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Xstrata may drag out choice of Anglo or Lonmin

Sep 8, 2009

LONDON (Reuters) - Xstrata Plc is unlikely to renew a bid for No. 3 platinum producer Lonmin Plc while it still harbors hopes of forging a major mining group and doubling in size by combining with Anglo American Plc.

Lonmin's shares have rallied over the past several days on speculation that Xstrata will move again once UK regulatory restrictions drop away early next month.

Xstrata declined to comment.

Rushing to make a bid for Lonmin would effectively mean Xstrata was giving up its quest to create a mining giant by seeking a merger with Anglo since it cannot buy both firms due to antitrust issues in platinum, analysts said.

Xstrata is more likely to play for time until it is forced to make a choice between the two merger possibilities.

Xstrata should be in no hurry to make a quick move one year after it canceled a 33-pound-per-share cash offer worth $10 billion on October 1 and bought a 25 percent stake in Lonmin, said analyst Rebecca O'Dwyer at Investec Securities.

"In my eyes that is pretty much a blocking stake. So I guess the question is why do they need to move in early October, particularly after they've seen the share price go up more than 20 percent in the last three trading days?" she said.

Lonmin gained another 1.1 percent to 16.90 pounds on Tuesday (8 September) morning.

Under UK takeover regulations, after cancelling a takeover bid, a firm may not make another offer at a lower price for 12 months.

Anglo owns the world's biggest platinum producer, South Africa's Anglo Platinum, which accounts for close to half of global output of the silver-white metal, which is used mainly to cut pollutants in vehicles and in jewelry.

Anti-trust officials would not allow one firm to own both companies, so eventually Xstrata will have to make a choice.

Xstrata has long said it was keen to build up a platinum division and got a start in 2007 with the purchase of South African junior Eland Platinum for $1 billion.

Buying the remaining 75 percent of Lonmin, which would cost $3.7 billion at current share prices, could also hit Xstrata's balance sheet several months after concluding a $5.9 billion rights issue in March to cut debt.

"We consider it unlikely that Xstrata's management would stretch its balance sheet so soon after the rights issue," said analyst Michael Rawlinson at Liberum Capital.


Xstrata has made no apparent progress in its wooing of Anglo since it launched its "merger of equals" proposal on June 21.

Anglo quickly snubbed Xstrata's plan for a "nil premium" merger and after several months of stalemate some analysts have given up on a deal.

"We believe that Xstrata's merger proposal with Anglo American is bound to be called off in the near term," analyst Sylvain Brunet of Exane BNP Paribas said in a note last week.

Anglo is canvassing shareholders and is not likely to use UK takeover rules for at least several weeks to force Xstrata to either make a bid or walk away.

Xstrata declined to comment, but people close to the situation continue to say that Xstrata is patient and big deals such as a combination with Anglo can take many months or years to come to fruition.

Xstrata Chief Executive Mick Davis said in a speech shortly after the Anglo proposal was unveiled that a key to success in the mining sector was becoming big and varied enough to take advantage of the best opportunities.

"I am absolutely convinced, I have a conviction, that scale and diversity lie at the heart of value creation going forward," he said.

Those words did not sound like a man who would easily give up on a deal to forge a mining colossus better able to compete with rivals such as No. 1 BHP Billiton and Rio Tinto.

Xstrata has grown from a small Swiss producer of steel alloys in the late 1990s to the fifth-biggest mining group by market value through a string of acquisitions.

"While Xstrata's approach for Anglo American is currently deadlocked and probability of a deal is seemingly decreasing, we believe Xstrata is biding its time," Rawlinson said. "Going for Lonmin would most likely terminate this transformatory opportunity."

(Reporting by Eric Onstad, editing by Will Waterman)

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