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Will the PIC vote to block Sibanye bid for Lonmin?

If the deal does not proceed Lonmin could be left rudderless, says mining analyst Wilhelm Hertzog.

NOMPU SIZIBA: After getting all the regulatory approvals to take over Lonmin, Sibanye Stillwater’s pursuit of the platinum player may be under threat. Sibanye Stillwater’s bid for Lonmin took place in December 2017, and at the time participants were happy with the terms of the deal.

But what has happened since is that the value of some pgms [platinum group metals] has shot up, while at the same time Sibanye’s share price has fallen considerably. And, given that it’s set to pay for its stake with its shares, some shareholders are beginning to call into question whether it’s still a good deal. Minority shareholders are apparently pushing for the Public Investment Corporation to veto the current terms of the deal, as it has a 29.3% stake in Lonmin.

Read: PIC said to be concerned by Sibanye offer

Well, to break down the issues for us, I am joined on the line by Wilhelm Hertzog, a mining analyst at Rozendal Partners. Thanks very much for joining us, Wilhelm. What were the original terms of the Sibanye takeover of Lonmin? Just detail for us the significant variables that have changed and why some are now having second thoughts about the deal going ahead.

WILHELM HERTZOG: Hi, Nompu. The original terms of the deal were that 0.965, I think, was the exchange ratio of Sibanye’s share for each Lonmin share in that takeover transaction. The transaction consideration was always Sibanye shares. So, if the deal went through, Lonmin shareholders’ fortunes were always tied to the Sibanye share price – ever since the deal looked like it would proceed.

So that was fine, as you mentioned, in late 2017, when the rand platinum price, and specifically the palladium price, were still in the doldrums and not nearly as high as they have been recently. Lonmin’s very existence seemed to be under stress at that time, because Lonmin was not competitive on a cost basis in the context of those low metal prices.

Read: Lonmin CEO still backs Sibanye offer even as profit rebounds

In the subsequent 18 months the palladium price specifically, the rhodium price and to a lesser extent the rand platinum price, have increased quite sharply and that has resulted in a scenario where, if you annualise Lonmin’s most recent profitability, Sibanye effectively is paying 1X operating profits for the entire Lonmin. That is a steal by anyone’s measures. But that’s within the vagaries of the platinum industry and of mining.

I think one should keep in mind that the original appeal of the transaction for Sibanye was mainly Lonmin’s above-ground infrastructure – the smelters, the refinery. That appeal is still there and they didn’t need the platinum price to recover sharply for the deal to make sense for them. One does feel somewhat that shareholders are now almost crying over spilt milk, because Sibanye stepped in, and was opportunistic and brave to make an offer at that time. Things have looked a bit better over the past three to six months, and now suddenly shareholders are baying for an increased offer, whereas they were happy to accept the exchange ratio 18 months ago. One gets where they are coming from, but it is maybe a bit disingenuous to now ask for a better offer.

NOMPU SIZIBA: I hear you. PIC can really be a game-changer in this. They have a 29.3% stake in Lonmin, and on May 28 Lonmin shareholders will be voting on whether to go ahead. But they need a vote of 75% for the deal to go through. Do we know what the PIC’s position is on this particular issue? Could they decide to vote against the deal? And of course they do have a bit of a shareholding in Sibanye itself.

WILHELM HERTZOG: Sure. They are playing their cards very close to their chest in what they have come out publicly with and stated in the media. They’ve stated that they don’t comment on their voting before a decision has been made, so we really don’t know which way it will go at this stage. But I think it could be a ground-shaking decision for them to vote against the deal, specifically because Lonmin’s board and management have come out so strongly in favour of the deal. I think it would be a bit out of character for the PIC to engage in such openly hostile voting, but one never knows. Times have changed and shareholders take their voting obligations very seriously these days. So it may happen, but I’d be surprised if it does.

NOMPU SIZIBA: Some of the pgm commodities have performed very well, as you mentioned, and this has changed the fortunes of platinum companies. But, as we know, these moves are cyclical and the reverse can occur. So do you think, come rain or shine, Lonmin needs to have a deal, or with the current prices it has been achieving it can afford to go solo again and have enough reserves stashed in not-so-rosy times going ahead?

WILHELM HERTZOG: Look, if current prices prevail, and if current prices are sustainable, then Lonmin is nicely profitable. But there are still their costs, mining costs; even in this very favourable price environment they have had a unit cost increase of in the order of 15% over the past three to six months per ounce of pgm mined, and that is still an unsustainable performance.

If the deal does not proceed, I think Lonmin will be left in the lurch somewhat, and the company will be rudderless. I struggle to see how an executive management team survives this transaction being voted down. I do think, having backed the transaction so vociferously, the CEO and probably members of the board will be under tremendous pressure from shareholders to resign and step aside if the deal gets voted down. That’s the weakest situation – where the company is, as I say, rudderless to some extent, and it’s not clear who will be willing to take on what could be a challenge, if you take on the leadership of Lonmin.

It is still a very difficult proposition, a very difficult business to manage, because you are continually facing older shafts with a declining production profile. That is something which Sibanye’s Neal Froneman historically has experience of managing, so it sort of fits the DNA of their business. But it is not the type of business which many people out there have the stomach for.

NOMPU SIZIBA: Yes, indeed. So you are inclined to believe that the PIC is not likely to bow down to minority shareholder pressure. Let’s just say that they do – presumably the unions would be quite happy, particularly Amcu.

WILHELM HERTZOG: Sure. I would venture to say that the unions would be quite happy. But I do think that the unions – with the recent developments in the platinum space specifically and with the Amcu strike at Sibanye, and the outcome of those negotiations and the core processes there, and also with Amplats’s announcement today about developments at Mototolo. I do think that the influence of the unions has maybe waned somewhat over the past few months, and that the unions are maybe less of a pressing issue and a dire concern compared to what they may have been, say, a year or so ago. So I think yes, the unions would be glad, but I do think that their voice probably counts a bit less today than it would have maybe six months or a year or two ago.

NOMPU SIZIBA: In the last couple of minutes we have, what are your views around the discussions that are going to take place on wages on the platinum belt?

WILHELM HERTZOG: Well, as I mentioned, given recent developments, I think that for the first time in many years the platinum miners are probably in a much better bargaining position to negotiate reasonable, realistic – let’s call them – inflationary-type wage increases, and not sort of the double-digit numbers that their unions have pressed for historically. So I think for the first time in many years it’s probably a bit more of a positive prognosis from a mining company point of view than what we’ve seen in the past number of years.

NOMPU SIZIBA: Okay, Wilhelm. Thanks very much for joining us this evening.

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If PIC votes it down, they better be stepping in with a a couple hundre million dollars, to invest the capital Lonmin has been sidestepping to stay cash neutral after the horrendous losses of the last few years… But PIC bailed them out last time, why wouldn’t they do it again…

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