The Gold Market: Rising Prices, Takeovers, and China
There were a record number of gold mining takeovers throughout the globe in 2010. The value of these deals is approximately $32 billion and represents 38 percent of all mine acquisitions in 2010. This figure is over two times the 2009 total for this industry. Much of this increased activity is due to the rising price of gold. The price peaked at $1,266.50 in June, breaking an all time record. It is set for its tenth straight annual gain, the longest streak since 1920.
Likely targets for a future takeover are Resolute Mining Ltd. and Newcrest Mining Ltd. Total gold reserves are gradually depleting because the amount of gold being discovered has decreased by four million ounces each of the past thirty years. According to Richard Phillips, managing director at Greenhill Caliburn Pty Ltd., a merger adviser, “Gold companies have finite assets. Producers are under pressure to continue to buy or find gold to replenish the production pipeline and many companies look to do both.” Some believe a global trend of consolidation will occur due to a focus on organic growth.
The largest deal thus far in 2010 is the $11 billion bid by KazakhGold Group Ltd. to acquire its own parent company, OAO Polyus Gold. This move creates the largest gold producer within the former Soviet republics. An $8.9 billion deal involving a takeover of Lihir Gold Ltd. by Newcrest Mining was recently agreed upon and represents the second largest deal of the year.
In the midst of all of this, China is beginning to support overseas acquisitions by offering loans and extending lines of credit to bullion companies within the country. It will also permit additional banks to import and export the precious metal. In addition, the country wants to stimulate the development of derivatives trading dominated by the yuan.
During the coming months, gold producers would like to focus on acquisitions of large companies, exposing them to additional exposure to capital markets. However, the limits placed on borrowing are not helping to make this situation a reality. Therefore, larger companies may instead refocus their takeover efforts on smaller companies as the price of gold is expected to skyrocket to $1,500 per ounce by late 2011.
Source: Keenan, Rebecca. The Daily Crux. How China is really buying gold.