Small Australia gold miners eye mergers to woo funds

By Denny Thomas and James Regan

SYDNEY (Reuters) - Australia's smaller gold miners are showing an urge to merge in an effort to bulk up and court investment funds that are being drawn to the sector due to the soaring bullion prices.

At least two sub-A$500 million mining deals have been tabled in the past few weeks and investment bankers and analysts are counting on more to come. The bankers, who had direct knowledge of some potential deals, did not wish to be identified as the negotiations were confidential.

"There's movement afoot in the smaller end of town and a recognition that now is the time to act," said DJ Carmichael & Co mining analyst James Wilson.

U.S. dollar-denominated gold has capitalized on uncertainties caused by the financial crisis, rising as much as 24 percent since January. In Australian dollars, gold's ascent is even more impressive, leaping as much as 34 percent.

The jump in prices of the metal and strong growth prospects of the miners are inviting growing attention from investors.

A survey this month by accountants Deloitte showed a handful of minnow-sized miners are gaining momentum on the back of their prospects. It singled out Centamin Egypt (CNT.AX) whose capitalization ballooned A$608.7 million, or 56.7 percent, in May.

The problem, however, is the vast majority of the 25 gold miners in Australia are small and have a market value of less than A$1 billion, making it near impossible for most fund managers to invest in them because of liquidity concerns.

'CONSTRAINT'

Companies want investment funds as shareholders as they tend to be long-term investors and their involvement boosts the profile of the business.

"For large investors, there is a bit of a constraint in the Australian market," said Steve Robinson, a fund manager with Alleron Investment Management. "Size does become an issue."

Alleron manages about A$1 billion in Australian shares, including Lihir Gold Ltd (LGL.AX), the second-biggest listed gold miner in the nation.

For institutions in Australia without mandates to invest in global shares, Newcrest Mining Ltd (NCM.AX) and Lihir are the only routes to gain exposure to big gold stocks. Newcrest, the biggest listed gold firm, has a market value of about A$14 billion and Lihir A$7 billion.

Centamin and Sino Gold Mining Ltd (SGX.AX) -- each about one-tenth the size of Newcrest -- are distant thirds. The rest of the stocks are valued under A$1 billion, with an average capitalization of around A$200 million.

There used to be more choices, including Normandy Mining, Gold Fields and Delta Gold, but these were acquired earlier this decade by international companies with overseas stock listings.

Companies eager to fill that void want to gobble up smaller mines to create size. In April, Avoca Resources Ltd (AVO.AX) launched an unsolicited scrip bid for Dioro Exploration NL (DIO.AX) in hopes of immediately taking annual gold output to a quarter-million ounces from 180,000.