Zinc Merger Revival?

Though the past year has revolved around weak zinc prices, rising stockpiles and the general threat of a deteriorating economic recovery, zinc miners are an optimistic bunch.

Zinc has for some time now been identified as a metal at the crossroads of expanding emerging market demand and supply gaps at a number of large zinc mines. Earlier this year, when refined and mined zinc prices began to climb to levels not seen in years, excitement began to build. 2012 was to be the beginning of zinc’s rise.

In February of this year, Graham Deller, head zinc researcher at mining industry consultant CRU, told the Financial Times that “[a]nything you pick up now is going to look cheap in three or four years’ time. Tripling [from current prices] is conservative.”

CRU has since gone further to support this position by launching its new Zinc Greenfield Mine Project Analysis service in the first week of October. The service is tailored to help clients navigate the upcoming supply shortage.

But so far, zinc’s rise has failed to materialize. Still, that should not be seen as a sign of a fundamental change in the impending supply shortfall. Instead, it’s an opportunity for companies with available cash on hand to acquire assets when the supply glut does arrive.

Lundin Mining (TSX:LUN), a Swedish-Canadian copper, zinc, lead and nickel miner, is amongst those eager to strike on the pending supply crunch and is willing to splash out to make it happen.

“We are looking at copper and zinc mines that produce 30,000 to 70,000 tonnes of metal per year,” Chief Executive Paul Conibear recently told Swedish business daily Dagens Industri, Reuters reported.

The Swedish newspaper claims that Lundin has upwards of US$600 million in capital available to invest in mines, including its Swedish zinc and copper Zinkgruven mine and potential unnamed takeover targets.

Lundin itself was at the center of takeover bids in 2011. It was in negotiations for a $9 billion tie up with rival Inmet Mining (TSX:IMN), but that deal fell through after Equinox Minerals launched a hostile bid for Lundin. The situation was complicated even further after Equinox was taken over by Barrick Gold (TSX:ABX).

While the acquisition versus expansion option that Lundin is facing has not yet been settled, Conibear noted, “[w]e hope to be able to make a decision on expansion at the end of the year.”

Mergers slow in 2012

Globally, markets have seen the smallest amount of merger and acquisition activity since the third quarter of 2009, according to data recently collected by Bloomberg. Since June 30 of this year a total of $446 million in takeovers have occurred in all markets, meaning that acquisitions are on track to drop to $2 trillion for 2012.

Raw materials and commodities like oil, copper and zinc, however, are the exception to the slowdown, despite the turbulence experienced in commodities markets this year.

Sales of commodity companies accounted for about 21 percent of the merger market this year, “almost twice their share during the first decade of the 21st century,” Bloomberg reported.

One of the largest ongoing commodity market deals is the Glencore International (LSE:GLEN) and Xstrata (LSE:XTA) merger currently under review by the European Commission. After months of reviews by numerous national and industry bodies, zinc stands as one of the stumbling blocks for the deal.

If the deal proceeds, Xstrata and Glencore would control 9.1 percent of the global refined zinc market and about 50 percent of the regional European market. Although there is a risk that Eurofer, Europe’s steel association, may complain about that dominance, investment bank Jefferies believes that the sale of a select number of assets would do much to avert Eurofer’s concerns.

On a smaller scale, Canadian Zinc (TSX:CZN) announced a merger with Paragon Minerals (TSXV:PGR) earlier this summer, adding Paragon’s 100 percent ownership of its South Tally Pond property to its projects.

Takeover activity within the zinc market will continue throughout this year and into 2013. Efforts are now underway to find out exactly what the targets are and when bids should be executed.

Securities Disclosure: I, James Wellstead, hold no direct investment interest in any company mentioned in this article.