Real Wealth #003 12/22/2005
What Barrick Gold's $10.4 Billion Bet Means For You
Thursday, December 22, 2005
Late Wednesday night, Barrick Gold (ABX) reached an agreement to buy its rival, Placer Dome (PDG), for a price of $10.4 billion.
That's Billion...with a "B".
The size of a deal like this is tough to comprehend.
But it's not difficult to comprehend why Barrick would do something like this. (More on that in a moment.)
Once the deal is complete — and Placer Dome's board is recommending the deal "unanimously" — Barrick would immediately become the largest gold producer in the world, surpassing Newmont Mining and AngloGold Ashanti Ltd. and reaching an annual production level of 8.4 million ounces.
The deal struck Wednesday night was very different than the original "hostile" proposal made in late October.
The October offer called for Barrick to pay a price of $20.50 per share. And that price was laughed off as being "too cheap" by Placer Dome executives at the time.
And now — just two months later — Barrick has agreed to pay a price of $22.50 per share.
In other words, Barrick sweetened the pot by a total of $1.2 billion.
I think it's fair to say that an increase of 13% over the original offer — more than a billion dollar increase — qualifies as substantial, don't you?
So what does Barrick's deal to purchase Placer Dome for $10.4 billion really mean to us?
First of all — and this is rather obvious — it creates an enormous company. Barrick will now have an annual gold output of 8.4 million ounces.
Seriously...8.4 million ounces! Just think of what that gold could be worth if the price moves from $500 to $600 over the next 12 months...
We're talking about an "extra" $840 million. And that's only on a $100 increase in the price of gold — I actually think we're headed to a price well north of $600.
And that brings me to my final point: the other thing we can learn from this news is that the price of gold isn't going down anytime soon.
Do you think this is the type of deal that a company like Barrick would make in anticipation of a coming bear market?
Of course not.
You don't increase your bid by $1.2 billion in less than eight weeks because you think the price of gold is going down.
The gold market responded to the news on Thursday by closing up nearly $10 an ounce at $505. Again, that's not an insignificant development.
Neither Barrick Gold nor Placer Dome is a part of our Gold and Energy Advisor portfolio at the moment. So there is no specific recommendation as to how you should immediately act on this news.
Instead, the announcement of the Barrick-Placer deal -- Barrick's $10.4 billion "bet" on the price of gold -- serves as further confirmation that we're still very much in the early stages of a long-term bull market for gold.
I mentioned in the December issue of Gold and Energy Advisor that some specific gold stock recommendations would be coming within the next two months. And the prospects for those recommendations just got better. A lot better.
Of course, good news for the price of gold — like the Barrick-Placer deal — is also good news for those investors who have invested in rare, high-quality U.S. gold coins.
The next 12 to 18 months should provide some extraordinary opportunities for you to make significant profits by investing in rare coins and in carefully selected resource stocks.
That's why it's more important than ever that you position yourself properly to take advantage of this roaring bull market. I'll have more details for you on just how to do this in the days and weeks ahead.
Please see risk disclosure link below.