Gold Stocks.... April 26 2011

Gold Stocks, GDX Fall, Barrick Target Lowered

Tuesday, April 26, 2011, 10:42am EST. Written by GoldAlert Staff.

GOLD STOCKS NEWS – Gold stocks dropped Tuesday morning as the Market Vectors Gold Miners ETF (GDX) fell $1.09 to $60.15 per share.  The weakness in gold stocks and the GDX came as gold bullion declined $5.21 to $1,501.79 per ounce.  The S&P/TSX Global Gold Index, a basket of gold stocks traded in Canada, retreated 1.1% alongside the GDX.

Gold stocks in the news included Barrick Gold (ABX), the world’s top gold producer and largest component of the GDX.  Yesterday, Barrick announced a C$7.3 billion takeover bid for Equinox Minerals (EQN.TSX), whose primary assets consist of the Lumwana copper mine in Zambia and the Jabal Sayid copper project in Saudi Arabia.  Barrick’s offer trumped a previous bid from China’s Minmetals Resources, who this morning withdrew its proposal for Equinox.  Shares of ABX tumbled 6.8% yesterday, and added to their slide on Tuesday with a 2.5% drop to $50.56.

Aaron Regent, President and CEO of Barrick Gold stated that “The acquisition of Equinox would add a high-quality, long-life asset to our portfolio and is consistent with our strategy of increasing gold and copper reserves through exploration and acquisitions. The transaction is expected to be immediately accretive to cash flow and earnings on a per share basis.”

Barrick Gold’s bid for Equinox is the latest in a growing series of merger and acquisition activity in the gold stocks sector.  Several large-cap gold stocks have sought to provide investors with increased leverage to the gold price by purchasing their small- and mid-cap peers.  Another noteworthy transaction in the gold stock sector also involved Equinox Minerals, which had been attempting to acquire Lundin Mining (LUN.TSX), but withdrew its offer upon its agreement with Barrick.

Following Barrick’s announcement, Macquarie Research lowered its price target on the largest company in the gold stocks sector from $80 to $73 but maintained its “Outperform” rating.  In its report, the firm wrote that “Our target is predicated on a 1.05x (from 1.15x) multiple to our C$65.52 operating NAV plus other net assets of C$4.37. The lower multiple reflects the potential for increased base metal content, higher political risk, and heightened concerns on ABX’s strategic direction. Barrick now appears to be more focused on the business of making profit rather than on the business of making gold, despite the two no longer being mutually exclusive.”

Macquarie went on to say that it believes shareholders of Barrick Gold “may have been better served with an aggressive dividend policy to differentiate the more mature producer from gold ETFs. With ABX trading at a 25% discount to NAV prior to the acquisition, we also believe a share buyback would have been preferential.”  Although Barrick “may still target these value enhancing opportunities, we believe the magnitude of any near-term dividend hike or buyback would be negatively impacted by a successful bid for EQN. While ABX is no longer a top pick, we maintain our Outperform recommendation.”

Other notable decliners in the gold stocks sector on Tuesday included GDX components AngloGold Ashanti (AU), Goldcorp (GG), and Newmont Mining (NEM).  In morning trading, AU, GG, and NEM fell 0.6%, 2.1%, and 1.0%, respectively.

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