A Gold-Plated Bidding War

From the Mailbag: What's the story with Yamana (NYSE: AUY) and Goldcorp's (NYSE: GG) bidding spat over Osisko (TSX: OSK)? Thanks for keeping us updated on these activities. - C.D.

Boy, this one's a potboiler. Think of it like an old-fashioned love triangle.

See, this pretty young thing named Osisko was going through some hard times. And this was even though she owned a profitable business.

Osisko operates the Malartic mine in Quebec, which has proven and probable reserves of 10.1 million ounces of gold. The Malartic Mine is also estimated to have a production capacity of 500,000 to 600,000 ounces of gold per year over a 16-year mine life.

Costs are cheap, too. Osisko makes a profit even at recent low gold prices. The company posted earnings of $9.8 million in the third quarter of 2013 and had cash of $172 million.

But the market wasn't giving Osisko credit for that. In January, the market valued the company at less than $2.3 billion. That's just $5.17 a share. That's way down from the $7 shares reached a year earlier.

Anyway, that was a value of just $222 per ounce of reserves. You'd get a working, profitable gold mine thrown in for free.

Enter Goldcorp, the moustache-twirling villain of our story. Mr. Goldcorp had his eyes on Miss Osisko's shapely... ahem... assets. He thought he could pick up those assets on the cheap.

(Full disclosure - Goldcorp is one of my recommendations in Oxford Resource Explorer.)

An Offer Is Made

In January, Goldcorp made a cash-and-stock bid equivalent to $5.95 per share. It represented a 15% premium to Osisko's closing price before the bid.

A mere 15% premium for a working, profitable gold mine and 10.1 million ounces in reserves? Mr. Goldcorp was twirling his moustache in glee.

"We strongly believe in the compelling strategic and financial merits of this transaction to the mutual benefit of both companies' shareholders," Goldcorp Chief Executive Chuck Jeannes said in a statement.

Osisko was having none of it. Management declared the Malarctic Mine should be valued at $4.4 billion!

Seeing red, Osisko filed a lawsuit against Goldcorp, saying a confidentiality agreement was breached.

Still, some observers said that was the best offer Miss Osisko could get. Especially after fourth quarter earnings came in, which were depressed by the price of gold.

In the fourth quarter, Osisko earned just $10.5 million, or $0.02 a share. Compare that to the $12.9 million it earned a year earlier. Sure, the company mined a record 137,321 ounces in the quarter at a cash cost of just $713 an ounce. And it increased its cash resources to $210.5 million. That didn't matter in such a bearish market.

Meanwhile, Mister Goldcorp was rubbing his hands, thinking about how this deal was going to be even better for him.

"Honey," the sharp-tongued, hatchet-faced harpies advised Osisko, "take Mr. Goldcorp's offer. Without that, your trajectory is going to only be down."

The Plot Thickens

Enter a white knight named Yamana. Now imagine this guy as a sun-bronzed hero just back from a South American adventure.

To be sure, Yamana is less than a third Goldcorp's size. But he was exactly what Osisko was looking for to push back against a bully.

And in early April, Yamana offered the equivalent of $7.60 per share to acquire half of Osisko. The offer came in the form of $441.5 million in cash and 95.7 million Yamana shares. The total value of the offer was $929.6 million.

But Goldcorp has a lot of weight to throw around. A week later, Goldcorp upped its offer for Osisko to $3.6 billion, or $7.65 per share. It also pointed out that it had more than quadruple ($341 million vs. $81 million) the working capital that Yamana had.

In other words, Goldcorp was saying: "Forget that romantic-eyed pauper. I'm Daddy Warbucks! Stop kidding around and let's get hitched!"

But Yamana had a Big Daddy of its own - Agnico Eagle Mines (NYSE: AEM).

Less than a week after Goldcorp's raised offer, Agnico and Yamana announced a joint, "friendly" agreement to acquire 100% of Osisko's shares for $8.15 per share, a deal worth $3.9 billion in Canadian dollars.

The Agnico-Yamana offer represents an 11% premium to Goldcorp's improved offer.

Goldcorp finally decided to take the hint, and dropped its pursuit of Osisko. Osisko dropped its lawsuit against Goldcorp.

When the deal closes, Agnico and Yamana will each own 50% of Osisko. The companies said Wednesday that they will form a joint committee to operate Osisko's Malartic mine.

For their part, Osisko shareholders will own approximately 16.7% of Agnico Eagle and approximately 14.4% of Yamana once the deal is finalized.

The deal is expected to close by early June. It's waiting on regulatory approval as well as a two-thirds approval vote of Osisko shareholders at a meeting in May. The approval of Agnico Eagle and Yamana shareholders is not required.

Time will tell whether Agnico and Yamana overpaid. Both stocks dropped on the announcement of the deal. Osisko shareholders have to be happy, though. Their stock was recently up 64% for the year.

Another winner: Goldcorp. Its shares rose on the news that it had dropped its hostile bid. So, shareholders approve of management's miserly ways - they don't want the company potentially overpaying for assets.

What Do We Learn?

There are four lessons from this love triangle...

1. Miners Are Still Cautious. There was a bidding war for Osisko, but it didn't get out of hand. Agnico and Yamana still paid less than Osisko thought its flagship mine was worth. This is important because it's not what you see in a bubble. Far from it.

1. Producing Miners Offer Incredible Value. If a mine is in production, it removes a lot of the risk from any potential deal. That's doubly true for a miner can make money at recent gold prices. I expect small cap miners that make money can see the big dogs start to sniff around. Their prices will get a tailwind, too.

1. Hostile Takeovers Are a Waste of Time. Goldcorp thought it could woo Osisko at a lowball price. But anytime a major miner makes an offer, that will get other miners interested. If the company is really a bargain, its stock will go higher. If it's not a bargain, why pursue the deal in the first place?

1. More Mining Deals. Osisko is probably a taste of what's to come, as the mining majors, pockets bulging with cash, snap up valuable assets. Especially at today's dirt-cheap prices.

There are plenty of love stories waiting to be written in the mining sector. It's going to be an exciting year.

Good investing,

Sean Brodrick