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Will mergers be the Midas touch for shareholders?

Silver Lake Resources (ASX: SLR) has today announced a friendly merger with Integra Mining Ltd (ASX: IGR). Integra’s shareholders will receive one new Silver Lake share for every 6.28 Integra share they hold, which values the company at around $426m, a 44% premium to Integra’s last closing price.

Integra’s managing director Chris Cairns said that the compelling logic of the combined group could not be ignored. He went on to say that investors are increasingly attracted to gold mining companies which enjoy the lower risk and economies of scale associated with multiple operations. Large miners can scale production up or down as required, attract large and more international investors and generally can lower the overhead costs. The combined Silver Lake market capital will be over $1 billion and one of Australia’s top five gold producers.

Corporate activity has been increasing in the gold industry recently, with St Barbara (ASX: SBM) seeking to merge with Allied Gold Mining Plc (ASX: ALD). That merger is expected to reduce cash operating costs, increase production and reliability, and improve the mill recovery rate – in other words, the amount of gold recovered per tonne of ore processed.

Getting back to Silver Lake and Integra, both companies have gold mining tenements adjoining one another at Mt Monger, near Kalgoorlie, so it makes some sense in that regard for the two to merge. The combined Mt Monger operations would contain 4 underground mines and 2 open pit mines, as well as 2 ore processing facilities, 3.4 million ounces of gold resources and a mine life of greater than 10 years.

Production from the combined company is expected to be between 200,000 and 250,000 ounces in 2013, increasing to 400,000 in 2014. That target could be pessimistic, as the company takes advantage of the combined tenements at Mt Monger, with Silver Lake ramping up its Murchison project for production early in 2013.

Silver Lake shares have fallen around 10% today, with investors likely giving the merger the thumbs down. My own view is that this deal makes sense, with Integra shareholders receiving a fair price and the combined company emerging with a number of potentially lucrative mining projects to go with the existing producing mines. The ‘new’ Silver Lake will also have no debt and cash of $107 million.

The Foolish bottom Line

We could expect more merger and acquisition activity in the gold mining sector, as companies seek further diversification and scale through new mines and quality new mining prospects. If the gold price crashed, many junior miners could disappear or be gobbled up by the larger miners on the cheap. Newcrest Mining Limited (ASX: NCM) could be one of those predators.

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Motley Fool writer/analyst Mike King owns shares in Silver Lake.  The Motley Fool ‘s purpose is to help the world invest, better.  Take Stock  is The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead.  Click here now  to request your free subscription, whilst it’s still available. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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