The mining industry is enjoying high prices, high profits and thus, high cash flows. What to do with all that extra cash?
Special dividends and share-buybacks to reward shareholders is one option. But with the expectation of even high prices on the horizon, many mining companies are looking to use this cash to increase their production potential. Developing new mines is another option, but the process takes several years, sometimes decades. An even better option, one that we are seeing gaining momentum as of late, is to expand production via purchasing other mining companies.
The mining industry has historically seen increased acquisition action as prices make new highs and miners become more aggressive in their desire to gain share of the market and cash in on their leveraged positions. This list in not exhaustive, but recent action includes:
– Xstrata recently completed their acquisition of Falconbridge
– Novagold is attempting to acquire Pioneer Metals
– Barrick has bid $1.5 Billion for NovaGold
– Goldcorp agreed to acquire Glamis for $8.6 billion
– Phelps Dodge had been going after Inco, but recently called it off
– EuroZinc and Lundin are merging to create a $3 billion company
– Barrick Gold and Placer Dome merged in December of 2005 (bumping Newmont as largest miner)
While we usually see majors gobbling up minors within the mining sector, we believe that majors themselves might become takeover targets soon. Companies such as Newmont ($23B Mkt Cap) and Barrick ($29B), or even Rio Tinto ($71B) and BHP Billiton ($132B) are dwarfed in terms of market capitalization by the big oil companies. In addition, private equity firms are also flush with cash and looking for companies that can produce huge returns.
So what does this all mean for savvy investors like you and I? The potential for significant profits in a very short timeframe. It is not uncommon to see the share price of the takeover target increase 25-50% in the days after the announcement. In fact, some of our most profitable trades have been mining companies that were taken over or merged with a larger company. Our shares of Western Silver shot up over 40% when Glamis announced their plans to acquire the company. Speaking of Glamis, their share price went up more than 21% the day that Goldcorp announced their takeover plans. We also cashed in very successfully on our Wheaton River position when Goldcorp announced plans to acquire the company in early 2005.
We have compiled a short list of companies that we believe are prime takeover targets. These miners have profiles that make them very attractive for a variety of reasons. Many are perfect compliments to the portfolio of larger mining companies or offer additional sources of mineral reserves that are needed for growth. Others are simply undervalued or have mines with promising drill results and insufficient funding to bring them online. Many are Australian, but that has nothing to do with Sydney being my home for the past year. Without further adieu…
Lonmin is the world’s third largest platinum producer, with four mines located in South Africa.
Lonmin could be the subject of a bidding war, with companies like Rio Tinto, BHP Billiton, Falconbridge, Russian company Norilsk Nickel and Xstrata all as potential suitors. But the most probable buyers are either Barrick Gold Corp or Gold Fields, who have both made tentative approaches to Lonmin. To make this morsel even tastier, Lonmin posted a doubling of first-half profit on Thursday, helped by soaring platinum prices, and said it was on track to increase production to 1,3-million ounces in 2010. Lonmin trades on the London and Johannesburg Stock Exchanges, under the symbols LMI and LOLMI, respectively. It can also be purchased in the U.S. as a pink sheet under the symbol LNMYI.PK.
Newcrest is Australia’s leading gold mining company, boasting a relatively low trading price and a politically stable home. Newcrest, which has a market value of more than $A7.2 billion, has long been viewed as an attractive takeover target for top international goldminers. Newcrest was recently upgraded to a “Buy” by UBS and is viewed as cheap by global comparisons. Newcrest currently mines about 1.5 million ounces of gold a year and is expanding output.
Goldcorp gave the nod to Newcrest, saying it was the only Australian gold stock of any scale, in terms of what’s left in the world. Other suitors include Newmont Mining Corp, which has long been viewed as the top contender. Canada’s Barrick Gold Corp and South Africa’s AngloGold Ashanti have also been mentioned as potential suitors.
Oxiana Limited (OXFLF.PK)
Oxiana Limited is Australia’s second-largest gold miner. Oxiana owns and operates the Sepon gold and copper mines in Laos and the Golden Grove base and precious metals operation in Western Australia. Oxiana owns the Prominent Hill copper/gold project in South Australia. During the year ended December 31, 2005, the Sepon Gold Operation in Laos produced 200,370 ounces of gold and 109,460 ounces of silver. Since July 2005, Oxiana’s zinc and copper concentrate operation at Golden Grove in Western Australia, produced 33,290 tons of zinc contained in concentrate and 10,362 tons of copper contained in concentrate. Oxiana Resources recently reported a 14-fold rise in first-half profit for 2006.
Xstrata, Placer Dome and Anglo American are the most talked about as potential suitors. Merrill Lynch added fuel to the speculation fire, stating that nickel, zinc and aluminum prices might fall further this year and investors should buy firms such as Oxiana and Lonmin, which might be takeover targets. Oxiana trades on the ADX under the symbol OXR. In the U.S., it is a pink sheet under ticker symbol OXFLF.PK.
Metalline Mining (MMGG.OB)
Metalline Mining through its subsidiary, Minera Metalin S.A. de C.V., is engaged in exploration and development of a mining concession in Sierra Mojada, Coahuila, Mexico.
The Sierra Mojada Property contains two mineral systems separated by the Sierra Mojada Fault. North of the fault the mineralization is silver, copper, zinc and lead sulfide deposits. South of the fault the mineralization consists of oxide zinc deposits. Currently Metalline focuses its operations on exploration of oxide zinc. Metalline is estimated to have 4.9 billion pounds of zinc resource with the potential to produce 398 million pounds of zinc annually. They will need about $300 million to build the mine, which is where a larger, cash-equipped company could help.
There is a worldwide zinc crisis and Metalline’s Sierra Mojada is likely to be one of the 3 largest zinc projects in the world coming to production in the next few years. The other 2 largest are located in Bolivia and Iran, which aren’t the most stable areas for investment. Due to this, it is expected that Metalline will solicit multiple bidders when they complete the feasibility study next year. Anglo American is expected to be amongst them.
A word of caution about trading bulletin board/pink sheet securities:
Please due your own due diligence, especially when considering purchasing an OTC security. An investment in an OTC security is speculative and involves a high degree of risk. Many OTC securities are relatively illiquid, or “thinly traded,” which tends to increase price volatility. Illiquid securities are often difficult for investors to buy or sell without dramatically affecting the quoted price. In some cases, the liquidation of a position in an OTC security may not be possible within a reasonable period of time.