Cause for optimism Monday, major gold producer Goldcorp launched a C$ 5.95-per-share bid for Montreal-based producer Osisko Mining. This is the biggest deal in the mining sector since 2012. Osisko shares jumped 20% on the day.
The company is an attractive buyout target because it has 10.1 million ounces of gold reserves at its Canadian Malartic mine in the Abitibi region of Quebec.
The Abitibi region has produced over 100 mines and 170 million ounces of gold since 1901. Osisko estimates it produced 485,000 ounces of gold last year. It also has other exploration potential in Quebec and at its two other major projects in Ontario.
Goldcorp knows Osisko. It once owned 10.1% of shares. It sold its stake for C$ 530 million in February 2011. Its recent offer for all of Osisko is only C$ 2.6 billion. In effect, Goldcorp is trying to buy the entire company for half of what it was worth when it sold its 10% stake just three years ago.
Goldcorp is trying to be opportunistic. The price of gold is down nearly 35% since the metal peaked in September 2011. Gold stocks are down even more. Osisko’s stock price is down 68% from its December 2010 high.
Goldcorp also already has a gold project in Quebec – Éléonore. This project will go into production later this year. So Goldcorp will be the largest gold producer in mining-friendly Quebec if it completes the Osisko deal.
We have seen several buyouts of gold companies recently. Another notable example is Canadian miner Primero Mining’s $ 220 million purchase of fellow junior miner Brigus Gold. Primero will provide cash to develop Brigus’s Black Fox mine in Ontario and to advance the nearby Grey Fox project.
And in October, mid-tier producer New Gold completed its purchase of explorer Rainy River Resources. Rainy River was attractive because it had 4 million ounces of gold reserves in the pro-mining Ontario province. Plus, New Gold bought at a solid price… less than Rainy River’s book value.
We should see more deals soon. It’s common to see the pace of buyouts pick up after the announcement of initial deals. Like homeowners who want to lock in a low refinancing rate before rates rise, gold companies who are “in the market” for acquisitions don’t want to miss the chance to buy undervalued assets.
In addition, 2013 was a terrible year for precious-metals companies. Precious-metals-stock prices are much lower now than they were a year ago… even for companies with tremendous assets.
Developer Pretium Resources is an example of a buyout candidate. A recently concluded sample program at its Brucejack project in northern British Columbia confirmed large amounts of gold and silver there. Shares jumped from less than $ 3 per share to more than $ 5. Pretium plans to begin producing in 2016. A producer may want to buy and develop Pretium to take advantage of its high grades.
Prospect generator and explorer Almaden Minerals is also a potential buyout candidate. Almaden continues to grow the footprint of its Ixtaca deposit in Mexico. The initial resource estimate announced last year included 1.7 million and 98.5 million ounces of gold and silver resources, respectively.
When gold stocks are falling like a knife, no one wants to try to catch them. But once deal-making begins, big companies don’t want to miss bargains.
The $ 1,200 level could mark the bottom for gold… so look for the deals to continue. And use the above ideas as an initial list of quality buyout candidates. They offer plenty of upside even if the deals don’t happen.
Good investing,