September 15, 2008

Xstrata Waits As Lonmin Stock Dips Dealtalk

By Eric Onstad

The mine operator Xstrata is happy to sit back and let shareholders of Lonmin fret about whether Xstrata will make a formal offer as Lonmin's shares dip below the indicated offer price worth $10 billion.

Sinking platinum prices and volatile mining shares have raised questions about whether Xstrata might walk away from Lonmin, the world's third-biggest platinum miner, after Anglo Platinum and Impala Platinum. British takeover regulators have set an Oct. 2 deadline for a decision by Xstrata.

But analysts and fund managers think that Xstrata, which has passed up an opportunity to buy more Lonmin shares on the market at its proposed offer price of pound(s)33, or $59, is merely playing a shrewd game and will end up making a formal offer.

"The best is to let the market sweat as much as possible. Everybody gets nervous; the more people get nervous, the more shares they will eventually get," said a hedge fund manager with a Lonmin holding.

"When you come out with your 'put up or shut up,' that's when you strike," he said, referring to the British takeover panel's demand for Xstrata to decide whether to make a formal offer.

For weeks after Xstrata announced its proposed offer on Aug. 6, Lonmin traded at a premium to the pound(s)33 a share offer price as rumors circulated about possible rival bidders and as Lonmin rejected the approach, arguing the company was worth much more.

Some investors were relying on Xstrata to sweeten its bid to head off any rival bids or to gain a recommendation from Lonmin. But when no rivals materialized and several prospective bidders denied any interest, the price dipped below pound(s)33. It closed at pound(s)30.40 on Friday, after moving as low as pound(s)28.77 on Thursday.

Xstrata had made it known that it was ready to buy more shares at the offer price of pound(s)33 a share and had built up a stake of 10.7 percent, but stood back as the price moved lower.

"This was a smart move by them, as they have changed the mentality of the institutions from one where they are holding out for a bump to one where they are begging for a confirmed bid," Michael Rawlinson, an analyst at Liberum Capital, said.

Speculation has surfaced that one hedge fund offered its Lonmin shares to Xstrata, but was turned down. An Xstrata spokeswoman, Claire Divver, declined to comment on that report and the company's intentions, but she confirmed that Xstrata had not been buying more Lonmin shares.

Even though the price of platinum has tumbled 42 percent during the past two months, hitting the margins of platinum producers, Xstrata is likely to see this as an opportunity rather than being scared off, Rawlinson said.

"We feel Xstrata will look through what they see as a temporary slide in prices," he said.

In retrospect, the decision by several fund managers to accept Xstrata's pound(s)33 proposed offer when it was announced Aug. 6 looks like a clever move, Tom Gidley-Kitchin, an analyst at Charles Stanley, said. "There were some quite large shareholders who sold out on the day of the offer."

According to a regulatory filing on Aug. 7, the asset management firm BlackRock sold 3.2 million shares at pound(s)33 a share and 148,502 more shares at just more than pound(s)34.

If Xstrata makes a formal bid, it is likely to be a conditional offer that would not go out to shareholders until it received competition clearance from South African regulators, according to industry analysts. This could take many months, they said.

Originally published by Reuters.

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