The 18th century nobleman Baron Rothschild gave voice to the contrarian investor's creed "the time to buy is when there's blood in the streets," along with the oft-forgot addendum, "even if the blood is your own." One of the world's biggest gold miners, Goldcorp (NYSE:GG), is apparently taking that advice to heart, launching a hostile takeover bid for a rival amid an industry roiled by falling prices, escalating costs, and depressed valuations.
Gold diggers, along with much of the rest of the mining industry, face still-falling commodity prices that create the need for massive cost cutting, asset sales, and asset writedowns. With their stocks having lost anywhere from 40% to 50% of their market valuation even as the yellow metal fell 30%, gold miners have felt the pain more acutely.
Barrick Gold (NYSE:GOLD) started the year with its gold reserves valued at around $1,700 an ounce, but subsequently cut its estimate to $1,300 an ounce, took over $5 billion in writedowns on its Pascua Lama project alone, slashed its dividend, and saw its stock cut in half in 2013. Newmont Mining (NYSE:NEM) was similarly affected, losing 55% of its value while gaining the distinction of being the worst performing stock on the S&P 500. Goldcorp itself was tarnished after it wrote down the value of its Penasquito mine in Mexico, suspended exploration, and deferred some development plans at Cerro Negro in Argentina. Its stock is at levels not seen in five years.
From AngloGold Ashanti and Kinross Gold to IAMGOLD and Newcrest Mining, the industry has seen billions of dollars in value swept away, with around $30 billion in writedowns recorded last year and even more set to occur in 2014 as new reserve prices are set in the coming weeks.
It's in such a debilitated state that Goldcorp has decided to go shopping, making a $2.6-billion hostile offer for Canadian miner Osisko Mining, a move that would boost its reserves while giving it control of one Canada's biggest gold mines, Canadian Malartic. Goldcorp already owns the Eleonore project in Quebec, set to begin production later this year, and is active in Timmins, Ontario, at its Porcupine project.
This isn't Goldcorp's first pursuit of Osisko either, having once before accumulated a 10% stake in the miner before selling off its shares rather than seek an acquisition. But with the current offer giving shareholders just a 15% premium on the stock price, it's roundly viewed as a lowball offer, and shares are trading well above the bid on the Toronto Stock Exchange in full expectation there will be a new higher offer made.
Last month I said we were about to witness a rising wave in M&A activity in the gold sector after Primero Mining (NYSE:PPP) made a $220 million stock-swap deal with junior miner Brigus Gold (UNKNOWN:UNKNOWN). With the depressed valuations of miners coupled with the long-term potential of gold -- I'm not sure I'm ready to stand alongside hedge fund operator James Rickards in saying gold will go to $7,000 an ounce within five years, though -- it is inevitable we'll see more such takeover bids play out.
With gold jumping 2% in the past week alone, Goldcorp happens to be on the leading edge of a tsunami that may soon wash over the industry.