Analysts: Xstrata could increase Lonmin stake

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Shares in Lonmin (LMI) dipped in the red again on news that it would be "some months" before chief executive Ian Farmer would be able to return to work full-time.

As a result, chief financial officer Simon Scott has been appointed by the board as acting chief executive for the time being. Scott will be supported by the existing team of executive vice presidents and the executive committee, which will continue to include both Roger Phillimore and Mahomed Seedat.

The share price has been recently plagued by violent strikes at the company's mines in South Africa, which has led to a total of 44 deaths and left 78 people injured. The industrial action by rock drill operators came after they called for a pay rise of more than $1,000 (£636) a month.

Last week, the company confirmed it had lost six days of mined production, equal to around 300,000 tonnes of ore, or 15,000 platinum equivalent ounces, and warned it was unlikely to meet its full-year guidance of 750,000 saleable ounces of platinum.

There were also worries that the hiatus in production during the strike would cause it to breach its banking debt covenants at the next test date on 30 September, with Alison Turner, analyst at Panmure Gordon, stating that a rights issue of around $700 million was "increasingly likely".

"A $700 million rights issue would be sufficient to erase existing debt and provide some cash headroom with longer-term financial flexibility provided by existing or restructured debt facilities," said Turner, adding that running scenarios around a potential equity raise confirmed Lonmin could theoretically raise in excess of $1 billion even if the market demanded a significant discount of between 30% and 40% to the theoretical ex-rights price.

However, the key spanner in the rights issue works remains Xstrata's (XTA) appetite. As Lonmin's biggest shareholder at 24.6%, Xstrata's support for any equity raise will be crucial.

Given the uncertainty over the Xstata-Glencore International (GLEN) merger, Turner believes Lonmin would be reluctant to announce a rights issue before shareholders vote on that merger on 7 September, but pointed out that this could still allow a rights issue to be completed before Lonmin's covenant test, which would most likely take place at the end of October 2012.

"Whether or not the Glencore merger goes ahead, we would argue that Xstrata has nothing to gain by allowing Lonmin to fail financially," she commented. "Assuming that Xstrata sees longer-term value in its investment in Lonmin, we believe it would have little choice but to support any capital raise.

"One alternative outcome that we do not believe can be ignored is that Xstrata uses Lonmin's current predicament as an opportunity to significantly build its stake in the company whether through an opportunistic bid or a disproportionate uptake of any equity placing."

Turner had a 'buy' recommendation on Lonmin's stock.