It looks as if struggling platinum miner Lonmin (LSE: LMI) has reached the end of its life as an independent company. After years of struggling with low platinum prices, workforce unarrest and high costs at its deep mines, this morning it was announced that the managements of Sibanye Gold Limited and Lonmin have reached agreement on the terms of a recommended all-share merger.
Sibanye Gold, which is trading under the name Sibanye-Stillwater, is offering 0.967 new Sibanye-Stillwater shares for each Lonmin share. Based on the 30 trading day volume weighted average price of Sibanye shares, the offer values each Lonmin share at 100p for a total value of £285m (according to this morning’s press release).
Commenting on the proposed merger, Ben Magara, Lonmin’s CEO said: “The combination with Sibanye-Stillwater provides a stronger platform for Lonmin Shareholders and other stakeholders to benefit from the long-term upside potential of an enlarged Sibanye-Stillwater group with greater geographical and commodity diversification.“
Time to buy?
Even though shares in Lonmin have jumped by around 20% this morning after the announcement, I believe that there could be an interesting opportunity for investors.
It has been hamstrung in recent years by a weak balance sheet and lack of scale. Indeed, the company has raised about $1.7bn from shareholders in the past eight years, and profits have collapsed as management has struggled to restructure the business. Meanwhile, Sibanye has been busy buying up platinum mines.
In 2015, Sibanye agreed to buy Aquarius Platinum Ltd then it gobbled up some high-cost platinum mines from Anglo American Platinum Ltd. A year later, the acquisition of Stillwater, the only palladium and platinum producer in the US was announced. These deals have left it with high levels of debt, but they’ve allowed the group to achieve scale in the platinum business, something the acquired entities never had.
This is why I’m positive on the deal. Not only are the shares still trading at a discount to the offer price, but investors who buy-in will end up owning a stake in what will become the world’s most dominant platinum miner.
What could go wrong?
Even though the outlook for the enlarged group seems attractive, this might not be the best opportunity for all investors. As Lonmin has shown over the past few decades, platinum mining is not a risk-free business and there’s plenty that could go wrong. For example, Sibanye’s high level of debt has forced the group to cancel its dividend payout.
Still, the merged entity will have scale on its side, which should allow it to succeed where others have failed.
So overall, if you’re looking for an attractive play on the price of platinum, buying Lonmin ahead of the merger might be a good idea (or hold on if you’re already invested). On the other hand, if turned off by the risks of platinum mining, it might be better to take the cash and run.
