Xstrata makes US$10 billion bid for Lonmin

Anglo-Swiss mining giant Xstrata PLC said Wednesday it was making a US$10 billion cash offer for Lonmin PLC, the world's No. 3 platinum producer. The move sent Lonmin shares soaring 47.7 percent to 34.25 pounds (US$66.92) on the London Stock Exchange, but the company immediately rejected the offer as not high enough.

"This is an opportunistic and entirely unwelcome attempt to acquire Lonmin at a price which undervalues its unique assets," Lonmin said in a statement.

The London-based company urged shareholders not to sell, adding it would make further announcements shortly.

Analysts said Lonmin would struggle to fend off a hostile takeover unless another bidder came to the rescue.

Xstrata was offering US$33 for each Lonmin share, which it said was a 42 percent premium over Tuesday's closing price. Zug-based Xstrata bought 8 percent of Lonmin's shares late Tuesday, while they were valued at 23.19 pounds (US$45.33).

The offer came as Xstrata reported profits of US$2.75 billion, or US$2.87 per share, in the first half of the year. The results represent an 8 percent drop in profits compared to the year-earlier period.

Xstrata CEO Mick Davis said the bid for London-based Lonmin "marks the next step in our strategy to develop a significant platinum business and add further scale and diversification to our portfolio."

Platinum is used in jewelry and for catalytic converters in automobiles. Expectations of growing demand in China for the precious metal led prices to surge from about US$1,225 per troy ounce a year ago to US$2,250 per ounce in February. Prices have since fallen under US$1,600 again.

All of Lonmin's mines are in South Africa, where 77 percent of the world's platinum is extracted.

Lonmin has struggled to fully exploit its mines and the recent high platinum price, Xstrata said.

"Xstrata believes that Lonmin's operations are attractive, but that a significant transformation of operating and management practices is required to return Lonmin to its former growth trajectory over time," it said.

One minining analyst, Simon Toyne of Numis Securities in London, said the tie-up would be a good fit for Xstrata, which has significant coal and platinum operations of its own in South Africa and is prospecting new locations in the country's Bushveld region.

"Xstrata's offer reflects the operational weakness that Lonmin has seen, which has made Lonmin vulnerable," he said. "The share price fell to a level which I think does significantly understate the value of those assets, if they are run properly."

Unless a counter-bid is made, possibly by a major gold mining company, Xstrata should be able to complete the takeover even without Lonmin's approval, Toyne said.

"(Xstrata) is easily big enough. They can afford to buy Lonmin, certainly."

Xstrata said it would fund the Lonmin takeover out of its own reserves and through bank debt. No regulatory hurdles are expected, it said.

Shares in Xstrata rose 2 percent to 32.64 pounds (US$63.79).