Should Goldcorp Buy Out Osisko Mining?

| About: Goldcorp Inc. (GG)

Merger and acquisition activity is heating up in the gold mining sector (NYSEARCA:GDX) as major mining company Goldcorp (NYSE:GG) has made a $2.6 billion offer to acquire the smaller, mid-tier miner Osisko Mining Corp (OSKFF).

Goldcorp aims to gain control over Osisko's Malartic gold mine in Quebec, Osisko's only operating mine, plus a pipeline of development projects in Canada.

The offer presents a premium of 15 % to the share price of Osisko at $5.95 a share, the closing price on Friday; however, shares are over $6.10 as we speak. Osisko shareholders would receive .146 of a Goldcorp share plus $2.26 in cash for each share they own and the bid is open until February 19.

Goldcorp shares are down nearly 2 % Monday, to $22.72 a share.

Overview of the Deal for Goldcorp

Goldcorp is expected to produce between 2.6 and 2.7 million ounces of gold in 2013 at low all-in sustaining cash costs. By adding the Malartic mine, the company would immediately benefit from the cash flow at the mine, plus add a 10 million ounce resource base to its portfolio of assets.

Here are some positives to the deal for Goldcorp:

- The mine is located in the prolific Abitbi Gold Belt in Quebec. This is arguably one of the most mining friendly jurisdictions in the entire world and a great place to do business.

In fact, Quebec was ranked No. 7 in the top 20 jurisdictions in the Americas based on potential policy index by The Fraser Institute.

- Malartic is a huge mine, with 10.1 million ounces of gold in the high confidence proven in probable categories, but the mine also has an addition 1.6 million ounces in measured and indicated and 1.2 million in inferred.

- The mine is expected to produce an average of between 500,000 to 600,000 ounces of gold per year over a 16-year mine life but I believe the mine life can be extended with further exploration.

- Development pipeline: Goldcorp also gains exposure to Osisko's other Canadian projects. Hammond Reef has 5.43 million measured and indicated plus 1.75 million inferred, and the Upper Beaver-Kirkland Lake project boasts measured and indicated resources of 2.1 million plus 1.8 million inferred.

- The Upper Beaver-Kirkland Lake project has high grades, with 5.0 g/t in the measured and indicated category and 4.4 g/t in inferred.

- With this acquisition, Goldcorp's 2014 production would increase to 3.6 million for 2014 with 44 % of its total production coming from Canada. From 2013 to 2016, Goldcorp estimates total production growth of 44 %, which outpaces its peers Yamana Gold (NYSE:AUY) (26 %), AngloGold (NYSE:AU) (23 %) and Agnico Eagle (NYSE:AEM) (23 %).

- Malartic is very profitable, producing operating cash flow of $70.7 million in Q3 2013, with free cash flow of $32.4 million and net earnings of $9.8 million.

- Gold production at Malartic year-to-date is 337,956 ounces at an average grade of .90 g/t and recoveries of 89.2 %. Full year guidance is 485,000 ounces.

- Cash costs have been steadily declining, from $804 in the first quarter of 2013 to $754 in the last quarter. The company attributes this success to a mine optimization program which had increased daily mill throughput and improves daily mine output.

- For Goldcorp, this allows the company to focus on growing its gold reserves and production in the politically stable country of Canada. In fact, Goldcorp would become the largest gold producer in Quebec, according to the company.

- The transaction would not affect the company's monthly dividend, which currently pays $.05 per month for a yield of 2.6 %.

- The company would still have a pretty strong balance sheet but more debt than before, with $600 million cash and a $1.25 billion acquisition facility for Osisko (of which $1 billion will finance the cash portion of this transaction), plus an undrawn revolving credit facility of $2 billion. Still, this debt load is very low for a major mining company.

In conclusion, I feel this is a great deal for Goldcorp because of the location of the project, the large resource base and production upside and the low operating costs.

The Deal For Osisko

Is the deal a good one for Osisko shareholders?

- Osisko shareholders would receive $2.26 in cash and .146 of a Goldcorp common share for each share of Osisko.

- As mentioned, the offer represents a premium of 28 % to the 20-day volume weighted average price of Osisko, and a 15 % premium to the closing price on Friday, Jan. 10. The deal is valued at $2.6 billion.

- Osisko has a current market cap of $2.7 billion, with $328.6 million in debt and $171 million in cash. Therefore, I estimate that Osisko has a current enterprise value of approximately $2.857 billion.

- Malartic has approximately 10 million ounces of gold reserves in the proven and probable category, while the company's Hammond Reef project has 5.43 million measured and indicated plus 1.75 million inferred, and the Upper Beaver-Kirkland Lake project boasts measured and indicated resources of 2.1 million plus 1.8 million inferred.

So, Osisko has a total resource base of approximately 21.08 million ounces.

- With an enterprise value of $2.857 billion and total resources of 21.08 million gold ounces, the deal is valuing each gold ounce at $135 per ounce.

- This is about in line with the average value per ounce of the reserves of some major mining companies. For example, Goldcorp's ounces are valued at $143 an ounce. Other producers are lower: Agnico Eagle ($138 an ounce), Barrick Gold ($97 an ounce), Yamana Gold ($103 an ounce). (Source:

- Osisko shareholders go from owning a single-operating mine company to multiple mines, as shareholders would gain exposure to Goldcorp's world-class assets.

- A monthly dividend from Goldcorp shares.

- Osisko does have a significant amount of debt even though they just amended the debt repayment schedule for financial flexibility. The company has $328.6 million in debt as of Sept. 30, 2013. Previously, the company owed $17.5 million in 2013 and $207.5 million in 2014; now, Osisko owes $30 million in 2014, $40 million in 2015 and 2016, and $115 million in 2017.

- Still, if gold prices don't pick up the debt would be a concern. While the company does have $171.6 million in cash, the company has just $80.1 million in working capital.


I feel that if this deal goes through, it would be a great deal for Goldcorp shareholders, and just a good deal for Osisko shareholders.

I feel that Goldcorp stands to benefit greatly from the addition of the Malartic mine as the company immediately would add 500K+ of low-cost ounces to its production profile and increase its exposure to Canada. Meanwhile, Goldcorp also would gain solid development projects in Canada.

Osisko shareholders get a significant premium. However, at $135 per ounce the deal is fair but not exactly a blow-out offer.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.

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