We Could See a Gold Rush Emerge

Excitement in the oil patch has tailed off, but, as Michael Lombardi discussed above, we could see a gold rush emerge in the mining sector. The cash price of gold traded as low as $420 in July, but recently touched $480 an ounce in mid-October.

 Investors may be presently quiet on the trade front, but there may soon be some heated action amongst the major gold producers. Barrick Gold Corporation (NYSE/ABX) — the world’s third largest gold producer — announced on Monday that it has launched an unsolicited bid for fellow Canadian gold producer Placer Dome Inc. (NYSE/PDG).

 Meg Jackson discusses some of the details below, but let me tell you that, if accepted, the merger would vault Barrick into top spot in the world ahead of Denver-based Newmont Mining Corp. (NYSE/NEM) — the current market leader.

 Of course, I’m assuming that there will be no competitive bids from either Newmont or AngloGold. Both stocks traded down on the news, but watch for pressure for the two companies to respond with potential takeovers of their own.

 So what gives? The reality is that Barrick wants the deal — and why wouldn’t it? It would allow it to increase its gold reserves and production capacity significantly, while, at the same time, help to reduce operating costs. Barrick pegs the annual cost savings of a merger at around $240 million.

 There are some that believe gold prices are set to crack $500 an ounce and break to $600. A strong break at $480 could see gold take a serious run at $500. If and when this happens, the world’s largest producer will be in a great position, and Barrick knows this.

 The current climate of high mining costs could drive a rush of mergers — we could see many smaller gold producers with good reserves being swallowed up by the major players. We could also see a speculative rise in the prices of smaller and mid-size gold producers such as Goldcorp. Inc. (NYSE/GG), Kinross Gold Corp. (NYSE/KGC), and Yamana Gold Inc. (AMEX/AUY) to name but a few. The gold bugs are definitely euphoric these days, but watch for others to jump on the bandwagon.