Goldcorp's Offer For Osisko Mining: What Investors In Other Potential Targets Can Learn

Includes: GG, OBNNF
by: Hebba Investments

On Monday, January 13th, 2014 Goldcorp (NYSE:GG) made an unsolicited offer to acquire Osisko Mining Corporation (OSKFF). The terms of the transactions were detailed as follows:

Osisko shareholders will be entitled to receive 0.146 of a Goldcorp common share plus C$2.26 in cash for each Osisko common share. Based on Goldcorp's TSX closing share price of C$25.29 on January 10, 2014, the total consideration offered to Osisko shareholders is C$5.95 per Osisko common share representing a premium of 28% over the 20-day volume-weighted average share price of Osisko from all trading on Canadian exchanges for the period ending January 10, 2014 and a premium of 15% over Osisko's TSX closing share price on January 10, 2014.

Source: Goldcorp News Release

For the purpose of this article we will not go into the valuation of the deal or whether this is a good deal for Osisko Mining or Goldcorp shareholders - though we do feel like the valuation may be a bit low. What we want to look into here is some of the things that investors should take from this attempted acquisition that may help evaluate other miners and explorers as future potential acquisition targets.

This is very important for investors who own explorers that are potential targets by major mining companies, because understanding the attributes of Osisko Mining Corporation that make it an attractive buy for Goldcorp can help understand the attributes of their own companies that would make them attractive to other majors.

This is by no means an exhaustive list, and we would love to hear the thoughts of others in the comments on what can be learned from this transaction in regards to other future transactions.

Location and Geographic Synergies

Below is a quick view of the main exploration projects and single producing mine of Osisko Mining Corporation.

Click to enlarge

Osisko's lone producing mine is the Malartic mine in Malartic, Quebec, with its Kirkland Lake project across the border in Ontario, and its Hammond Reef project not too far from that. Goldcorp on the other hand has some of its biggest projects in Quebec and Ontario, including Red Lake (Ontario), its Cochenour project (Ontario), and Eleonore (Quebec) - a very large portion of Goldcorp's current and expected future production.

This we believe is one of the biggest reasons this transaction was attractive to Goldcorp, and as the company mentioned in its news release it "leverages Goldcorp's existing investments in Québec and Ontario with opportunity for corporate and regional synergies."

So takeaway number one is that if majors can find acquisitions in regions they already have operations (even if they already have large regional operations), then that makes the transaction much more attractive. Logically this makes sense because any acquirer has to derive some benefit over and beyond the price paid - which usually includes a hefty premium to the existing price. Other than exploring and delineating more reserves (which is far from a certainty), existing operations provide those types of synergies because human resources, governmental familiarity, and existing infrastructure can be used to cut costs in the target company. Investors should thus analyze their holdings and see if any companies fit that bill.

Size of Production and Reserves

Another observation should be the size of the acquisition, production, and reserves. This takeover is a acquisition of over $2 billion dollars and adds more than 400,000 production ounces to Goldcorp's annual gold production, more than 10 million in reserve ounces, and close to 10 million more resource ounces (over and beyond the reserve totals) - a significant addition even to a major the size of Goldcorp.

This is an important takeaway for investors because it shows that one thing that majors may be looking for based on Goldcorp's attempted acquisition, are significantly sized targets. This makes a lot of sense because many of the risks present in a small mine are the same risks present in a large mine but without the same type of reward. That means that investors should remember that if they're looking for a major to acquire their explorer, they should also understand that the majors need a large enough target to make it worth their while. This isn't a hard and fast rule because majors do buy smaller explorers, but it definitely helps.

There are a few more takeaways we will publish in our second follow-up piece to this article, but we'd love to hear from other investors concerning observations of what makes Osisko an attractive acquisition for Goldcorp - and what other explorers and miners may have similar attributes.

Disclosure: I am long GG. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.