Excerpts from an article in the Outsider Club, by Adam English, 6/8/16 (Highlites by doodledog)
Following the gold peak of 2011, the long price slide set up a terrible environment for gold
sector mergers and acquisitions.
Extraction costs were too high, debt burdens were the same. Cash flow was severely
curtailed or negative, and all-share deals made little to no sense.
Several years later, the tide turned. We're now entering the third year of a $50 billion
deal surge.
And with gold prices surging this year in particular, the value of these deals is way up.
As Bloomberg recently noted, “The average paid in 133 transactions in the three months
to June was $64 an ounce of gold equivalent in the ground, up from $36 in the first
quarter of 2016”
Significant gold discoveries are diminishing and the trend is accelerating.
During the 1990s, total of 124 deposits containing 1.1 billion ounces of gold were
discovered.
Since 2000, this has fallen to 93 deposits containing 605 million ounces.
Annualize that data and it comes out to 110 million ounces per year discovered in major
mines during the 90s and 46.5 million per year from 2000 through 2013 — a 57% decrease.
The 674 million ounces of gold discovered since 1999 could eventually replace just 50% of
the gold produced during the same period, assuming a 75% rate for converting resources
into economic reserves and a 90% recovery rate during ore processing.
All of this wouldn't be as much of a problem if it was easy to quickly turn a discovery into a
producing mine in short order.
That simply isn't possible though. SNL discovered that the time from discovery to production
has dramatically widened over the years.
Between 1985 and 1995, the average was about eight years. The time increased to 11 years
between 1996 and 2005, then 18 years between 2006 to 2013.
There are plenty of reasons for this to happen, including greater costs from infrastructure and
processing capacity due to lower ore grades, remote locations, and limited capital, an increasing
need for more detailed feasibility reports, and tougher permitting requirements and studies of
social and environmental impacts.
Regardless, it means one thing to major gold miners that are looking to boost production, and thus
revenue. The current merger and acquisition spree has an ever-dwindling list of quality projects
and companies to pursue. Competition is stiffer, prices are higher, and the clock is ticking.
Focus on Junior Miners.
The trick as investors is to establish positions in the highest quality junior gold miners before deals
are announced.
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