Great goldmine rush to merge

THE BEST part about running a gold mining company, their chiefs have long said, is that you do not have to employ pumped-up marketing executives. Unlike every other commodity, there was no need for sales contracts, no requirement to build a rapport with customers and, best of all, no prospect of making more than you could sell.

Gold industry chiefs, knowing there was a guaranteed market for their product, would struggle to hide their smugness as they heard their counterparts in coal companies recounting torrid tales of humiliating negotiations with Japanese steel mills.

They knew life was no better for copper producers, who were forced to ride the rollercoaster of the electronics industry on which their businesses depended so heavily, or for those in the mineral sands business, whose daily task was to convince paint makers they could put more shine in their gloss.

The ready-made market and fat profit margins spawned almost endless jokes about how their industry was the best fun you could have with your clothes on. And then the music stopped. The price of the not-so-precious metal has tumbled from $370 an ounce in 1997 to $273, wiping out scores of mines and leaving many more highly marginal.

The huge increase in global production that flowed from the technology boom of the 1980s was capped by a sudden realisation that gold had been replaced by the US dollar as the ultimate hedge against economic uncertainty.

Any hope that gold's glory days would return was scotched by its failure to achieve even a dead-cat bounce following the terror attacks of 11 September. Traditionally, such a catastrophic event would have underpinned a sharp price spike as financial institutions round the world rushed to buy the time-honoured insurance policy against economic and political turmoil. But if gold miners can glean anything positive from the metal's poor response to the New York events, it is that they have eliminated any doubt the industry must take drastic action to survive.

The harsh truth now gradually being accepted, at least among the world's biggest producers, is that it is going to have to start spending millions of pounds each year marketing a product that once flourished despite receiving little or no promotion. And it is also going to have to shrink, both in terms of the amount of gold it produces and the number of companies producing the precious metal.

To suggest the world's leading gold miners are drawing up plans to create their own version of oil cartel Opec would be a little far-fetched. Such an admission would probably also prove too tempting to the trust busters in Europe and the US, attracting their unwelcome involvement in future merger and acquisition activity.

But those in the industry say there is no question that the big draw of consolidation is the ability to slash supply and co-ordinate a global marketing campaign for gold that would have more measurable benefits for those companies that fund it. And already the ball is rolling.

The merger of North American giants Barrick and Homestake has created the world's biggest producer, eclipsing long-time leader AngloGold. But Anglo, which has developed some of the most innovative marketing strategies in the industry, will be on a par with the new group if it beats America's Newmont in the A$3.2m (£1.2bn) battle for Normandy Mining, Australia's biggest producer.

The fact that the loser of this battle, along with all other producers, will see themselves better off if a major player such as Normandy, led by chief executive Robert Champion de Crespigny, is taken over says much about the industry's need to cut production if it is to grow profits. Industry consultant Gold Fields Mineral Services forecasts total gold supply this year will reach 3,845 tonnes, exceeding demand by more than 200 tonnes.

Slowly, and begrudgingly in many quarters, gold miners are realising there are simply too many of them. The industry is so fragmented that the top 10 producers account for less than one-third of the world's total annual output.

Gold mining sources point to the fact that the three biggest iron ore companies generate more than half of the world's output while half of the world's diamonds come from just one company, De Beers.

Until recently, AngloGold - led by chief executive Bobby Godsell - was the world's biggest gold producer, but had a market share of less than 10%. They say this destabilising fragmentation presents several hurdles for the industry in its battle for survival. Among them is that a substantial number of the world's 200 gold companies have just one mine, many of which are barely profitable at current prices.

'The bigger you are, the more rational you can be about your production options but the smaller you are, the more you cling to whatever limited production you have,' said AngloGold marketing director Kelvin Williams. 'The majority of gold companies are a one or two-operations business. They don't have anything to close.' Williams, who has an annual marketing budget of more than $40m (£28m), including the firm's contribution to the World Gold Council, said consolidation would also pave the way for more effective gold promotions. 'The small operators say they don't have much interest in marketing, let the big guys do it. So there is much greater scope for buck passing in a fragmented industry.'

The industry has long realised the closest panacea it will find for its price problems is consolidation. Gold miners only need one head office, one set of management and one group of shareholdersto deal with. Yet despite widespread agreement on this point, the process has been excruciatingly slow. While this is partly due to the individual ambitions of those running mining companies, it is also because the synergies available from mining mergers are feeble compared with those achieved in manufacturing and service industries.

The inability to move mines, making one big hole mashing rocks at one common treatment plant, has limited the desire among gold producers to jump through the costly and time-consuming hoops associated with mergers.

Hopes that gold producers will eventually enjoy the same level of co-operation as their counterparts in the oil business are almost certainly misplaced. But further consolidation could give them reason to be confident that supply may be cut enough to see at least a reminder of the good days, even if it does mean dealing with marketing executives.