The rush into gold has lifted the share prices of most gold miners with industry leaders such as Newmont, up 39% since this time last year to be trading broadly in line with the gold price whereas other miners, such as Barrick Gold, is up 24%, and is not keeping pace with gold.

Value Doubts

But where doubts start to develop in the gold price continuing to rise, or even maintaining its current elevated level, is in professional attempts to value goldmining companies to assist investors decide what’s a fair price for their shares.

A mutually agreed merger currently underway in Australia highlights the challenge of keeping pace with the gold price.

Northern Star Resources and De Grey Mining agreed late last year to a $3.1 billion share swap merger, triggering a slow-moving independent valuation process ahead of shareholder meetings.

KPMG, an international accounting firm, was appointed valuer, filing its report earlier this month – with a surprise discovery.

Northern Star, which is Australia’s biggest locally based goldminer, is paying more for De Grey than KPMG’s valuation which, naturally led to a finding that the terms were fair and reasonable for De Grey shareholders.

Whether the complex swap terms of one Northen Star share for every 0.119 De Grey share is fair and reasonable for Northern Star shareholders is a different matter.

KPMG valued De Grey at between A$1.68 and A$1.99, an average of A$183.5 whereas the implied value at the time of the bid was between A$1.92 and A$2.08, an average of A$2 which indicates that Northern Star is paying A16.5c per share more than the KPMG mid-point value for De Grey.

Investors appear to have their doubts about the value of the merger to Northern Star which has seen its share price rise by 8% since the deal was announced on December 2, whereas De Grey has risen by 40%, and the gold price is up 14%.

One reason for Northern Star being generous is that De Grey owns Australia’s biggest undeveloped gold asset, the 11-million-ounce (and growing) Hemi project near the north-west iron ore export centre of Port Hedland.

Another reason could be the need for Northern Star to make a “knock-out” offer to deter a rival bid which could come from Gold Road, another miner which owns 17% of De Grey.

If the gold price keeps rising, and if Northern Star can successfully develop the Hemi resource, the deal is a good one for the Northern Star investors.

But if the gold price falls then they have already been warned by KPMG that their company is paying too much for De Grey in gold’s hothouse environment