Osisko-Goldcorp battle turns bitter

VANCOUVER — How quickly relationships between potential partners can sour.

For more than five years Osisko Mining (TSX: OSK; US-OTC; OSKFF) and Goldcorp (TSX: G; NYSE: GG) considered joining forces in a series of meetings that gained momentum, as Osisko finished building and commissioning one of the world’s largest gold mines.

The Canadian Malartic mine in Quebec produced 475,277 oz. gold in 2013 at an average cash of $760 per oz. According to Osisko’s calculations, only 13 of the 55 gold mines owned by North America’s five largest gold miners produced more, and Osisko expects production to increase and costs to decline at Malartic in 2014.

Goldcorp is one of those five gold majors, and it wants Malartic. The mine sits on more than 10 million oz. gold reserves in a low-cost, politically stable environment, making it precisely the kind of asset gold majors are seeking today.

Goldcorp’s interest in Osisko is no secret. Osisko and Goldcorp talked informally but regularly between 2008 and 2012 — a relationship that led to three informal takeover offers that Osisko rejected.

In late 2012 the potential partners entered more substantive  merger discussions aimed at a friendly deal. The framework for those discussions included a two-year confidentiality agreement and a standstill clause preventing Goldcorp from making a hostile takeover bid for one year.

That standstill clause expired last October. Days later, representatives from the two companies had another meeting, but what transpired at that meeting is now at the heart of a bitter lawsuit.

Osisko says its chief financial officer, Bryan Coates, agreed to share new information with Goldcorp only if the standstill agreement were extended for another eight months. In an affidavit, Coates said Goldcorp’s people agreed verbally and so, based on that verbal deal, Osisko shared sensitive new information.

But Coates claims Goldcorp stymied Osisko’s efforts to formalize the extension of the hostile bid clause after the meeting.

Several months later, on Jan. 13, Goldcorp unveiled a US$2.6-billion hostile takeover bid for Osisko. Within two weeks, after advising shareholders to reject the “financially inadequate” and “very hostile” bid, Osisko sued Goldcorp for breach of confidentiality in a suit alleging Goldcorp misused confidential information and acted in bad faith. The suit seeks to block Goldcorp’s bid entirely.

Lawyers for Goldcorp call Osisko’s version of events a fabrication.

“There was never, ever, ever an agreement to prolong the standstill,” lawyer Alain Riendeau of Fasken Martineau told Quebec Superior Court judge Louis Gouin at the Feb. 4 pre-trial hearing. “As far as we’re concerned, that’s a fabrication.”

Goldcorp suggests instead that Osisko is using the lawsuit to buy time. Goldcorp’s offer was initially set to expire Feb. 19, giving Osisko only a month to find a white-knight suitor. With a trial date now set for March 3, Goldcorp has extended its offer until March 10.

“We are disappointed that Osisko has resorted to baseless legal claims that serve only to delay a proper bid process and distract Osisko shareholders from the compelling value that Goldcorp’s offer represents,” said Goldcorp president and CEO Charles Jeannes in a statement.

Goldcorp is offering 0.146 of a  share plus $2.26 in cash for each Osisko share. Based on Goldcorp’s closing price on Jan. 10, the day before the bid was announced, the offer values each Osisko share at $5.95.

Osisko has a long list of arguments against Goldcorp’s bid. The mid-tier miner believes the bid undervalues Malartic, especially by being timed just as the mine finishes ramping up and enters its most productive years. Osisko says the premium in Goldcorp’s offer is “well below those paid in relevant precedent transactions,” and in fact represents a discount to Osisko’s trading price since the bid was announced. The company also points to the greater geopolitical risk, exposure to base metals and rich valuation in Goldcorp shares compared to its own.

In defense of its offer, Goldcorp points to the bid’s 28% premium over Osisko’s prior 20-day, volume-weighted average share price; the dividend payments and greater liquidity inherent in Goldcorp shares; the synergies between Malartic and Goldcorp’s Ontario and Quebec operations; Goldcorp’s strong balance sheet and 50% gold production growth forecast for the next two years; and the benefit of moving away from a single-asset miner to a multi-mine operator.

The companies continue to lob accusations back and forth. In the meantime, Osisko is  optimizing Malartic. Following record production in the fourth quarter, Malartic achieved record monthly gold production of 50,111 oz. in January, despite delays from mill downtime and unusually cold weather.

“Canadian Malartic is breaking away from the pack, showing what a powerful gold producer this world-class asset is,” said Osisko president and CEO Sean Roosen. “Osisko owns the largest gold mine in Quebec and, at current production rates, we are the largest producing gold mine in Canada.”

When Goldcorp revealed its bid Osisko shares were trading at $5.17, which was average for the previous six months. On news of the bid shares gained $1.07 in a day, then climbed for the next two weeks to a $6.89 high before settling slightly. Osisko has 441 million shares outstanding.

Goldcorp’s share price has also climbed since the bid was announced, rising from a 52-week low of $21.87 in late December to now sit near $27.50. Goldcorp has 812 million shares outstanding.