It's been less than a year since Glencore International (GLEN.L), the commodities trading behemoth, debuted with its initial public offering, netting the company a massive windfall and a fat wallet.
Now the company is looking to parlay its fortunes and put to use its newly minted currency.
Earlier this week, Glencore announced an all-stock merger proposal with the Swiss based mining company, Xstrata (XTA.L).
If the deal passes muster with the company's shareholders and antitrust regulators, the newly formed entity will become the fourth largest mining company by market valuation ($90 billion estimated), and the consummated deal will be the largest ever M&A mining transaction to date.
The combined company will squarely focus its sights on the "big three" which sit atop the global mining food chain and all boast market capitalizations in excess of $100 billion: BHP Billiton (BHP), Rio Tinto (RIO) and Vale S.A. (VALE).
They will also be in a very unique position, having Glencore's dominant downstream commodities trading unit coupled with the upstream mining and production from Xstrata.
The initial merger is only the first step in this ambitious business plan. Their ultimate goal will be to aggressively grow its mining production and natural resource reserves and asset deposits.
And there are two ways to accomplish this: The long way, and the short way.
The long way involves purchasing, prospecting and developing potential unproven reserves that are most likely years away from pulling the first pebble out of the ground. Regulations, permits and ramp-up time to build out the necessary infrastructure are becoming increasingly costly and time burdensome.
The short way involves acquiring companies that are already past the development stage and are pulling the resources out of the ground with proven reserve deposits and processes already in place.
No doubt, Glencore-Xstrata will initially get aggressive and pursue the short way... And the "Big Three" know this.Merger & Acquisition Activity Likely to Heat up in 2012
Besides the Glencore-Xstrata announcement likely being a catalyst to a flurry of deals, the market conditions have become extremely favorable for natural resource companies to become targets of takeovers.
Commodity prices have begun to firm up again after a general steady decline last year. Slowing global growth, inflation-fighting emerging markets, and the Eurozone debt mess were the biggest contributors to the long downtrend maintaining its pattern for most of 2011.
But now, the tide is beginning to change. Global manufacturing is showing signs of recovery, emerging markets are lowering interest rates to boost growth as inflation has eased, and the Eurozone looks like it's not going to sink into the Mediterranean Sea anytime soon.
The Thompson Reuters/ Jefferies CRB Commodities Index Have Commodity Prices Bottomed?
Aside from commodity prices firming, borrowing costs and stock price valuations are low.
Thanks to the Central Bankers, the near certainty that interest rates will stay low forever has resulted in corporate borrowing costs at historically low levels. Low borrowing costs and cheap financing make it all the more tempting for management to pull the trigger on a takeover deal.
And while the broad markets and equities in general have made a nice run during this bull rally we've been in since October, many of the cyclical natural resource stock valuations are still way off from their 2011 highs from last spring. Many are still considered to be in bear market territory (corrections greater than 20%).
Several of these beaten down resource names will most likely come into play as the bigger players, as well as the medium size players, attempt to counter Glencore-Xstrata and each other, looking for great bargains and value to boost their reserves and revenue.Natural Resource Stocks that Could Be Acquisition Targets:
The hot spot may be focused on hard assets skewed towards commercial construction -- iron ore, copper, aluminum and metallurgical coal.
Freeport-McMoran (FCX) is the second largest publicly traded copper producer, and could be an attractive target. However, while valuations are indeed compelling, the company has a market capitalization approaching $45 billion, which could prove quite challenging to take on.
Another miner with a strong copper presence is Teck Resources (TCK). Based in Vancouver, Canada, this company has a more modest market capitalization of $24 billion. It also is a diversified miner with various mineral deposits in its portfolio. From a valuation standpoint, it too is significantly off its 2011 highs and is trading around 10 times earnings.
Dow Jones Industrial component, Alcoa (AA) may be a potential target. The aluminum producer is a dominant leader in its space and is currently trading with an $11 billion market capitalization.
Three companies that are of smaller scale (under $5 billion in market capitalization) that focus on mining metallurgical coal with proven and functioning mines could look like quick easy deals. They are Walter Energy (WLT), Arch Coal (ACI) and Patriot Coal (PCX). Patriot Coal has a bit more presence in thermal coal production.
One particular company stands out the most, in my opinion, as being ripe for a takeover.
This company mainly focuses on the production of iron ore and metallurgical coal. It has mines in the U.S., South America, Canada and Australia.
It's still trading 25% off its cyclical high last year and sports a 7 price/earnings ratio. The current market capitalization is roughly $11 billion -- not out of reach for the big players to target.
The company is Cliffs Natural Resources (CLF)...
After the stock price bottomed with the broad market last October, it's been trending very strongly but still significantly off its cyclical highs. Aside from possibly being a takeover target, CLF could certainly be a solid candidate simply as a core investment holding -- definitely one to keep on your radar, especially if we happen to get a pullback.
The next several months could be very active for M&A in the natural resource space, especially if economic conditions continue to improve. Valuations and borrowing costs are at compelling levels, making many of these companies prime targets for takeover bids.