It's Shopping Season In The Global Base-Metals Sector
By Brian Truscott
Of DOW JONES NEWSWIRES
5 September 2007
Source: Dow Jones News Service
VANCOUVER (Dow Jones)--Base-metal-company valuations have retreated but cash in hand has not, which means just one thing: it's shopping season.
"This is the perfect time for acquisitions, what with the amount of unallocated capital sitting on balance sheets at the moment," said one sector analyst.
What's more, market liquidity and volumes are way down.
"If a company came in and offered an all-cash deal at a 30% premium, shareholders would probably say 'Thank you' and take it," he said.
And it's not as if there's just one or two names on the potential mergers-and-acquisitions block; it's the whole sector - zinc, nickel, copper, uranium, you name it.
An ad hoc list of senior names - Rio Tinto Plc (RTP), BHP Billiton Ltd. (BHP), CVRD (RIO), Xstrata Plc (XTA.LN), Teck Cominco Ltd. (TCK) and the like - quickly add up to more than $30 billion in available cash and marketable securities. Add in a long list of mid-tier players that have been generating scads of free cash flow from high metal prices and you get an astronomical sum of money that has to be employed in some fashion.
Taking a step back and looking at the various base-metal sectors, here's a list of names that are likely going to be taken out in fairly short order,
Hudbay Minerals Inc. (HBM.T) is the company the market reckons will be taken out first, primarily for its zinc - a metal that will become a precious commodity starting in 2010. Likely predators? Nrystar, the coming spin-off from Belgium's Umicore and Australia's Zinifex. Or it could be the oft-rumored suitor Lundin Mining Corp. (LMC), which might choose to go after Inmet Mining Corp. (IMN.T) instead.
Another in the sector expected to go is Breakwater Resources Ltd. (BWR.T), which is relatively small but seen as a strong producer which generates scads of free cash flow. This might actually become a HudBay target in a stopgap effort to protect its independence and a way to spend some of its excess cash.
Another favorite target: Equinox Minerals Ltd. (EQN.T), a dual-listed copper company operating in stable Zambia, with operations scheduled for the middle of 2008. "Equinox is the cheapest by far in the market right now for what you can get with your dollar," said one analyst.
In the nickel sector, Brazil's Mirabela Nickel Ltd. (MNB.T) is sitting on a cash pile and has no debt and there are widespread rumours in the market that both FNX Mining Co. (FNX.T) and Lundin are buying the company's stock.
At the same time, it's thought diversified FNX Mining is a company ripe for the taking - a long list of suitors could be taking a slide rule over this one.
Anvil Mining, Katanga Seen As Targets Among Copper Cos.
And while Aur Resources has already been taken in the copper sector, Anvil Mining Ltd. (AVM.T), a leading producer of copper in the Democratic Republic of Congo, should also be on the block.
Which brings us to Katanga Mining Ltd. (KAT.T), which has just wriggled out of a hostile takeover bid by Camec, or the Central African Mining & Exploration Co. (CFM.LN). "This one has been a big political game and Camec lost out," one analyst said.
Nevertheless, Katanga has had its data room open during the bid and lots of the major players in the area went through it, meaning one of them could take a run at grabbing the DRC-based copper and cobalt producer.
And just down the road from Katanga is Nikanor Plc (NKR.LN), which had previously been rumored for some kind of tie-up with Katanga, simply because Katanga has infrastructure and Nikanor has a good deposit.
Over in Peru, Chariot Resources Ltd. (CHD.T) is a sitting duck for Lundin Mining, which inherited a 19% stake in Chariot when it took out Rio Narcea.
On the uranium front, it's no secret that Cameco Corp. (CCJ) is sitting in a Canadian market where the regulator looks at virtually everything it does. This inevitably pushes back projects, especially regarding the rehabilitation of its flooded Cigar Lake mine, where the opening date keeps being delayed. At least one analyst thinks 2013 is now a realistic target for operations, while another questioned whether the mine will ever open.
That means Cameco needs inventory. At the same time, BHP Billiton and Rio Tinto have both spoken about ramping up their uranium divisions.
Which companies are in the middle? Paladin Resources Ltd. (PDN.T), Denison Mines Corp. (DNN) and Uranium One Inc. (UUU). All three are targets for companies sitting on huge cash piles.
And we haven't even touched upon what Anglo American Plc (AAL.LN), a diversified senior that's fast developing its asset base outside of South Africa, might do, apart from, say, jettisoning some of its assets in northern Asia. It wouldn't take a run at Teck Cominco, would it?
"The only other option for some of the seniors here is to use their cash to become more diversified, by focusing on downstream operations - a higher-margin business area," one analyst said. "That means they wouldn't have to be a price-taker anymore and so therefore (could) become a diversified producer, which is something along the lines of what Alcoa (Inc. (AA)) did."
And the timeline for the M&A shenanigan?
"Any time now; it's going to be fun," the analyst said.
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