The latest update of the M&A share attractiveness ranking for the world’s 40 largest mining companies demonstrates the current slump of gold (and to lesser extent copper) mining stocks. Discounting Ivanhoe, which has been taken out by Rio Tinto, ENRC tops the list of companies that might become the target of an acquisition. The company’s stock moved higher over the past weeks on acquisition rumors, reducing its attractiveness ranking, but analysts still see approximately 50% upside in the stock. Behind ENRC the ranking is dominated by gold and copper miners, with Anglo American the only non gold or copper miner in the top 10. Low gold and copper prices and the emergence of gold ETFs has depressed the share price of the miners over the past year, but most analysts still expect better times for this group of miners.
The thebusinessofmining.com M&A share attractiveness ranking is a combination of analyst expectations and current share level compared to the annual high, normalized against BHP’s share performance. The ranking provides a market perspective of how ‘cheap’ a stock is for potential acquirers.
Valuations across the mining industry are coming down as a result of low commodity prices and uncertainty about the future of the global economy. Many companies are reviewing investment plans, pressured by investors to return money to shareholders if the project pipeline is short of feasible investment opportunities. Most companies in the industry will be extremely careful with large-scale M&A at this moment, but for some companies with either a lot of cash or a good position to give out more equity the reduced prices could provide opportunities to make a big acquisition. The ranking presented below presents the attractiveness of acquiring any of the Top 40 mining companies.
An acquisition of any of the world’s largest 40 miners will have to be financed to a large extent by raising additional capital from equity holders, as the acquisition price would be too high for most companies to pay cash after taking on more debt. The attractiveness of executing a share deal to acquire a company is split into the current level of share depression (historic performance) and the outlook for the share as given in analyst targets (future performance).
The share depression is represented in the chart and the ranking below by taking the ratio of current share price compared to 52-week high, normalized to the performance of BHP Billiton, the largest company in the group (i.e. share depression of BHP Billiton = 1.0). The 52-week high is used surprisingly often in acquisitions as the price paid, as it is easy to accept for many shareholders of the target company that they will receive the highest price over the past year.
The outlook for shares is given by the ratio of consensus analyst target dividend by current share price. Whatever the historic performance of a share, the outlook ratio shows the expected potential for the share. For these large mining companies the consensus target is typically formed out of at least 10 equity analyst and banker targets. An overall ranking score of share attractiveness is calculated by dividing the outlook ratio by the share depression ratio.
In this initial ranking of attractive targets, using closing share price of August 3rd 2012, the top 5 positions are claimed by ENRC, Ivanhoe, Kinross, Peabody, and Anglo American. Each of these shares has taking a significant beating over the past year. Apart from Anglo they have all dropped about twice as far from their year high share price as BHP Billiton. However, analyst targets for each of the companies are high too, each being expected to gain at least 50% of value in the relatively short term. The combination of a big drop in share price and a promising upside makes the companies attractive for potential buyers. Clearly many more factors play a role in target selection, and politics, synergy potential, and several other factors rule out quick action for most of the top targets in the ranking. However, the chart and ranking below do serve well as a quick scan to see which companies are in the ‘danger zone’ of becoming an acquisition target.
©2012 | Wilfred Visser | thebusinessofmining.com
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