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In a previous article, I pointed out how bright the future is for silver. For example, one of my predictions -- increased demand for silver -- is slowly coming to fruition. Chart 1 shows how the total silver stock (green dots) is starting to decline, indicating signs of increasing silver demand (or decreasing supply). Even the registered silver (blue dots) has started to decline just recently.

Chart 1: CME Silver Stock

The silver price has been forming a base around $US 27/ounce in the latest months (Chart 2).

Chart 2: Silver Price

As a result of this positive development in silver, there has been strong merger and acquisition activity among several mining companies in the sector.

On January 20, 2012, Pan American Silver Corporation (PAAS) announced that it purchased Minefinders Corporation Limited for about CAD 1.5 billion in an effort to more than double production by 2015. The combination comes at a high price, though. Since the acquisition, Pan American Silver Corporation's profits have dropped 46% due to takeover charges. As a result, its stock has also taken a 40% beating.

A few weeks later, one of the sector's most visible mergers came to pass in February 2012, when Glencore International PLC (GLEN) offered to buy out Xstrata PLC (XTA) for $US 41 billion.

More recently on the Russian front, Nord Gold (RTSD) offered to buy out High River Gold (HRG) on July 18, 2012 for $C 1.4/share. High River Gold has a 50% stake in the high grade silver mine at the Prognoz property, and is in the process to assess this buyout offer. Investors can get into High River Gold at this moment to bet on a higher buyout price, as I believe this $CAD 1.4/share bid is too low, considering the company's high class gold and silver properties and its earnings versus book value.

On July 16, 2012, Liberty Silver Corp. (LSL, LBSV) announced an offer to acquire all the outstanding common shares of Sennen Resources Ltd. (SN), a junior mineral exploration company. What is very notable is that the buyout premium is as high as 47.3% on this deal. Therefore I believe this is a hostile takeover attempt. We will see more and more hostile takeovers in the sector, in my opinion.

Another example is the friendly takeover on June 8, 2012 between RX Gold & Silver (RXEXF.pk) and U.S. Silver (OTC:USSIF). This friendly takeover quickly turned out to become a hostile takeover a month later. U.S. Silver got a hostile takeover bid from Hecla Mining (HL) at 23% buyout premium. Hecla Mining said it plans to make an all cash offer to acquire all of the outstanding common shares of U.S. Silver for $CAD 1.80 per share, and all of the outstanding common share purchase warrants of the company for $CAD 0.205 each.

As you can see, the M&A activity in silver mining is heating up exponentially. So how do investors find these buyout targets? The key is to look at the enterprise value. Enterprise value is calculated as market cap plus debt, minority interest and preferred shares, minus total cash and cash equivalents. So the more cash a company has, the higher its chances of being a buyout target. At the same time, the lower its market cap vis a vis the assets on its balance sheet , the higher its chances of a buyout.

Additionally, miners are running out of high grade ore and are in search of large, high grade deposits. So look out for companies with high deposits.

One of my recommendations is Vista Gold (VGZ), which I talked about here. What I like about Vista Gold is its extremely high amount of large scale deposits. Big mining companies can just buy out parts of Vista Gold's projects for cash.

Another recommendation is Endeavour Silver (EXK), which I discussed here. This company keeps increasing its production quarter after quarter, and uses its cash flow to acquire mines.

Even Kinross Gold (KGC) could be an acquisition target at its cheap valuations compared to its peers. Kinross Gold fired its CEO Tye Burt after a 60% drop in its share price in less than a year's time. J. Paul Rollinson, vice-president of corporate development will be his successor. I wouldn't buy in immediately, though, as sentiment isn't positive right now.

Source: Merger And Acquisition In The Silver Mining Industry Flaring Up