Market Report: Lonmin rises on talk of interest from Xstrata

Hopes that Lonmin could soon be swallowed by a larger mining player drove shares in the platinum group 6 per cent, or 90p, higher yesterday to 1,520p. The buzz surrounding the company was caused by Merrill Lynch, which not only talked of Lonmin as a takeover target but also upgraded its recommendation on the shares all the way from "sell" to "buy".

Merrill has long viewed Lonmin as vulnerable to a bid and sees Xstrata, up 47p to 1,357p, as the most likely buyer of the company. Given that Xstrata recently failed to win Canada's Falconbridge, the US broker suggested that a move on Lonmin from the Anglo-Swiss company could soon be likely.

Xstrata has twice failed to win important assets in the global mining world this year. In March, it lost out to BHP Billiton in the battle for Australia's WMC and some now believe it is desperate to do a deal.

Merrill Lynch says that after the loss of Falconbridge, Xstrata has shown interest in investing in its own platinum projects. Given this background, the purchase of Lonmin could now make more sense. But even without a takeover, the broker sees Lonmin as good value. Key to profits at the group is the price of platinum and Merrill expects this to remain strong in the near term. In fact, it suggests that the City's forecasts for future earnings at Lonmin will soon have to rise significantly to take account of this.

Elsewhere in the FTSE 250, Egg ticked 2p higher to 103.5p on talk that Prudential, its 79 per cent shareholder, will soon unveil a bid to buy out minorities at the internet bank. According to the latest dealing room chatter, the insurer will try to take full control of Egg via an all-share deal. There was no talk of a take-out price yesterday but one thing is for sure - it is unlikely to be anywhere near the 160p a share at which Prudential floated the company in 2000. Unite Group rose 3.25p to 343.25p after the student accommodation provider raised £31m via the issue of new shares at 330p. Unite will use the cash to fund future developments.

The FTSE 250 rose 41.6 points to an all-time high of 8,102.8. Meanwhile, the FTSE 100 also made progress, gaining 30 points to 5,460. BG added 20.5p to hit a record high of 554.5p as the old rumour of a bid for the group from Royal Dutch Shell, 24p better at 1,877p, did the rounds of the Square Mile. BP finished the day 6.5p better at 637p.

Pendragon rose a further 33.25p to 501p as Panmure Gordon applauded the group's plans to acquire its rival Reg Vardy. The broker expects the deal to boost Pendragon's earnings significantly and so upgraded is stance on the shares from "hold" to "buy".

The recently floated restaurants group Gondola Holdings brushed aside bearish comments from Dresdner Kleinwort Wasserstein and rose 0.5p to 326.5p. The German firm warned its clients that the owner of the Pizza Express and Ask Central chains faces a highly competitive market and also highlighted the fact that the company continues to have a sizeable debt burden. Dresdner slapped a "reduce" recommendation on Gondola.

Dana Petroleum added 7p to 852p after Colin Goodall, its chairman, bought 10,000 shares at 842p. There was also director share buying at BTG, up 5p to 225p. Consuelo Brooke, a former fund manager who is now a non-executive at the biotech, bought 22,500 shares at 220p.

SPI Lasers jumped 17p to 170p after a contract win. Angel Biotechnology made its debut on AIM. Having raised £1.5m at 1.1p, the medicines maker saw its shares close at 1.4p. Angel will use the cash to establish a presence in the US.

Cambrian Mining, off 2p to 125p, confirmed that it plans to sell its stakes in King Coal and Maple Coal. Victoria Oil & Gas soared 96 per cent, or 55p, to 112p, as investors continued to pile into the stock after Wednesday's news that the explorer has half a trillion cubic feet of recoverable gas at its site in Russia. According to the broker Ambrian, the find makes the company worth about 306p a share.

Circle Oil dropped 0.75p to 27p but the company's finance director used the weakness to top up his holding. John McKeon bought 125,000 shares at 25.5p, taking his total holding to 13.9 million.

Biofuels shares were suspended at 145.5p as the biodiesel group entered talks with its bankers and stock market advisers about securing further funding. If these negotiations fail, the company is unlikely to have much of a future.

Finally, Oil Quest Resources asked to have its shares suspended at 15.75p and confirmed that it plans a major acquisition. Word has it that the group is looking to complete the £30m purchase of a private company with assets in the North Sea.