When Sibanye-Stillwater’s acquisition of Lonmin was first announced, it looked like an opportunistic assault on a company plagued by years of weak commodity prices and poor management, not to mention an unfortunate political legacy.
In December 2017 Lonmin shareholders, shell-shocked by events dating from even before the Marikana massacre of August 2012, must have been tempted to heave a huge sigh of relief when Sibanye-Stillwater arrived on their doorstep with a share-exchange offer.
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As could be expected, given that the Sibanye-Stillwater team could smell fear and desperation from the Lonmin camp, the offer was cheeky. It priced in all of Lonmin’s problems, many of which looked near fatal, but was remarkably snoep when it came to the assets, which include a state-of-the-art smelter and two refineries. Lonmin also has an assessed loss of $1.1bn, extremely valuable for a profit-generating entity.
Lonmin has managed to survive through the depths of survived the platinum price weakness and now no longer requires rescuing
Sibanye-Stillwater’s offer document didn’t shy away from detailing the extensive benefits it was set to reap from the transaction. In an appendix to the Lonmin circular issued last month, Sibanye-Stillwater reminded shareholders it had "identified expected total pretax synergies of approximately R1.5bn by 2021, averaging approximately R1.28bn a year for the period 2021 to 2032, as a result of the acquisition".
That’s a three-year payback period on a deal initially valued at R4bn. (The delay in closing the deal, as the Competition Appeal Court considers an appeal by the Association of Mineworkers & Construction Union, Amcu, means the synergy target date has been pushed out by one year to 2022.)
Even allowing for just over R1bn to effect the synergies, in December 2017 this looked like a remarkably attractive deal for Sibanye-Stillwater shareholders. But by March 2019 it had become significantly better. As a result of the increase in platinum prices after the initial announcement, targeted synergies, says Sibanye-Stillwater, are expected to increase. However, it says it can’t quantify the extent of the increase because it has not had access to Lonmin’s operations since the initial announcement.
Some Lonmin shareholders are not as tentative; they contend the company’s prospects have been transformed by the increase in prices.
"If anything, the all-share acquisition by Sibanye is increasingly looking like a disguised rights issue by Sibanye to shore up its strained balance sheet and covenant ratios," says Anton Hugo, an independent mining analyst at PrimaPlatform.
He says Lonmin’s earnings before interest, tax, depreciation and amortisation (ebitda) were $219m in the 12 months to March, yet it is being sold for an enterprise value (market cap less cash) of only $169m.
Lonmin’s share price, which has been trading between a low of around R7 and a high of R16 since December 2017, is being held back by the Sibanye-Stillwater offer.
"It is trading at a derived value of the Sibanye-for-Lonmin swap ratio, less a discount for uncertainty," says Hugo.
Initially the bid valued Lonmin at £1 a share, which was conveniently in line with the valuation for the massive rights issue in 2015. (For those interested in history, compare the £2,500 at which Lonmin shares peaked in the pre-rights issue days of 2007.)
Lonmin has managed to survive through the depths of the platinum price weakness and no longer requires rescuing, says Hugo.
By contrast, the past 18 months have not been kind to Sibanye-Stillwater, which is weighed down with debt equal to more than 2½ years of ebitda and has a gold division that is losing money due to the five-month Amcu strike and costly restructuring. This is reflected in its share price, which has weakened since December 2017.
The recent revision of the exchange ratio — from 0.967 Sibanye-Stillwater shares for each Lonmin share to one-for-one — won’t win over the naysayers. Hugo says it comes nowhere close to compensating for Lonmin’s improved outlook, and insists the share swap should be based on a share price of £1.50-£2.
To be expected, Sibanye-Stillwater has no plans to make further revisions. "We’ve made an adjustment, we have sent out the circulars, from our side there is no intention to make any further changes," says senior vice-president for investor relations James Wellsted.
All Weather Capital analyst Prince Mopai, who acknowledges that the Lonmin operations will be better managed in the Sibanye-Stillwater camp, says the valuation issue is tricky.
"There’s no straight answer as to whether the deal is undervaluing Lonmin’s intrinsic value," says Mopai. Even with better platinum prices Lonmin remains marginal. And then there’s Lonmin CEO Ben Magara’s comments after last week’s release of first-half results. "He’s acknowledging that though Lonmin has returned to profit the sustainability of the business is still problematic," says Mopai.
In his remarks Magara, bound by a co-operation agreement with Sibanye-Stillwater, played down the possibility of an improved offer.
The Lonmin circular also reveals that Magara was allocated 1.3-million Lonmin share options at no cost in December 2018. These, and all executive options, vest immediately once the deal is approved.
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