Big gold merger not seen as quick fix for bullion
By Alden Bentley
NEW YORK, June 25 (Reuters) - The North American gold
merger between Barrick Gold Corp <ABX.TO> and Homestake Mining
<HM.N> will create a fearsome global competitor for the era of
low bullion prices, but may not soon alleviate the structural
supply problem in the the gold market, analysts said Monday.
Analysts said Monday's surprise announcement helped the
long-term bullish argument for gold, but it would take time
before a small list of big producers would curtail production
much.
"I do not anticipate any impact with regards to the gold
price as a result of this transaction," said David Mallalieu,
gold mining analyst at Scotia Capital Markets in Toronto.
Monday's $2.3-billion share-swap deal vaults Canada's
Barrick, already the second largest North American producer,
into the No. 2 slot world wide. Combined production would be
about 6 million ounces (187 tonnes) a year, ranking it just
behind South Africa's AngloGold Ltd. <ANGJ.J>
Both Homestake and Barrick are cheaper producers than
AngloGold, meaning that planned annual cost savings of $55
million will give them considerable firepower when it comes to
new acquisitions. It also means they are not under the gun to
close mines.
The merged company is expected to have a market
capitalization of about $9 billion and a cash cost of some $156
an ounce. It will also have about $900 million in cash on hand.
"You have got a bigger, more liquid balance sheet," said
David Christensen, director of global mining research at
Merrill Lynch. "Instead of firing bullets out of a six shooter,
you are now firing howitzers. There is no other producer in
this industry that can compete with this company for quality
assets."
By acquiring California-based Homestake, one of North
America's oldest gold miners, Barrick expands its portfolio of
mines and exploration properties in Canada, the United States,
Chile and Australia -- home to 40percent of Homestake's
output.
Analyst Peter Ward of Lehman Brothers said that the
synergies achieved by the merger might best be realized at the
Valadero gold project on the Chile/Argentina border, owned 60
percent by Homestake and 40 percent by Barrick.
He said the merger might make Valadero more likely to come
on stream, providing the potential negative of bringing
additional gold to the market.
Christensen said consolidation is a positive trend for the
industry, which has been plagued by over production and
inefficiency and is trying to readjust with bullion prices near
their lowest in two decades.
Low gold prices have killed some high cost producers and
fanned the consolidation as big producers try to rationalize
and cut costs just as the aluminum and copper mining industries
have done in recent years.
Even efficient gold mining operations had a hard time
turning a profit this year when prices were in the $250s, near
the 20-year lows set in the summer of 1999.
Spot gold closed at $273.75/4.25 an ounce on Monday, up
from Friday's close at $273.30/90.
But mergers in the gold industry do not automatically
change the supply-demand fundamentals, analysts said.
That is because so much of the gold that has been mined
through the ages is still around, in central bank vaults, under
mattresses and in churches and museums.
Some of these above ground stocks have been mobilized in
recent years. Seeking returns on a low yielding asset, central
banks have reduced holdings and lent their gold to speculators
and mining companies who sell it forward to protect future
production against weaker prices.
Base metals and other traditional commodities get consumed
in the normal course of economic activity, thus reducing the
number of mining companies, which can lead to a shortage of
material.
But less so in gold, where official sector sales totaled
471 tonnes of supply last year, on top of the 2,573 tonnes that
came from the mines, according to consultants Gold Fields
Mineral Services Ltd. Selling by investors, mostly bars and
coins, added another 291 tonnes.
"What dictates prices is the above ground disinvestment,"
said Ward. "Consolidation matters in steel, aluminum and
copper, where you don't have 20 years worth of inventory.
"The idea that consolidation in the gold market is going to
tighten up supply is a false hope in my opinion," he said. |
