Retailers Aren’t the Only Ones Slashing Prices

The one clear take away from the completed merger between Arch Coal and Foundation Coal goes to show how quickly resource companies have gone from Fifth Avenue to strip mall drive. Only considering where Foundation Coal was trading this time last year, it stands to reason that the company sold for half of what it could have received a year ago. When you consider the company had a market cap of over $38 Billion at its peak of over $86 a share just last June, the $2 billion deal  looks like even more of a steal.  This bargain basement pricing exists throughout the resource space and so long as the large banks of world are willing to offer shoppers (Companies looking to grow through acquisitions) credit cards (The Financing) we could see a flurry of deals in this space.

While it is not entirely fair to compare any of these companies to their prices of yesteryear, or to each other for that matter, it does highlight the massive revaluation that has taken place across all resource sectors.  The reality is that this new, less levered world will not engender the same types of massive speculation that helped drive raw materials prices to unsustainably high prices. With that said, even with less credit available, the long term fundamentals of the resource space are still intact and will continue to put upward pressure on the equilibrium price of all raw materials.

The long term result of the battle between supply and demand is something the market is currently trying to quantify in its pricing of everything from coal to copper. While it is impossible to predict what those prices will be, what we do know is they are drastically lower than last year. With prices as low as they are the projected profits of the companies extracting these resources are also markedly lower.  The result is a rash of cash flow positive resource producers with sound financial structures who have been put on the clearance rack by an unforgiving market.

It is those companies who have positioned themselves well financially who will ultimately stand to benefit from the market's sale prices. While two years ago companies were outbidding each other on assets that were ever increasing in price, now they have an opportunity to bid against themselves on depressed assets.  

For investors the opportunity is there, it just requires looking for those companies who have attractive assets in politically stable countries and whose financial structure does not carry with it undue risk of financial distress should a price rebound lag.  If picking individual companies is not practical, another option is to look for more specialized resource mutual funds and ETF's which target small and mid cap resource companies.  For those looking to acquire the buyers, look at IYM or DBB.