Australia is a country with an enormous amount of resources. Fortescue Metals Group Limited (ASX: FMG) is one of the largest S&P/ASX 200 Index (ASX: XJO) mining shares and has been making huge profits. But could it make sense to merge with one of its competitors?
Fortescue produces an enormous amount of iron ore each year. But, it isn't the only iron miner on the ASX – others include BHP Group Ltd (ASX: BHP), Rio Tinto Ltd (ASX: RIO) and Mineral Resources Limited (ASX: MIN).
Changes in the iron ore price can significantly impact how much profit these businesses make.
The iron ore price has been rising recently, reaching around US$120 per tonne.
However, China may not pay quite as much as it used to for the steel-making ingredient. As reported by the Australian Financial Review, a new entity called China Mineral Resources Group (CMRG) has been established to enable stronger buying power of iron ore by Chinese entities.
Regal Partners Ltd (ASX: RF1) head of resources fund manager, Tim Elliott, suggested the newly formed CMRG could be bad news for the iron ore price, according to the AFR:
It's likely to lower iron ore prices, at least in certain market conditions. If this does occur, one option may be for Australia and Brazil (and perhaps Canada and South Africa) to form a producer bloc.
But, he was optimistic about the mining sector in general and said the situation was "incredibly bullish" for most commodities:
I think mining investors will see years of strong returns as the next resources supercycle really gets under way.
There's an array of special interest groups opposing new mines but no voice championing the benefits of new mines for consumers and living standards, for tax revenue, for creation of high-paying regional jobs and global poverty alleviation.
Merger idea
The Fortescue share price has risen by more than 20% in the last six months.
Elliot suggested that a strategically compelling acquisition idea from a producer's perspective — in "hypothetical terms" — would be a takeover of Mineral Resources by Fortescue.
The AFR reported on this suggestion for Fortescue:
It would cease the building out of new iron ore projects to prevent extra tonnage damaging the value of Fortescue's existing iron ore business, while adding world-class lithium assets.
This would be a significant acquisition considering Mineral Resources currently has a market capitalisation of $17 billion, according to the ASX, compared to a $70 billion valuation for Fortescue.
But, other resource businesses on the ASX have shown an appetite for large deals, such as Woodside Energy Group Ltd (ASX: WDS) buying the petroleum assets from BHP, and BHP aiming to acquire the OZ Minerals Limited (ASX: OZL) company.
