As the first four months of 2014 draws to a close, it is clear that acquisitions are back. Maybe not to the levels seen in 2007, but it’s certainly a dramatic improvement over 2013. In fact M&A activity reached $26.5 billion in the first quarter of this year, a 26% percent increase year over year.
Mining is a perfect example. The sector was beaten down and declared dead in 2013, but now there is a flurry of activity. The most significant was the takeover of Osisko Mining (TSX: OSK), but others may soon follow. Private equity and pension funds have plenty of cash to work with, and may be looking to take advantage of some cheap asset prices.
The most recent issue of Canadian Business included an interview with Peter Hodson, CEO of 5i Research. Mr. Hodson identified three miners that could be the next takeover target.
1. Mandalay Resources
Mandalay Resources (TSX: MND) operates two mines, a silver-gold operation in Chile and a gold-antimony mine in Australia. There are a few reasons why an acquirer may want to scoop up this company.
First of all, the company actually has producing mines, which demand a significant premium over development projects (as could be seen during the Osisko bidding war). Second, the company has zero debt. Finally, the company is 40% owned by West Face Capital, a hedge fund that wouldn’t mind selling the company for a big premium.
2. Semafo Inc.
Like Mandalay, gold producer Semafo Inc (TSX: SMF) has some attributes that would be appealing to a potential acquirer. It also has a producing mine and zero debt. Samafo is also a much larger company, with a market capitalization of over $1 billion, meaning it may garner more attention from the industry heavyweights.
But there is one major problem with Semafo: location. Its producing mine is located in Burkina Faso, a landlocked nation in west Africa. Burkina Faso does not have a history of bloody conflict, but it does border Mali, which has been a hotbed for terrorist activity over the last five years. The likelihood of violence spilling over the border is low, but a takeover of Semafo may still send the wrong message to an acquirer’s shareholders. And that alone may be enough to deter a takeover offer.
3. Capstone Mining
Copper producer Capstone Mining (TSX: CS) has some of the attributes that acquirers look for. First of all, the company has three producing mines. Secondly, they’re all in stable regions: the Yukon Territory, Arizona, and Mexico. Capstone also has a large copper project in Santo Domingo.
Capstone does have 55 cents per share in net debt, although this is manageable for a $2.89 per share company. And the company is trading at just 8 times forward earnings. So there may be an opportunity for an acquirer to scoop up a bargain.
Foolish bottom line
You should never buy a stock just because you think a company will be acquired. But when looking at the companies in this list, they have attributes that individual investors should look for too, like producing mines and little debt. So even without a takeover, the shares may still turn out well. And if there does end up being a takeover, all the better!
Motley Fool Canada's market-beating team has just released a brand-new FREE report revealing 5 "dirt cheap" stocks that you can buy today for under $49 a share.
Our team thinks these 5 stocks are critically undervalued, but more importantly, could potentially make Canadian investors who act quickly a fortune.
Don't miss out! Simply click the link below to grab your free copy and discover all 5 of these stocks now.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.
Fool contributor Benjamin Sinclair holds no positions in any of the stocks mentioned in this article.