Who Will "Glen-Strata" Acquire First? 4 Prime Targets
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For years Xstrata was on the prowl for acquisitions of natural resources or the companies that produce them. Xstrata may be remembered for its acquisition of Falconbridge, a Canadian natural resources company with operations in 18 countries. Falconbridge produced copper, nickel, cobalt and platinum, among other things. Even as Xstrata is now the target of Glencore, it still has the acquisitive juices flowing for smaller deals. For example, last year Xstrata acquired coking and thermal coal reserves in Canada's Peace River Coal basin. The company spent under $1 billion, a drop in the bucket, but it shows where their heads are. Coking coal will remain a focus of a combined Glencore/Xstrata, or "Glen-Strata."
Foolish investors may also remember that Xstrata and Anglo American were in talks, never consummated, about a merger of equals in 2009. Synergies described in documents at the time were coal and copper related. Recently, Glencore acquired South African thermal coal producer Optimum. If/when Glen-Strata emerges from their honeymoon, the combined company is expected to look for under-valued assets. Given the continued focus on coal and copper, a likely target is Teck Resources, (NYSE: TCK).
Teck gets about 50% of its earnings from premium hard coking coal and 30% from copper. Teck has good quality coal and copper assets located in safe countries in North and South America. With an enterprise value (EV) of about $20 billion, Teck is not a target for a lot of companies. Aside from Glen-Strata, only BHP, Anglo, Rio Tinto and Vale could afford to play such high stakes poker. Importantly, Teck would greatly diversify and enhance Glen-Strata's overall coal exposure.
Teck is producing about 22.5 million metric tonnes of premium hard coking coal from western Canada. As mentioned earlier, Xstrata is already making strides into western Canada's Peace River Coal basin.The last time that Xstrata looked at Teck it probably did not control the oil sands assets it does today. Once in production, Teck's oil sands operations would be a natural hedge of diesel prices offsetting cost inflation at Glen-Strata's other mining operations.
One thing in common for all of the major mining companies is that if they buy companies with existing production, they need to buy world class assets with competitive costs and ideally lots of growth potential. Another target for Glen-Strata would be Walter Energy, (NYSE: WLT); I've already offered Walter as a sacrificial lamb in this article. Walter is truly unique with its 7 million tons of premium low-to-mid vol coking coal exported through the port of Mobile, Alabama. When the Panama Canal upgrade is completed in 2014, Walter will be a prime beneficiary.
Consol Energy (NYSE: CNX) would be a great tuck-in acquisition. With an EV of just $10.4 billion, Glen-Strata could gain access to superb east coast coal assets including one of the best low-vol coking coal mines in the U.S. The company also has low-cost long wall operations in northern Appalachia that earn extraordinary margins in better coal market conditions. Also attractive to Glen-Strata might be Consol's significant assets in the Marcellus and Utica shale plays. Global E&P companies have piled into the east coast shale plays over the past few years.
Peabody Energy (NYSE: BTU) is a no-brainer for Glen-Strata. Like Consol, a bite-sized EV of just $12 billion. Peabody has global presence in thermal and coking coal. Sometime in the next 5-10 years thermal coal from the Powder River Basin (PRB) in Wyoming will be moving in size through newly built west coast and Gulf ports. Glen-Strata could become a trader of 10's of millions of PRB coal. Glen-Srata would also gain instant access to coal projects in China, Indonesia and Mongolia.
In some ways, Glen-Strata is more likely to take the plunge on a company like Teck or Walter because the Glencore half of the couple is a prominent global commodities trader. As such, due to greater synergies, Glen-Strata would presumably be able to pay a higher price than peers to take out an attractive target. I've listed four possible targets for Glen-Stata to pursue. Of these four, I am long Consol and Walter.
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.