Goldcorp, Inc. Says Osisko Shareholders Have Its Back

The gold miner says it has the support of acquisition target's biggest shareholders.

Feb 4, 2014 at 11:24AM

So here's another reason Canadian gold miner Osisko Mining (NASDAQOTH:OSKFF) likely went to court to stop Goldcorp's (NYSE:GG) hostile takeover: A "significant number" of Osisko's shareholders apparently support Goldcorp's bid.

According to the gold-mining major, it's been meeting with Osisko's shareholders and finding out that by and large they support the takeover attempt. Because there's significant risk associated with being a miner with a single asset, regardless of its quality, the opportunity to diversify across a portfolio of low-risk operations that has a strong growth outlook is attractive because it can better withstand future gold market depressions.

Further upheavals in precious metals were only recently thought impossible and now they carry the suggestion they're likely. Gold lost some 35% of its value following hitting a peak of $1,900 an ounce in 2011, and analysts now believe it's possible it could lose another 20% before the year is done.

Credit Suisse just came out forecasting gold of $1,000 an ounce could happen this year. There is a confluence of trends including interest rates, inflation, and imports that could conspire to drive demand lower, and though it's debatable whether systemic risk has been reduced as the global financial powerhouse contends -- I'd actually argue the exact opposite, that actions by global governments and central bankers have vastly increased the risk of collapse -- it's also true those institutions have proved adept at delaying the day of reckoning so the rest of the thesis could play out, at least short term. And gold, which had been rallying of late, just gave up most of those gains as somewhat stronger-than-expected numbers for the U.S. economy apparently flipped a pressure valve switch and the price of gold fell.

Also working in Goldcorp's favor is receipt from Canada's Competition Bureau assurances the acquisition does not run afoul of antitrust laws so the regulatory agency would not oppose the takeover.

M&A activity is going to be the new normal in gold as the majors seek to replenish their pipelines. Both Goldcorp and Newmont Mining (NYSE:NEM) have already said they intend to pursue this route, but we're likely to see others follow suit. Valuations of mining companies have hit their lowest levels in years, and probably informed Goldcorp's decision to "lowball" Osisko, but it's also a recognition of the opportunity to acquire high-quality assets at a discount.

Certainly, Osisko's Canadian Malartic would fall into that category. It's estimated the mine could produce as much as 500,000 to 600,000 ounces of gold annually over its 16-year life, and last year ramped up to achieve 475,277 ounces produced at a cash cost of $760 Canadian per ounce. Fourth-quarter production was even better.

While miners have a number of projects listed in their portfolios that are undeveloped, it's going to become harder to move them toward production. Environmental concerns have shelved Barrick Gold's Pascua Lama project in Chile and Northern Dynasty's massive Pebble mine in Alaska. And despite hopeful language by the government of Peru, projects initiated by both Newmont and Southern Copper remain stalled.

And miners aren't always the best exploration companies, so picking up junior miners that specialize in that endeavor will feed their pipeline needs.

If the price of gold does drop further, we'll see even more miners mothball greater numbers of uneconomical projects. Gold Fields (NYSE:GFI), for example, has a relatively high all-in sustaining cash cost of just under $1,100 per ounce, and though it's moving in the right direction, its Ghanian Damang project and South African South Deep mine have AISC costs of $1,700 and $1,600, respectively, that's just not feasible to maintain. Those just can't progress further at today's depressed gold price let alone one of $1,000 per ounce.

So with a diversified portfolio, a relatively low ASIC cost, and the financial wherewithal to take Osisko Mining's Canadian Malartic forward and make it one of Goldcorp's leading projects in terms of free cash flow, production, and net asset value, it's easy to see why shareholders might be supportive of the hostile bid, Osisko's court challenge and charges of lowballing notwithstanding.

With the tender offer running until February 19, there's still two weeks time to see the drama surrounding the hostile takeover heightened further.

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