Why Glencore Will Divest Its Stake in Platinum Producer Lonmin

Some members of the press (including us) have covered Glencore Xstrata’s positioning of two senior division heads Gary Nagle, the boss of its alloys division, and Paul Smith, head of strategy and communications as non-executive directors on platinum producer Lonmin’s board as the merged mine-to-markets company taking control with a view to sell out.

“Glencore tightens its grip on Lonmin,” declared the Independent, and “Glencore increases influence at Lonmin,” surmised the FT in rather alarmist terms.

Glencore inherited Xstrata’s platinum assets when it acquired Xstrata in May of this year. The combined company’s platinum assets include a 25% stake in the world’s third largest primary platinum producer, Lonmin PLC, and a 74% stake in Eland, another platinum-producing asset in South Africa.

Referring to Chief Executive Ivan Glasenberg’s advice that the company’s platinum assets aren’t core to its business, the suggestion is that Glencore is about to unload their stake as a result – but we wonder whether this is a realistic picture.

The firm’s holding in Lonmin represents a sizable chunk of cash; for an owner-managed business like Glencore, that represents an investment that needs to be understood and, where possible, actively managed to maximize value and reduce potential risks.

How Glencore Sees Lonmin: Non-Core vs. Non-Value

Lonmin has its challenges, not least its worker relations in South Africa, but it also has enormous potential value – value that at the moment is poorly reflected in the share price, due to both the problems in South Africa and also the wider malaise in the platinum group metal (PGM) market.

There is no question Glencore will divest its holding. The philosophy running through the entire organization is one of total ownership of the supply chain from mine all the way down to refined-product consumer, facilitated by the firm’s sophisticated marketing division. Glencore has no PGM marketing operation to speak of, and as such, platinum is non-core – simple as that.

However, that doesn’t equate to non-value. The firm’s labor problems notwithstanding, the underlying platinum market has plenty of medium-to-longer term upside that should see Lonmin worth much more in a year or two than it is now.

RBC Capital Markets agrees, saying PGMs in general have strong medium- to long-term fundamentals; the platinum market is in a small deficit and, even on the last year or so of lackluster automotive demand, is likely to stay in deficit for the next few years.

Check back in later this morning for a platinum price outlook.

Read more from Stuart Burns.

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  • I agree. Ivan Glasenberg’s move here is interesting. Levering two Chartered Accountants onto the Lonmin Board (one with operations skill and the other strategy skills) is a positive move and probably not as welcome as Roger Phillimore (Chairman) pretends. Miners/producers in the Bushveld Complex dominate world supply of PMGs but their fragmented approach to investment and production wipes out their potential to control world pricing. What’s needed is a strategy to consolidate investment and production in the region, stabilise the workforce and improve mining and processing techniques to better match supply to world demand. With a bit of financial muscle you could make a fortune buying up Bushveld companies at this time, consolidating them and then sell the “newco”. You would also need a few of the right people on the ground to get it organised?


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