The solution? Buy out junior miners sitting on resources big enough to arrest the majors’ decline. There aren’t that many such juniors, which points to a bidding war as the best are snapped up and the rest rise in sympathy.
Here’s an example that was announced a few hours ago:
Hecla Mining Company (NYSE:HL) and Klondex Mines (NYSE:KLDX; TSX:KDX) today announced Hecla will acquire all the outstanding shares of Klondex, a high-grade Nevada underground gold producer with its Fire Creek, Midas and Hollister mines, through a plan of arrangement. Klondex’s Canadian assets will be spun out to its existing shareholders.
Under the Transaction, Hecla will acquire Klondex for consideration of US$462 million with a mix of cash and shares of Hecla common stock and the newly formed company (Klondex Canada). Klondex’s shareholders will receive US$2.47 per share in cash or shares of Hecla, which represents a 59% premium to Klondex’s 30-day volume-weighted average price, as at March 16, 2018, on the NYSE American.
To understand why more such deals are in the pipeline, here’s an analysis of gold’s reserve decline issue (or crisis as the writer puts it) from Canadian metals dealer Sprott Money:
For readers unfamiliar with mining fundamentals, in order for gold mining companies to be able to maintain steady, efficient production, they require (at least) several years of reserves of ore to process. These years of reserves are referred to as the “mine life” of that particular mining operation. Obviously mines (and companies) with more years of mine life in their reserves will be healthier than those with less years of reserves.
Between 2012 and 2013 alone, gold mine reserves across the industry plunged by almost 15% — a huge decline. Flash ahead three years, however, and mine reserves have continued their decline, uninterrupted. Last year was the fifth consecutive year of industry-wide declines in reserves. The cumulative effect of these years of declines? A report from AGF Investments on this subject calculates that current reserves reflect a 30-year low for the gold mining industry.
The calculus is pretty simple. Inadequate production leads to both higher precious metals prices and rising demand for exploitable reserves. So the juniors win twice, as the value of what they’re discovering and the desperation of the majors to buy them out both surge.
The problem with this dynamic is that it offers quick gains for the owners of high-quality junior miner shares at the cost of the spectacular profits that flow to a junior that’s allowed to grow into a mid-tier or major. In other words, that instant 50% capital gain pales next to the 1000% run that might be possible in the absence of a buy-out. But hey, in today’s world we should probably take our 50% profits where we can find them.
The VanEck Vectors Junior Gold Miners ETF (GDXJ) was unchanged in premarket trading Tuesday. Year-to-date, GDXJ has declined -7.03%, versus a 1.36% rise in the benchmark S&P 500 index during the same period.
This article is brought to you courtesy of DollarCollapse.com.