Goldcorp's Battle for Osisko Mining Continues

Goldcorp raised its offer for Osisko Mining and might be overpaying, but it has the necessary financial strength to absorb possible risks.

Apr 14, 2014 at 9:59AM

In my latest article on Goldcorp's (NYSE:GG) battle for Osisko Mining, I predicted that Goldcorp would have to raise its bid for Osisko by at least 35% from its initial proposal. Goldcorp decided to be less generous and increased its takeover bid to C$7.65 per share, up 28.5% from the initial offer. Osisko stated that its Board of Directors would consider this new bid. Is Goldcorp winning the battle?

Goldcorp closer to winning the battle
Earlier, Osisko Mining's CEO Sean Roosen stated that it would be tough for Goldcorp to raise its bid for the company as Goldcorp told its shareholders that it would not overpay for Osisko. He clearly got it wrong, as Goldcorp decided to push forward. In fact, Goldcorp does not need shareholder approval for the Osisko bid. This means that Goldcorp is free to raise its offer to any value that it finds suitable.

Osisko tried to defend itself from Goldcorp's takeover by announcing a partnership with Yamana Gold (NYSE:AUY). Yamana Gold was set to acquire a 50% interest in Osisko's mining and exploration assets for C$929.6 million. However, with the new Goldcorp offer presented to Osisko's shareholders, it will be tough for Yamana Gold to stay in the game.

Goldcorp's chances of acquiring Osisko increase substantially with its new offer. It will be hard for Osisko to explain to its shareholders why they should choose a 50% stake sale to Yamana Gold instead of the more generous Goldcorp's bid. In my view, it is unlikely that Yamana Gold will engage in a bidding war and raise its own offer for the 50% stake in Osisko.

Pyrrhic victory?
Goldcorp's move resembles a phenomenon that is called the "winner's curse" in game theory. In short, the winner tends to overpay for an asset when a bidding war starts. The desire to acquire the asset overcomes rational calculations, and the bid exceeds the intrinsic value of an asset.

Osisko Mining recently released first quarter production data from its sole producing Malartic mine, revealing that it produced a record 140,029 ounces of gold in the first quarter. Osisko Mining estimates that cash costs for 2014 will be between $527 and $577 per ounce of gold. These costs fit well in Goldcorp's overall portfolio, as the company estimates that its all-in sustaining costs for 2014 will be $950-$1,000 per ounce of gold.

Typically, all-in sustaining costs are $200-$300 higher than cash costs, depending on specific assets and companies. For example, cash costs at Marigold mine, which Goldcorp and Barrick Gold (NYSE:ABX) recently sold to Silver Standard Resources, were $969 per ounce in the fourth quarter, while all-in sustaining costs were $1,216 per ounce. This means that Malartic's all-in sustaining costs are likely to be below Goldcorp's average.

While Malartic will immediately bring positive cash flow to Goldcorp should the latter succeed in acquiring Osisko Mining, the price for this victory could be substantial. Fortunately for Goldcorp, it has a solid balance sheet and more than enough liquidity to fund its offer. Even if Goldcorp is overpaying for Osisko, this move will not endanger the company's position in any way.

Bottom line
Goldcorp decided to proceed with Osisko Mining bid, and will likely end up paying too much for the acquired assets. However, the company's financial strength will not be damaged because of the possible acquisition.

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