- Goldcorp clearly wants to buy a mining company, or at least another mine.
- Given its interest in Osisko Mining, we can guess that Goldcorp is in the market for a large producer with low costs in a low-risk mining jurisdiction.
- While there aren't any possibilities quite like Osisko Mining, there are options with most of these qualities -- I list four here.
With this being the case, I think that Goldcorp could still be in the market to purchase another gold miner, or at least another gold mine.
Fellow author Hebba Investments recently put out a piece suggesting the same thing, although I disagree with the selection of companies he puts forth as candidates that Goldcorp would be interested in. He is focused on Canadian companies given that Osisko Mining's flagship project -- Canadian Malartic, is in Canada. But he points out Canadian companies with smaller mines (e.g., Argonaut Gold (OTCPK:ARNGF)) and with mines that are not yet producing (e.g., Pretium Resources (NYSE:PVG)).
I think Goldcorp management's fixation on Osisko went beyond its location. In particular, I think it was the combination of the following four things that led Goldcorp to value Osisko shares so highly, and as I would argue -- too high.
- It is a large producer -- it has the potential to produce as much as 600,000 ounces of gold annually.
- It has a long potential mine life. It has enough resources to produce for over 15 years, and possibly longer, if Agnico Eagle and Yamana Gold can find additional resources.
- It is a low-cost producer, and it will generate cash-flow at $1,300/ounce gold.
- It is located in Canada, which is a low-risk mining jurisdiction.
While there is nothing available to Goldcorp that is quite like Osisko Mining, I think there are a few possibilities out there that could generate interest from Goldcorp's management. Considering that it was willing to spend C$3.6 billion, I have come up with a couple possibilities.
Again, I must emphasize that none of the stocks on this list fits all of these criteria.
Allied Nevada Gold
The Hycroft project -- owned by Allied Nevada Gold (NYSEMKT:ANV) -- has all of the qualities of Canadian Malartic, except that it is a smaller producer and it is located in Nevada -- another low-risk mining jurisdiction.
This company would be incredibly valuable to an acquirer. Right now, the company is valued at $370 million. Still, it is a low-cost producer with 200,000 ounces of gold production, over 20 million ounces of resources, and the potential for more annual production. The reason it is so cheap is that the company has a tremendous amount of debt. This debt increases the company's effective cost of mining gold by a couple hundred dollars per ounce, and as a result, it is probably about "break-even" with gold prices where they are.
To a multi-billion dollar company like Goldcorp, the company's $600 million in debt is easily manageable.
Given the incredibly low price tag of Allied Nevada, I think we could see Goldcorp come in and pay a hefty premium and still have a lot of capital left over, if it is still set on acquiring $3.6 billion worth of assets.
NovaGold (NYSEMKT:NG) owns half of the enormous Donlin project in Alaska (Barrick Gold (NYSE:ABX) owns the rest), which is generally a good mining jurisdiction. It also only has a market capitalization of $1.1 billion. However, the mine isn't yet in production, and it has a $6.6 billion price tag, or $3.3 billion to a 50% owner such as NovaGold. If Goldcorp were to offer $1.5 billion to NovaGold shareholders, its total cost would be $4.8 billion minus NovaGold's $200 million cash position and its stake in the smaller Galore Creek mine, which would presumably be sold. While this is probably more than Goldcorp wants to spend, in about 4 or 5 years, the Donlin project will be generating over 500,000 ounces of gold annually for Goldcorp, with production costs of just $950/ounce. Furthermore, the mine's life is even longer than Canadian Malartic's. While Goldcorp may not want to wait so long for production, I think NovaGold may be on management's radar.
Tahoe Resources (NYSE:TAHO) is another possibility. This is a silver miner with a huge project -- Escobal in Guatemala -- that just went into production. It will produce about 400 million ounces of silver over 20 years, with very low production costs. Tahoe Resources is valued at just over $3 billion, which I think is too high with silver prices where they are, but this didn't stop Goldcorp from pursuing Osisko Mining.
But Goldcorp has another incentive to buy Tahoe Resources -- it already owns 40% of the company, which means that its cost would be just $1.8 billion, plus whatever premium was offered. If Goldcorp were to attempt a hostile takeover of Tahoe Resources, its 40% ownership position would make this much easier than chasing after Osisko was.
The one issue that Tahoe Resources has is that the Escobal mine is located in Guatemala, which is not considered to be a safe place to mine. Nevertheless, if Goldcorp were to buy Tahoe Resources, it would still have capital left over to go buy a smaller, low-cost gold producer in a safe mining jurisdiction, assuming that it is interested in spending C$3.6 billion.
Finally, Goldcorp may be interested in Detour Gold (OTCPK:DRGDF), which has one of the largest-producing gold mines in Canada. The Detour Gold Mine has a whopping 29 million ounces of gold. Furthermore, it has a valuation of just under $1.5 billion, and so, we could see Goldcorp buy out the 60% of Tahoe Resources it doesn't own, as well as Detour Gold. Detour Gold will produce more than Canadian Malartic going forward -- in the next couple of years, production should reach a whopping 750,000 ounces. The trouble with Detour Gold, and the reason that it is so much cheaper than Osisko Mining is because production costs aren't so low -- they should be about $1,200/ounce when everything is said and done. This means that if the gold price turns south, we could see the mine lose money. Since one of the appeals of Osisko Mining's Canadian Malartic mine was its low production costs, this is a big deal. But if Goldcorp really wants to add to its gold production, and if it wants to do so now and in a low-risk mining jurisdiction, Detour Gold may be on its radar.
Again, while there are no projects quite like Osisko's Canadian Malartic, there is little doubt that Goldcorp is in the market for acquisitions. The companies I mention here are probably on Goldcorp's radar, and all are potential takeover targets.
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