Is this the modern day version of the California gold rush or is gold in the process of forming a bubble?
Erik Sprott from Sprott Asset Management is thinking steam ships and gold pans. In an article entitled, “Debunking the Gold Bubble Myth“, Sprott argues that there has been, and will continue to be, a widely held misconception that a bubble is forming. He argues that gold buyers are not merely speculators buying on emotion with no rationale other than to sell to the ‘greater fool’ at higher prices in the future. This logic, according to Sprott, is flawed because it assumes that gold has no intrinsic value and is simply a speculative asset that has captured investors’ imaginations. Coupled with the fact that gold is actually a surprisingly under-owned asset class leads Sprott to believe that the bull market in gold is far from over.
Ross Norman, CEO of Sharps Pixley, a London-based bullion broker that sells retail physical precious metal coins and bars to UK clients doesn’t see a bubble forming. In a recent interview with Bloomberg, Norman stated, “I don’t think it’s in bubble territory. I do think underneath and underpinning this market are some very strong fundamentals that have taken us here.” Mr. Norman cites fantastic demand growth through the ETFs, the fact that international central bankers have turned from sellers to buyers and flat mine supply as reasons for gold to continue its upward price movement.
1. AuRico Gold Inc. (TSX:AUQ)
AuRico Gold, formerly Gammon Gold, had a reputation for underperformance. Last year the company overhauled much of its board and elected to freshen things up by undertaking a name change. The paperwork was completed this summer and AuRico’s Ocampo mine in Mexico was demonstrating improved results with a 19% increase in gold equivalent production and cash cost of $340 per realized gold equivalent ounce. A supportive board and strong results gave AuRico’s chief executive officer Rene Marion the green light to build the company through acquisitions.
On August 29th, AuRico announced the $1.46-billion take over of Northgate Minerals (TSX:NGX). But apparently investors in AuRico Gold did not like the sound of the deal. On the day of the announcement AuRico shares were down more than 20% and since then millions of shares have exchanged hands. What on the surface appears to be a strategic merger of equals, with the acquisition of Northgate AuRico will increase its gold reserves by more than 80 per cent, some industry analysts seemingly don’t like the deal. Desjardins Securities analyst Brian Christie downgraded his rating to “hold” from “buy” but maintained a $15 price target. His concern is that the merger will dilute the net asset value of the company.
There is a flip side to every story and, despite the sell-off, some analysts are optimistic about the merger. CIBC World Markets analyst Brian Quest upgraded AuRico to “sector outperformer” and, like his counterpart Brian Christie, maintained a price target of $15 per share. Mr. Quest stated in a research note, “…a gold producer operating in Australia, Canada, and Mexico, producing nearly 500,000 ounces of gold in 2012, should garner support in the years to come.”
Perhaps the sell-off in AuRico after the announcement was more a function of the run-up prior to the announcement. Two months ago, shares in the company could be had for as little as $9. But on the day before the announcement, AuRico shares closed at $13.72, just 8.5% shy of both analysts price targets. At press time, the company’s shares are trading at just over $12.00.
Next, we look at the company that lost an epic takeover battle to AuRico Gold, Vancouver-based Timmins Gold.
2. Timmins Gold Corp. (TSX:TMM)
Last September, Timmins Gold made a non-binding proposal to the directors of Capital Gold (TSX:CGC) to merge on a negotiated basis. The proposed value of the transaction was $4.50 per share; shares of Capital Gold were, at the time, trading at $3.89. But from the get-go, Capital Gold’s board was not receptive the proposal. Enter another company featured on our 10 Most Interesting Gold Stocks list, AuRico Gold, and you the stage was set for a contentious 7 month long take-over battle. The final price tag, AuRico’s winning bid was for $6.34 per share. $1.77 more than what was original agreed upon when Capital and AuRico signed their merger agreement.
Since losing the fight for Capital Gold, Timmins has been quiet on the M&A front but has been making noise elsewhere. The company has been continuously drilling and extending the mineralization at its flagship San Francisco gold mine located in Sonora, Mexico. And on August 11th, 2011, the company reported that it sold 17,965 gold ounces during the quarter. This represents a 59-per-cent increase in gold sales over the first quarter of the previous fiscal year. In addition to the San Franciso mine, Timmins also has a collection of interesting gold assets across Mexico. Most notably a 40,000 hectare land package in the Peňasquito area of Mexico that is contiguous to Goldcorp’s 13 million ounce Peňasquito Gold Deposit.
We caught up with Bruce Bragagnolo, President & CEO of Timmins Gold, to discuss some of the company’s past challenges and learn what’s in store for this emerging junior gold producer – CLICK HERE – for the interview.
For 10 Most Interesting Gold Stock – Part 2 – CLICK HERE.