Gold prices edged over $1000 an ounce on Tuesday pushing shares of many mining companies up. Shares of Toronto-based Kinross Gold (KGC) surged at the market open rising more than 6% in initial trading on reports that gold had topped $1,003 an ounce and silver rose to $16.54 an ounce. But as the morning went on, Kinross’ shares retreated as the price of metals fell back.
Dahlman Rose analyst Adam Graf says equity investors expect very close correlation between precious metals prices and mining stocks. "As miners, you'd think they have a lot of leverage to a rising gold price, and $1000 is a sort of psychological barrier to an extent," he says. "But that's assuming all costs are flat, and costs have moved in lockstep over the past five years."
The cost for a miner to produce an ounce of gold was $180 when gold was about $300 an ounce. The production cost has risen to more than $400 an ounce partly because higher gold prices make it more profitable – but also more expensive – to process gold from lower-grade ore.
The bright side is that oil prices have dropped from last year's peak cutting miners' costs. "Operating costs have gone down while gold prices have actually risen, so they should see significant margin expansion," Graf says.
Also, Kinross' silver operations should provide an added boost, but that' going to show up later, not on the day-to-day fluctuations of the metals themselves, he says.
Bottom Line: Hold
Investing in mining stocks is more complicated but less volatile than playing precious metals in the commodities market. Be cautious and look at the cost variables closely.
Investors were soured on Kraft Foods' (KFT) unsolicited $16.7 billion bid for U.K. candymaker Cadbury (CBY) and sent shares of the food conglomerate down almost 5% on Tuesday.
Kraft offered a 31% premium to Cadbury's closing stock price on Monday in a deal that would require about $8 billion worth of debt to complete. It's the first merger bid by a Dow Jones Industrial Average component this year and is seen as an indication that capital markets are improving.
"The combination would build on Kraft Foods' position as a global powerhouse in snacks, confectionery and quick meals with a rich portfolio of iconic brands," Kraft CEO Irene Rosenfeld said in a prepared statement. "We are eager to build upon Cadbury's iconic brands and strong British heritage through increased investment and innovation."
She emphasized a "friendly" spirit to the negotiations but also said Cadbuy's ability to grow as a standalone company was limited.
A statement from the English company begged to differ: "The board is confident in Cadbury's standalone strategy and growth prospects as a result of its strong brands, unique category and geographic scope and the continued successful delivery of its vision into action plan. The board believes that the proposal fundamentally undervalues the group and its prospects."
Market observers have also suggested that a joint bid from Nestle and Hershey (HSY) is also considered a possibility for Cadbury.
The back-and-forth statements are only the first steps in the merger dance, said Kenneth Zaslow, an analyst at BMO Capital markets.
"We would not be surprised if this were just the beginning of the negotiations between KFT and CBY as well as the potential emergence of other suitors," Zaslow wrote on Tuesday. "CBY makes strategic sense reflecting costs synergies (at least $625 million) and potential revenue opportunities (i.e., developing markets, new channels)."
But a deal that makes sense isn't necessarily a deal that succeeds, he added.
"While KFT has begun to turn around its business, the timing of a large scale acquisition appears early; and KFT needs to overcome history, as there has been a limited number of large-scale packaged food acquisitions that have been successful within a reasonable timeframe."
Bottom Line: Hold
Investors will need to chew on this possibility for a while and not react solely to the market's first taste of deal talk.