$8.8bn Newcrest takeover of Lihir Gold signals higher gold price
Posted on 04 May 2010 with no comments from readers
Investment banks are predicting a wave of mergers and acquisitions in the precious metal mining sector over the next year as the major players position themselves for higher and higher gold prices.
News that the Australian investor’s favourite Newcrest Mining has agreed to buy local rival Lihir Gold for $8.8 billion to create the world’s fifth-biggest producer should be seen in this context.
M&A down
This comes at a time when the mergers and acquisitions market is at a very low ebb around the globe. In most industry sectors companies are guarding their cash position and do not feel bullish enough to take out their rivals now. The finance is also much harder to find.
Things are very different in the precious metals sector. Yesterday gold hit a new all-time high in sterling. The fear among the big players is that they will miss the boat to expand if they do not move quickly enough.
This danger is real enough. Gold share prices rise in a leveraged fashion against the gold price. For manufacturing and extraction costs are relatively fixed so the impact of rising prices on profits is proportionately higher than the actual price gain.
The message for investors ought to be clear. Newcrest has an excellent record of well timed investments and shrewd management. It is probably not getting its timing wrong on the gold price.
Gold buying signal
But then again it is always a comfortable position to follow rather than anticipate the big beasts in the jungle. There is therefore much to be said in seeing this as a signal to buy gold. Whether it is time to buy gold equities is harder to judge.
The downturn in the global equity rally is unlikely to be very discriminating, and in late 2008 gold stock owners got a nasty shock as their shares fell along with everything else. If precious metal prices hold up better this time it could be a bit different but that leverage to the price of precious metals also works to the downside.
That said these are going to be exactly the equity class to buy after a major sell-off that cannot be far away. Yesterday’s rally in US stocks on the back of almost non-existent percentage gains in two economic indicators is a rally on its last legs. The weakness in Asian stocks on Chinese retrenchment is far more significant.
