Even at a 50% discount to 2011, market isn't impressed with Goldcorp bid for Osisko

01/13/2014 6:55 pm EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

Goldcorp (GG), the world’s second largest miner of gold, has made a $2.38 billion offer to buy Canada’s Osisko Mining (OSK.CN or OSKFF in New York.) According to Goldcorp, the acquisition would add about 10 million ounces to the company’s reserves and would increase Goldcorp’s annual production by about 500,000 ounces or 18%. After the deal about 44% of Goldcorp’s production would come from geopolitically stable Canada vs. 34% now.

The market isn’t especially impressed. Goldcorp’s shares closed down 0.39% today and the take seems to be that, given the depressed price of gold and gold mining stocks, Goldcorp should have offered less for Osisko. Even before the bid shares of Osisko were up 30.3% from December 3 to January 10. The offer from Goldcorp tacks on another 15% premium. (Goldcorp is a member of my Jubak’s Picks portfolio http://jubakpicks.com/ )

I suspect that the issue isn’t so much absolute price but a sense that Goldcorp should have found a better asset to buy. In February 2011 Goldcorp actually sold a 10.1% stake in Osisko for $533 million. That valued the whole company at $5.28 billion. Looking at the $2.38 billion just offered by Goldcorp, you get a very clear sense of how badly this sector has been hit by the fall in gold prices.

The reason that Wall Street may not be very impressed may have more to do with ore grades than with absolute deal prices. Back on January 2 I wrote that gold mining companies were facing reserve write-downs in January as a result of the falling price of gold. http://jubakpicks.com/2014/01/02/look-for-more-gold-reserve-write-downs-in-january/ Some deposits that were worth mining at $1,400 an ounce were not worth mining at $1,200 and companies would have to remove some of those deposits from their inventory of actual reserves. In that environment, the most valuable reserves to own—or to acquire—were those with the highest ore grades since those would be worth mining at $1,400 or $1,200 or even $1,000 an ounce.

And mines with those higher grades would be the most attractive acquisitions too. Which is why names such as Canada’s Pretium Resources (PVG) and Torex Gold Resources (TXG.CN or TORXF in New York,) which are seen as having high-grade ore bodies, have been showing up on analysts’ list of likely acquisitions.

Osisko doesn’t make the top of that list mostly, I think, because it’s not clear how the lower price of gold will change the company’s reserve figures. At the end of 2012 Osisko lowered its yearend figures for proven and probable reserves to 10.1 million ounces from the 10.7 million ounces shown at the end of 2011. In the most recent quarter cash costs at the company’s lead Malartic mine came in slightly above analyst projections.

In a less fraught environment for gold and gold mining stocks I doubt that these worries would matter much given that Goldcorp has bid roughly half as much for Osisko as the February 2011 valuation. But in the current market everything raises a flag. (I’m cutting my target price on Goldcorp  today to reflect that very negative environment—and the extreme difficulty in calling any bottom for gold or gold mining stocks—to $32 a share by January 2015 from my current $48 target.)

And, frankly, investors looking to buy a gold mining stock—and there must be a few of these souls, right—are clearly focused on potential acquisition candidates than on acquiring companies. Pretium Resources climbed 4.8% today and Torex Gold finished the day up almost 13%.

Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. When in 2010 I started the mutual fund I manage, Jubak Global Equity Fund http://jubakfund.com/, I liquidated all my individual stock holdings and put the money into the fund. The fund may or may not now own positions in any stock mentioned in this post. The fund did not own shares of any company mentioned in this post as of the end of December. For a full list of the stocks in the fund as of the end of June see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/.

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