just received this in my email inbox courtesy of minesite.com :
It only takes one deal involving a well known acquisitor and the whole basis on which junior mining companies are valued can be transformed. Rob Davies, who writes a weekly column on Commodities for Minesite, seized on the price being offered by Goldcorp for Andean Resources as evidence that the game had changed.
Goldcorp looks like acquiring Andean Resources for US$3.5 billion, and, given that the resource base at Andean's Cerro Negro project amounts to a mere three million ounces of gold that works out at US$1,167/ ounce. That looks like a staggering price to pay when compared with 2009 when the average price paid for reserves was around US$150/oz and for global resources including reserves less than US$50/oz. But 2009 was a very tricky year as mergers and acquisitions came back to life slowly after the global financial surface. The trend has certainly been accelerating since the last quarter of that year, but even so US$1,167 looks very generous at a time when the price of gold is around US$1,250/oz.
OK, there are some 25 million ounces of silver in the resource mix, but it is gold that Goldcorp is after. Wayne Hubert, managing director of Andean, adopts the ultra cool approach saying that he expects resources to double so the price being paid is only US$583/oz, but even that is right at the top of the range of prices paid by 290 buyers of companies who have completed gold mergers and acquisitions so far this year.
As Rob went on to point out, if you add on US$100 per ounce to build the mine, and another US$60 for cash costs (net of a significant silver credit), you've still got change out of US$800 to for the production of each ounce of gold. The question investors will be debating is whether that is enough. Goldcorp is taking two big bets here. The first is clearly on the price of gold and here a fair amount of encouragement will be received from the way the market took the IMF's sale of 10 tonnes of gold to Bangladesh in its stride. The second is on the consistency of mineralization as geology can be a fickle friend, flattering only to deceive.
It is not going to be cheap to double those resources and Cerro Negro will not be a big producer when it does start in 2012 at 200,000 ozs. That is the key issue driving mining merger and acquisition and commodity prices. There simply isn't much new metal being found and that must be the key to the deal. What with politics, environmental considerations, lack of infrastructure and many other considerations maybe the big boys are panicking as to how they can maintain their production and resources in the years ahead.
"With this project you can add ounces year after year after year, and therefore, add value for your shareholders," said Chuck Jeannes, chief executive of Goldcorp. Yes, that would be the hope, but John Ing, an analyst at Maison Placements added a dose of cold reality when expressing doubts over the production date, noting that a feasibility study, exploration and more drilling were needed before construction could begin.
In the end all will be revealed, but in the meantime one can envisage hectic activity in the offices of exploration companies all over the world as they rejig data in an effort to bring their resource profiles into line with those apparently required by the big boys. And while all this is going on their chief executives will be away on a course entitled "Elevated Optimism" so that they can play their role to the full.
By Charles Wyatt
AND Price at posting:
$6.30 Sentiment: None Disclosure: Not Held
