New Trend for Emerging Gold Producers: Amalgamation

The new trend for 2009 among emerging gold producers will be amalgamation. In spite of gold’s buoyant performance during the final quarter of 2008, investment in potentially profitable gold deposit developers continues to remain virtually non-existent.

Survival Strategies – Linear and Central Sun

The major exception to that rule is Canadian junior mining companies which are willing to (or forced to for lack of options) accept flow-through financings. Flow-through provides tax incentives for Canadian resident investors who are able to deduct the full amount invested from their income for the year. Companies receiving the investment can only use flow-through funds for “in-the-ground” expense, meaning none can be used for administrative costs.

Only companies with properties in Canada qualify. Excessive flow-though financing places downward pressure on share prices, because there is a strong incentive to blow out flow-through shares at any price, since the Adjusted Cost Base of a flow-through share is essentially $0.

Many investors don’t fully understand that Flow-through financings represent a major disadvantage to other investors in the same company who do not reside in Canada. This is why amalgamation is the only survival path available to some companies who have either already diluted their share structure excessively through flow-through offerings, or whose properties are not in Canada.

Yesterday’s announcement by Linear Gold (LGCFF.PK) and Central Sun Mining Inc. (SMC) describing an agreement by the two companies to merge is exemplary of how companies stagnating due to the tough financing environment will move forward intact.

The new company will provide shareholders with exposure to 45,000 ounces per year in gold production from Central Sun’s Limon mine in northwestern Nicaragua, building to 130,000 annually upon completion of a mill at the Orosi project, also in Nicaragua. The new company will continue under the Linear name, and will have US$20 million in cash. Central Sun shareholders will receive 0.4 of a Linear share which will put Linear’s issued and outstanding to just over 51 million.

Strong Gold means Strong Gold Producers

Meanwhile, tensions in the Middle East helped gold perform strongly and major producers benefited.

Barrick Gold (ABX) shares rose nearly 7% in trading yesterday as the strong spot gold price continued to exert a positive influence on senior gold producers. Barrick is the largest gold producing company in the world, with total 2008 production expected to exceed 8 million ounces of gold.

Goldcorp (GG) also saw its shares trading 7.53% higher in mid-day trading, and Kinross (KGC), Agnico-Eagle Mines (AEM), Newmont Mining (NEM), and Freeport-McMoran (FCX) also benefited from the strong gold price.

Crew Gold in Trouble

Crew Gold Corp. [TSX:CRU] took a tumble after the new military regime of Capt. Moussa Camara in Guinea in West Africa issued a “stop-work” order shortly before issuing an order to restart mining yesterday. The new regime came to power in a military coup on December 23rd, and its volatile commander has stated that all mining concessions will be reviewed in the weeks to come.

Crew also operates mines in Greenland and the Philippines.

Rio Tinto (RTP) is seeking to engage in dialogue with the new government as its $6 billion iron ore project there comes under threat.

The new regime, led by Captain Moussa Dadis Camara, which took control of the country on Dec. 23 after President Lansana Conte died, plans to cancel mining agreements. Alcoa Inc. (AA), United Co. Rusal and AngloGold Ashanti Ltd. (AU) also have operations in the country while BHP Billiton Ltd. (BHP), the world’s largest mining company, is building an alumina refinery with Global Alumina Corp.

Chavez to Seize Gold Mine

Not to be outdone by the nationalization rhetoric coming out of Guinea, Hugo Chavez said on Saturday the he would take control of Venezuelan gold mining operations to offset the falling oil prices’ effect on national coffers. He declined to name any companies or projects, but his mining minister says that Las Cristinas, the country’s largest gold mine, will be a prime target in the new year.

Las Cristinas is currently held by battered Crystallex Internation Corp (KRY).

Rusoro Mining Ltd. [TSX:RML] and Gold Reserve Inc. (GRZ), also with substantial gold projects in Venezuela, are currently locked in a acrimonious takeover battle. It remains to be seen what Chavez’s attitude towards these two warring factions will be. Rusoro is headed by Russian nationals, so it is likely that the company will prevail in Venezuela.

Comments

[bosun.j:]

*Rusoro is headed by Russian nationals, so it is likely that the company will prevail in Venezuela.*

Had the CIA not tried to depose Chavez the company from Spokane would likely have less to worry about.

I still chuckle when I recall Chavez's sniffing on the podium at the UN and his Diablo pronouncement.

2008 Dec 30 08:32 AM

[John Polomny:]

Fully agree with the gold company consolidation call you make here. Contrary to what mosy think at these gold prices quite a few god mining companies are cash flowing nicely. Buying ounces on Bay Street or Wall Street is cheaper and easier then going out drilling yourself.

2008 Dec 30 02:06 PM

[GMiki1:]

A lot of the juniors though they don't look great via their charts are actually in good shape with positive cash and remarkable resources. They're also a little further along than they were a couple of years ago. I hope this is a good year for them. I hope I'm holding a few that will survive and thrive.

Best to all the miners who work so hard and struggle through such unfairly (market manipulated) times.

2008 Dec 30 06:38 PM

[Kaleb22:]

Good article James, I bought ABX at $21 three weeks ago and it is at $36 today. I was thinking about dumping it and waiting for a gold drop but I don't think we will see another drop in gold.

2008 Dec 31 05:19 PM

[1967:]

Excellent perspective... Another struggling entity - Minera Andes (MAI-T)...cash call and financing a challenge, with critical dates mid-Feb and March... Any one have intell on this company?

2008 Dec 31 08:17 PM

[De Graaf:]

If you want to make money in 5 years from now, without to much risk despite common consent, is buying Rusoro Mining. Its a steal and the fundamentals are great. Also preferred partner with the Venezuelan government.

Rusoro is almost a penny stock that is set to boom like Yamana Gold currently does. The only thing which lacks is the proper pricing of the stock.

Buy now, not a second later. Rusoro Mining Ltd.

2008 Dec 31 08:48 PM

[Greg Pinelli:]

People like Chavez can do what they like..soon Venezuela will have no outside investment..NO credit rating..and MUCH less oil income..The can rot in the tropical haze until the people get rid of that bloated scum bag....

Gold and silver producers will definitely consolidate..but it will largely be as a result of Juniors (as in oil and gas) acting as the ex officio exploration arms of mids and majors..and being paid very well for success.....

Jan 03 08:21 PM

[Greg Pinelli:]

Deposing or not deposing Hugo Chavez has NOTHING to do with possible success or favor in Venezuela....Chavez is megalomaniac whose lust for power is ruing his country.
NO COUNTRY SHOULD INVEST IN VENEZUELA..OR ANY COUNTRY THAT PROMOTES TERRORISM..that includes the Saudis...

Jan 03 08:24 PM

[Greg Pinelli:]

Kaleb is correct...NOWHEREMAN has consistently bashed gold..but the realities of credit expansion and currency devaluation speak for themselves.....


On Dec 31 05:19 PM Kaleb22 wrote:

> Good article James, I bought ABX at $21 three weeks ago and it is
> at $36 today. I was thinking about dumping it and waiting for a
> gold drop but I don't think we will see another drop in gold.

Jan 03 08:25 PM

[bosun.j:]

@Greg Pinelli:


That most especially includes America! Oh, wait, Its already happening!


On Jan 03 08:24 PM Greg Pinelli wrote:


> NO COUNTRY SHOULD INVEST IN VENEZUELA..OR ANY COUNTRY THAT PROMOTES
> TERRORISM..that includes the Saudis...

Jan 03 10:49 PM

[NOWHEREMAN:]

Mr. Pinelli, other than my outlook for 2009 and the irrationality of expecting Gold Bullion to go up 9 years in a row, please point out to me what comments I have made that actually "Bash" gold.

If you mean the ETF GLD, I will bash that left and right.

GDX, DGP, I have no problems with. However, GLD is not transparent enough for me.

Heck, I went totally Bullish on Gold bullion when Bernanke decided to bailout everything. I can lead you to that comment if you wish.

But then the truth isn't part of your Bailiwick.
IMHO

Jan 04 12:48 AM

[relmor:]

Why do people hate a country who refuses to be bullied and manipulated by world powers. I dont understand that one bit.

Jan 10 10:15 AM