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Rebuffed by larger rival, Xstrata eyes Lonmin

This is an undated handout photo of work at a Lonmin open cast mine in South Africa.

The mining world's great white shark - Xstrata PLC - is on the verge of another feeding frenzy, signalling that the industry's merger lull is about to come to an end.

That, at least, is what some analysts believe. Xstrata's target this time is said to be Lonmin PLC, the world's third-largest platinum producer. Takeover rumours, analyst upgrades and media speculation about a deal lifted Lonmin's shares by 9 per cent Friday. They were up almost 6 per cent Monday, valuing the London-listed company at just above £3-billion ($5.28-billion).

Xstrata said it does not comment on "market speculation."

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The Anglo-Swiss mining company already owns 25 per cent of Lonmin; it had bid for the entire company a year ago, just before the financial crisis forced it to abandon the takeover attempt. Under United Kingdom Takeover Panel rules, Xstrata will be free to launch a new offer in October at a lower price than the £33 a share it pitched in 2008. Lonmin shares now trade at half that level.

Analysts say it makes sense for Xstrata to bid for Lonmin, which began life in 1909 as Lonrho - the London and Rhodesian Mining Company - but only if it decides to end its pursuit of mining giant Anglo American PLC. Two months ago, Anglo rebuffed Xstrata's £42-billion "merger of equals" proposal, one that was pitched with no premium.

"It makes no sense for Xstrata to stay at 25 per cent of Lonmin," said Charles Kernot of London's Evolution Securities. "They need 100 per cent or zero."

Buying Lonmin would make an Xstrata merger with Anglo all but impossible because, together, the three companies would control well more than half of the global market for platinum, the expensive metal used in cars' catalytic converters and in jewellery. Antitrust authorities would be sure to stop the deal or demand asset sales that might make the deal unappealing for both sides.

An executive who knows Xstrata said he doubts Xstrata chief executive officer Mick Davis is ready to give up on Anglo, a company he has coveted for years.

"Mick is chasing the whale, not the sardine," he said.

But Anglo CEO Cynthia Carroll, a former Alcan executive in Montreal, branded Xstrata's approach as "totally unacceptable" and has shown no interest in entertaining the merger idea.

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Analysts agree that mining is poised for a flurry of deals whether or not Xstrata pounces on Lonmin. That's partly because metal prices are up by about two-thirds this year, improving cash flows, and because the healthier companies have better access to the debt and equity markets than they did last winter, when the credit crisis was in full swing.

Rio Tinto, the world's third-largest mining company, sold $15.2-billion (U.S.) of shares in July. Luc Pez, a mining analyst in Paris with Oddo & Cie, expects mergers and acquisitions to pick up momentum, but doubts the industry heavyweights - BHP Billiton, Rio Tinto, Anglo American, Vale - will dominate the takeover agenda. The action, he said, will be concentrated in the medium- and small-size companies, such as Lonmin, Alcoa, UC Rusal and Freeport-McMoRan.

"The M&A story is moving but it is likely to focus on the tier two and tier three assets because it's very hard for the biggest companies to overcome the antitrust and nationalism issues," he said.

The deal making has already started. Last month, Canada's Eldorado Gold agreed to buy Australia's Sino Gold Mining in an all-share bid valued at $2-billion (Canadian).

China, analysts say, will figure prominently in any merger activity because Chinese mining companies are backed by a government with a $200-billion (U.S.) sovereign wealth fund. Three months ago, China Minmetals acquired Oz Minerals for $1.4-billion.

About the same time, Vancouver's Teck Resources Ltd. sold $1.74-billion (Canadian) of class B subordinate voting shares to China Investment Corp.

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In another deal, Yanzhou Coal, China's fourth-largest coal mining company, agreed to buy Australia's Felix Resources for about $3.5-billion Australian ($3.2-billion Canadian).

According to data compiled by Bloomberg, the value of mergers and acquisitions in the mining, metals, coal, iron ore and steel sectors rose to $19-billion (U.S.) in the third quarter of this year from $16-billion in the second quarter.

Analysts expect a lot of activity among the smaller companies, many of which are in a financing black hole and need to recruit buyers to stay in business.

"Survival is driving a lot of the consolidation out there," said Mr. Kernot of Evolution Securities.

One company that mystifies analysts is BHP, the world's biggest mining company. Last year BHP withdrew its effort to buy rival Rio Tinto, a merger that at one point would have been valued at $400-billion. During the financial crisis, BHP could have bought virtually any mining company in the world, but sat on the sidelines.

"BHP is paralyzed," one mining executive said. "It's the Chinese now who are buying anything that's moving."

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About the Author
European Columnist

Eric Reguly is the European columnist for The Globe and Mail and is based in Rome. Since 2007, when he moved to Europe, he has primarily covered economic and financial stories, ranging from the euro zone crisis and the bank bailouts to the rise and fall of Russia's oligarchs and the merger of Fiat and Chrysler. More

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