Capital raisings galore today, M&A boom tomorrow as commodities shift into overdrive

Takeover time moved a step closer this week as the “almost everything boom” stretched out to new heights with Fitch Ratings warning that the mining sector is likely to shift from a buyer’s to a seller’s market over the next 12-to-18 months.
30th April 2021
Tim Treadgold

Takeover time moved a step closer this week as the “almost everything boom” stretched out to new heights with Fitch Ratings warning that the mining sector is likely to shift from a buyer’s to a seller’s market over the next 12-to-18 months.

The alert from Fitch, a leading credit rating agency, recognises the challenge of trying to buy high-priced individual assets and the need for bidders to make a full takeover for the parent company.

For investors, this forecast shift is a double-edged sword because historically most mergers and acquisitions (M&A) launched at the peak of a market destroy more value than they create.

The best policy as the shift into the M&A phase gathers pace is to buy the target and sell the bidder, especially in cases of a competitive bidding duel which pushes prices to an unjustifiable level.

Copper is the sector seen by Fitch as the starting point for a takeover rush, but any acquisition is probably going to require “a significant premium to the target’s current valuation and is more likely to be negative for the credit profile of the acquirer”.

The hard-commodity boom which is driving money out of low-return assets such as cash and government bonds, has also spilled over into the art market with works by 16 Australian painters hitting new highs this week, including $2.5 million for an Arthur Streeton scene of Venice.

Investor focus on minerals and metals has rarely been higher as measured by the flood of cash pouring into capital raisings around the world, with S&P Global Market Intelligence reporting that financings in March quarter reached $US3.23 billion, the strongest month since 2011.

S&P reckons that 2021 will be a record year for fund raising by the miners with the March quarter inflow more than half what was raised in all of 2020. Gold attracted the most new capital ($US1.68 billion) while copper and other base metals received $US1.34 billion.

That M&A alert and capital raising comments from S&P came in the same week that copper and iron ore picked up the running from last week’s leader, palladium.

Copper extended its winning streak to a record $US9888 a tonne ($US4.54 a pound) while iron ore briefly touched $US194/t before retreating slightly as Chinese authorities renewed their criticism of high commodity prices.

Other measures of the “almost everything boom” included a number of clear warnings that markets are entering silly season.

Apart from the utter nonsense of cryptocurrencies there was the remarkable example of Hometown International, a U.S. company which owns a delicatessen in Paulsboro, New Jersey, which topped the $US100 million market value despite posting sales of $US13,976 last year – and yes, a tiny deli is all that it owns.

Gold, which has faded from view as everything else rockets up, started a fresh assault on the $US1800 an ounce mark after last week’s failed attempt.

But to move up much further than its latest price of $US1783 an ounce gold needs a scare to upset financial markets – and that might come later this year in the form of a “taper tantrum”, a shock caused by a slowdown in government bond market support.

Hints that something will happen in the bond market surfaced in several reports during the week with UBS, an investment bank, telling clients that the U.S. central bank is expected to start pulling back market support in September, around the same time the Bank of England steps back.

Locally, Westpac expects the Reserve Bank to continue with its quantitative easing (QE) bond buying, but at a reduced rate over the next four quarters with a final QE program in July next year.

In other signs of the growing sea-change in markets the commodity world’s “tail-end Charlie” made its first appearance with an upturn by titanium minerals and zircon which enjoyed strong price rises with more to come as demand picks up for paint (the major end use of titanium dioxide) and ceramics (zircon).

Iluka Resources, the leading local mineral sands producer with an option of rare earth production, was a solid performer during the week with a rise of 36c to $7.65 – with that price roughly double where the stock was this time last year.

Iron ore, the big newsmaker of the week as its crept towards an all-time high of $US200 a tonne, produced only modest winners on the stock market, perhaps another sign that investors are not convinced that current boom-time prices can last much longer.

Fortescue Metals, the iron ore sector leader, filed a lacklustre third quarter production report which missed broker estimates. Higher costs and lower realised prices saw Fortescue deliver a small share price rise of 87c to $22.40, a move which largely reflected the higher ore price.

RBC Capital markets was unimpressed with Fortescue’s result and while maintaining a neutral investment view of the stock, tipped a future price of $21, down $1.40.

Other iron ore producers moved up modestly. Champion Iron added 50c to $6.94 and Mt Gibson put on 3c to 92c.

Perhaps the most interesting iron ore stock today is not a producer, but the royalty “harvester” Deterra which added 2c to $4.40 but was also named as a potential M&A target in the wake of Franco Nevada, a gold royalty acquisition specialist adding two iron ore royalties to its collection, one in Canada and one in Brazil. Deterra would be a perfect fit.

Other share price moves and reports of interest in a week dominated by a flood of quarterly results included:

  • Sandfire reporting a cracking March quarter which delivered copper and gold into a twin bull markets, finally waking some of the sleepier investment bank analysts. Credit Suisse summed it up with a headline that read “50% upside on spot copper, now that’s appealing” On the market, Sandfire added 67c to $6.87 with Credit Suisse tipping a future price of $7.20 and Macquarie tipping $9.30.
  • Chalice continued its record-breaking run with a rise of 38c to $7.09 as interest builds in its near-Perth palladium discovery. “Nearology” stocks (also known as near-enough-is-good-enough”) also did well. Magnetic, which is exploring to the east of Chalice’s Julimar discovery added 3c to $1.60 while Venture Minerals, which is working with Chalice on a “Julimar lookalike” exploration project in WA’s south-west corner, added 1.5c to 9.4c.
  • Independence was the pick of the battery-metal stocks as it exits gold to be full focussed on nickel and lithium. It put on 35c to $7.49 while Pilbara Minerals gained 3c to $1.18 and Galaxy, which is merging with Orocobre, was up 30c to $3.93.
  • Rumble Resources, which has re-kindled interest in the zinc and lead potential of central WA, gained another 8c to 64c even as it socked away a fresh $40 million from a capital raising priced at 50c.
  • Small gold stocks had a slow week as investors drowned in the detail of their quarterly reports. Lefroy reported promising gold and copper results from drilling at its Burns prospect and fell by 26c to 98c. Breaker lifted the resource at its Lake Roe project to 1.37 million ounces and lost 2c to 21c, and Calidus said it was on track to become a 130,000 ounce-a-year gold producer from its Warrawoona project, but lost 3c to 39c.
  • Potash stocks had a mixed week. Danakali raised $20.3 million for its Colluli project in Africa with the share price slipping 2c lower to 50c. Salt Lake Potash went the other way with a 2c rise to 45c, while Kalium Lakes lost 1c to 20c,
  • Nickel stocks were equally mixed. Western Areas added 5c to $2.30. Mincor was up 2c to 99c. while Nickel Mines paid a high price for a March quarter production miss, shedding 13c to $1.15, but with Shaw and Partners tipping another leg down to $1.01.

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