Source: Julian Phillips, Gold Forecaster 08/18/2010

Recently Kinross made an offer for the shares of Red Back with its Mauritanian gold deposits as the target. The offer made to Red Back was accepted by the shareholders of Red Back, but looked on with skepticism by Kinross shareholders.

In the statement made by Kinross, the directors asked for patience to be shown by their shareholders for around six months. In that time, they expect to reveal more of the extent of the Red Back deposits. Institutions expect to see their Mauritanian deposits reach between 10 Moz. and 20 Moz.

The fact that the deposits will require shallow low cost open mining operations make the venture capable of profits that will justify the price paid. If this proves to be the case then it marks the way forward for the big gold mining companies in expanding their resources and not relying on inherent growth.

The Background of the Gold Mining World

The cost of finding new large deposits is climbing as are the risks attending such work in this politically greedy world. On top of that most if not all of the large deposits have been found and the large companies have to replace exhausted deposits. This means lowering their sites on the size of discoveries and entertaining the likelihood of taking over small companies, like Red Back that have already found the goods.

This can be risky, very risky for it is not just a matter finding a deposit but proving it to independent standards (403-1), doing a feasibility study, raising finance , developing the mine, reassuring investors that the political climate of the are is conducive to shareholders investment (politically favorable), then producing the gold.

Ideally the deposit should be continuously expanded (Goldcorp's Red Campbell Lake and South Reef deposit, etc.). This then makes the project attractive to investors as the risk declines from the discovery to production. The point at which investment takes place relates directly to the stage of development it is at.

Major mining companies need to replenish resources to continue in existence:

• Each mine contains only so much proven gold resources.
• The rate at which this is depleted gives the mine its life.
• In turn, the profit path of the mine can be traced and its value established.
• The number of shares issued to shareholders relates to the earnings the mine will achieve.
• The dividend policy defines the cash flow to the shareholders.
• In turn the value of the share relates to the average earnings rating in that particular market and by extension the share price.

The number of mines and their life defines the future of the mining company owning them (they used to be called 'mining houses'). Such large groups of mines under one roof become attractive because the life of a company extends far beyond the life of any of their individual mines.

Prospects for More Takeovers of Junior Mining Companies

Since the days of accelerated production that lasted from 1985 to around 2005 (the time when the bullion banks loaned bullion to the miners to use in financing production) new deposits have become more difficult to find and bring to production. The political climate in which miners operate in the world has increased the risks associated with investment. The deposits that are out there have become smaller.

Mining companies are lowering their sights and looking at deposits as small as 1 Moz. Anything larger is more inviting. Deposits in politically favorable and mining friendly nations add to that attraction.

So imagine that you have to before a company that is producing the proven deposits and is already producing and good drill results on your properties you would not choose but go for both, provided the terms are right for you.

There are many companies out there from those exploring, to those with proven deposits right the way up to junior companies already in production. These are safer than the unknown, so, subject to the takeover enhancing shareholder value and not diluting it, takeovers are a very good way to go and a way that will be followed increasingly by large mining companies in the future.