Gold-firm acquisitions flavour of the year

Gold- company acquisitions this year surged to the highest level in at least a decade, and the industry may continue its buying spree in 2007 as producers struggle to find new deposits.

Goldcorp Inc's $8.5 billion acquisition of Glamis Gold was the biggest of 357 deals valued at a total of $24.3 billion this year, data compiled by Bloomberg shows. That eclipsed the $16.2 billion spent last year on 341 transactions, including Barrick Gold Corp's $10 billion purchase of Placer Dome Inc.

Producers are rushing to boost supply because mines are being depleted faster than new reserves are being found, and a six-year rally in gold prices is providing cash to buy assets.

The number of discoveries of at least 2.5 million ounces has declined for eight straight years, according to Metals Economics Group in Halifax, Nova Scotia. "The driving force behind the M&A is that you have difficulty finding new gold mines,'' said Graham Birch, who helps manage $27 billion at BlackRock Investment Management in London. "It's all about trying to get access to reserves.''

From 1992 to 2005, the world produced 1.1 billion ounces of gold, or 1.8 times more than the new resources discovered among deposits of at least 2.5 million ounces, Metals Economics Group said.

The drop in new reserves followed years of reduced spending on exploration as gold fell to a 20-year low of $253.20 an ounce in 1999. Worldwide exploration budgets fell to a 12-year low of about $780 million in 2002, said Jason Goulden, director of corporate exploration strategy at Metals Economics. "There is a scramble for land," said Ian Cockerill, chief executive officer of Johannesburg-based Gold Fields Ltd.

Gold Fields, the fourth-largest producer, earlier this month completed a $1.53 billion purchase from Barrick of half of the world's biggest deposit, the South Deep mine in South Africa.

Gold Fields is buying shares in Western Areas LImited, which owns the rest of South Deep. The deal will increase the company's reserves by about half.

Since 1999, the price of gold has more than doubled to $629.90 an ounce from a 20-year low. The precious metal reached a 26-year high of $732 on May 12. The rally, fueled by investors seeking a hedge against inflation or an alternative to the dollar as it fell against the euro, has spurred demand for new reserves.

The cost of reserves rose to a record $120 an ounce in 2005, compared with a low of $33 in 2000, said James Lowrey, a senior analyst at Metals Economics, which tracks more than 1,450 companies and deals of at least $50 million since 1995.

Gold Fields CEO Cockerill admits he paid top dollar for the South Deep mine at $104 an ounce. "It is certainly one of the more expensive acquisitions that we have made compared to the company's historical average of $60, he said. "But then again, it's a very special ore body,'' he added.

The mine, west of Johannesburg, contains as much as 29.3 million ounces, equal to about a third of the world's annual gold production. Gold Fields plans to study the viability of expanding annual production to one million ounces, from the 800,000 ounces expected yearly by 2011.

Vancouver-based Goldcorp spent about $175 for each ounce of reserves it acquired in the Glamis deal last month, and Toronto-based Iamgold Corp's $1.1 billion stock acquisition of Cambior Inc valued each ounce at about $117, Lowrey of Metals Economics estimated.

Doubling resources is a 'big rationale for doing this deal,' said Goldcorp Chairman Ian Telfer, who has made more than eight acquisitions in the last four years. The purchase of Glamis helped Goldcorp overtake Johannesburg-based AngloGold Ashanti Ltd as the world's third-largest gold producer by market value.

Citigroup was the top investment bank with five deals worth $11.6 billion, accounting for 48 per cent of the market share. It advised Glamis on its takeover by Goldcorp. JP Morgan ranked second with $11.4 billion and seven deals, including Glamis.

Global gold production in the nine months ended September fell 2.2 per cent to 1,804 tonne from a year earlier, London-based researcher GFMS Ltd estimated. Lack of new supply will help boost gold prices by $200 over the next two years, topping $800 an ounce, Telfer said.

"There is definitely a sense that the industry "" which is really good for gold "" is kind of flat to shrinking,'' said Barrick Chief Executive Officer Gregory Wilkins. "Placer was important for positioning the company for dealing with the industry challenges."

Shares of Toronto-based Barrick, which completed its acquisition of Placer Dome in March, rose 6 per cent this year.

Denver-based Newmont Mining Corp, whose bullion sales may plunge 14 per cent this year, has fallen 15 per cent, the biggest drop among the 16 companies in the Philadelphia Stock Exchange Gold and Silver Index.

Newmont, which spent $225 million to boost its stake in a mining project in western Australia this year, cut its 2006 sales forecast three times, most recently in September, because of lower output in Ghana and Uzbekistan. The company said on September 27 that its gold sales may fall 14 per cent this year to 5.6 million ounces from 6.5 million in 2005.

Freeport-McMoRan Copper & Gold, owner of the world's biggest gold mine, last month agreed to buy copper producer Phelps Dodge for $25.4 billion. Kinross Gold Corp, Canada's third-biggest gold producer, agreed to purchase rival Bema Gold Corp for $2.84 billion in stock to expand in Russia.

Barrick's Wilkins said his acquisition strategy won't be affected by short-term changes in prices, which have fallen 14 per cent from the 26-year high reached in May.

Barrick may make a bid for New Orleans-based Freeport to boost reserves and lower operating costs, CIBC World Markets said in a research note on December 15. Both companies have declined to comment. Barrick on December 7 failed in its $1.71 billion hostile bid for Vancouver-based NovaGold Resources.

Kinross Chief Executive Officer Tye Burt said takeovers may get a boost from the recent slump in prices.

The decline may bring more targets into a price zone to encourage acquirers, Burt said. "In a strong commodity price environment, it's always tough to reach price agreements. Everyone's trying to protect their production profiles.''