Lisa Wright
Happy days are here again for gold bugs, with the price of bullion setting new records almost daily and hovering above the $1,300 U.S. an ounce level for the first time in history.
And the investor stampede to the precious yellow metal – thanks in large part to the ailing U.S. economy—has spurred a frenzy of deal-making as gold companies duke it out for new assets to lock up reserves.
After a golden decade that has seen the metal price jump more than 400 per cent from a low of $252 U.S. in 1999, speculators are still buying gold faster than the world’s biggest producers can crank it out. So the seniors must acquire new discoveries or existing mines owned by smaller companies to stay afloat.
Amid the wild industry talk of gold hitting anywhere from $2,000 to $10,000 an ounce in this cycle, the mergers and acquisitions activity in the global gold sector has reached an all-time high of $32 billion so far this year – already double that of 2009.
But analysts caution that miners are making some “very big bets” that the gold price will continue to soar for years to come considering the big bucks they have shelled out recently to develop new mines, which in fact take years to build before any ore can be extracted.
“Adding ounces is the ultimate strategy, but building an asset is a long-term investment,” notes John Hughes, metals analyst at Desjardins Securities in Toronto.
He says project development typically takes three to five years, and it’s anyone’s guess where the gold price will be by then.
Kinross Gold Corp. took some heat from the street but ultimately succeeded in its friendly, $7.1-billion takeover last month of Red Back Mining Inc., the focal point of which is the $1.5-billion development of the Tasiast mine in Mauritania.
This year Goldcorp Inc. and Eldorado Gold Corp. locked horns in their quest to acquire Australia’s Andean Resources Ltd., which Goldcorp scooped up last month for $3.6 billion. And Newcrest Mining Ltd. took over rival Lihir Gold Ltd. for $9.5 billion in August.
“It’s obvious that continued high gold prices, and even further upward movement, are the expectation of the CEOs making these huge bets,” says Bob Gallagher, chief executive of New Gold Inc.
The Vancouver company hasn’t jumped into the acquisition fray as others have in recent months because the price isn’t right, he says, with share prices in the sector gaining steam along with the metal price.
“Investors are scratching their heads over some of these deals, but they’re going along with it,” says mining analyst Barry Allan of Mackie Research Capital Corp.
It just shows how aggressive that mining company executives like Kinross’ Tye Burt are willing to be to get more gold in the pipeline, says Allan, “but it’s a bet, pure and simple.”
“Paying top dollar for an asset leaves them no room” if gold’s bull market ends before they can start production at new mines, he notes.
Gold is rising due to continuing concerns about the U.S. economy, the weakening greenback and record demand for exchange-traded funds (ETFs) in gold. The metal has rallied as central banks and governments maintained low borrowing costs and spent trillions of dollars to stimulate their economies.
Bullion has outperformed global equities, treasuries and most industrial metals this year.
“The strong price provides more confidence for these companies to go in and follow through on some of the M&A activity as we are seeing now,” says Hughes.
“And it’s a reflection of not having a next generation of mine development of any size,” he says.
Billionaire financier George Soros warned last month that gold was in “the ultimate bubble”, but gold bugs believe that it will take a while to burst given the uneasy global economy. Rising gold prices have encouraged investors to add gold to their portfolios and central banks to start adding it again too.
Gold guru Rob McEwen, the former CEO of Goldcorp who is now runs junior explorer U.S. Gold Corp., had predicted the price would hit $2,000 by year’s end but says now that “will be a push.”
The mining mogul raised a few eyebrows last month when he sold his sizeable stake in gold explorer Rubicon Minerals Corp., which saw its share price immediately tumble by 3.5 per cent.
Tidy profit-taking aside, McEwen maintains the gold price will pass $2,000 an ounce and run up to $5,000 in this cycle.
“Gold is money…It is a currency that can’t be increased dramatically with a printing press,” he says.
“But do not expect a straight climb up. There will be corrections, consolidations, before resuming the climb higher,” he adds.
Still, the ups and downs of gold – which struggled to reach $1,300 for the last 18 months—have brought some bears out of hibernation.
“Gold is being driven by a rising level of fear. Gold right now is quite volatile, and we’re not as optimistic as others are at the moment,” says Toon van Beeck, senior analyst at IBISWorld, a Santa Monica, Calif.-based research firm.
“As economic conditions improve, investment in gold as a store of value and a hedge against the U.S. dollar will decrease,” he says.
He predicts the gold price will actually tumble by $200 in the next three years.
However most analysts remain bullish on bullion in the near-term, since gold is the historic flight to safety in troubled times. But they caution that we’ve seen this show many times before in the mining industry.
Five years ago, the plot was centered on base metals, particularly nickel, which was on its way to a record high of $25 U.S. a pound. That had former Canadian foes Inco and Falconbridge actually talking merger, but it was too late.
Brazil’s Vale gobbled up the former and Xstrata snagged the latter in multi-billion dollar deals that had the industry buzzing about overpaying for assets at the top end of the cycle.
Nickel is now $10.50 a pound after tumbling below $5 in 2008, employees of the former Inco wound up on strike for a year, and Vale and Xstrata slashed staff during the recent economic meltdown.
“We know the movie will have the same ending,” says Allan.
“The plot may be a bit different and there are a few new characters this time, but it’s a boom and bust industry and always will be.”
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