Iron ore prices retreat by 12% and iron ore mining stocks say, So what?, and move higher

It’s hard to imagine this happening with any other “product.”

The price of the product drops 12% for the next quarter.

And the stock market essentially shrugs it off. On a bad day for the market, August 30, when the Standard & Poor’s 500 stock index drops by 1.47%, the shares of the world’s biggest producer of this product fall by 1.29%. Shares of the second largest producer fall by 2.49%, it’s true, but that’s not unexpected since the beta of that stock (the measure of the stock’s volatility in comparison to the entire stock market) says that these shares are on average two-thirds more volatile that the stock market as a whole. (The drop in the shares is almost exactly what beta projects.)

And on a good day for the market, September 1, when the S&P 500 jumps by 3%, shares of the largest producer rocket upward by 5.5% and shares of No. 2 go up 6.1%

Guess when it comes to iron ore—and that’s the “product” in question—investors just don’t expect any price drop to last for very long.

Even after the drop iron ore prices would be120% higher than they were a year ago. So this disappointment would leave these miners still incredibly profitable.

Acquisition fever burns hot–here are three stocks to profit from the frenzy

Acquisition frenzy is upon us. August is on a path to be the second best August ever for acquisitions. Making a profit from one of these deals ought to be as easy as shooting fish in a barrel.

Except it’s not.

Many of the barrels as completely void of deals: fire away as you like you’re not going to hit anything. Others are full of nothing but minnows: Nothing you hit is going to be worth the ammo.

There is a way to improve the odds, though.

If you understand the reasons behind the surge in acquisitions, you can figure out where the big fish might be hiding. (For more on the acquisitions boom see my post http://jubakpicks.com/2010/08/24/thinking-long-term-right-now-is-hard-which-is-why-its-worth-doing/ )

That can help you eliminate some barrels and prioritize others.

Using that process, I’ve come up with three acquisition candidates that I think are worth putting in your gun sights.

Platinum gets center stage in South Africa’s politics

Turmoil in South Africa’s mining industry.

The most immediate and obvious impact will be on global supply of the platinum group of metals. But since the big mining companies involved produce copper, gold, and other metals in their mining of platinum and palladium, the global market for those commodities will get tighter too.

At issue are laws designed to redress the inequalities of apartheid. The laws stipulate targets for black ownership, the employment of black mangers and women, and the economic development of communities near the mines. One goal of the legislation is to make up for the use of cheap black labor in the mines during white rule. Mining companies must sell a minimum 26% stake to black South Africans by 2014.

Mining industry leaders Anglo American (AAUKY.PK) and Lonmin (LNMIY.PK) say that the government has deprived them of mining rights. And that this threatens overseas investment (and therefore jobs—the two companies employ 100,000 in South Africa) in the country’s mining industry. (The industry as a whole accounts for almost 500,000 jobs in the country and for a little more than 5% of South Africa’s GDP.) With mine nationalization on the agenda of a September meeting of the ruling African National Congress, the disagreement seems headed to crisis.

The ore hit the fan in March when the national Department of Mineral Resources awarded a fifth of the prospecting rights in Anglo American’s Sishen iron ore mine to Imperial Crown Trading. Anglo American subsidiary Kumba Iron Ore filed suit to reverse the award.

The award to Imperial Crown Trading is the mining industry’s worst nightmare come true.

A smaller but better fertilizer deal?

It doesn’t have the splash of BHP Billiton’s (BHP) $40 billion bid for Potash of Saskatchewan (POT), but Agrium (AGU)’s attempt to snatch AWB, Australia’s largest wheat exporter away from GrainCorp (GRCLF) is actually a more important deal for the acquirer.

It looks like Agrium will succeed in succeed breaking up the GrainCorp/AWB deal, since the AWB board has voted to accept Agrium’s offer over that of GrainCorp and most analysts don’t think GrainCorp will come back with a higher bid. I think the acquisition will push Agrium to a new level in the fertilizer markets of Asia. This isn’t simply an effort to deploy some company cash but a strategic move that will open up big new markets for the company.

Agrium has offered $1.1 billion in cash for AWB. That tops GrainCorp’s offer of $980 million in stock.

Canada’s Agrium, North America’s third-largest fertilizer producer by market value, would gain a platform for expanding sales of fertilizers and herbicides into Australia, the world’s fourth largest wheat exporter. But more importantly it would give Agrium a boost in its expansion into Asia. The big prize is China, the world’s largest market for fertilizer. Agrium owns almost 20% of the shares of Chinese fertilizer producer Hanfeng Evergreen, a leading Chinese producer of controlled-release fertilizers

Sell McDonald’s (MCD)

McDonald’s (MCD) has put together an extraordinary 2010—so far. But I’m not as excited about the second half of the year, especially not at current share prices.

On Monday August 9 McDonald’s announced that global comparable store sales climbed 7% in July from July 2009. Sales at restaurants open for 13 months or more rose 5.7% in the United States and 10% in Asia, Africa, and the Middle East.

McDonald’s sales are indeed hitting on all cylinders: the dollar menu, new higher priced menu offers, frozen frappes, and upgraded coffee drinks have all boosted sales since their roll outs.

However, it’s not sales that worry me but margins. In the first half of 2010 McDonald’s benefitted from falling commodity prices for wheat, corn syrup, sugar, beef, chicken and other raw materials. In its last conference call with analysts the company said that it expected commodity prices to continue to decline in the second half of the year but at a reduced rate.

With wheat and other grain prices soaring on drought, wild fires, and grain export bans, I don’t think declining commodity prices are guaranteed in the second half of 2010.

That wouldn’t be a problem except that the stock has become rather expensive given the 13% earnings growth projected by analysts for 2010 or the 8.2% growth rate projected for 2011.