With the cash price of gold on the COMEX recently trading at $515 an ounce and the June 2010 gold futures contract at a superlative $621 an ounce, the price trend is looking higher. As I said in a recent commentary, the break at $500 could see a subsequent target of $520 to $530 on a cash basis. Today, we are not that far away. The sentiment in gold is bullish, and this has driven activity in the gold sector, which could turn out to be the next hot area for trading as we move into 2006.
Clearly, the trend is towards consolidation in the gold sector as gold producers aim to reduce the operating cost per ounce by achieving economies of scale and increasing gold reserves in the ground.
That said, the consolidation is not limited to the major producers, as mid-sized and smaller producers are also getting into the action. The trend is towards reducing the number of gold producers out there. For investors, buying some of the profitable smaller players with good reserves could set you up with the opportunity for takeover profits.
A rising player, Goldcorp Inc. (NYSE/GG) with a market-cap of $6.89 billion, well below the $9.52 billion and $14.26 billion belonging to Placer and Barrick, is on the hunt. Goldcorp initiated a $420-million takeover bid for an early-stage gold developer in Quebec, Canada-based Virginia Gold Mines Inc. (TSX/VIA) with a market-cap of CDN$470 million. Virginia Gold owns the highly promising Eleonore gold project in Northwestern Quebec. And while Goldcorp is the buyer here, don’t be surprised if it becomes the target of some of the bigger gold producers.
In another mid-range play, Toronto-based Iamgold Corp. (TSX/IMG), with a market-cap of CDN$1.31 billion, is looking to acquire Australia-based Gallery Gold Ltd. in a friendly stock deal valued at about CDN$230 million.
As gold attracts more interest, I expect many more consolidation plays on the horizon, especially with some of the smaller and mid- sized players as targets. Savvy investors can surely profit from this trend.