subject: Return of the Gold Rush, Kinross and Goldcorp Acquisitions‏ [print this page] Canada's Kinross and Goldcorp IncCanada's Kinross and Goldcorp Inc. are gold mining giants who understand the big picture, the future and the market they thrive in. Their recent moves to takeover international mining firms
Red Back and Andean Resources Ltd. illustrate the future of gold production and represent the long-term strategies needed to capitalize on quadruple digit gold prices in a post peak production world.
According to the circumscribed principles of economic equilibrium, the global spike in gold prices should abate in absence of a supply shock. That's because as higher gold prices further incentivize companies to ratchet up production, the subsequent surge in global supply will water down the value. Yet despite a 440% increase in the price of gold over the last decade, levels of global output have been in decline since 2000.
That's because gold is suffering a supply shock. Like any non-renewable resource, the global supply of gold has a peak point in which more is above ground in vaults than below in dirt. Any production after that peak point is in a terminal rate of decline. Notwithstanding any huge technological advancement, most experts estimate that gold already reached its peak production rate sometime around 2001.
The Kinross and Goldcorp takeover deals underscore prescient strategies for capitalizing on shrinking reserves in a world of continuously rising gold prices. With a global shortage of new mining properties, large companies are far better off acquiring global explores like Red Back and Andean Resources Ltd. than seeing their returns dwindle every year from their existing stakes. Kinross and Goldcorp are making the first moves in what will amount to a gold-fuelled trillion dollar land grab in which stake acquisition from smaller companies will be the primary drivers of competition and success. As a result, a gold mining company's ability to succeed will depend less on its operational ability to process gold and more on the stakes and properties it holds. Already this year, mergers and acquisition activity amongst gold miners represents 40 per cent of takeover deals in the mining sector.
Under the Kinross deal, the Toronto based firm paid a huge premium of $7.1 billion for Red Back; mainly because of its stake on the Tasiast mine in Mauritania, one of the most potentially lucrative gold mines in the world. While the estimated cost for developing Tasiast is around $1.5 billion, gold cash flow from the mine will be around $1.3 billion a year at today's spot prices, making financing a veritable non-issue. On top of Tasiast, the combined company will now own 10 operating mines and five development projects in eight countries, including Russia, South America and the United States. Red Back's proven and probable gold reserves have been climbing impressively since 2006 and now stand at 8.1 million ounces and another 3.2 million in the somewhat less-secure "measured and indicated" category. With a market cap of $19 billion the combined company will be the world's fifth largest gold producer.
The Vancouver based Goldcorp Inc. deal saw the world's second-largest gold miner sign a $3.6 billion cash-and-share agreement with Australian-based Andean Resources Ltd. In a bidding war with Vancouver-based Eldorado Gold Corp. Goldcorp Inc. was forced into paying a 35% premium for Andean, but now owns its highly lucrative properties in southern Argentina which contain an estimated 3 million ounces of gold, another 26 million ounces in silver and a total valuation of $1.65 billion based on current findings. As they develop these undercapitalized projects, that number's only going to get bigger.
So the global gold rush has begun, but it won't involve pans and pick axes this time, as the Kinross and Goldcorp deals illustrate, this rush is about mergers and acquisitions.
Return of the Gold Rush, Kinross and Goldcorp Acquisitions
