Not even the first mote of dust had settled on the first edition of Casey Gold Stock Companion when, on August 31, two of our recommended issues, Goldcorp and Glamis, announced an agreement to merge. Under the terms, Glamis will be absorbed by Goldcorp, and each share of Glamis stock will be exchanged for 1.69 shares of Goldcorp stock. The merger must be approved by a two-thirds vote of Glamis shareholders — which, for reasons explained below, seems close to certain.

The announcement had a dramatic effect on the price of both stocks. Valued at Goldcorp’s and Glamis’ closing prices from the day before, the deal represented a 33% premium for Glamis shareholders – a premium the market treated as borderline crazy. Glamis closed up 19% on the day for being lucky, while Goldcorp’s shares lost 9% for overpaying.

Even though the market clearly scorned the terms of the deal, the price action in the stocks suggested only the mildest skepticism about the merger itself or perhaps simple indifference. The total market capitalization of the two companies barely budged, on a day when the AMEX Gold Miners Index (GDM) rose 2.5%.

What to do? First ask whether the merger is in fact a good thing.

While Glamis is the smaller of the two companies, Glamis and Goldcorp are clearly in the same league, as our Gold Stock Guide suggests. Neither is an industry giant, but both are producing gold at multiple sites in Canada or the U.S. and in Latin America, and both are looking for more. The effects of the merger will be…

1. Greater political diversification. Glamis is focused on the U.S, Mexico and Central America (Guatemala and Honduras). Goldcorp also has important operations in Mexico (the Luismin gold/silver mines ), but adds to the mix properties in Argentina, Brazil, Canada and Australia.

2. Economies of scale. Every company that merges with another talks about economies of scale, as though talking would make it so. But in the gold mining industry, it isn’t just talk. It is the norm that a successful small company will get acquired by a larger company, fairly reliably, the whole turns out to be worth more than the sum of the parts. And for a successful small company (and its shareholders), getting acquired is payday.

3. Greater acceptability to institutional investors. As a group, institutional investors have hardly noticed the gold mining industry. (“Gold mining? I seem to recall something about King Solomon’s mines. Are they still around?”) But that’s likely to change as gold’s bull market proceeds. And when the institutional investors go looking for gold stocks, they will do what comes naturally for institutions, which is to buy big companies.

4. Smarter management. Unless Goldcorp’s departing president knows something almost nobody else knows, Goldcorp has promised to pay too much for Glamis. But he’s leaving. Goldcorp’s new president, post-merger, will be Kevin McArthur – Glamis’ current CEO, who negotiated the fat acquisition premium for his shareholders.

So what to do?

If you already own both Goldcorp and Glamis and the total value is less than 15% of your budget for gold investments, do nothing. But if the total does exceed that limit, sell enough to get down to 15%. For maximum tax advantage, sell whichever stock has the smaller gain in your hands.

If you own just one of the two, do nothing.

If you haven’t yet filled your budget for gold investments, consider the new (and we believe improved) Goldcorp for up to 15%. Yes, it’s locked in to paying too much for Glamis, but that blunder is already reflected in its stock price. It is clearly a better buy now than it was the day before the merger announcement.

Casey Gold Stock Companion is the new, low-cost newsletter from Casey Research. It specializes in the larger gold mining companies with developed, producing or near-producing deposits – stocks that offer much of the upside while avoiding the uncertainties that come with the smaller, early-stage gold mining companies. Gold Stock Companion provides guidance and specific recommendations for investors who want an uncomplicated, low-risk approach to big profits from the bull market in gold.

About the Editor:

Terry Coxon is the author of Keep What You Earn and Using Warrants and the co-author (with Harry Browne) of Inflation-Proofing Your Investments. He edited Harry Browne’s Special Reports for its 23 years of publication and all of Harry Browne’s investment books since 1974.

Mr. Coxon was the founder and for 22 years the president of the Permanent Portfolio Fund, a mutual fund that invests in precious metals as well as stocks and bonds. He currently is president of Passport Financial, Inc., a specialty financial publishing company.