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Follow the Yellow Brick Gold to China

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A new extension of the yellow brick road leads beyond the Emerald City, and tunnels clear through to China.

Although China staked its claim as the world's leading producer of gold in 2007, opportunities for global investors to participate in this industry remain few. With the consolidation announced this week, the field grows smaller still.

Vancouver-based Eldorado Gold (AMEX: EGO  ) launched a friendly all-stock acquisition of Australia's Sino Gold, creating a formidable intermediate gold producer with a combined market capitalization of about $5.9 billion and gold reserves of 12.7 million ounces.

The deal is a clear-cut feather in both miners' caps. Sino shareholders will receive a 21% premium to the pre-announcement valuation in the conversion of their shares to Eldorado, and will benefit from geographical diversification of assets beyond China through Eldorado's projects in Turkey, Greece, and Brazil. These include Eldorado's flagship Kisladag mine in Turkey, weighing in at 5.5 million ounces of gold reserves.

Eldorado also brings attractive iron ore assets to the table, with 9.3 million tonnes of iron ore at the Villa Nova project in Brazil. Located in the same province as Anglo American's Amapa joint venture with Cliffs Natural Resources (NYSE: CLF  ) , Eldorado's iron ore mine joins a small subset of Brazilian production not controlled by Vale (NYSE: VALE  ) . Commissioned just during the second quarter, Villa Nova has been placed on care and maintenance until iron ore demand recovers in earnest.

The move is deeply transformational for Eldorado as well, building the company's gold portfolio in China from just one operating mine with 817,000 ounces of gold, to three working mines chasing approximately 5 million ounces of reserves.

Sino Gold's flagship is the prolific Jinfeng mine, and its White Mountain mine continues to ramp up toward full production. Construction at Sino Gold's Eastern Dragon project is slated to begin in September, and the company also brings a strategic exploration joint venture with major miner Gold Fields (NYSE: GFI  ) to the table. Prior to this deal, Eldorado acquired Gold Fields' 19.9% ownership stake in Sino Gold in return for Eldorado shares, keeping Gold Fields vested in the new corporation.

For exposure to a producing gold miner within the world's most prolific gold-producing nation, Eldorado Gold will now have no peer. In terms of gold reserves, Eldorado Gold continues to chase fellow low-cost, intermediate-scale producers like Agnico-Eagle Mines (NYSE: AEM  ) and Yamana Gold (NYSE: AUY  ) , but like China's economy, Eldorado's star is certainly rising.

I added Eldorado Gold to my Motley Fool CAPS portfolio back in July 2007, and the pick has outperformed the S&P 500 benchmark by 138% over that period. I expect that trend to continue, and invite your comments. Make your own call on precious-metal stocks today, and discover the advantage of investors helping investors.

Fool contributor Christopher Barker sees a pot at the end of the rainbow for investors with exposure to gold. He can be found blogging actively and acting Foolishly in the CAPS community under the user name TMFSinchiruna. He tweets. He owns shares of Agnico-Eagle Mines, Cliffs Natural Resources, Eldorado Gold, Vale, and Yamana Gold. The Motley Fool has a gilded disclosure policy.

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 29, 2009, at 7:07 PM, NFLNostradamus wrote:

    Eldorado sounds like a buy. 12.7 million ounces is a strong backbone. There's an ongoing concern between non-producer Midway Gold and Barrick at Midway's Spring Valley site in Nevada that had an estimated resource of 2 million ounces. They announced the 2Q drilling results and metallurgic work there last week. Barrick stands to earn a 60% interest on the site if they spend $30M there by 2013.

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