The mystery of gold's sudden turn yesterday has been cleared up overnight. Goldcorp (NYSE:GG) is merging with Glamis Gold (GLG), offering a 32% premium (in stock) for the much smaller company. I don't think this so much says that Glamis is undervalued (P/E 98) as it does that Goldcorp is overvalued (P/E 25), and only the looniest of gold bugs will be buying GG on this news.
Gold producers must consolidate the industry before mid-caps like Glamis, who just doubled their proven reserves, start dumping gold onto the open market. GLG's production was up 30% to 138,000 ounces in Q2, with a production cost of just $190/ounce. They projected their new El Sauzai mine to double to 230,000 ounces for '06, while the Marlin mine was also looking to boost production from 100,000 to 200,000 ounces.
You need monopolies, or at least cartels, in order to maintain high pricing, and this administration has never met a merger it didn't like (and before you write in, yes I know these two are both Canadian). Investors have been willing to pony up 98 times earnings for Glamis, betting on outstanding increases in production that should have them producing over 700,000 ounces of gold next year. At a cost of $200 an ounce that should net them over $200M in profits, plus they have a large silver operation, so the question would be: Why sell to GG for so little?
Perhaps the miners, like the oil consolidators of prior years, feel it is becoming more important to control output than to increase production in order to maintain their profit margins. In the short run this will be good for the gold sector, but in the longer run there are just too many miners to keep a lid on all of them, and the market will adjust.