Titans snatched in year of the takeover

16 08 2010

After former nickel titans Inco and Falconbridge were snatched from Canadian hands and homegrown golden boys Barrick Gold Corp. and Placer Dome teamed up, no one expected 2007 to top that on the resource scale.

Then the midtier guys went into merger mania, metal prices refused to tank as predicted, British resource giant Rio Tinto PLC scooped up Montreal aluminum king Alcan Inc. and the world’s largest mining company, BHP Billiton Ltd., took a run at Rio.

If that wasn’t enough, lately Swiss miner Xstrata PLC (the name on the former Falconbridge’s letterhead now) is rumoured to be in play. None other than the new owner of Inco, Brazil’s CVRD, and another top-five global miner, Anglo American PLC, are said to be sniffing around.

It was quite a year.

So, when it comes to 2008, you really have to wonder what’s left to pick off on the takeover front and whether resource commodities will stay strong in the midst of all this consolidation.

Well, stay tuned.

Believe it or not, another interesting year is in store for the supercharged metals world.

“What’s happening now (with all the takeover activity and merger rumours) is setting the tone for 2008,” says analyst John Hughes of Desjardins Securities. “BHP and Rio Tinto are going to be well-watched.”

The Canadian scene doesn’t have much left to grab on to, but Hughes believes Teck Cominco Ltd. is a candidate.

Mainly due to its dual share structure, the Vancouver-based zinc and copper giant has sat on the sidelines as one of the last survivors on the country’s base-metals radar. But a takeover or some sort of combination with Temagami Mining, for instance, isn’t impossible, he argues.

“The world of metals has changed a lot over the past year, and Teck Cominco has remained outside of it. The market is looking for that company to progress in some way, shape or form,” Hughes says.

Teck took over Toronto copper maker Aur Resources last year in a $4 billion friendly deal, which was pretty safe and some say a bit generous after the $18 billion last-ditch, “hail Mary” bid for Inco in 2006 flopped right at the buzzer.

With the sector’s lack of big new discoveries and rising capital costs, Teck is appealing as an established low-cost zinc player with more than 20 years of reserves.

“By agreeing to terms with one group, a potential acquirer could obtain 32 per cent of voting control in Teck Cominco,” Hughes and co-analyst John Redstone say in a research note.

“And both aluminum and zinc are trading significantly below historical peak prices, and metals and mining companies traditionally shy away from acquisitions at record prices.”

United States aluminum giant Alcoa Inc., which lost Alcan to Rio Tinto last year, could also be on the auction block. Alcoa boasts a low valuation and most power needs are taken care of under long-term contracts, observers say.

Regardless, veteran mining analyst Barry Allan of Research Capital Corp. says we’re in full “silly season” mode with all the takeover speculation, and he doesn’t see a lot panning out for the big guns.

“It’s reaching silliness proportions. I mean, how much bigger do you have to get?”

He points to the possibility of a BHP-Rio combination.

“I’m failing to see the merits of that.”

As it stands now, Rio has rejected BHP’s whopping $140 billion (U.S.) offer as too low. Many still expect the two diversified big wheels to come together with a friendly deal early in the new year. A merger would create a mining powerhouse with a market value of about $320 billion, which, amazingly, would rival most of the world’s big oil companies.

It’s still not a done deal though. The proposed combo has prompted widespread speculation about looming counter bids and has the world’s steel makers fearing a bulked-up BHP would have too much muscle in setting raw-materials prices.

A merger would eclipse a monster Canadian deal done earlier last year, with Rio swiping Alcan out from under Alcoa for $38 billion (Canadian). Rio is now the world’s largest bauxite and aluminum producer, which is why BHP and possibly other suitors would come calling.

If this merger came to pass, we’d be getting into monopoly territory. The bigger BHP and its Brazilian competitor, CVRD, also known as Vale, would control most of the world’s iron ore and uranium. The possibility makes China, one of the largest consumers on the planet, a little nervous about prices.

The new behemoth would also control a good chunk of the global flow of coal, copper and diamonds.

A merger could have an impact on their two diamond mines in the Northwest Territories, Diavik and Ekati. The mines are now controlled separately by BHP and Rio, and could be in for a shakeup should a newly merged parent company look for an asset sale after a merger.

Meanwhile, the Canadian midtier went hog wild again this past year. Kinross Gold Corp. scooped up Bema Gold Corp., Agnico Eagle Mines Ltd. acquired Cumberland Resources Ltd. and Yamana Gold bought Meridian Gold Inc. for $3.5 billion and completed a three-way merger with Northern Orion to create the world’s fifth-biggest gold producer.

Allan doesn’t see a whole lot more happening on the Canadian landscape this year.

“What’s left? Once you burn down all the houses there’s nothing left to burn,” he jokes.

“What we really need is for the juniors to emerge. We haven’t seen a significant amount of that yet. And we haven’t had a big discovery in base-metals land” on the level of a Voisey’s Bay in Labrador in several years, he notes.

On the global scene, talk of a possible link-up of Xstrata and Anglo American has gone on for several months, with analysts pointing to overlapping operations in coal, copper and platinum that would make the two a charming couple.

But the more interesting scenario for Canada would be if Vale took over Xstrata. That would mean the long-awaited consolidation of the century-old Inco and Falconbridge nickel assets the two now own separately in the Sudbury basin.

“If they get together, they could roll it out as a separate nickel company to trade on the TSX,” says Hughes, who sees the disappearance of Inco and Falconbridge from the stock exchange as a lost opportunity for investors in this bull market. “As a base-metals analyst, we can only dream of that happening.”

So what about metals prices? Despite the volatility that hit the market generally due to the subprime-mortgage crisis, most base metals remained pretty strong last year after setting records in recent years. Gold has corrected lately, but it hit a 28-year high recently, just shy of the all-time peak of $850 (U.S.) an ounce set in January 1980. Spot gold closed yesterday at $834.90, down $4.70 from a jump after the assassination of former Pakistani premier Benazir Bhutto.

It was also a time for the secondary metals to shine, with lead and molybdenum, or “moly,” as it’s called, setting records. And the rare earth metals like niobium and tantalum were also on a hot streak.

“It was a nice surprise that commodity prices held up,” says Allan.

He expects to continue to see some “lovely prices” in metals next year, with gold possibly hitting $900 an ounce. Surprisingly the gold stocks haven’t followed suit, he says, due to rising costs for getting bullion out of the ground.

Analysts say it would take one or two things for metals to finally hit the skids next year: a full-blown recession in the U.S. or weakening demand from insatiable China, which has been the main driver of the commodities market.

Hughes doesn’t buy the argument that demand will drop off from China after the Beijing Olympic Games in 2008. China has been on such a construction spree that essentially an Olympics infrastructure is built “every other week.”

“The world is in consumption mode. We would have to see something catastrophic to make China a no-go,” adds Allan.

Something else to watch for in 2008 is the opening of Ontario’s first diamond mine. De Beers Canada is building the Victor project, near the James Bay community of Attawapiskat. The open-pit mine is due to start production in the first half of 2008.

“Volatility is inherent in the game of metals, and 2008 will probably see more of the same,” Hughes notes.

“We’re still bullish. Generally, you’ll see good times,” says Allan.




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