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We like to think we live in an age of information, yet BHP Billiton (NYSE:BHP) showed no events as of 2 am while this was in the Australian newspapers at 9:15 am (either 9 or 10 pm on the correct side of the planet). This is critical news! That is why I always go direct -- the gathering agencies are spottier than you think...

OK, this is a complicated play now - BHP initially had a strike because they were making obscene amounts of money and hadn't given the workers a raise in years. They ended up giving them like a dollar each so there should be a relief rally on BHP, which missed out on yesterday's miner rally that was caused (as predicted by me) by JOYG's great earnings

So the BHP Oct $45s for .75 are the way to go but this is a short-term trade that hedges our Phelps Dodge (PD) $85 put for $1.20. The initial exuberance over great mining activity is all well and good and the miners will have a great quarter as they SELL SELL SELL whatever it is they mine.

But commodities traders are much smarter than stock traders and they will realize that if miners are all breaking revenue targets, then they are pulling too much stuff out of the ground.

Look how crazy Glamis was going - they were looking to double production. We talked about WDO last week and how they were trading down as they were already pulling more gold than they were selling.

Economics 101: If global gold production is 85 million ounces per year and global demand is roughly the same (LME says they have plenty) then you can't have companies like Glamis ramping up production from 500,000 to 700,000 ounces of gold while Newcrest also adds another 500,000 ounces etc...

LOL, just kidding - it's the weekend! Seriously, their production is up huge as well (and they had 10M site visitors, very impressive). So just like OPEC must reign in rogue producers who can flood the market trying to dump their oil, so must the major miners, like Goldcorp, reign in the up and coming miners like Glamis, Zijin, or worse, Newcrest (who produced 500,000 more ounces in '06 yet again, a triple from '04) to prevent them from flooding the market with gold.

According to the Metals Economics Group:

If we look at the effects of industry consolidation on exploration spending over the past few years, we see that large portions of the acquired companies' budgets effectively disappeared in the years following the acquisitions, as the surviving companies' budgets either remained the same as before the acquisitions or were reduced further, despite incorporating an expanded exploration portfolio.

Interesting strategy n'est pas?

Of the 1,519K oz produced by Newcrest, all but 22,ooo were sold but, as discussed previously, if this surplus gold is being snapped up by speculators and public demand doesn't catch up, there could be hell to pay on the back end!

For every Glamis that is reined in by a major (and there will be plenty more mergers this year ahead of a change in House leadership, which may not allow for the rubberstamping of every acquisition in the future), there are 20 new wildcats looking to open new mines like NAK (my favorite) who stand ready to open up a 64M ounce mine in Alaska (at $600 an ounce, people are willing to freeze while they dig!) or Nova's 32M ounce US project or New Zealand's Oceana Gold who will be doubling their operation to 300,000 ounces next year.

How quickly can this happen? Late stage site development spending is up 60% since 2001, a drastic increase in mines that are soon to come on-line. After many years of declining production (due to low margins on low-yielding fields) and, as evidenced by JOYG's stunning numbers, the industry is coming around full circle.

It will be a race to the finish line as investors expect all of these projects ($4.9Bn in '05) to begin showing some returns, no matter what price they have to sell the gold for!

Source: A Few Miner Adjustments: BHP Billiton & Phelps Dodge