Monday, August 28, 2006

Don't say I didn't warn you

Reading a story in today's Globe on how the current consolidation wave in the mining industry is creating a void of blue-chip Canadian resource companies has got me thinking -- why all the fuss over buying expensive companies?

"What do you expect when resource prices are where they are," George Vasic, a strategist at UBS is quoted as saying in the article. "Nobody is taking them over when copper is at 50 cents and gold is at $250."

Well pardon me, but why weren't they? I don't understand why all these companies are clamouring over each other, trying to outbid themselves on $16, $18, $20-billion nickel firms like Inco and Falconbridge, when they could have had them for a fraction of that a few years ago, back when everybody and their mother wasn't obsessed with all things base-metallic.

If buying Inco is such a "bold, strategic move" for Phelps Dodge or CVRD now, while the stock is worth nearly $80, why wasn't it a good idea in 2002 when you could have had it for $20? Aren't you supposed to try to buy the $80 company for $20, not the opposite? That's the sort of question I think the shareholders of these grab-happy miners need to ask of the management that run their companies for them. That, or face a sink-hole acquisition of Time Warner / AOL-like proportions.

What happens when Chinese demand slows by a single iota, and all of a sudden there isn't a ready-made market for all of Sudbury's dirt? It strikes me that in their zeal to drive the resources bandwagon, a lot of these firms are ignoring a fundamental tenet of investing: buy low, and sell high.

A few years down the line, I suspect they might be reminded of that.

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