Buying gold producers is not the same thing as buying the metal itself.

Canadian majors Barrick and Goldcorp would be content to confirm this with discussions of loonie strength, energy input costs and stroppy labourers asking for higher wages. Which, in today's context, is another way of talking about inflation eroding margins.

So for gold producers the double edge is sharp - whilst gold price rises are welcome, the very forces responsible for them make controlling costs of production a serious challenge. A hedge for producers to watch carefully.

Thus on the day when inflation rears its head more than expected but crude is off a few dollars one might expect gold producers to be sort of pleased. Unfortunately, gold is not exactly glittering this afternoon - off $15 and change.

Barrick and Goldcorp, of course, tend to strongly track prevailing gold ore prices; and this is visible in their price graphs today. But what to make of Gold Eagle Mines' price action?

It is, apparently, all about synergies and boosting reserves. Gold Eagle were bought by Goldcorp last week and the divergence between spot gold and spot Gold Eagle in the weeks prior to the announcement (look carefully) shows some clever analysis by a few seers.

I mean that, for a change, sincerely. Well, partly. Gold Eagle held 8 kilometres of land adjacent to Goldcorp's vaunted Red Lake district. Agnico-Eagle Mines Ltd, a smaller rival to Goldcorp, bought over 5% of Gold Eagle in June. Goldcorp did not feel they could cede the turf. So the deal was hardly a complete bolt from the blue. But nor was its likelihood a no brainer either - it is , after all, a US$1.5 billion transaction that Goldcorp have undertaken.

But the point is that it is not just about synergies and reserves. And there is, perhaps, yet another subtlety in the episode. Agnico-Eagle stand to make over C$25m on their stake. That would be a 50% plus gain in less than 8 weeks. For a firm turning over circa US$425m annually that must appear to be mighty easy money. Certainly simpler than digging for it. A one-off?

That's possibly enough to make worthwhile the time spent looking over other gold/gold producer equity divergences in the sector.

Related articles:
Stocks decline following inflation reading
Barrick and Goldcorp: analysts make adjustments
Goldcorp Consolidates Red Lake Holdings With Gold Eagle Acquisition
Goldcorp Agrees to Buy Gold Eagle for C$1.5 Billion

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  1. Charles Butler // 8/05/2008 01:08:00 PM

    Hi Rawdon,

    You're perhaps arguing that it is not a typical top-of-the-market bad purchase, but rather a hand being forced as the only defence against falling spot.

    I concur, if that's the case.


  2. RJH Adams // 8/05/2008 03:40:00 PM

    Yes, it's strategic more than reserves+synergies. They had 4.7% pre-buy; this was a spoiler move.

    But the v hidden argument is that gold producers may just begin to decide to take these stakes for speculative purposes more than they do for operational rationales.

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