Consolidation Is in the Air

After a strong rally in the resource sector, a fast but furious wave of consilidation has struck many industries, but this is just a precursor to what lies ahead over the next several quarters. Just to name a couple off the top of my head.....

- Suncor (SU) Buying Petro-Canada (PCZ). This will create an oil sands behemoth as the newly combined company will have their foot in many projects including Synacrude. The future synergies of this deal are not reflected in the market place as your average investor knows little if anything about the sands. Oil will likely reach $100/ barrel next year and rise for the foreseeable future as the supply-demand disconnect grows. Sure there are alternatives in the pipeline, but nothing will replace oil altoghether as it is extremely versatile. That being said, the sands provide an absolutely enormous reserve base for these companies. Sure the margins will be marginally lower in say 3-5 yrs relative to other oil service firms, but this will be more than made up for on volume. Critisizing the sands is like saying Wal-Mart (WMT) is not as good as Whole Foods (WFMI) because their margins are smaller. This sounds crazy at first, but that is the main argument I hear. This all being said, Oil and the oil sands have a long way to go in the consolidation phase. My pick for this is Oil Sands Quest (BQI) , which is in the exploration stage but has some very attractive assets that will only become more desirable as time passes.

- You don't hear much clamor about potash anymore, but this fertilizer is best in class as seen through the superior yield and durability crops treated with this substance have shown. There are numerous bargains right now, such as Potash (POT), along with many others. KCLOF.PK is a front runner to get bought by the likes of a Potash or the new Gorilla in the room (BHP). Potash One has what looks like a substancial discovery of a new potash mine, which hasn't been done in many years. For those who aren't familiar with Potash, it is mainly found in Canada and Russia, the latter being an obvious problem. With a growing middle class in China, India, Brazil among others, Potash will play an important role in ensuring the quality and quantity of various crops are able to meet these demands. There are several other candiates to fit this role but to avoid boring you to death, I am just throwing my favorite picks out there.

Aura Minerals (ARMZF.PK) and African Minerals (AMLZF.PK) for the base metals (although they may be the last sector I will mention to consolidate) as well as Taseko Mining (TGB) , although the latter is a good buy either way. This industry has so many players I feel I need to at least mention Ivanho mines (IVN) in this brief paragraph.

Obviously the Gold miners will have considerable consolidation taking place as the top tier companies seek to replace lost reserves at a time when this industry have greater than 50% operating margins which will likely creep high to somewhere between 60-80% as inflation rears its ugly head. We have seen Sino (SIOGF.PK) get eatin up by El Dorado (EGO). I have three canidates that I will mention (though there are many more) and they are Kirkland Lake Gold (KGILF.PK) as management has won me over with their sucessful diamond drilling results on their various connected mining properties in Canada. These properties wer previously deemed worthless decades ago and thought to have run dry. Kirkland will not only have unparralled production growth over the next 4 year, but will ramp up to nearly mid tier level. Next is Jaguar (JAG) as they have very compentent management and have a great track record of executing their production goals. Others include B2Gold (BTO), which Kinross (KGC) has slowly been accumulating and Seabridge Gold (SA) which has there world class KSM project. This will likely be taking on as a join partnership but a full buyout will be irresistable to shareholders is the likes of Barrick make a full out bid.

Silver also has many prospects, but I will cut to the chase a bit faster with these ones. Mag Silver (MVG) , First Majestic (FRMSF.PK) & ECU Silver (ECUXF.PK) are all ripe for the picking.

Disclosure: Long BQI, TGB, JAG & FRMSF.PK.

Comments

[Hyperinflation:]

Non-government forced consolidation..haha

Sep 06 05:54 PM

[starkoski:]

I totally agree with everything you said. Check out my first blog entitled "Peak Oil Investing Mach 2 – Part 1- The Sixth Sense" - I think that you will find it along your line of thought. Let me know what you think of it.

Sep 06 07:42 PM

[User 422955:]

Potash (K) is found in far more places than Canada and Russia. SQM mines K in Chile. China mines K in occupied Tibet. There is even a mine on tiny Christmas Island. New mines are being planned in Ethiopia, Argentina and Australia as well as Canada (and, presumably Russia).

I agree that consolidation will take place. Will it involve companies which currently mine K, or those which will become junior miners in the next year or two, or both established and junior miners? I've no idea which, or all. Whatever consolidation there is, I believe the price of K will come down when new mines open and old mines expand production faster than the market can absorb all the additional K. Will the price crash in the next 2 - 3 years? I think that's the most likely scenario.

No position in K; long Ag and Au.

Sep 06 07:45 PM

[Hyperinflation:]

I meant mainly as in they are the most plentiful countries. Potash mine discoveries have increasingly scarce relative to the demand. Of course it is found elsewhere, but like platinum, the majority can be found in a few select countries. Don't get me wrong there are new mine discoveries but they until Potash One's potentially large discovery, only small and rather short lived mines have popped up from time to time. As for the price crash, it has already happened and unlikely to continue. The all in costs make unfeasible to even explore for new mines unless those in search of them expect prices in the future to rise. Potash has enormous reaches aside from fertilizer which you can I explain it more effectively from my previous article
seekingalpha.com/artic...

Sep 06 08:04 PM

[Hyperinflation:]

Yes Peak Oil has Occured but I think there is a widespread misconception about "peak Oil". In other words, it only meant that we reached the maximum output levels and I respectfully disagree it will decline in an exponential manner. I wrote what I considered to be a pretty good article regarding the Oil Sands seekingalpha.com/artic...
which points out that the sands have one of the largest reserve bases in the world that have just started to be utilized as it was not feasible to sell oil under $80/barrel due to the high costs of separating the sand from the oil. It was not until recently that major projects were taken on as oil only prices hit $100/barrel about 2 years ago. That coupled with some mentionable discoveries from Devon and Petro-Bras in addition to the remaining global reserves suggest it will be a linear drop off over a long period of time. You also have to consider alternatives will likely arise to a meaningful degree within the next 10 years marginally curbing the demand. That being said oil will always be important, at least in our lifetimes and I wouldn't be surprised to see the price reach $200/barrel over the next several years and $100-$150 in 2010.


On Sep 06 07:42 PM starkoski wrote:

> I totally agree with everything you said. Check out my first blog
> entitled "Peak Oil Investing Mach 2 – Part 1- The Sixth Sense" -
> I think that you will find it along your line of thought. Let me
> know what you think of it.

Sep 06 08:19 PM

[highlarche:]

Suncor I agree

Sep 07 10:47 AM

[richjoy403:]

Interesting that your oil/oil-sands pick is BQI...however, is BQI your favorite ONLY in case of consolidation?

As consolidation may or may not be on the near horizon, I would like to know also of your view of BQI as an investment based only on projected inflation in per barrel price of oil (i.e.; without BQI being bought by a larger player).

Sep 07 11:02 AM

[dipps:]

Historically the stock has activley traded above $2.50 and I have been informed that oil must trade above $70 for BQI or the oil sands for that matter to prosper. Consolidation and demand will no doubt eventually make a "win win" situation out of a 90 cent stock and the oil sands.

Sep 07 12:39 PM

[Mayascribe:]

Hyper: Above you named four stocks I already own (JAG), (BQI), (TGB) and (IVN).

A couple weeks ago I posted an Instablog titled "Will Oil Sands Be USA's Trump Card?" In that insta I briefly tell how a Canadian trapper discovered the sands, breakdown how much it costs to create a barrel of sands oil as compared to conventional oils, and list the major players involved.

One oil sands stock I suggest you take peek at is Tam Oil and Gas (TAMO). It's currently around .67/share, and has recently been moving up as they have been acquiring vast acreage; for instance, in June they bought 270,000 acres in the Peace River Valley of Northwestern Alberta, where an independent analyst estimated that there are 2.33 billion barrels in the first 22,400 examined. With the 400% increase in Tamo's acreage, little known TAMO has become a major player rubbing shoulders with the Suncors, BPs and PetroChinas, and just about every major oil company in the world.

As oil approaches $100/barrel, oil sands do become profitable--that's why PetroChina just bought 1.6 billion Canadian dollars of sands oil last week.

Good article.

Sep 07 02:13 PM

[User 422955:]

Thanks for your response, Hyper. I cite one counter example: Legend International Holdings (LGDI.OB) This Australian company is planning to mine where potash had already been discovered over a decade ago. So they know where they want to mine. An Indian agricultural figure is on their Board. Obviously, they wish to build a market in India.

Other Australian companies: Reward Minerals (RWD.ASX). Auspotash -- no listing found. Mt. Isa metals, a wholly owned subsidiary of D'Aguilar Gold (DGR.ASX).

Small Australian mining companies seem to mine whatever they think they can make money on: precious metals, base metals, potash and any other mineable substance.

Sep 07 05:22 PM