Gold majors looking at juniors for takeover targets

Posted on 16 April 2008 with no comments from readers

Action in the gold market has so far been confined largely to bullion, futures and large producer stocks. But as with any bull market the trick for the canny investor is to find an asset left behind by the boom, something that should have gone up and has not yet done so. Junior gold and silver exploration companies fall into this category.

These are the companies that own the land on which future supplies of gold and silver are most likely to be found. They hold the land banks of this sector, and these assets should logically become more and more valuable as precious metals rise in price.

The good news for investors is that the market has forgotten about the junior gold and silver companies for the moment. Hedge funds and big investors are punting in bullion, gold futures and major stocks.

Takeover prospects

The big gold and silver producers are, however, not unaware of what comes next and are starting to run due diligence on the juniors big time. They want to know what to buy and where and are lining up acquisition candidates.

Legendary gold investor Jim Sinclair recently commented on his website: ‘Given the high capital cost and risk associated with exploration in virgin territory, most of these predatory companies are looking closely at established mineral belts where mines have been found and are still being discovered. It’s not rocket science but just common sense.

‘What we’ve seen so far on the merger front is only the tip of the proverbial iceberg. In the coming years, companies with good land positions in the world’s most prolific mineral belts will reap the rewards of their efforts at premiums that will shock you by today’s standards. In fact, the targeting process is happening as I speak.’

It is not obvious! If you owned a coal mine – particularly one that was running low on coal – would you not want to buy up land near to your mine on which coal might be mined?

The most valuable junior gold and silver companies are therefore the ones that own land near or adjacent to current gold production areas. For this will be the easiest place for a major to search for new seams and extend its existing operations.

Perhaps this is one reason why 1970s star analyst Joseph Granville is so keen on Linux Gold, a tiny junior with claims next to those of existing major producers. But there is a whole legion of juniors with well placed assets, and these will surely be the most likely acquisition targets.

Next up would be land in areas known to hold precious metal reserves, but as yet undeveloped. Again the juniors have assembled these claims, raised money to explore them and in some cases are moving to become small producers and not just explorers.

Junior revaluation

However, as the gold bull market moves up to another leg a reassessment of the value of the juniors looks inevitable. And the likely trigger for a stock market boom in this tightly held and rather illiquid market will be the first set of acquisitions.

At this point the patience of the junior exploration companies and their shareholders will be rewarded with some huge stock price increases. Jim Sinclair says ten-fold stock price increases for the juniors will follow in this gold bull market, just as in the late 1970s, and he has put $23 million into just one junior himself, although he is not saying which!

Many of the juniors are listed on the Canadian stock exchange and several websites offer research into this sector, such as www.goldseek.com and www.golddrivers.com. But the time to buy these stocks is now while prices are at a historic low in comparison with the gold price.