ANDY HOFFMAN

00:00 EDT Friday, August 01, 2008

It was always seen as the logical buyer, but it took plans for a misplaced mine shaft and a blindside investment by a rival gold producer to spur Goldcorp Inc. to offer $1.5-billion for junior Gold Eagle Mines Ltd. and defend its turf in Red Lake, Ont.

Red Lake is the crown jewel in Goldcorp's portfolio. Often called the world's richest gold mine, it produced more than 700,000 ounces last year and the company is working on expanding its operations in the area considerably.

Gold Eagle controls the land right next door and is developing a promising deposit of its own, the Bruce Channel discovery, which some initial estimates have suggested could contain more than 10 million ounces of gold.

Yet until recently, Goldcorp was content to sit back and wait as Gold Eagle worked on the potential mine. Why would the world's second-largest gold miner by market value bid against itself?

That all changed on June 26, when Toronto's Agnico-Eagle Mines Ltd., made a surprise purchase of Gold Eagle stock. The $50-million private placement gave Agnico a 5-per-cent stake in the junior miner and warrants entitling it to raise its holding to more than 7 per cent. Suddenly, Goldcorp decided it was time to make a deal.

"This is a world-class district. It's been the foundation of this company. It's the highest grade, richest gold mine currently active in the world. We'll be pretty protective of our area, " Goldcorp president and chief executive officer said in an interview.

"We certainly don't want competition in the area," he added.

Goldcorp is carrying out extensive drilling in an area near a former producing mine and says the Bruce Channel discovery is part of the same mineral deposit.

"This is the area we plan to be in for decades," Mr. McArthur said. "We expect that the ore that is produced in this area should go through our mill."

After the Agnico private placement, Goldcorp executives approached Gold Eagle about a possible transaction. According to sources close to the deal, Goldcorp demanded and was granted the right to exclusive negotiations with the junior mining firm.

"Goldcorp wanted to act aggressively here. They did not log their interest with Gold Eagle, saying they wanted to do a deal, until after the Agnico placement," said a source close to the talks. The result was an offer of $6.80 in cash and 0.146 Goldcorp shares for each Gold Eagle share.

The friendly bid values Gold Eagle at about $13.60 per share, representing a 19-per-cent premium to Gold Eagle's closing share price Wednesday and a 36-per-cent premium to the average price for each company during the last 20 trading days.

The proposed deal is being recommended by Gold Eagle's board of directors.

Management and shareholders holding 10.5 per cent of the stock have agreed to tender their shares.

But at least one major Gold Eagle shareholder isn't satisfied with the bid. Warren Irwin, president of Rosseau Asset Management Ltd., said his firm owns about 6.5 million shares and will not tender to the offer.

"It is a premier asset in a premier camp with strategic value to Goldcorp and we view this bid as inadequate," Mr. Irwin said in an interview.

Another catalyst for the Goldcorp bid was that Gold Eagle was about to start sinking a shaft on an island to conduct exploration drilling on the underground deposit. "We were days away from starting blasting," Gold Eagle CEO Simon Lawrence said in an interview.

Goldcorp, however, wants the shaft sunk on the mainland and ground it already controls. "It didn't make sense for them to start developing a shaft in an area that we thought was the wrong place," said Goldcorp's head of corporate development Chuck Jeannes.

As for the potential for a rival offer, Agnico-Eagle CEO Sean Boyd would not comment on what his company plans to do next. He would only say that Agnico has considerable interest and management expertise in the Red Lake area.

In addition to its Gold Eagle stake, Agnico has staked thousands of acres in the district.

"We've been looking at ways to get ourselves well positioned into promising parts of that belt. That was the only reason for that [Gold Eagle] investment," he said, adding "we've always been nibbling around the edges of the Red Lake camp."

Some analysts have questioned Agnico's ability to launch a rival offer due to its extensive capital requirements at several development projects and a recent decline in its share price.

Goldcorp, which already owns 5 per cent of Gold Eagle, has the right to match a competing offer and is entitled to a $44-million break fee if a rival bid is accepted.

If it doesn't enter into a bidding war with Goldcorp and accepts the offer, Agnico stands to make a profit of more than $25-million on its Gold Eagle stake.

One industry veteran said the investment could herald a new, "less genteel" era in the gold sector because in the past, companies rarely purchased stakes in junior miners exploring in a rival's backyard.

"If people are going to go around buying chunks of things they know someone else is interested in just to make $25-million that's a different industry than we've been used to," the executive said