Monday, 13 January 2014

Gold, Goldcorp and a deal

Finally a gold sector deal of a reasonable size.  I have talked about Goldcorp before but never really got too excited about the company. 

Today though brings something to get excited about. 

Slowly, slowly conditions are improving in the gold sector. It is not just trends in the gold price (which has held above the US$1200 level in recent weeks) but a reduction in the write-downs, production misses and general malaise of the gold mining sector.  One further element which indicates some element of stabilisation, recovery and value would be gold mining sector M&A.  This is the excitement from Goldcorp today as the company announces:

'Goldcorp announces offer to acquire Osisko for C$5.95 per share in cash and shares'So who are Osisko and why are Goldcorp offering to pay a premium of around 15% to its Friday closing share price and nearly 30% above the average price of the last month?
Well, the company's website talks about a pure gold play, focused on Canada:

'When you invest in Osisko Mining Corporation, you invest in a company focused on gold, 100% unhedged, allowing it to fully benefit from the rise in precious metal prices.  Our main asset, the Canadian Malartic mine, is a world-class mine located in one of the best mining jurisdictions in the world, the Abitibi-Témiscamingue district in Québec'.

Looking through their last corporate presentation,Osisko has 10m ounces of reserves (about a sixth of Goldcorp's proven and probable reserves - interestingly the EV of Goldcorp is not dis-similar to x6 that of Osisko) exhibited production cost and cost reduction which are both positive traits...

...however in the first 9 months of 2013, they are running at a loss, mainly due to announcement an asset impairment of over C$0.5bn earlier in the year. 

But with low debt, generating cash and a sub book valuation (see below), Goldcorp have seen a synergistic opportunity and, of course, heightened their own corporate call option on gold.

Goldcorp's near C$6 bid is equivalent to about the highest share price over the last year, but still equates to a share price lower than any other price seen in the previous two years - what a statistic.

As with any deal nowadays, Goldcorp sees accretion on 'key per-share metrics' and that is not surprising given that Osisko is underlying profitable and generates cash.  Additionally, Goldcorp has operations in the area that Osisko operates so allowing cost synergy potential. 
Overall, with such low gold market valuations (and despite the low Osisko grade) the deal seems solid enough.  Inevitably too, with Goldcorp using shares as well, this will overhang the market a little.  Additionally, as the first multi-billion deal between gold plays, scepticism will be apparent.  Let's not forget, Goldcorp's own share price ride has been exceptionally negative too over the last three years as shown below:

Despite the initial Goldcorp share price negative signal (-1.5% as I write pre-market) this is a positive for the gold sector.  When large industry players are moved to bid for medium-sized peers - despite the low sentiment towards the space - investors should take notice.  Now the next question is whether Osisko's management team will accept the bid or not.

Gold stocks remain a strong contrarian buy.  My own personal larger cap favourite can be found linked to this report.




No comments:

Post a Comment