Acquisitive miner Xstrata unveiled a $10 billion takeover bid for the world's third-biggest platinum producer Lonmin, aiming to diversify its business from industrial metals such as copper.
South Africa-focused Lonmin swiftly rejected the bid on Wednesday as its shares soared 51 percent to a high of 35 pounds, slightly over Xstrata's planned offer of 33 pounds a share, implying investors see scope for a sweetened bid.
Lonmin shares, which had shed 36 percent since May 19, closed up 47.7 percent at 34.26 pounds.
Anglo-Swiss Xstrata's swoop is part of a wave of consolidation in the metals sector amid booming demand from China that has sent prices soaring over the past few years.
Five months ago, Xstrata escaped being bought when a takeover attempt by Brazil's Vale failed.
Xstrata bought an 8 percent stake from several major shareholders after the close on Tuesday and purchased more shares on Wednesday, bringing its stake to 10.7 percent. (Watch the accompanying video to learn more about the Xstrata-Lonmin merger...)
Lonmin rejected the bid as undervaluing the firm.
"This is an opportunistic and entirely unwelcome attempt to acquire Lonmin at a price which undervalues its unique assets," the company said.
BlackRock fund manager Graham Birch, a major Lonmin shareholder, said: "It's a bit opportunistic because all the mining shares have been so battered in the last six weeks or so." "Obviously Xstrata has taken advantage of market weakness. Mining shares have got so ridiculously cheap. I suppose it's not impossible there will be bids for others."
Xstrata would fund the bulk of its $10 billion offer through bank debt and Chief Executive Mick Davis said he expected little problem in sealing the financing considering the number of messages from bankers he had received on Wednesday morning.
Xstrata's move spurred gains in other mining shares as investors bet that other companies would take advantage of more reasonable valuations after mining shares lost around a third over the past three months on worries about a global slowdown.
The UK mining index gained 3.3 percent and Anglo American, around which takeover speculation has swirled, added 3.2 percent.
Shares gained 2.4 percent in sector number one BHP Billiton, in the midst of a $150 billion takeover bid for number two Rio Tinto, which rose 2.4 percent.
Platinum prices also got a boost from Xstrata's move, jumping more than 3 percent, since it showed confidence in the metal's future, traders said.
Over the past few months platinum prices had fallen by a third from a record $2,290 in March.
Xstrata said it had the expertise to turn around the South African mines owned by Lonmin, which has repeatedly cut its production targets due to operational problems, smelter difficulties and power shortages.
Lonmin cut its 2008 sales target for the third time on Wednesday, slicing off another 6.5 percent when it released quarterly output data.
Analysts largely supported the bid since Xstrata has a track record of improving performance of companies it has bought, such as Canada's Falconbridge and Australia's MIM.
"We find it difficult to see any other bidders coming out of the woodwork for Lonmin, so unless shareholders reject the deal, we believe it is likely to go ahead," said Investec analyst Rebecca O'Dwyer.
She said the bid was at a price earnings ratio of 14, below Lonmin's average multiple of 17 over the year to June before the latest slide in mining shares.
Xstrata's most important commodities are copper, coal and nickel, but the firm entered platinum last year with a $1 billion purchase of South Africa's Eland Platinum.
Xstrata has grown from a small Swiss producer of steel alloys in the late 1990s to the fifth-biggest mining group by market value through a string of acquisitions.
Lonmin has been turning robust profits, posting a 63 percent jump in first-half profit in May on strong platinum prices.
Xstrata also posted a 2 percent rise in first-half attributable net profit of $2.83 billion, higher than an average forecast of analysts polled by the firm of $2.65 billion.
Davis told Reuters operating profit in coal was due to double in the second half compared to the first.