-- Posted Friday, 9 January 2009 | | Source: GoldSeek.com
One of the most positive trends in the gold industry – for those companies with lots of cash - is what kind of assets cash will buy
There is no ready chart to show this trend, but because junior company valuations (their share prices) have largely been wiped out over the past year, those with cash are in the driver’s seat to pick up assets or entire companies, cheap.
The majors are awash in cash. Kinross Gold (K-TSX) has $700 million. Barrick (ABX-TSX) has $1.7 billion.
Even the juniors and intermediates are on the prowl. One high-profile example is New Gold Inc. (NGD-TSX). It has $250 million cash and positive operating cash flow. This is an inexact science, but cash like that could buy a lot more now than even six months ago, before the October meltdown in resource stocks. Similarly, B2Gold (BTO-TSX) is a junior with $60 million cash available to buy assets or companies.
The unprecedented sell-off in the resource sector – has resulted in the value of non-producing assets having a zero or even negative value, with many companies trading well below cash. Even the value of most small producers have virtually gone to zero (for example, New Gold is trading just above it’s cash per share value, despite 2009 production of around 100,000 ounces).
And there is no risk capital to be had. There is absolutely NO new debt available to even the better credit risks. Some of the major miners are able to raise funds in this market, but for the junior producers and explorers – the well is dry. There are no hedge funds, or even sector specific funds or larger speculators willing to fund small mining or exploration companies now. This means there is no competition for industry capital.
The market knows this. So investors have sold down these junior mining shares 70 – 95%. According to Canaccord Capital’s Small Cap Overview of December 18, 2008, the market cap per ounce of gold in the ground is down 75% in 2008 to $26.17. Base Metals and uranium valuations are down 85% (once again proving gold’s relative outperformance – though that is hardly solace from the shellacking we have taken).
Look at some of these examples, mostly in the gold sector: GLR Resources (GRS-TSX) has 1 million ounces in reserves and could go into production at 90,000 ounces per year. It trades at 1 cent. It just needs money. Orsu Metals (OSU-TSX) is producing now, and will produce over 100,000 ounces in 2009. It trades at 14 cents, down from $1.10. Then there’s Donner Metals (DON-TSXV) with a new zinc discovery in Quebec that could be in production in 2 years, with a mill in place. The stock is 10 cents. Underworld Resources (UW-TSXV) looks like it could have 1-2 million ounces in the Yukon – 20 cent stock, $4 million market cap. Bear Creek Mining (BCM-TSX) has one of the largest new silver discoveries in the world, traded at $11 per share last year and hit 60 cents. The list goes on.
There is currently a once-in-a-lifetime opportunity for industry players with cash. Investors are so fraught with fear and determined to cash out, it’s likely a takeover bid at 25% of the year high on any of these stocks – but still a double from where the stock is now – could actually be successful. Cash will buy a lot more now than ever before in the industry.
Deals are starting to happen. IamGold (IMG-TSX) just bought Orezone (OZN-TSX) for 49 cents a share, after OZN traded at $2 for a couple years.
And even as investors – both retail and institutional – largely stay away from gold stocks, the number of deals will increase as the more agile and opportunistic predators skim off the cream, and the lumbering giants of the industry awake from their inertia.
And as the old saying goes – gold may make the world go round, but cash greases the wheels. Or something like that. In any case, for companies like New Gold, Kinross etc., the wheels are starting to turn.
-- Posted Friday, 9 January 2009 | Digg This Article
| Source: GoldSeek.com
