FTSE in-depth: Xstrata may dig deep for Lonmin

By Geoff Foster for MailOnline
Updated: 03:30 EDT, 24 May 2011

Mick 'the miner' Davis, chief executive of Xstrata, 37.50p easier at 1357.50p, is no mug.

Foster: Worries about the strength of the global recovery dragged the Footsie lower.

He doesn't need anyone to tell him that there is no better time to pick up Lonmin at an attractive price. Stockbroker Evolution yesterday reminded him that it was back in late 2008 that he abandoned an approach for the platinum miner as the economic crisis was unravelling.

Lonmin's shares, 43p down at 1481p, are now trading 55% below the £33 a share he was prepared to pay in 2008, so surely it would make a great deal of sense for Davis either to increase Xstrata's shareholding to 29.9% from 24.6% or launch a full-scale cash offer for the company.

Analysts reckon a bid in the region of £5.1bn or £25 a share would do the trick.

Davis has great aspirations for Xstrata and does not want to be swallowed by newly-floated commodities giant Glencore which sits on 34.5% of its equity. So to diminish the likelihood of that happening, he should bid for Lonmin and lift the combined value to, perhaps, £45bn.

Evolution certainly believes Davis should bite the bullet as it would resolve Lonmin's major productivity issues, substantially reduce costs, create synergies, extend the group's presence in South African platinum and deter an unsolicited approach from Glencore.

Ahead of its elevation to the Footsie today, Glencore was sold down to 509p before rallying to close 10p off at 514p, which compares with last week's flotation price of 530p. Saudi billionaire Prince Alwaleed via his investment firm Kingdom Holdings has acquired a 3.6% stake in the controversial commodities trader.

Worries about the strength of the global recovery and continuing concerns about debt troubles in eurozone countries dragged the Footsie 112 points lower to 5,835.89.

Credit rating agency Standard & Poors downgraded Italy's outlook to 'negative' from stable and that followed hard on the heels of Fitch on Friday slashing Greece's debt to 'junk status'.

The risk now is that contagion effects spread into the core with countries such as Belgium likely to be next for a downgrade.

Eurozone troubles affected Wall Street too, with the Street of Dreams trading 100 points down at the outset.

Market bulls should not be too disheartened. Broker JP Morgan Cazenove remains upbeat and sees the Footsie trading around 6,000 during May and June.

It expects a significant rally early in the second half of 2011 with two important supports for equities emerging. It sees a big increase in share buybacks and dividends are projected to grow by 13% for cyclical sectors in 2011 and 14% for financials.

Shares of IAG, the merged British Airways and Iberia airlines group, lost altitude at 235.2p, down 12.6p. Selling developed on fears that the weekend ash cloud eruption from Iceland's Grimsvotn volcano will cause yet more disruption to air traffic.

Last year a month-long disruption cost British Airways between £15m to £20m a day.

Plumbing giant Wolseley remained friendless at 1949.00p, down a further 82p, on continuing concern about the pace of the US economic recovery.

Broker Liberum Capital believes that growth is unlikely to slow significantly in the short term and margin recovery should continue, perhaps helped by disposals. Its target price is £25.

Michael Spencer's inter-dealer broker ICAP touched 475.2p on positive comments from Credit Suisse before closing 2.3p easier at 465.10p. The broker upgraded to outperform from underperform as the group is increasingly well positioned relative to the exchange space given the regulatory uncertainty around vertical business systems in Europe.

Fashion retailer Next firmed 23p to 2249p after director Francis Salway bought 6,702 shares at 2219.5385p a pop.

Director share sales left online video search engine group Blinkx 6p cheaper at 138.75p. Dr Michael R. Lynch sold 1.35m at 139.99p and chief executive Suranga Chandratillake 383,257 at 137.85p.

IGAS Energy edged up 0.25p to 72p after the domestic gas producer announced in-line annual results. Numis has a target price of 130p and says the company has materially reshaped its business this year, taking ownership of its UK coal bed methane resource and successfully raising £20.6m of new equity.

It sees IGAS operational at five coal bed methane sites before early 2012.

Consumer debt adviser Fairpoint plummeted 20p to 68p after warning full-year profits would be substantially below market expectations due to lower unemployment rates.