Record clip of metals mergers: chasing fool's gold?

Forget prospecting. By the time the next rich vein of gold is found, the blistering rally in prices might be over. The much quicker road to today's Klondike is to leverage assets and jump someone else's claim.

Evidence of this fast-forward approach to mining is piling up in the number of mergers seen so far this year. Mining companies worldwide have announced 737 deals so far this year, closing in on the record high of 763 unveiled in 2005, according to Dealogic, a merger-tracking research firm. Already, their combined price tags have surpassed last year's by $34 billion.

"The pace is continuing to be quite robust, and there are a number of active deals in the pipeline," said Gordon Bell, managing director and head of the global mining and metals group at RBC Capital Markets. Joining oil and natural gas, metals is the latest commodity sector to undergo a massive consolidation in the wake of steep price increases.

The incentive is simple. Mining companies need reserves, and it's faster to buy them than do the prospecting. And with stock prices for many buyers at all-time highs, they can offer hefty premiums to their targets' share prices. In the last few months, major gold companies including Goldcorp Inc. Barrick Gold Corp. and NovaGold Resources Inc. have all launched deals to buy other gold miners.

Not even a recent sell-off in gold and other metals prices, which has hurt shares in mining companies, has dulled executives' appetite for the next takeover target. Gold futures have dropped by about $120 an ounce since hitting a mid-May high of $717, with over $40 of that lost in the last week. Silver has fallen $3.70 an ounce, or 25%, to $11.20. And copper futures have dropped about 13%. Those declines have dragged down publicly traded mining companies.

The Amex Gold Miners Index has dropped 13% in the last week and over 4% in the past month. Still, the broader Dow Jones U.S. General Mining Index boasts a 17% advance in just the past three months.The recent sell-off underscores how volatile the fortunes of any company involved in the commodity sector can be. Indeed, not all deals get the gold seal from investors.

M&A gold rush

Consider Goldcorp's Aug. 31 offer for Glamis Gold Ltd. of Reno, Nev. Goldcorp offered a 33% premium for Glamis' stock, motivated in large part by a mine that isn't even producing gold yet. Vancouver-based Goldcorp has set its sights on Glamis' developing Penasquito mine in Zacatecas, Mexico. The site should produce 400,000 ounces of gold a year once it starts up in 2009, which would raise the company's annual production to about 3.5 million ounces from about 1.8 million ounces today. "That's the main asset that Glamis has and the reason we're so excited," said Goldcorp Chief Executive Ian Telfer of Penasquito.

With Telfer expecting already lofty gold prices to rise another $200 an ounce in the next two years, those additional gold deposits will come in handy.