Alcoa and Teck Cominco Remain Prime Takeover Targets

Alcoa Inc. (AA) and Teck Cominco Ltd. (TCK) remain prime takeover targets in a metals and mining sector that should continue to see consolidation, according to Desjardins Securities.

What is driving this persistent “merger mania?”

There is a lack of new projects for one, analyst John Redstone told clients in a note, adding that without major new discoveries, companies will need to merge if they want to maintain or grow production.

New projects are also becoming increasing complex due to factors like politics and permitting, as well as emerging technologies and challenging ore mixes.

“It follows that a larger company would have better resources (particularly trained personnel) to deal with these difficulties,” Mr. Redstone said.

The higher cost environment means larger companies are better suited in terms of financing, but they also have more tools for cost containment, he noted.

As for Alcoa and Teck, the names Mr. Redstone considers the most likely takeover candidates next year, he thinks the former’s valuation is currently “extremely low.”

Meanwhile, the analyst does not think Teck’s dual share structure is an insurmountable barrier to a takeover bid. A buyer would only need to agree to terms with Temagami Mining in order to get 32% voting control in Teck, Mr. Redstone noted.

As for the value of a potential takeover offer for either company, he pegs an initial offer in the 20% to 30% premium range.