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Is Goldcorp’s Osisko bid just the start of a gold M&A rush?
While not the first recent takeover bid in the gold space, Goldcorp’s offer for Osisko suggests that the bigger players may now feel the decline in the gold price is near its end and could prompt others to follow.
There has been considerable speculation as the gold price has fallen and previously profitable gold miners struggled to keep their heads above water that the predators with strong balance sheets are poised to strike and attempt to swallow up smaller – or just less well cashed up – miners in the gold space.
See also: Mixed reviews for Goldcorp's C$2.6bn bid for Osisko
Goldcorp’s hostile bid for Osisko – the one time darling of the Canadian exploration and development sector, but now a mid-tier gold miner in its own right – could thus just be the start of a flood of M&A moves as the gold price looks to be nearing its bottom and gold stock valuations are seen as being close to their likely lows.
While there have already been other M&A moves in the space over the past year although mostly at a much lower level – Hecla’s ‘white knight’ acquisition of Aurizon, Centamin’s Ampella transaction and Asanko’s PMI takeover all immediately spring to mind. But none of these have had the impact of the Goldcorp bid given the sizes of the two companies involved.
The Goldcorp $2.6 billion stock and cash offer, worth around $6 per share has been described by Osisko as being opportunistic and hugely undervaluing the company being set at a 15% premium to the Osisko price the day before the bid was announced.
See also: Goldcorp’s C$2.6bn hostile bid ‘very low’ and ‘opportunistic’ - Osisko
But such is the nature of bids in this kind of bear market. Even so, the offer may be seen as attractive to some Osisko shareholders who have seen stock in their company fall from almost $16 three and a half years ago to a recent level of a little over $4, a decline of around 75%. True Goldcorp’s own stock has fallen from a peak of around $55 three years ago to a recent $23, itself a 58% decline, but investors may feel they are better protected from the vagaries of the gold market in a larger gold miner with far higher grade resources and with strong expansion plans (see:Goldcorp predicts 50% increase in gold output in 2014-2015) than in a mid tier company mining much lower grades and perhaps seen as considerably more vulnerable financially to further gold price weakness. At least that is what Goldcorp is probably banking on. And, in targeting Osisko in the mid tier space Goldcorp may also feel confident that few, if any, other companies interested in the gold mining sector will have the financial resources to make a counter bid which might be more acceptable to Osisko management.
Ultra low stock valuations due to the falling gold price are also making a number of other companies with exciting assets very vulnerable to predation by larger entities. If the bigger gold miners reckon that the gold price is anywhere near its bottom – despite some respected analysts suggesting further falls ahead (see: Goldman’s Currie still looking for $1050 gold, bearish on all commodities) - the floodgates in M&A may well start to open.
If a gold price recovery does set in then those gold miners on the brink of collapse may see a very rapid share price revival. Think October 2008 when the junior mining markets across the board were decimated and the subsequent huge gains in the better junior resource stocks made the prescient investor huge sums of money. Some stocks gained over 1,000% in the following year or two, admittedly from perhaps ridiculously low levels. Companies looking to pick up good assets on the cheap may need to strike now or risk losing out as stock prices pick up. There are some very sweet targets out there, particularly in the junior space.
But in M&A, as in investment in general, timing is everything. If Goldcorp executive management is correct in its presumed view that the gold price is indeed bottoming, and may already have done so, then this is also something which should resonate with all gold stock bargain hunters out there – corporate or individual.
We have already seen a small pick up in gold stock valuations over the past month – the HUI (gold bugs index) is up around 10% over the period for example – and if this pattern, suggesting a small increase in confidence, continues, the real bargain stock prices in junior and mid tier golds may not be around for long which may prompt other predators waiting in the wings to make their moves. However the HUI has seen a number of other short term recoveries in the past couple of years, but overall remains very much in an overall bear trend, so timing is everything here. Judging the bottom is an art few investors, big or small, ever get absolutely right.