The latest bidding wars amongst the world's biggest mining companies for nickel producer LionOre Mining International Ltd. (LIM.AU) and Canada's Alcan (AL.T) may be a sign miners expect the current rally in base metals prices to continue longer than previously thought, analysts said Thursday.
Recent talk of a possible approach by mining giant BHP Billiton (BHP) for a $100 billion plus merger with smaller rival Rio Tinto Plc. (RTP) has only reinforced that thought, regardless of whether there is truth to market speculation.
At a time when prices for most base metals are well above historical levels for the second straight year, more mining companies are reassessing their growth strategies, which could lead to an acceleration in mergers and acquisitions in the coming years, analysts said.
"If you think prices will be at this level in two or three or four years, you may be able to do things to capture more of that opportunity such as bringing back old mines or an acquisition," said Alan Heap, Citigroup's commodity strategist in Sydney.
When base metal prices rallied to spectacular highs in early 2006 and then quickly gave back a substantial chunk of their gains, many analysts and mining companies forecasted more moderate prices for 2007.
But demand, especially from China, has exceeded most growth forecasts, and with the mining industry struggling to keep up with growing demand, prices for copper, lead, nickel, tin and zinc have risen above market forecasts, said Deutsche Bank analyst Peter Richardson.
"That would support an interpretation that prices will be stronger for longer than many had anticipated at the start of the year," Richardson said.
Xstrata, CVRD lead the pack in betting big on prices
Mining companies traditionally have sought to acquire and develop world-class deposits that could produce returns at all stages of the commodity cycle, and some like Rio Tinto Ltd. (RIO.AU) have not changed their strategies.
In its 2006 annual report, the company said it remained focused on investing in large, long life, low cost orebodies.
"We believe this will, over time, produce value growth for shareholders in varying market conditions, which may not always be as favorable as today's," the company said.
But a growing number of companies are seeking to capitalize on today's high prices by acquiring companies whose assets may not be world class but can still produce significant returns in the near term, said ABN Amro analyst Rob Clifford in Sydney.
Metals prices have risen spectacularly since the current commodity cycle began at the start of 1999. Copper has increased 430% to $8,000 per metric ton while nickel spiked a phenomemal 1200% to $50,000/ton.
The increase in aluminium and iron ore prices has been more modest but still substantial, with aluminium up about 145% to $2,869/ton and iron ore up about 200% since 2001 to about $90/ton cost and freight.
High earnings and record revenues that resulted are partly behind the acquisition fervor that's gripping the market, Clifford said.
But another big factor is the expectation that metal prices will take longer than normal to return to their historical levels, largely due to strong demand in emerging markets and higher production costs, he said. "We don't actually know if prices have peaked but demand is still strong and supply is still constrained."
Clifford recently authored a report that pointed out that companies like Xstrata, which have backed their bullish short-term price expectations by an aggressive acquisition strategy, have outperformed bigger rivals BHP Billiton, Rio Tinto and Anglo American. Xstrata's performance, and the resilience of prices this year, may lead to more acquisitions by the world's top miners.
The market is currently abuzz with speculation that BHP Billiton, the world's largest miner, is considering a takeover of Rio Tinto, the world's third-largest.
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