Goldcorp Inc Walks Away From a Pricey Deal

As Goldcorp will not raise its offer for Osisko Mining, Agnico Eagle Mines and Yamana Gold will win, but it's hardly a victory to celebrate with champagne.

Vladimir Zernov
Vladimir Zernov
Apr 23, 2014 at 3:26PM
Energy, Materials, and Utilities

It looks like the battle for Osisko Mining is over now. Goldcorp (NYSE:GG) has announced this week it will not raise its offer, which means Agnico Eagle Mines (NYSE:AEM) and Yamana Gold (NYSE:AUY) will acquire Osisko Mining for C$3.9 billion.

That Goldcorp finally walked away from the bidding war is not surprising; to stay in the game, the company had to raise its offer by more than 50% compared to its initial bid, which was submitted back in January. Now, when it's almost certain Osisko Mining will be acquired by Agnico Eagle Mines and Yamana Gold, it's time to take a closer look at the deal.

Agnico Eagle Mines and Yamana Gold are paying too much
So, what are Agnico Eagle Mines and Yamana Gold getting for their money? First, it's the producing Canadian Malartic mine, which currently holds 9.37 million ounces of gold reserves and 11.1 million gold ounces of measured and indicated resources. Osisko Mining also has Hammond Reef and Upper Beaker-Kirkland Lake projects under way. There are no reserves estimates for these projects, but Hammond Reef measured and indicated resources are estimated to be 5.43 million ounces of gold, while Upper Beaver-Kirkland Lake is estimated to hold 2.1 million ounces of gold resources.

To get a feel for what producers are ready to pay for gold mines, let's look at the recent sale of Marigold mine. Goldcorp and Barrick Gold (NYSE:GOLD) sold Marigold to Silver Standard Resources (NASDAQ:SSRI) for $275 million. As Marigold was labeled a discontinued operation, Goldcorp did not file reserves estimates for the mine in its latest annual report. However, if we subtract 2013 Marigold production from Goldcorp's last year reserves estimates, we can get a feel for where reserves stood this year.

Marigold produced 107,500 ounces of gold in 2013, so the mine should have had more than 3 million ounces of gold reserves, and around 0.5 million ounces of gold resources. The price Agnico Eagle Mines and Yamana Gold are paying for Osisko Mining is almost 13 times more than the price Silver Standard Resources paid for Marigold. Are Osisko Mining's assets 13 times more valuable? I very much doubt it.

Shareholders pay for the deal through dilution
Agnico Eagle Mines and Yamana Gold will finance the deal with the help of debt and shares. The biggest portion of the purchase will be financed with Agnico Eagle and Yamana Gold's shares, so it's shareholders who mostly carry the burden of this deal through dilution. Moreover, both companies had reasonable debt levels, so additional debt will not be a problem.

While the deal is not disruptive for these gold miners by any means, it's surely not the best move. Yamana Gold and Agnico Eagle Mines could have searched for better value in current market conditions. No wonder investors are disappointed, and shares of Yamana Gold and Agnico Eagle Mines have taken a beating since the announcement of the deal.

The bottom line
Yamana Gold and Agnico Eagle Mines decided to enter a pricey deal at a time when gold prices remain under pressure. One of the implications of this deal will be increased sensitivity to gold price downside for these companies. Shares of both miners have already been hit, but the downside could continue as investors digest the impact of the deal.