NEW YORK ( TheStreet ) -- Newmont Mining ( NEM) announced Thursday plans to acquire Fronteer Gold ( FRG) for $2.3 billion, a 37% premium to Wednesday's closing price.

For the price tag, Newmont will get 100% ownership in Fronteer's Long Canyon project in Nevada, which has measured and indicated resources of 1.4 million ounces of gold. Fronteer's CEO, Mark O'Dea told me at the Denver Gold Forum that cash costs are estimated to be $350 an ounce.

"The acquisition of Fronteer Gold will contribute significantly to our anticipated growth profile in North America," stated Richard O'Brien, Newmont's President and CEO. Newmont produced 5.4 million ounces of gold at cash costs of $485 an ounce and sold 5.3 million ounces for an average of $1,222. The company will report fourth-quarter earnings on February 24th.

Newmont will also acquire two other projects from Fronteer: Sandman, already a joint venture with Newmont, and Northumberland, both of which are in Nevada and will come on stream between 2012-2014. In total, the company has measured and indicated gold resources of 4.2 million ounces. In total, Newmont paid about $547 for each ounce of gold.

A separate company, Pilot Gold, will be spun off with $10 million in cash and a portfolio of Fronteer's exploration properties. Fronteer will own 80.1% of the company and Newmont will hold the remaining interest. The goal is to continue exploration in Turkey and Nevada with Fronteer's management and experience.


This acquisition has been a long time coming. The worst kept secret in the gold community is that Newmont and Barrick Gold ( ABX) would be forced to make acquisitions to replenish their gold supply following their peers Goldcorp ( GG), Kinross Gold ( KGC) and Agnico-Eagle ( AEM) who bought Andean Resources, Red Back, and Comaplex, respectively.

Goldcorp paid a 35% premium, Kinross a 21% premium and Agnico a 30% premium, which had analysts worried that Newmont and Barrick would be forced to shell out the cash as well.

Tom Winmill, portfolio manager of the Midas Fund, warned investors to "avoid the big ones that don't already have growth in their portfolio. Newmont comes to mind. Barrick Gold is kind of treading water on the growth profile Barrick probably won't do an acquisition but Newmont might."

Despite the acquisition, investors seem positive on Newmont. Shares are up 0.9% at $56.17.

Jeb Handwerger, editor of GoldStockTrades.com, who recommended Fronteer as a takeout target, says Newmont "now controls some of the top high grade discoveries in a mining friendly jurisdiction controlling over 2 million acres in Nevada."

Fronteer Gold is up almost 40% on the news to $14.38.

No doubt, this is going to ignite speculation as to who the next target will be. 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%. The pressure is on to find new deposits as long as gold holds above $1,000 an ounce.

Mergers make the most sense for large gold companies because finding a new mine and bringing it into production can take upwards of 10 years, during which the company must contend with geopolitical and environmental risks, which could slow the project down. Using rough math, if a producer wants to increase their annual production by 1.5 million a year, the miner must find twice as many ounces of resource, which means finding or buying big deposits.

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Another option for a company needing to strike gold is partnering. A senior miner can partner with juniors 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 strategy is a fall back and "a buyout is more beneficial."

Now that Newmont has made its big acquisition, it might be more attractive to investors. Brian Hicks, co-manager of the U.S. Global Investors Global Resources Fund, doesn't recommend Newmont, specifically, but did say that "we like the stocks that have made their acquisitions already and we think that they will start to gear up."

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Now the focus turns to Barrick -- will it or won't it buy? Barrick is the biggest gold company in the world with a market cap of $47.01 billion. Barrick produced 2.06 million ounces of gold in the third quarter at total cash costs of $454 per ounce.

Dan Denbow, co-portfolio manager of the USAA Precious Metals and Minerals Fund, says "I think they have plenty of growth within the portfolio that I think is under-recognized ... they have areas where they are spending money looking for new deposit." Denbow thinks that Barrick can deliver growth without making a big purchase.

Hicks thinks that Barrick might use its cash to increase its dividend. At third-quarter end the company has a cash balance of $4.3 billion. Shares were relatively flat at $47.65.


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-- Written by Alix Steel in New York.

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