Mining is so hot these days

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Mining is hot these days. China needs copper. China needs steel. Well they need everything and this makes mining hot. Just check out the truck. Cool huh? Well this presents a trading opportunity and a potential takeover trade.

The company

Rio Tinto (RTP) is an international mining company. The Company’s principal product and global support groups include Iron Ore, Energy, Industrial Material, Aluminum, Copper, Diamonds, Exploration and Technology.

The Players

There are a few companies that are interested in Rio:

• Blackstone (BX) - They need no introduction. This king amongst kings in the hedge fund industry has deep pockets. Seemingly no company is out of its reach. Blackstone plans to execute a classic buy and break up of the company. They believe that the core iron unit alone is worth $110 billion. They are rumored to be working with a Chinese consortium to raise funds for bidding.

• China - Well not directly, but China has invested $3 billion in Blackstone and China needs everything Rio produces.

• BHP Billiton (BHP) - Like Rio, BHP is a diversified miner and minerals company. It would make a nice combination. Earlier BHP was rebuffed by Rio, but don’t count them out.

Many other niche players will also be interested. There are valuable units that would attract other suitors on their own merit. A potential sale to the likes of a Blackstone would essentially unleash a wave of smaller units being sold to eager buyers.

And the winner is…

My money says Blackstone will come out on top, but BHP won’t be empty-handed. Blackstone knows how to wheel and deal and Rio will get a chance to cherry-pick the core assets it wants. Earlier this year BHP lost the bid for Alcan when Rio scooped it up. This would present an opportunity to pick up Alcan again and some other nice business units if it doesn’t win it all.

How to trade it

Rio is up over 120% fueled by high commodity prices caused by insatiable appetites of India and China and takeover speculation. You should be good for another 10-20% over the next 3 months as the takeover talks move forward. I would buy at $468 and sell half at 10% gain and another quarter at 15% and let the remainder ride out through takeover talks.