Majors ready to buy out juniors?

After the quick overview of different players in the mining industry, let's discuss more about operations and what makes the majors so different from the juniors.

Typically the majors have large operations spanning different continents. Kinross's market cap is at roughly $12+ billion. http://finance.yahoo.com/q?s=Kgc

As an example, let's take a look at Kinross's holdings and operations:
http://www.kinross.com/operations/exploration.html

As you can see on their site's left tab, it spans from US, Brazil, to Chile, and even Russia. The reason for this is diversification of risk (think local political, labor, even weather conditions). As well, some countries may be lower cost and can bring up the margin for the company as a whole.

Referring to their budget allocation above, over 1/4 is dedicateed to the continual exploration for more deposits and reserves.

If you think about it, this makes sense... no company can sit on their 40,000,000 ounces of mineral and simply produce year after year without worrying about depletion. Occasionally, surprise resource estimation may go down and worry investors even more as the attrition rate for mines grow faster.

As such... this brings us to our junior exploration companies, many which do not have a positive cashflow and are entirely sustained by joint venture payments (from majors) and shareholder capital! In my previous entries I talked about how junior companies bear majority of the risk in exploration and many could literally end up with a stake claim and a piece of land without significant mineralization.

If a large corporation did this and announced results of failed exploration - shareholders will show their sentiments by selling stocks in the market. On the other hand, junior companies are under-covered by analysts, and so estimates and expectations are much different. The culture now is such majors wait for juniors to make a reasonable discovery, and pursue a buyout strategy which makes them look great to shareholders.

Imagine buying 100,000 ounces of gold (valued today at about $900/ounce - thus valued at $900,000,000) for a mere $500 million cash today... wouldn't that be a great business acquisition to disclose to your shareholders?

Related to this idea, a recent article from Reuters quoted CEO of Goldcorp - CEO Kevin McArthur told Reuters last week the company did not want to buy anything that was already operating, and would instead focus on early-stage properties.

http://in.reuters.com/article/innovationNews/idINN3034216520080530

More related news from the same front from Jim Sinclair's website:

Cash-rich gold miners set their M&A sights lower Fri May 30, 2008 1:33pm EDT By Cameron French - Analysis TORONTO (Reuters) - Despite strong cash positions, big gold miners are avoiding mid-sized to large acquisitions in favor of development-stage properties that can expand their reserve bases and lower their per-ounce costs. And with tight credit markets making it difficult for small players to use debt to develop new mines, deep-pocketed majors are expecting to find willing sellers. While the thinking among gold companies up until a year ago was "bigger is better" -- evidenced by Barrick Gold's (ABX.TO: Quote, Profile, Research) 2006 $10-billion takeover of Placer Dome and Goldcorp's (G.TO: Quote, Profile, Research) $7.5-billion acquisition of Glamis Gold -- the new focus is on controlling costs and replacing depleted reserves. "I think everybody has said that there will not be the Goldcorp-Glamis type of big deals, that if there are any deals they will likely be fill-in deals, property deals," said John Ing, president of Maison Placements in Toronto. "Cost are increasing, and what's more important is that there's a lack of discoveries." With few large gold strikes over the past few years and production by big players on the rise, companies are struggling to find ways to replace the millions of ounces per year they excavate. "We're running out of major gold deposits, and the deposits we do have become increasingly difficult to come on stream," Peter Munk, interim CEO of top producer Barrick Gold, said at the company's annual general meeting earlier this month. With a lack of new discoveries, top miners have tried to extend current mines by mining lower-grade ore, a practice that raises costs. Digging into a new deposit with higher grades typically lowers average cost per ounce. SHIFT IN THINKING Barrick's recent transactions underline its shift in thinking. In the first quarter, it paid $1.7 billion for Rio Tinto's (RIO.L: Quote, Profile, Research) 40 percent interest in the million-ounce-a-year Cortez property in Nevada and bought Arizona Star Resource Corp for C$773 million, giving it a majority stake in the massive Cerro Casale project in Chile. Munk said such deals would continue to be on Barrick's radar, while other top players have said much the same. Kinross Gold (K.TO: Quote, Profile, Research) CEO Tye Burt said on a conference call earlier this month the company expected to benefit from problems junior players were facing in tight debt markets. Goldcorp (G.TO: Quote, Profile, Research) CEO Kevin McArthur told Reuters last week the company did not want to buy anything that was already operating, and would instead focus on early-stage properties. "The juniors discover gold a lot better than the seniors do, they do a very good job," McArthur said. The companies can certainly afford it. At the end of the first quarter, Barrick was sitting on a cash balance of $1.9 billion, while Goldcorp has $1.3 billion and no debt. Global No. 2 producer Newmont Mining (NEM.N: Quote, Profile, Research) has about $1 billion. And while costs have continued to rise, gold has shown no signs of a prolonged retreat. Spot metal prices were just under $900 an ounce on Friday. "They're spending a lot of money (on exploration) but the resources are limited and there's some good resources on the exploration side of the sector," said Peter Spina of Goldseek.com. "The (explorers') valuations are very cheap, so maybe these large companies sense that and are waiting for them to get in a more desperate position before making a move." More...