What are we looking for?
Pay dirt for global miners.
As the commodities trader Glencore heads toward a merger with the miner Xstrata, some observers theorize that the expensive and dangerous job of digging up ore will increasingly fall on the shoulders of a handful of major players with the financial muscle and engineering expertise to take on the challenges involved. According to this vision, behemoths such as Glencore-Xstrata, BHP Billiton , Vale , Rio Tinto and China Shenhua Energy will inevitably gobble up smaller mining firms as they strive to achieve economies of scale.
It’s an intriguing theory, so we decided to see what firms might make the most attractive acquisition targets. Since acquisitions are usually done at a hefty premium to current share prices, owning shares in these firms could prove rewarding if takeover bids emerge.
How we did it
We looked for firms in the mining sector that met the following criteria:
-they trade in Toronto, New York or London;
-they change hands for less than 10 times earnings;
-they have enterprise values that are less than seven times EBITDA (Enterprise value is the total market value of a company’s shares and its net debt. EBITDA is earnings before interest, taxes, depreciation and amortization);
-they have market capitalizations between $100-million (U.S.) and $15-billion. (In other words, big enough to move the dial for a larger company.)
-they have net debt that is less than their shareholders’ equity.
All these criteria are intended to spotlight firms that could be acquired at reasonable prices, with enough cash flow to support the debt that may be required to fund their acquisitions.
What we found
A dozen firms met our rough-and-ready criteria. Five of them were Canadian.
Readers should note that this screen is intended only as a first pass at identifying possible takeover targets. It doesn’t take into account the ore reserves of these companies, their exploration prospects or any of the other factors that can make a miner worth more or less than the accounting figures might suggest.
Investors should do their own research before buying. But each of these miners does possess the fundamental financial characteristics that might attract a potential acquirer.