There are no takeover targets in iron ore

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From Bloomie, some people just don’t get it::

Today’s plunge in iron ore is creating tomorrow’s acquisition targets.

…Among the most vulnerable are Western Australia’s Atlas Iron, BC Iron and Gindalbie Metals, according to stock broker Fat Prophets. All three – valued at less than $US200 million ($232 million) after losing two thirds of their value this year, or more – are struggling with production costs that are too high for the current market. Private funds such as X2 Resources, which has raised as much as $US3.75 billion from investors, may be able to pick up bargains before an iron-ore rebound makes the assets viable, said Ernst & Young.

…The price slide has put even the biggest producers in play. Ivan Glasenberg’s Glencore in July approached Rio Tinto with a deal that would have created the world’s largest mining company. Rio rejected the proposal the following month.

…The stock collapses reflect doubts the companies will ride out iron ore’s price slump, said Shannon Rivkin, a director at Rivkin Securities in Sydney.

“It’s guaranteed that we’ll see a lot more companies go out of business,” he said. “There will be buyers but they’re going to have deeper pockets and longer timeframes. Iron ore prices are not going to be this low forever.”

No, they won’t, they will be a lot lower. Nobody is going to get taken over, least of all RIO. The small guys are going to die; the price is going too low for any of them to find synergies to survive. The big guys are going to get a lot cheaper as profits tank and China will prevent any major takeovers (except perhaps FMG). In eighteen months, Glencore won’t want RIO anyway.

The sector is rooted, it’s that simple.

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About the author
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal. He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.