Mining Drives Speculative Trading

Precious metals and mining shares are still attractive investments, but are going up. China is hungry for metals, whether we’re talking copper, iron or aluminum. So is Europe…and, in fact, the rest of the industrialized world. We are seeing an insatiable building up for mining companies, whether early-stage or in production. The interest is in mining the metals in the ground.

The market action points to speculative buying of mining companies, especially those with a massive reserve of metals in the ground waiting to be developed.

Just take a look at the proposal by Cliffs Natural Resources Inc. (NYSE/CLF) to bid for Canada-based mining company Consolidated Thompson Iron Mines Limited for CAD$4.07 billion. At stake is the massive concentration of iron ore in the ground, which is used to make steel.

Another ongoing battle in the Canadian mining sector has dragged on for several months to acquire the massive but undeveloped iron-ore deposit located on the Mary River project in the Canadian territory of Nunavut, which is held by Canada-based Baffinland Iron Mines Corporation (TSX/BIM).

The battle for Baffinland Iron Mines began in September 2010 when Nunavut Iron Ore launched an initial bid of CAD$0.80 for the company. It is interesting that Nunavut Iron Ore was formed for the sole purpose of buying Baffinland Iron Mines and is backed by private U.S. equity.

The problem was that the CAD$0.80 bid was vastly under-valuating the value of the iron ore in the ground. Yes, it will cost an estimated $4.0 billion to get it out; but once this is done, analysts believe that there will be enough iron to feed Europe for years.

This is why the battle is ongoing for this junior mining company that has incredible potential. The bids have steadily risen after Europe-based steel behemoth ArcelorMittal entered into the bid. The price of Baffinland Iron Mines traded as high as CAD$1.58 on Wednesday, nearly double the initial bid price. And, by all estimates, the price required will continue to rise. ArcelorMittal has a battle chest of money available for higher bids. Nunavut Iron Ore has limited finances, but has said that it is seeking out cash-rich Chinese companies that are also hungry for iron resources to fuel the country’s massive economic engine.

Arbitragers have been trading the stock based on expected higher bids, and so far this has played out well. If you see bids like this surface and especially on smaller mining companies, then you can try to make money buying in and selling higher.

Or scope out small mining companies with vast resources. These companies will drive speculative trading in 2011 and beyond.

I expect there will be numerous other takeover deals similar to the example of Baffinland Iron Mines. .Mining is hot and there is a lot of money to be made.