Editorial: McEwen’s right, but does anyone still care?

While Rob McEwen and Ian Telfer are two of mining’s most successful CEOs, you couldn’t get more pronounced differences in personality and style, with McEwen, the obsessive maverick, embodying the classic value investor and Telfer, the breezy dealmaker, epitomizing the wily momentum investor.

As a result, the smiles and champagne that characterized the merger between McEwen’s Goldcorp and Telfer’s Wheaton River Minerals only 18 months ago have already been replaced by cheap shots and rancour as the two publicly feud over Goldcorp’s future.

Things came to a head on Aug. 31, when Goldcorp, now led by CEO Telfer, offered 1.69 shares for every Glamis Gold share — a whopping 32.7% premium at the moment it was announced. It valued Glamis at US$8.4 billion at the time of the offer, or US$6.4 billion at presstime.

Telfer is pitching the deal as a “bigger is better” scenario, with the new Goldcorp boasting: the third-largest market capitalization in the gold sector at US$20 billion; the fifth-largest gold production at 3 million oz. next year; gold reserves of 40 million oz. and resources of 20 million oz.; gold-production growth of 50% between 2006 and 2010 — greater than any other major; and continued low production costs.

Specifically, Goldcorp seems to be paying most of these billions for only two things: the large, but very low-grade Penasquito gold-silver-zinc-lead deposit in Mexico; and Glamis’ well-respected operating team.

With such a rich offer from Goldcorp, we doubt that any competing bid will materialize, especially since Goldcorp has a right to match any such offer.

Glamis shareholders will likely overwhelmingly approve the takeover when they vote on Oct. 26, and Telfer has said the deal could conceivably close a week or two later. However, there is a breakup fee of US$215 million, payable by Glamis should its shareholders vote down the deal.

McEwen, now simply a Goldcorp shareholder with 6.1 million shares (its largest individual shareholder), is absolutely correct in protesting that this offer pays far too high a premium. It’s very dilutive to Goldcorp shareholders using the standard metrics of earnings and cash flow per share, for at least the rest of this decade and, beyond that, the company will become dependent on healthy base metals and silver prices, and thus lose some of its cachet as a gold company.

More than a few people have noticed what a lousy deal this is for Goldcorp shareholders. Since the takeover was announced, Goldcorp shares have fallen from $33.77 (US$29.85) on Aug. 30, the last trading day before the deal’s announcement, to $25.54 (US$22.38) at presstime on Oct. 17, or a drop of 24% in Toronto and 25% in New York. That’s $3.4 billion in market capitalization wiped out in six weeks.

Glamis shares, of course, have fared better, falling only slightly from $43.02 (US$38.86) on Aug. 30 to $42.71 (US$37.53) at presstime on Oct. 17, or less than 1%.

(For comparison, during the same period, the spot gold price dropped 4.5%, while the TSX Capped Gold index and the Amex Gold Bugs index fell 9.1% and 12%, respectively.)

Today, McEwen is pushing hard to overturn the deal by agitating for Goldcorp to hold a shareholder vote. To that end, he’s applied for a compliance order from the Ontario Superior Court against Goldcorp under the Ontario Business Corporations Act, with the court date scheduled for Oct. 20.

Since the offer is structured as a “plan of arrangement” rather than a “takeover bid,” and has already been approved by both boards, McEwen will argue that, under the act, an Ontario corporation such as Goldcorp must receive shareholder approval to complete a “fundamental change,” such as this plan of arrangement with Glamis.

Goldcorp, in turn, says McEwen’s claim, is “simply without legal merit.”

We’ve read the act and, frankly, it strikes us as vague on this matter; the court decision could go either way.

However, if McEwen loses in court, he can still force a vote since he says he’s already received support from more than 780 shareholders who represent 5.8% of the company — beyond the 5% threshold needed to requisition a Canadian public company to hold a special meeting.

Should McEwen succeed in scuttling the takeover of Glamis, the unstated next steps would be messy: replacing the board and then launching, and defending against, a flurry of lawsuits.

Perhaps to lay the groundwork for such future legal action, McEwen is already going beyond just criticizing the takeover offer and is questioning the corporate governance abilities of Goldcorp’s directors and management, given that shareholders are being denied a vote, the deal was cobbled together very quickly, and little material is being released about the deal (in contrast to Glamis’ detailed information circular).

McEwen showed during the long strike at Goldcorp’s Red Lake/Dickenson mine in the mid-1990s that he has the steely determination to stick to his principles no matter what, but how many others are ready to follow him through that kind of pain again?

We’ve covered a few shareholder revolts over the years, and this one just doesn’t feel like it has any legs. During the conference call announcing the takeover, and at such meetings as the Denver Gold Forum, there’s been almost no opposition to the deal publicly expressed, and there are no dissident directors or management to rally around.

Asked in Denver if there was a groundswell of support for a shareholder vote, Telfer replied, “We’ve talked to all the ground . . . it can’t swell,” and added that Goldcorp has spoken with the top 100 or so shareholders, and none have asked for a vote except McEwen.

This, along with the high trading volumes in Goldcorp stock since the deal’s announcement, tells us that most of the Goldcorp shareholders who opposed the deal have exited the stock in the past six weeks.

Instead of sticking around to fight, they’ve preferred to move on quickly to companies such as Agnico-Eagle Mines and Royal Gold, where management — like the Goldcorp of old — still aims to improve share price by increasing good old-fashioned earnings and cash flow per share, rather than focusing on more nebulous markers of success, such as net asset value.

The remaining and new Goldcorp shareholders seem prepared to give Telfer and his team the benefit of the doubt on the Glamis deal, especially in light of all the money the team made Wheaton shareholders earlier this decade.