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TABLE OF CONTENTS Apr 21 - 27, 2014 Volume 100 Number 10 - 0 comments

Agnico Eagle joins Yamana in battle for Osisko

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By: Salma Tarikh

The fight for Osisko Mining (TSX: OSK; US-OTC: OSKFF) has heated up, with Agnico Eagle Mines (TSX: AEM; NYSE: AEM) entering the ring with Yamana Gold (TSX: YRI; NYSE: AUY) to launch a joint friendly takeover bid to beat Goldcorp’s (TSX: G; NYSE: GG) hostile advances.

The two Toronto-based mid-tier producers are offering $3.9 billion, or $8.15 per Osisko share, trumping Goldcorp’s revised $3.6-billion hostile bid and replacing Yamana’s earlier proposal for the smaller Montreal-based gold producer. 

The joint offer marks a 10% premium over Osisko’s April 15 close and is above the implied value of Goldcorp’s revised $7.34-per-share bid, with many analysts noting the Vancouver-based major has little room to raise its offer to win Osisko’s prized Canadian Malartic gold mine in Quebec. That mine, stuck in the middle of the heated bidding war, offers attractive low-cost production in a low-risk and politically stable jurisdiction. It has the ability to churn out 600,000 oz. gold a year at cash costs of US$525 per oz. for at least 14 years. 

Under the joint offer, Agnico and Yamana would provide $1 billion in cash and $2.3 billion in combined shares. They would also form a new Osisko entity, worth $575 million.  

For each share held, Osisko shareholders would receive $2.09 in cash; 0.07264 of an Agnico share and 0.26471 of a Yamana share, which are both valued at $2.43 apiece; and one Osisko share priced at $1.20.   

The new spinout entity will hold Osisko’s Mexican assets and $155 million in cash, plus a 5% net smelter royalty (NSR) on Canadian Malartic and a 2% NSR on all existing exploration properties, including the Kirkland Lake assets and the Hammond Reef and Pandora properties. 

Osisko’s CEO Sean Roosen recommends that shareholders vote in favour of the offer, noting it represents the best value for the company. “I feel that this is the best outcome that we could possibly come to, and we’ve set the stage for two excellent companies to share in the potency of the Canadian Malartic asset,” he said on a conference call. 

If the bid succeeds, Agnico and Yamana would each own half of Osisko, where they would operate the Canadian Malartic mine under a joint committee. They would also jointly develop and explore Osisko’s other Canadian projects. Osisko shareholders would own 14% of Yamana and 17% of Agnico. 

Both major gold miners say the transaction is “accretive on per-share metrics” including net asset value, free cash flow and production. Canadian Malartic would contribute 300,000 oz. gold a year to each of the firm’s production profile for many years to come. 

Agnico says Canadian Malartic, set to become its fourth gold mine in Quebec, could improve its total cash costs and all-in sustaining cost profiles. It adds the transaction is “simple” and “low risk.” 

Yamana has assets in Mexico and South America, and says it would benefit from having Agnico — which started mining in Quebec over 50 years ago — as a partner as it enters a new jurisdiction. 

The current deal trumps Goldcorp’s revised bid on April 10. The world’s second largest gold producer by market value is offering 0.17 of its share and $2.92 in cash for each Osisko share, up from its original offer of 0.146 of its share and $2.26 in cash. But Osisko’s board has rejected both unsolicited offers, noting it previously preferred Yamana’s offer. 

Yamana struck a complex partnership agreement with Osisko on April 2, thwarting Goldcorp’s initial bid from January. Yamana had offered to buy half of Osisko’s mining and exploration assets for $3.4 billion. Under that agreement, Osisko would have had sold part of the gold produced from Canadian Malartic at a discount as well as increased its debt.

Desjardins analyst Michael Parkin notes “the complexity of this new offer is far less than that of the previously announced Yamana partnership, and we believe this new bid will be well regarded by shareholders.” 

While the $3.9-billion deal may be good for Osisko, Adam Graf, an analyst at Cowen and Co., says he believes it is “dilutive” to both Yamana and Agnico. “We are disappointed that these industry bellwethers [including Goldcorp] appear to be using cash and shares towards value-dilutive acquisitions.” 

The transaction requires approval from two-thirds of Osisko’s shareholders, who are set to vote in May. The deal should close by June. The junior has also agreed to pay a $195-million break fee. 

Goldcorp did not return a request for comment. But shortly before Osisko announced the joint bid on April 16, Goldcorp said it would nominate 11 candidates, including its CEO Charles Jeannes, for election to Osisko’s board at the junior’s annual meeting in May. All of the nominees, except one, are current directors or officers of Goldcorp.

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