Stocks - ANR vs RTP ?

Question

ANR, Alpha Natural Resources - a metallurgical coal comapny - is doing well and might be purchased by CLF, Cleveland Cliffs, or a European steel company.

RTP, Rio Tinto, is a diversified mining company with coal, copper, uranium and similar minerals. It has not done as well, recently, as ANR. S&P upgraded to 5stars and Rio might be bought out by BHP Billiton.

For the next 6 to 12 months, which should I choose?

Answer 1

Operating mainly out of the Australian markets, Rio Tinto is a global mining behemoth. Although it's year over year Income statements are positive (Quarterly results not available on Yahoo Finance), they have picked up some acquisitions that point to increased liabilities and are cutting into it's total asset class. Bottom line: that affects liquidity and cash flow.

I don't see BHP Billiton buying them out anytime soon either, due to the legal ramifications and lawsuits that drag on for decades in any type of M&A action of this size.

ANR on the other hand, shows steady quarterly momentum to the upside. This would make them an attractive near-term Value play, barring any unforeseen circumstances that would impact the Coal industry. Coal does have a nasty reputation as an unclean fuel.

As funny and counter-intuitive as it would seem, I would base my decision on Gold. The Australian market will respond to a rebound in Gold price, thereby taking Rio Tinto along with it. On the other hand, if current market sentiment prevails, down commodities and up USD, it would make sense to stick with the momentum player ANR.

Answer 2

Please don't listen to investment advice when the source is wikipedia!

ANR pros: Potential purchase

     Cleveland Cliffs (CLF) has offered to buy ANR for mostly stock. ANR holders would receive .95 shares of CLF and $22.23 in cash for every share of ANR. Arcelor-Mittal (MT) has considered an all-cash counterbid near $110/share. Because CLF's most recent close of $94.50, CLF's bid would be about $112.

ANR cons: Likelihood of deal

     A significant shareholder of CLF in Harbinger Capital does not support the deal. The problem is that they own anywhere from 15-18% of the company. And because CLF's hq is in Ohio, Ohio law says that they would need 2/3 vote for the deal to go through. This makes it increasingly likely that the Deal won't go through by CLF. The MT deal could go through if it is in fact a legal offer though.

RTP pros: There is the potential of a hostile bid by BHP worth $133.5b based on BHP's share price (3.4 BHP shares for every RTP share).

RTP cons: The company and shareholders seem very united in agreeing that the bid undervalues the company so the deal is likely not to go through.

Bottom Line: Based on recent events, it seems very unlikely that the RTP deal is going through. But with the company trading close to 9x future earnings, it seems to be a very good value play at the least with the potential deal being icing on the cake. As for ANR, it is unlikely that CLF will be the buyer, but MT still remains in the hunt. It looks likely that no matter what, the probabilities lie in favor of a buyout around $110 (about 20% premium). I would suggest an investment spread between both given risks associated in each. I would weight the investment more toward ANR due to the higher probability of a deal going through (a 70-30 spread).

Also note that coal stocks are very highly correlated to oil and natural gas stocks. Also, Freeport (FCX) should NOT be considered for a gold investment because the company is approx. 80% copper and only about 20% gold.