LONDON Lonmin (LMI.L) has rejected a reverse takeover proposal from its largest shareholder, Xstrata XTA.L, which questioned the ability of the strike-hit platinum producer's current bosses to keep their loss-making group afloat.
At the centre of a wave of strikes at South African mines that have left dozens dead, Lonmin highlights the difficulties facing a platinum industry under pressure from low prices, rising costs and a restive labour force.
Lonmin on Friday detailed a discounted $817 million rights issue to repair its balance sheet - its second cash call in three years - and said it had slid to a $698 million full-year loss.
But it was the news of investor and one-time suitor Xstrata's efforts to remove current management and, under at least one plan, take control of Lonmin, that came as a surprise.
"The proposals from Xstrata were conditional proposals, with terms that did not favour all of our shareholders," Lonmin's acting chief executive, Simon Scott, said.
Xstrata, which holds a 25 percent stake as a result of a failed 2008 takeover attempt, said the aim was not to take control, only to protect the value of its investment. It took a $514 million writedown on its Lonmin stake in August.
But it also did little to ease the tension that has marked the four-year relationship between the two companies.
"Lonmin has suffered longstanding operational problems and we are concerned that the business does not have the management capabilities to ensure a sustainable future, even if short term funding issues are resolved," an Xstrata spokesman said.
"We believe our concerns are shared by other major Lonmin shareholders," he said, adding the group was open to "all constructive solutions" to strengthen management and operations.
Under a first proposal made last month, Xstrata would have sold its South African platinum group metals, chrome and vanadium businesses to Lonmin for shares, conditional on a $1 billion rights issue, which they would underwrite.
Xstrata - which also demanded the right to appoint the chairman, the chief executive and the chief financial officer - would have ended up with 70 percent of Lonmin.
The proposal was rejected. A source involved in the matter said Lonmin felt a premium had not been offered for control, and Lonmin had concerns about a potentially lengthy process that would have meant breaching lenders' conditions.
Lonmin and Xstrata did not disclose the terms of the deal, but the Xstrata assets in question, all South African, are valued at as much as $3 billion, analysts said.
Xstrata made a separate proposal on Thursday that would have seen it support the rights issue currently planned, but replace Lonmin's executives. This has also been rejected.
Lonmin said it had not received other proposals.
Xstrata is now expected to woo fellow shareholders, but it may not be easy to get support for a management change.
"Xstrata were trying it on. The first proposal probably reflects the fact that maybe Xstrata do not want to be in platinum mining," said one of Lonmin's 10 largest shareholders.
DOUBLE OR QUITS
Xstrata's own investors, however, were more supportive - important for the miner as it nears a vote on its $33 billion takeover by its own largest shareholder, Glencore (GLEN.L). That vote is due November 20, the day after Lonmin investors vote on the rights issue.
"Lonmin is a disaster, the whole of South Africa is a disaster. Even if the recovery goes to plan, it still won't make money two years out," one top-10 Xstrata shareholder said.
But he said Xstrata would go for a "double or quits" strategy and could come back with revised proposal in an effort to avoid taking a loss.
Shares in Lonmin, already down more than 50 percent this year, dropped on the news. At 1200 GMT, the stock was down 2.3 percent at 442.5 pence, though analysts said the news was not all negative. Xstrata was down 1.6 percent, against a 0.8 percent drop in the sector .FTNMX1770.
"It's fairly clear that what Xstrata was looking to do was to do a deal with Lonmin at a time when Lonmin had balance sheet problems... giving Xstrata potentially a chance to get quite a good deal," Panmure Gordon analyst Alison Turner said.
"For Lonmin shareholders I take it as a positive... although Xstrata hasn't come forward to say that they would support this rights issue, they have put proposals on the table that clearly indicate that they do see value in the Lonmin asset base."
Lonmin, which already had one of the most stretched balance sheets in the sector, was hit in September by strikes at its flagship Marikana mine which saw some of the worst violence in South Africa since the end of apartheid and left 46 people dead.
The six weeks of strikes cost Lonmin $159 million and 110,000 lost ounces of platinum, forcing the group to tap shareholders.
Lonmin said on Friday the rights issue was "imperative" - without it, the company would risk breaking the terms of agreements with its lenders.
It was not clear, however, whether Xstrata would subscribe unless its conditions were met.
Lonmin, the world's third largest platinum producer, priced its $817 million rights issue at a discount of 44.4 percent to its theoretical ex-rights price of an existing share, as reported by Reuters. In South African rand, the discount is 45 percent.
It said it would issue 9 new shares for every 5 existing shares, a total of up to 365 million shares at 140 pence.