Goldcorp Inc Bows out of Expensive Bidding Bout

Despite the quality of the mine being chased, price still matters.

Apr 25, 2014 at 9:56AM



That sound you heard may have been the collective sigh of relief from Goldcorp (NYSE:GG) investors following news the gold miner will not raise its acquisition offer for the Canadian Malartic mine in Quebec.

Having originally bid C$2.5 billion for the mine's owner, Osisko Mining (NASDAQOTH:OSKFF), an offer that was viewed as a lowball attempt to steal a quality asset, Goldcorp watched as Yamana Gold (NYSE:AUY) stepped in late in the game with a white knight counteroffer that, while higher at C$3.1 billion, was complicated and had a lot of moving pieces, such as it being only for 50% of a stake in Osisko, requiring contributions from two pension funds, promises of future streams of production, and joint operation of the mine.

Thus when Goldcorp returned with its own higher and simpler offer, valued at around C$3.6 billion, it had the potential of being an easier sell with investors despite management preferring Yamana's bid. With the ball back in its court, Yamana returned with a streamlined second offer, this one a very straightforward C$3.9 billion, except that Agnico Eagle Mines (NYSE:AEM) would join in the spoils.

I thought there was the possibility Goldcorp would give one last try to acquire the Canadian Malartic asset if for no other reason than it provided a high-quality asset in a politically stable country, something many of its other mines currently lack. The mine is 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. Despite having promised not to overpay for acquisitions, it seemed reasonable it might try to woo support one more time.

However, my Foolish colleague Vladimir Zernov correctly said Goldcorp's last offer would indeed be its last and that the Yamana-Agnico counteroffer was itself overpriced (he also said Goldcorp's own higher bid was too high as well). With gold still hovering in the $1,300-per-ounce range and weakness showing as the Federal Reserve promises to continue to taper its purchases of assets even as the crisis in the Ukraine creates market uncertainty, chasing the gold miner's shares higher as Yamana has done was a rash and foolish thing to do.

The market apparently agreed with his assessment as shares of Yamana are down 10% since it made its original white knight offer but are 14% lower from the highs they achieved after Goldcorp raised its offer, suggesting investors were happy Yamana was being beaten out for the Canadian asset.

Goldcorp may not want to overpay for Osisko, but junior miners everywhere with decent assets ought to be thinking about when a buyout bid will be coming their way. Production from existing projects at the majors are seeing their quality ebb, which means the consolidation wave that began in earnest last year will continue to pick up steam.

Goldcorp investors should consider this foiled acquisition attempt not as a defeat but as a strategic retreat. With some $630 million in cash and equivalents on its balance sheet, the gold miner still has the financial wherewithal to strike elsewhere to pick up prospective mines that will add to its reserves without breaking the bank.

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