NEW YORK (TheStreet) -- Not everything that glitters turns out to be gold. Companies in the gold mining sector know this better than anyone. But this may now be changing.
Much of the last two years were characterized by falling production, asset writedowns and share price declines to complement a lower underlying gold price. The New York Stock Exchange's Arca Gold Bugs index composed of shares of all leading North American listed gold companies fell to a five-year low late last year and even a small bounce since has left this index well below the average levels seen over the last few years.
Mention the gold mining sector to most investors at the start of 2014 and the response unsurprisingly would generally have been indifference at best. News in the sector has gotten much more interesting over the last few weeks, with three of the largest North American gold mining companies -- Newmont Mining (NEM - Get Report) Barrick Gold (ABX - Get Report) and Goldcorp (GG - Get Report) --[ all being involved in potential deals.
Many headlines over the weekend concerned a potential Newmont Mining and Barrick Gold merger. Neither company has covered themselves in corporate glory recently with writedowns, mining disputes, cost over-runs and a real struggle to expand mining production. Barrick Gold even announced a share issue in November last year to help shore up its balance sheet.
The rationale for the proposed Newmont-Barrick deal is very clear -- the hope that purchasing and administration synergies will allow efficiency gains sufficient to materially boost profits.
Goldcorp have adopted a different approach using the relative strength of their balance sheet to make two bids for its smaller Canadian gold sector peer Osisko Mining (OSKFF). Currently the second of these bids -- at approximately a 35% premium to the initial approach Goldcorp made -- remains unsuccessful due to two other Canadian gold-sector companies Yamana (AUY) and Agnico Eagle (AEM) trumping the second Goldcorp bid.
What is all this merger and acquisition activity telling investors? The out-of-favor gold-mining sector is now in play. In Newmont and Barrick's case this is driven by their recent corporate malaise while for Goldcorp it was driven more by the opportunity to buy assets not far off multi year lows.
When three of the largest names in a previously out-of-favor sector are involved in potential deal activity, investors need to take notice as higher ratings and profits could be set to follow.
At the time of publication the author had no position in any of the stocks mentioned.
This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.