The Osisko Battle Will End Better for Agnico Eagle Mines Than Yamana Gold

Agnico Eagle Mines and Yamana Gold are in very different positions following the win on their Osisko Mining bid.

May 14, 2014 at 12:00PM

Yamana Gold (NYSE:AUY) and Agnico Eagle Mines (NYSE:AEM) recently won the battle for Osisko Mining, outbidding Goldcorp (NYSE:GG). Although Yamana Gold and Agnico Eagle Mines will each own 50% of Osisko's assets, the fates of the two miners look very different.

Agnico Eagle Mines shows growth
Agnico Eagle Mines is in good shape. The company recently reported its first quarter earnings, which showed solid growth in production, revenue, and operating cash flow. The growth of cash flow from operations was the most remarkable part of Agnico Eagle Mines' report. Operating cash flow totaled $248 million, while investing spending was $106 million. Thus, Agnico Eagle Mines generated significant free cash flow, which helped the company reduce its indebtedness by $80 million.

The company's debt will soon rise by $500 million, however, as Agnico Eagle Mines will be drawing the money from its available $1.1 billion credit facility to finance the cash portion of the Osisko offer. In addition, Agnico Eagle Mines shareholders will experience a 16% dilution.

Although the fight with Goldcorp to take control of Osisko Mining had pushed the latter's value into inflated territory, Agnico Eagle Mines looks positioned to profit from the move. Osisko's sole producing Malartic mine could contribute up to 300,000 ounces of gold annually for Agnico Eagle Mines, increasing the company's production by more than 20%.

Yamana Gold experiencing difficulties
Yamana Gold is in a different situation. The company's first quarter report disappointed investors, as a drop in production hurt its revenue and cash flow. During the earnings call, Yamana Gold reminded investors that the first quarter is usually a weaker quarter. Yamana Gold's first quarter performance was significantly weaker compared to the first quarter of 2013, however, as production fell and costs rose. As a result, Yamana Gold's investment spending significantly outpaced its operational cash flow.

Just as in Agnico Eagle Mines' case, the Malartic mine will contribute 300,000 ounces of gold annually to Yamana Gold's production. All-in sustaining costs at Malartic are expected to be about $800 per ounce, lower than Yamana Gold's first quarter all-in sustaining costs.

Yamana Gold's production lacked significant growth for all of 2013 and the beginning of 2014. With the addition of ounces from Malartic, Yamana Gold's production will increase by around 25%. It's worth noting that the price of growth for Yamana Gold will be relatively higher than for Agnico Eagle Mines.

How could this be when both companies are purchasing an equal share in Osisko Mining? The bid for Osisko consists of both cash plus Agnico Eagle Mines and Yamana Gold shares. Yamana Gold shares have been under significant pressure this year, thus the company had to use more shares in order to reach the value of the offer.

Bottom line
The story with the Osisko Mining acquisition looks better for Agnico Eagle Mines than for Yamana Gold. Agnico Eagle Mines in a good shape and could afford to overpay for an asset whose value became inflated because of a series of bids. Goldcorp is a winner in this situation too, as its management had the wisdom not to gamble on Osisko and refused to increase its offer for the second time. At the same time, Osisko Mining is a pricey and doubtful purchase for Yamana Gold.

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