Goldcorp Inc. (GG), the leading Canadian gold producer is acquiring the Australian gold miner Andean Resources Ltd for a total consideration of C$3.6 billion (US $3.4 billion) along with its key assets including Cerro Negro gold project in Argentina. Currently, the company has resources of 2.54 million ounces of gold and 23.56 million ounces of silver. Goldcorp believes that the acquisition of Cerro Negro that has substantial expansion potential would compliment its high-growth and a low-cost production profile.
The Deal nitty-gritty
Pursuant to the deal, each Andean shareholder would receive 0.14 shares of Goldcorp or cash payment of C$6.50, subject to a maximum cash consideration of C$1 billion for each Andean share held. Andean shareholders will have the option to elect between cash or shares or any combination of cash and shares, subject to the aggregate cash limitation. Goldcorp’s cash and stock bid was superior to Eldorado’s C$6.36 per (all in stock) bid. Eldorado is one of Canada’s leading gold miners and the second suitor of Andean Resources.
Goldcorp’s current offer represents a 35% premium over Andean’s closing price as on September 2, 2010 and a 56% premium to Andean’s 20-day volume weighted average trading price.
Although the board of directors of both the companies has unanimously approved the deal, the transaction is contingent upon a 75% vote from the Andean shareholders. Andean has agreed to pay Goldcorp a termination fee equal to 1% of the aggregate of the total consideration offered by Goldcorp, under certain circumstances.
M&A–Miner’s Forte
Mergers and acquisitions (M&A) have always been a critically important growth strategy for metals and mining companies. Large producers like Newmont Mining (NEM) and Agnico Eagle (AEM) with huge resources are able to discover and develop new deposits, and boost reserves; while smaller ones own few mines and confined to them. The M&A activity is supported by higher metal prices that have strengthened the financial position of many mining giants.
Like other industry players, including Barrick Gold Corporation (ABX) and Kinross Gold (KGC), Goldcorp also follows an aggressive acquisition strategy for attaining growth. The acquisition of Glamis Gold Limited and Placer Dome’s Canadian assets were major milestones for the company. Goldcorp’s merger with Glamis Gold Limited in 2008 positioned it as the world’s largest gold mining company. The company also acquired the Placer Dome Canadian mines and other agreed interests from peer Barrick Gold, which pushed its annual production up by 50% and increased the gold reserves by 72% in 2009.
We are optimistic about Goldcorp’s Penasquito mine in Mexico, which is expected to start commercial production in the third quarter of 2010. In addition, we saw Goldcorp divesting many of its non-core assets and generating huge cash flows, which are likely to be used for future growth projects. However, Goldcorp is exposed to various political and economic risks. Goldcorp also faces foreign exchange risk as it pays most expenses in local currencies and sells in dollars.
Currently, Goldcorp is a short-term (1 to 3 months) Zacks #3 Rank which translates into a longer term (6+ months) Neutral recommendation.
BARRICK GOLD CP (ABX): Free Stock Analysis Report
AGNICO EAGLE (AEM): Free Stock Analysis Report
GOLDCORP INC (GG): Free Stock Analysis Report
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