The Conversation (0)
The rising price of gold is fuelling an increase in mergers and acquisitions, as larger companies look for new resources to develop. Though in general the value of gold mining stocks has not risen with the spot price, this is likely to change as majors acquire smaller prospecting companies.
The rising price of gold is fueling an increase in mergers and acquisitions, as larger companies look for new resources to develop. Though in general the value of gold mining stocks has not risen with the spot price, this is likely to change as majors acquire smaller prospecting companies.
“The obvious root for reinvestment is to acquire more gold deposits and the way to do that is through a gold and exploration company. I think we’re going to see a huge pickup in merger and acquisition activity in the near future in the gold sector,” said Lawrence Roulston, geologist and editor of the newsletter Resource Opportunities. “The gold production companies are generating huge cash flows with higher prices and they’re looking to re-invest that money.”
One of the largest recent acquisitions occurred in July, when Barrick Gold Corporation (TSX:ABX) acquired Equinox Minerals Limited for $7.7 billion. As the world’s largest gold miner, it currently has 26th operating mines across the globe and is predicting annual gold production to rise from its current 7.8 million ounces to 9 million in the next five years.
In the small-cap stocks, AuRico Gold Inc. (TSX:GAM) is paying the cheapest valuation for a takeover of a North American gold producer in seven years even at these high bullion prices. The Halifax, Nova Scotia-based company that has production in Mexico agreed yesterday to buy Northgate Minerals Corp. (TSX:NGX) $1.28-billion in stock to add production in Canada and Australia.
And it’s not only North American gold mining operations that are seeking out new projects to acquire, with a Chinese gold consortium eyeing South Africa as a thrust into the continent’s gold market.
Roulston says that investing in major gold miners that are in the process of acquiring projects from exploration companies is one way investors are able to benefit from the steady growth in the value of gold, without the perceived risk of putting their money in exploration companies. However for those who are looking to make the biggest gains, a well-researched exploration company will have the greatest opportunities in the event that their projects are successful and eventually consolidated with larger companies.
“Fundamentally, investors right now are terrified, and they’re going to safety and gold is a safe haven and the exploration companies are seen as risky,” said Roulston. “It’s only a matter of time until the gold producing companies and the gold exploration companies get recognition that the price of gold has risen much higher and therefore the fundamental value is much higher.”
Exploration companies are in an era where they are looking to new avenues for gold production, including previously producing mines, lower-grade mineralogy and thinking global by entering under-explored jurisdictions of the world. As discussed earlier this month by Gold Investing News, many equities are facing consolidation, and this is a trend we are likely to see in the near future.