It’s one of those rules of the jungle. If you’re sitting down to a hearty meal, better keep an eye out — you could easily end up as someone else’s lunch. In a report titled Mine – Riding The Wave, PricewaterhouseCoopers states that though mining companies (of all commodities) have never had it so good, they’d better keep looking over their shoulders because there’s a good chance they could be swallowed up by another mining company – not the least because of the actions of the many hedge funds that want to extract the maximum out of the sector and aren’t exactly a mining company’s best friend. Though it is about global mining in general, the report is interesting because the analysed companies include BHP Billiton, Rio Tinto and Anglo American. These guys are huge and diamonds are an almost invisible slice of their pie – though gold is pretty significant (take a look at the chart). But the dynamics are interesting and there’s definitely some basis for those rumours about BHP Billiton wanting to take over Rio Tinto – and Anglo American wanting to take on a ‘supertanker’ sightholder as a partner (a safety move?) 
First you have to hear just how good the mining companies in general have it. According to the report, net profits of all the companies analysed over 2006 was 64% higher than in 2005 and a whopping 1,423% up on the 2002 levels; return on equity reached 33% compared to 26% in 2005; net cash inflow from operating activities was US$76.7 billion, an increase of 40% compared to 2005; and high commodity prices continue to drive improved results across a range of key performance indicators for the industry.
The report also thinks the future’s pretty rosy because, “unprecedented demand, primarily driven by Asia, continues. New supply is coming on stream for many commodities, but is struggling to catch demand, partially as a result of under investment in the 1990s. There remains confidence that demand will exceed supply, leading to the continuation of high commodity prices for the time being. Industry CEOs believe that current results are extremely positive and should be repeated, at least in the short term.” But the report slips in the caution right after this. “The prospect of takeovers of companies of all sizes means that CEOs must remain focussed, both on moving their companies forward and managing their position, in the current environment of mega-mergers: hunt or be hunted.” Adding to the danger is the fact that, “hedge funds continue to be active in the industry and have impacted transactions and commodity prices due to the positions they take. This transaction activity is often hostile and no one is immune to their attentions. High cash flows and easily accessible funds mean that this trend will continue. There are growing indications of potential for private equity funds to share in the returns from the industry.”
Keep an eye on the miners.
