Majors amassing $144 billion in M&A cash… start buffing up your gold projects

The consultants’ Global Capital Confidence Barometer also shows growth is the top priority for 50% of those surveyed and that 39% intend to make acquisitions in the next 12 months.

Businessweek reported last week Standard Chartered Plc has estimated that the world’s six largest mining companies will amass $144 billion in cash over the next two years and quoted Ric Ronge of Pengana Global Resources Fund: “We’re not expecting a doomsday outcome for the miners and especially the bigger companies, which are the potential acquirers.”

The gold sector is expected to generate much of the M&A activity in the resource sector as big players seek to secure new supplies. According to investment bank Standard Chartered analysis project plans of the big five gold producers by market cap suggest average production growth of only 4% in the next five years.

Speaking to BNN on Tuesday, analyst Joung Park of Morningstar in Chicago said given record cash flows this year, the big gold mining companies have enough in the bank to increase dividends and go on buying sprees.

Park said he does not expect mega-deals but larger players will likely make so-called ‘bolt-on’ acquisitions among mid-tier and smaller players: “The cheapest gold ounces are now on the stock exchange not in the ground.”

So far this year more than 430 gold miners have been taken over.MINING.com reported mid-October after slumping to the level of high teens at the height of the 2008 banking crisis, in 2011 acquirers have been willing to pay an average premium of more than 50% on the value of the shares of a target during the prior month.

This trend will likely accelerate: The most recent large North American deal, AuRico Gold’s C$1.46 billion bid for neighbour Northgate Minerals happened at a premium of more than 62%.

An analyst speaking to GMF who asked to remain anonymous sounded a warning for targets who may become too greedy. The following quote is about Vale dropping its offer to buy mid-size Metorex but would apply to any of the industry’s 800-pound gorillas:

“It’s the problem of being Uncle Rich. When people know you have money and are in the market, they ask the maximum possible price. Vale does not like its leg to be pulled. They have a price, and if the counterpart does not agree, they simply do not play the game.”