How Much of a Risk Premium Should Goldcorp Pay for Osisko?

Gold miner may have no choice but to up its bid one more time

Apr 18, 2014 at 9:36AM

How much is Goldcorp (NYSE:GG) willing to pay for peace of mind?

That seems to be the real deciding factor in whether the gold miner will up its offer for Osisko Mining (NASDAQOTH:OSKFF) after its recently raised offer was trumped once again by Yamana Gold (NYSE:AUY), which stripped out much of the complexity of its original white knight bid by adding in a partner, Agnico Eagle (NYSE:AEM).

Osisko's Canadian Malartic mine is largely seen as a quality mine in and of itself, 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. Of equal importance, though, is its location in the politically stable, mining-friendly region of northern Quebec. That alone ought to put a premium on the price an acquirer is willing to pay.

G

Source: Goldcorp

Although much of Goldcorp's principal properties are spread throughout North America, its greatest concentration is in Mexico, where 40% of its proven and probable reserves are located, with another 21% in Canada. However, more than half of the gold it produced in 2013 came from Mexico, while 26% was out of Canada -- although its Eleonore project in James Bay, Canada is on target for its first production later this year.

Screen Shot

Source: Goldcorp SEC filings. Excludes the Marigold project in Nevada in which it owned a 66.7% interest, as that was just sold to Silver Standard Resources on Feb. 3.

Perhaps more stable politically than either Argentina or Chile, where Goldcorp's environmental permit for its El Morro project was suspended, Mexico has adopted policies recently that make it the highest cost country in which the company operates. The government passed a 7.5% tax on profits from resources plus an additional 0.5% on precious-metals miners, a levy that raises Goldcorp's effective tax rate to more than 40%. It might not pull out of Mexico as a result, but expansion there becomes untenable and is why it needs projects like Canadian Malartic to expand its operations.

It also suggests that the miner may be willing to go to the well one more time at least to see if it can entice investors to choose its deal over the one made by Yamana and Agnico. The markets, though, probably won't like it, as Yamana's stock fell 4% yesterday and Agnico's was down 9% on the belief they're paying too rich a premium for the asset. Goldcorp's stock, on the other hand, edged higher, perhaps in relief as it may now wriggle out from having to overpay.

Even though the gold miner has previously stated it would do no such thing, having started the ball rolling and angered its adversary in the process, Goldcorp may have no choice but to see this through to the end.

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