Goldcorp Heats up Osisko Takeover Battle With Yamana

Goldcorp (NYSE: GG  ) , the world's second largest gold miner by market value, raised its hostile takeover bid for Osisko Mining Corp. (TSX: OSK  ) to C$3.6 billion from C$2.6 billion in cash and shares. The Vancouver-based company's new offer comes after its onsite due diligence at Malartic last week. The unsolicited bid of C$7.65 a share represents an increase of about 38% from the previous bid and is higher than the white knight bid by Yamana Gold (NYSE: AUY  ) earlier this month.

While Goldcorp's earlier offer on January 13, 2014 of C$2.6 billion was rejected by Osisko shareholders on the recommendation of its board's special committee, the company's new offer closes on April 22, 2014, and the minimum tender condition will now be satisfied with 50.1% or more of Osisko's shares.

Bidding war for an attractive asset
Yamana announced earlier this month (April 2) that it has entered into a friendly agreement with Osisko, whereby Yamana will acquire a 50% interest in Osisko's mining and exploration assets for C$441.5 million in cash and 95.7 million common shares. At the time of offer, Yamana said that its offer was valued at C$7.6. However, analysts believe it is less than that .

Goldcorp's new offer has heightened a bidding war for Osisko. Osisko is a small Canadian gold producer and has only one production mine, Canadian Malartic in Quebec. Both Goldcorp and Yamana Gold are attracted to it because of its large size and low-cost operations. Moreover, it is located in a politically stable location. Malartic's FY13 gold production was 475,000 ounces of gold at cash costs of $760 per ounce, which is below the peer average.

Premium increased but makes better offer than Yamana
Goldcorp's revised bid offers a 1.3% premium to Osisko's April 9 closing price of C$7.55 per share and 21% premium to previous offer of C$6.32 per share. The revised offer could be favored by Osisko shareholders due to both the increased premium and its simplicity over Yamana's white knight offer. If a deal is reached, a potential acquisition of Osisko would add a low cost and a long mine life asset with low political risks to enhance Goldcorp's already growing portfolio. However, it would also add pressure to Goldcorp's balance sheet in the near term and increase its net debt/EBITDA ratio. Despite the added pressure, I believe Goldcorp's balance sheet remains one of the strongest among its peers.

If investors were to favor any deal they would most likely go with Goldcorp's offer as it has a few advantages over Yamana's proposed general partnership offer. First of all, Goldcorp's offer is simple and straightforward, and investors would appreciate it over Yamana's complex offer. Yamana's general partnership agreement involves restructuring of debt and precious metal stream with a repurchase option. Goldcorp's offer, on the other hand, does not require a formal shareholder approval and has an earlier closing date.

Strong balance sheet to fund the deal
If a deal is reached, financing the transaction should not be a problem for Goldcorp, as it has one of the strongest balance sheets among its peers. The cash portion (C$1.8 billion) of the offer would be sourced partially through $1.25 billion non-revolving credit facility, and the remainder should come from the company's cash balance. The credit facility was previously set up to fund the original proposed transaction. Goldcorp's cash balance was recently boosted by the sale of its holdings in Primero (C$224 million) and the divestiture of the Marigold mine. Goldcorp and its joint venture partner Barrick Gold Corporation (NYSE: ABX  ) sold their respective interests in the Marigold mine to Silver Standard Resources (NASDAQ: SSRI  ) for a total consideration of $275 million. Goldcorp had a 66.7% share in the mine. Goldcorp's estimated cash balance now stands around $1 billion and the company has further $2 billion in its undrawn credit facility.

Bottom line
Goldcorp is a long-term investment opportunity. It has a strong balance sheet and compares well to its peers in terms of production growth and cost position. The company offers investors strong production and cash flow growth. Moreover, it operates in politically stable jurisdictions. The addition of the Canadian Malartic mine in an already strong portfolio would not only give Goldcorp an immediate raise in production but should also reduce its all-in sustaining costs. I suspect if Osisko shareholders are to favor any offer, it would be Goldcorp's offer.

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