Mining stocks may be down, but they aren’t out. While the share prices of our miners have been sold off in the latest market pullback and could stay under pressure for the next month or three, the fundamental outlook for the sector is still positive.
But there could be a second tailwind. I am expecting mergers and acquisitions (M&As) to feature prominently in the next 12 months – something I’ve written about a few times before.
Citigroup is tipping a similar theme to emerge and has highlighted the likely bidders and targets in the sector to watch out for.
This isn’t the time to be negative on mining shares even as they are among the worst performers on the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) over the past week.
Miners could be about to unleash their large M&A war chest after holding back over the past few years. The value of announced takeovers fell in 2017 to US$49 million – the lowest since 2003, according to Citigroup.
“At the same time capex [capital expenditure] has fallen >90% since the 2012 peak,” said the broker. “With robust commodity prices and strong cash generation, some in the sector will likely look to spend on M&A.”
The broker has picked the five most likely takeover targets. These stocks are coal producer Whitehaven Coal Ltd (ASX: WHC), copper miner OZ Minerals Limited (ASX: OZL), lithium explorer Galaxy Resources Limited (ASX: GXY) and gold producers Resolute Mining Limited (ASX: RSG) and Perseus Mining Limited (ASX: PRU).
These stocks represent the best in terms of mine longevity, growth, strong margins and value. What’s more, they produce a single commodity and that makes them more appealing to buyers wanting to increase their exposure to that specific mineral.
Lord forbid that you would buy these, or any stocks, just for their takeover appeal!
Those trading on attractive valuations should be the ones you target first.
On that note, Citigroup has a “buy” recommendation on Oz Minerals, while it has a “buy/high risk” rating on Resolute, Perseus and Galaxy.
On the other side of the transaction, the miners that are most likely to be hunting for assets include diversified base metals producer South32 Ltd (ASX: S32), nickel miner Independence Group NL (ASX: IGO), copper producer Sandfire Resources NL (ASX: SFR), and gold miners Northern Star Resources Ltd (ASX: NST) and St Barbara Ltd (ASX: SBM).
South32 is already making a move as it just announced that it was going to acquire a 50% stake in the Eagle Downs coal project for US$133 million plus royalties.
It’s not too surprising that experts aren’t tipping our biggest (and probably most cashed-up) miners BHP Billiton Limited (ASX: BHP) and Rio Tinto Limited (ASX: RIO) to be eager bidders. These miners are in the process of selling assets and may not be keen on bidding until that process has largely been squared away.
But I don’t think they can resist the temptation of doing a few takeover deals, although we may have to wait till 2019 to see some action.
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Motley Fool contributor Brendon Lau owns shares of BHP Billiton Limited, Rio Tinto Ltd., and South32 Ltd. The Motley Fool Australia has no position in any of the stocks mentioned. 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. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.