Chinese Seek To Buy Undervalued Gold Mining Company

China has been steadily adding to its gold reserves as it attempts to diversify its huge holdings of foreign currency.  From only 395 tonnes in 1988, the Chinese central bank has increased its gold reserves to 1,054 tonnes.  As the largest foreign holder of U.S. Treasury debt, the Chinese have complained loudly about America's addiction to debt and the nonstop efforts of the Federal Reserve to debase the U.S. dollar.

Besides buying ever increasing amounts of gold bullion, the Chinese have now decided to add gold mining companies to their shopping list.  Given the incredible disconnect between the market value of gold mining companies compared to the value of gold bullion, the decision to buy gold mining companies should come as no surprise.   Many gold mining stocks are selling at a substantial discount to their net asset values of proven gold reserves.

As reported by Bloomberg, China's second largest gold producer, Shandong Gold Group Co, Hunts for Brazilian Gold Acquisition.

Jaguar Mining Inc. (JAG), which is exploring its options after receiving acquisition proposals, is proving that even a record takeover premium for a gold company can be a bargain.

Shandong Gold Group Co., owner of China’s second-largest gold producer, offered to buy Jaguar for $785 million in cash, two people familiar with the deal said Nov. 16. The $9.30-a- share bid is 77 percent more than Jaguar’s prior 20-day average, the highest premium in a cash takeover of a gold miner greater than $500 million, according to data compiled by Bloomberg. Jaguar is still trading at a 3.5 percent discount to its net asset value, cheaper than 94 percent of comparable gold miners.

“Relative to their peers, Jaguar is trading at a pretty substantial discount,” Sachin Shah, a Jersey City, New Jersey- based special situations and merger arbitrage strategist at Tullett Prebon Plc, said in a telephone interview. “Even a $9.30 offer may be undervaluing the company. They could actually get a longer-term value asset at a cheap price. It’s the Brazilian assets that make Jaguar so appealing.”

After closing at $7.80 in New York on Nov. 16, Jaguar fell 3.5 percent yesterday to $7.53. The company is trading at 0.97 times its net asset value of $7.80 a share, based on the average of analysts’ estimates compiled by Bloomberg. That means it’s still cheaper than 16 of 17 other gold companies with similarly sized mines, the data show. Jaguar’s rivals are worth an average of 1.8 times the value of their underlying assets.

“The stock has lagged the group and generally underperformed, and as a result the company was ripe for the picking,” Mark Kellstrom, a senior partner at Summit, New Jersey-based Strategic Energy Research and Capital LLC, which focuses on energy and natural resources, said in a phone interview. “For a purchaser like Shandong, there’s a real opportunity here to buy gold reserves at cheaper valuations, improve the operating results and therefore reap a nice return.”

It was simply a matter of time before cheap gold mining companies became acquisition targets.  Gold mining companies have lagged far behind the gains of gold bullion and are selling at huge discounts to the value of their gold reserves.  A look at the comparative performance of the SPDR Gold Trust (GLD) to the PHLX Gold/Silver Index (XAU) shows that since 2008, gold has returned approximately 200% compared to a return of only 50% for the XAU.

The fundamental appeal of gold mining stocks is further bolstered by increasing demand for gold bullion.  The Gold Demand Trends released by the World Gold Council shows that global demand for gold increased by 6% in the third quarter.

Courtesy yahoo finance

Despite the recent volatility in gold prices, the long term fundamental case for gold remains intact and, in fact, grows stronger by the day as one sovereign nation after another stares into the abyss of debt default.  The move by the Chinese to acquire Jaguar Mining could be the spark that sets off a stampede to acquire undervalued gold mining companies.

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Australia’s Largest Gold Company Seeks to Expand West African Output

According to their recent statements, Newcrest Mining Ltd. is working to double gold production at their Bonikro mine on the Ivory Coast.

Newcrest is an Australian based company, whose operations extend to Papua New Guinea and Indonesia. Following a merger with Lihir Gold completed in August 2010, they became the world's fifth largest gold producer, in addition to being the largest producer within Australia.

It was through the company's takeover of Lihir Gold that they acquired their West African mine Bonriko. The mine produced 150,023 ounces of gold in 2009, but it will have to do better than that in the future to justify the company’s interests on the African continent.

Geoff Day, chief operating officer-offshore for the Melbourne-based company, told reporters that West Africa has a history of high level gold production. He believes that that history supports the company’s plans for the mine.

“Ideally, and this is not written in stone, if we’re going to have a presence in Africa, we’d be looking for something bigger. You’d have to think it would be in the order of 300,000-500,000 ounces. That would be something where you can say you can support a country presence.”

Newcrest Mining forecasts that their gold production will continue to increase. By 2014, they target a gold output of 3.75 million ounces, achieved through an annual increase of 8.2% from existing mines and projects.

Today their share price closed at A$40.24, down .44 for the day. Newcrest Mining Ltd (NCM:AU) has ranged from a 52 week low of A$29.73 to a 52-week high of A$43.71.

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