Earlier this year we saw China make a major move in the gold mining industry when they supplied Barrick with $300million in stock to assist in purchase of Randgold. Then we saw NewMont take over, in a somewhat hostile bid, GoldCorp. Where there once stood approximately 20, now stands two fewer. This pool, seemingly, is about to contract once again and if that happens we would see a contraction of 15% of the top 20 major gold mining companies in the world!
“We need more pipeline, especially in gold production,” Jerry Xie, executive vice president, said in an interview on the sidelines of the Denver Gold Forum on Monday. “We’re currently looking for acquisition opportunities quite aggressively. We’re doing this on behalf of our parent company, not just for ourselves.”
Another layer of evidence that not only is the gold mining industry in far deeper trouble than anyone is willing to admit, it is more support for what we have been saying about gold and silver moving to much higher levels on the exchange charts.
With gold currently hovering around $1,500/ounce and silver close to $18/ounce, we believe this type of scenario is one of the single biggest reasons the metals are going to move much, much higher. The mining industry, as those that have been following along know, has been in serious trouble for more than a decade. The inflows of capital into the mining industry have been all but shutoff and only in the past year has the industry seen any amount of capital coming into the coffers. With mining being absolutely dependent upon new mines, deeper mines and continual research and development, this means a steady flow of new capital is vital to maintain an operation. No new funding, no new anything, especially, new sources of gold and silver.
Making a long-term bull case for miners, Bernstein Research analyst Paul Gait said the sector is being valued at a 100-year low.
“Our broad conclusion is that mining has never been cheaper than it is today, hence the current sector weakness represents an ideal entry point for any long-term investor,” Gait said in a Sept. 3 note.
Analyzing the sector’s cyclically adjusted price to earnings ratio, or CAPE, Gait found that the mining industry trades at 1.4 standard deviations under its long-term average value. This, Gait said, is the lowest recorded data point over the past century.
“The only comparable period in recent history was during the height of the dotcom bubble in the late 1990s, however even during the dotcom bubble the valuation disconnect was not as severe as it is now,” Gait said. “Over the four years between 1997 and 2001, the relative valuation averaged about 0.46x relative CAPE, during the period 2015 to present the average has been 0.31x relative CAPE!” Source
We are now witnessing the end result of this lack of capital inflows. Mergers at the very top of the mining “food chain”. The junior miners are great, especially the ones that have reached the 43-101 stage and are on the cusp of actually mining material, but there are few of these that are viable operations. Junior miners are true gamblers and they are gambling with millions upon millions of dollars. If you can find a solid junior mining company to invest a few thousand dollars, it very well could become ten of thousands of dollars in a short period of time.
In the meantime, it is interesting to see the major mining companies eat their own. The latest to come to the chopping block could very well be IAMGold. Will it fall?
China Gold Is Hunting for Deals Worth as Much as $2 Billion
China Gold International Resources Corp., the overseas arm of state-owned China National Gold Group, is on the hunt for acquisitions to replenish its pipeline as deal-making in the sector heats up thanks to a jump in the metal’s price.
“We need more pipeline, especially in gold production,” Jerry Xie, executive vice president, said in an interview on the sidelines of the Denver Gold Forum on Monday. “We’re currently looking for acquisition opportunities quite aggressively. We’re doing this on behalf of our parent company, not just for ourselves.”
The miner, listed both in Canada and Hong Kong, is targeting companies with assets in operational stages that have ramp-up plans. The company is comfortable making purchases with a price tag at roughly $1 billion to $2 billion, Xie said.
The company is open to studying potential acquisitions of single-asset companies with mines near production, he said. It is also interested in possible asset sales that may come from Barrick Gold Corp. and Newmont Goldcorp Corp., which both have plans to divest after recent mega-mergers.
Gold is near a six-year high, and industry shares are up about 60% in the past 12 months. Meanwhile, the amount of gold reserves still buried in mines is down by more than half from a 2011 peak. It’s a potent mix that may push miners toward consolidation over expansion for growth.
Acquisitions of gold producers have already jumped to $18.2 billion this year, the highest level in eight years, driven by the merger of Barrick and Randgold Resources Ltd. as well as Newmont’s $10 billion purchase of Goldcorp Inc., according to data compiled by Bloomberg. Meanwhile, the long-term outlook for gold prices remains bullish, with Citigroup Inc. seeing potential for a record above $2,000 an ounce in the next two years.
China National Gold, the nation’s second-largest gold miner, is studying a bid for a stake in Canada’s Iamgold Corp., Bloomberg news reported in June. Xie declined to comment on the parent company’s potential deal.
Does this mean the end of large scale mining? Nope. It just means the stress and strain of the past decade is now coming to the surface and these mining behemoths need to make changes. If they don’t….well, I guess China will be paying them visit in the near future.
