Xstrata looking to extract value from Lonmin

Mining giant reportedly ready to renew its hostile bid for the platinum producer

The Mining giant Xstrata is said to be considering launching a fresh bid for Lonmin, the world's third largest platinum producer. The rumoured deal would value the company formerly known as Lonrho at more than £3bn.

In a previous attempt to gain control, Switzerland-based Xstrata offered £5bn for Lonmin in a hostile bid last October. It was forced to concede defeat as the markets crashed and sources of funding dried up.

However, the recent revival in "risk appetite" among the world's investors, and the upward trend in world equity markets, appear to have injected new life into Xstrata's acquisition programme. The group's chief executive, Mick Davis, is understood to have instructed its financial advisers, JP Morgan and Deutsche, to conduct a feasibility study which could lead to a new bid for Lonmin, according to The Observer newspaper.

Under Takeover Panel rules, Xstrata is allowed to launch a new bid at a lower price than the £33 a share it originally proposed if it waits a few weeks more, until 2 October. Lonmin enjoys a market valuation of around £3bn now, so any offer would most likely have to offer a premium to this.

The offer is likely to take the form of a mixture of cash and shares. The group already has a 25 per cent stake in Lonmin following its failed bid attempt.

An Xstrata spokeswoman declined to comment on yesterday's report.

Lonmin, with operations mainly in South Africa, has suffered from the economic downturn which has led to a 50 per cent fall in the price of platinum during the past 18 months.

Its share price has slumped from more than 3,500p in March last year to just 1,578p now. Commodity prices are traditionally squeezed exceptionally badly in a downturn. However, demand for the metal is expected to recover soon because of its use in jewellery and catalytic converters, both areas hit badly by the global downturn but which may bounce back equally vigorously. The price of platinum is also thought to have bottomed out more widely, as world economic growth seems set to revive next year, and as China in particular has accelerated her development.

Xstrata would be well-placed to cash in on the recovery should a bid for Lonmin be successful. Lonmin shares rose 9 per cent on Friday, making it the FTSE's biggest riser, boosted by broker upgrades and the rumours that Xstrata was planning to launch a new bid next month.

Yet any move on Lonmin is likely to signal the end of Xstrata's continuing efforts to merge with rival mining giant Anglo American; it is unlikely to pursue two difficult bids at the same time.

The group had its £42bn merger of equals rebuffed by Anglo American in June, with the latter branding the offer "totally unacceptable" and not in the interests of its shareholders.