Goldcorp in $1.5B friendly takeover of Gold Eagle Mines

The pace of takeovers in the mining sector is accelerating. The latest move sees heavyweight Goldcorp (G-T, GG-N), one of whose main assets is the prolific Red Lake gold mine in northern Ontario, agreeing to take over Gold Eagle Mines (GEA-T) in a friendly cash-and-shares deal valued at $1.5 billion. Gold Eagle has made the Bruce Channel gold discovery in the Red Lake district, so the takeover provides Goldcorp with an opportunity for area consolidation.

Goldcorp already owns a 4.7% stake in Gold Eagle. Another large shareholder is Agnico-Eagle Mines (AEM-T, AEM-N), which owns about 7.1% of Gold Eagle’s shares fully diluted. Agnico-Eagle has acquired its stake in a $50 million private placement in June. Goldcorp is proceeding with the takeover offer despite the absence of a resource estimate for the Bruce Channel project.

Goldcorp says that Gold Eagle management and directors, as well as certain shareholders, representing a total of 10.5% of Gold Eagle’s share ownership, have agreed to vote in favour of the offer. Responding to a question during a conference call, a Goldcorp executive said that he did not know how Agnico-Eagle intended to vote their shares. According to the takeover agreement, at least two-thirds of Gold Eagle shareholders must vote in favour of the takeover for the deal to go ahead.

For each Gold Eagle share, holders will receive $6.80 plus 0.146 of a Goldcorp share. Instead of this cash-and-shares combination, a holder may elect to receive $13.60 per share, with no Goldcorp shares, or 0.292 of a Goldcorp share with almost no cash (one hundredth of one cent) per share, or another combination of cash and shares. The price represents a 19% premium on Gold Eagle’s closing stock price on July 30, and a 36% premium on the volume-weighted average stock price for the 20 days prior to the takeover announcement.

The Bruce Channel discovery is located approximately 700-800 metres beneath the Bruce Channel waterway that separates McKenzie Island from the mainland, and appears to be a down-plunge extension of the Goldcorp-owned past-producing Cochenour-Willans mine, which is located immediately northeast of the discovery. The Bruce Channel is adjacent to the Red Lake mine, and is situated along the Red Lake trend.

After drilling nearly 200 holes, the mineralized zone defined so far has a vertical dimension of 1,450 metres, horizontal dimensions of 800 by 450 metres, and is open in all directions. As can be expected, it is geologically similar to Goldcorp’s mines nearby. Gold Eagle has come across many occurences of high-grade mineralization and visible gold in drill-core. For example, one hole drilled in July returned 4.5 metres of about 13 grams gold per tonne.

Goldcorp believes that Gold Eagle’s Bruce Channel property is a world-class discovery. During the conference call to discuss the takeover, Goldcorp executives said that Gold Eagle did some of the drilling in Bruce Channel from Goldcorp’s past-producing Cochenour-Willans mine, and Goldcorp personnel observed the drill-core. It is clear that, based on assays released to date, plus what its people could see in the core, Goldcorp is convinced that the takeover is justified by the economics of the deposit.

In the conference call following the takeover announcement, Goldcorp executive vice-president Charles Jeannes said: “We believe that the deal solidifies our dominant position in the Red Lake area… We have acquired potentially a world-class high-grade resource… We are quite confident that this acquisition will prove accretive to our shareholders from the point of view of reserves and resources per share, net asset value per share, as well as cash flow and earnings once the mine is producing.”

Jeannes added that the deal creates significant synergies with Goldcorp’s existing infrastructure in the Red Lake district, such as mill and tailings disposal facilities. Earlier access for delineation drilling will be provided using Goldcorp’s existing Cochenour shaft, and the main production shaft could be on the mainland. The first step will be to dewater the Cochenour shaft.

Goldcorp believes that the mineralization at Bruce Channel is the down-plunge continuation of the past-producing Cochenour mine, and that it remains open in all directions. One more synergy is that resources in Cochenour, which are uneconomic on their own, can now be developed.

While acknowledging that the Bruce Channel project has no reported resource, Jeannes says:”We have been looking at this deposit and all the data for a long time, and we have developed a rigorous proprietary resource and financial model.”

The only figure that Jeannes would disclose from the financial model was that the all-in production cost is below US$650 per oz. He summarized the takeover by saying that the deal “will be accretive to Goldcorp shareholders on all metrics… (and it will) add significant value to one of our crown jewel assets.”

Coming on the heels of the takeover of Aurelian Resources (ARU-T, AUREF-O) by Kinross Gold (K-T, KGC-N), the takeover has wider implications: the major producers need deposits to replace their reserves, so other junior explorers with significant discoveries may receive takeover offers.

On the TSX, Goldcorp shares fell $1.70 to $38.15, while Gold Eagle shares gained $1.71 to $12.28.