Is this takeover target set to beat the Anglo American share price?

The Anglo American plc (LON: AAL) share price has recovered strongly, but can this takeover opportunity emulate it?

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At the beginning of 2016, the share price charts of miners Anglo American (LSE: AAL) and Lonmin (LSE: LMI) looked quite similar — both were suffering badly from the downturn in the mining business.

Other than also having their origins in South Africa, that’s pretty much where the similarity ends. A cyclical upswing in the industry has led to a strong recovery for Anglo American, whose share price is actually up 15% over the past five years. But over the same period, Lonmin shareholders are still sitting on a 98% loss.

Anglo American suffered from the downturn in metals and mineral prices, but commodities prices tend to keep in line with inflation in the long term, and that really should give investors who can ignore short-term ups and downs a significant advantage.

I can only see the demand for the company’s major consumable products, key among which are iron ore, copper and metallurgical coal, growing over the long term. As well as prices firming up, the firm’s production of all three is rising.

Diamonds

On top of industrial commodities, Anglo American is big in diamonds, having upped its stake in De Beers to a controlling 85% in 2011.

All of this has been helping drive the company to become a solid dividend stock.

Yields will fluctuate according to business cycles, and that can be a downside for those seeking regular income. But if you’re in a net investing phase and reinvest your dividends, year-by-year fluctuations really shouldn’t be a problem. Forecast yields of 4.6% and 4.7% for this year and next look very attractive to me.

While P/E ratios are typically low at the top of a business cycle, forward multiples of under nine look like good value to me — even if you did miss the big bargain sale when Anglo American shares were a lot cheaper.

Takeover

Lonmin’s fortunes have fared very differently. The company produces gold and platinum group metals, and is the world’s third largest primary producer of platinum.

Lonmin, however, has been having financial difficulties for years, and its share price slide has continued right up to the middle of August this year. But progress towards last December’s all-share takeover approach from fellow South African producer Sibanye Gold (trading as Sibanye-Stillwater), the biggest producer of gold in the country, has helped boost the shares by nearly 40% since then.

Though the takeover has been given the green light by South African regulators, it’s not a done deal. But a refinancing transaction revealed Monday should enable to firm to deal with one of the obstacles standing in the way. Last year, Lonmin breached its covenants on a $150m loan, though lenders chose not to pull the plug.

Staying afloat

Now a $200m loan from Jiangxi Copper Company of China, which will be repaid mainly in platinum and palladium, will be used to settle that debt and provide operational funding.

A fourth quarter update the same day showed an improvement in net cash to $114m at 30 September, from $102m a year previously. And platinum sales of 681,580 ounces beat expectations of 650,000 to 680,000 ounces.

Whatever happens with the takeover, Lonmin shareholders need to be aware that Sibanye does not have a UK listing for its shares. It does have ADRs listed on the NYSE, so check carefully what you’d get.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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