Cash-rich gold miners set their M&A sights lower

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.