Best of the Week
Most Popular
1.Crude Oil Price Trend Forecast 2016 Implications for Stock Market - Nadeem_Walayat
2.Odds of Winning Walkers Crisps Spell & Go olidays K, C and D Letters - Sami_Walayat
3.Massive Silver Price Rally During The Coming US Dollar Collapse - Hubert_Moolman
4.Pope Francis Calls For Worldwide Communist Government - Jeff_Berwick
5.EU Referendum Opinion Polls Neck and Neck Despite Operation Fear, Support BrExit Campaign - Nadeem_Walayat
6.David Morgan: There Will Soon Be a Run to Gold Like You've Never Seen Before - Mike Gleason
7.British Pound Soars on BrExit Hopes Despite Remain Establishment Fear Mongering - Nadeem_Walayat
8.Gold Price Possible $200 Rally - Bob_Loukas
9.The Federal Reserve is Not Going To Raise Interest Rates and Destroy Gold - Michael_Swanson
10.Silver Miners’ Q1’ 2016 Fundamentals - Zeal_LLC
Free Silver
Last 7 days
The Worst Urban Crisis in History Could be Upon Us - 24th May 16
Death Crosses Across The Board Are IRREFUTABLE Stock Market Sell Signals - 24th May 16
Bitcoin Trading Alert: Bitcoin Price Stays below $450 - 24th May 16
Stock Market Crash Death Cross Doom Prevails - 23rd May 16
Did AMAT Chirp? Implications for the Economy and Gold - 23rd May 16
Stocks Extended Their Rebound On Friday - Will They Continue Higher? - 23rd May 16
UK Treasury Propaganda Warns of 3.6% Brexit Recession, the £64 Billion Question? - 23rd May 16
Stock Market Support Breached, But Not Broken! - 23rd May 16
George Osborne Warns of 18% Cheaper House Prices - BrExit for First Time Buyers - 22nd May 16
Gold Bull-Phase I Continues to Confound (The Trek to “Known Values”) - 22nd May 16 r
Avoiding a War in Space - 22nd May 16
Will Venezuela Be Forced to Embrace the US Dollar? - 21st May 16
Danish Central Bank Stumbles with Its Currency Peg to the Euro - 21st May 16
SPX Downtrend Underway - 21st May 16
George Osborne Warns of More Affordable UK Housing Market if BrExit Happens - 21st May 16
Gold And Silver 11th Hour: Globalists 10 v People 0 - 21st May 16
David Morgan: There Will Soon Be a Run to Gold Like You've Never Seen Before - 21st May 16
Gold Stocks Following Bull Analogs - 20th May 16
The Gold Chart That Has Central Banks Extremely Worried - 20th May 16
Silver Miners’ Q1’ 2016 Fundamentals - 20th May 16
Stock Market Rally At the End of the Road? - 20th May 16
British Pound Soars on BrExit Hopes Despite Remain Establishment Fear Mongering - 20th May 16
NASDAQ 100, FTSE, and British Pound - When Rare Market Data Screams, Listen  - 20th May 16
Unintended Consequences, Part 1: Easy Money = Overcapacity = Deflation - 19th May 16
The Federal Reserve is Not Going To Raise Interest Rates and Destroy Gold - 19th May 16
Stock Market Final Supports Are Broken - 19th May 16
Gold - Pro-Inflation? Anti-USD? - 19th May 16
Further Stock Market Uncertainty As Indexes Gained On Friday, Will Uptrend Resume? - 19th May 16
What This U.S. Presidential Election Tells Us About Her Millennial Generation - 18th May 16
Stock Market Trendline Broken on Fed Announcement - 18th May 16
An Incredibly Simple, Rarely Used Way to Book 170% Investing Gains - 18th May 16
Statistically Significant Stock Market Death Cross? - 18th May 16
Precisely Wrong on US Dollar, Gold? - 18th May 16
What You Can Gain From One Tech CEO's $355 Million Loss - 18th May 16
The ‘Tide’ has turned… NEGATIVE For STOCKS!!! - 18th May 16
Goldman Sachs's - Regulatory Climate is Chilling Deals; Hatzius Not Worried About a Recession - 18th May 16
Bitcoin Price Remains above $450 - 18th May 16
Crude Oil Price Trend Forecast 2016 Implications for Stock Market - 17 May 16
Could the National Debt Really Grow as High as $31 Trillion by 2023? - 17 May 16
Gold Price Possible $200 Rally - 17 May 16
Crisis Investing - Jim Rogers on “Buying Panic” - 17 May 16

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

Why 95% of Traders Fail

Will We See Consolidation in Gold Stocks Mining Industry?

Commodities / Gold and Silver Stocks 2013 Mar 01, 2013 - 12:31 PM GMT

By: Jordan_Roy_Byrne

Commodities

As the gold mining sector plunges to the end of a cyclical bear market, one wonders if this ongoing selling climax will precipitate a catalyst for more mergers and acquisitions in the industry. The last 12 years tells us that these transactions tend to follow the market itself but with a lag. Peaks in M&A activity (in global mining) in terms of number of transactions and value occurred in 2006-2007 and 2010-2011 while troughs occurred in 2002 and 2008-2009. According to Ernst & Young, 2012 had the lowest number of global mining deals since 2008 and the lowest in terms of value since 2009. On a smaller microeconomic level, the current depths of the junior mining industry and low share prices across the board should provide a catalyst for more deal flow. Going forward I believe we will see industry consolidation but in two separate different phases which will produce different winners.


The first phase should begin soon but will be the smaller phase. First we should note that one reason it will be the smaller phase is because the market is forcing the major producers to focus on execution, cash flow generation and dividend growth rather than production growth itself. On a per share basis, the majors have done a lousy job in terms of production growth. At the same time, many majors have new CEO's who are unlikely to immediately take the kind of risks that doomed their predecessors. Thus, don't expect the majors to participate much in this initial phase.

The established small and mid-tier companies who have growth mandates and posses financial strength and operational expertise will look to acquire quality assets on the cheap or distressed assets for pennies on the dollar. Obviously, the entire gold mining sector is going for fire sale prices right now and especially the juniors. These companies seeking growth will first look to see if quality junior-owned assets can be bought at a significant discount. Second, they will look to acquire the junior companies that currently operate underperforming mines (the distressed assets) which could be improved with an injection of more capital or technical expertise.

The largest driver of this initial consolidation will be the failure of a high percentage of junior companies. Through the brilliant work of John Kaiser we know that the junior sector will shrink considerably in a Darwinian sort of way. Simply put, too many of these companies have marginal prospects and will not be able to raise the capital to survive this difficult environment.

The second phase won't begin until well after we see gold stocks (i.e GDX, HUI) break to new all-time highs and confirm the breakout. This phase is at least a few years away and could somewhat resemble the pac-man scenario, which Eric King wrote about in 2004. Let me explain.

The gold stocks bottomed in Q4 of 2000. This bull market is currently in its 13th year. Two years from now it will be in its 15th year. Look at how much capital has been deployed into exploration yet look at the pathetic results.

The exploration potential to add to production growth isn't promising and requires too much time anyway. Secondly, the best assets will already be in production. What else might you find after 15 years of a bull market, 15 years of new mines going into production and 15 years of Billions being spent on exploration? Factor in stronger share prices and its obvious why this will be the phase when consolidation will heat up as producers acquire smaller producers. It will be the easiest and the only way to get production growth and reserve replacement.

What are the investment implications?

During the first phase the junior industry will contract substantially (as many others before me have predicted). Many juniors will die off as they can't raise the money to sustain themselves while the juniors with the best prospects or with faltering productive assets will be acquired by the successful small and mid-tier producers. For the most part, the winners in this phase will actually be the acquirers who can add to their pipelines on the cheap and thereby inevitably become more desirable for a larger company in the future.

In the latter phase (perhaps 2015-2016), you'll see the major and intermediate producers acquiring mid-tier and large junior producers. In other words, M&A activity will move up the food chain. Interestingly, in the final years of the secular bull market we'll see more money chasing fewer companies. Unlike in the first phase, the winner in this phase will be the companies that are acquired. As for the short-term, we began scaling into positions last week but maintain plenty of cash to be deployed (potentially) at our strong targets of HUI 336 and HUI 300.

If you'd be interested in professional guidance in this endeavor, then we invite you to learn more about our service.

Good Luck!

Email: Jordan@TheDailyGold.com
Service Link: http://thedailygold.com/premium

Bio: Jordan Roy-Byrne, CMT  is a Chartered Market Technician, a member of the Market Technicians Association and from 2010-2013 an official contributor to the CME Group, the largest futures exchange in the world. He is the publisher and editor of TheDailyGold Premium, a publication which emphaszies market timing and stock selection for the sophisticated investor.  Jordan's work has been featured in CNBC, Barrons, Financial Times Alphaville, and his editorials are regularly published in 321gold, Gold-Eagle, FinancialSense, GoldSeek, Kitco and Yahoo Finance. He is quoted regularly in Barrons. Jordan was a speaker at PDAC 2012, the largest mining conference in the world.

Jordan Roy-Byrne Archive

© 2005-2016 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Catching a Falling Financial Knife