome producer, said in a statement that Lonmin has “suffered longstanding operational problems and we are concerned that the business does not have the management capabilities to ensure a sustainable future.”

Lonmin management rejected Xstrata’s proposals “without substantive engagement,” and Lonmin has never proposed an effective answer to its management problems, Xstrata said. The Swiss mining company is “open to constructive solutions to strengthen Lonmin’s management and operational capabilities,” it said.

Olive Branches

Lonmin left “olive branches, we left invitations to continue discussions,” Phillimore told investors on the conference call. It doesn’t seek an adversarial relationship with Xstrata, he said.

Lonmin is the worst performer on the FTSE 350 Mining Index in the past six months, having lost half its value. It has declined 90 percent since its 2007 record and is trading at levels last seen in 1999.

“The sector as a whole is currently trading at price-to-book levels last seen in the early 1980s and late 1990s,” Paul Whitburn, an analyst at RE:CM, said in a note yesterday. It’s “offering the type of buying opportunity that only comes along once every decade.”

The walkout at the Marikana mine from Aug. 10 to Sept. 20 cut 110,000 ounces of output valued at about $170 million. Workers returned after accepting pay increases of 11 percent to 22 percent. Police shot dead 34 on the strike’s worst single day of violence on Aug. 16, killings that are the subject of a judicial inquiry that started Oct. 1.

Production Drops

Full-year refined platinum production fell 6 percent to 687,372 platinum ounces, the company said Oct. 30.

Labor unrest spread to Anglo American Platinum Ltd., the largest producer of the metal, as well as to South African gold, coal and iron ore operations. The stoppages shaved 50 basis points off the country’s economic growth, Treasury Director General Lungisa Fuzile said Oct. 26. Strikes that started more than eight weeks ago at Anglo’s platinum mines continue.

“This is going to be a long haul for the company and it is not clear that despite high wage settlements that the company will not be held to hostage by its work force in the future,” Meyer said in a separate note today.

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