Osisko Bidding War Proves Gold is Underrated

A bidding war irrupted over Osisko Mining (OSK), an emerging gold producer. Osisko owns the attractive, 9.4 million-ounce Canadian Malartic mine in Quebec, plus a few exploration-stage assets.

Here’s how the war began…

In January, Goldcorp (GG) made a hostile offer to acquire Osisko for C$5.95 per share in cash and stock. Considering the great progress Osisko has made bringing the Canadian Malartic mine into production (and the fact that Osisko traded north of $15 per share in 2011), Goldcorp was offering a bargain-basement price.

In early April, Yamana Gold (AUY, YRI), sensing the value Goldcorp was getting, joined the bidding with a complex (but shrewd) C$7.60 offer for Osisko. It was a friendly offer, so Osisko management clearly preferred merging with Yamana. Yamana’s first offer involved financing from Canadian institutional investors through a loan and a gold stream. It also allowed Osisko shareholders to retain a much more concentrated ownership in the Canadian Malartic mine, rather than wind up with a fractional ownership in the Goldcorp empire.

Yamana’s offer prompted a C$7.60 counteroffer from Goldcorp.

Finally, on April 16, Yamana responded with a new strategy: It found a bidding partner in Agnico Eagle Mines (AEM), one of our recommended gold stocks. Here are the details of what looks like the final winning offer:

Agnico Eagle and Yamana will jointly acquire 100% of Osisko’s shares’ total consideration of C$3.9 billion, or C$8.15 per share — a 7% premium to Goldcorp’s prior. The offer consists of C$1.0 billion in cash, approximately C$2.33 billion in Agnico Eagle and Yamana shares and shares of a new company (“Spinco”) with an implied value of approximately C$575 million.

Osisko shareholders who choose to hold on to the Spinco would receive the following: a 5% net smelter royalty (NSR) on the Canadian Malartic mine, C$155 million cash, a 2% NSR on the Kirkland Lake assets and Osisko’s other development assets and liabilities.

AEM stock fell sharply after the announcement, but the offer makes a lot of sense for its shareholders. With employees and assets already nearby the Malartic mine, AEM would bring a lot of expertise and mine-operating cost savings to the new partnership.

Earlier this week, Goldcorp let its offer expire. So AUY and AEM have very likely won the bidding.

The fight to acquire Osisko reveals the dichotomy between the gold mining stock views of a) the investing public and b) the executives and board members running these companies.

Insiders — those in position to know the most about the assets they manage — are as bullish as they’ve ever been: They’re buying shares at a brisk pace.

Ted Dixon of INK Research publishes indicators of insider buying. Dixon’s indicator for the TSX gold sector shows a ratio of insider buying to insider selling of 2.5:1 — one of the most bullish readings ever.

Institutional investors seem to have abandoned the sector. For now, the consensus doesn’t want to own gold because it expects the Fed will taper QE and then reverse QE by shrinking the money supply and everything will be dandy. I have my doubts.

Since the 2008 crisis, several central banks, including the Fed, have encouraged the development of a highly unstable financial system. Real estate, the collateral for much of the banking system, is now priced on the assumption that low mortgage rates are permanent. And stocks have rallied on the assumption that future earnings should be discounted back to the present at very low rates. Take away the QE and low interest rates and we’re supposed to believe these asset values would not fall violently? I don’t think so.

Asset values might stay high and keep rising if private-sector economies were robust. But they’re not! In fact, since 2008, private-sector economies have become ever more intertwined with (and dependent upon) government and central bank stimulus. Investors expecting this Fed tightening cycle to be like the last one will be surprised at how rapidly the economy contracts in response to slight withdrawal of addictive monetary stimulus.

Individuals, to the extent that they’ve held onto gold miners through the carnage (or bought recently), are not likely to sell these stocks anywhere near current prices. This state of affairs describes a sector that’s bottomed and has a lot of upside potential. New investors, when they see central banks trapped in states of permanent stimulus, should migrate to gold miners. To acquire shares from strong hands, they’d have to bid aggressively, creating the conditions for a bull market.

Best regards,

Dan Amoss, CFA
for The Daily Reckoning

Ed. Note: If Dan is correct, the next few years could prove to be a real boon for the price of gold – and savvy gold investors. But there’s more than one way to play it than by simply buying the yellow metal. And readers of the FREE Daily Resource Hunter know that better than anyone. In every issue they’re treated to specific chances to discover real profit opportunities from across the resource and energy space. Some of them have likely already turned those opportunities into small fortunes. Don’t miss your chance to do the same. Sign up for Daily Resource Hunter for FREE, right here.

This article originally appeared in Daily Resource Hunter.

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Dan Amoss

Dan Amoss, CFA, tracks aggressive accounting and other red flags that markets miss. He’s a student of the Austrian School of economics and Daily Reckoning fan since 2000. Agora Financial relies on Dan for macro market commentary as well as profitable plays like his 2008 call to readers to buy Lehman Bros. puts, which...

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