Here’s Why Goldcorp Is So Interested in Buying Osisko Mining
Since January, Goldcorp (NYSE:GG), one of the world’s largest gold miners, has had a takeover bid in place for shares of Osisko Mining, owner of the Canadian Malartic mine. While Osisko’s management and many of its shareholders are against the deal, Goldcorp’s management continues to extend its offer for Osisko shares.
The appeal of Osisko Mining is its 100 percent ownership of the Canadian Malartic mine, which is one of the biggest gold mines in North America. The mine has 20 million ounces of gold and is expected to reach production of 500,000 ounces to 600,000 ounces per year. Osisko’s management is claiming that the mine can maintain this pace of production for 16 years.
But given the size of the resource, we could see substantially more production. It is also possible that the mine’s owner can find additional resources nearby the current resource — gold tends to be found near existing gold deposits. Furthermore the mine has relatively low production costs of about $1,000 per ounce. This means that at $1,300 per ounce gold, the mine generates $300 per ounce or $150 million in cash flow before taxes.
The appeal of the mine goes beyond these quantitative metrics. Canadian Malartic is located in Quebec, and Quebec is one of the safest places to mine. According to the Frasier Survey of mining executives, which surveys thousands of mining executives on the pros and cons of mining in various locations, Quebec finished 21st out of 112 countries, states, and provinces.
Given these points, it is clear why Goldcorp is interested in owning Osisko Mining. However, it is also clear why Osisko shareholders don’t want to sell. Osisko’s management and its shareholders have referred to the bid as “hostile,” which suggests that Goldcorp is undervaluing the company’s shares.
Goldcorp’s management retorted that the seemingly small premium that was offered to Osisko shareholders — 15 percent — is skewed by the (then) strong performance of Osisko shares. Since the deal was made in the wake of the 2014 rally in gold mining shares, Osisko shares had been up substantially in just a couple of weeks when Goldcorp made its bid. In fact, if you look at the average share price of Osisko shares over the 20 trading days prior to Goldcorp’s takeout offer, the latter company is paying closer to a 25 percent premium for Osisko shares.
Ultimately, I agree with Goldcorp on this issue: The bid for Osisko was more than fair, and in fact, it may be too generous considering the weak gold price. Recall that Osisko’s Canadian Malartic mine is expected to generate about $150 million in pretax cash flow at $1,300 per ounce gold. If we include taxes, this figure drops to about $120 million. Given the company’s $2.8 billion price tag, this $120 million in annual cash flow doesn’t seem like a lot.
Goldcorp is hoping that it will be able to mine at Canadian Malartic for far longer than the 16-year estimate. It is also taking into consideration the fact that there are very few large gold mines with low production costs in low-risk mining jurisdictions, and therefore its management is willing to pay more than 20-times annual cash flow.
Given the value that Goldcorp is ascribing to Osisko Mining, the latter company’s shareholders should seriously consider taking the deal. As of Goldcorp’s latest extension announcement, Osisko shareholders have until April 4 to accept Goldcorp’s offer. Since this tug of war has been going on for some time, I think Goldcorp will eventually give up and pursue opportunities elsewhere if Osisko shareholders do not accept.
While Goldcorp Chairman Ian Telfer is confident that the deal with go through, I am not so sure of this. Having encouraged Osisko shareholders to take the deal, I have received emails and comments from Osisko shareholders standing their ground and expressing some pretty bitter emotions toward Goldcorp.
With that being said, I think Goldcorp will and should move on to other opportunities if April 4 comes and goes. While there aren’t any properties quite like Canadian Malartic, there are plenty of other intriguing opportunities that Goldcorp can pursue. Given that I don’t expect the gold price to remain this low for very long, I think Goldcorp needs to move quickly to find and secure a quality acquisition target.
Having maintained a solid balance sheet throughout the downtrend in gold prices, Goldcorp prepared for just this sort of situation. Now that low gold prices and attractive valuations have arrived in the gold mining sector, it would be a shame if Goldcorp failed to take advantage.
Disclosure: Ben Kramer-Miller is long Goldc
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