More mining wolves, fewer lambs
Barry Sergeant
'03-JUL-06 14:17'
There is growing market speculation that BHP Billiton and Rio Tinto, the world’s two largest diversified resources companies, are likely to bid for Alcoa, the US aluminium giant, and its 60% subsidiary, Alumina Ltd.
Alcoa, which has underperformed during the metal and commodities upcycle due to disappointments from its downstream fabrication assets, has a current market value of $28 billion. Alumina Ltd has a market capitalization, or value, of $6 billion. However, due to the premiums investors demand in merger and acquisition (M&A) activity, the offer for the two companies, should it materialize, could require substantially more than the $30 billion suggested by the see-through market value of the two stocks.
Mega-mergers in the resources sector have been heavily in the news in recent months, with US-based Phelps Dodge bidding to buy Canada-based Inco, plus Falconbridge, for around $40 billion all told. A successful execution of this M&A would form the world’s largest nickel miner and the world’s largest copper digger.
The Phelps Dodge plan would put to rest the bid by Teck Cominco to buy Inco, and also Xstrata’s bid for Falconbridge. In the background, while not falling strictly in the resources field, Mittal Steel appears set to cough up $32 billion for Europe-based Arcelor.
Recent M&A activity has hardly taken experts by surprise. In a detailed report dated May 2005, Chris Lancaster, an investment analyst at RBC Capital Markets, told his clients that the global diversified base metal sector was increasingly awash with billions of dollars in free cash, fuelling the likelihood of heightened merger and acquisition activity.
Lancaster then named the list of potential targets as including Brazil’s CVRD, Alcoa, Canada’s Alcan, Russia’s Norilsk and Anglo-Swiss Xstrata. Smaller targets were identified as Inco, Phelps Dodge, Noranda/Falconbridge, WMR, Teck-Cominco, Impala Platinum, Alumina, Lonmin, and Antofagasta.
Lancaster said that stocks “widely regarded” as having open registers, and therefore possibly most vulnerable to takeover, included Alcoa, Alcan, Phelps Dodge, Inco, Impala Platinum and Lonmin. As things turned out in 2005, the only really big deal seen was the acquisition of WMC Resources by BHP Billiton.
The deal saw BHP Billiton splash out $7.3 billion in cash for a rather tidy looking story: a complementary nickel business, plus Olympic Dam, the world's fourth largest copper resource and one of the world's 10th largest gold deposits. The takeover also establishes BHP Billiton as a major producer of uranium with the largest resource base in the world.
Lancaster last year argued that the lack of “top-class mining assets” might trigger a series of hostile takeover attempts and further rationalisation within the industry. In terms of value, Lancaster last year said that the ratio of stock price to estimated NAV (net asset value), graded the “cheapest” stocks as CVRD, followed in order by Anglo American, Antofagasta, Lonmin, Alcan, Noranda, Xstrata, and Phelps Dodge. Anglo American has since announced plans to further refocus on resources.
Anglo American could be had, but may be considered to be somewhat overexposed to rand earnings, and could present certain competition regulation headaches for its bigger peers. CVRD, the world’s No 1 digger of iron ore, is still considered something of a national asset in Brazil, and can hardly be said to be vulnerable on its share register.
London-based Lonmin, a South African platinum miner, has produced an ongoing set of improving results under CEO Brad Mills, previously with BHP Billiton. Lonmin last year staged its own piece of M&A activity, in buying Southern Platinum for nearly $200m, mainly for its platinum property at Messina in South Africa.
There has been much anticipation of M&A in the resources sector. On February 17 this year, within minutes of Lonmin announcing that it was in M&A talks, its stock price shot up 34%, catalysing a rush into resources stocks across the world. Miners occupied the limelight in Johannesburg, London and even on Wall Street, where almost every stock in the sector rose strongly on the day.
The JSE finished almost 4% higher on the day, with Lonmin finishing 28% higher; Impala Platinum rose 15%, Anglo Platinum by 10%, Northam by 9% and Aquarius by 8%. Gold stocks were led higher by Harmony, with an 8% gain and among diversifieds, Anglo American rose 7%. Lonmin pulled out of the talks, but has remained a speculative stock beyond its strong fundamentals.
Resources stocks have taken a breather since the May 10 peak on global stock markets, but with the softer dollar, the metals and commodity sector is again on the rise.
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