Centennial Coal (ASX:CEY) got a big, wet, sloppy, billion dollar kiss from Swiss mining giant Xstrata (LON:XTA) yesterday. It was two smooches, really. First, Xstrata plans to buy Centennial’s Anvil Hill project in the Upper Hunter Valley for AU$425 million. Next, Xstrata will buy Centennial’s 86% stake in Austral, which owns the Tahmoor mine and its prized hard-coking coal assets.
We’ve provided a little more analysis of the deal for readers of Outstanding Investments. Centennial was one of our share tips as a value play. Infrastructure bottlenecks at the Port of Newcastle and in New South Wales damaged coal stocks earlier in the year. The shares have since rebounded. What’s the main take-away from the Oil Search rumour and Xstrata’s bid for Centennial’s assets?
That’s easy. Tangible assets have real value because of the transparent underlying economic demand for them. Asian utilities burn Australian coal to generate electricity. They also use Aussie coking coal to make steel. Forecasting demand is a little trickier. But valuing the assets is not as difficult as, say, figuring out what the market price for a bunch of mortgage-backed securities might be.
For that reason, expect to see more of these types of asset sales, or even outright takeovers. And if that’s the case, it wouldn’t hurt to have a knowledge of which Aussie companies are sitting on the best ore bodies, coal seams, and mineral deposits in the world, now would it?
Here’s a contrarian thought: the US dollar could rally. It’s not our thought. But our commodity trading friend in Chicago, Steve Belmont, makes a worthy point. With so many dollar bears, it’s worth taking a look, at least as a thought experiment, at the other side of the trade.
“In our opinion,” Steve writes, “there are too many investors all on the same (bearish) side of the dollar boat; it is simply too easy to be bearish on the buck right now. This is also why we’d rather be long precious metals than short dollar. Contrary to popular belief, precious metals do not always track the dollar either. In fact, gold’s biggest percentage move of this bull market occurred in 2005 – when the dollar was rallying, not declining. Precious metals are not necessarily anti-dollar, but anti-currency.”
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