3 Reasons Small Caps Are The Best Plays For Consolidation In The Precious Metals Sector

A previous article on Benzinga detailed why the consolidation in the gold sector is now so appealing. For those looking to profit from takeovers in the sector, small caps are the best play.

Here are three reasons why taking positions in small cap mining firms such as McEwen Mining (NYSE:MUX), Premium Exploration (OTC:PMMEF), Pilot Gold (OTC:PLGTF), Dakota Territory Resource (OTC: DTRC), and Rare Element Resources (NYSE:REE), among others, could result in handsome profits.

At present, two of the biggest publicly traded gold companies, Barrick Gold (NYSE:ABX) and Newmont Mining (NYSE:NEM), have been trying to work out a deal.

Small cap gold stocks will benefit the most, no matter what happens.

If the Barrick Gold/Newmont Mining transaction is completed, there will be increased investor attention on the sector. Shares prices will rise as buyers gobble up stock hoping to profit from the next acquisition. Small caps will have the most upside due to having the lowest prices.

The low prices also make small caps easier acquisition targets.

For any type of buyer, ranging from a firm in the sector to a private equity group, a small cap is the easiest way to enter a sector. It is much easier to absorb the company culture than try to mesh two different organizations. Foreign buyers also face less political opposition. The prices are low, making it easier to establish control.

As an example, the stock price of Newmont Mining is up nearly 20 percent for the quarter due to the attention from Barrick Gold. That makes small caps like Premium Exploration, McEwen Mining, Pilot Gold, Dakota Territory, Rare Elements, and others more appealing takeover targets.

Being based in North America makes gold companies much more attractive.

There is a premium being paid for natural resource firms with holdings in North America. Conflict around the world has investors favoring the political stability and economic security of the United States and Canada.

Premium Exploration operates in Idaho. Next door in Nevada is where Dakota Territory is headquartered. Close by is Rare Element Resources in Colorado. McEwen Mining is based Canada, as is Pilot Gold.

For investors, these small caps offer the appeal of being alluring targets in a hot sector in the most desirable market: North America.

No matter what happens with Barrick Gold and Newmont Mining, consolidation is likely to continue on the precious metals sector. Asset prices are very tempting, as is the future for the commodities. The two biggest consumers of gold, India and China, are two of the most promising economies in the world.

For those reasons, the exchange traded fund for gold, SPDR Gold Shares ETF (NYSE:GLD), is up more than 4 percent for the quarter.