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TABLE OF CONTENTS Jan 20 - 26, 2014 Volume 99 Number 49 - 0 comments

Goldcorp offers $2.6B in cash and shares for Osisko

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By: Salma Tarikh

Goldcorp (TSX: G; NYSE: GG) is launching a hostile $2.6-billion takeover bid for Osisko Mining (TSX: OSK; US-OTC: OSKFF) to acquire the smaller rival’s Canadian Malartic gold mine in Quebec, with many analysts arguing the offer is too low.

Under the proposed bid, Osisko shareholders would receive 0.146 of a Goldcorp share, plus $2.26 in cash for each Osisko share held, for a total value of $5.95 per share. This works out to be a 15% premium to Osisko’s Jan. 10 closing price and a 28% premium over its 20-day, volume-weighted average share price.

“We believe that our offer is compelling to Osisko shareholders for many reasons,” Goldcorp’s CEO Chuck Jeannes said on a conference call. “First the premium offer of cash and shares provides immediate and a certain value of liquidity for Osisko shareholders. These are volatile times for the gold price and mining equities generally, and we want to take advantage of Goldcorp’s financial strength by including a material cash component.”

The Vancouver-based major plans to fund the $1-billion cash portion of the offer with a US$1.3-billion term loan, leaving its cash position at US$620 million. It also has an undrawn US$2-billion credit facility.

Jeannes says that with the bid, Osisko shareholders could become Goldcorp shareholders and benefit from the senior’s strong balance sheet, diverse assets, low-cost profile and growth projects, and take part in regional synergies with Goldcorp’s Quebec and Ontario operations. Goldcorp runs the large Red Lake mine in Ontario and is starting up the Éléonore gold mine in northern Quebec later this year.

Jeannes says the transaction is accretive to Goldcorp shareholders, and that the Canadian Malartic mine could become one of Goldcorp’s top mines in terms of free cash flow generation, gold production and net asset value.

“Canadian Malartic has a large reserve base — around 10 million oz. gold — supporting strong production over a long mine life. Due to the homogeneous orebody and favourable mining characteristics, we consider it to be a low-risk mine from a technical standpoint,” he added.

Located in Quebec’s prolific Abitibi gold belt, Canadian Malartic started production in May 2011 and is slated to produce 500,000 oz. gold a year over an initial 16-year mine life. If the deal concludes, Goldcorp would become Quebec’s largest gold producer.

Jeannes notes Goldcorp did not contact Osisko’s key shareholders or debt holders prior to the Jan. 13 announcement. The offer became official on Jan. 14, and remains open until Feb. 19, 2014.

On Jan. 15 Osisko said the fact that its share price soared above Goldcorp’s offer price shows that the takeover bid is “very low” and “opportunistic.” Osisko urged its shareholders not to take any action until its board makes a recommendation. Many analysts covering the Montreal-based firm agree and argue for a higher price.

Raymond James analyst Phil Russo said Goldcorp’s bid “falls short of an appropriate premium based on recent comparable acquisition transactions.”

Russo says that Goldcorp’s acquisition cost for Canadian Malartic’s reserves is $1,000 per oz., which represents a 20% discount to the spot gold price, compared to a 15% discount seen in similar transactions. He believes there’s room for Osisko to ask for a higher premium that equates to a 10–15% discount, potentially pushing the offer price to $6.50 to $6.75 per share. Russo has bumped his $6.25 target price to $6.50 and maintains a “market perform” rating on Osisko. He says the chances of a competing bid for Osisko are slim.

Desjardins analyst Michael Parkin agrees, noting the cost of the acquisition and the scale of Canadian Malartic lowers the potential of a “white knight” emerging. He says Goldcorp may need to sweeten its bid to win over Osisko shareholders, who drove the company’s shares up 20% on the news to close at $6.24, above the $5.95-per-share offer. But he says Goldcorp’s initial offer is a “smart starting point,” and could be raised to gain shareholder support from Osisko without “overpaying from the start by beginning with an overly aggressive bid.” He has a $6.75 price target on Osisko.

However, Jeannes hinted on the call that Goldcorp would keep its current offer. “We have shown a history of being disciplined in these sorts of things and we have a view of the value proposition — and we are going to stick to it.”

Adam Graf, a New York-based analyst at Cowen & Co., who covers both firms, says while Canadian Malartic would provide Goldcorp near-term free cash flow, Osisko’s other assets — including the Upper Beaver and Hammond Reef projects in Ontario — provide little value. He contends there are “more value-accretive assets for sale in Canada and North America,” such as Pretium Resources’ (TSX: PVG; NYSE: PVG) high-grade Brucejack project in B.C. The Osisko acquisition, Graf says, would reduce his US$19.36 price target on Goldcorp by 40¢ per share pro forma.

The deal requires standard regulatory approval and two thirds of Osisko’s shareholders to vote in favour of the acquisition.  

Goldcorp closed the day at $25.04, down 25¢. It owns no Osisko shares.

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An aerial view of Osisko's Canadian Malartic mine. Credit: Osisko Mining
An aerial view of Osisko's Canadian Malartic mine. Cred...

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