Gold Mining Buy-Out Binge Coming, And That’s A Mixed Blessing

For gold bugs, this is a good news/bad news story.

Say you’re one of the many people who bought junior gold and silver mining stocks a few years ago — and then watched in horror as they fell day after day, week after week, finally settling at pennies on your dollar.

Then, just as they seem to be recovering, you’re notified that some big miner with much less spectacular upside potential is buying one of your little lottery tickets for a premium to the current price — but a fraction of what you paid back in the day. You now own shares of Goldcorp or Agnico Eagle or some other household name, which isn’t bad. But it’s definitely not the 10-bagger you’d been hoping for to redeem your terrible timing.

Well, get ready, because that’s your future. As Casey Research’s Louis James put it in a recent interview:

The uptick is quite visible. Companies were running out of cash, pulling in their horns, operating in lights-on mode. But now they’re raising money and putting it to work. Resevoir’s deal with Nevsun was a real eye-opener, as was Goldcorp’s acquisition of Kaminak. I hear from contacts that the quality exploration companies are getting new CAs [capital advances] signed with juniors as well as majors. The latter have been cleaning up their balance sheets and are thinking of going shopping again.

Some recent news stories bear this out:

China’s Gold Miners Come of Age to Scour Globe for Acquisitions

(Bloomberg) – China’s gold miners plan to extend the biggest buying spree in four years as the nation seeks greater clout in the global bullion industry. The prospect may be helping drive up the price of assets from Australia to the U.S.

Some of the country’s top producers say they want to build on last year’s spree, when the nation spent the most on overseas gold assets since 2011. Overseas deals by companies based in mainland China in 2015 quadrupled from the year before to $483 million according to data compiled by Bloomberg. Bigger groups including Zijin Mining Group Co., Zhaojin Mining Industry Co. and Shandong Gold Group Co. have led a wave of domestic consolidation that’s amounted to $5 billion of takeovers in the past five years.

China is the world’s biggest producer and user of gold and started a price fixing in Shanghai this week as it attempts to establish a regional benchmark and bolster its influence in the global market. With limited domestic resources and growing demand, Chinese companies are looking to snap up overseas assets as prices rebound after touching the lowest in almost 6 years in December.

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Sibanye Targeting Gold Acquisition by End of 2016, CEO Says

(Bloomberg) – Sibanye Gold Ltd., the biggest producer of the precious metal from South African mines, wants to buy a gold-producing asset by the end of the year, adding to its acquisitions of platinum operations in its home country.

The asset would have to make a “material difference” to Sibanye’s current output, meaning it would have to produce at least 200,000 ounces of gold a year, Chief Executive Officer Neal Froneman said in an interview after the company’s annual general meeting Tuesday. Any acquisition would have to be generating cash to help pay dividends, he said.

Froneman, 56, is on the lookout for purchases after turning around three aging gold mines in South Africa’s Witwatersrand Basin following Sibanye’s spinoff from Gold Fields Ltd. in 2013. Last year, Sibanye agreed on two platinum acquisitions — Anglo American Platinum Ltd.’s Rustenburg operations and Aquarius Platinum Ltd., both located northwest of Johannesburg.

“We remain optimistic about doing a gold transaction before the year-end,” Froneman said. “But gold valuations are proving to be challenging from an acquisition point of view. There’s been a substantial re-rating in the equity prices of gold companies.”

What does this mean for precious metals investors?

First, it means that many of the potential moon shots that now litter the junior mining landscape may not get to make the gorgeous run that every speculator dreams about. Instead, after only one or two doublings they might be converted into shares in much bigger, less exciting companies.

Which is not a disaster by any means. In a precious metals bull market, the Barricks of the world will be huge winners. And the impact of a few acquisitions on all the other candidates can be hugely positive, a rising tide that lifts even leaky boats. So the ever-present bankruptcy risk in the typical junior miner is lessened by the new, somewhat indiscriminate capital flowing in. The upshot: junior mining stocks become a little less profitable as a group but also considerably less risky.