A company like Soho would be a consideration.....ICash-rich gold miners set their M&A sights lower
Fri May 30, 2008 1:33pm EDT
By Cameron French - Analysis
TORONTO (Reuters) - Despite strong cash positions, big gold miners are avoiding mid-sized to large acquisitions in favor of development-stage properties that can expand their reserve bases and lower their per-ounce costs.
And with tight credit markets making it difficult for small players to use debt to develop new mines, deep-pocketed majors are expecting to find willing sellers.
While the thinking among gold companies up until a year ago was "bigger is better" -- evidenced by Barrick Gold's (ABX.TO: Quote, Profile, Research) 2006 $10-billion takeover of Placer Dome and Goldcorp's (G.TO: Quote, Profile, Research) $7.5-billion acquisition of Glamis Gold -- the new focus is on controlling costs and replacing depleted reserves.
"I think everybody has said that there will not be the Goldcorp-Glamis type of big deals, that if there are any deals they will likely be fill-in deals, property deals," said John Ing, president of Maison Placements in Toronto.
"Cost are increasing, and what's more important is that there's a lack of discoveries."
With few large gold strikes over the past few years and production by big players on the rise, companies are struggling to find ways to replace the millions of ounces per year they excavate.
"We're running out of major gold deposits, and the deposits we do have become increasingly difficult to come on stream," Peter Munk, interim CEO of top producer Barrick Gold, said at the company's annual general meeting earlier this month.
With a lack of new discoveries, top miners have tried to extend current mines by mining lower-grade ore, a practice that raises costs. Digging into a new deposit with higher grades typically lowers average cost per ounce.
SHIFT IN THINKING
Barrick's recent transactions underline its shift in thinking.
In the first quarter, it paid $1.7 billion for Rio Tinto's (RIO.L: Quote, Profile, Research) 40 percent interest in the million-ounce-a-year Cortez property in Nevada and bought Arizona Star Resource Corp for C$773 million, giving it a majority stake in the massive Cerro Casale project in Chile.
Munk said such deals would continue to be on Barrick's radar, while other top players have said much the same.
Kinross Gold (K.TO: Quote, Profile, Research) CEO Tye Burt said on a conference call earlier this month the company expected to benefit from problems junior players were facing in tight debt markets.
Goldcorp (G.TO: Quote, Profile, Research) CEO Kevin McArthur told Reuters last week the company did not want to buy anything that was already operating, and would instead focus on early-stage properties.
"The juniors discover gold a lot better than the seniors do, they do a very good job," McArthur said.
The companies can certainly afford it. At the end of the first quarter, Barrick was sitting on a cash balance of $1.9 billion, while Goldcorp has $1.3 billion and no debt. Global No. 2 producer Newmont Mining (NEM.N: Quote, Profile, Research) has about $1 billion.
And while costs have continued to rise, gold has shown no signs of a prolonged retreat. Spot metal prices were just under $900 an ounce on Friday.
"They're spending a lot of money (on exploration) but the resources are limited and there's some good resources on the exploration side of the sector," said Peter Spina of Goldseek.com.
"The (explorers') valuations are very cheap, so maybe these large companies sense that and are waiting for them to get in a more desperate position before making a move."
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https://in.reuters.com/article/innovationNews/idINN3034216520080530