Digging for Gold Among the Miners

By Eric Jackson
RealMoney Contributor
9/7/2010 11:30 AM EDT
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There's been a lot of excitement about the mergers-and-acquisitions action in the tech sector lately. That has naturally spurred a great deal of speculation as to what other companies might be taken out next -- and, currently, those same dynamics are also present in the gold sector.

Last week, Goldcorp (GG - commentary - Trade Now) announced it had agreed to buy Andean Resources for roughly $3.46 billion, topping another bid from Eldorado (EGO - commentary -Trade Now). Australia-based Newcrest Miningrecently completed its purchase of Lihir Gold, a deal that was worth some A$9.5 billion as of early May. Additionally, Kinross Gold (KGC -commentary - Trade Now) agreed to buy Red Back at the start of August.

We're likely to see a number of similar deals to come, wherein the big gold players -- names such asBarrick Gold (ABX - commentary - Trade Now), Goldcorp, and Newmont Mining (NEM - commentary -Trade Now) -- look to buy assets of some of the junior gold miners.

Why will these gold majors buy now? There are several reasons:

• They have the cash and currency to do so. Just as in the word of large-cap tech, these large majors weren't doing deals two years ago when the walls were closing in on the global economy. The market hasn't returned to the 2006 buyout binge days, but the stock market has at least recovered enough to make the head honchos sufficiently confident to green-light deals.
• The price of gold is near $1,300 an ounce. If you were a CEO of one of these large majors, you'd think twice before going to your board to buy an attractive junior at a time when the price per ounce of gold had collapsed (as had been the case in early 2009). You'd know that would be a tough sell, and that a few directors would be likely to ask, "What's the rush?" The higher price at this point means these boards will likely feel more confident in the economics of buying these assets.
• A physical scarcity of gold has made these juniors even more attractive. There are 162,000 tons of gold in the world. That's it. Printing presses can't print more gold. Therefore, given that gold prices are hovering near all-time highs and that some are predicting event stronger upward moves, it makes sense for these large majors to act now and get a piece of the action.
• These large majors need to add reserves each year. Barrick, in 2009 alone, produced 231 tons (or 7.4 million ounces) of gold -- which means it reduced its reserves by that amount. These large players need to keep filling the top of their reserves funnel in order to show their investors that they are keeping their reserves high. They can't do that through new finds by themselves. They need M&A.

So, as to the virtually certain coming tide of consolidation in the gold space, I like these juniors:

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Why Seabridge Says No to Mining Projects

By Eric Jackson07/14/10 - 08:00 AM EDT

Stock quotes in this article: SA , NEM , ABX , GG

Rudi Fronk has been the Chief Executive Officer and President of Seabridge Gold(SA) since 1999. In this recent interview, he talks about the company's history and two key Seabridge projects in Canada.

Tell us how Seabridge started.

Fronk: We launched Seabridge in October 1999. At the time, gold was trading for well below $300 an ounce. The dollar was strong. People wanted to buy technology stocks. Gold had fallen completely out of favor. However, we thought it would eventually rebound.

Seabridge's Advantage

With my partners at Seabridge, during this depressed gold price period, we looked to acquire uneconomic gold assets. We hoped we could convince their owners to sell these deposits to us at low prices. We wanted the gold assets to be in the ground still with low holding costs so we could wait for prices to come back. We wanted them in politically stable countries, where they weren't going to be expropriated by the government on a whim. We wanted projects that had additional exploration upside which could be exploited later. Our concept was to create a public vehicle that supplied our shareholders a high-leverage investment on the gold price.

During the early years from 1999 through 2002, we bought nine deposits after looking at more than 100. We spent $15 million on the nine deposits we purchased at which previous owners had estimated about 15 million ounces of gold still in the ground. The parties we bought the projects from had already spent $300 million to find them, so we really were getting them for pennies on the dollar.

So the approach you took with Seabridge sounds like it directly was influenced by your experience at Greenstone.

Absolutely, experience is the best teacher. I ran Greenstone from 1993 through early 1999. During that time we discovered a number of large gold deposits in Central America, totaling approximately 5 million ounces. We completed bankable feasibility studies on three projects, raised capital to build them and were going through final commissioning on two of them just when the price of gold began to collapse. To make matters worse, in 1998 hurricane Mitch came through Central America devasting our supply chain. To build these mines, we took on significant debt. In 2000, the projects were expropriated by the Honduran and Nicaraguan governments. It is interesting to note that two of these mines are still in production today.

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Gold's Appeal, Even in Deflationary Times

By Eric Jackson
RealMoney Contributor
6/7/2010 5:00 PM EDT
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Last week, I met up with Eric Sprott, a hedge-fund manager who has been a pronounced gold bull and market bear since the 2000 Nasdaq bubble burst. I will post a full interview with him later this week inTheStreet. In the meantime, I want to lay out some of his arguments concerning gold for you to consider.

Gold is seen by some investors as a useless yellow rock. You can't eat it, this line of thinking goes. It was something that people clung to centuries ago, but it has no use today -- especially when there are so many compelling stocks to invest in. Besides, the thinking also goes, if you want safety, you can buy U.S. Treasuries. People who pooh-pooh gold also tend to characterize the gold bulls as kooky, end-of-the-world types.

It was anti-gold thinking like this that drove down the price of gold 10 years ago to $250 per ounce. That drop in the price of the metal also coincided with the ultra-high-risk appetite that investors had at the time for tech stocks.

Many non-followers of gold assume that what drives the value of the metal is inflation. But we've seen the value of gold quintuple over the last decade in a period of deflation -- not inflation. And many are of the view that deflation will be with us for the foreseeable future.

Sprott's view of gold is that the metal is -- and will be -- driven by two fundamental factors: (1) limited supply of the metal and (2) a view that the metal will become increasingly seen as a safe and alternative currency vs. other fiat currencies.

On the first factor, physical scarcity, you might not realize that there are only 162,000 tons of gold in the world today. And all the miners of the world are only extracting another 2,500 tons annually. If suddenly all central banks and investors decided that they wanted to allocate 5% of their portfolio to gold, there would not be enough to go around.

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Gold Rush

By Eric Jackson
RealMoney Contributor
5/6/2010 2:00 PM EDT
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With the concerns about Europe and sovereign debt swirling around the capital markets, gold has risen to a recent high of $1,184 an ounce. Gold bulls like Eric Sprott have made outspoken calls that the price of the commodity is going to spike in the coming months in response to fear of overleveraged governments grappling with new fiscal constraints and diminished purchasing power of their currencies. In a seemingly contradictory turn, though, now may be a perfect time to position yourself for some consolidation in the space.

Investors have been interested in gold as an investment since Lehman's bankruptcy. The price of gold jumped to $900 an ounce in the days following the Lehman filing and AIG (AIG - commentary - Trade Now) bailout. In the weeks the followed, though, the price of gold collapsed amid an immediate deleveraging of all types of assets, stocks and commodities alike -- by November 2008, the commodity dropped to close to $700 an ounce.

At that time, many large gold producers and junior miners saw their stocks hit significant low points. In fact, if you go back and study the charts for the gold stocks, their low point came not in March 2009 but in early December 2008. Since then, they've had a steady upward climb.

You might have thought larger companies like Barrick Gold (ABX - commentary - Trade Now), Newmont Mining (NEM - commentary - Trade Now) and Goldcorp (GG - commentary - Trade Now) would have been scooping up junior miners at that low point because of the low prices. Like most of corporate America, however, they were hesitant to pull the trigger on any deals with so much uncertainty in the air.

With most observers expecting further price inflation and potential debt uncertainty ahead, many hedge fund managers are betting that gold prices will keep rising. If management teams of gold companies agree, they are likely considering how to grow their reserves. Using their higher stock prices and healthy cash balances will likely prove tempting in grabbing some smaller, valuable companies before other competitors do.

So, with the price of gold now much higher -- and the stock prices of these major players largely recovered (Barrick's market capitalization is over $44 billion) -- the sector seems poised for consolidation. What is the best way to play this? Simple -- look for the junior miners with the most attractive assets from a major producer's perspective.

I am a long holder of Seabridge Gold (SA - commentary - Trade Now), a company I wrote about back in February. Seabridge owns the rights to the KSM project in Canada; it's not developing the property, which is estimated to have 50 million in gold deposits, but looking to partner or be acquired by a larger producer.

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Where Do We Go From Here?

By Eric Jackson
RealMoney Contributor
4/15/2010 9:15 AM EDT
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Earlier this week, I reviewed my long picks and macro predictions from the start of the year. They did pretty well as a group, assuming you held them through the quarter: up 22% through earlier in the week from the publication date.

This is my updated list for the current quarter. I included only China-based U.S.-listed stocks last time, this being a focus of mine. For balance, I'm presenting five China and five non-China picks. Here they are:

Top 5 China Picks

Orient Paper (ONP - commentary - Trade Now): Iprofiled the paper-printing company a couple of weeks ago. This is my top China pick at the moment. It will be interesting to see the company's first-quarter results and possible analyst upgrades or research initiation.

Puda Coal (PUDA - commentary - Trade Now): This is a holdover from my initial list. It has performed well in the first quarter and still looks appealing. It is still transitioning from a coking-coal company to owning and operating thermal-coal mines in China's Shanxi province. The market hasn't yet digested a local government move to encourage consolidation of the many small mines operating in this coal-rich province. As one of the beneficiaries of this policy, Puda has already acquired a handful of mines, but more should develop this year.

China-Biotics (CHBT - commentary - Trade Now): This is a new position. I met with its new chief financial officer, Travis Cai, in Shanghai a couple of weeks ago, but I hadn't had the opportunity to write up my notes for RealMoney(although I will, soon). This probiotics company sells to three key markets: Retail, through a chain of shops, mostly in Shanghai, that sell health supplements; dairy, supplying additives to China-based milk and yogurt producers; and feed, via health-supplement additives for livestock feed. It has more than $150 million in cash from a recent secondary issue. It has opened a new production facility, and could easily open a second one. It also has strong opportunities in the dairy and feed segments.

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Taking the Other Side on Seabridge

By Eric Jackson

RealMoney Contributor

2/18/2010 8:59 AM EST

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There are two sides to every story -- or at least there should be.

Over the weekend, Bill Alpert of Barron'sprofiled two junior gold miners: NovaGold Resources (NG - commentary - Trade Now) and Seabridge Gold (SA - commentary -Trade Now). Both are Canadian gold prospectors with $1 billion market capitalizations. Both are at development stage. As such, there are no revenues and earnings to peg valuations to. Investors have only the estimates of gold deposits to go on, and the article makes the point that these estimates are not yet a hard science.

Yet the article goes on to point out a number of potential problems with Seabridge Gold without telling the other side of the story. I hold a long position in Seabridge, so I obviously see this topic through that lens. Nevertheless, I want to rebut some of the problems of the Barron's article.

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