Have you ever wondered for whose benefit takeovers serve? You could be forgiven for being cynical, but it would be worth a look at the terms of such agreements. There are few synergies to be gained from merging mining operations since head office/admin is a relatively small expense. There could be said to be value in merging Rio Tinto and BHP Billiton, because the merged entity would have greater market pricing power. But that will be a short term benefit since consumers will just increase support for smaller emerging producers at the expense of these 'majors'. For that reason there are benefits in the short term, but in the long run I think such mergers & acquisitions are just aiding short term interests, which include directors with options. Its good for fund managers because they can cash out at a good price along with directors. But then I guess who is to say that companies should be run for short or long term gain. I guess you could argue that institutions get the greater vote. On the basis we should not embrace the 'buy & hold' strategy.
Consider the latest merger between Australian miners Zinifex Ltd and Oxiana Ltd. Currently shareholders in each company have the choice of investing in either Zinifex (a zinc-lead miner & refiner) or Oxiana Ltd, a copper-gold-nickel miner. Its true that the $US12billion merged entity would command a bigger Price-Earnings rating in the market, but what does it say about these company’s anticipated commodity price outlook? They must consider the outlook to be fairly similar or have opposite views since they are prepared to buy each other. Or perhaps that was not even a consideration. The company intends to acquire further interests in copper and zinc, so clearly that is why they support the merger. They also like nickel, so the merged entity is intending to go on the acquisition trail. Already Zinifex has made a $A852 million takeover bid for nickel miner Allegiance Mining NL. Knowing the commodities they are interested in, we might guess their future targets:
1. Marengo Mining – copper-gold play in PNG
2. Alloy Resources – If the project proves attractive
3. Metals X Ltd – It controls one of the world’s largest undeveloped nickel resources
The merged group will be the world's second-largest producer of zinc and a substantial producer of copper, lead, gold and silver with the capacity for further acquisitions up to $US3.6 billion.
Another issue is - Why pay a premium for short term cash flow when you can buy under-valued developmental projects that need cash? Well I suggest the reason is that projects don’t generate cash flows that help short term earnings, and thus the stock prices to which senior executives remuneration is tied. Now that’s cynical. On the other hand, the "merger of equals" might make more sense in a market that is uncertain about the outlook for commodity prices. Well at least that is the impression from the values being placed on commodity producers. In these circumstances 'cashflow is king'.
Both Zinifex and Oxiana have been viewed as possible takeover targets by Xstrata, though I think that is unlikely given the takeover of Allegiance.
Anyone who knows the mining industry will tell you that Lycopodium is synonymous with mining feasibility, design and technical studies that need to performed before a project can secure a mining licence or financing. There is no question that during a commodities boom like the present one, there are likely to be a lot of staff leaving your business to set up their own consultancies. I know its happening because I see all these new names in the industry compared to 5 years ago when there were only a hand-full. The implication is that companies like Lycopodium are having to pay more to retain staff, or needing to outsource to pay more to outsource to staff that previously worked for them, as well as paying the price for the higher staff turnover that these disruptions cause. The flipside is that the problem is industry-wide, so these engineering consultants are able to pass on the costs to their customers whom are earning record prices for commodities, or are well supported by equity markets for capital. These large companies are also tending to pick up the larger more lucrative contracts, whilst the recently departed fight over the scraps, and maybe do a bad job besides.
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