New Trend for Emerging Gold Producers: Amalgamation

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 |  Includes: ABX, AEM, CRYFQ, FCX, GDRZF, GG, KGC, LGCFF, NEM, RIO, SMC
by: James West

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 (OTC:LGCFF) 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 (NYSE: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 (NYSE:GG) also saw its shares trading 7.53% higher in mid-day trading, and Kinross (NYSE:KGC), Agnico-Eagle Mines (NYSE:AEM), Newmont Mining (NYSE:NEM), and Freeport-McMoran (NYSE: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. (NYSE:AA), United Co. Rusal and AngloGold Ashanti Ltd. (NYSE:AU) also have operations in the country while BHP Billiton Ltd. (NYSE: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.