Gold Corp Huge Gains Are at the End of "Acquisition Trail"
Commodities / Gold and Silver Stocks 2014 Feb 06, 2014 - 12:52 PM GMTBy: Money_Morning
Peter Krauth writes: A few weeks back, Goldcorp Inc. (NYSE: GG), a top gold producer, made a hostile $2.6 billion offer for Osisko Mining Corp (TSE: OSK).
It was one of many signs that top gold producers are on the acquisition trail.
And another strong signal that gold prices may be heading upward.
But, by watching early, we have a terrific opportunity to stay ahead of this acquisition and take advantage of the gold and commodities opportunities that are about to come our way...
We Spotted These Deals Early
Recently I told you about a group of mining titans, including a major private equity player, who are looking to acquire a large Peruvian copper mine.
Just two months prior to that, I'd mentioned that the former CEO of Xstrata, Mick Davis, had raised $1 billion to hunt for resource sector deals.
These are early signs that sophisticated industry insiders see the slew of major write-downs, slashed capital expenditures, and asset sales as a glaring opportunity. They realize that has set up the commodities space for some seriously profitable deal making going forward.
Goldcorp's move is another clear sign of that... and Osisko knows it.
Management has already recommended that shareholders reject Goldcorp's $5.95 per share offer, and no one's really surprised. A few years back Osisko rejected a $12 per share offer from...Goldcorp. As recently as 2010, Osisko traded as high as $16.
To be sure, Goldcorp's eyeing a bargain.
But if you look more closely at what they're trying to buy in Osisko, you'll better understand what's really motivating Goldcorp.
A Key Window into Gold's Direction
Osisko has a few projects but right now its crown jewel - what Goldcorp's really after - is one big mine.
Their flagship asset, the Canadian Malartic mine in Quebec, was explored, financed, and built for $1 billion. It currently produces 475,000 gold ounces annually, but it's expected to average between 500,000 and 600,000 ounces per year over its 16-year mine life.
However, more significant than anything else in Goldcorp's pursuit of Osisko is management's outlook on the gold price.
Here's what I mean...
Malartic's gold ounces are close to industry average grades, and its all-in cash costs near $1,000/ounce are also typical. At $1,250 gold, profit margins are OK, but not outstanding.
On the other hand, Malartic has 10 million ounces in reserves (the highest quality of resources), and it's located in Quebec, one of the top mining jurisdictions worldwide. And it's a producing mine.
Recent and previous bids have already been rejected. But Goldcorp's courted Osisko so aggressively, it's clear they really want to add Malartic to their suite of projects and help grow production.
If Goldcorp succeeds in its bid for Osisko, it's going to have to pay considerably more than $5.95 per share.
Combining Osisko's current production would instantly add nearly 20% to Goldcorp's annual output.
So in pursuing Osisko, Goldcorp has to believe that gold prices, at least in the medium and long term, are going to go higher - a lot higher. That's because there are only so many synergies and economies of scale to be had from joining operations and sharing overhead.
Consider the fact that the average gold grade for producing mines is 1.06 grams/ton, but only 0.66 g/t for undeveloped deposits. That means future mines will supply 37% less gold for every ton of rock extracted and processed.
But it's much higher gold prices that are going to make each and every ounce coming out of the ground at Malartic throw off a ton of cash for Goldcorp. And they know it.
That's why Goldcorp really wants Osisko.
Lining Up with Goldcorp: More Bullish Mergers
We don't need to look far for examples of recent buyout deals.
New Gold Inc. (NSYEMKT: NGD) completed its takeover of Rainy River Resources back in October. New Gold got 4 million ounces in a good jurisdiction (Ontario) and paid less than book value.
As well, Primero Mining (NYSE: PPP) bought Brigus Gold Corp (USA)(NYSE: BRD) for $220 million, and Asanko Gold (NYSEMKT: AKG) is acquiring PMI Gold Corporation (TSE: PMV).
More such deals are coming, since bargain-priced gold equities have made M&A irresistible.
Barclays Plc's Paul Knight, vice chairman and co-head of global metals and mining, told Bloomberg, "Majors who have done portfolio optimization will look at some of the juniors and say, 'Here's a chance for us to acquire a potentially better asset than we've sold and to mitigate the loss of production.'"
According to Bloomberg data, gold miners are near their cheapest relative to book value in over 20 years.
Rick Rule, Chairman of Sprott Global Resource Investments Ltd., said of their recently announced investment mandates with large institutional investors that these deals indicate the sector is undervalued, and these investors are using the sector's weakness to position themselves for future returns.
In the past few years, subscribers to my research service Real Asset Returns have done very well in acquired plays in the mining sector, including precious metals.
A great example was when Minefinders was taken over by Pan American Silver Corp. (Nasdaq: PAAS) in 2012. We earned 56.54% on the sale of a first tranche (before the takeover offer), then 42.12% on the balance of the position once PAAS announced the takeover.
Given the strong outlook, we've recently added new holdings poised to benefit from this trend.
The takeaway from my analysis is that Goldcorp's management - a team with deep experience building, running, and yes, acquiring mines - want Osisko's ounces because they're going to be worth a whole lot more before too long.
And we're going to keep a close eye on it for you so you'll know right when it's ready to pop...
Source : http://moneymorning.com/2014/02/06/huge-gains-end-acquisition-trail/
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