TORONTO () -- Those unfortunate enough to still be stuck in front of their quotrons this summer can attest to the illiquidity of this market, and the below average volumes.
This year the hackneyed "sell in May and go away" would have worked in the resource sector (unlike three summers ago when commodity stocks posted major gains), but not because everyone was on vacation.
In truth, the sector peaked this May because it had been rising since the fourth quarter of the prior year. Whether or not summer was upon us, we were due to go lower. This begs the question, when everybody gets back to their desks in September, will things really pick up as all and sundry appear to believe? Alas, that is the subject of another article.
As the title of this piece reflects, what we want to talk about today is the frenetic pace of deal making, mergers, consolidations, etc. that has been going on despite the lack of volumes, or apparent interest in this market.
Deals
In the past month (or so), we have seen Barrick [NYSE:ABX; TSX:ABX] take a run at Novagold [AMEX:NG; TSX:NG], Northgate [AMEX:NXG; TSX:NGX] at Aurizon [AMEX:AZK; TSX:ARZ], the whole Teck [NYSE:TCK; TSX:TCK.B] / Xstrata [LSE:XTA] / Falconbridge [NYSE:FAL; TSX:FAL] / Inco [NYSE:N; TSX:N] / Phelps Dodge [NYSE:PD] entanglement, Stornoway [TSX:SWY]-Ashton [TSX:ACA]-Contact [TSX:CO] three-way merger, the South Korean takeover of Newmont's [NYSE:NEM] oil sands properties, and frankly a tonne more that your correspondent cannot seem to bring to mind at the present time (this is not a definitive list).
While investment bankers are making fat fees, the mining sector is out there trading paper, taking equity interests, buying new mines producing and non, consolidating, expanding and generally being aggressive. This is very positive, and your correspondent believes, justified.
Another good sign is that we are not only seeing producers acquire producers, or producers acquire incredibly rich mines only, but development projects, some with very large CAPEX requirements.
This means that finally the long-term outlooks for commodity prices are being adjusted upward even if nowhere near on the scale indicated by the forward curve.
The Winners
Those who have acted now will prove to be huge winners as the sector comes back, more and more people become involved, and valuations continue to slowly creep higher and higher.
As a lot of these things are valued right now, they are incredibly accretive on most metrics, and paybacks are much shorter than what one would find elsewhere.
The consolidation/accretive acquisition model has worked since 2001 with two successes that particularly standout: Wheaton River and Silver Wheaton [AMEX:SLW; TSX:SLW]. The difference now is that the street is making a lot more money available to those companies that wish to make plays for other companies, or to buy assets.
Your correspondent believes that investors should target companies that have acted in the right way in the past or that are doing so now. The bargains out there won't last forever, as metal prices prove their staying power well above the long-term averages being used by the industry and analysts right now, and assets become more expensive. Take advantage.
