OPINION | PIC equities head needs balancing act
The head of listed equities at the Public Investment Corp (PIC) has a nice problem on his hands. Next week he will make the final decision on whether to allow Sibanye-Stillwater to merge with Lonmin.
The respective investors in the platinum producers will hold separate meetings on May 28 to approve the proposed merger in which they will exchange shares. The PIC will be the biggest shareholder in both meetings.
As it stands today, Lonmin needs Sibanye more than Sibanye needs Lonmin. The main attraction of the deal, first announced in December 2017, was that it would bring Lonmin’s single-asset, ageing and labour-intensive platinum group metal (PGM) assets into a larger group with a more diversified income stream. Sibanye also operates gold mines in SA, where it is the largest producer of the metal, and PGM mines in the US.
Lonmin shareholders, weary of endless cash calls without seeing a return, enthusiastically welcomed the Sibanye overtures, thus avoiding certain death for a company that had already tapped them for equity three times in the previous six years. PGM prices, at about $900 (about R13000) an ounce for platinum, were not helping either; the company’s R12,900 an ounce production costs meant it was always going to struggle to break even. At the current platinum spot price of $815 (R11,772) an ounce, Lonmin’s situation would have been more desperate had the other metals it produces not come to the party.
Palladium has just come off a record high of $1,545 (R22,320) an ounce. Over the past 20 years it has traded in the $500 (R7,223) an ounce range. Rhodium has shot up to just under $3,000 (R43,318) an ounce, about five times higher than it was in January 2014. This helped Lonmin achieve R15,389 an ounce for its PGM basket, better than its unit cost of R14,795 an ounce. This has catapulted Lonmin’s operating profit to $219m, five times higher than it was in 2017.
Naturally, Lonmin’s minority investors want to benefit from this improved set of circumstances. They are now urging the PIC to use its 29% Lonmin stake to block the Sibanye takeover at the meeting next week. But the PIC would be shooting itself in both feet if it heeded those pleas. Both Sibanye and Lonmin recognised the changed circumstances and have amended the initial takeover ratio of 0.967 Sibanye shares for each Lonmin share – which the minority shareholder rightly felt was unfair – to a one-for-one swap.
Sibanye is still getting a great deal. But that is not to say PGM prices will stay at current levels for any length of time. The elevated prices are the only thing keeping Lonmin viable.
The PIC is also the biggest investor in Sibanye. Its 10.3% stake is worth R2.9bn. That is equivalent to more than 90% of the entire market capitalisation of Lonmin. And a deal that merges both companies helps the PIC lower its exposure to Lonmin, which has already cost it losses of R1bn. It will now own 12% of the combined entity.
At any rate, can you imagine the PIC’s head of listed equities, who is a seller of Lonmin shares, haggling and vigorously bargaining with himself as the buyer on the Sibanye side? All so that the Lonmin minority shareholders can make more money from his Sibanye management team’s initiative to combine the companies?..