Shareholders of Kaminak Gold (OTCPK:KMKGF) were served with some good news to go with their morning coffee on May 12 in case they share your humble scribe's habit of checking resource sector headlines over cafe latte while waking up. The takeover offer for their company was hard to miss for those who did, and it certainly created some excitement among commentators; firstly, because it came not from Kinross Gold (NYSE:KGC) as most observers would have tipped but instead from Goldcorp (NYSE:GG); and secondly, because of the sizeable premium which came on top of a very decent run in the share price year-to-date.

In summary: Goldcorp is proposing to exchange each share of Kaminak Gold for 0.10896 common shares of Goldcorp in an all-scrip deal. This exchange ratio implies a deal value of $520M, and a 40% premium based on the 20-day VWAP for Kaminak Gold shares traded on the TSX.

In Detail

Kaminak Gold's flagship Coffee gold project is a highly attractive cold climate heap leach project in Canada's Yukon Territory. A feasibility study was released in early January which we discussed at some length here for those interested; and for those who are not, we quote the following snippet:

Reserves of 46.4M tonnes at a grade of 1.45 g/t gold underpin a mine life of 10 years with total production of 1.862M ounces of gold. Coffee compares extremely well to other heap leach projects regarding grades, metallurgical recoveries, projected unit mining costs and several other metrics; and based on this data it comes with little surprise that economics as documented by the FS are very robust.

And here is the thing: those robust economics amount to an NPV(5%) of $455M after tax at an assumed gold price of $1,150/oz.

That's right, Goldcorp is paying a Dollar for 88 Cents.

Only if we were willing to take a bullish view, and adjust the NPV(5%) to a gold price assumption of $1,250/oz (more or less equal to the spot price at the time the deal was announced) we would be able to conclude that Goldcorp is actually buying a Dollar for a Dollar. But even wearing those rosy-colored bulls' glasses would not make this deal look very attractive considering the inherent development risk, and a gold price assumption at a 52+ weeks high.

Intriguing we thought, and dug into a few other metrics. Several North American gold miners changed hands recently, as we documented in a recent analysis on the occasion of Silver Standard (NASDAQ:SSRI) taking over Claude Resources (OTCQB:CLGRF) so there is plenty of recent valuations to compare the Kaminak deal with.

Goldcorp is paying $279 per recoverable reserve ounce; and $2,694 per ounce of annual production (averaged over Coffee's projected mine life). This valuation is very similar to Oceanagold's (OTCPK:OCANF) acquisition of the Haile Gold project about one year ago where valuations were for $318 per reserve ounce; and about $3,000 per ounce of annual production. The projected time lines to production are also quite comparable, as is the projected initial capex and mine output; as is our judgment: Oceanagold grossly overpaid for the Haile gold project, and Goldcorp is about to do the same.

Consider this: Goldcorp is paying 5 times as much as Silver Standard paid for Marigold on per-ounce valuations; and it's paying significantly more than Newmont Mining (NYSE:NEM) paid for the Cripple Creek & Victor mine; or Kirkland Lake Gold (OTCPK:KGILF) paid for St. Andrew Goldfields (OTCQX:STADF). However, these transactions all concerned operating mines, not development projects as is the case with Kaminak Gold. The least we can do to get a bit closer to an apple-for-apple comparison in these cases is work the up-front capex necessary to bring Coffee into production into our valuation ($317M according to the feasibility study, probably an optimistic estimate but sufficient for this exercise). The adjusted per-ounce purchase price for Kaminak now prints $450 per reserve ounce; and $4337 per ounce of annual production - slightly more even than Silver Standard (over)paid for Claude Resources, a deal that we found simply made no sense.

No matter how we look at this deal, we cannot help but conclude that Goldcorp is overpaying for the Coffee project; just like it did a couple of years ago for the Borden project. One really has to admire Kaminak Gold's CEO Ms. Eira Thomas who managed to keep a straight face when she talked about negotiations with Goldcorp's counterpart Mr. David Garofalo in this interview:

"We weren't haggling too much. I think it was certainly recognized from our side that the offer that Goldcorp put on the table was a fair value offer [...] and we recognized that this was an opportunity for our shareholders to lock in value."

Well, you couldn't say it any clearer without endangering the well-meaning of the goose that's laying this egg. Kaminak has been offered a great deal, and shareholders should be very, very happy, indeed.

KAM data by YCharts

So how could this happen? Why exactly would Goldcorp overpay for Coffee? The chart above provides some food for thought in this context. It shows the share price development since the release of the feasibility study for the Coffee project. Kaminak Gold's share price has outperformed Goldcorp's share price and it might well be a case of market valuation getting away from Goldcorp during negotiations; with too much at stake to pull out, especially with the new Goldcorp CEO Mr. Garofalo presumably eager to mark some territory. Stranger things have happened, and rumored competing bids from other majors would have helped to up the ante and reach the announced agreement.

Goldcorp has confirmed the view we already voiced a year ago, and updatedfor Itinerant Musings subscribers very recently: the major is set to underperform peers, and lose much more of its shine in coming quarters. It has missed out on deals when the resource sector was a buyer's market, and it is now grappling to pick up additions to the portfolio in what seems to have turned into a seller's market which is heating up quickly.

Maybe it will provide some consolation for unhappy Goldcorp investors that another major gold producer must be licking wounds right now. The Coffee project has been touted the perfect match for Kinross Gold, an opportunity to leverage the nearby Fort Knox mine which is struggling with declining reserves. We would not be surprised in the least if Kinross Gold has also been bidding for Coffee, unwilling to top Goldcorp's offer in the end. Not picking up Coffee is presumably a blow to Kinross Gold, which already has water concerns at Maricunga, and a below par Tasiast expansion on its plate.