As the world's population continues to grow and become more modern, some interesting supply/demand dynamics are beginning to occur in the natural resources sector. Overall demand for a variety of commodities has been steadily moving upwards, while supplies continue to remain restricted. Some analysts have even begun using the term "peak everything" to describe the pending crunch situations. To that end, funds like the Market Vectors RVE Hard Assets Producers (NYSE:HAP) have become portfolio necessities for investors. Given the constrained supplies of many commodities, merger and acquisition activity is beginning to rise. With new sources of supply getting harder to find, analysts expect this trend of M&A to continue. For investors, that could lead to some big gains.
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A $90 Billion Dollar Giant
Freeport-McMoRan's (NYSE:FCX) $26 billion purchase of Phelps Dodge back in 2006 was the one of the biggest mining M&A deals around, at the time; however, that pales in comparison to the latest in mining M&A. World's largest commodity trader Glencore (OTCBB:GLCNF) has agreed to an all-share merger of equals with mega-miner Xstrata (OTCBB:XSRAY) to create a $90 billion natural-resources giant. The deal signals a new level of activity and would be the largest mining merger in history. The combination of the two powerhouses will create the world's fourth-largest miner as well as a leader in commodities trading. While the deal still has to clear regulatory hurdles, analysts expect it to pass as Glencore already owns 34% of Xstrata.
However, that deal could be just the starting point for more mining M&A. According to merger/acquisition researcher Dealogic, the mining sector saw 1,915 deals valued at a total of $64 billion back in 2009. Last year, that number increased to 2,714 deals at a value of almost $169 billion. Analysts expect deal activity to increase throughout the new year as large miners continue looking for growth via M&A activity. This is similar to what is happening in the technology sector.
Aside from Glencore/Xstrata deal, there is some evidence that more M&A is on the way. Mega miner BHP Billiton (NYSE:BHP) spent $16.9 billion on shale-gas purchases throughout 2011 after failing to buy Rio Tinto (NYSE:RIO) and Potash Corp of Saskatchewan (NYSE:POT). The firm plans to invest more than $80 billion in key divisions over five years and Chief Executive Marius Kloppers recently said that there is "absolutely no doubt that BHP will do more transactions." Analysts expect other medium- to large-commodities firms to follow BHP's lead. (To know more about acquisitions, read Analyzing An Acquisition Announcement.)
Betting on the Growth
The growth in mining and commodities M&A can be seen as a sign of the times. As we continue to use more of the planets resources, larger firms lacking in organic growth will undoubtedly continue the trend. For investors, there is certainly a potential to profit. Given the size of BHP's previous efforts and the Glencore/Xstrata deal, the SPDR S&P Metals & Mining ETF (ARCA:XME) could make a great starting point. The fund tracks 42 different miners across a variety of subsectors, including steel, coal and precious metals production. The SPDR's expense ratio is 0.35. Likewise, the new iShares MSCI Global Metals & Mining Producers ETF (ARCA:PICK) can be used, as well.
Despite the long-term demand stemming from Asia, coal producers have seen their shares prices plummet over the last year as domestic demand has fallen. Analysts point to the sector as major possibility for future M&A and Walter Energy (NYSE:WLT) could be on the top of an acquirer's list. The firm primarily produces metallurgical coal, which is used for steel production. As emerging nations continue to build-out their infrastructure, Walter's assets could be a crown jewel for a larger firm. However, shares of the firm continue to drop, in the face of slowing U.S. demand.
The Bottom Line
As the world continues to see commodities demand skyrocket in the face of dwindling supplies, merger activity in the mining sector is anticipated to grow. Buyout activity is expected to surge throughout the new year and Glencore/Xstrata deal is just the tip of the iceberg. For investors, this increase in M&A offers a chance to profit. The previous ideas, along with Teck Resources (NYSE:TCK) make ideal selections to play the trend. (For additional reading, check out 5 Must-Have Metrics For Value Investors.)
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At the time of writing, Aaron Levitt did not own shares in any of the companies mentioned in this article.