Goldcorp: Feeling Glamis All Over?
by Edgar J. Steele

September 5, 2006

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"It has been, indeed, a trying hour for the Republic; but I see in the future a crisis approaching that unnerves me and causes me to tremble for the safety of my country. As a result of the war, corporations have been enthroned and an era of corruption in high places will follow, and the money power of the country will endeavor to prolong its reign by working upon the prejudices of the people until wealth is aggregated in a few hands and the Republic is destroyed."
  --- Abraham Lincoln, in reply to a letter from a friend in Illinois, as the War of Northern Aggression wound down

"Every morning, I have a 5-mile run and a cold shower, then I feel rosy all over."
(From the back of the bus) "Tell us more about Rosy."

  --- Tired, old joke

These are wild times for metal stocks, as evidenced by the recent flurry of hostile takeover bids and friendly mergers and consolidations.  All this indicates a belief by some, at least, that the stocks of takeover targets are undervalued.  Some allege that this undervaluation results from the illegal rigging of world metals market prices by some of those same companies attempting to acquire others, particularly Barrick Gold Corporation's pending hostile takeover bid for Novagold, now that Barrick has bagged Novagold's own former hostile-takeover target, Pioneer Metals.  More on this in a moment.

Technical stock analysts generally claim that price floors have been tested and reconsolidated and that both gold and silver now are due for big upward spikes.  A few predict imminent downward metal price moves.  Regardless, I know which way the dollar will be going (down, because that is the only direction it can go), and that is all that matters to me in dictating my long-term precious metals position.

Silver spiked up this past week.  Maybe a trend.  Maybe not.  Those who bought along with me have all their positions in the black, so we quite simply don't care.  We know what the future holds.  What's more, we hold at least half our wealth in the form of metal itself, not paper (including Exchange-Traded Funds like GLD and SLV, incidentally), so we can afford to just sit on our assets.  Our only question is when to move our paper investments to increasingly-safer forms, then into metal, as well.  I think there still is a strong updraft in metal prices coming and would like to capitalize on it to some degree with the leverage that paper affords.

Capitalism or Fascism?  Gee, I Can't Tell the Difference!

Mergers and acquisitions:  It's just business as usual in what passes for "Capitalism" these days.  Corporate fascism, more like it, given the clearly-existing linkages between government, market makers and market participants.  For example, the position of US Treasurer effectively has become a sinecure for the Goldman Sachs investment banking firm.  Current Treasury Secretary, Henry Paulson, was Goldman Sachs' most recent CEO.  Clinton's Treasury Secretary, Robert Rubin, also once headed up Goldman Sachs.  What are the odds?  About the same as the room-temperature-IQ son of George Bush ascending to the Presidency on his own merits, I'd say.

Ever since my days on Treasury staff for a major American corporation, I have known just how irrelevant are stockholders and how corporate officers always realign their companies to ensure their own survival and prosperity at the expense of stockholders, beginning with "stacking" the Board of Directors.  With a solid background in Finance (BA) and Accounting (MBA, Cal Berkeley), not to mention a law degree from UCLA, I know all the little tricks, such as shuffling foreign tax credits to avoid paying US taxes altogether or moving debt off a balance sheet via major lease deals or interlocking corporate book cooking sales or burying costs and revenues in reserves (euphemistically called "capitalizing" them) so that they are available in the future to massage reported income streams (which always differ radically from taxable revenues and costs) or directly plundering the worth of a company by granting officer stock options that are buried in financial statement notes and amount to a direct transfer of wealth from shareholder wallets to those of corporate executives and directors (well, how did you think they managed to stack the boards in the first place?).

My knowledge, coupled with how I have seen American business increasingly grow into a form of corporate fascism that disregards shareholders, first, then citizens of whole countries, second, as companies conduct business in the self interest of their own executives (witness Enron or, better yet, Dick Cheney's Halliburton), has led me seriously to reevaluate my belief in the viability of Capitalism in any society for longer than a very brief period of time. 

Employees, of course, always have been irrelevant and disposable to capitalism in any form, which is why collectivist labor unions got a toehold in the first place, then a stranglehold, in American business - a stranglehold that led directly to today's outsourcing and the upcoming impoverishment of the American working class in yet another demonstration of how collectivism of any sort always is a really bad idea.

Capitalism now seems to me always destined to morph into the dictatorial-collectivist sort of monopolistic, fascistic greed, oppression and exploitation of the common man that is all too prevalent in the world today, as the line between business and government increasingly blurs.  Separation of church and state?  What we really need is separation of Board Room and State!

Mind you, there is no danger of my philosophically lurching toward that other form of collectivism, most easily recognized in the forms of socialism or communism.  As hinted above, I see them being just as bad as what I now see developing in the world today, perhaps worse, if we judge them by what took place in Russia and China last century. 

Of course, we haven't seen the end result of what is happening today.  Things yet could end up even uglier than ever before seen, given all the loose talk by lunatics like Rumsfeld and Cheney about pre-emptive war, tactical usage of nuclear weapons, disease pandemics and, of course, the eradication of liberty in order to preserve it, Orwell-style. 

Then there is the increasing evidence of governmental false flag operations, such as that which 9/11 increasingly appears to have been, whereby governments knowingly murder swaths of their own citizenry in order to stampede the rest toward a foregone conclusion reached in private, smoke-filled rooms.

End of socio-political sermon for today.

Goldcorp: Too Successful for Its Own Good

Vancouver-based Goldcorp, Inc. (GG) just has announced its agreement to acquire Glamis Gold, Ltd. (GLM) in a deal that will result in Goldcorp becoming the world's third largest gold producer.  The total value of all outstanding shares of the combined venture, to continue under the name Goldcorp, will exceed $20 billion.  I'm not happy about this merger, nor is the rest of the market, evidenced by the fact that GG's stock gapped down $3 the morning after the announcement.  Glamis, of course, was up, reflective of the unconscionable 1/3 premium being offered.  This is the sort of premium offered by competitors in hostile takeover deals, not friendly mergers.  Something stinks here, folks, and it's coming from the Goldcorp Board Room. 

Once again, Goldcorp's officers have shafted their own stockholders, in my opinion.  The last time was via the recent outlandish stock options they granted themselves and board members.  Previously, I found a listing of those options by director and executive on line, leading me to demand an explanation of Goldcorp's public relations director (whose response to me was at once both arrogant and inadequate).  Oddly enough, I no longer seem to be able to find such a listing anywhere on Goldcorp's web site.

Knowing full well the terms of the impending-but-still-secret Glamis deal, in the works since June, on August 25 Goldcorp's officers had the unmitigated gall to tell shareholders to reject the August 16 "minitender offer" by TRC Capital for 3,000,000 shares of Goldcorp (less than 1% of Goldcorp's total outstanding shares).

Minitenders are made for several reasons, the most important being the ability to acquire a small (less than 5%) but significant stake in a company without the necessary government agency filings attendant to larger acquisitions.  Minitenders also "test the water" by seeing how a proposed price flies with the target's shareholders and executives.  Minitenders often (but not always) precede a takeover bid.  Finally, minitender offers simply are ways for some unscrupulous companies to acquire blocks of stock from unwary investors below current market prices. 

TRC regularly goes around making this sort of tender offer to the shareholders of all sorts of companies, including Coca Cola and Halliburton recently, so appears to be one of those opportunists comprising the very last category noted.  Even so, for Goldcorp's management to say "Don't sell your shares to TRC (for about $30 each)," knowing full well that they were about to announce a deal that would result in the lowering of Goldcorp's stock price to about $27 per share because of an outrageously excessive premium being offered for no apparent reason is ... well ... actionable, if not criminal.  Keeping its mouth shut would have been one thing.  Virtually no shareholder would have taken TRC's offer anyway, unless they somehow knew that Goldcorp was about to shaft them even worse. 

However, in my professional legal opinion, to actively discourage stockholders, to whom Goldcorp officers and directors owe a high fiduciary duty, from selling their stock for a price substantially higher than those same officers and directors know they are about to create, goes beyond mere breach of fiduciary duty and verges well into the territory of fraud, both civil and criminal in nature.

After this consolidation with Glamis, Ian Telfer, Goldcorp's current president, moves up to Chairman and Glamis' president seems to be taking over the executive reins.  That may be good, but then you have to wonder just who is taking over whom, particularly in light of the premium offered to Glamis.

I've been in the midst of hostile takeovers before.  I understand the mentality that festers, then runs rampant through an industry once the dominoes start falling.  I think that Goldcorp's executives and directors have been running scared.

Round and Round We Go...

Here's what I speculate is going through the minds of Goldcorp's board members:  Because of its success, both operationally and due to blind, dumb luck in market timing, Goldcorp is the single most attractive takeover candidate in the world.  GG's total market cap is small enough to be swallowed by at least 10 or 15 other gold companies (yes, most of them smaller than Goldcorp).  Goldcorp's strong balance sheet, high reserves, low extraction costs and nonexistent hedging (GG has stopped stockpiling, which is a form of "reverse hedging") all make acquisition of Goldcorp a no brainer for anybody who can float the financing to pull it off.  An acquisition of Goldcorp instantly cleans up anybody else's financial statements and strengthens their own stock. 

Once Barrick and Novagold started the hostile-takeover festivities, I'm positive that Goldcorp got very nervous and examined ways to avoid a hostile takeover of itself, as attempted by Glamis last year.  One way is to get too big to swallow, by swallowing a major competitor yourself.  Another is to weaken your balance sheet and/or operating cost picture.  Goldcorp gets bigger by acquiring Glamis, with the added short-term bonus of significantly diluting its own stock by paying such an outrageous premium (this impediment disappears once the consolidation takes place).  Oddly enough, however, Goldcorp proposes this acquisition, not by issuing debt, which would make it even less attractive as a takeover target, but by issuing stock, in a move that hurts only existing Goldcorp shareholders.

Envision the Crimson Permanent Assurance Company, sailing the financial high seas at the outset of the Monty Python movie, The Meaning of Life. 

Corporations are run by people - usually men.  And men will be men, after all, albeit men in Brooks Brothers suits.  Fragile male egos get bruised in takeover attempts.  Unsuccessful hostile takeover targets often turn around and go on the attack, even though the former attacker might not be the best target, strictly from an acquisition standpoint.  But, then, men will be men.  It's a guy thing.  Picture how bar fights begin ... and end.  That's why Barrick turned around and now is wasting its time on Novagold when it should have pursued Goldcorp, instead.  That also is why Goldcorp simply must have Glamis, a company that made its own hostile takeover bid for Goldcorp last year.

Now picture victim turned victor, vanquishing its foe.  Or, as Monty Python showed us:  walking the corporate plank.  And you thought finance and accounting was dull!

Too Many Lawyers, Not Enough Good Ones

Speaking of walking the plank, Goldcorp's Telfer and crew should be sued by someone willing to finance a shareholder derivative suit for breach of fiduciary duty in (1) engineering the recent massive stock options they gave themselves and (2) giving away the store with the Glamis offer when it is Glamis who should be paying the premium to Goldcorp and, (3) particularly, for telling us to refuse TRC's offer of $30 per share when they knew full well that they were about to drive Goldcorp's stock price to a far lower level in just a matter of days.

There are other ways for companies to protect themselves from takeovers:  poison pills and the like, but they often get invalidated by the courts.  Growth via debt leverage, making yourself simultaneously too big to swallow and too undercapitalized to be an attractive breakup candidate, is the best way:  You issue debt and use the proceeds to buy the stock of a major competitor outright.  The Goldcorp/Glamis merger merely creates a larger entity since the loss with which Goldcorp's shareholders get tagged goes to the Glamis shareholders as a gain.  Total market cap for the combination stays the same, as does the combined debt and hedging structures.  Here's the problem:  After Glamis, Goldcorp still is the most attractive takeover candidate around.  Only the field of potential hostile suitors has been narrowed and Barrick still is the most ominous predator around.

In fact, Goldcorp's lower share price makes it an even more attractive takeover target, particularly if a hostile tender offer is enough to make the Glamis deal go sideways.  Even if Glamis goes through, an acquisition of Goldcorp by a company the size of Barrick or Newmont, the number-two gold company in terms of total market capitalization, makes a lot of sense.

Regardless, the market historically swings up once everybody returns from their August vacation.  Now is the time for a predator to make its move. The action has only just begun, I suspect.

Telfer mentioned spinning off the silver end of GG's business.  That's the biggest potential growth area of the precious metals field, of course, and getting rid of its Wheaton silver operation, with which Goldcorp fortuitously merged last year just prior to silver's big move upwards in order to dodge Glamis, would make Goldcorp less attractive.  Any bets on it going to an allied group, maybe directly involving Telfer, now that he will be just Chairman, for a sweetheart price, thereby further insulting GG's stock price? 

Oh, you're probably right - I'm just too suspicious.  But, it is suspicion born of experience, believe me, and I already have taken the measure of those currently running Goldcorp and found them wanting.

Telfer also joked about issuing a takeover bid for a larger gold company.  That is just bluster.  Tell me he isn't running scared.  Picture Telfer walking that plank ... please.

The Music Begins...

As mentioned above, it was just last month that Toronto-based Barrick Gold Corp. rescued Pioneer Metals (PSM-TSX)from a hostile takeover bid made by Novagold Resources, Inc. during the previous month, in which Novagold offered CDN $.57 per share for Pioneer.  Barrick and Pioneer agreed to CDN $1.00 per share, which was about a third more than that for which Pioneer was trading just prior to Novagold's June bid.  In financial circles, Barrick thus became what is called a "white knight" for rescuing Pioneer from a lowball takeover bid.

Some may recall that it was just one month prior to Novagold's unsuccessful bid for Pioneer, in May 2006, that the prices of metals and mining stocks underwent a drastic meltdown, from which they have yet to recover.  The traditional end-of-summer, low-point window is closing fast.  Gold likely is about to move higher.  Certainly, all the activity suggests that the major players believe so.

Simultaneous with rescuing Pioneer from Novagold, Barrick then made its own hostile takeover bid for Novagold itself, which since has adopted "poison pill" defenses, effectively designed to kill Novagold in the event of a successful takeover bid by Barrick.  Novagold claims Barrick has misused confidential financial information gained during a joint venture involving both companies.  Lawsuits all around, of course.  Novagold also has embarked upon a public-relations campaign, including the announcement of significant increases in the estimates of its in-ground reserves (coincidental, of course, and surely not designed to support Novagold's contention that its stock is worth more than that being offered by Barrick).

In supporting Novagold's defense against Barrick's takeover bid, the Gold Anti-Trust Action Committee (GATA) alleges that Barrick illegally has participated in rigging the market price of gold via "short sales" (sales of future production at current prices) far in excess of what Barrick possibly ever could deliver, designed to keep gold's price artificially low.  This, of course, facilitates a cheap takeover like that which Barrick now is attempting of Novagold.

GATA's estimable chairman, Bill Murphy, stated:  "Barrick's hedge book is mega-toxic and so the company is desperate for the unhedged gold in the ground at NovaGold, with which Barrick would extricate itself from a nightmare.  Taking over NovaGold will help Barrick immensely.  This cannot be allowed to happen UNLESS Barrick has to pay so much that it impairs their credit situation..."  Indeed, already Standard and Poor's (a credit rating service) has downgraded Barrick's debt ratings, due simply to the existing takeover bid, which would push Barrick's debt level up substantially, while affording little increase in its cash flow.

There are other industry mergers shaping up, too.

Plan B?

I think there is a very strong likelihood of Barrick's bid for NovaGold failing.  When that happens (and I'll bet this already is lined up, with all the papers drafted, just awaiting dates and signatures in Barrick's board room), Goldcorp becomes the next logical target for Barrick.  In fact, but for the infighting and bruised egos involved in the Pioneer scuffle, Barrick likely would have gone after Goldcorp in the first place.

Face it:  Barrick has been a major tool used by our government in manipulating the price of gold.  You think they will not see that Barrick is rewarded?  Barrick must somehow reduce its exposure to its outlandish short forward sales.  Goldcorp does that job for Barrick better than anybody else.  Do the math.

Whither the Goldcorp Shareholder?

So - where are we?  We already have taken our lumps for this surprise Glamis deal, so we might as well just hold on for now.  We can only hope it falls apart, somehow, thereby returning the 10% of our stock value that Telfer magnanimously handed over to Glamis. 

Let's get real clear about the dynamics at work here:  Goldcorp is the single best gold company in the world.  Any acquisition by Goldcorp, even without paying any premiums, will weaken it and cause its stock price to drop.  Any acquisition of Goldcorp, however, will strengthen the acquiring company and cause Goldcorp's stock price to rise, due to the premium required.

Now I'm hoping for Barrick to drop pursuit of Novagold and immediately turn on Goldcorp, creating a situation that might cause Glamis to want to go sideways, despite the premium now on the table.  If not, then Barrick should swallow both at once.  Barrick can do it and end up looking a whole lot better than it does right now due to its current massive hedging position.  Barrick would, of course, be fought tooth and nail and would have to offer a hefty premium.  If Glamis dropped out, double that premium.  I, for one, gladly will tender my Goldcorp shares for that premium and put the money elsewhere, as my patience with Goldcorp's management finally has run out after a very successful four-year run.

If we get out of Goldcorp whole - no ... when we get out of Goldcorp - what do we do with our money?  Maybe a few junior flyers, but the bulk of mine goes into the GDX fund, with perhaps a third into the GLD and/or SLV ETFs.  We already have our long-term silver positions established, of course.  The dollar is getting just too, too shaky for my taste. 

That, however, is another story.

My name is Edgar J. Steele.  Thanks for listening.  Please visit my web site, www.ConspiracyPenPal.com, for other messages just like this one.  


Copyright 2006, Edgar J. Steele

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