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GOLD
COMPANY MERGERS REACH NEW HEIGHTS
by David Shvartsman
Finance Trends Matter
December 28, 2006
Mergers and
acquisitions in the gold mining industry have surged, with more deals
done in the past year than at any other time in recent memory. Bloomberg
reports:
Dec. 27 (Bloomberg) -- Gold-company
acquisitions this year surged to the highest level in at least a decade,
and the industry may continue its buying spree in 2007 as producers
struggle to find new deposits.
Goldcorp Inc.'s $8.5 billion acquisition of
Glamis Gold Ltd. was the biggest of 357 deals valued at a total of $24.3
billion this year, data compiled by Bloomberg shows. That eclipsed the
$16.2 billion spent last year on 341 transactions, including Barrick
Gold Corp.'s $10 billion purchase of Placer Dome Inc.
Producers are rushing to boost supply
because mines are being depleted faster than new reserves are being
found, and a six-year rally in gold prices is providing cash to buy
assets. The number of discoveries of at least 2.5 million ounces has
declined for eight straight years, according to Metals Economics Group
in Halifax, Nova Scotia.
``The driving force behind the M&A is
that you have difficulty finding new gold mines,'' said Graham Birch,
who helps manage $27 billion at BlackRock Investment Management in
London. ``It's all about trying to get access to reserves.''
This news confirms the long-held view of money-manager and financial
writer Jim Puplava, who had predicted a trend towards increased
consolidation in the gold mining industry for precisely the reasons
stated above. To quote from Jim's 2003 article, "Pac-Man,
Clicks & Bricks":
As a result of the size of annual gold
production and the short mine life of the large producers, these
companies are faced with a significant dilemma. The only way these
companies are going to maintain size is to substantially increase their
exploration budgets to find or buy new ore deposits. In addition to
acquiring new deposits, companies will also face issues of finding low
cost deposits. Finding new deposits is one thing, but finding a deposit
that is profitable to mine will be the other problem.
For more on this, see Puplava's, "The
Perfect Option" and, "The
Perfect Option, Part 2".
As I argued in an April, 2006 article entitled, "Recent
Gold Action", demand for gold has strengthened over the past
few years and new sources of supply will not be easily produced at the
drop of a hat. Here's the response made to critics who, in the face of
rising demand, thought $600 gold was a sign of "a bubble"
Not only is investment demand up in North
America, it is profoundly evident in Asia and the Middle East. The
people of India and China have traditionally been buyers of gold, in the
form of jewelry and as a store of savings. Their purchases will only
increase over time, as their economies continue to develop and
prosperity levels rise among the masses. Middle Eastern demand is
pronounced as ever, with the Gulf economies prospering from a recent oil
boom and the resulting flood of new money. An ongoing repatriation of
funds previously held abroad, and the establishment of the Dubai Gold
Exchange, have no doubt also encouraged gold purchases. Meanwhile, a
sizeable increase in Gulf central bank holdings of US dollar reserves
have led some to consider diversifying out of the dollar and increasing
the region's central
bank gold reserves as Russia,
Argentina and China have done.
There will not be an easily mineable influx
of supply to meet this demand. Gold mining companies face a dwindling
resource base and rising
costs in extracting gold from
the ground. Consider the environmental hurdles and permitting
difficulties associated with bringing on new mines in many
jurisdictions, along with the increasing push
for nationalization of
"strategic resources" in Latin American countries, and it
becomes a little unclear as to where all this gold will be found.
Gold mining companies will continue to engage in what Jim Puplava
referred to as the "Pac-Man strategy". In other words, eat or
eat be eaten.
© 2006 David Shvartsman
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David
Shvartsman
Finance Trends Matter
Chicago, IL USA
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