Takeovers Increasing In The Gold-Mining Field

As has been noted in the Financial Sense Newshour podcasts for some weeks now, senior gold companies are buttressing their reserves by taking over junior exploration companies with multimillion-ounce deposits. Kishori Krishnan of Gold Investing News has written a round-up of the latest deals with this teaser of an introduction:

Gold miners are adding to their reserves. And fast. Given the strong metal prices, precious metal miners are using their cash flow from existing operations to pay for new acquisitions.

Especially Vancouver-based miners, who are now aggressively pursuing growth projects. Most have realized one thing - that the gold market does not need a weak US dollar to rise. For, the supply of gold itself has been declining for a decade now.

Reports indicate that we are at the lowest level of supply in at least 15 years. And this, for a commodity which has had a persistent growing demand.

Given the serious shortage of new gold discoveries and mines going into production, one interesting fact has emerged.

Since 2000, the gold price has risen over $600 or so, yet the actual amount of gold produced has declined almost every year since then. That’s counter-intuitive, given that when a commodity price goes up, there should be more production.

This is telling us something important....

Late last year, there was exceitement over some of the "big boys" shifting into gold. These new gold bugs, of which John Paulson is one, were held up as evidence that the gold rally is going to continue. Successful investment professionals aren't likely to to get in - to initiate positions in a big way - at the top of a bubble. If any tendency, they have a record of getting in too early.

The same reasoning can be applied to the executives of senior mining companies, although a different factor is operating here. Flush with cash and/or access to financing, but with in-house exploration coming up relatively dry, the seniors are hitting the acquisition trail not just because they need to but also because they can. This point is consistent with a mature bull market.

But, M&A activity only gets rolling when assets are for sale at a discount. The takeover trend isn't mature; it's new. There hasn't been enough time for acquirers to lose their heads yet.

Takeovers in the early stages are a form of bargain-hunting. Granted that the bargains are gold-exploration companies - not gold itself - but the trend and its recency suggests that the bull market is not over.