This Day On The Street
Continue to site right-arrow
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
Stocks Under $10 with 50-100% upside potential - 14 days FREE!

Basic Materals M&A: 4 Possible Deals

Stocks in this article: WLT MEE CLD GLPW TIN RIO BHP

(M&A story updated with details on Walter Energy's recently released quarterly results.)

NEW YORK ( TheStreet) -- Deals in the basic industries sector are on the rise, even as asset values soar amid an ongoing boom in commodities prices.

Just since the New Year, the troubled coal miner Massey Energy (MEE) sold itself to Alpha Natural Resources (ANR) for $7 billion; the iron-ore miner Cliffs Natural Resources (CLF) agreed to spend $5 billion on a Canadian extractor that just moved into commercial production; and ArcelorMittal (MT) teamed up to make a deal for a junior miner that aims to take iron ore out of the ground in a remote corner of Arctic Canada.

The reasons behind the activity are clear. With prices for industrial raw materials rocketing ever higher -- copper and iron ore especially have appreciated in record-breaking fashion in recent months -- miners want to seize coveted mineral deposits before their values inflate even more.

Plus, many acquirers in basic materials are now flush with cash. Outsized profits fueled by an economic recovery in the developed world, and torrid growth in emerging markets, means companies have fat war chests to employ.

Like big pharma, the world's largest mining concerns have always scoped the planet for smaller, development-stage companies with promising assets. Growing through acquisitions is often cheaper than prospecting and developing mines from soup-to-nuts.

Analysts at Morningstar (MORN) recently issued an extensive research report on the prospects for mergers and acquisitions regardless of industry in 2011. The basic materials sector warranted a chapter. "Significant capital and time required for mining expansion as well as the uncertainty involved in mining exploration have shifted the focus to M&A as a means for growth," wrote Bridget Freas, equity analyst at Morningstar in Chicago.

There are a few caveats. The biggest: Don't expect mega-mergers akin to the one BHP Billiton (BHP) attempted last year, when it went after but ultimately failed to nab Potash Corp. (POT) (or, indeed, the blockbuster deal that would have combined BHP and rival Rio Tinto (RIO), which crumbled under the weight of its own ambition, and the financial crisis, back in 2008. And then there was Rio's nearly-catastrophic acquisition of Alcan in 2007, at the height of the bubble. The deal nearly bankrupted this enormous multinational concern; in some ways, Rio is only now recovering.)

That could be why Rio and others may be pulling away from the M&A scene. On Thursday, when Rio Tinto reported chartbuster 2010 results, company chieftain Tom Albanese said Rio would focus on organic growth rather than acquisitions this year. This despite the fact that Rio is, at this very moment, in the midst of trying to buy the Australia-based coking coal miner Riversdale Mining for nigh $4 billion - and might reportedly see some competition in the bidding from the Brazilian steel giant CSN.

Both Rio and BHP have seen criticism from institutional investors unhappy with their dealmaking in the past, though Freas says any unrest among shareholders is likely more directed at megadeals than smaller-scale M&A.

And so any dealmaking in the sector will likely follow the pattern already established so far this year and, indeed, in 2010: big, publicly traded companies snapping up junior miners and other smaller players. Last year, the metals and mining industry saw 101 deals, 7% more than in 2009, according to a recent report by PwC. But the total value of the deals struck remained relatively flat, slipping to $87 billion from $88 billion in 2009.

Because many of these smaller fries emerged from the recession with burdened balance sheets, and because many shot higher in value amid the overall commodities boom, the field of potential buyout candidates is limited, says Morningstar's Freas.

The list of takeover targets isolated by Morningstar is heavy on coal producers and includes a few non-miners. Massey Energy, by the way, was No. 1 on the list, which came out a little more than a week before Alpha announced it was buying the company.

Without further ado, here are four potential takeover targets in the basic materials sector:

1 of 5

Select the service that is right for you!

Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!


DOW 17,959.44 +154.64 0.87%
S&P 500 2,078.54 +7.89 0.38%
NASDAQ 4,781.4240 +16.0440 0.34%

Brokerage Partners

Rates from

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs