Goldcorp, Glamis to merge

Vancouver — The latest in a series of mega-mining mergers sees Goldcorp (G-T, GG-N) looking to boost its ranking amongst the world’s top gold companies through an agreement to merge with mid-tier producer Glamis Gold (GLG-T, GLG-N), creating a new US$20-billion company.

Shareholders of Reno, Nev.-based Glamis will receive 1.69 shares of Goldcorp for each of their shares, giving a valuation of US$51.49 based on Goldcorp’s closing price on Aug. 30, a 32.7% premium on Glamis’ TSX closing price on that day. The proposed transaction, approved by both boards, is expected to close in November, subject to regulatory approvals and the support of at least two-thirds of Glamis shareholders.

The deal values Glamis at about US$8.6 billion given its 166.6 million shares outstanding. Based on Glamis’ proven and probable reserves of about 28.4 million gold-equivalent oz. (15.73 million oz. gold and 616.9 million oz. silver), Goldcorp is buying “ounces in the ground” at about US$300 apiece. With a measured and indicated resource of more that 40 million contained gold-equivalent ounces, the acquisition cost comes in at about US$213 per oz.

Earlier this year, Glamis acquired Vancouver-based Western Silver in a US$1-billion merger to obtain the large Peasquito silver-gold deposit in central Mexico. Subsequent studies have boosted the project’s reserves (gold up 100% and silver up 85%) with the deposit now comprising about three-quarters of Glamis’ reserve base.

Under the merger agreement, Glamis agrees to pay a US$215-million break fee to Goldcorp under certain circumstances, which also retains a right to match any competing offers. Goldcorp and Glamis shareholders would hold 60% and 40% of the new Goldcorp, respectively, with the companies holding board representation in the same proportion.

“From the Goldcorp side, the biggest driver for us was the value we saw in Glamis; this transaction doubles our reserves and resources,” said Goldcorp president and CEO Ian Telfer.

Glamis produced just over 286,000 oz. gold in the first six months of this year from El Sauzal in Mexico, Marlin in Guatemala, its 66.7%-interest in Marigold in Nevada and the San Martin mine in Honduras at a total cash cost of US$196 per oz. On the development side, a revised feasibility study at Peasquito is evaluating doubling the proposed 50,000-tonne-per-day throughput with full production expected by late 2009.

Glamis president and CEO Kevin McArthur reviewed the optimization potential of the merger stating, “We believe synergies between the two companies will eventually amount to about twenty-five million dollars per year, in addition to management and people synergies.”

In the first half of this year, Goldcorp produced almost 674,000 oz. gold from its Red Lake, Porcupine (in which it owns 51%) and Musselwhite (68%) mines in Canada; Alumbrera (37.5%) in Argentina; Luismin in Mexico; Amapari in Brazil; Peak in Australia; Wharf in South Dakota; and its 50% of La Coipa in Chile. Total cash costs were negative US$108 per oz. due to the large copper byproduct credit from Alumbrera. The company also holds a majority interest in Silver Wheaton (SLW-T, SLW-N).

Goldcorp has barely finished digesting its recently closed $1.6-billion acquisition of certain Placer Dome assets midway through its second quarter under an agreement struck with Barrick Gold (ABX-T, ABX-N), which successfully acquired Placer in a $10-billion takeover deal in March.

The combined company would become a significant low-cost and un-hedged gold producer with pro forma annual bullion output approaching 3 million oz. gold, plus proven and probable reserves of 41.1 million ounces. The new Goldcorp would rank third amongst the senior gold producers, based on market capitalization, after Barrick Gold and Newmont Mining (NMC-T, NEM-N).

The planned merger is the latest in a series of major transactions as metal producers rush to replace reserves being mined at accelerated rates. The growth strategy is increasing in popularity as companies weigh the costs and benefits analysis of adding reserves through acquisition versus exploration.

Not being able to vote on the planned merger, many Goldcorp shareholders were not enamoured with the deal, cited as being overly dilutive, and sold off a good portion of their shares to push down the stock price by about 15% to the $30-level on high TSX trading volume. Alternatively, Glamis shares gained 18% to close up $7.68 at around $50.70 on TSX trading.