Mining’s old guard needs strong medicine
A new report details subpar investor returns in the mining industry over the last decade, particularly big cap diversified companies which have not adapted to new realities.
Gold (NYSE:GLD) has been in an uptrend for over a decade now. Last week, gold climbed above $1800 per ounce before consolidating. Although gold seems to break a new nominal high every other day, the gold critics have been consistently wrong about gold being in a bubble. In fact, Geroge Soros called gold in late 2010 the “ultimate bubble.” Many investors may be wondering where the next catalyst for higher gold prices will come from (besides more money printing).
Some fund managers are expecting mergers and acquisitions to fuel another gold boom. In an effort to avoid building costly new mines, gold producers may target junior miners (NYSE:GDXJ) in order to expand production while gold prices remain high. There have been few developments in the M&A space for precious metals. Earlier in the year, Barrick Gold (NYSE:ABX) made news by annoucning a buyout, but the company bought out copper (NYSE:JJC) producer, Equinox Minerals Ltd. However, Sprott Asset Management (NYSE:PHYS) portfolio manager Charles Oliver said, “I am convinced we are going to see more mergers in the second half of this year. A rising gold price makes people feel good about their business and future outlook, and I think that will propel M&A activity.” It appears that Sprott Asset Management already prepared for silver miner (NYSE:SIL) success back in April. Eric Sprott announced that he sold $35 million of his PSLV fund in April. Sprott went on to explain, “Every dollar of money that was raised by selling shares of the Trust was reinvested in silver or silver equities.” Is Gold the Safe Haven? For more analysis on support levels and ranges for gold and silver, consider a free 14-day trial to our acclaimed Gold & Silver Investment Newsletter.
Miners may also be a takeover target because share prices have been lagging bullion prices considerably this year. As the chart below shows, the Market Vectors Gold Miners ETF (NYSE:GDX) and the Market Vectors Junior Gold Miners ETF (NYSE:GDXJ) have failed to keep pace with the SPDR Gold Shares ETF (NYSE:GLD).
Mark Serdan, a portfolio manager with BMO Asset Management Inc., also believes large gold producers may be inclined to start buying junior mining companies. However, Serdan says, “A return to stock market stability is needed to get deals done. When that happens, I think you will see more M&A activity.”
Investors looking to capitalize on possible M&A activity in precious metals will need to keep a close eye on developments. Not all M&A activity involves a complete buyout. For example, Agnico-Eagle Mines Limted (NYSE:AEM) agreed last month to purchase a 9.2% stake in Rubicon Minerals Corp. (AMEX:RBY). Also, some M&A activity involves countries nationalizing their entire gold industry, which is the case in Venezuela.
Is Gold the Safe Haven? For more analysis on support levels and ranges for gold and silver, consider a free 14-day trial to our acclaimed Gold & Silver Investment Newsletter.
By: Eric McWhinnie
Disclosure: Long AGQ
