Mining: A rock-solid investment

By Jon Markman

In the category of weirdest financial news stories of the year, Philippine food conglomerate San Miguel announced this week that it plans to spin off its 117-year-old namesake brewery and use the proceeds to expand into mining.

Chairman Eduardo Cojuangco said the new underground venture, along with investments in infrastructure construction and real estate, would be the company's "new engines of growth."

Now think about that for a moment. If you can't make money selling ice-cold beer in a tropical steam bath like Manila, you probably aren't the shiniest 7-iron in the golf bag. So you almost certainly don't belong in the cutthroat world of metals and mining.

Yet such is the fervor today among executives of major industrial companies to grow faster, bigger and stronger through investments in basic materials. It's almost as if ores the world over are casting a magnetic spell over boardrooms, luring otherwise intelligent managers to throw shareholder funds down holes in the ground and into blast furnaces that not too long ago were considered the last places any sane executive would wish to invest.

Have companies gone mad, or have the rules radically changed?

By the looks of the premiums that are being paid for rock and refining assets lately, it looks like we've actually got a whole new rule book, as governments in Asia, Eastern Europe and South America throw off the chains of centralized economic control and allow local entrepreneurs and mayors to industrialize and urbanize at breathtaking speed.

Fueled by high middle-class savings rates and low interest rates, unfettered business people have the money to push their countries from the 19th century to the 21st century without a stop anywhere in the 20th -- building highways, factories, power plants, apartments and shipyards everywhere in sight. In China alone, copper imports were up 52% in the first half of 2007.

Shimmering gimmes

In this scenario, large international metal miners and processors are pulling out all the stops to lock up capacity anywhere they can find it -- and paying record amounts to make deals. There's a sense that they haven't got a moment to lose in the race to hollow out and pave over the planet. But there's a cunning strategy here as well, as consolidation has created regional monopolies that can slash capacity to prevent profit-flattening price wars and rid the industry of cyclicality.

In a moment, I'll recommend some stocks that will help you benefit from this historic change, but first check out the mind-blowing size of a few recent deals:

• British mining conglomerate Rio Tinto (RTP, news, msgs) offered $38 billion this month for Canadian bauxite miner and aluminum smelter Alcan (AL, news, msgs). Alcan traded exactly flat from 1997 through late 2005 -- a seemingly useless hunk of shiny junk -- before shooting up 220% in the past 18 months.

• Brazilian steel maker Gerdau Ameristeel (GGB, news, msgs) two weeks ago offered $4.2 billion for Texas steel-mill operator Chaparral (CHAP, news, msgs). Chaparral was up 800% from its initial public offering in mid-2005 to the date that Gerdau believed it was a must-buy.

• Arizona mining conglomerate Freeport McMoRan Copper & Gold (FCX, news, msgs) paid $25.9 billion late last year for copper miner Phelps Dodge, a company whose shares had languished for a decade before tripling from 2004 through late 2006.

• Swiss mining conglomerate Xstrata paid $22.5 billion for Canadian miner Falconbridge last year after warding off several other buyers in a bidding war.

• Brazilian mining conglomerate Companhia Vale do Rio Doce (RIO, news, msgs) bought Canadian nickel miner Inco for $17 billion last year after another bidding war.

• Dutch steel maker Mittal (MT, news, msgs) bought Luxembourg steel titan Arcelor last year for $33.5 billion. It's now known as ArcelorMittal.

The list goes on, but you get the idea. It's natural to conclude that every small and midsize metal miner and refiner in North America is fair game for big global resource predators whose coffers are overflowing from the profits of skyrocketing commodity prices.

As an independent investor, you could almost say that because they all are in play, they are what golfers call gimmes, or tap-in putts -- purchases that can't go wrong, given enough time.

Continued: Still cheap despite gains

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