Another Gold Miner Joins the Bidding Drama

Yamana Gold and Agnico-Eagle Mines make an impulsive move to acquire Osisko Mining.

Apr 16, 2014 at 5:04PM

Sometimes reading corporate news can be more interesting than reading an exciting thriller. This is surely the case with the bid war currently under way for Osisko Mining. When Goldcorp (NYSE:GG) increased its offer for Osisko Mining by 28.5% in order to top Yamana Gold's (NYSE:AUY) proposal, I thought that the story was close to an end. At that time, I believed there were two ways the story might end: Either Goldcorp would win the battle or Osisko Mining would find a way to push Yamana Gold's offer, which it clearly favored.

I didn't believe that any player would increase its bid again, as I considered Goldcorp's offer already too high. That's why the announcement of a friendly acquisition agreement of Osisko Mining by Yamana Gold and Agnico-Eagle Mines (NYSE:AEM) was a great surprise. Agnico-Eagle Mines and Yamana Gold have now announced that they're acquiring Osisko Mining for a total consideration of approximately C$3.9 billion, an 11% premium to Goldcorp's current bid. Will this spectacular story continue?

Another bid would be irrational
Although the Osisko story has been full of twists and turns, there's little chance that we'll see another act of this drama. A higher bid would be truly irrational. It is unlikely that Goldcorp will turn a business acquisition story into a gambling house story. Lifting the offer by another 10% from the existing Yamana Gold and Agnico-Eagle Mines proposal would make Goldcorp's bid 50% higher than its initial offer. Notably, Goldcorp's first offer made back in January already represented a 28% premium over the 20-day volume-weighted average share price of Osisko Mining.

Dubious move from Yamana Gold and Agnico-Eagle Mines
In my view, Yamana Gold and Agnico-Eagle Mines are overpaying for Osisko Mining. The stock market thinks the same, as shares of both miners were deep in the red on the day of the acquisition announcement. Osisko Mining's shares had become overvalued following the bidding fury. Buying an asset whose price has increased so rapidly in the past few months when gold stubbornly trades around $1,300 per ounce could not be considered a wise strategy.

Yamana Gold's and Agnico-Eagle Mines' offer consists of C$1 billion in cash, C$2.3 billion in Yamana Gold and Agnico-Eagle shares, and shares of a new company, Spinco, worth approximately C$575 million. This offer will lead to dilution for shareholders of both miners. At the same time, Goldcorp's shareholders should be happy, as the company will likely drop the hunt for the overvalued Osisko Mining. I think that if Goldcorp decides to stay in the game and makes another bid, it will be a big negative for the company's valuation.

Bottom line
The only real winners in this story are Osisko Mining shareholders -- their stock rallied 66% this year. I don't think that shareholders of Agnico-Eagle Mines and Yamana Gold could be satisfied with the news. They will experience a significant dilution in exchange for a mine that is able to produce 500,000-600,000 ounces of gold annually over a 16-year mine life.

In addition, the debt levels of both companies will increase, as Agnico-Eagle Mines had just $170 million of cash at the end of the fourth quarter, and Yamana Gold possessed $220 million of cash at the end of the fourth quarter. In order to maintain a sufficient cash cushion, both companies will have to raise $350 million-$400 million in additional debt.

All in all, it looks like Yamana Gold and Agnico-Eagle Mines just made an impulsive move.

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