Shares in Lonmin soar 48 per cent after it rejects £5bn Xstrata offer

Platinum producer Lonmin firmly rejected a hostile £5bn bid from the mining heavyweight Xstrata yesterday but it faces an uphill battle to retain its independence.

Analysts believe that Xstrata is on the cusp of success and a small increase in its offer will secure victory. Lonmin has looked vulnerable after repeatedly cutting production targets because of problems at its smelter in South Africa.

Xstrata's chief executive, Mick Davis, decided to pounce with an offer of 3,300p a share, a thumping 42 per cent rise on Tuesday's close. He bought 8 per cent from several major shareholders and snapped up a further 2.6 per cent yesterday.

Lonmin tersely rebuffed the bid, calling it unwelcome and opportunistic. Dealers believe there is an outside possibility of a rival bid with Brazil's Vale – which was in merger talks with Xstrata in late 2007 – and Russia's Norilsk Nickel being mentioned.

Lonmin closed 48 per cent, or 1,107p, higher at 3,426p. Xstrata ended 33p easier at 3,167p.

Mr Davis has spent billions on acquisitions over the past five years building Swiss-based Xstrata into a £31bn goliath but platinum remains tiny compared with its massive copper, coal, nickel, zinc and alloy interests.

The aim is to grow platinum output to between 500,000 and one million ounces over the next 10 years. Gaining control of Lonmin, whose mines have a life of 30 years, would satisfy Xstrata's ambitions at a stroke.

The group's platinum operations are close to Lonmin's main Marikana complex in South Africa, offering scope for technical support across the enlarged operations, rationalisation and cost savings.

Xstrata is critical of Lonmin's recent performance, claiming it has been forced to downgrade production targets for the year to September four times in the past few months to 765,000-777,000 ounces, or 15 per cent below original estimates because of operational problems and power shortages. Late yesterday, Lonmin revised the figure down to 725,000 ounces.

"A significant transformation of operating and management practices is required to return Lonmin to its former growth trajectory over time," said Mr Davis.

Lonmin is the world's third-leading platinum producer after Impala Platinum and Anglo Platinum. The trio account for four-fifths of the global supply of platinum, with 56 per cent used in the manufacture of catalytic converters which control and clean harmful emissions from car engines. Demand is expected to remain strong, driven by tightening emission regulations although current high prices have dampened demand for platinum jewellery.

Around 77 per cent of platinum supplies are found in South Africa, but it is also mined in Russia and Canada. Lower car sales in the US and disappointing trading news from General Motors and BMW have led to a weakening of the price over the past month.

Xstrata's offensive is part of a wave of mergers within the mining sector as producers attempt to meet demand created by growing industrialisation in countries such as China and India. The European Commission is due to rule on BHP Billiton's blockbuster $170bn bid for Rio Tinto in November. There are worries that the combined group would dominate the world's iron ore market.

Xstrata also reported first-half earnings which were lower, reflecting lower zinc and nickel prices, a weaker dollar and higher costs. Pre-tax profits fell almost 10 per cent to $4bn.

Michael Rawlinson at Liberium thought that Lonmin shareholders were "fed up" with the current management and would take the cash, while Investec said Lonmin might be worth up to £35 a share. Evolution Securities reckoned a fair price would be about £40, valuing it at £6.4bn, although Seymour Pierce said that investors should sell in the market now.