Canada Might Hold a Golden Investment Opportunity

Despite a tepid reaction by analysts and investors, Goldcorp's hostile takeover bid for Osisko Mining might be a genius move.

Jan 16, 2014 at 10:42AM

Goldcorp (NYSE:GG) shares fell after the company announced a hostile takeover bid for smaller competitor Osisko Mining Corp (NASDAQOTH:OSKFF). It's been a rough year for Goldcorp to say the least, and as you'd expect, it's due almost entirely to the outright collapse in the price of gold. Precious metals prices fell across the board last year, resulting in a great deal of pain for industry majors such as Goldcorp, Barrick Gold (NYSE:ABX), and Newmont Mining (NYSE:NEM).

As a result of a strengthening U.S. dollar and a reduced sense of economic uncertainty, metals prices are under intense pressure. Often seen as a 'fear trade,' gold in particular sold off over the past year because the Federal Reserve announced it would taper off its aggressive economic stimulus programs. While investors and analysts are decrying Goldcorp opening up its coffers while it's in distress, management's eye on the future might turn out to be a genius move.

Doubling down on gold
In all, Goldcorp intends to pursue Osisko Mining Corp. in a $2.4 billion cash-and-stock bid. Goldcorp's underlying strategy is to obtain control of Osisko's major producing mine in Canada, where Goldcorp is headquartered. That means Osisko's assets fit perfectly with Goldcorp's geographic operational and risk profiles.

Goldcorp's hostile bid comes as gold is plumbing depths not seen in years. At slightly more than $1,200 per ounce, the price of gold has fallen by several hundred dollars per ounce in just a couple of years. This has resulted in pain across the industry. 

Barrick Gold and Newmont Mining will report their respective fourth-quarter and full-year fiscal 2013 results over the coming weeks, and the results aren't expected to be pretty. Barrick's third-quarter net earnings clocked in at $170 million, down significantly from $580 million in the same quarter last year.

Newmont's average realized gold price of $1,322 per ounce represented a 20% drop from the prior year quarter, which dragged revenue down by 20%. And, gold has declined even further from their realized prices last quarter, which means Barrick's and Newmont's results may actually deteriorate further.

A shrewd move after all?
To borrow a phrase usually reserved for buying stocks, the best time to buy is when there's blood in the streets. That sentiment can be applied to corporate mergers and acquisitions as well, and while analysts frowned on Goldcorp's bid due to the low-grade nature of Osisko's reserves, the deal might turn out to be a calculated, strategic move.

Goldcorp increased its gold production 11% in 2013 during a year in which many precious metals miners shut down growth projects and are resorting to cost cuts to sustain profitability. Barrick Gold has cut costs by $2 billion year to date. Furthermore, Barrick sold various assets totaling $700 million in the third quarter. Likewise, in the third quarter, Newmont sold its investment in Canadian Oil Sands Limited for $587 million, and it's cut spending by $700 million year to date.

Goldcorp clearly isn't dissuaded by the poor business conditions currently afflicting the precious metals industry. The company projects its 2014 gold production to increase 13%-18%, and by 50% over the next two years. Absorbing Osisko's reserves and mines will only add to the company's production capacity going forward. The Malartic mine, the only mine owned by Osisko in operation, is expected to produce 500,000 to 600,000 ounces of gold per year over its 16-year life.

Goldcorp betting on a recovery
Goldcorp is clearly betting its future on higher gold prices down the road. While it's hard to imagine considering the bloodshed in the precious metals markets over the past year, Goldcorp management seems convinced. It's increasing production and is looking to add to its reserves at a time when most other gold miners are cutting back. If management is proven right, Goldcorp will be one of the first gold miners to recover. 

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Bob Ciura has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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