The LEAPS Trader
105 W. Monument Street
Baltimore, MD 21201
Thursday, August 31, 2006
Email – #335
** A Big Deal For Goldcorp
This morning Goldcorp (NYSE: GG), one of our bull spreads, announced that it was merging with Glamis Gold in a C$23 billion deal. As a result of this deal, the new Goldcorp will become a senior producer. This means it has joined the leagues of Newmont, Barrick etc. as a major producer. As it currently stands, the combined company will have proven and probable reserves of more than 40 million ounces of gold.
I would rather have seen Goldcorp go it alone and become a takeover target. Glamis is an attractive company with one very significant asset: its Penasquito mine in Mexico. This new mine is proving to be a major find with proven and probable gold equivalent reserves in excess of 35 million ounces.
Also, this deal puts Goldcorp squarely in the gold camp with a ratio of gold to other metals of about 70% to 30%. The cost picture is also attractive with the combined cash cost per ounce of just under $200 per ounce, slightly higher than Goldcorp’s stand-alone cost per ounce.
There are two major benefits from this deal. First, the combined company will reduce combined operating costs, which should offset the increase in resource cost. And, second, the combined company represents a much more attractive takeover target for the bigger senior producers.
The biggest problem I see with this deal is that it is dilutive to Goldcorp earnings in the short term, because it is paying a high price for future growth. However, it is positive from the standpoint that the net asset value of the combined company will be higher.
On a fundamental basis, the deal is being done using Goldcorp shares. Goldcorp is offering 1.69 shares for each share of Glamis. This non-cash deal allows the companies to maintain the strongest debt-to-equity profile of all of the majors, at around 6%. The combined company will still remain unhedged and fully exposed to the fluctuations in the price of gold, high and low.
Our Goldcorp play remains unaffected for the most part. It is a play on the rise of gold prices over the next two years. If that does not happen, the trade will lose. But, if gold rises to the $700 to $800 level by January 2009, this trade will be swimming in money. So, in sum, barring a collapse in gold prices, this trade should still work out in our favor. Our spread is between $30 and $40 with a break-even price of $33.50 by January 2009.
Good Investing,
Karim Rahemtulla
