Yamana to partner up with Osisko, outbids Goldcorp

Osisko Mining (TSX: OSK; US-OTC: OSKFF) has worked out a deal with Yamana Gold (TSX: YRI; NYSE: AUY) to retain control of its Quebec-based Canadian Malartic gold mine while trumping Goldcorp’s (TSX: G; NYSE: GG) hostile bid.

Under the offer announced April 2, Yamana will provide $441.5 million in cash and 95.7 million of its shares worth $929.6 million to buy a 50% interest in all of Osisko’s mining and exploration assets, including Canadian Malartic. 

Each Osisko shareholder will receive $2.194 in cash, 0.2119 of a Yamana share (worth $2.06 based on its April 1 close) and one new Osisko share valued at $3.35. This puts the total offer price at $7.60 per share or $3.4 billion, marking a 22% premium over Goldcorp’s unsolicited takeover bid.

On a joint conference call with Yamana, Osisko’s president and CEO Sean Roosen highlighted the “significant premium” in the new proposal while noting Goldcorp’s offer has “continuously been underwater” since the larger rival announced its bid on Jan. 13. 

Goldcorp is currently offering 0.146 of its share and $2.26 in cash for each Osisko share held, and based on its April 1 close values Osisko at $6.21 per share.

However, Osisko’s management has repeatedly rejected that offer saying it grossly undervalues the Canadian Malartic mine, while searching for a better proposal.

In a joint release, Osisko revealed it has been working over the past two months to bring the Yamana deal to its shareholders. Its board has unanimously agreed that this offer is superior to Goldcorp’s as it allows Osisko shareholders to continue to take part in the future production and cash flow from the Canadian Malartic mine, where the Montreal-based firm will remain the operator. This year the mine is set to produce 525,000 to 575,000 oz., up 11% to 21% over last year’s record production of 475,277 oz. gold.

Yamana’s CEO Peter Marrone added the transaction provides his company, which currently has assets in South America and Mexico, a low-risk entry into a new district, tax synergies, and most importantly half of Canadian Malartic’s production and cash flow.

“The transaction has significant benefits to Yamana shareholders. We will be adding a world-class cornerstone asset that complements our current portfolio… It’s highly accretive to Yamana on key metrics, which include significant increase to cash flow and free cash flow per share.” 

To support the transaction, Osisko has entered two separate binding agreements, first with CPPIB Credit Investments to increase its existing $150 million credit facility to $425 million, and second with La Caisse de depot et placement du Quebec for a sale of a gold stream on Canadian Malartic for $275 million. The commitments provide Osisko with another $550 million in funds, and when added to Yamana’s cash consideration, bring its available funds to around $1 billion. Osisko intends to distribute that amount to its shareholders.

The gold stream will allow La Caisse to buy 37,500 oz. gold a year at 42% of the spot gold price, but contains a repurchase and put clause. Desjardins analyst Michael Parkin estimates the value of the stream at $315 million, assuming no tax.

Under the proposed partnership, Osisko will retain a 2% royalty on all its other assets excluding Canadian Malartic. It will also keep its head office in Montreal, but will jointly work with Yamana on all of its assets.

For the deal to pass, Osisko will need approval from at least two-thirds of its shareholders. It intends to hold a special shareholder meeting by no later than May 20, with the transaction expected to close by the end of that month.

If Osisko walks from the deal, it will be required to pay Yamana a $70 million break fee.

Given that Goldcorp recently gained access to additional confidential information on Canadian Malartic on April 1, it extended its bid set to expire in a few days to April 15, likely buying it more time to make a counter offer. 

On the partnership news, Osisko shares gained nearly 7% to close at $7.35, while Yamana dipped 2% to $9.48.