- Short the buyers and potential buyers;
- Buy the buyout targets;
- Buy the large miners that already have made big purchases;
- Buy the mid-tier miners who focus more on organic growth rather than buyouts
First off, M&A for gold miners is here to stay as long as gold prices stay high. The stronger the gold demand, the more gold a company must produce, the more gold it has to find to replenish supply.
According to the World Gold Council gold demand trend report, mine supply grew 3% in the third quarter compared to a year ago while gold demand rose 12%. Although the difference between supply and demand was largely made up for by an increasing recycled gold supply, as prices sustain high four-digit levels the pressure is on to find new deposits.
Using rough math, if a producer wants to increase its annual production by 1.5 million ounces a year, the miner must find twice as many ounces of resource. CEO of Novagold (NG) Rick Van Nieuwenhuyse says "typically resources to reserves is about 60% [and] you get about 90% recovery." Finding a new mine and bringing it into production can take upwards of 10 years during which time the company must contend with geopolitical and environmental risks, which could slow the project down. Some companies get lucky like Endeavour Silver (EXK) which took its Lucera mine from discovery to production in four months, a pretty rare scenario. Another option is partnering. A senior miner can partner with a junior on a new project to help shoulder some of the financial burden while reaping the benefits of someone else's work. Paolo Lostritto, mining analyst at Wellington West Capital Markets, thinks that this strategy, however, is just a fallback. Juniors might enter into a partnership expecting the richer company to jump-start the project into production, but since the senior typically has a longer production time line (maybe it won't need more gold deposits for 10 years) sometimes an asset just sits there. "A buyout is more beneficial [for a junior]," argues Lostritto.
Select the service that is right for you!COMPARE ALL SERVICES
Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.
- $2.5+ million portfolio
- Large-cap and dividend focus
- Intraday trade alerts from Cramer
- Weekly roundups
Access the tool that DOMINATES the Russell 2000 and the S&P 500.
- Buy, hold, or sell recommendations for over 4,300 stocks
- Unlimited research reports on your favorite stocks
- A custom stock screener
- Upgrade/downgrade alerts
Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.
- Diversified model portfolio of dividend stocks
- Alerts when market news affect the portfolio
- Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.
- Real Money + Doug Kass Plus 15 more Wall Street Pros
- Intraday commentary & news
- Ultra-actionable trading ideas
Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.
- 100+ monthly options trading ideas
- Actionable options commentary & news
- Real-time trading community
- Options TV