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Chris Ecclestone, Mining Strategist, explained the potential for gold mining companies, “the interesting thing is that Chinese enterprises in the past have roamed the world searching for base metals and products that they can take back to the mother land. In this case a purchase of a gold company in Brazil, it is definitely a mold breaker. It means that potentially all gold stocks within a certain size are fair game.”
The parent of China’s second largest gold producer by market capitalization, Shandong Gold Group Co. (SHA:600547), has initiated a $785 million offer for Jaguar Mining Inc. (TSX:JAG,NYSE:JAG).
Chris Ecclestone, Mining Strategist for Hallgarten & Company, explained the potential for other gold mining companies on BNN, “the interesting thing is that Chinese enterprises in the past have roamed the world searching for base metals and products that they can take back to the mother land. In this case a purchase of a gold company in Brazil, it is definitely a mold breaker. It means that potentially all gold stocks within a certain size are fair game.”
Traditionally, the Chinese have demonstrated a strong appetite for gold jewellery during this season for gifts, and the nation even celebrates a golden week holiday annually in early October. However, the Chinese central bank remains significantly underweight in physical gold compared with most countries, with most recent estimates of 1.7 percent of foreign reserves as physical gold reserves.
Ecclestone added, “gold is definitely not a strategic asset and if the Chinese are going to start on a campaign of putting their reserves to work in buying up gold in the ground and gold in the whole production process, rather than buying the end product. It is a very interesting development which could light a fire under a number of [gold] stocks out there that are in the mid tier, that are perceived by the markets to be undervalued.”
A golden offer
According to Bloomberg, Shandong has offered $9.30 representing a 73 percent premium above Jaguar’s closing price of $5.39 during the previous trading session on the New York Stock Exchange. This year there has already been approximately $24 billion of gold sector corporate reorganization announced with an average premium of 25 percent. If the bid from Shandong is successful it will represent the biggest gold mining takeover by a Chinese company. Since the announcement of the potential deal for Jaguar Mining, the market has responded positively sending share prices up 41 percent, involving a considerable volume of shares.
Jaguar Mining has provided a news release stating that, “in light of the publicized unsolicited offer, the Board of Directors has determined to initiate a strategic process to explore alternatives to maximize shareholder value. At this time, none of these proposals has progressed beyond the exploratory stage. The Board has retained financial and legal advisors to assist in this regard. There is no assurance that the process will culminate in a change of control transaction.”
A competitive landscape
Last month PwC provided a report of gold sector merger and acquisition activity this year, indicating Canada, Australia and the United Sates have been dominant in the market place with approximately 79 percent of the ownership.
In the gold sector this year the largest value of corporate reorganization involved a top gold producer Newmont Mining Corporation (TSX:NMC,NYSE:NEM) acquiring Fronteer Gold Inc. for $2.3 billion.
Chinese demonstrate a strong appetite for resources
Recent merger and acquisition activity involving Chinese companies includes last month’s Sinopec Group’s $2.1 billion agreement to acquire oil and gas exploration company Daylight Energy and Minmetals Resources’ announced $1.28 billion offer to takeover copper mining company Anvil Mining Ltd (TSX:AVM).
Securities Disclosure: I, Dave Brown, hold no direct investment interest in any company mentioned in this article.