Takeover time in commodities

Summary: Things are set to heat up again in the mining industry, and there's big players involved.

Key take-out: Atlas Iron is shaping up as a takeovers case study for what's set to come. 

Two billionaires, and a contender for that title, have emerged as the forward scouts for what is likely to be a burst of takeover action in the resources sector after a four-year drought.

Andrew Forrest and Gina Rinehart are the iron ore billionaires who have kicked off the game with their separate raids on the share register of a mining minnow, Atlas Iron. Chris Ellison, an almost billionaire, started proceedings but is at risk of being elbowed out.

While not a traditional takeover, because the prize is not ore in the ground but rather access to shiploading facilities, the logic driving Forrest, Rinehart and Ellison is straight from the growth-by-acquisition text book.

More deals are likely as cashed-up miners look to expand by acquiring rivals which have valuable assets but lack the means to develop them.

Forrest, the founder and chairman of Fortescue Metals Group, wants a say in the future of Atlas because it owns 63 per cent of a group which controls a berth in Port Hedland – Australia's biggest bulk export port.

Perhaps more importantly, the North West Iron Ore Alliance (NWIOA), in which Atlas is the biggest shareholder, holds a form of priority sailing entitlement which means its ships might get clearance to sail from a very congested port ahead of other ships, including those operated by Fortescue.

Rinehart, major shareholder in the Roy Hill iron ore project and its associated berth at Port Hedland that's adjacent to that operated by NWIOA and Fortescue, can see the same opportunity to boost access to essential infrastructure.

Ellison, chief executive of Mineral Resources, sees the harbour opportunity to boost exports of iron ore and lithium, which his company is mining in WA's Pilbara region.

All three might struggle to secure outright control of Atlas if it is the port facilities they want. That's especially since the WA Government issued a warning that the NWIOA berth and sailing rights are reserved for small miners.

But even if control of the berth and sailing rights is not the objective, then ownership of Atlas could be a way of securing additional iron ore, albeit low-grade material, and exploration tenements which appear to contain more ore, and potentially a substantial amount of lithium.

And then there's the appeal of controlling an asset in order to stop someone else getting it and potentially emerging as a future competitor.

Who's a bidder and who's a target is always an interesting question for investors, because the maxim of sell the predator and buy the prey has held true through past resource cycles.

Citi keeping an eye on commodities 

The latest attempt to put names on either side of the takeover tango came from Citi, an investment bank which keeps a close eye on the resources sector.

It sees five most likely buyers of assets and five most likely targets.

• On the buy side of the equation are South32, Independence Group, Sandfire Resources, Northern Star and St Barbara Mines.
• On the target side are Whitehaven Coal, OZ Minerals, Resolute Mining, Perseus Mining and Galaxy Resources.

Citi said that miners globally had shied away from mergers and acquisitions (M&A) for some time.

“The $US49 billion of announced M&A in 2017 was the lowest since 2003,” the bank said, "At the same time capital expenditure has fallen by around 90 per cent since the 2012 peak.

“With robust commodity prices and strong cash generation, some (companies) in the sector will likely look to M&A.”

But, in compiling its lists, Citi had two warnings: That short sellers active in Galaxy and Whitehaven could potentially be punished by an M&A deal, and that acquirers typically perform slightly negatively with an average loss of between 3 per cent-and-5 per cent over a few months.

In structuring its two lists, Citi considered three tests. For potential acquirers there was the question of need (such as replacing a decline in production, capacity (an ability to pay) and M&A history (has a bidder been “burned” in past takeovers).

The tests for targets were longevity and growth (long mine life and expansion potential), strong profit margins, and overall value.

Of the potential acquirers, Citi said:

• S32. Some of its mines will close in around 10 years and it might use some of its cash to grow by M&A rather than return it to shareholders.
• Independence. After the recent sale of the Jaguar copper mine and closure of the Long nickel mine, Independence is left with two mines and might use some of its cash to fund a third.
• Sandfire. Its primary asset, the DeGrussa copper mine, has just four years of life left and a successful history of growth could spur M&A action.
• Northern Star. A cashed-up goldminer with a history of successful M&A, and
• St Barbara. Needs to replace the Simberi goldmine and bolster declining grades at the Gwalia mine.

Of the potential takeover targets, Citi said:

• Whitehaven. Offers a mix of long mine life, project growth potential and strong profit margins.
• OZ. Its two main projects, Prominent Hill (in production) and Carrapateena (in construction) combine with attractive exploration potential.
• Resolute. Offers globally significant gold growth.
• Perseus. High growth gold operations at a low cost, and
• Galaxy. The least encumbered of the emerging lithium producers.