Platinum price surge bodes well for Lonmin

By Annunziata Rees-Mogg Dec 05, 2005

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Platinum has been overlooked by investors for a long time thanks to the fact that its price has not moved as sharply as those of other metals. But a price surge to a 25-year high has now changed all that.

Platinum is a key component of catalytic converters in diesel engines, so high oil prices and environmental legislation are both boosting demand.

One good play on this and on the price rise continuing is via the miner Lonmin (LMI, 1,640p), says the FT. The world’s third-largest miner of the metal recently reported an 11.3% jump in annual pre-tax profits – rising to £186m for the year to September (from £169m the previous year). Chief executive Brad Mills anticipates that the price of platinum will continue to rise, and Lonmin plans to boost production through small-scale acquisitions.

For example, the company recently bought Southern Cross Platinum, a Canadian firm with plans to develop new open-cast mines in South Africa. Overall, in the coming year Lonmin aims to increase its output of new platinum by a third to 80,000 ounces.

Merrill Lynch has long viewed the company as a potential takeover target for mining giant Xstrata, says Michael Jivkov in The Independent. But even without a takeover bid, the broker rates Lonmin a buy.

Merrill Lynch argues that profit forecasts now look conservative, given the high platinum price, and have upped their price target to £18. Lonmin’s forecast p/e is 15 and while that’s not cheap, says the FT, its “scarcity premium” is unlikely to disappear if prices keep heading towards $1,000 an ounce. The shares are up 56% this year, but they’re still “attractive”, says Tempus in The Times. “Buy.”

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Published in Tips & advice | More articles by Annunziata Rees-Mogg

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