Following the news of Glencore International plc’s purchase of Xstrata Plc, which will create a diverse firm involved in a variety of precious metals, there is increased investor interest in mining companies, with everyone looking over their shoulder, asking, “Who’s next?”
Since the deal is so large, this essentially raises the bar for other mining companies about who can be acquired and for what price. It used to be that only small, junior gold miners and other precious metals firms were the ones to be bought. This deal opens the doors to larger mining companies and throws down the walls for more mergers by precious metals firms on a large scale.
Mining companies are sitting on a ton of cash, as precious metals prices remain strong. Looking at one segment of the precious metals space, gold miners’ per-share cash flow and earnings reached the highest level in nine years during the third quarter of 2011, according to Bloomberg. This positive cash flow is being seen by most mining companies in the precious metals space.
Economies of scale are another driver for precious metals mining companies. As mines are becoming more complex and it’s becoming more difficult to extract precious metals out of the ground, mining companies are being forced to partner up with or sell completely to larger mining companies with more capital to develop the properties. This large scale allows mining companies to lower operation costs. Small junior gold miners simply don’t have the same cost of financing or technical knowledge in-house as large mining companies do.
With the price of the Glencore/Xstrata deal worth approximately $41.0 billion, mining companies with a market capitalization of under $20.0 billion could be a target. Large firms that are trading with relatively low values include Teck Resources Limited (NYSE/TCK), which, although large at $24.0 billion in market capitalization, trades approximately at the same price-to-earnings (P/E) ratio and price-to-book (P/B) ratio as Xstrata.
A firm trading at a lower P/E with international properties is Cliffs Natural Resources Inc. (NYSE/CLF). At just under $11.0 billion in market cap, it trades at a trailing P/E of 5.9. A smaller precious metals company with a market cap of $8.0 billion that is trading at a book value with a trailing P/E of eight is Sterlite Industries (India) Limited (NYSE/SLT).
For those investors looking for junior gold miners, an interesting firm is Timmins Gold Corp. (TSX/TMM). The firm just released positive results, especially for junior gold miners, as they actually are producing, at 21,524 gold ounces for the third quarter in 2011. This includes a record for the firm of 8,504 gold ounces for December 2011. Junior gold miners are notoriously difficult to invest in as mining companies, as they are usually still exploring and not actually producing gold. This miner is producing and increasing its gold production, a positive sign.
Of course, no one can know for sure who will be the next target, but if an investor were to focus on the mining companies with good value and excellent properties, he/she would significantly increase the odds of making a profitable investment.