"An investor who has all the answers doesn't even understand all the questions"- John Templeton
Anyone that has followed the commodity space over the last few years is probably familiar with the type of M&A that occurs in booms. The equation is pretty simple: Deals are done at ever stretching multiples which are predicated on increasingly linear demand projections. When you arrive at that last top ticking seemingly implausible transaction the 'cycle' or 'cyclicality' which is at the core of the industry has virtually disappeared; demand as far as the eye can see and then some. The possibility of busts are barely mentioned and of course never modeled. For the skeptical observer the only thing you can do during this period is bide your time and wait for the script to flip. Because when it does you will be the one who can pounce on the type of opportunistic deals that have a real chance of paying off over the long haul. Well, it would appear that in some resource related industries that time is fast approaching. After nearly a year of falling Chinese PMI's (turns out China did stumble), production cuts, sliding resource contract prices, and of course collapsing stock prices; the tables seem to be turning.
While the big news in commodity land today may be that Glencore (GLNCF.PK) closed its merger of Xstrata, the news that caught my eye was an announced unsolicited bid for Australian iron ore and steel producer Arrium. When you account for the current state of the iron ore and steel markets, Arrium's debt laden balance sheet, and the general lack of M&A in these sectors up until now this news is hard to ignore. The bidding group is an Asian consortium led by Posco and the Noble Group and joined by some Korean sovereign related entities. This bid demonstrates something that I have been arguing in favor of over the past few weeks which is that a wave of opportunistic buyers at these market prices is a matter of when and not if. This is despite the fact that longer-term I still think enough doubts remain about the state of iron ore, met coal, steel, and other notable resource related markets to warrant caution here. Simply put there are certain strategic buyers out there that can't resist these prices, and who have different horizons from your normal market participants. Now whether this small little bid is the beginning of something more serious globally or ends up amounting to a blip on the radar remains to be seen. However, what it implies for iron ore, steel, and met coal stocks that have been crushed over the last year shouldn't require much creative thinking. Those looking for US listed names to play for a knock on effect from this news should look to the likes of Alpha Natural Resources (ANR), Walter Energy (WLT), Cliffs (CLF), and US Steel (X) to name an obvious few. Depressed metallurgical coal names and leveraged iron ore or steel producers should be the most sensitive names at these levels and remain the most likely targets for mining majors, asian buyers, and potentially opportunistic middle east sovereigns looking to diversify their resource portfolios.
Disclosure: I am long ANR.