Start the conversation
Comment on This Story
Or to contact Money Morning Customer Service, click here.
A few weeks back, Goldcorp Inc. (NYSE: GG), a top gold producer, made a hostile $2.6 billion offer for Osisko Mining Corp (TSE: OSK).
It was one of many signs that top gold producers are on the acquisition trail.
And another strong signal that gold prices may be heading upward.
But, by watching early, we have a terrific opportunity to stay ahead of this acquisition and take advantage of the gold and commodities opportunities that are about to come our way…
We Spotted These Deals Early
Recently I told you about a group of mining titans, including a major private equity player, who are looking to acquire a large Peruvian copper mine.
Just two months prior to that, I'd mentioned that the former CEO of Xstrata, Mick Davis, had raised $1 billion to hunt for resource sector deals.
These are early signs that sophisticated industry insiders see the slew of major write-downs, slashed capital expenditures, and asset sales as a glaring opportunity. They realize that has set up the commodities space for some seriously profitable deal making going forward.
Goldcorp's move is another clear sign of that… and Osisko knows it.
Management has already recommended that shareholders reject Goldcorp's $5.95 per share offer, and no one's really surprised. A few years back Osisko rejected a $12 per share offer from…Goldcorp. As recently as 2010, Osisko traded as high as $16.
To be sure, Goldcorp's eyeing a bargain.
But if you look more closely at what they're trying to buy in Osisko, you'll better understand what's really motivating Goldcorp.
A Key Window into Gold's Direction
Osisko has a few projects but right now its crown jewel – what Goldcorp's really after – is one big mine.
Their flagship asset, the Canadian Malartic mine in Quebec, was explored, financed, and built for $1 billion. It currently produces 475,000 gold ounces annually, but it's expected to average between 500,000 and 600,000 ounces per year over its 16-year mine life.
However, more significant than anything else in Goldcorp's pursuit of Osisko is management's outlook on the gold price.
Here's what I mean…
Malartic's gold ounces are close to industry average grades, and its all-in cash costs near $1,000/ounce are also typical. At $1,250 gold, profit margins are OK, but not outstanding.
On the other hand, Malartic has 10 million ounces in reserves (the highest quality of resources), and it's located in Quebec, one of the top mining jurisdictions worldwide. And it's a producing mine.
Recent and previous bids have already been rejected. But Goldcorp's courted Osisko so aggressively, it's clear they really want to add Malartic to their suite of projects and help grow production.
If Goldcorp succeeds in its bid for Osisko, it's going to have to pay considerably more than $5.95 per share.
Combining Osisko's current production would instantly add nearly 20% to Goldcorp's annual output.
So in pursuing Osisko, Goldcorp has to believe that gold prices, at least in the medium and long term, are going to go higher – a lot higher. That's because there are only so many synergies and economies of scale to be had from joining operations and sharing overhead.
About the Author
Peter Krauth is the Resource Specialist for Money Map Press and has contributed some of the most popular and highly regarded investing articles on Money Morning. Peter is headquartered in resource-rich Canada, but he travels around the world to dig up the very best profit opportunity, whether it's in gold, silver, oil, coal, or even potash.
How does GLD fit into this market ?
It doesn't. It's an ETF…and not even an honest one. It's a third rate claim on actual gold. So, you aren't holding actual gold, and you aren't owning a mining or royalty company with the leverage to the gold price those entities afford.
GLD is a trap the gold cartel set for the ignorant. It gave them a way to suck gold sector money away from the real thing and into a fund they could loot. And they have.
It's okay for very short term trading maybe, but that's it. ABSOLUTELY NOT suitable as as a core holding.