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M&A Share Attractiveness Ranking – February 2013

February 17, 2013 Comments off

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.

Mining M&A - Share attractiveness chart - 130217

Mining M&A - Share attractiveness ranking - 130217

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Mining week 26/’12: Resource nationalism & slowdown worries

June 24, 2012 Comments off

Top Stories of the Week:

  • Glencore mine in Bolivia nationalized
    • Bolivia nationalizes the Colquiri zinc and tin mine, one of 5 of Glencore’s assets in the country. The government promises to give a ‘fair compensation for equipment.
    • The nationalization comes after several weeks of labor conflicts between Colquiri’s workers and Glencore’s local subsidiary
    • Sources: Wall Street Journal; Glencore press release; La Prensa Bolivia
  • Rio Tinto invests $4bln more in Pilbara region
    • Rio Tinto has decided to spend an additional $3.7bln in the Pilbara region as part of its long-term investment plan.
    • $2.0bln of the funds will be used for infrastructure enhancements to allow the company to meet its output targets. The other $1.7bln will be used to extend the life of one of the largest mines in the area.
    • Sources: Rio Tinto press release; Financial Times; Fox Business
  • Media stress commodity price uncertainty

    • The disparity between performance of global mining stocks and metal prices is triggering debate in banking world and media about the potential impact of a further slowdown of the global economy.
    • Sources: Mining Weekly; Financial Times

    Trends & Implications:

    • The uncertainty about short-term economic developments in both OECD countries and developing economies, most notably China, is causing share prices across the mining industry to lag the current performance of both metal prices. The uncertainty for short-term prospects apparently also affects the long-term outlook for the industry, making investors believe price and profit levels can’t be sustained. As a result, Price/Earnings (PE) ratios are dropping, causing market capitalization to go down despite good company performance.

    ©2012 | Wilfred Visser | thebusinessofmining.com

Mining Week 17/’12: The sense and nonsense of stock prices

April 22, 2012 Comments off

April is traditionally the month in which the major diversified miners present their annual results. BHP Billiton closes its fiscal year in the mid of the calender year, but joins its main competitors in giving an update of its performance in an investor meeting in this month. One of the key objectives of the executives presenting their numbers to an audience that will listen to each of the presentations in the course of a couple of weeks is to make the company look good, or at least better than competitors.

Managing the expectations of investors serves a twofold purpose: in the first place the goal is to make sure the investors know what they are investing in and what the perspectives for the company are – as a result the stock price should reflect the true performance and potential of the company; in the second place the goal is to keep the shareprice high or make it go higher – often referred to ironically as ‘reflecting the true value of the company’.

Why care about stock prices?

  • Market value matters in the first place from a financial point of view. The higher the market price, the easier and cheaper it is to raise debt, giving flexibility to invest.
  • The second important reason to care about the share price is the mergers and acquisitions arena. An undervalued company is an acquisition target, and having a strong share price makes doing paper acquisitions (pay with shares instead of cash) attractive.

Why not care about stock prices?

  • Market value does not matter because an executive should not be driven by short term stock price fluctuations, which are typically mainly the result of market conditions and events the executives do not have a hand or a say in. In the long term good management will lead to a distinct outperformance of competitors, but short term movements are too erratic to say much about management performance.
  • An executive should not be driven by the market price (i.e. the shareholders interest) alone, but should take the interests of other stakeholders (employees, society), which are often not directly or fully included in the share price, in account too.

©2012 | Wilfred Visser | thebusinessofmining.com

Bulk offers miners some relief

September 23, 2011 Comments off

“The London Metal Exchange, where copper, aluminium, zinc, nickel, lead and tin change hands, is providing minute-by-minute insight to the subsequent share price moves of large mining companies. With LME metals in free fall, the shares of companies such as BHP Billiton, the world’s largest miner by market capitalisation, have followed.

With copper down 8.6 per cent and nickel a hefty 17.5 per cent on Thursday, extending big losses earlier on the week, it is understandable why miners’ shares are tumbling. More could come if LME prices continue to drop, as they are in early Friday trading. But that exclusive focus on LME metals ignores the real cash-cows of the mining sector: iron ore, thermal coal and coking coal. Prices are holding rather well this week.”

Source: Financial Times, September 23 2011

Observations:

  • For London-listed miners the LME-metals account for 33% of earnings, with 53% from iron ore and coal (thermal and metallurgical).
  • Nearly all commodities lost 5% or more of their value in the spot market on Thursday and Friday.

Implications:

  • Falling commodity prices signal doubt about continued economic growth is starting to affect traders, despite miner’s comments that demand is staying strong. The falling premium of lump ore over fines confirms the view that we might be past the peak of prices.
  • Miners will need to decide again about hedging (part of) their production to benefit longer from high prices. Long term supply contracts for bulk materials do serve as a sort of hedge, but metals-prices could also be hedged using derivatives.

©2011 | Wilfred Visser | thebusinessofmining.com

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