Buyout Mania Hits the Gold Market

“The only easy day was yesterday,” say my Navy SEAL friends. Every day is different, of course. Still, a wave of business news hit the beach this week.

Headlines included news of Google buying Nest Labs, a maker of smart thermostats, for $3.2 billion. Charter made a $37.4 billion move to acquire Time Warner Cable. Japan’s Suntory wants to buy the U.S. company that distills Jim Beam whiskey for a cool $13.6 billion. This is how people with big cash are deploying capital.

Big business is shaping its future… and ours, too. What does this wave of combinations herald? Connect the dots. Our collective culture is evidently evolving toward a state in which people sit in climate-controlled rooms, watch old movies on television and drown their sorrows in hard liquor.

Malartic has gold-equivalent reserves of 10.1 million ounces, which puts it among the largest gold mines in Canada.

Then again, like a stealth bomber flying under the U.S. multimedia radar, Goldcorp (GG) made a $2.6 billion buyout offer for Quebec-based Osisko Mining (OSK). Let’s peer into that golden future.

First, some history. In late 2010, Osisko shares traded on the Toronto Stock Exchange just shy of $16. Indeed, a few years ago, Osisko’s board rejected a $12 takeover offer from Goldcorp. Then last July, Osisko shares traded under $3.50 during the midsummer smack-down. Toward the end of 2013, Osisko shares revived a bit, into $5 country.

Now as the new year dawns, along comes Goldcorp — “again,” to quote Forrest Gump — with an offer. It’s a lower offer than before, to be sure. But Goldcorp is still laying real money on the table, with a bid initially valued at $5.95 a share, a 15% premium based on last week’s Osisko closing price.

This offer is Goldcorp’s way of telling the market that it’s a good time to buy a gold mine (on the cheap!) In other words, per Goldcorp, we’re near the nadir of the 18-month gold swoon, and perhaps the related share price decline. That’s good news, because I actually believe that the people who run Goldcorp know a few things about gold.

Markets reacted, as you might imagine. Osisko’s stock price quickly moved up 20%, to about $6.25 on the news, which is higher than Goldcorp’s offer. The arbs apparently expect a higher bid down the line.

Thus, just as Google sees a future in smart thermostats, Goldcorp is taking out Osisko, a one-mine play that trades at a discount. It’s all about Osisko’s Canadian Malartic mine, recently completed, now up and running, and a very fine mine indeed.

Between 2005-2011, Osisko spent about $1 billion to develop and build Malartic. The mine began commercial production in May 2011. When all moving parts are spinning, Malartic is designed to produce over 500,000 ounces of gold equivalent per year over the next 16 years, with more to come. Malartic has gold-equivalent reserves of 10.1 million ounces, which puts it among the largest gold mines in Canada.

And what of the board of directors of Osisko? Earlier this week, the board announced that it’ll consider the Goldcorp offer, “as well as any formal offer actually made.” That’s another way of saying that they hope someone else comes along and starts a bidding war. The Goldcorp people say they don’t want a bidding war, but that’s because they’re not in one yet. At the end of the day, Goldcorp management wants Malartic and clearly believes that the new mine is worth more under Goldcorp ownership than simply standing alone.

Goldcorp planned for this. Goldcorp kept a clean, solid balance sheet through the latest gold cycle. Goldcorp avoided top-dollar, top-of-cycle buyouts that turned into expensive write-offs in the past year — compare this with, say, disappointments like Kinross (KGC) and Barrick Gold (ABX). Ugh, don’t get me started.

On a market-friendly note, since the Goldcorp announcement hit the wires, there’s been a very slight sell-down for GG shares. But, on the year shares are up more than 6%. Overall, the market believes that Osisko and its Malartic project are positive and an accretive addition to Goldcorp.

At the end of the day, Goldcorp stands to pick up one of the best gold mines in Quebec for a deep discount. There’s long mine life ahead, with low costs per ounce. Nice move.

Best wishes…

Byron W. King
for The Daily Reckoning

Ed. Note: The gold mining space is just one sector of the resource market Byron has been keeping his eyes on. In fact, he often appears in the pages of the Daily Resource Hunter to give readers regular updates on everything from miners, to physical metals, to natural gas, to oil, and more. And his wealth of knowledge has helped them discover real, actionable stock picks that could have made savvy investors a fortune. If you’re interested in getting first-hand knowledge just like this, sign up for the FREE Daily Resource Hunter email edition, right here.

Original article posted on Daily Resource Hunter

You May Also Be Interested In:

Byron King

A Harvard-trained geologist and former aide to the United States Chief of Naval Operations, Byron King is our resident gold and mining expert, and we are proud to have him on board as the managing editor of Whiskey & Gunpowder.

This “old rock hound” uses his expertise and connections in global resource industries to bring...

View More By Byron King