This Gold Miner's Acquisition Bid Is Good News for Shareholders

Goldcorp's offer to acquire Osisko Mining makes perfect sense.

Jan 14, 2014 at 10:36AM

Despite its low debt level and solid balance sheet, Goldcorp (NYSE:GG) was reluctant to add assets to its portfolio in 2013. The company was focused on organic growth, and expected to grow its production by 13%-18% in 2014. However, Goldcorp decided to take advantage of depressed asset prices and made an offer to acquire Osisko Mining for $2.4 billion.

What does Goldcorp get?
The main asset that Goldcorp acquires if the offer is accepted is the Canadian Malartic mine in Quebec, Canada. The mine is estimated to have 10.1 million ounces of gold reserves. Canadian Malartic is expected to produce more than half a million ounces of gold per year over its mine life.

Estimated cash costs at Malartic were $770 per ounce in 2013. When presenting at Scotiabank Mining Conference back in December of 2013, Goldcorp stated that its sustaining capital stood at $317 per ounce in the third quarter. With these two figures in mind, we can get a rough estimate of all-in sustaining costs at the mine.

All-in sustaining costs at Malartic will most likely be between $1,000 and $1,100 per ounce. The addition of this mine will probably lift Goldcorp's all-in sustaining costs, which were previously projected to be in the range of $950-$1,000 per ounce. However, the impact will not be substantial.

In addition to Malartic, Goldcorp will receive Hammond Reef and Kirkland Lake projects, which are in the exploration stage. Together, they have an estimated 7.5 million ounces of gold reserves.

Is the price right?
Goldcorp's offer represents a 15% premium over Osisko's closing price on January 10 and a hefty 28% premium over the 20-day volume-weighted average share price. This may seem like a big premium, but bear in mind that Osisko's shares were under pressure, just like shares of any other gold miner have been.

It's worth noticing that a rival offer is unlikely. Major miners like Barrick Gold (NYSE:ABX) and Newmont Mining (NYSE:NEM) have trouble with their big projects, Pascua-Lama and Conga respectively. Barrick Gold has recently diluted its shares by 16% to bring down its debt level. However, Barrick's debt still stands above $11 billion, and the company is not expected to pursue asset purchases at this time.

Newmont's debt situation is better than Barrick's, but the Conga project will need a hefty check when it is fully restarted. As of now, Newmont is reluctant to spend money on new acquisitions. What's more, Newmont is optimizing its portfolio by selling assets. The company recently sold its Midas mine to Klondex Mines for $83 million.

Right move from a long-term point of view
Mining is a cyclical business, and buying assets when gold prices are depressed makes sense. Goldcorp's balance sheet will remain solid, as Goldcorp has secured a $1.25 billion acquisition facility from Scotiabank. In addition, the company has $2 billion in undrawn revolving credit facility. Importantly, this liquidity also ensures the existing dividend.

The offer will be open for acceptance until February 19. If the acquisition is approved, Goldcorp expects to produce 3.6 million ounces of gold in 2014. This will lead to a 35% increase in production compared to the previous year. Neither Barrick nor Newmont can boast such growth in the current environment.

All in all, I think that Goldcorp's bid for Osisko is the right move. 

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