Goldcorp to Sell Its Stake in Primero Mining

Source: Thinkstock

On Wednesday we learned that Goldcorp (NYSE:GG) is planning on selling its 19.8 percent stake in Primero Mining (NYSE:PPP) in a secondary offering. While trading in Primero shares were halted, it is very likely that this announcement is going to have a negative impact on the market value of Primero shares, as it means that the supply of Primero shares on the open market will increase by nearly 25 percent.

I think investors who follow the gold mining sector can take away several points from this announcement.

First, Goldcorp is only going to realize about $224 million Canadian collars from this transaction, which is minimal compared to its $22 billion market capitalization. One has to wonder what possessed Goldcorp’s management to do this. CEO Chuck Jeannes claims that the sale is a part of the company’s larger plan to optimize its portfolio. While this is somewhat vague, I take this to mean that the company wants to own fewer assets so that its portfolio is easier to manage. This would fit in with the company’s sale of its stake in the Marigold gold in Nevada several weeks ago to Silver Standard.

Ultimately I think Goldcorp is looking for a large mine to acquire, and this sale will help management retain the capital it needs in order to execute a larger transaction. This belief is reflected in the company’s recent attempt to acquire Osisko Mining (OTCMKTS:OSKFF) for that company’s large Canadian Malartic mine. Therefore, given this transaction and what it seems to imply, investors might want to look to buy a company that could be a potential takeover target for Goldcorp. Look for a company with a large mine that will produce a lot of gold for many years at a low cost.

Second, investors should consider that Goldcorp sold completely out of its smaller equity position from a portfolio of just two. The company’s only other equity position is its roughly 40 percent stake in Tahoe Resources (NYSE:TAHO). This stake is much larger, and assuming that Goldcorp saw value in each stake, the more logical decision would have been to sell a part of its Tahoe stake to retain holdings in each. I think the deal bodes well for Tahoe shareholders. While I recently called for a pullback in Tahoe shares due to the fact that they are near an all-time high, there is long-term value in these shares given that it is now producing at its large Escobal silver mine in Guatemala.

My third point is perhaps the most obvious conclusion that one can draw from Goldcorp’s announcement: Primero shares are perhaps not as attractive as they once were. Primero shares didn’t really trade with other gold miners last year. They took a shallow dip, but they performed relatively well given their low cost production at the San Dimas mine, their strong balance sheet, and their growth expectations. Recently Primero acquired Brigus Gold (NYSEMKT:BRD), which sacrificed the strong balance sheet. When Brigus shareholders approved the deal, I argued that it gave Primero shares more leverage to the gold price in exchange for some of its margin of safety.

Furthermore, after the deal was announced, Primero shars flew higher as sentiment began to shift in the gold mining sector. Both of these occurances give the shares a less favorable risk/reward profile, and this could have prompted Goldcorp’s management to sell. It could also be a sign to other Primero investors to look for opportunities elsewhere.  However, given the recent strength in Primero shares, the pullback that I expect we will see in the coming days may present interested investors with a buying opportunity, as markets tend to overreact to situations such as this one. Investors who like the added leverage to the gold price that the Brigus deal gives to shareholders may want to take advantage.

To summarize:

    1. Goldcorp may be preparing for an acquisition, so look for potential targets in low-cost producers with large mines.
    2. Given this deal, Goldcorp clearly favors Tahoe Resources on a relative basis, and so this is one to hold onto or to pick up on weakness.
    3. The deal probably signals a near-term or intermediate-term top in Primero shares. The company is riskier than it was prior to acquiring Brigus Gold, and so Goldcorp’s announcement might be a signal to investors to get out if they are risk averse, or it might create a buying opportunity for investors looking for a more leveraged gold stock.

 

More From Wall St. Cheat Sheet: