The first thing that stands out about Goldcorp Inc.'s $2.6-billion hostile takeover bid for Osisko Mining Corp. is that it's happening at all. In the fading gold market, major gold companies have been shedding underperforming assets, conserving cash and taking multi-billion-dollar writedowns, not launching multi-billion-dollar takeovers. But with asset prices much lower than they were a couple of years ago, Goldcorp is taking a leap to secure future production and reserves to replace those that have evaporated along with the high gold price.
Goldcorp's offer for Osisko – a Montreal-based miner whose Canadian Malartic mine in western Quebec has 10 million ounces of proven and probable reserves and produced nearly 500,000 ounces of gold last year – is a modest 15 per cent over Osisko's closing share price before the bid was announced, hardly rich compared with the gaudy premiums paid in the sector a couple of years ago. At $5.95 a share (in cash and Goldcorp stock), it's less than half of what Osisko's stock was trading at two years ago.
However, Goldcorp's purchase price works out to about $240 (U.S.) per ounce of proven and probably reserves – not wildly rich based on industry norms, but hardly a bargain, either. (Gold Fields Ltd. acquired three Australian mines from Barrick Gold Corp. a few months ago at a cost per ounce of less than half what Goldcorp is offering for Osisko's mine, its sole producing property.)
Nor is the mine a low-cost producer. Its cash production costs in the third quarter of 2013 topped $725 (U.S.) an ounce; Goldcorp's cash costs are running below $500. TD Securities analyst Greg Barnes estimated that the proposed acquisition would raise Goldcorp's overall cash costs by about 7.5 per cent. Goldcorp may believe it can bring Osisko's costs down; the press release announcing the bid refers to the prospects for "operation improvements" and the benefits of "synergies" with Goldcorp's existing Quebec and Ontario operations.
But here's the dilemma facing Goldcorp and other senior gold producers: As the gold price falls and gold producers are forced to get more disciplined about higher-cost properties, simple arithmetic makes some existing reserves uneconomic to produce – and long-term production outlooks necessarily shrink. Just last week, Goldcorp slashed its mine-life outlook for its highest-production mine, Mexico's Penasquito, to 13 years from 19, because "lower-grade mineralized material will not be mined or processed under current assumptions."
Companies will be feeling a pretty compelling desire to replace their lost ounces of future growth through acquisition, if they can afford to; and unlike many of its balance-sheet-challenged large competitors, Goldcorp can, with more than $600-million in cash and ample available credit lines. Adding Osisko would instantly boost Goldcorp's gold production by 17.5 per cent, and proven and probable reserves by 15 per cent. It would give Goldcorp a property close to home and close to existing assets, in a relatively low-risk political jurisdiction – something not easy in the increasingly scarce world of gold mining.
In every case of a hostile bid, there's a good chance the buyer will have to sweeten the deal to earn its target's grudging approval, so the cost to Goldcorp could still rise. Indeed, the stock market at midday Monday was pricing the stock 4 per cent above the value of Goldcorp's offer, on that very assumption. But there might not be any white knights waiting to ride in with a higher bid. At this price range, the list of possible suitors is short, and with many of those companies (think Barrick, Kinross, et al) still tightening their belts, cleaning up their balance sheets and licking their wounds from previous acquisitions, interest in jumping into a bidding war for Osisko may be near zero.