Trickle could become a flood

It has been an extremely volatile period for investors in Australia's resource stocks with 5 to 10 per cent movements in a number of mid-tier companies becoming commonplace.

Share prices are being driven by short-term influences, gyrating wildly to the latest news headline from Europe or China.

In many cases, value based on earnings or free cash flow has never been better but investor confidence is low and the commodity price outlook is becoming increasingly difficult to predict.

For periods throughout the past few months, we have seen leading stocks such as BHP-Billiton, Rio Tinto and Fortescue Metals trade on forecast price to earnings ratios as low as five to seven times.

Such undemanding valuations and a desire to secure strategic long term assets have supported the takeover ambitions of a number of companies this year. Recent examples of merger and acquisition activity include:

·MacArthur Coal (MCC) - US-based coal miner Peabody Energy and Luxembourg-based steel giant ArcelorMittal has received more than 65 per cent acceptances for its $5 billion takeover offer. MCC is the last of Australia's significant independent and producing coking coal groups.

·Anvil Mining (AVM) - China's MinMetals Resources has agreed to buy the Congo-focused copper miner AVM for $C1.33 billion cash.

The deal shows Chinese companies willingness to invest in risky locations to secure long -term copper production.

· Bow Energy (BOW) - The Shell and PetroChina joint venture has made a recommended $535 million takeover offer for BOW.

The deal should help ease concerns that Shell and PetroChina may not have enough reserves to support their plans for a LNG export facility at Gladstone which is targeting initial production of 8mtpa from about 2017.

·Sundance Resources (SDL) - Chinese company Hanlong has made an increased offer of 57c cash per share, valuing SDL at $1.65 billion. SDL's main asset is the Mbalam iron ore project in Cameroon.

The staged and conditional takeover offer has a targeted completion date of May 2012.

·Minara Resources (MRE) - Glencore International has successfully acquired the balance of MRE, in an offer valuing MRE at $1.02 billion.

Before the offer, Glenore owned about 73 per cent of MRE shares and 40 per cent of its key asset, the Murrin Murrin nickel mine in WA.

We believe it's possible this trickle of corporate activity could quickly turn into a flood should we see an uptick in confidence after a potential resolution to the European debt crisis and signs of stability out of China.

The combination of cheap stocks, ultra-low global interest rates and record corporate cash flow and cash reserves is highly supportive to M&A activity.

We believe potential targets include Woodside (Shell is looking for a buyer for its 24 per cent stake) and smaller companies Extract Resources (Chinese interest in African uranium play), Sandfire Resources (Oz Minerals is a major shareholder and hungry to expand its copper production) and Metgasco (coal seam gas interest).

Information contained in this article does not consider your personal circumstances. You should consult a stockbroking professional before making any investment decisions. Sentinel may hold positions in stocks discussed from time to time.