Resources Supercycle: The consolidation trend continues

Posted December 6, 2007

"Commodities, which have surged with the help of the freshly minted Chinese economy, are reaching the end of their boom as the larger mining companies start squabbling over their smaller competitors." — Stephanie Grimmett

by Stephanie Grimmett

Baltimore — (TFN): British coal miner New Hope Corporation and multinational commodities corporation Xstrata are wrestling over Australian colliery Resource Pacific.

Xstrata (XTA: London) offered AUD 960 million (about $837 million or AUD 2.85 per share) for Resource Pacific. This follows the AUD 2.30 per share tender (about AUD 775 million or $675.5 million) by New Hope (NHC: ASX).

Resource Pacific (RSP: ASX) is studying the bid, and New Hope is still considering whether it will make a counter offer.

Resource Pacific produces 4.41 million tons of coal per year from its New South Wales mine near Sydney. And 14% of the company is owned by Marubeni Corporation, a 150-year-old Japanese company that operates in industries as varied as mining, agriculture and textiles.

Xstrata already has a cooperation agreement with Marubeni. And the acquisition would fit well into the company’s stable of mining endeavors. A majority of Switzerland-based Xstrata’s earnings (a little more than 50%) are from copper, with only 11% each coming from coal and nickel. And rising global prices for both commodities mean the company’s been attempting to expand its nickel and coal resources in the last two years.

Xstrata has been on a buyout tear lately. The company just put in an offer of AUD 3 billion for nickel miner Jubilee Mines. And it lost a bid for control of Canadian nickel miner LionOre to Russian rival Norilsk recently.

But Xstrata won a fight for larger Canadian mining group Falconbridge in mid-2006.

China just became a net importer of coal, and Xstrata would like to increase its sales in Asia, especially to the Chinese market. Australian coal producer Resource Pacific would be the perfect addition to its global assets.

Xstrata brought in $26.9 billion in revenue last year, and made $8.3 billion in earnings, a more than 100% gain on last year’s earnings. And Resource Pacific’s $15 million in earnings last year would make a nice Christmas present to its shareholders.

Right now, we’re watching the commodities supercycle wind up to its peak. Xstrata’s absorption of a string of larger and smaller mining companies in the last year is a sign that the supercycle has entered its final phase.

Commodities, which have surged with the help of the freshly minted Chinese economy, are reaching the end of their boom as the larger mining companies start squabbling over their smaller competitors.

Remember the technology boom, when new tech companies jumped out of the economic foliage like grasshoppers on a hot August day? The same thing has happened in this boom, only the companies that are popping up are mines that weren’t successful until the asking price for commodities grew high enough to counterbalance the cost of difficult extraction.

Oil companies have stepped back into expensive oil sands projects that weren’t worth it until the price for their product moved above $70. And base metals miners have expanded their operations to include inefficient veins because they can turn a profit on them at today’s prices.

And now the largest competitors in the commodities race are hungry. They’re grabbing the smaller start-ups to eliminate the possibility that someone else will buy them first and to give themselves an edge when competing with the other big boys.

Consolidation always marks the end of the boom. And with Xstrata looking to grow exponentially with its recent acquisitions, you can definitely see it as a strong player in the consolidation market.

Perhaps the big kids in town should keep an eye out for Xstrata in the next few months. They could see a run for their money from the smaller corporation if it gets its hands on enough mines.

BHP Billiton (BHP: NYSE), the world’s largest mining company, is currently attempting to takeover third-ranked Rio Tinto (RTP: NYSE), and the idea is causing rancor not only in Rio Tinto’s boardroom but also with the Chinese and European steelmakers that depend on competition between the two companies to keep iron ore prices down.

With the possibility that number one and number three could unite, the second largest mining corporation, Companhia Vale do Rio Doce (RIO: NYSE), will be on the hunt for new acquisitions to balance out the fight. And Xstrata, with its strong financials and its aggressive buying, could make for a good addition to the RIO family.