The last minute shoppers are finally coming out to play. None too soon, with only four days left before Christmas. And what are they buying?
China is buying banks. Mining companies are buying each other (how vain). And retro American investors wish it was 1999. They’re buying tech stocks like Oracle (NASDAQ:ORCL). And we are buying none of this market good cheer.
How about we start with the miners? Next year could be a very good year to be a takeover trader. That is, if you keep your eyes on takeovers in the mining business, you’re going to find a lot of rapid movement in share prices as the whole sector gobbles itself up.
Who is buying who? Zinifex (ASX:ZFX) made a $775 million bid yesterday for Tasmanian nickel miner Allegiance (ASX:AGM). Allegiance shares rose 38% on the bid, which is about six times 2009 earnings, according to Andrew Trounson in today’s Australian.
China is involved too. Chinese nickel-maker Jinchuan has a 10.4% stake in Allegiance and is contracted to take all 8,500 tonnes of production from the firms Avebury mine on the West Coast of Tasmania.
So Zinifex wants to buy Allegiance, which is partially owned by Jinchuan, before Zinifex itself is bought by someone else, like, say, Oxiana (ASX:OXR). Are you with us?
For the miners, it’s all about increasing production by acquisition. It’s a much quicker route to higher sales than organic growth and project development. And as you can tell, the whole sector seems to be in the grip of a takeover mania. Hmmn.
According to Jo Clarke in today’s Financial Review to the top eight takeover targets for 2008 are:
1. Oxiana: base and precious metals in Australia and Laos
2. Zinifex: zinc and lead mining in Australia
3. Lihir Gold (ASX:LGL): Gold in PNG and Australia
4. Albidon (ASX:ALB): nickel in Australia
5. Western Areas (ASX:WSA): nickel in Australia
6. Equinox (ASX:EQN): copper in Zambia
7. CBH Resources (ASX:CBH): zinc and lead in Australia
8. Andean Resources (ASX:AND): gold in South America
Why all the action in nickel stocks? We took a look at a five-chart for nickel and then asked our new technical analyst and trader Gabriel Andre what to make of it. First the chart.
What does it mean? We’ll let Gabriel explain. He’s the technical analyst and trader.
“It could be a good time for a rebound. The nickel price has reached a long-term support line. This support is a former resistance line with highs in 2000, early 2004 and 2006. The break of this line during August 2006 triggered a strong bullish trend.”
Sounds good so far. He continues, “As usual in the markets, the new high became—and remains–the main support line. Indeed, the price rebounded sharply on this support after the sharp sell-off in last August, which confirms the validity of this technical line.”
But is nickel a buy right now? Gabriel says there is a risk. If the support doesn’t hold, the price will fall further. “Since the beginning of December, the price is just above this strong support. Technically speaking, the break of this support should trigger another big sell-off with the other long-term support line (through the lows of 2001 and of 2005) as the new target.”
Words matter, as we mentioned yesterday. A sure sign that the minerals boom is maturing is the filtering down of specialist knowledge to the retail investors. It is not enough anymore to know that resources in a bull market. Or that nickel has made what looks like a double technical bottom and has found long-term support. You have to know more.
For example, there are two kinds of nickel deposits. Nickel sulphides are harder to find but higher grade. Nickel laterite deposits are easier to locate, but harder to process. Nickel competes with zinc as an alloy for making stainless steel. Is the nickel price forecasting demand growth, or supply constriction…or nothing of the sort?
By the way, before he became an iron ore Baron with Fortescue, Andrew Forrest nearly became a nickel baron. His master plan was to use a new process for turning laterite ore into nickel in Western Australia through his vehicle at the time, Anaconda.
Prophets are never honoured in their own time. The process Forrest trumped for treating the laterite ore didn’t quite come off the way anyone expected. He parted ways with the project, which has since become Minara Resources (owned 40% by Glencore, the behind-the-scenes partner in Xstrata).
“Minara trades at less than half the P/E of the rest of the resource industry. The question going forward—and it’s worth a look—is whether the company can contain costs,” says Outstanding Investments editor Al Robinson.
Determining resource quality is also important, as Minara and other firms ramp up brownfield and greenfield exploration all over Australia. Incidentally, Al has also written an article on how reserves and resources so they are compliant with JORC. Look for that in your stocking on Monday.
The Daily Reckoning Australia