Silver Lake Resources Ltd., a gold mining company from Australia has offered to buy Integra Mining for A$426 million. The friendly take over offer could double Silver Lake’s annual output while cutting costs for the company.

The offer could also fuel more merger activity among smaller mining companies according to Integra Managing Director Chris Cairns who told Reuters that mining costs have soared in Australia to be among the highest in the world due to a widespread shortage of skilled mine workers and a strong Australian dollar. The high costs have cut profits and made it harder to access funding as lenders eyes cheaper mines elsewhere.
“The feedback from shareholders has been very, very clear. These days they are questioning the profitability of gold companies as costs escalate,” Cairns told Reuters at the Diggers and Dealers mine conference.

Silver Lake, which produces about 200,000 ounces of gold a year in Western Australia, said it planned to acquire near neighbor Integra in an all-share deal to create a gold miner with a market value of nearly $1 billion.

The combined company would have production of 400,000 ounces a year by 2014, making it a mid-tier producer in Australia.

Silver Lake plans to issue one share for every 6.28 Integra shares, valuing Integra at a 43 percent premium to its close on Friday. Integra shares, which were near a two-year low on Friday, rose as much as 30 percent, while Silver Lake fell over 10 percent.

Mining costs in Australia range from $800/oz to $1,200/oz, compared with just $300/oz in some parts of Africa, while gold is currently sitting around $1,600/oz.

Unlike in the boom years immediately after the 2008 financial crisis, when funding was readily available for new mining projects, headwinds in Chinese economic growth mean funding is much harder to come by, pushing many miners offshore.

Dramatic drops in prices for everything from copper and nickel to iron ore and zinc as China cuts down on imports call into question the viability of new mining projects -- scaring away potential funding.

Over the last 12 months in Western Australia state, where 80 percent of Australia's roughly 270 tonnes of gold is mined each year, the capitalization of listed companies tumbled 23 percent, according to accountants Deloitte, which compiles a monthly index of the sector.