Best of the Week
Most Popular
1.UK House Prices BrExit Crash NOT Likely Despite London Property Market Weakness - Nadeem_Walayat
2.BrExit Morning - New Dawn for Britain, Independence Day! - Nadeem_Walayat
3.LEAVE Wins EU Referendum - Sterling and FTSE Hit Hard, Pollsters, Bookies and Markets All WRONG! - Nadeem_Walayat
4.BrExit Implications for UK Stock Market, Sterling GBP, House Prices and UK Politics... - Nadeem_Walayat
5.Trading BrExit - Stocks, Bonds, Sterling, Opinion Polls, Bookmaker Odds and My Forecast - Nadeem_Walayat
6.FTSE and Sterling Brexit Trading, Deconstruction of the EU Referendum Result - Nadeem_Walayat
7.UK Interest Rate Cut to 0.25% Imminent and More QE Money Printing - Nadeem_Walayat
8.Trading BrExit - British Pound Plunges, FTSE Stock Futures Slump on LEAVE Shock Referendum Win - Nadeem_Walayat
9.The Stock Market is Reading it Wrong! - Chris_Vermeulen
10.Breakouts Galore in Gold and Silver - Jordan_Roy_Byrne
Free Silver
Last 7 days
Silver Market COT Stuns: What's Going On Here? - 24th July 16
Gold Demand Remains Stable During Sector Weakness - 24th July 16
Sernova, Diabetes and Haemophilia - 24th July 16
Russia: Tensions, Turmoil, and Western Hubris - 24th July 16
Soybean Commodity Price to Soar Again - 23rd July 16
SPX Stock Market Uptrend Continues - 23rd July 16
Gold And Silver – Debt Addiction Will Carry Precious Metals Higher, Guaranteed - 23rd July 16
Pokemon Go - How to Play, First Use, Balls, Stops, Catching Pokemon's... Great Excercise! - 23rd July 16
7 Signs That the Gold Market Remains Resilient - 23rd July 16
Basic Income in The Time of Crisis - 23rd July 16
Silver Bull Faces Correction - 22nd July 16
The Serious Warning No One’s Talking About - 22nd July 16
Stock Market Insight from Greed, Volatility, and Put/Call Ratio - 22nd July 16
What Will Happen To the Stock Market When Interest Rates Rise? - 22nd July 16
How to Escape the World’s Biggest Ponzi Scheme - 22nd July 16
Addicted to Debt - We Can’t Borrow from the Future Anymore - 21st July 16
Not Everything Is Bullish for Gold - 21st July 16
Don’t Get Sucked Back Into the Stock Market - The Big Picture Hasn’t Changed - 21st July 16
Silver – Caught Inside - 21st July 16
Forex: "The Markets Are Getting Exciting!" - 20th July 16
China Economic Troubles - Is Kyle Bass Finally Getting His Revenge? - 20th July 16
Why Lithium Will See Another Price Spike This Fall - 20th July 16
The Peak Oil Paradox Revisited - 19th July 16
SPX Challenges the Upper Trendline - 19th July 16
Missing ’28 Pages’ of the 9/11 Report Released into Blitzkrieg of World Events - 19th July 16
Likelihood of Organized Disruption at GOP Convention - 19th July 16
More on the ‘Breadth Thrust’ and Stock Market Internals - 19th July 16
FX Traders: Get a Free Week of Forecasts (Details inside) - 19th July 16
Ups and Downs in Gold and Crude Oil Price - 19th July 16
Keep an Eye on ‘Bitcoin’ as the Next ‘Financial Crisis’ Starts! - 18th July 16
Erdogan Might Have Known about the Coup but Didn’t Prevent It on Purpose - 18th July 16
More Deflation Ahead: Silver, Gold And Their Mining Stocks A Must-Have - 18th July 16
Stock Market Minor Top? - 18th July 16
5 Best Gold and Silver Junior Mining Stocks in 2016 - 17th July 16
Gold And Silver – NWO-Created Tragedies Will Never End, Seek Truth - 16th July 16
How Long Can Buybacks Continue To Support A Market Which Is Standing On A Fundamentally Flawed Premise? - 16th July 16
Will They Come For Your IRA? - 15th July 16
Gold’s Record Selling Overhang - 15th July 16
Capitalism Has Entered a New Era—and Historic Stock Market Investing Returns Are Gone Forever - 15th July 16
Gold Price Could Hit $5,000 or Even $10,000 in a Few Years - 15th July 16
Junior Gold and Silver Mining Funds or Individual Gold and Silver Mining Stocks - 15th July 16
The Soaring Risk of Flying in Bernanke's Helicopter - 15th July 16
The Broad Stock Market, Helicopters and Gold - 15th July 16
The Curious Case of Vanishing Lady Liberty; Only Gold and Silver Remember Her - 15th July 16

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

Forex Forecasts

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