How Much is Too Much for Gold-in-the-Ground?
This year's bumper gold-mining deals come as big discoveries have gone missing in gold...
WHATEVER'S LURKING in Andean Resource's data room - opened to suitors for two years, but now closed after GoldCorp trumped Eldorado's US$3.3bn bid - it must be pretty spectacular.
Because on published figures, and at current spot prices, GoldCorp's offer equals 74% of the gold and silver resources indicated and inferred at Cerro Negro. Based on viable reserves alone, the bid is priced at 1.5 times proven and probable ounces!
That suggests real confidence not only in the precious-metal bull market, but most spectacularly in Andean's exploration projects.
Southern Argentina certainly looks compared with the world's better-developed but fast-ailing gold mining sites. A marginal producer at the top of gold's last long-run bull market, South America has since overtaken Australia, North America and South Africa, and now spits out twice as much gold per year (according to GFMS's 2010 forecasts) as the world's single largest gold-mining nation, China. Extraction costs are also alluring, doubling since 2006 to around $350 per ounce (GFMS again) but undercutting North America's average cash costs by well over $100 and slashing South Africa's cost in half.
As for the timing, 2010 has already overtaken full-year 2008 with record spending on gold mining mergers and acquisition. The sector's third-largest corporate action takeover of the year to date, GoldCorp's agreed offer - which may still see revised bids from other suitors, according to the newswires - follows Newcrest's US$8.4bn acquisition of fellow Australian firm Lihir in May, and last month's $7bn purchase by Kinross of the 91% of Red Back Mining it didn't already own.
This size of takeover led the mining world table in 2008, when precious-metal producers didn't even figure in the top 10 deals, despite it being a bumper year for gold M&A. And as for last year, gold's biggest takeover in 2009 was for the $1.7bn purchase of Sino Gold by Eldorado - Andean's disappointed suitor today.
So what about price? Well, Newcrest's takeover of Lihir in May was priced at just 22% of proven and probable reserves, equal to 12% of indicated and inferred resources - a real bargain compared to Kinross's merger with Redback. Even with spot gold trading near all-time highs, that cost nearly 25% of potential resources, equal to fully 38% of proven and probable ounces. Little wonder perhaps that ISS on Friday called Kinross' bid too rich; J.P.Morgan says Redback would needs to near-double its resources to make the offer worthwhile.
But with gold mining firms bloated with cash and bleeding reserves as they continue to mine, could one-third (or so) of proven-and-probable ounces set a useful benchmark for acquisitive majors? Andean may be sitting on a further 4.2 million ounces of "potential" gold, reckons Credit Suisse's Michael Slifirski. In which case (and not forgetting South America's low extraction costs), GoldCorp's bid would fall to 35% of total resources at current prices.
Together with the Kinross-Redback deal (and only if both complete), that might suggest a base level for M&A pricing in a world losing 4 million ounces per year in new discoveries since 1980.