Another Deal in the Year of Consolidation - 2008

Since the middle of last year, I have always believed that 2008 would be the year of consolidation for the gold mining industry. The majors and mid-tier gold miners are loaded with cash from the sales of gold over the past couple of years. It is too risky and difficult to develop new properties and much easier to buy emerging producers with significant reserves.

Logically, consolidation should benefit emerging junior gold producers with large (1 million +) and growing reserves along with low cost production.

Well, yesterday Lihir launched a friendly merger/acquisition of Equigold in an attempt to further diversify beyond their Lihir Island gold mine in Papua New Guinea. Lihir has a low grade gold mine on an island. Get this, the bottom of their Lihir Island pit is 900’ below sea level. They have occasional issues with water seepage and other assorted problems.

Yesterday’s merger announcement of Equigold, combined with acquiring Ballarat Gold almost two years ago is a way of not only growing production and reserves, but also reducing their one mine risk. Lihir in Papua New Guinea represents more than 90% of their projected production in 2008. Management's goal is to be a 1 million ounce producer. Barring problems in execution, this deal does that. Lihir Gold was projected to produce 900,000 of gold in 2008 before this deal.

Equigold owns two mines; one in Queensland, Australia and one in the Ivory Coast of West Africa. Equigold produced 110,000 ounces of gold last year in Australia and was scheduled to begin production in West Africa this year, ramping up an additional 120,000 ounces of gold by 2009 with overall cash costs for both mines below $400 an ounce for Equigold.

Merger Presentation

Just like the New Gold/Metallica/Peak Gold deal, this one is intended to draw greater attention to Lihir Gold based as a diversified mid-tier producer.

This is just the beginning of the great year of junior gold miner merger and acquisitions in my opinion. I'm hopeful a couple of the plays in my portfolio can benefit from this trend.

Cheers!