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For big gold miners, it's buy first, answer questions later

There are going to be a lot more trust-me stories from big gold miners buying little ones.

The dearth of great deposits for sale and the competition for them in a hot gold market means large gold miners are going to have to move ever earlier to get their hands on the best new projects, bankers and industry executives say. That means buying before the drill results that prove the potential.

The result is transactions such as those done by Kinross Gold Corp. chief executive officer Tye Burt, who bought Red Back Mining in a deal that took some shareholders by surprise, and Goldcorp Inc.'s Chuck Jeannes, who moved fast last year to grab Andean Resources when it came up for sale.

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There are too many potential acquirers looking at too few targets to be patient. What's more, investors and analysts are paying such close attention to gold stocks in this rising-bullion market that good deposits get fully priced pretty early on.

So now we have a rush to the front of the line. It's a time of buy first, release the drilling results later. This demands a lot of behind-the-scenes due diligence, and often the big company ends up taking a toehold position in the small company to get a better view. For all that though, it involves a lot of faith from investors who don't get the same insight into the target.

That faith has been slow in coming, but the results out of Kinross and Goldcorp are starting to warrant it.

"There are naysayers at first," said Mr. Jeannes, who's spent a lot of time with investors explaining just why he moved fast to spend $3.6-billion on Andean when it was put in play last fall. "I'm starting to see light bulbs go off as investors say 'Now I get it.'"

Investors get it because now the numbers are rolling in to support what Mr. Jeannes has been saying. Goldcorp last week announced that the resource estimate at Andean's flagship Cerro Negro project in Argentina is now twice as big as previous indications suggested. Proven and probable gold reserves rose to 4.3 million ounces from 2.1 million, while silver reserves increased to 36.2 million ounces from 20.5 million ounces.

Analysts believe there may be more gold yet.

"In our view, reserve upside remains compelling considering that all of the deposits remain open for expansion with several other identified veins yet to be drill-tested," Canaccord Genuity analyst Steve Butler said last week as he raised his target price for Goldcorp stock.

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When it works, it works. But there are big risks in this game of buying early.

The obvious one is the gold isn't there. There hasn't been a real miss yet on a major acquisition, but there probably will be if things keep going this way.

Even if the gold is in the ground, the time between announcing a deal and the results that create the "light bulb" moment for shareholders can be perilous for the acquiring company. The buyer's stock can trade lower while investors get their head around the deal. There has been talk that Kinross, which has languished in the wake of the Red Back purchase, could be a takeover target just because its shares are cheap relative to the competition.

That gap may be set to close as analysts come back from a recent tour of the Red Back assets in Africa with glowing things to say. Deutsche Bank said the Tasiast project that Kinross got in the deal could be a "company-maker," while BMO Nesbitt Burns said that "Tasiast potential exceeds expectations" and Scotia Capital enthused that the Tasiast resource growth potential is "huge." If the results don't close the gap, a buyer might.

The other risk is the flipside: That the would-be acquirer doesn't move in time and misses out on a good asset. That's what happened to Mr. Jeannes with Osisko Mining Corp. Goldcorp had a toehold and would have loved to have grabbed Osisko, but never got a shot. Osisko did a good job of telling its story and the stock was a strong performer. There was never a gap between Goldcorp's multiple and Osisko's that would enable Goldcorp to make an accretive purchase.

Now, sporting a market cap of almost $5-billion, Osisko is as likely to be a buyer as a seller. In fact, about the only name one hears as a potential acquirer of the company is giant Barrick Gold Corp.

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In the end, Goldcorp sold its toehold position in Osisko at a nice profit. But owning Osisko and its nine-million-ounce Canadian Malartic gold deposit would have been even nicer.

There just aren't many such finds around, even though the industry has certainly been looking.

"We've been exploring like crazy," Mr. Jeannes said. "The easy stuff for the most part has already been found."

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