Seniors Eyeing Shining Gold Juniors

 @ibtimes on February 18 2010 12:57 PM

By Kishori Krishnan Exclusive To Gold Investing NewsThe

There are two ways to play the gold game. Either keep a watchful eye on the biggies and check out their every move, or latch on to some tried and tested junior gold miners, many of who are set to have their day in the sun.

Back in the early stages of the gold bull market, junior mining stocks were all the rage. During 2002-2006, many junior miners were putting in annual gains of 200 per cent to 300 per cent. Remember the case of junior miner Seabridge Gold (SA), which produced 3-year returns in excess of 1500 per cent?

Of course, with credit markets contracting late 2008, some junior miners looked like they were going out of business. Several investors were caught off-guard by the suddeness and the severity of the decline in the junior mining sector.

Many swore never to go back again. But hold on here - by the end of last year, gold miners played catch up.

And 2009 turned out to be a great year for emerging junior plays and stocks in the Gold Stock Strategist Emerging Junior Gold Producers (GSSX) Index. The GSSX Index outperformed the GLD by powering ahead 123 per cent, beating the XAU gain of 36 per cent, the HUI gain of 30 per cent, and the TSX Venture Exchange of 92 per cent.

Just to put things in perspective - the XAU is a capitalization weighted index with 16 large cap precious metals mining companies traded on the Philadelphia exchange.

The HUI-AMEX Gold Bugs is a modified equal dollar weighted index consisting of 15 major gold mining companies.

And the TSX Venture Exchange index represents around 2,300 companies.

The fact of the matter is juniors are poised for a historic bull run. There are high quality juniors who are set to come out as winners.

Check out this link to understand the junior sector better. It has been updated at the end of December 2009.

But first, let us understand what the seniors are upto.

Senior play

Canada’s third-largest gold producer, Kinross Gold Corp has reported an increase in production by 22 per cent. Revenue was up by 49 per cent.

The company which has earned 21 cents a share in the fourth quarter has cut a deal to sell 25 per cent of the Cerro Casale deposit to Barrick Gold Corp for upwards of $475 million, including $455 million in cash and the assumption of a $20 million US obligation.

As a result of the transaction, Barrick’s share of Cerro Casale has risen to 75 per cent.

Kinross has also reversed a year-earlier net loss of US$ 468 million.

On its part, the world’s largest producer of the metal, Barrick Gold Corp gained 2.2 per cent on the stock exchange early Thursday, after announcing it would spin off its African operations.

Kinross Gold advanced 2.7 per cent after its fourth-quarter profit surpassed the average analyst estimate by 36 per cent.

Barrick, Kinross and Agnico-Eagle Mines each reported fourth-quarter earnings that topped the average analyst estimate by at least 6.6 per cent, a Reuters report said.

Barrick also said it would spin off its operations in Tanzania into a new company.

And despite opposition, the firm has also decided to go ahead with its Pakistan copper, gold mine, even as Chile has given the thumbs up to Barrick to up gold mining.

Shrugging off another legal dispute is New Gold Inc, which has not been dissuaded from carving out 70 per cent of El Morro despite stiff opposition.

On Tuesday, the Vancouver-based miner said it had closed a transaction to buy 70 per cent of the copper-gold deposit in Chile, from Xstrata PLC for US$ 463-million.

It then transferred that stake to Goldcorp Inc, which plans to team up with New Gold to develop the project. New Gold still owns 30 per cent of it.

Not limited

Clearly, there is a lot of action here, but it not just limited to a play between seniors. Many of them are eyeing juniors with proven resources in their bid to grow.

Typically, juniors ripe for the picking own a chunk of land with a proven resource of gold or silver that has been explored and drilled, but lack the cash flow and expertise to build and operate a mine.

Often, the ideal time for juniors to cash out is once a discovery is made. After all, they’ve done what they do best: explore. Then the seniors and intermediates dig in and develop and operate the mine.

According to Mining Deals 2007 Annual Review, in a report released by PricewaterhouseCoopers, a record 1,700 deals worth almost US$ 160 billion were conducted worldwide.

With the downturn on its last legs, the strong level of activity is expected to continue this year. David Christie, director of gold and precious metals at Scotia Capital, has reportedly said that few mergers between seniors would take place. He believes that the fight will be for the best juniors.

And if the trend continues or accelerates as investors warm back up to juniors, we could see yet another golden time for junior mining companies.

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