Recently two mining giants -- Goldcorp (GG) and Barrick Gold (ABX) -- published their bullish earnings reports showing increasing margins due to a rising gold price. Here is a perfect example of a report that's trying to tell us something. The hidden message in these glowing statements is of great significance to gold traders. What is the other side of the story?
The fly in the ointment may be that the majors need new blood. They are having difficulty making progress with their next generation mines; experiencing delays and shortfalls. There is a sense of urgency in their pronouncements of increasing the capital they are going to spend on exploration and development of two key emerging assets.
Goldcorp specifically identified the El Morro Project in Chile, where it's partnered with New Gold (NGD), and which has the largest potential increase in reserves. New Gold has had a major breakout at $12 and phenomenal month of August.
Read the writing on the wall. The future of the majors lies not so much in glowing statements but in their hidden meanings. These companies, as measured by the Market Vectors Gold Miners ETF (GDX), are getting more mature and are facing diminishing reserves and a rising gold price. This may be the reason their share prices are underperforming -- they are sitting on large cash positions and must either increase dividends or look for growth through mergers and acquisitions.
Our area of specialization is in researching promising explorers, as measured by the Market Vectors Junior Gold Miners ETF (GDXJ), which will grow increasingly attractive as acquisition targets for the older majors. For example, the acquisition by Newmont Mining (NEM) of Fronteer.
Also witness the recent move by Agnico Eagle Mines (AEM) in investing $70 million dollars in a young promising company Rubicon Minerals (RBY), which had recently sold off to the downside. Also look at Aurico Gold’s (AUQ) takeover of Northgate Minerals (NXG) at valuation levels not seen in more than seven years. I realize that miners have been trailing bullion for several months and am convinced that their day is yet to come. Rubicon had recently published a decrease in resources, sending shares plummeting. Agnico seized the opportunity to make a very advantageous investment. In the Summer of 2008, Agnico had taken interest in Gold Eagle Resources at bargain prices. It didn’t take long for Goldcorp to buy the entire company, giving Agnico a significant profit. This may be exactly the template that other hungry majors will be looking to emulate as they buy emerging properties at discounted prices. As the price in gold bullion advances many situations increase in value. GST is always on the hunt for assets in the earth, which are the mother lodes of the eventual bullion.
When the day of the junior miners comes, the profits will far outstrip those of bullion. From a technical standpoint, often times mergers and acquisitions are not readily discernible in chart patterns. Indeed, Fronteer had quite a nasty correction before it was acquired by Newmont. Suffice it to say that momentum traders rarely benefit from mergers in the making.
I've noticed that equity prices will fall below a rising 200-day moving average only to eventually break through on the way up. Interested parties might find juniors at irresistible bargains right now in comparison with gold bullion.
Disclosure: I am long GLD, GDX, NGD, SLV.