The heated takeover battle for Osisko Mining ended this week as Goldcorp (NYSE:GG) decided to not raise its offer. However, Goldcorp is likely to explore other potential acquisitions as this remains the best way to grow in the new price environment. In fact, I expect M&A activity in the gold mining sector to increase in the coming months.
Goldcorp walks away from its offer
As expected, Goldcorp decided to not raise its offer for Osisko Mining. The company had time and again said that it would not overpay for the acquisition despite the attractiveness of the Canadian Malartic mine.
Goldcorp had already raised its offer once after Osisko agreed to a friendly but complex deal with Yamana Gold. The company eventually had to walk away from the offer after Osisko struck another deal with Yamana Gold and Agnico Eagle. The offer from Yamana and Agnico Eagle bettered Goldcorp's raised offer. In addition, their offer was much simpler when compared to Yamana's previous offer.
Goldcorp may explore for other targets
While Goldcorp may have walked away from the Osisko deal, the company is likely to explore other opportunities. As I have noted in previous articles, this is the only way for gold miners to grow in the present environment where there is limited upside potential for gold prices. Any low-cost mine that is located in a jurisdiction with low political risk will be attractive to miners. Low cost, low risk will be the mantra for gold miners. That was the rationale behind Barrick Gold (NYSE:ABX) and Newmont Mining's (NYSE:NEM) merger talks.
The Wall Street Journal reported last week that the merger talks between Barrick Gold and Newmont Mining broke down, but given the potential synergies the talks are likely to resume. In fact, The Wall Street Journal, citing informed sources, reported last Wednesday that Barrick Gold had sent an email to Newmont Mining outlining revised terms for a possible merger.
Time to take a serious look at gold mining stocks
At the beginning of this year, I had a bearish outlook for gold miners. As the year has progressed, however, the outlook for the gold mining sector has improved. One reason is that gold prices seem to have a strong floor. The second reason is that the sector could see a significant increase in M&A activity.
Valuations in the sector are attractive due to the sharp decline in gold prices last year. At the same time, a stronger floor for gold prices gives certainty over future cash flows. Smaller miners that have low-cost mines in politically stable areas will be attractive takeover targets.
Can prices get a boost?
Even as gold miners adjust to the new low-price environment, there is a possibility that prices could get a significant boost as the year progresses. Gold prices will only see significant price appreciation if the Federal Reserve continues with its bond purchases. That is unlikely now that the U.S. economy is showing signs of a robust recovery. There is growing speculation that the European Central Bank (ECB) might launch its own quantitative easing program sometime this year, however.
Although the euro zone economy has shown some signs of recovery, low inflation remains a big worry for the region. There is growing pressure on the ECB to launch its own bond purchases. It must be noted that of all the major developed world central banks, the ECB has been the most hawkish. Also, the ECB still has room for a rate cut. It is likely to cut rates further before it goes for any quantitative easing. If inflation remains low despite the rate cut, however, the ECB will be under pressure to go for a bond purchase program like the Fed. Such a move, which could possibly come later this year, will be positive for gold prices.
Varun Chandan Arora has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.