Yamana Gold Inc's Move Puzzles Goldcorp

Goldcorp (NYSE: GG  ) has long abstained from purchasing assets despite the favorable price environment. Goldcorp finally made an offer to acquire Osisko Mining and its main asset Malartic mine in early January. However, Osisko Mining was not happy with the offer, as it thought the offer undervalued the company.

In an attempt to defend itself, Osisko Mining filed a claim in Superior Court of Quebec, accusing Goldcorp of improper activities related to the offer. In a surprising move, Yamana Gold (NYSE: AUY  ) stepped in and announced that it will acquire a 50% interest in Osisko's mining and exploration assets, beating Goldcorp's offer by more than 20%. What's up next in this bidding thriller?

Will Goldcorp raise its offer?
Yamana Gold had to raise its offer to beat competition from Goldcorp. However, as Yamana Gold is acquiring a 50% interest, it will not have total control over Osisko's operations. Osisko's assets look like a good bet to enhance Yamana Gold's portfolio, which is one of the lowest-cost portfolios in the industry. Last quarter, Yamana Gold's all-in sustaining costs were $935 per ounce of gold, way below current gold prices.

Goldcorp could be tempted to raise its bid for Osisko. The company didn't buy anything significant during the downturn of gold prices in 2013. Instead, it was focused on optimizing its portfolio. The recent sale of the high cost Marigold mine to Standard Silver Resources (NASDAQ: SSRI  ) is an example of this strategy. Marigold's all-in sustaining costs totaled $1,503 per ounce last year, and now it's Standard Silver Resources' challenge to bring those costs down.

Malartic mine, which has 9.37 million ounces of gold in reserves, is a desired target for Goldcorp. Goldcorp met Yamana Gold's move by announcing due diligence at Osisko Mining and extending the date to acquire Osisko's common shares. It is unlikely that Osisko's shareholders will approve a lower valued offer by Goldcorp. In this case, Goldcorp will have to raise its bid to stay in the game.

Will it be good for Goldcorp to win the fight for Osisko?
While Malartic may be an interesting asset, it may not be worth chasing it at a higher price. If we assume that Goldcorp's initial calculations of Osisko's value were correct, then Yamana Gold is already overpaying. In current situation, Goldcorp should possibly add at least another 10% to what can be an inflated value to overcome Yamana Gold.

Malartic is Osisko's sole producing mine. This mine brought $262 million in operational cash flow in 2013, while the whole company spent $141 million on capital expenditures. Malartic is free cash flow positive, but does it justify an even higher bid?

Osisko's shares are now trading higher than C$7, way above the C$5.95 at which Goldcorp valued the company when it was making its offer in January. It turns out that Goldcorp will have to raise its offer at least 35% from the initial proposal. This will be too much, in my opinion, given the current gold price environment.

Bottom line
It's too early to say whether Goldcorp will raise its bid for Osisko or not. In my view, the game is not worth the candles. The idea of taking opportunities in the low price environment assumes that the price of the asset must be low. Goldcorp's initial offer already represented a 28% premium over the 20-day volume-weighted average share price of Osisko at the time of the offer. Paying another 35% may be just too much.

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