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Tickers in this Article: AAUK, GG, NEM
Gold. You can't eat it. You can't drive it or fly it. You can't wear it or live in it, but regardless, we still covet it.

And for centuries we have coveted it. Actual consumption of gold for jewelry and pricey electronic contacts is quite low. In the end gold is a currency, a store of value. There has been a flurry of mergers and acquisitions in the gold mining business, so we're going to take a look at three that are left standing.

Is Bigger Really Better?
Newmont Mining (NYSE:NEM), with a market capitalization of $18.5 billion and sales of $5.1 billion, is the only gold miner in the S&P 500. Similar to others in the gold mining business, NEM uses its stock for currency to buy up other gold miners. The good news is that Newmont now has significant economies of scale. The flip-side is that the company is also so big it would take a major event to be meaningful. (For greater insight, check out What Are Economies Of Scale?)

Newmont is determined to grow by acquisitions. The company even has its own internal merchant banking operation. The company also does not hedge its production, which can work to either hurt or help it. The major risk is Newmont's international business and subsequent geopolitical risk.

Because of Newmont's acquisition feast over the past several years, its financial statements are very complicated. For example, NEM's revenue has an average growth rate over the past three years of 15%, and last year it came in at 13.2%. At the same time, its growth rate in earnings averaged over thee years is 14.8%, but last year surged by 124.1%. Finally, NEM's gross margin is 43.5%, but its net margin is -30.7% and return on equity is a -21.5%

Merger Magnet
Like Newmont, Goldcorp (NYSE:GG) has also been on a merger and acquisition spree, both friendly and hostile. And it also prefers to eschew the futures and forward markets to hedge its production. Goldcorp's acquisition of Wheaton River Minerals in 2005 has brought its market capitalization to about $16.5 billion and sales to just over $1.7 billion. This deal has also given the firm some exposure to copper and other minerals. Since the acquisition of Wheaton and the management changes that came with it, GG has been binging on M&A activity.

Goldcorp carries more than a casual amount of geopolitical, currency and regulatory risk in addition to its non-hedged position in the commodities the company mines in the first place. The firm has made four acquisitions since 2005 and has shown no propensity to slow this pace.

The volume of acquisitions has made GG's financial numbers somewhat confusing as well. While the company's growth rate in revenue has averaged 59.5% over five years, 86.7% over three and 90.8% last year, the firm's growth rate in earnings has gone the other way. From averaging 24.2% over the prior five years, it averaged 20.6% over the last three and 12.1% lat year. At least GG's gross margin of 64.3% produces a net margin of 23.9% and a 5.3% return on equity.

World Class Operation
Headquartered in London, Anglo American (Nasdaq:AAUK) is truly a global organization and gives new meaning and a shining example of the value of diversification. The company is involved in precious metals, to be sure, but also ferrous metals, iron ore, coal, diamonds. It is even involved in paper and packaging. The company's fundamental strategy is to use high prices in one commodity to buy assets of others at rock-bottom prices. (To learn more, see Evaluating A Company's Capital Structure.)

The company faces several serious obstacles going forward. The weak U.S. dollar is a problem as well as geopolitical risk and the volatility of the commodities it produces. Still, with all that to contend with, the company has made $9 billion in divestitures and $15 billion in acquisitions during the past five years.

Anglo American's results are far more stable than our first two examples. For the last year, revenue grew at just over 18% while earnings saw a growth rate of 20.4% and net margin of 13.4% and a return on equity of 15%.


Diversification is a Good Thing

The bottom line for or investors always comes down to share appreciation.

• Newmont Mining trades at a price-earnings multiple (P/E) of 128-times and the stock has returned zero the past three years.
• Goldcorp has fared somewhat better, trading at a P/E of 71-times and appreciating about 100% over the last three years.
• Anglo American trades at a rather sedate P/E multiple of 14-times and has returned 140% over the past three years.

With that in mind, maybe it pays to buy your precious metals on the cheap?

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