Among gold miners, there are currently a lot more sellers than buyers, which of course makes life a lot easier for the buyers. A recent attempt by Goldcorp (TSX:G, NYSE:GG) to acquire Osisko Mining (TSX:OSK) offers a perfect illustration.
On January 13, Goldcorp announced an offer to acquire Osisko at $5.95 per share, which represented a 15% premium over Osisko’s previous closing price. Osisko’s executives, who are firmly against the proposal, have called the bid “opportunistic”. And they are right.
Osisko’s gold production comes entirely from one property, the Canadian Malartic mine in Quebec. Production started in 2011, right before the price of gold peaked at about $1,900 per ounce. Since then, gold has fallen by about a third. Over the same time period, Osisko shares fell by two-thirds.
While the slump in gold prices has hurt everyone involved, Goldcorp has withstood the storm relatively well. Although the company’s shares have fallen by about half since 2011, that drop is not as severe as most of its peers. The company has not overextended itself, and has a rock-solid balance sheet. Management is well respected – according to Osisko itself, Goldcorp has the highest multiple amongst its peer group, trading at 1.3 times its net asset value.
This has put Goldcorp in a perfect position to acquire smaller competitors. The company’s balance sheet gives it the flexibility, and thanks to the company’s track record, shareholders should be forgiving. Most importantly, the current market environment allows Goldcorp to choose between many potential targets, all selling at a steep discount relative to two years ago.
Contrast this with Goldcorp’s largest peer, Barrick Gold (TSX:ABX, NYSE:ABX). Barrick has overextended itself in the past, and now is in the process of cutting costs and selling assets. The company even had to raise equity last fall to shore up its balance sheet.
Foolish bottom line
Osisko has announced it is looking for a white knight to offer a higher price. But it has a big problem — only Goldcorp seems to be in a buying mood. Even if Goldcorp’s bid for Osisko fails, it should have plenty of other options in this market. It’s no wonder that Goldcorp offered such a small premium to Osisko’s closing price.
Osisko’s shareholders are optimistic, with the shares trading above Goldcorp’s offer price. But in this market, with so many options available, Goldcorp has little incentive to raise its offer. And Osisko will have a tough time finding another suitor – it certainly won’t be Barrick.
Goldcorp is setting itself up perfectly for a recovery in gold prices. For investors who want to make the same bet, Goldcorp’s high multiple may very well be worth paying.
