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    Asset prices find a whole new level - Dryblower

    Monday, 16 July 2007

    DISCOVERY in the mining industry is no longer just about kicking rocks and drilling holes. For Dryblower, it's taken on a whole new meaning.

    Rio Tinto's $44 billion bid for Alcan was not really a discovery. It had been well flagged. But the price certainly was – a knock-out 33% higher than a rival bid from Alcoa.

    Neither would a play from BHP Billiton for Alcoa, if it decided to challenge the anti-monopoly regulators, be a surprise. But the likely starting price of around $70 billion would be.

    There's a message here which Dryblower believes is more than a simple sign that we have started takeover season.

    It's more a case of hang on for the ride because what's about to happen could be truly staggering for three reasons.

    . Firstly, it is now very obvious that people with control of vast amounts of money are subscribing to the "stronger for longer" theory of commodity pricing.

    . Secondly, what is happening at the top end of town will flow right through the sector as everyone jumps aboard the mining express.

    . Thirdly, because the prices for plum assets in the ground are so high we might well see a flow-through effect to stock market prices being paid for all types of assets.

    In other words, Rio Tinto's move on Alcan, and BHP Billiton's widely expected bid for Alcoa could trigger a fresh wave in the five-year old resources boom.

    There are already signs that merger mania is gathering pace. Some time today, Territory Resources is expected to declare its hand for Consolidated Minerals.

    Perhaps some time later this week Oxiana and Zinifex might announce their marriage.

    In the background there are the rumbling sounds of consolidators looking for ways to bring together more small gold producers in the same way as that achieved by Apex Resources.

    Other deal-makers are looking for ways to integrate the small nickel producers near Kambalda and the small iron ore miners of the Mid West.

    Takeover season is upon us because the profits being generated by high commodity prices are so attractive that bidding companies have no fear about their ability to raise the cash to do a deal, either as equity or debt.

    If you're a shareholder in a target company this is either a worry, because nobody is safe, or an opportunity to take the cash and doing something else.

    If you're a shareholder in a bidding company this is an opportunity to be part of something bigger, or worry about the price being paid.

    But, for everyone in the resources sector there is no doubt that the entire game, thanks to the Rio Tinto tilt at Alcan, has just become a lot more expensive.

    No one pays 33% above a rival bid unless there is enormous confidence in the long-term capacity of earnings to justify the cost of servicing the demands of equity and debt.

    And, if people as smart as those running Rio Tinto can justify a price which stretches valuations to a new level – then so can everyone else.

    The immediate tests of whether we are indeed entering a new period of higher asset prices (for ore in the ground, and shares on the stock market) will come if and when BHP Billiton moves on Alcoa, Oxiana moves on Zinifex, and Territory puts a firm bid on the table for ConsMin.

    When those events happen Dryblower reckons it's a fair bet that the price of everything else will move up to a new level.

    Click here to read the rest of today's news stories.

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