Merger and acquisition activity in the gold mining community is nothing new, but has definitely picked up steam in the past few years as gold prices soared past $1,000 an ounce. Most recently Goldcorp (GG) and Kinross Gold (KGC) bought Andean Resources and Red Back for $3.4 billion and $7.1 billion, respectively.
Although the purchases represented hefty premiums, the large gold companies were forced to replenish their resources as gold demand skyrocketed and supply waned. The above-ground supply of gold has slowly shrunk since 2001, leaving gold producers in a bind.
According to the World Gold Council, mine supply increased only 3% in the second quarter of 2010 while total gold demand rose 36%. The more gold a company produces, the more replacement gold it has to find, and organic growth on a big scale is hard to come by. It can also take 10 years to discover a mine and take it into production, so for a quick fix large companies have to turn to acquisitions."The big companies need to replace ounces, and they're only going to do that through acquisitions," argues Mark Bailey, CEO of Minefinders (MFN). "They don't have the patience to go out and make a grass-roots discovery. ... The big sized companies will have to acquire, the mid-sized companies will have to acquire ... [as well as smaller companies] that want to grow quicker." Goldcorp paid a 35% premium for Andean Resources in its efforts to outbid Eldorado Gold (EGO) for the company. Andean has indicated resources of 2.54 million ounces of gold. Shareholders will have to wait for the mine to be built before the acquisition will contribute to earnings. CEO Chuck Jeannes is estimating production by late 2012. Kinross paid a 21% premium for Red Back but will have immediate access to 450,000 ounces of gold from its already producing operations. The acquired West African miner, however, has initial reserve estimates of 25 million ounces. According to CEO Tye Burt, there is a 36-month plan to put the new mill into production while they are drilling. It will take about a year for Kinross to start adding this new gold to their production. Burt believes that more senior producers that don't have growth will follow in Kinross' and Goldcorp's footsteps. Projects will most likely be of higher quality and good grade.
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