Gold's Master Crafter of Deals

Move over Pink Panther; the golden goose strikes again.

With a flair for final-hour maneuverings that even Inspector Clouseau may have strained to notice, Goldcorp (NYSE: GG  ) has once again stymied a competitor's attempt at strategic growth while building out what I consider the most impressive development pipeline in the gold mining industry.

Eldorado Gold (NYSE: EGO  ) spent two years contemplating what became a $3.2 billion friendly takeover bid for Australian explorer Andean Resources and its cornerstone Cerro Negro property in southern Argentina. But just as it has done on two previous occasions already this year, Goldcorp swooped in as a spoiler and grabbed this attractive asset with a $3.4 billion bid for cash and shares.

Fools may recall that Goldcorp aggressively outbid a joint venture between Newmont Mining (NYSE: NEM  ) and Fresnillo Silver for the Camino Rojo property near Goldcorp's Penasquito mine in Mexico. Just days later, the company outmaneuvered larger rival Barrick Gold (NYSE: ABX  ) by using junior miner New Gold (AMEX: NGD  ) as a bridge to a 70% interest in the El Morro project in Chile.

In this case, as Mineweb reporter Dorothy Kosich suggests, the CEOs of Goldcorp and Andean Resources used to run the only two intermediate gold producers based in Reno, Nevada. I find it reasonable to presume that their past acquaintance may have played a role in this transaction.

Pointing to Goldcorp's incentive to acquire the project, a recent feasibility study conducted by Andean Resources calls the Cerro Negro project "one of the lowest-cost undeveloped gold projects in the world". Once in production, the mine's estimated cost of just $60 per ounce (after silver by-product credits) will assist the company's ambition to remain the lowest-cost major gold producer in the world.

Looking at the acquisition cost in this case tells an entirely different story: one of very high expectations for meaningful expansion of existing gold and silver resources at Cerro Negro. Using only the established indicated resource of about 3 million gold equivalent ounces (using a 50:1 ratio), you see, would yield a purchase price of $1,129 per ounce. You can bet a giant bullion bar that Goldcorp is not about to deploy $3.4 billion in anything but a miserly fashion. 

As I pointed out following the much-criticized acquisition of Red Back Mining by Kinross Gold (NYSE: KGC  ) , development properties commonly conceal their ultimate scale and value from investors until further exploration work can be completed and interpreted. Modern geological methods, meanwhile, permit reliable modeling of a site's true potential, and I encourage Fools to take Andean Resources CEO Wayne Hubert seriously when he states that Cerro Negro "has the potential to double or triple its gold and silver resources over the next couple of years."

Regardless of the potential criticism of this deal based upon the apparent premium paid for established resources, I consider this move a giant achievement for Goldcorp, and continue to award Goldcorp the golden trophy for "master crafter of deals."

Fool contributor Christopher Barker can be found blogging actively and acting Foolishly within the CAPS community under the username TMFSinchiruna. He tweets. He owns shares of Eldorado Gold, New Gold, and Kinross Gold. True to its name, The Motley Fool is made up of a motley assortment of writers and analysts, each with a unique perspective; sometimes we agree, sometimes we disagree, but we all believe in the power of learning from each other through our Foolish community. The Motley Fool has a disclosure policy.


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  • Report this Comment On September 07, 2010, at 12:44 PM, rfaramir wrote:

    My only problem with how this deal turned out is that I have a small investment in EGO and none (yet) in GG :-(

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