Proposed Goldcorp & Wheaton Combination: Gold-Wheaton??

07-Dec-04: Wheaton was just about the only gold stock up yesterday. Our comments on this ostensibly friendly transaction follow the announcement and data below (in subsequent pages). From Goldcorp's website:

Goldcorp and Wheaton River to Create World's Lowest Cost, Million Ounce Gold Producer: December 6, 2004 - Goldcorp Inc. and Wheaton River Minerals Ltd. announce that they have reached an agreement in principle to combine to create the world's lowest cost, million ounce gold producer. The combination would be effected through a share exchange take-over bid where Goldcorp would offer 1 common share of Goldcorp for every 4 common shares of Wheaton River.

The two companies have agreed in principle to negotiate a definitive agreement over the next 21 days subject to approval by Wheaton's board (upon reaching a definitive agreement, due diligence, and an opinion from Wheaton's financial advisor). Furthermore, according to the press release:

"Under the agreement in principle, Mr. McEwen would remain the Chairman of the Board and Mr. Telfer would become Chief Executive Officer of the combined company upon completion of the offer. The board of directors would be comprised of ten members, of which five would be current directors of Wheaton River." Once the due diligence period is over (January?) and the board approves the deal, it is still conditional on Goldcorp winning over at least 2/3 of Wheaton's undiluted shares outstanding. Wheaton is charged a US$35 million termination fee in the event it wanted to terminate the deal in order to entertain a superior offer.

I can't find anything wrong with this "potential" deal based on the available information. Wheaton shareholders get a nice little Christmas premium for their shares, and they get half of the richest mine in Canada.

The deal is worth about US$2.65 billion. Both companies get catapulted into the 1 million ounce per year producer club, with that expected to grow by nearly 50% over the next few years.

Goldcorp shareholders can breathe a sigh of relief over their newfound diversity - protecting them from the risk associated with a one mine deal - as well as growth, thanks to the work of Ian Telfer and Frank Giustra in putting together the assets that Goldcorp is buying: the Luismin project in Mexico has less than 1 million ounces of gold left in it, but its silver reserves fetched a handsome stake in a new silver company (spin-off) and it comes with about 23 exploration prospects in the vicinity; the Alumbrera gold-copper deposit in Argentina containing 2.3 million ounces of gold and 1.4 billion pounds of copper; and the Amapari gold deposit in Brazil contains about 1.4 million ounces and is expected to add up to 300,000 ounces in production per year by 2006.

There is enough capital in the new company (US$500 million +) to finance all the necessary development programs, which total approximately US$220 million (estimate) without having to worry about share dilution.

The bottom line is that Goldcorp is getting cashflow (or asset) value, while Wheaton is getting premium market pricing for their shares - probably due to the quality of Goldcorp's reserves at the Red Lake mine.

According to our net present value calculations, Goldcorp's shareholders acquire about 25% more value to underpin their shares - as you know, Goldcorp's shares trade at a premium to the sector.

So basically, Goldcorp shareholders are getting Wheaton's copper cashflows for free.

The stock was trading at 4.5 times Wheaton's share price before the announcement but the ratio narrowed to about 4.2 afterwards as arbitrageurs pushed Wheaton's shares up 25 US cents (7.8%) on Monday.

At today's values the new company would be trading at approximately 14 times next year's expected cashflows and 10 times 2007 cashflows - assuming gold prices average around US$500.

Of course, we expect them to average much more.

One objection that could be raised is that because Goldcorp would no longer be a pure gold company it might not be able to attract the kind of premium multiple on cashflows that it did prior to the transaction.

But we would counter that the company is acquiring more diversification, and more growth (value) with those premium valued shares. Moreover, most of the expected future growth is to come from the gold side. It could very well be a sweet marriage.

Note: we show different figures for cash costs than the deal advertises because Wheaton calculates this figure using the net byproduct method (i.e. subtract byproduct revenues from operating costs then divide by ounces of gold produced) while we've adjusted for the co-product method across the board - i.e. before subtracting byproduct revenues. Our method tends to overstate costs if you're making other comparisons on a per gold ounce basis. But in the data above we take account of the other revenues in our valuation calculations.

Regards,

Ed Bugos
Editor - The GoldenBar Report
www.goldenbar.com

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