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Canadian gold mining's bidding war shows appeal of buy over build

Gold bars are pictured near Baker Lake, Nunavut August 24, 2011. REUTERS/Chris Wattie

By Nicole Mordant

(Reuters) - A takeover battle for Canada's Osisko Mining Corp (OSK.TO), involving three of the world's top gold producers, is more than just a testament to the quality of the company's low-cost mine, it also spotlights a shortage of top-class gold assets in politically stable areas of the world.

The struggle between Goldcorp Inc (TOR:G) and deal partners Yamana Gold Inc (YRI.TO) and Agnico-Eagle Mines Ltd (AEM.TO) underlines the appeal of buying a mine, in this case Osisko's Canadian Malartic gold mine in Quebec, rather than building one.

A report on Friday that there have been recent merger talks between the world's two top gold producers, Barrick Gold Corp (ABX.TO) and Newmont Mining Corp (NEM) further illustrates a buy rather than build mentality that has overtaken the industry - cost cutting would likely be a key part of any such deal. The talks have broken down, according to the report from the Wall Street Journal, which cited unnamed sources.

There have been numerous development cost overruns on major mining projects around the world in recent years and the time it takes to get permission to develop sites has been getting longer amid tighter regulation and opposition to mining from environmentalists and local communities.

For example, it usually takes between seven and ten years to get permits for a mine in the United States, according to a 2013 survey by mineral industry advisory firm Behre Dolbear Group Inc. In 2009, it took between five and seven years.

Strengthening the buy-versus-build case is price: the market prices for gold companies have plunged by an average 60 percent since September 2011 as the gold price tumbled from a record high of $1,920 an ounce to below $1,300 now, a drop of about a third.

Toronto-based miners Yamana and Agnico are now offering $3.6 billion for Osisko, 50 percent higher than Vancouver-based Goldcorp's first offer in January and 11 percent above its last, sweetened offer.

The bidding war may be the clearest sign yet that the slump in asset values is coming to an end.

Industry insiders don't expect a flurry of such deals due to the scarcity of attractive assets and as miners try to rein in costs after a spate of expensive acquisitions made in 2010 and 2011 as bullion soared to its peak.

"The truth is, there just aren't that many good mines around," said Adrian Day, chief executive of Maryland-based Adrian Day Asset Management.

He said that the more aggressive major companies "are going to take a look at good assets ... however you define good - low cost, long life, good jurisdiction."

Canadian Malartic, which produced its first ounce of gold in April 2011, checks these boxes. Along with a 14-year mine life, Osisko forecasts the mine's cash costs, a measure of mine site expenses such as ore extraction and processing, will fall to between $527 and $577 an ounce this year from $679 in the fourth quarter of 2013.

That is well below the global industry average of $767 an ounce in 2013, according to metals consultancy Thomson Reuters


Located in Quebec's prolific Abitibi mining district, the Canadian Malartic open-pit mine contains nearly 9.4 million ounces of gold reserves and is expected to produce some 600,000 ounces of gold a year over its life. It is Osisko's only operating mine, another attractive feature for would-be purchasers.

"When looking at a transaction you have to consider its level of complexity and what other baggage comes with it," said Shea Small, a partner at law firm McCarthy Tetrault's Toronto office.


Rising gold prices unleashed a decade of mine building from 2000 as the value of in-the-ground resources climbed. But with bullion's slump over the past 2-1/2 years, mine projects have been halted as spiraling development costs made them uneconomic.

A high-profile example is Barrick's (ABX.TO) Pascua-Lama project on the Chile-Argentina border, which the company shelved last October after development costs soared to $8.5 billion from about $5 billion two years earlier.

In this lower gold price environment, miners' appetite for risk has shrunk.

"Development assets are more attractive than exploration assets and production assets are more attractive than development assets," said Mike Elliott, global and Asia-Pacific mining and metals leader at consultants EY, based in Sydney.

As well as the regular costs in time and money of getting the permits needed for development, corruption in some parts of the world is also making projects unattractively expensive.

Many mining companies have to be wary of global anti-bribery laws in countries such as the United States, and in coming years, in Canada. They can be in breach of these laws if they bribe foreign officials anywhere in the world.

Miners are moving away from higher political risk countries in Africa, Central Asia and even South America and moving back to established mining markets such as Canada.

The experience of miners such as Canada's Centerra Gold Inc (CG.TO) in Kyrgyzstan, where riots have broken out in support of calls by opposition politicians to nationalize the company's Kumtor mine, have been instructive to others.

Several analysts have said Yamana's pursuit of Canadian Malartic will help the company, whose mines are in South America and Mexico, reduce its geopolitical risks.

"I think the industry is clearly in a phase of evolution," said Sean Boyd, Agnico-Eagle's Chief Executive Officer.

"Companies are trying to restructure their portfolios and move out of assets that are difficult to run and complex and go toward assets in a smaller portfolio that are easier to manage and that can generate those solid returns," he said.


Over the past two years, the gold industry under pressure from disgruntled shareholders, has put itself on a strict diet, slashing operating and exploration costs. Acquisitions have also dried up.

The Yamana and Agnico-Eagle offer for Osisko is the gold sector's biggest in more than a year.

Shareholder disapproval of aggressive dealmaking, and the lack of candidates, will likely limit the number of further big deals.

The name most frequently mentioned as another appealing target is Detour Gold Corp (DGC.TO), which like Osisko has a single, producing mine in Canada. But the Detour Lake mine, which poured its first gold a year ago, is a higher-cost operation: it forecasts total cash costs at between $800 and $900 an ounce this year.

Where the bidding stops for Osisko will reveal whether miners have learnt lessons from the sector's recent penchant for overpaying for assets.

"We think the war is entering a dangerous phase, as buyers are threatening to erode potential returns with higher and higher bids," said Kristoffer Inton, an analyst at Morningstar in a note to clients about the takeover battle.

(Reporting by Nicole Mordant in Vancouver; Additional reporting by Allison Martell and Euan Rocha in Toronto; Editing by Jeffrey Hodgson, Martin Howell)