Breaking up the gold giants

Capitalism offers an obvious goal for its contestants; to get bigger. From the size of TV's and cars to the empires of business, modern capitalism has increased the size of everything. Mining is no exception.

Mining houses have chased growing output and growing assets with vigour, leading to a consolidation of the industry; 80% of traded iron ore, for example, is controlled by just three companies despite iron ore being among the most common metals in the earth's crust. 'Bigger is better' works  as a business strategy just as well as it does a consumption strategy.

That creed may finally be changing. One of the world's largest asset managers, Blackrock, has made an astonishing and brave call; to break up the world's gold mining giants.

Together, Barrick, Newmont, Goldcorp and Newcrest produced almost 80% of the world's mined gold supply last year. An industry that used to be characterised by small operators and brigands is now dominated by suited corporate goliaths.

Yet when it comes to mining, size has disadvantages.  The value of gold miners is greatest when production and reserves are maximised. In order to maintain valuations, miners have to replace enormous production volumes or face depleting reserves.

For a company like Barrick, which produces almost 8m ounces a year, it means a lot of capital expenditure in digging increasingly marginal sources of gold. Blackrock's suggestion is to break up the giants and create much smaller entities that don't have to worry about replacing such colossal output. They would be able to concentrate on squeezing efficiency gains and paying dividends. It's a fine idea. Big miners are taking note, too.

Anglo Ashanti, for example, has suggested spinning-off their Australian assets. However the gold majors respond, it's clear that further consolidation among the top tier is unlikely. The age of gold giants is closing.