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(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.
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
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: