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Gold company mergers reach new heights

Mergers and acquisitions in the gold mining industry have surged, with more deals done in the past year than at any other time in recent memory. Bloomberg reports:

Dec. 27 (Bloomberg) -- Gold-company acquisitions this year surged to the highest level in at least a decade, and the industry may continue its buying spree in 2007 as producers struggle to find new deposits.

Goldcorp Inc.'s $8.5 billion acquisition of Glamis Gold Ltd. was the biggest of 357 deals valued at a total of $24.3 billion this year, data compiled by Bloomberg shows. That eclipsed the $16.2 billion spent last year on 341 transactions, including Barrick Gold Corp.'s $10 billion purchase of Placer Dome Inc.

Producers are rushing to boost supply because mines are being depleted faster than new reserves are being found, and a six-year rally in gold prices is providing cash to buy assets. The number of discoveries of at least 2.5 million ounces has declined for eight straight years, according to Metals Economics Group in Halifax, Nova Scotia.

``The driving force behind the M&A is that you have difficulty finding new gold mines,'' said Graham Birch, who helps manage $27 billion at BlackRock Investment Management in London. ``It's all about trying to get access to reserves.''

This news confirms the long-held view of money-manager and financial writer Jim Puplava, who had predicted a trend towards increased consolidation in the gold mining industry for precisely the reasons stated above. To quote from Jim's 2003 article, "Pac-Man, Clicks & Bricks":

As a result of the size of annual gold production and the short mine life of the large producers, these companies are faced with a significant dilemma. The only way these companies are going to maintain size is to substantially increase their exploration budgets to find or buy new ore deposits. In addition to acquiring new deposits, companies will also face issues of finding low cost deposits. Finding new deposits is one thing, but finding a deposit that is profitable to mine will be the other problem.

For more on this, see Puplava's, "The Perfect Option" and, "The Perfect Option, Part 2".

As I argued in an April, 2006 article entitled, "Recent Gold Action", demand for gold has strengthened over the past few years and new sources of supply will not be easily produced at the drop of a hat. Here's the response made to critics who, in the face of rising demand, thought $600 gold was a sign of "a bubble":

Not only is investment demand up in North America, it is profoundly evident in Asia and the Middle East. The people of India and China have traditionally been buyers of gold, in the form of jewelry and as a store of savings. Their purchases will only increase over time, as their economies continue to develop and prosperity levels rise among the masses. Middle Eastern demand is pronounced as ever, with the Gulf economies prospering from a recent oil boom and the resulting flood of new money. An ongoing repatriation of funds previously held abroad, and the establishment of the Dubai Gold Exchange, have no doubt also encouraged gold purchases. Meanwhile, a sizeable increase in Gulf central bank holdings of US dollar reserves have led some to consider diversifying out of the dollar and increasing the region's central bank gold reserves as Russia, Argentina and China have done.

There will not be an easily mineable influx of supply to meet this demand. Gold mining companies face a dwindling resource base and rising costs in extracting gold from the ground. Consider the environmental hurdles and permitting difficulties associated with bringing on new mines in many jurisdictions, along with the increasing push for nationalization of "strategic resources" in Latin American countries, and it becomes a little unclear as to where all this gold will be found.

Gold mining companies will continue to engage in what Jim Puplava referred to as the "Pac-Man strategy". In other words, eat or be eaten.

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