Resource Sector Focuses on Consolidation as Xstrata Seeks to Merge

Things not produced by central banks did rather well yesterday. January crude oil was up almost 5% and again traded above US$94. You’d think oil would eventually head lower if we encounter an honest-to-goodness American recession. But if the supply of new dollars is growing faster than the supply of new barrels of oil, then crude prices could stay nominally high for quite some time.

But the news coming out of commodity producers isn’t giving us a clear picture of what’s ahead for resources. “A radical about-face on the super cycle by one of the commodity world’s biggest bulls would be required if rumours out of London are to be proved correct,” writes Paul Garvey in yesterday’s Australia.

Those “rumours” are that Swiss-based mining giant Xstrata (LON:XTA) is up for a merger from the right party. What kind of dowry does Xstrata bring to a potential marriage? An impressive one.

The company is the world’s largest exporter of thermal coal (for use in power plants). It’s the fourth-biggest copper producer in the world. Since 2002, the company has spent over US$27 billion on acquisitions to beef up its metals portfolio. It’s also been active here in Australia, making a bid for West Australian nickel miner Jubilee (ASX:JBM) and New South Wales coal producer Resource Pacific Holdings (ASX:RSP).

So why would the hunter be willing to become the hunted? Is Xstrata putting itself on the block because it’s concluded it would rather not be a buyer at this point? That would be, ye gads, somewhat bearish for the big blue chip mining stocks.

The median P/E on the resource sector is now around 16. Earlier in the year we mentioned the idea that the entire sector would be revalued. That’s happened. The big companies trade at steeper premiums to earnings because they are being treated like growth stocks and less like cyclical resource stocks.

But now, all the growth will have to come from acquisition. This would seem to favour the mid-level resource companies. But first, the consolidation at the top will have to sort itself out. BHP (ASX:BHP), Rio (ASX:RIO), Vale, and Xstrata will jockey in the first quarter of 2008 to see what kind of mega-mergers make sense. If the mergers happen, the second quarter could belong to the mid-level producers.

Is it really almost Christmas? This will be our third Christmas in Australia. We still have trouble getting used the whole “warm Christmas” instead of “white Christmas”. As a native Coloradoan, we are used to spending Christmas day inside, looking out at the snow through the frost windows while we listen to David Bowie and Bing Crosby sing their bizarre version of Little Drummer Boy.

Pa rum pum pum pum. But we’re fully committing to the Aussie experience this year. We’ve got tickets for the Boxing Day test at the MCG between India and Australia. If there’s anything more Australian than beer and cricket, we’d like to know!

Dan Denning
Markets and Money

Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.

Leave a Reply

1 Comment on "Resource Sector Focuses on Consolidation as Xstrata Seeks to Merge"

Notify of
Sort by:   newest | oldest | most voted
MMLJ of Sydney
And Dear DRers With not a little insight into Xstrata and their major shareholder Glencore, this little beauty parade is not THAT surprising. Xstrata is a mining company that thinks like a trading company. This is a key point of difference with the other mining majors who just like to dig holes. See recent comment from Xstrata MD Mick Davis on this very point. So if someone like Vale or Anglo really want to catapult unconscionable amounts of cash at the Xstrata shareholders, three things to consider as to why Mick Davis would engage his own advisors to dive into… Read more »
Letters will be edited for clarity, punctuation, spelling and length. Abusive or off-topic comments will not be posted. We will not post all comments.
If you would prefer to email the editor, you can do so by sending an email to