In Search of Elephants: Purchase or Perish in the Gold Mining Industry

While many investors in the precious metals sector are flocking to the relatively conservative, liquid, exchange-traded funds such as SPDR Gold Trust (GLD) and the I Shares Silver Trust (SLV), some very interesting developments are occurring in the gold mining sector. Most notably, large gold mining companies are scouring the globe looking to acquire big assets to satisfy their voracious appetite for reserves.

Transactions over the past month continue to demonstrate that large, advanced-stage deposits, no matter where they are located on the globe, are scarce and coveted by mining companies.

But, this is merely a continuation of a multi-year trend – which we call “purchase-or-perish” - in the gold mining sector.

Amidst either stagnant, or worse, declining production profiles, large mining companies have been seeking to grow their reserves, because investors attribute significant value to both reserve growth and production growth in this environment of rising gold prices....

Summary, Interpretation & Implications

While these transactions are notable, their significance is more clearly seen in the context of the bigger picture, which is the continuing hunger of major gold mining companies to replace reserves.

The implications are that large, undeveloped gold and silver deposits, particularly those with more than 5 million gold-equivalent ounces, are coveted by the major mining companies.

A short list of junior companies which have deposits which fit into this category include:(1)Detour Gold [Toronto:DGC]:17.3 million ounces; (2) International Tower Hill Mines [Toronto:ITH]: 12.5 million ounces; (3) Osisko Mining [Toronto:OSK]: 10.4 million ounces;(4) Andina Minerals [Toronto:ADM]:9.8 million ounces; and, (5) Brett Resources [Toronto:BBR]:5.2 million ounces.The following exhibit illustrates the companies’ gold resources.

Exhibit 2:Selected Large, Undeveloped Gold Deposits

While each of these companies may be potential acquisition targets, it should be noted that there are numerous differences between the companies, and their specific projects. Importantly, the economics between the different projects vary widely due to differences in grade, capital costs, metallurgy, availability of existing infrastructure, and many other factors.

However, suffice it to say, as the gold price rises the economics become much better, and these relatively low-grade, bulk-tonnage deposits become more attractive.

While the author prefers to focus on the economics of the individual projects as the first priority, instead of size, there is no doubt that these companies may have short lives as independent entities. With larger mining companies focused on the “pareto principle” (i.e. “80/20 rule”) to reserve growth, the largest deposits are in strong demand.

Matthew T. Schroeder is the President & Founder of Anomalous Investments, an independent advisory service focused on uncovering select ‘special situations’ in the natural resources industry.He can be reached at matthew.schroeder@anomalousinvestments.com.

Disclosure:The author owns shares in GLD.

http://seekingalpha.com/article/168802-in-search-of-elephants-purchase-or-perish-in-the-gold-mining-industry?source=feed