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Consolidation Of Gold & Silver Stocks



-- Posted Tuesday, 5 September 2006 |

 

 

 

Honest Money Gold & Silver Report

 

 

 

 

"Foul cankering rust the hidden treasure frets, but gold

that's put to use more gold begets." [1]

 

 

Abstract

 

The precious metal and industrial metal market sectors have picked up the pace of consolidation via mergers and acquisitions. Today’s announcement between GoldCorp. (GG) and Glamis Gold (GLG) to combine as one entity  is another one of many examples of the consolidation that is occurring in the gold and silver mining sector.

 

This is not a surprise, as we have written about it before, and we shall likely write about it again. The many acquisitions of smaller mining companies by larger mining interests makes perfect sense and cents. It represents a paradigm within a paradigm.

 

One of the major investment themes or paradigms within the marketplace is the realization that paper assets and debt obligations are losing face, while investment in tangible assets is gaining popularity and momentum – attracting larger and larger monetary flows. This merger activity has been going on since the beginning of the bull market in gold and silver, but it is starting to pick of speed quite noticeably.

 

Still Early

 

The precious metal bull market is just entering stage two – the general public is not even aware that it exists. Many experienced investors including professionals have not acknowledge its presence. This is typical behavior in regards to gold and silver – they are assets OUTSIDE of the mainstream mindset. But this is beginning to change, and it will only grow stronger as the precious metals bull market unfolds.

 

Ironically, the reason why the merger and acquisition of the pm stocks is occurring with more regularity is because of the recent multi-decade BEAR market they have recently broken out of. A bear market causes miners to experience falling profit margins, as the price of the products they supply goes down.

 

Falling profits in turn causes a halt of new investment, as the mining companies are leery to update production facilities and equipment, especially the exploration and development of new mines, which is a very expensive and risky business proposition.

 

Slowly, the business cycle in the mining industry causes production levels of gold and silver to fall. The supply of precious metals begins to converge towards the demand for the metals, a rebalancing takes place.

 

The tide begins to change: with the change of tide prices begin to rise, as it recently did a few years ago – heralding in the beginning of a new bull market. Such is the way of cycles – the ebb and the flow – the out-breathing and in-breathing of all things, including the markets.

 

Rising Prices

 

Now that the price of gold and silver is rising, gold mining companies want to increase their rate of production. The more product they bring to market, the more profit they will make – as long as the supply does not overwhelm the demand, otherwise the pendulum will swing the other way to revert to the mean.

 

To increase mining production is a slow and expensive endeavor. Bringing a new mine on line is even more complex, requiring years of hard work and large sums of capital.

 

This is evident by the stocks to flow ratio of gold, which is an unrivaled 75 to 1. In other words, it would take 75 years of presently existing yearly gold production to equal the existing above ground reserves of gold. No other commodity even begins to come close to such a high stocks to flow ratio.

 

One of the reasons why gold is so precious is because of its stock to flow ratio, which is also a significant factor in the supply to demand ratio of gold. An increase in supply takes time – it does not, and cannot, happen overnight.

 

New Supply On Line

 

Because of the time factor and expense associated with bringing new supplies on line, many of the larger mining companies find it easier to buy up smaller companies that already have proven reserves of gold and silver; many are even producing or bringing the metals to market, which is even more productive and hence profitable. 

 

The bottom line is that it is easier to buy existing known reserves then to invest resources and time to locate and produce new supply – as long as the acquisitions take place before the price of the metals rise too much, thereby causing mergers and acquisitions to become more and more costly, to the point of being non-productive.

 

Forward looking mining executives see the price of the precious metals rising, they know the rise in price is going to continue upwards; hence the early bird is looking to catch the early worm – before other predators show up on the scene. As the bull unfolds there may very well be a feeding frenzy of smaller companies getting eaten up by the giants and titans of the industry. 

 

So far, the past few years have seen a number of acquisitions in the mining industry. The table below lists some of the more well known companies that have merged. There are several others that are not listed in the table.

 

 

Mining Mergers & Acquisitions

 

 

 

 

Buyer

Acquisition

Date

 

 

 

 

 

 

 

 

 

 

 

 

Placer Dome

Getchell

1999

 

 

 

 

 

 

Placer Dome
South Deep

1999

 

 

 

 

 

 

Newmont

Battle Mountain

2000

 

 

 

 

 

 

Franco

Euro-Nevada

2000

 

 

 

 

 

 

Barrick
Homestake

2001

 
 

 

 
 

 

Newmont
Normandy

2001

 

 

 

 

 

 

Newmont
Franco-Nevada

2001

 

 

 

 

 

 

Gold Fields
WMC Gold Assets

2001

 

 

 

 

 

 

Kinross

Echo Bay

2002

 

 

 

 

 

 

AngloGold
Ashanti

2003

 

 

 

 

 

 

Goldcorp
Wheaton River

2004

 

 

 

 

 

 

Glamis Gold

Western Silver

2006

 

 

 

 

 

 

Barrick

Placer Dome

2006

 

 

 

 

 

 

Xstrata

Falconbridge

2006

 

 

 

 

 

 

 

 

 

 

 

 

 

The Art of the Deal

 

Besides the above mergers that have taken place, several other offers have been made and refused, as well as offers that are still pending and awaiting the final outcome. Inco, for example, attempted a hostile takeover of Falconbridge that was thwarted.

 

Presently, Barrick has a hostile takeover bid for Nova Gold, and just yesterday Gold Corp. offered to buy Glamis Gold, which is still pending final approval. Needless to say things are heating up in the precious metals mining industry.

 

We suspect that as the price of gold and silver rises there will be further mergers in the industry, as savvy CEO’s attempt to cash in on the higher prices of their product by buying proven and known reserves, as opposed to the more costly and time consuming exploration and development involved with bringing new facilities and supply on line.

 

The times they are a changing – you can smell it in the breeze: the realization that tangible goods are the real deal, as opposed to paper promises; and what better tangible goods to own then the precious metals of gold and silver – the sovereigns of the ages.

 

 

"The great merit of gold is precisely that it is scarce; that its quantity is limited by nature; that it is costly to discover, to mine, and to process; and that it cannot be created by political fiat or caprice." [2]

 


Come visit our new website: Honest Money Gold & Silver Report
And read the Open Letter to Congress

COMING SOON: A REQUEST FOR AN AUDIT OF US GOLD RESERVES

 

 

 



[1] William Shakespeare

[2] Henry Hazlitt


-- Posted Tuesday, 5 September 2006 |




 



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