Mar 17, 2007

Blanchard & Co: Mine consolidation means less gold supply

By Neal R. Ryan
Vice President and Director of Economic Research
Blanchard and Co. Inc., New Orleans

Friday, March 16, 2007

News is circulating around the market today of a potential bid by Barrick for Newmont. This story gets trotted out every so often as analysts start trying to jump out in front of the next big deal.

While such a deal would make a lot of sense, since the two companies joinlty own a number of properties or have royalty interest in each other's mines, the gold market itself will be the biggest beneficiary of any huge merger like this.

For the one thing that has been confirmed since the major gold mining company mergers began in 2000 is that the result will be lower production.

Case in point: The top three gold producers are all projecting less production in 2007 than in 2006, just a few years after each was involved in major acquisitions. Major companies pursue the world-class deposits that will add significantly to their bottom lines, not the marginal projects that have a smaller return on investment. Consolidation equals less production.

For example:

-- In 2000 Homestake, Barrick, and Placer Dome prroduced 8.95 million ounces of gold altogether. With Homestake and Placer Dome combined in Barrick in 2006, Barrick produced 8.5 million ounces and expects to produce 8.2 million ounces in 2007.

-- In 2000 AngloGold and Ashanti produced a combined 8.98 million ounces of gold. Combined in 2006, AngloGold Ashanti produced 5.6 million ounces and expects 2007 production to be 5.5 million ounces.

-- In 2001 Newmont and Normandy produced a combined 7.85 million ounces. Combined in 2006, Newmont produced 5.9 million ounces and expects 2007 production to be lower.

So we welcome more industry consolidation.

Also, we remark quite a bit about China's liberalizing its gold business. The country is continuing to ease trading restrictions and taxes on purchases in the country. The system isn't fully effective yet but it's getting there. It's our feeling that investment demand from China for precious metals is just beginning. We will see massive drawdowns of gold supply via Chinese demand over the coming few years. Because of this increased investment demand and contracting supply, precious metals are entering a two-to-three-year sweet spot where, we believe, price appreciation will surprise even the most bullish analysts.

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