M&A in Mining Stocks Should Soar, These 5 are Prime Targets
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In various articles over the past week I've opined that global mining companies like Rio Tinto, Vale, Anglo American, Xstrata will use their size and free cash flow generation to reward shareholders through special dividends or share buybacks. However, even more likely the majors will become increasingly acquisitive. They have access to incredibly cheap funding. For example,Teck Resources, (NYSE: TCK) recently issued 6-yr fixed coupon debt at 2.5%! The majors generate huge cash flows before capital expenditures. Typically the majors re-invest most of that cash flow, but lately cap-ex cuts have been the norm. This suggests that cash will be piling up on the balance sheets. One attractive route to pursue is strategic acquisitions for both growth and diversification. Now is a great time to buy, target valuations are down by 50%-75%. The following 5 names are ideal takeout candidates.
Peabody Energy, (NYSE: BTU): One of the largest pure-play coal companies in the world, Peabody has an Enterprise Value, "EV" of $11 billion. Compare that to BHP at about $200 billion, Vale at $120 billion and Rio Tinto at $100 billion. Peabody is not a stretch for these giants. An acquirer would gain geographic diversification, a successful coal trading business and a dominant position in the Powder River Basin, "PRB" in Wyoming, USA. Peabody has aggressive growth targets for it's Asian coal business centered in Australia, and it has multiple marketing offices around the world.
Teck Resources: Teck has an EV of about $20 billion, still easily digestible by a major in my opinion. Teck would be especially appealing to Xstrata as it would instantly give Xstrata a powerhouse coking coal business. Xstrata would also benefit greatly from Teck's sizable and relatively low-risk North and South American copper operations. Teck has a foothold in the Canadian oil sands that might be appealing as well.
Consol Energy, (NYSE: CNX): Back in 2010, Consol made a transformational acquisition of Marcellus and Utica shale assets. At the time, investors didn't understand or particularly like the deal. Within just a few quarters, the deal looked like a disaster as natural gas prices plunged. However, Consol adroitly teamed with 2 sizable strategic partners and has executed well in its drilling programs. Today, the shale gas assets are a lot more valuable that what they paid, and large global companies are anxious to get into the shale plays. In addition, Consol has one of the best coal franchises in the U.S. Like Teck Resources, Consol trades at a substantial discount to the-sum-of- its parts.
Cliffs Natural Resources, (NYSE: CLF): Cliffs is a work in process. After 2 significant acquisitions in 2 years, there's still a lot of wood to chop. A prospective suitor would get excellent iron ore assets in the U.S. and highly prospective production in Canada's Labrador Trough where CLF shares a dominant position alongside Rio Tinto. An acquirer of Cliffs could also roll-up a handful of attractive but under-capitalized emerging iron ore producers in the region.
Walter Energy, (NYSE: WLT) I know I'm beating a dead horse, but I can't help myself. It's my single favorite takeout target in the natural resource sectors. WLT's EV of just $4.5 billion would be a drop in the bucket for a major, but acquiring it would give a company like Xstrata instant scale and power in coking coal. Vale would greatly benefit from Walter's high quality coal assets in Alabama which are ideally situated for exporting to Brazil and Europe.
Last year a number of acquisitions in the coal space were done at the top of the market. This year the majors have an opportunity to buy companies in what might turn out to be the sale of the decade. Each major should be looking to acquire companies like those named above. If they don't pull the trigger, there's a good chance their competitors will.
MockingJay2011 owns shares of Walter Industries and CONSOL Energy. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.