Goldcorp Ups Its Offer for Osisko to C$3.6 Billion

Source: Thinkstock

Source: Thinkstock

This morning, Goldcorp (NYSE:GG) announced that it has increased its buyout offer for Osisko Mining (OTCMKTS:OSKFF) to C$3.6 billion ($3.3 billion.) This is another key development in what has been the most compelling drama in the mining space for the year.

For investors who aren’t familiar with the history of Goldcorp’s attempt to buy Osisko Mining, the company first made an offer of C$2.6 billion back in January. Osisko’s management largely opposed the deal. It believed (and still does) that the company’s Canadian Malartic mine is worth significantly more than this, and as a result, Goldcorp has been unsuccessful. Goldcorp attempted to circumvent Osisko’s management and addressed shareholders directly, although they too were against the deal.

Then Yamana Gold (NYSE:AUY) came in and made an offer to buy a 50 percent stake in Osisko’s assets. The deal gives Osisko Mining C$442 million in cash and about C$900 million in Yamana Gold stock. The offer is only slightly better than Goldcorp’s in how Osisko’s assets are being valued, but Osisko shareholders would retain the upside potential that the Canadian Malartic mine offers. That was about a week ago — and now Goldcorp has upped its offer for Osisko shares.

I have maintained that even at the lower valuation, Goldcorp was overvaluing Osisko Mining. However, I explained that given some of the qualities of Osisko’s Canadian Malartic mine that it is a premium asset that one could argue is worth more than its discounted cash-flow at the current gold price. There are a few reasons for this:

  • Canadian Malartic is one of the few large long-life gold mines in the world.
  • Canadian Malartic is located in Quebec, which is a low risk mining jurisdiction.
  • Canadian Malartic has relatively low production costs, and these costs can come down.

Given these points, I maintained that C$2.6 billion ($2.4 billion) is a lot to pay for a mine that is only going to generate about $120 million in annual cash-flow at the current gold price.

This is why the new offer baffles me. Now instead of paying C$2.6 billion for a mine that will yield $120 million in cash-flow and some other miner assets that hardly move the needle, Goldcorp is offering C$3.6 billion. That’s 27.5 times cash-flow! As an investor who follows this sector very carefully, I am baffled, and I fail to see the reasoning behind this offer.

Furthermore, it seems that nobody is taking this offer seriously. Osisko Mining’s CEO Sean Roosen still prefers the Yamana Gold deal, which allows Osisko shareholders to retain half of its stake in Canadian Malartic and its secondary assets. We also have a very unusual reaction to the takeout offer in the price of Osisko shares. The Canadian listed stock is currently valued at C$3.37 billion, or C$230 million less than Goldcorp’s offer.

All of this tells me that there is a small chance, if any, that Goldcorp will wind up owning Osisko Mining. As an investor in the companies involved, I would take the following positions:

  • Osisko Mining: Osisko Mining shareholders seem to have developed a cult-like mentality. While Canadian Malartic is a great asset, it is currently overvalued by the market. I would therefore sell, and look for opportunities elsewhere.
  • Goldcorp: Goldcorp is offering too much for Osisko Mining. I think this reflects poorly on management. I have sold my stake in light of this and of other recent negative developments.
  • Yamana Gold: Yamana Gold has seen its shares slump since it partnered up with Osisko Mining, but I think it is the winner here. While it isn’t getting a great price for Osisko, it is not blatantly over-paying. We can easily see Canadian Malartic outperform my expectations, and if gold prices rise Yamana Gold’s deal will look extremely prescient in a few years.

Disclosure: Ben Kramer-Miller is long Yamana Gold shares.