Goldcorp (GG +0.00%) recently tried to take advantage of depressed asset prices and pursued a purchase of Osisko Mining. However, Agnico Eagle Mines (AEM +2.90%) and Yamana Gold (AUY +0.00%) were able to outbid Goldcorp in a fierce bidding war. Will Goldcorp pursue other alternatives this year now that the company has shown its interest in acquisitions?
Major acquisitions will lead to dilution for Goldcorp's shareholders
Goldcorp's last offer to Osisko Mining consisted of both cash and shares. Goldcorp finished the first quarter with $1 billion of cash on the balance sheet, so it does not have enough cash on hand for a big acquisition. Each major purchase, should it happen, will likely be funded with the help of debt and share dilution.
A low debt level is one of the key things that differentiates Goldcorp from other major miners like Newmont Mining (NEM +2.66%) and Barrick Gold (ABX +3.07%). Goldcorp had $1.5 billion of long-term debt at the end of the first quarter, compared with Barrick Gold's $13 billion debt and Newmont Mining's $6.1 billion debt.
It is unlikely Goldcorp will inflate its debt level without a major reason to do so. The company has been very conservative recently with its spending, and there are no signs that its attitude toward project funding has changed. Yes, the second offer for Osisko Mining was a little bit venturous, but it reflected Goldcorp's desire to own that particular asset.
Future growth means there is no pressure to go shopping
Importantly, Goldcorp has two major projects that will be starting gold production this year. Cerro Negro in Argentina is on track to produce its first gold in the middle of this year. Goldcorp expects that the mine will produce 130,000-180,000 ounces of gold in 2014. Eleonore in Canada will start production in the fourth quarter, and will be producing 575,000-625,000 ounces of gold annually once it reaches full capacity in the first half of 2015. As a result, Goldcorp expects to grow its gold production by more than 20% next year. Such growth means the company has no pressure to acquire additional production capacity and can take its time to find attractive deals.
An interesting opportunity to buy assets could have been presented if Newmont Mining and Barrick Gold decided to merge. Both companies were willing to make a spin-off company, but disagreed about which assets to include in it. There would have certainly been some assets to shop for during such a gigantic merger. However, merger talks failed, and the deal is unlikely in the near future, judging by the unfriendly rhetoric of both Barrick Gold and Newmont Mining.
Currently, Goldcorp has a low-cost portfolio. The company's first-quarter all-in sustaining costs were $840 per ounce. In comparison, Barrick Gold's first-quarter all-in sustaining costs were $833 per ounce, and Newmont Mining's were $1,034 per ounce. Despite low first-quarter costs, Goldcorp reiterated its 2014 cost guidance of $950-$1,000 per ounce because of the timing of sustaining capital use. Clearly, each new asset must not increase the company's cost profile, as the possibility of further gold price downside still exists. Unfortunately for Goldcorp and other miners, it will be difficult to find such assets at reasonable prices.
Bottom line
It is unlikely Goldcorp will be actively pursuing new acquisition targets following the failure of its bid for Osisko Mining. However, the company has the resources to pursue attractive opportunities should they present themselves.
