Wheeling and Dealing as Mining Profits Soar

Wheeling and Dealing as Mining Profits Soar

Since my stock advisory Small Cap Alpha launched last year, I’ve made the case that mining would rebound strongly because of solid demand for commodities and underinvestment.

All associated mining plays are up from their initial recommendations.

But this story is no longer new. It’s become obvious to many investors that mining is undergoing a resurgence.

That said, I don’t think the opportunity in the sector is gone. It’s just shifted slightly.

The major and mid-tier resource companies now have the cashflow and confidence to acquire smaller projects or invest in joint ventures.

For a long time, they have held back on acquisitions because they wanted to emphasise disciplined spending and pay down debt. In doing so, they’ve won back investor sentiment.

However, at the end of the day, they’re in the mining business. They can only do that for so long. Which means that, at some point, they’ll need to add to their reserve base and diversify asset portfolios.

I believe that time is now.

Consider some of the deals that have been made in the last six months:

In February, Newcrest Mining Ltd [ASX:NCM] took a US$250 million stake in Lundin Gold, a gold and copper play listed in Canada. Newcrest is also looking to acquire two more ‘Tier 1’ assets by 2020.

Canadian firm Copper Mountain Mining Corporation just acquired Australian copper junior Altona Mining Ltd [ASX:AOH] for AU$93 million.

Australian miner OZ Minerals Ltd [ASX:OZL] bid $444 million for copper junior Avanco Resources Ltd [ASX:AVB] in March. Avanco’s largest shareholder approved the offer. In April, OZ Minerals’ CEO stated that the company was scouring the market for more acquisition deals.

Meanwhile, gold miner St Barbara Ltd [ASX:SBM] put $4 million into explorer Duketon Mining Ltd [ASX:DKM] in April.This adds to its strategic stakes in three other explorers.

Also in April, energy major Santos Ltd [ASX:STO] received a $13.5 billion takeover offer from US firm Harbour Energy. The offer was raised to $14.4 billion, which Santos rejected!

And mining service company Emeco Holdings Ltd [ASX:EHL] announced it was acquiring a rental business with an enterprise value of $80 million.

So you can see that there’s plenty of positive sentiment and deals taking place in the mining sector.

Better yet, I’m convinced there could be plenty more this year and next.

BHP spin-off South32 Ltd [ASX:S32] has an astonishing US$1.9 billion in net cash to use.

What’s more, Australia’s key exports — iron ore and coal — are enjoying higher prices than forecasts from earlier in the year.

This gives producing miners enjoying this windfall greater firepower to become more aggressive with their spending plans.

It also explains why Australian government tax receipts were much higher than previous estimates in this year’s budget.

Both Rio Tinto and BHP forecast strong commodity prices and the potential for acquisitions at a conference in Miami last month.

In the case of BHP, alongside stronger prices, the upcoming sale of its shale assets in the US will also give it an enormous windfall of cash.

What’s more, the CEO of engineering firm WorleyParsons Ltd [ASX:WOR] expects a wave of investment to sweep across Australia from the petroleum and mining industries. As far as he’s concerned, that’s just to keep meeting existing demand.

These are all reasons why I’m incredibly bullish on promising junior miners, especially those that could become subject to takeover offers.

A day after I sent out a report exploring this idea in Small Cap Alpha, South32 announced that it had a conditional agreement to acquire a 50% stake in a Queensland coal development for up to US$213 million.

Not only that but a company called Sino Gas & Energy Holdings Ltd [ASX:SEH] announced it had received a proposed acquisition from a US private equity firm. The offer price was at a 19% premium to the closing price on the previous day of the announcement.

Sino’s management is endorsing the offer to shareholders.

These are signs of things to come.

I spent two days in May at a resource conference on the Gold Coast. Everything I saw there says we’re on track with my basic thesis that mergers and acquisitions will continue to pick up.

I’m not alone on this front. The Australian reported recently that Citigroup believes the Australian mining sector is on the verge of a mergers and acquisitions boom.

Another interesting angle I picked up at the conference was the mining industry’s reluctance to step outside the ‘Tier 1’ jurisdictions of Australia, Canada and the United States, with the exception of Ecuador.

I highlighted in the aforementioned report Australia’s secure property rights and rule of law as two appealing factors for the industry.

The importance of this can’t be understated.

The Australian reported recently that Islamic terrorists beheaded 10 people in Mozambique’s Cabo Delgado province.

Multiple Australian mining companies operate in Mozambique, including one that presented at the conference.

So you can see how important the issue of security is for mining companies.

In any case, everything I see suggests it could be a good year ahead for the Aussie resources sector.


Callum Newman Signature

Callum Newman,
Editor, The Daily Reckoning Australia