Vox: Rio Alto; Barrick Gold; Alcoa
What does it say about investor sentiment when, on a day that sees a huge merger in the oil business, the shares of Rio Alto barely register?
The conventional wisdom is that the company is a likely takeover candidate, if not an inevitable one. Yet the shares are trading near a 52-week low.
It says, in part, that the fundamentals for oil and gas are not looking good right now, and that, oil stocks are pricey. Rio isn't certain about the near term. The company has hedged some gas production and is clipping its capital spending for the first half of next year. Given its relatively high debt burden and the high cost of some of the reserves it has added recently, that seems prudent.
But the falling stock price also says that the market is discounting the takeover possibility by the day. There's probably still a healthy amount of takeover inflation in the stock, but it's fizzling. The more it fizzles, though, the better the likelihood of a bid.
So how attractive is the stock at just under $20? The hungry U.S. players who have been swallowing up Alberta's gas concerns have been throwing a lot of money around, thanks in part to tax treatments that lower their cost of capital.
If Rio were sold for premiums similar to those of other recent deals, the price tag could be north of $30. If it's not sold, it's got a way to fall.
But it doesn't seem too bold to bet that, based on factors behind the torrent of acquisitions seen so far ? structural changes in the power industry, emission regulations, supply, pipeline construction ? Rio will be gone soon.
Here's a scenario: Odds are Rio was the subject of overtures in the spring, in the thick of the M&A frenzy. No deal occurred, and the stock subsequently fell, along with commodity prices. That would have opened the door to any potential buyer to scoop up some stock, lowering the total cost of an eventual bid which, the argument goes, is imminent.
It's not a bet for the faint of heart, but it doesn't seem terribly far-fetched either.
Barrick's hedging play
Traders know that you never want to be the last short to close your position. That might be on gold miner's Barrick's mind these days as the battle for Normandy plays out.
Barrick, of course, is a hedger. It has big short positions in the metal. The idea of higher gold prices is, therefore, not appealing to Barrick. That's putting it mildly. The idea is horrifying. That's not surprising given the company has earned an extra $1.5-billion (U.S.) in profits ? or $68 an ounce ? in the past 14 years from hedging. The company said last week that it would rather put $68 in the bank than bet on rising gold prices, echoing the sentiment of most investors. That explains why Barrick would not want Newmont and Franco to team up and take out Australia's Normandy.
Franco, headed by Seymour Schulich and Pierre Lassonde, is of the mind that hedging has hurt bullion pricing. It is willing to bet that gold prices will rise, modestly, over the next few years ? particularly if it can force some shorts to close their positions, or hedges.
If Franco-Newmont-Normandy do unite, Newmont's and Normandy's hedges would be closed out. At 14 million ounces, the combined position isn't negligible.
Speculators are losing interest in shorting gold these days, as the returns have been crimped by lower interest rates and higher lease rates. But gold bugs figure that a major player closing out its short sales and standing firm on the prospects for bullion could move the gold price north.
That would not be pleasant for the world's most profitable gold firm, Barrick. The gold business is fuelled on rumour as much as anything, and there are some who figure talk of Barrick buying Anglo is designed to lift the latter's stock price to make it more attractive to Normandy investors.
At any rate, this is more than just a takeover story. But then again, as Mr. Schulich puts it, 'If you don't believe gold is going up, I don't believe you should own any gold.'
Metal madness?
Markets always look ahead, so on the surface, maybe it isn't unusual that Alcoa's grim forecast was drowned out by the cheers.
Shares in the aluminum maker, which has announced 6,500 job cuts, rose 4 per cent. Alcan shares climbed 3 per cent.
But considering the message, the reaction seems a little overenthusiastic. Which part of bloated inventories, dismal demand, battered prices did investors not understand? These are not problems that disappear in six months, which, we're told, is roughly the lead time between smart stock purchases and economic recoveries.
Alcan and Alcoa are fine firms ? but at 25 times forward earnings, if we're not in the trough, they are not cheap.
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