Sprott Global Resource Investments

Sprott's Thoughts

Henry Bonner

The Battle for Osisko Mining: A Good Sign for the Gold Mining Sector?

Steve Todoruk, an Investment Executive at Sprott Global Resource Investments Ltd., said last year that big miners were the key to a rebound in natural resource stocks.

He is happy to see them get rid of their mistakes from the bull market years, writing off their worst projects. With all this bad news out of the way, he believes they should get back to generating cash flow and sensibly expanding operations, which would improve sentiment in the sector.

Today, Steve says big miners look like they have moved past the pain of the last three years, becoming more aggressive now. See his recent note below.

When the mining sector is growing, companies expand their production by acquiring new mines and deposits. In unhealthy times in the mining sector, merger and takeover activity usually comes to a halt.

When this merger activity starts to wake back up, it could signal the start of a rebound from a bear market. Mergers signal that companies feel more confident that the worst is behind them; it indicates that they are more aggressive and preparing for rising metals prices.

Two months ago, we saw signs that majors were on the search for mergers and acquisitions once again. The world’s third-largest gold producer, Goldcorp, announced a hostile takeover of Osisko Mining Corp., which owns the large Malartic gold mine in eastern Canada, for $2.4 billion1.

The mine aims to produce 500,000 ounces of gold per year for a long time2, in a safe country – increasing Goldcorp’s annual production and decreasing its exposure to political risk. Goldcorp believed the mine would also have synergies with another mine that Goldcorp is building in the same province of Canada -- the Eleanore Mine.

Displeased with the low-ball offer, Osisko’s management denounced Goldcorp for being opportunistic at a time when the mining company’s share price was undervalued. They urged Osisko shareholders to turn Goldcorp down and allow management to fight for a higher offer.

As with most management teams who are the target of a hostile takeover, Osisko set out to find a white knight to make a higher and more friendly takeover offer -- preferably instigating a bidding war to push the takeover price even higher.

In early April, Osisko announced it had found such a suitor in Yamana Gold Inc. Yamana would buy 50% of Osisko for $1.24 billion3, meaning Osisko and its shareholders would retain direct exposure to this growing gold mine through the other 50% of the company.

A week later, Goldcorp stepped in again, offering $3.28 billion to fully take over Osisko.

Once again, Osisko responded by attracting an even higher offer. Osisko announced that Yamana and Agnico Eagle Gold Mines were making a joint offer totaling $3.55 billion for the company2. This latest offer represents a 60% increase from where Osisko was trading just two months earlier.

Osisko Battle

A: Goldorp makes initial bid for Osisko; B: Osisko announces Yamana counter-bid; C: Goldcorp responds with higher bid; D: Osisko announces joint bid from Yamana – Agnico Eagle

What this recent takeover fight means is that at least three big gold mining companies are seeking to make new acquisitions today. They have cash to spend. That is very healthy for the junior mining companies that own high-quality deposits – especially in mining-friendly, lower-risk countries.

The recent Osisko episode also shows share prices can rise quickly if a bigger company comes along and offers to acquire some or all of their assets.

As an investor, I suggest building positions in juniors that are most likely to be taken over by bigger companies. Don’t fret about your company’s languishing share price. If you have done your homework and chosen the best juniors with high quality deposits, I believe a bigger company will come knocking on the door someday offering a significantly higher and fairer price. From my experience, the price that a bigger company will pay tends to reflect the full value of the deposit, regardless of where the market has priced it.

The dust appears to have settled on the battle between Goldcorp and Yamana - Agnico Eagle. Goldcorp has recused itself from the bidding war, meaning they will walk away the loser. This leaves the gold miner disappointed; its cash is still there, burning a hole in its pocket.

To investors, this means Goldcorp will be on the prowl for another opportunity to expand. It’s time to find the companies that Goldcorp and others are likely to acquire. Hopefully, we may make a takeover premium as high as Osisko has just experienced.

Start by looking for juniors that have large, high-grade gold deposits in Canada.  Your Sprott Global broker is a good place to start looking for these companies.

P.S.: You can view Steve’s talk on investing in mineral discoveries here.

Steve Todoruk worked as a field geologist for major and junior mining exploration companies after he graduated with a B. Sc. in Geology from the University of British Columbia, in 1985. Steve joined Sprott Global Resource Investments Ltd. in 2003 as a Senior Investment Executive. To contact Steve, e-mail him at stodoruk@sprottglobal.com or call him at 1.800.477.7853.

1 http://thebostonjournal.com/2014/01/13/goldcorp-offers-c2-6-billion-to-acquire-osisko-mining/

2 http://www.forbes.com/sites/maggiemcgrath/2014/04/16/agnico-eagle-yamana-gold-and-osisko-mining-strike-3-6-billion-friendly-deal-to-sidestep-goldcorp-takeover-bid/

3 http://online.wsj.com/article/BT-CO-20140402-706825.html


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Generally, natural resources investments are more volatile on a daily basis and have higher headline risk than other sectors as they tend to be more sensitive to economic data, political and regulatory events as well as underlying commodity prices. Natural resource investments are influenced by the price of underlying commodities like oil, gas, metals, coal, etc.; several of which trade on various exchanges and have price fluctuations based on short-term dynamics partly driven by demand/supply and nowadays also by investment flows. Natural resource investments tend to react more sensitively to global events and economic data than other sectors, whether it is a natural disaster like an earthquake, political upheaval in the Middle East or release of employment data in the U.S. Low priced securities can be very risky and may result in the loss of part or all of your investment.  Because of significant volatility,  large dealer spreads and very limited market liquidity, typically you will  not be able to sell a low priced security immediately back to the dealer at the same price it sold the stock to you. In some cases, the stock may fall quickly in value. Investing in foreign markets may entail greater risks than those normally  associated with  domestic markets, such as political,  currency, economic and market risks. You should carefully consider whether trading in low priced and international securities is suitable for you in light of your circumstances and financial resources. Past performance is no guarantee of future returns. Sprott Global, entities that it controls, family, friends, employees, associates, and others may hold positions in the securities it recommends to clients, and may sell the same at any time.

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Investors should carefully consider the investment objectives, risks, time horizon and liquidity needs before making an investment. Past performance is no guarantee of future returns. Securities discussed may not be a suitable investment for your portfolio.”