NEW YORK -- A $9 billion deal that would create the world's largest
gold company could ignite a rush of takeovers, as smaller companies
struggle with high mining costs that eat into profit margins,
analysts and industry observers said on Monday.
"I expect this will continue as it's the best way for companies to
build up reserves, by buying other mining companies," said Peter
Schiff, chief executive of brokerage Euro Pacific Capital Inc. of
Newport Beach, California.
"I don't think this is the end of consolidation. Bigger companies
will buy juniors; it's easier to buy reserves on Wall Street," said
Schiff, who manages approximately $400 million of investments,
including 10 percent in gold mining stocks.
His comments came after Canada's Barrick Gold Corp. bid $9.2 billion
in cash and stock to acquire another Canadian miner, Placer Dome
Inc..
Successful completion would catapult Barrick -- already Canada's
biggest gold miner and the world's third largest -- ahead of Denver-
based Newmont Mining Corp. and South Africa's AngloGold Ashanti Ltd.
in world rankings. Placer is the world's No. 5.
The announcement comes at a time when the industry is struggling
with higher exploration and mining expenditures, brought on by sky-
high energy costs. Meanwhile, the gold price hit an 18-year high
around $480 per ounce earlier this month -- although it has slipped
since, with the spot price in New York down below $466 from Friday's
$473.
Asked if the Barrick-Placer Dome deal would spark a wave of
consolidation, Peter Spina, an industry observer who runs the
precious metals Web site Goldseek.com, said: "Absolutely.
"It's surprising there have not been more. I expect some other
bidders to come into the picture," he said. "Big companies are
looking to consolidate and there are not many big players."
Both AngloGold and Newmont declined to comment on whether they were
interested in Placer Dome or future acquisitions of smaller miners,
the so-called "juniors."
"Placer Dome has been a possible takeover target for some years; and
I don't know whether Newmont or AngloGold will get into a battle,
but there's certainly a possibility," said analyst David Davis at
Andisa Securities in Johannesburg.
"(But) Barrick will probably only keep the core assets it wants and
spin off the rest of them."
Before the deal was announced, Harmony Gold Mining Co. Ltd. Chief
Executive Bernard Swanepoel commented on mergers in general. "The
rate of depletion plus the rate of declassifying reserves back to
resources far outstrips the rate of discovery.
"For companies which all have to justify their share prices partly
through being growth stories, to me it sounds inevitable that
corporate activity will take place."
Goldseek.com's Spina said the rising cost of mining the Earth's gold
deposits was crucial. "Companies are forced to go after others to
build their resource base.
"If you look at the valuation of the juniors, they have been
devastated in the last two years." Their market valuations are down
as much as 90 percent, he said.
"Also, in the gold market, the price has gone up, but so have costs.
These companies have not been able to raise capital," said Spina. "I
believe in the next year when the price heats up, there will be more
interest. This market has more potential to the upside."
"Most companies have not invested as much in exploration as they
should because of (previously) low gold prices and the increased
cost of mining," said Euro Pacific's Schiff. "Prices need to rise
substantially, and in my mind will go a lot higher."
Schiff, who owns some $600,000 of Barrick stock and $300,000 of
Placer Dome shares, said he was talking about gold in the range of
$2,000-$4,000 per ounce.
Frank Holmes, chairman and CEO of U.S. Global Investors, said the
deal highlights mining companies combining to share costs. He cited
the recent friendly deal in Canada in which Inco Ltd. agreed to
acquire rival nickel miner Falconbridge Ltd..
"Already we are seeing several mining companies sharing heavy
equipment costs. Barrick could save $200 million, so there's
probably a lot of synergies," said Holmes, whose $2.6 billion mutual
fund in San Antonio, Texas, is approximately 20 percent invested in
gold and mining stocks.
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