Gold Mining M&A

Nana Sangmuah: African Takeouts on the Menu
Source: Brian Sylvester of The Gold Report 10/29/2010

Clarus Securities Analyst Nana Sangmuah was born in Ghana, West Africa-a growing hot spot for gold exploration. He believes several gold juniors operating in West Africa are prime takeover targets and expects merger and acquisition (M&A) activity to heat up as the major gold producers seek to replenish their diminishing project pipelines. In this exclusive interview with The Gold Report, Nana reveals a few juniors on both sides of the Atlantic that could fall prey to larger predators.

The Gold Report: Nana, tell us about your coverage sector.

Nana Sangmuah: My coverage universe consists mainly of the junior golds with market caps under $500 million, but some of those are creeping up in size. An example is Semafo Inc. (TSX:SMF), which is currently worth about $3 billion. Obviously, the idea is to pick up names with a growth trajectory that could give upside to investors.

Currently, my universe includes some of the little ones like Azumah Resources Ltd. (ASX:AZM), which has a good growth trajectory, a $175 million market cap, significant exploration upside and a good management team to move it along the path. Other names in our coverage universe include Cluff Gold PLC (TSX:CFG;LSE:CFG), which is significantly undervalued and poised for a rerating in the near term and developers like Keegan Resources Inc. (TSX:KGN; NYSE.A:KGN) and Perseus Mining Ltd. (TSX:PRU; ASX:PRU). They are prime takeover candidates in West Africa, which is heating up. We also cover very seasoned, disciplined players in the space like Randgold Resources Ltd. (NASDAQ:GOLD), which probably has the best growth trajectory in the universe, and all of that can be fully funded internally with operating cash flow.

TGR: So, you're looking for companies that are on a growth trajectory. How do you arrive at that decision? What's your methodology for finding companies that fit that thesis?

NS: Obviously, you need a sizeable resource. Geology is key, and that plays into the size of the land packages because bigger land packages, potentially, hold bigger resources. And the land package should be on a greenstone belt because that is where we've seen most of the world's recent significant gold discoveries. Once the location and the geology check out, then you ask questions about the management team behind the asset. Does it have the know-how? Has it developed other deposits? Does it have people working with it that could unlock value on the asset? And then you have to make sure the company has the cash to execute the strategy. You can have the best asset but if the balance sheet is not strong enough, there will be a lack of news flow and investors will probably turn their attention to other projects.

TGR: You're from Ghana and West Africa in general has received a lot of attention lately due to Kinross Gold Corp. (TSX:K; NYSE:KGC) acquiring the assets of Red Back Mining. One of these was the Chirano gold mine in Ghana, and the other was the Tasiast Gold Mine in Mauritania. This has people talking about some other companies that could be takeover targets in West Africa. What are majors looking for in takeover targets?

NS: In the takeover category, most majors look for production visibility and exploration upside. One of the guys in my coverage universe fits the bill quite well: Perseus Mining, which is totally cashed up and on track to launch production at the rate of about 220 (Koz.) per year, starting in Q311.

Aside from the fact that Perseus will be graduating into the producer category, it has enormous exploration potential. The company is doing just about the most aggressive drilling in the region on its Central Ashanti Gold Project (formerly the Ayanfuri). Perseus is drilling 30,000 meters a month companywide, which is definitely going to provide a lot of news flow to sustain investor attention during development.

The project was owned by AngloGold Ashanti Ltd. (NYSE:AU; JSE:ANG; ASX:AGG; LSE:AGD) before it was abandoned and Perseus took over. Perseus has since delineated about 5.3 million ounces (Moz.) of gold at Ayanfuri alone. With a companywide global resource of 7.3 Moz., Anglo is one of the largest resource holders in West Africa that's not owned by a major mining company; that makes it a prime takeover candidate. There is going to be a site visit trip for analysts in November to showcase the progress of development, which seems to be going well.

Aside from that, it also has assets in Cote d'Ivoire-mainly the Tengrela Gold Project (1.3 Moz.), which is also on track with a definitive feasibility study in November. That project could sustain head grades of about 3-4 grams per ton (g/t) for the first four years of production at cash costs in the low $300s. The market is not assigning a lot of value to this asset at this stage.

The exploration results from Tengrela show that the whole project is growing with recent new discoveries. There is further exploration upside in Cote d'Ivoire as the company has ground right next to Rangold's Tongon Project (4.6 Moz.), which is starting production in Q4 at the rate of 250,000 oz/year. This is yet to be drilled by the company.

TGR: How much value do you put on ounces in the ground? For instance, if it's an inferred resource, do you ascribe a different value to it than actual reserves?

NS: If it's an actual reserve that could easily make its way into the discounted cash flow (DCF) profile, you would have a discounted cash flow valuation on the reserves. The inferred resources would be valued based on a peer market average for an ounce in the ground, and that is currently creeping up. It's around $100 per ounce now based on my peer comparable tables.

TGR: You recently attended the Denver Gold Forum in September, and apparently there was quite a fierce debate there between Martin Murenbeeld, who's the chief economist with DundeeWealth Inc., and Paul Walker, the CEO of precious metals consulting firm GFMS. Murenbeeld was bullish on gold and Walker was bearish. What side is Clarus on?

NS: Well, we're obviously on the bullish side for the next couple of years and we raised our forecast to $1,300 for 2011 and 2012. But we're reverting it back to $1,000 by 2013.

Now, the reason is that there's no sign of real recovery out there yet. This is probably one of the rare occasions where we've seen a lot of countries fall into recession at the same time, and everybody is mirroring each other in the ways they're trying to get themselves out of this equation. This will likely go on for a while, and I think people will continue to look for alternative places for investment. This will prompt further increases in gold investment demand and physical demand, which traditionally gets stronger in the fourth quarter.

Frankly, the supply side of the equation has not really improved as the number of new discoveries over the last 10 years has kept diminishing. For the next while, I think we can solidly bank on having some strength in the gold price going forward, based on pure fundamentals.

On the other side, if there's a recovery, we will probably have to start rotating out of gold investment and looking elsewhere.

Before that happens, I think inflation is definitely going to be the gatekeeper. If a real recovery comes through, inflation should hit hard, and that would drive gold prices to a higher level before we roll over. I think the logical time frame to get that happening would probably be around the 2013 mark.

TGR: At that point, you think enough gold supply will have come onstream, the global economy will have recovered and that those two things will conspire to lower the gold price. Is that what you're saying?

NS: Supply in itself might not necessarily increase drastically, but as interest rates creep up, I think people will start looking elsewhere for investment alternatives and gold will no longer be the "go-to" choice. People might even start to sell off positions.

TGR: There is a theory that suggests the geology in West Africa is very similar to the geology on the east coast of Brazil because these continents were attached millions of years ago. Do you believe that theory?

NS: It's logical if you look at the plate tectonics that have been in existence for a long period of time. I would highlight, though, that the mineralogy and the grade profile on those zones are quite different. Even within West Africa, you find different grade profiles along different belts.

The prospectivity of eastern Brazil, though, is impressive. Based on my statistics, so far around 90 Moz. has been delineated in that region, with grade profiles of about 2-3 g/t, and there's still more drilling to be done.

Some of the companies that are active in this space will probably be adding to the tally in the next little while, like Rio Novo Gold Inc. (TSX:RN). It's currently returning about 3-4 g/t rates on the Almas Gold Project, and Rio is about to tap into the Guarantã Gold Project, as well.

TGR: One of those Rio Novo projects is in a greenstone belt that is similar to the greenstone belts of West Africa. Do you see potential for Rio Novo to continue to expand its resources there?

NS: Well, based on the NI 43-101-compliant resources, it would probably be under 1 Moz.; but historical, non 43-101-compliant resources come in about 1.5x higher. And the company's doing a lot of infill drilling. The prospectivity remains. I think it could easily meet and exceed 1 Moz. based on additional targets yet to be chased on the project.

I will be seeing the project in a few weeks to do some level of due diligence. But it's not wholly a matter of growing the resource, which oftentimes becomes the focus for a lot of people. The key is whether a company can get those ounces in the ground into meaningful production. And that's what excites me about the Rio Novo group-the management is really proven. The technical team has built mines operating at a capacity of 55,000 tons per day (tpd), so putting these less-than-10,000 tpd operations into production should prove less of a challenge. And the geological team has actually proven a lot of discoveries in the belt. Technically, I think these people are savvy, and I think the company should probably rerate itself into producer in a very short while.

TGR: You mentioned that you have an upcoming site visit to see Perseus' projects in Africa, and that you've got another Rio Novo project to see in Brazil. You recently visited Colombia for a conference in Medellin and conducted some site visits in the area. Tell us about your trip.

NS: Continental Gold Ltd. (TSX:CNL) is a company I visited, and I was very impressed by what I saw walking in these adits at the Buriticá project. There's nothing to make you disbelieve that there's gold in those veins. I think the key here is how big the potential resource is going to be, because the dimensions are not well established yet. We should know all these dimensions soon with five drill rigs turning on the property, as the company aims to complete an initial resource in 2011. With a current market cap of around $570 million, the resource is being counted at 5 Moz. Is that a stretch? I believe its strong portfolio of assets covering 160,000 hectares in Colombia gives it huge, untapped exploration potential.

Some of the other assets like Berlin, which has some drills currently turning on it, look much more exciting. Historically, Berlin has produced about 400 Koz. gold in a single lode with a thickness of about 20 meters. That is just about 20% of the whole strike length. The rest of the asset has yet to be tested, but Continental currently has almost $100 million in cash to put into all of these projects. The ability to delineate the resources to back the valuation, and even exceed it, is told there.

Continental has a great management team; and good geologists that have delineated significant resources at other projects are working on this asset, so it's just a matter of time. I always encourage investors to sit tight and watch for results to come out. The results here are typically very high-grade zones that have not really been closed off at depth. There's still huge potential in the initial veins that we've seen at Buriticá. The company has come up with some new samples and there are geophysical anomalies that have yet to be tested, as well. The growth prospects are quite enormous.

TGR: Continental's an interesting story certainly in part due to its management. You've got an Aurelian Resources reunion with Patrick Anderson and Tim Warman on the board, and now Keith McKay as CFO. These guys were all part of Aurelian, which was sold to Kinross for about $1 billion in 2008.

NS: Exactly, that's one of the key points I try to find in these early stage companies. The assets should be prolific, which shakes out on Continental, and management should know what it's doing because it's done it before. Thirdly, it should have the cash to drill these veins aggressively-and Continental has that, as well. It all lines up.

TGR: It sure does. What are some other companies you're following?

NS: It's a broad list. It includes Cluff Gold and its West African assets, which produce about 100 Koz. per year. But Cluff is grossly undervalued because people are discounting the life of the current operations-the Kalsaka mine in Burkina Faso and the Angovia project in Cote d'Ivoire. Based on current drilling information, there could be extensions to these resources that could extend the mine life, but that is not the only key value driver of the stock. The flagship asset is the Baomahun gold project in Sierra Leone; only 25% of a 12 km. strike length has been tested, and 2.5 Moz. has been delineated. Cluff has picked up nine similar prospects along the strike length that have yet to be tested. The company is cash-flow positive and will be chasing some of these zones aggressively.

Cluff is trading at roughly 7x cash flow-quite a huge discount compared to its peers, which trade at around 18x. And even on an in-situ valuation basis, which is often used for early stage junior gold companies, it trades at $55/oz., which is still below companies that have yet to show any production visibility that average about $100/oz. New COO Peter Spivey will take the reins officially in January, and he will continue to guide the turnaround story. There's a lot of upside at these levels. Cluff is pouring gold and is unhedged with great exposure to the gold price right now.

TGR: You mentioned that Cluff's flagship project is in Sierra Leone. I think when a lot of people hear Sierra Leone, they think of jurisdiction risk. What are your thoughts on that?

NS: Well, I think the company's had a challenging past, but that's probably where the opportunity lies. There's stability in the region now. You probably have to add a little bit to your cost estimates because the infrastructure is not great. But in talking with peers and colleagues working in the country, there's little perceived political risk. I mean we are seeing investment demand increase with significant investment made in the country by China. I think Sierra Leone is at ground level in terms of exploiting its natural resources, and that's probably where you're going to get the most upside.

TGR: One company that you mentioned earlier is also exploring in Ghana, and that's Keegan. Tell us about that one.

NS: Keegan has the Esaase gold project in Ghana; within 18 months, it's been able to delineate 3.5 Moz. And I think this resource could easily be pushed closer to 5 Moz. We're expecting an update in Q4, but Keegan is another company that I think should be reaching the radar screens of a lot of people looking to acquire gold assets in West Africa. It's also shown production visibility by completing a preliminary economic study that shows it's capable of reaching production by 2013.

Keegan currently has about $30 million to continue derisking the asset, and one good thing about the project is the underground potential. Most people realize there's potential to dig deep in a greenstone belt. Currently, the company's chasing rich veins to a depth of 2.5 kilometers. A deep intersection on the Esaase project, at about the 400- to 500-meter level, is coming up with grades of about 10 g/t over 24 meters, suggesting this potential is available.

The other aspect to Keegan is its other Ghana asset, the Asumura gold property. This property is close to Newmont's 16 Moz. Ahafo gold operation, which has yet to be fully tested. Keegan has two rigs turning on it, and no analyst on the Street has a valuation on this asset yet. Decent exploration success is going to spike another wave of growth in the stock.

TGR: In March, Barrick Gold Corporation (NYSE:ABX; TSX:ABX) spun out its African assets into African Barrick Gold Plc. (LSE:ABG). Is that company looking to expand its project pipeline and production profile in Africa?

NS: Yes, and I think it's just about time because it had some level of production from its mines in Tanzania, but that has not been smooth. I think the company revised guidance downward on that twice this year, and that's had an impact on the stock. People are waiting for African Barrick to tell investors where the growth is going to come from.

I see them as potential acquirers, and that adds to the list of companies who are looking in West Africa. I don't see a significant team of geologists in African Barrick that can start looking at the grassroots projects and build upward. Obviously, if it had those people, it would take a lot more time to get the growth that it is seeking.

TGR: Any parting thoughts on the junior gold sector?

NS: Well, we've seen all kinds of M&A activity. But I think it's going to accelerate because a lot of the majors still have a decline in their production profiles, and few have had much success with exploration. There's only one way to boost your production profile and that is to acquire a junior. I think most of these juniors, particularly those in my coverage universe, are well cashed up. In the next 6-18 months, they will be attacking their assets with a lot more vigor as part of an effort to grow their resource profiles. That would definitely be enticing to a lot of these majors looking to boost their resource and production profiles in those regions.

Clarus Securities Analyst Nana Sangmuah obtained his BSc (Honors) Engineering at the University of Mines and Technology (Tarkwa, Ghana) in 1999. His previous industry experience includes state-owned Prestea Underground Mine in Ghana (currently owned by Golden Star); AngloGold Ashanti's Obuasi and Iduapriem mines (Tarkwa, Ghana) and Goldfields International's Damang gold mine (Tarkwa, Ghana). Nana completed his postgraduate MBA finance degree at University of Toronto, Rotman School of Management in 2004. He has roughly seven years of global mining equity research experience that covers more than 60 mining companies worldwide in the gold, base metals and diamond sectors and has in-depth knowledge of mining projects in West Africa.

Want to read more exclusive Gold Report interviews like this? Sign up for our free e-newsletter, and you'll learn when new articles have been published. To see a list of recent interviews with industry analysts and commentators, visit our Expert Insights page.

1.) Brian Sylvester of The Gold Report conducted this interview. He personally and/or his family own shares of the following companies mentioned in this interview: None.
2.) The following companies mentioned in the interview are sponsors of The Gold Report: Continental.
3.) Nana Sangmuah: I personally and/or my family own shares of the following companies mentioned in this interview: None. I personally and/or my family am paid by the following companies mentioned in this interview: None.

Streetwise – The Gold Report is Copyright © 2010 by Streetwise Reports LLC. All rights are reserved. Streetwise Reports LLC hereby grants an unrestricted license to use or disseminate this copyrighted material (i) only in whole (and always including this disclaimer), but (ii) never in part.

The GOLD Report does not render general or specific investment advice and does not endorse or recommend the business, products, services or securities of any industry or company mentioned in this report.

From time to time, Streetwise Reports LLC and its  directors, officers, employees or members of their families, as well as persons interviewed for articles on the site, may have a long or short position in securities mentioned and may make purchases and/or sales of those securities in the open market or otherwise.

Streetwise Reports LLC does not guarantee the accuracy or thoroughness of the information reported.

Streetwise Reports LLC receives a fee from companies that are listed on the home page in the In This Issue section. Their sponsor pages may be considered advertising for the purposes of 18 U.S.C. 1734.

Participating companies provide the logos used in The Gold Report. These logos are trademarks and are the property of the individual companies.

Streetwise Reports LLC
P.O. Box 1099
Kenwood, CA 95452
Tel.: (707) 282-5593
Fax: (707) 282-5592
Email: [email protected]

If you are at all attuned to the gold-stock sector, you've likely noticed a pickup in activity on the deal-making front this year.

And indeed the gold miners are doing some moving and shaking.  In fact, this industry is undergoing a consolidation unlike anything we've seen in this entire bull market.  And for a variety of reasons, this may only be just the beginning.

Many investors have seen some of their own stocks directly affected by this consolidation, and it has been quite intriguing watching things unfold across the industry.  With so many deals, I was curious as to how 2010 is stacking up to other years.  And thanks to a recent report put out by PricewaterhouseCoopers (PwC), my eyes were opened to the sheer magnitude of what is happening.

PwC's analysis of the global mining sector includes the tracking of mergers and acquisitions (M&A).  And its latest report quantifies and confirms what we are watching unfold.  Through the middle of August, the global mining sector has seen 1,324 deals worth a whopping $104b.  At this pace 2010 may surpass a record 2007 that saw 1,732 deals worth $159b.

But while these numbers are quite striking, it's what is underneath them that should really arouse gold-stock investors.  Of all the individual sectors, PwC found that the gold-mining sector is seeing the most action.  Measured by volume and value, gold companies are responsible for 38% and 32% of these deals respectively.

And this gold-heavy weighting is all the more impressive considering the resources it is up against.  Measured by value, 2010 gold deals so far are nearly equal to the deals involving the major mineable natural resources of iron ore, coal, and copper, combined! The capital markets of these resources dwarf gold's, which says a lot about the money currently chasing this yellow metal.

So what exactly does this gold-happy M&A scene tell us?  It tells us a whole lot, but three things are glaringly apparent.  First, gold miners are bullish on the future price action of their underlying metal.  Second, economic gold deposits are harder to find.  And last, and most important, is gold assets are radically undervalued.

As for bullishness, it is natural for any company to have faith in its product.  And in the gold-mining industry this faith is supported by smashing fundamentals.  Gold's secular bull still has a ways to go, and gold miners continue to see a lot of upside in its price.  The acquiring companies obviously don't seem to be bothered by the fact that gold continues to blast through all-time nominal highs.  If they thought gold was at its apex, they wouldn't be buying.

We've also seen a universal dehedging campaign across the entire gold-mining industry.  Even Barrick Gold and AngloGold, two of the world's largest producers and also notorious hedgers, have diligently worked to wipe the hedges from their books in recent years.  Most miners now smartly want full price exposure when they sell their gold to market.

This M&A activity, coupled with anecdotal observations, also tells us that economic gold deposits are getting harder and harder to find.  In this industry the miners live and die by their ability to renew reserves.  And since every ounce mined subtracts from the reserve base, this is a constant uphill battle.  To complicate things even more, when miners get big enough they face the added pressure of growth expectations.

Adding to a miner's reserve base is not an easy task.  In fact, there are really only two ways to do it.  First is the miner finds the gold on its own, and second is the miner buys it from someone else that found it.  Finding gold is of course very difficult.  If it was easy, everyone would be doing it and the metal wouldn't be worth over $1,300 for just an ounce.

And since gold is finite and the low-hanging fruit is all but gone, the discovery of brand-new deposits has become increasingly rare.  With less easy gold to be found, the inherently expensive endeavor of exploring for it is more drawn-out and thus costly.

If a company actually does make a discovery, whether greenfields (a fresh new deposit) or brownfields (an extension to a known deposit or mineralized structure), advancing the deposit far enough to prove-up economic gold grades adds major costs to the exploration process.  And this is only the beginning if a project is approved for construction.  Building a mine can cost anywhere from tens of millions to northwards of $1b for a larger-scale operation.

So when faced with the ominous task of organic reserve renewal/growth, many miners choose what is typically a much easier method of adding reserves, buying them.  By going the M&A route miners are relieved of the growingly-difficult task of finding gold, and thus don't have to apportion such a big chunk of capital towards exploration.  Instead they can focus on developing their pipelines in order to replace depleted mines and/or add additional mines to deliver production growth.

And not only are more and more miners finding M&A easier than organic development, they are finding it necessary.  Even the miners good at exploration just aren't discovering economic gold deposits fast enough to replace reserves.  And in this industry you can't afford to fall behind in this critical element of running your business.  If investors are seeing mining life pare too much too fast, they will head for the exits and not look back.  This is of course detrimental to a stock.

So with the producer outlook on gold prices bullish and a growing need to acquire reserves rather than develop them internally, this ongoing industry consolidation seems completely normal.  But this big run on gold assets of recent is far from normal, right?  Provocatively there is one other major factor that currently makes these assets irresistible to the reserve-hungry deal vultures.  They are radically undervalued!

There are many ways to demonstrate how undervalued gold assets, or gold stocks, are.  And one of our favorites here at Zeal is the HUI/Gold Ratio (HGR).  The HGR is calculated by dividing the daily close of the venerable HUI gold-stock index by gold's daily close.  And charted over time we can clearly see how gold stocks are trading relative to the performance of their primary driver.  With 10 or so years of bull market data to glean from, the HGR paints a very telling picture.


The chart above is pulled from my business partner Adam Hamilton's essay, Gold-Stock Recovery 3, published just last month.  And though I won't be getting into the bells and whistles of Adam's excellent chart in this forum, it is vital for investors to grasp the message that this metric delivers.  And the best way to truly understand the HGR is to view it.  This chart speaks volumes!

With a current HGR of only 0.38x, you can see that gold stocks are well under secular support.  In fact, the last time we saw an HGR at these levels, prior to the stock panic, was 2003.  And do you know where gold was trading back then?  Brace yourselves … in 2003 gold averaged $364.  Gold stocks aren't even close to pricing in $1300+ gold per historic HGR precedent.  I encourage you to peruse Adam's essay for more in-depth HGR analysis.  You'll be amazed to find out where gold stocks should be, and where they could be heading.

With this chart clearly showing gold stocks still disconnected from gold, should we expect today's HGR as the new norm?  I doubt it!  To me the big question is how long will investors accept gold stocks' underperformance?  Due to their inherently-risky nature these stocks simply must possess positive leverage to their underlying metal.

Investors demand this leverage, or else owning these stocks is not worth the risk.  Unfortunately thanks in large part to the stock panic, this leverage has been thrown out of whack.  And while the HGR has slowly recovered since the panic low, greatly rewarding us few contrarians who remained in the game, its still-low level tells us the great majority of gold-stock investors are still on the sidelines.

We believe the HGR will eventually be restored to pre-panic levels, which would mean huge gold-stock gains are still to come.  And while investors have not yet realized this, the gold companies have.  As demonstrated by the flurry of M&A activity, the miners are taking advantage of these cheap prices and snatching up gold assets while the getting is good.  They know that once the investing class rejoins the game, things will get a lot more expensive.

As for the types of deals we are seeing, they certainly haven't been lacking in variety.  And as one would expect, the larger gold miners are making the biggest waves.  And why shouldn't they be?  Many of these miners are making money hand over fist, and have the cash to invest in their pipelines.  In fact, even those miners that don't have large treasuries can't pass up the values out there today.  These cash-strapped companies are able to circumvent their shortfalls by simply issuing enough shares to get what they need.

Some of the bigger deals result in not only the addition of reserves, but the addition of production volume.  Such examples are Australian major Newcrest Mining acquiring neighbor Lihir Gold and its massive mine in Papua New Guinea, and Canadian giant Kinross Gold making a big move into Africa, acquiring Red Back Mining.

When not adding operating mines, the larger miners have aggressively sought after in-ground resources to strengthen their pipelines.  Some of these companies prefer advanced-stage deposits with proven reserves that are ready for development.  Goldcorp and its recent $3b+ bid for one of South America's finest undeveloped gold deposits is a great example.

Other miners are not afraid to go after early-stage discoveries, those yet to prove their economic worth.  Kinross Gold's 2010 buying spree included the acquisition of a small explorer operating in Canada's Yukon Territory.  This C$139m deal brought over what could be a major discovery.  And Kinross jumped on it before investors were able to bid this junior to the moon.

But the big miners aren't the only ones in the M&A fray.  Smaller miners are making moves to capitalize on these cheap assets as well.  Mid-tier and junior-level producers are acquiring companies and projects to secure their own longevity.  And we are even seeing consolidation within the junior-explorer realm.  Savvy explorers are buying or merging with other small exploration companies to enhance their own project portfolios in hopes of developing mines on their own or becoming all that more attractive to the bigger fish.

So what does all this M&A activity mean to investors?  Well ultimately I believe this consolidation is a foreshadowing of a big run-up in gold stocks as mentioned earlier.  The smart managers seeking to grow their companies are buying these cheap assets before investors bid them too high.  It also means investors should own the highest-quality gold companies, as these are the ones that will be the targets of future deals.

At Zeal we seek to find these highest-quality gold companies, and profile our favorites in our acclaimed research reports.  And indeed we are finding that these companies are high-probability takeover targets in the midst of this recent M&A extravaganza.  Of the 40+ gold stocks we've profiled in the last 18 months, 7 no longer exist as a result of acquisitions.  And as you can imagine, the average premiums have been quite spectacular.

Investors looking to own some of these elite gold stocks have several options when it comes to uncovering the winners.  They can of course wade through the dross of the hundreds upon hundreds of gold stocks out there and methodically explore the entire pool in hopes that the best come to surface.  This will take hundreds of hours, and if they don't know what to look for it can be an exercise in futility.

Another option is to rely on the experts, leveraging their hundreds of hours of research searching out the best of the best.  Zeal reports profile what we believe to be the best stocks within their given peer groups.  And a 16% acquisition rate in just the last 18 months speaks to the quality of companies profiled in these reports.

And interestingly if you go back farther than 18 months, another dozen-plus of the gold stocks we've profiled have also been acquired.  Two of these were parties to this year's biggest gold deals, Red Back and Lihir as mentioned above.  We profiled both of these companies in our November 2007 report, back when they had respective market caps of $1.1b and $6.7b.  With Red Back taken out for $7.1b and Lihir $8.5b, investors riding these stocks the last few years have made out pretty well.

But even though many of our favorites have been taken out, there are still plenty that have not.  Seeing incredible value in the assets they hold, I ultimately believe these companies would better reward shareholders by grinding it out on their own.  But as we've seen all too often in this industry, it is their quality assets that make these companies all the more attractive as M&A targets.

And what better targets than the small junior-level companies that hold the next-generation gold deposits.  Even PwC notes that the opportunities for "mega deals" have become scarce.  It points out that smaller companies are now gaining favor on the deal-making scene.  And this fits well for the stocks profiled in our latest reports.

We spent nine months canvassing the pool of 500+ junior-level stocks trading in the US and Canada to find those with the highest probabilities for success.  This research is distilled into three action-packed reports that profile our 12 favorite early-stage explorers, 12 favorite advanced-stage explorers, and 12 favorite junior producers.

And of the 32 still left standing as of this week, a lot of potential exists.  These juniors not only reside in the sweet spot of the M&A action, they have the strength to greatly reward investors if they continue to go at it alone.  Buy your reports today to have these detailed fundamental profiles at your fingertips!

These reports also serve to feed many of the trades in our acclaimed subscription newsletters.  For nearly a decade our monthly Zeal Intelligence subscribers have enjoyed timely stock recommendations that have greatly outperformed the markets, with average annualized realized gains of +43.2% for all stock trades (including all losers).

Our weekly Zeal Speculator newsletter for more-active traders has also found great success.  In fact, in early September we closed a trade in the stock (profiled in our advanced-stage explorers report) bought by Goldcorp mentioned above.  This six-month trade netted our subscribers a realized gain of 156% … not bad!  For real-world trade recommendations, expert market analysis, and even access to the subscriber chart section of our website that updates the HGR weekly, subscribe today!

The bottom line is PwC's recent report speaks volumes, and confirms what we've seen happening on the gold-stock scene.  2010 has had a lot of M&A activity so far, and considering the current market conditions there could well be a lot more to come.

Gold companies are ahead of curve, and recognize that they can get assets for cheap right now.  And by owning shares of the thinning population of quality gold companies, those astute investors who also recognize this disconnect can buy in for cheap as well.

Scott Wright

October 29, 2010

So how can you profit from this information?  We publish an acclaimed monthly newsletter, Zeal Intelligence, that details exactly what we are doing in terms of actual stock and options trading based on all the lessons we have learned in our market research as well as provides in-depth market analysis and commentary.  Please consider joining us each month at …

Thoughts, comments, or flames?  Fire away at [email protected] .  Depending on the volume of feedback I may not have time to respond personally, but I will read all messages.  Thanks!

Copyright 2000 – 2010 Zeal Research (