Goldcorp Gains Ground in Osisko Takeover

A thaw in negotiations could lead to its having the largest gold operations in Canada.

Mar 4, 2014 at 11:01PM

Nothing like a little Russian hegemony in Ukraine to get gold moving north again, and with prices up 11% so far in 2014, the outlook for the precious metal is looking better than it has in a long time.

So, too, is the potential for gold mining major Goldcorp (NYSE:GG) to complete its hostile acquisition of Osisko Mining (NASDAQOTH:OSKFF), whose Canadian Malartic mine in northern Quebec -- already one of the largest gold mines in the Great White North -- could become the crown jewel of its suitor. As the two miners were set to square off in court yesterday, they announced a rapprochement that has Goldcorp agreeing to not take up and pay for any Osisko shares under its offer until April 15, in return for Osisko's agreeing to provide Goldcorp full due diligence access to its books for review by April 1.

In January, Goldcorp insulted Osisko with a $2.6 billion hostile offer that represented just a 15% premium to where Osisko shares were trading, a bid the junior miner said grossly undervalued the company. Canadian Malartic, which is Osisko's primary asset, is estimated to have 10.1 million ounces of gold reserves that could produce as much as 500,000 to 600,000 ounces of gold annually over its 16-year life, with all-in sustaining costs estimated to be between $1,000 and $1,100 per ounce.

Yet Osisko reported preliminary full-year results showing that the mine produced more than 475,000 ounces at a cash cost of $760 Canadian per ounce, while producing more than 137,000 ounces at $713 Canadian per ounce in the last quarter. Therefore the price Goldcorp is offering represents a discount to estimates of price-to-net asset value multiples paid for other large-scale gold producers.

Osisko says the bid values Canadian Malartic at equal to those estimates, whereas the average multiples of previous large-scale gold producer acquisitions has been around 1.8 times estimates. Indeed, Goldcorp's offer for Andean Resources in 2010 was at the average P/NAV multiple, while its 2006 offer for Glamis Gold was 2.4 times estimates. Placer Dome in 2005 carried a multiple of 2.1 times P/NAV estimates. 

So the miner went to court in a bid to block Goldcorp's takeover effort, alleging that Goldcorp misused confidential information and acted in bad faith before launching the hostile bid. The mining major has toyed with the idea of acquiring Osisko over the years, but no real proposal ever emerged. But with the depressed valuations in the industry as a result of gold's 30% plunge last year, opportunism is rank and Goldcorp obviously saw the chance to strike.

Goldcorp says it has the support of a large and growing contingent of Osisko's shareholders, which helped inform the decision to go to court to thwart the takeover attempt. And though the agreement between the two miners doesn't guarantee that a deal does get done, it may very well mean that the hostile takeover turns friendly and a higher offering price will be made. Osisko's shares have traded above Goldcorp's bid in the belief a better one will be made, and this truce may pave the way for that to happen.

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