We're in the early innings of a massive mining industry consolidation. In the first three quarters of 2011, we've seen $132 billion in mining mergers and acquisitions. That's almost a 70% increase over the $79 billion we saw during the same period last year. Gold miners amount to a small slice of that, with just $12.5 billion in deals so far this year. But gold stock shareholders are seeing massive, overnight gains. And there's more to come... Back in September, I showed you how hard it's become for the big gold miners to find new deposits of "easy ounces." That means they're digging in technically difficult – or politically complicated – areas, pushing up costs...
The price tag to build a new mine these days can run into the billions of dollars. The mine must be able to repay that cost within a year or two and then produce a reasonable return on the investment. The huge upfront costs set the bar high in terms of the size and quality of deposits that big gold companies are willing to pursue.
This just means the highest quality, large, undeveloped gold deposits in the world are getting increasingly valuable. As $1,500-plus gold sends a surge of profits into the coffers of big gold miners, you'll see fat premiums paid for great projects. Already, we had seen major gold miner Newmont pay a 40% premium to acquire junior Fronteer Gold. And the premiums are just getting fatter... In August 2011, AuRico Gold offered to buy Northgate Minerals for a 62% premium. And in September, Agnico Eagle offered to buy Grayd Resources for $229 million. The offer was a 66% premium to Grayd's 20-day average share price. From March to June this year, there were $20 billion worth of gold mining takeovers. According to Bloomberg, that's the most in at least 10 years. The average deal carried a 50% premium. With gold prices holding over $1,600 an ounce (and nearly back to $1,800 as I write), gold producers are amassing huge piles of cash to finance those lucrative takeovers. According to Mining.com, the six largest mining companies will have $144 billion in cash by 2013. We can't know exactly which company to be taken out next. But we do know what the big gold miners are looking for. It's the same thing we're looking for as resource investors: undervalued assets. One way to judge that is with the PEA. That's a Preliminary Economic Study. It's an estimate of the economics of a mine, based on the exploration done to date. They're subject to change with additional exploration, but they're a good starting point for estimating the net present value (NPV) of a project. According to a PEA Grayd conducted, its La India project in Mexico is worth $187 million... with gold at $950 an ounce. (As you might imagine, it's worth a whole lot more with gold where it is today.) The entire company had a $154 million market cap. So the acquisition was a no-brainer, even at a 66% premium. I ran a scan on small-cap mining stocks, looking for companies that had PEAs indicating assets worth much more than their market value. Here's a glimpse at what I found.
I'm not saying you should pile into these stocks. I haven't vetted them at all.
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