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.
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.