Consolidation momentum builds

Early last summer, John Lydall of National Bank Financial predicted that the burgeoning consolidation binge taking place in the global mining industry would continue with more deals, mergers and acquisitions in the weeks ahead. Sure enough, Australian newspapers were soon busy reporting the takeover battle for North Ltd. and Ashton Mining.

Lydall’s prediction that the next flurry of deals would come from North America proved prescient as well. In particular, he urged shareholders to buy shares of Rio Algom (ROM-T) “in anticipation of a takeover at higher prices” . . . and sure enough, two majors are now bidding for control of the base metal miner.

The Toronto-based mining analyst says the reasoning behind all this activity is understandable. “We really believe that current share prices of many companies in the global mining sector drastically underestimate their long-term value.”

As an example, Lydall points to Teck‘s (TEK-T) recent purchase of 4 million shares of Cominco (CLT-T) to illustrate the difference between market values and underlying fundamental values. Because the deal was non-arm’s-length, it required an independent valuation. CIBC World Markets assessed Cominco’s value at between $31.29 and $42.15 per share.

At the same time, Lydall notes, Cominco was trading at $18.50 per share and Teck was bidding $25 per share for 4 million shares. “Understandably,” he adds, “Cominco’s independent directors issued no recommendation whether shareholders should accept or reject the offer.”

Lydall continues to recommend shares of both Teck and Cominco “because they are so cheap when compared with their underlying asset value.”

In the gold sector, Lydall gives a thumb’s-up to the proposed merger between Goldcorp (G-T) and CSA Management, which is expected to be completed in November.

“We see this as a very important step forward for Goldcorp,” he writes in a research report. “Until now, Goldcorp had a messy two-tier voting structure, which was further complicated by the company’s control block being held by a two-tier voting structure in CSA Management.”

Lydall hints that consolidation of the two companies could ultimately lead to a consolidation of Goldcorp’s and Placer Dome‘s (PDG-T) holdings in the Red Lake gold camp of Ontario. He also recommends Goldcorp as one of the few growing gold companies in North America.

In the months ahead, Lydall sees potential for an eventual merger between Noranda (NOR-T) and Falconbridge (FL-T). Noranda, which is in the midst of a takeover battle for Rio Algom, already owns half of Falco, and analysts have long-predicted a complete takeover.

“We believe shareholders of both companies would see enhanced value if all the interests of both were merged,” Lydall adds. “We would not be surprised if steps toward this direction are taken in the months ahead.”

What’s next on the merger front? Lydall lists Inco (N-T), Stillwater Mining (SWC-X), Breakwater Resources (BWR-T), Aber Diamond (ABZ-T) and Manhattan Minerals (MAN-T) as likely to attract corporate-buying interest. “Each of these companies is a potentially attractive target because of . . . the potential for high levels of profitability.”