Metals Merger Mania – Say It Three Times Fast

The Big Build-Out basket of stocks, up 30% year to date (YTD), is turning out to a very profitable collection of stocks.  This past week it surpassed CEF as the top performer on the week in review roster of stocks.  Here are the returns of its top performers: FAL 87.9%, N 77.4%, BUCY 51.4%, PCU 34.1% and BHP 28.1%. 

These are not penny anny stocks putting up those returns.  They are amongst the largest companies in their industries.  N is the world’s 2nd largest producer of Nickel (key component of stainless steel) with FAL being 4th on that list.  BHP is the largest metal mining company in the world and is expected to announce over $10 Billion in profits in its upcoming earnings release.  So, what is driving these returns?

The world’s demand for base metals (copper, aluminum, zinc, nickel and iron ore) is going through the roof led by the industrialization of Brazil, Russia, China and India.  As it becomes more difficult to find new supplies, companies are forced to merge to increase their resources.  Being a Nickel producer in this merger mania has been a “sweet” spot. 

N and FAL agreed to merge last year in what would have formed the largest Nickel producer in the world.  However, regulatory approvals slowed the merger and by the time the approvals were in place there were other suitors anxiously waiting.  Tech Cominco would be the first to make a hostile take over attempt of N with a condition that the N/FAL merger was not completed.  Then Xstrada, a Swiss based company, made a bid to purchase FAL.  N concerned that its bid for FAL would now not be sufficient found a white knight in Phelps Dodge to enter the fray and submit a friendly offer for N.  Companhia Vale Rio Doce the world’s largest producer of iron ore decided that it too would like to add N to its mix.

If you are keeping score FAL has two suitors (N and Xstrada) and N has three (Teck Cominco, Phelps Dodge, Companhia Vale Rio Doce).  All of this interest has driven the stock prices of N and FAL through the roof.  So, how does this story end? 

Xstrada won in its pursuit for FAL. The deal will be finalized by the end of the month.  Tech Cominco dropped out of the battle for N with Companhia Vale Rio Doce and Phelps Dodge still battling.  The big winner has been the BBO up 30% year to date and well positioned for the next big merger war.

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