Goldcorp Ups Its Offer for Osisko to C$3.6 Billion

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Source: Thinkstock

Source: Thinkstock

This morning, Goldcorp (NYSE:GG) announced that it has increased its buyout offer for Osisko Mining (OTCMKTS:OSKFF) to C$3.6 billion ($3.3 billion.) This is another key development in what has been the most compelling drama in the mining space for the year.

For investors who aren’t familiar with the history of Goldcorp’s attempt to buy Osisko Mining, the company first made an offer of C$2.6 billion back in January. Osisko’s management largely opposed the deal. It believed (and still does) that the company’s Canadian Malartic mine is worth significantly more than this, and as a result, Goldcorp has been unsuccessful. Goldcorp attempted to circumvent Osisko’s management and addressed shareholders directly, although they too were against the deal.

Then Yamana Gold (NYSE:AUY) came in and made an offer to buy a 50 percent stake in Osisko’s assets. The deal gives Osisko Mining C$442 million in cash and about C$900 million in Yamana Gold stock. The offer is only slightly better than Goldcorp’s in how Osisko’s assets are being valued, but Osisko shareholders would retain the upside potential that the Canadian Malartic mine offers. That was about a week ago — and now Goldcorp has upped its offer for Osisko shares.

I have maintained that even at the lower valuation, Goldcorp was overvaluing Osisko Mining. However, I explained that given some of the qualities of Osisko’s Canadian Malartic mine that it is a premium asset that one could argue is worth more than its discounted cash-flow at the current gold price. There are a few reasons for this:

  • Canadian Malartic is one of the few large long-life gold mines in the world.
  • Canadian Malartic is located in Quebec, which is a low risk mining jurisdiction.
  • Canadian Malartic has relatively low production costs, and these costs can come down.

Given these points, I maintained that C$2.6 billion ($2.4 billion) is a lot to pay for a mine that is only going to generate about $120 million in annual cash-flow at the current gold price.

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