Metals and Mining - Can You Dig It?

As commodities continue to roar into the new year, we continue to see deals being proposed (and upped) as more firms continue to try to source raw materials and financial players see the potential for decent returns.


I believe we will continue to see more deals taking place and more capital being spent on purchasing and developing resources.  This will, of course, continue until firms start paying uneconomic prices for resources, believing that growth - and hence prices - will continue to rise for the foreseeable future.  Thats said, you don't stand in the way of a speeding train - you try your best to board it, ride it and jump before the tracks give way.



From the FT:

The rival bidders for Baffinland Iron Mines have both sweetened their bids over the new year period, escalating the battle for control of a vast undeveloped iron ore deposit in Canada’s high Arctic.

Nunavut Iron, an acquisition vehicle backed by Energy and Minerals Group (EMG), a US private-equity firm, said late on Friday night that it would offer C$1.45 a share for Baffinland, valuing the company at about C$570m.

Nunavut’s move came less than a day after ArcelorMittal, the world’s biggest steelmaker, lifted its bid to C$1.40 a share.

ArcelorMittal is bidding for all Baffinland’s shares while EMG would buy only 60 per cent.

The battle underlines a global scramble for access to raw materials amid concerns of looming shortages. The latest offers value Baffinland at double the amount offered by Nunavut when it made its first hostile approach in September.

With planned annual production of 18m tonnes over a life of at least 20 years, it is viewed as one of the world’s best undeveloped deposits. Baffinland plans to develop the deposit into a mine at a cost of C$4bn.

 Full story here: FT on Baffinland

And how has that train performed so far, you ask?  Here's the parent sector:

And the sub-sector:

Pretty well I have to say.

Drilling down (yeah, I am that clever):

Source:  Finviz.com

Looking at the above table with respect to forward P/E, it would appear that there is further room for growth.

I am still a buyer of select basic materials (metals/mining) debt and equity as there is still room for fundamental growth and momentum.  That said, I am also wary of M&A activity as the potential balance sheet erosion could affect these firms.  As always, analysis is the key - look for balance sheet headroom, covenant headroom and business location.