Consolidation fever in the mining industry
Mining companies have been rolling up the industry over the past few years, and the consensus is that that trend will continue until there are no possible buy reagents left. That's the conclusion of a Financial Times article ("Miners roll up their sleeves to consolidate scarce resources", 7/25/06).
The most immediate sign of the buying frenzy is in the current duel between Phelps Dodge and Xstrata to buy Canada-based Falconbridge, a bidding war that has doubled the price of that company from around $10 billion to over $20 billion.
But that's not the only deal in the works.
- Australian iron ore miner Mount Gibson just made a bid for rival Aztec, hoping to boost the company to #3 status in Australia.
- Canada's GlobeStar Mining Corporation just bought out Dominican Republic nickel mines from Everton Resources Inc.
- Canada's Stornoway Diamond Corp. has bid to buy Canada's Ashton Mining and Contact Diamond Corporation, both diamond mining companies.
- New Zealand's Oceana Gold recently acquired Australia's Climax Mining, another gold miner.
- Canada's Barrick Gold has made an offer to buy Canadian rival NovaGold.
And these are just the deals happening in the last few months, all worth at least hundreds of millions of dollars.
Because metals prices are so high, the mining companies are loaded with cash. That means that even $20 billion acquisitions are doable. Some mid-size mining firms drawing strong interest are Alumina, Newcrest, Lonmin and Vedanta. There are twenty mining companies in the world with between five and 20 billion dollars in revenue, and all bets are that there will be significantly next within a few years. And the bidding, as for Falconbridge, is likely to be strongly contested.
And, as we've seen with big oil, acquiring established sources is far more desirable than spending money on exploration. The FT article quotes a Citigroup analyst as saying: "Acquisitions and buybacks deliver better returns than the expansion of production."
Older miners are wearing out faster than new mines are discovered. Also, the increasing environmental controls and Third-World nationalism make the cost of new mines grow ever higher.
PLus some very big companies are rumored, according to the article, to be targets. Aluminum company Alcoa is one of them, as is rival Alcan. Even gold and diamond giant Anglo-American may be tempting, now that is selling off both its steel and paper operations, making a pure mining play.
Companies like Rio Tinto and BHP Billiton are identified as possible predators. Both are set to generate many billions in cash this year, thanks to skyrocketing iron ore prices. Even smaller deals (purchases of single mines) are significant, as bigger companies keep rolling up smaller ones.
