Seeking Alpha
Research analyst, growth, energy
Profile| Send Message| ()  

Goldcorp Inc. (GG), the largest gold producer by market value, recently announced its intention to acquire all of the outstanding shares of Canadian gold miner, Osisko Mining (OTCPK:OSKFF), for a total consideration of C$2.6 billion in cash and shares. The Osisko shareholders are entitled to receive a total consideration of C$5.95, comprised of C$2.26 in cash and 0.146 common share of Goldcorp. The offer does not require approval of GG shareholders but is subject to approval of 2/3 of Osisko's shareholders.

Osisko is a Montreal based gold producer. The deal would add Osisko's flagship, long-life asset, the Canadian Malartic gold mine, located in Quebec, with its 10.0 million ounces of reserves to Goldcorp's profile. Goldcorp with its strong operating cash flows and strong balance sheet has sufficient liquidity to fund this acquisition and the future growth. Goldcorp has obtained a $1.25 billion non-revolving credit facility and as mentioned earlier does not require the approval of the shareholders. The cash portion of the offer is financed via the new $1.25 billion term credit facility, leaving GG's existing cash balance and $2.0 billion revolver in-tact.

The proposed acquisition of a low cost and long mine life asset with low political risk is a strategic positive for Goldcorp and it will enhance the company's already growing portfolio. Goldcorp added that the deal would also add to the company's operating cash flows, which would help in funding key growth projects. Goldcorp also has existing investments in Quebec and the proposed deal shall allow the company to cut some corporate costs.

The deal would also grow GG's Canadian footprints. New mining royalty and tax laws in Mexico, permit and political issues in South America, and post investment contract changes at Pueblo Viejo in the DR highlight the importance of regional exposure for all mining companies. While many other countries have evolved to become less mining friendly, Canada remains one of the more supportive countries. Once Eleonore and Cochenour are complete, GG's domestic operations are expected to drive nearly 50% of total production, which puts GG in a favorable position compared to its peers.

4Q Production

The company also recently released 4Q and full year 2013 production results, 2014 production and cost outlook, and updated its 5-year production plan. Both the reported production results and costs were better than the market expectations. Excluding the impacts of the proposed acquisition of Osisko, the 2014 outlook highlights y/y production growth of 15% with all-in sustaining costs falling by 10%. GG's production growth and cost reduction expectations for 2014 are both better than its peers.

All three of GG's major growth projects (Cerro Negro, Eleonore, and Cochenour) are on schedule. In addition, the timeline at Cochenour was pulled forward by 6 months, saving $44 million of capex. Over the next five years, the company expects production to peak in 2016 at levels ~50% higher than 2013 production of 2.67 million ounces before starting to decline in 2017.

Conclusion

We have a buy rating on GG. At a time when the gold industry is focusing on balance sheet preservation, GG's proposed acquisition of Osisko probably came as a surprise to many. However, a closer look at the acquisition tells us that the Vancouver based senior gold miner would benefit across a number of key metrics, including production growth and free cash flow; all while reducing its political risk and continuing to maintain a conservative balance sheet. The potential addition of Osisko's one producing mine and two development projects should also be a smooth transition for GG as the assets are all located within jurisdictions in which GG already operates.

GG is one of the most compelling growth stories among gold miners. The company can deliver meaningful growth over the next few years. Goldcorp's development projects are well into the construction phase, with all of GG's current growth projects expected to commence first gold production within the next 12-18 months. 2013 was a big year for capex, but company's spending expenditures are expected to fall in 2014. The company also executed a cost-cutting program in 2013, resulting in $280 million in cost savings, some of which should translate favorably into lower operating costs.

Risks: Goldcorp, like all other gold companies, is exposed to the downside risk of lower than expected gold prices. Additional, worse than expected execution at company's growth projects Eleonore and Cochenou and cost overruns or further delays at Cerro Negro all present a downside risk to the company.

Source: Goldcorp: A Compelling Growth Story With Minimum Political Risk