Goldcorp acquisition spurs Detour Gold, other miners; EnPro jumps outright; Tower weaker

By Rebecca Melvin

New York, Jan. 13 - U.S. convertibles were stronger on lighter volume on Monday, with bids outpacing offers pretty much across the board, a New York-based trader said.

"The tone is better to buy," the trader said, with transactions getting done on the offer side of previous levels. He said the improved tone stemmed from "the move last week in the [jobs] numbers and subsequently what happened to Treasuries."

On Friday, U.S. Treasuries rallied after the December jobs report turned out to be a downside surprise with only 74,000 workers hired by U.S. private-sector employers, the lowest level since July 2011 and well below expectations.

On Monday, the Treasury's 10-year note yield declined 4 more basis points to 2.82% after falling 10.5 bps on Friday.

News that Goldcorp Inc. is offering to acquire smaller rival Osisko Mining Corp. for C$2.6 billion put the mining convertible names in focus on Monday as investors considered potential sector consolidation and its impact on various names.

For example, Detour Gold Corp., a Canadian-based company with U.S. dollar-denominated convertibles, traded up, as did the underlying shares of the Toronto-based gold exploration and development company.

The 3.25% convertible bonds of B2Gold Corp., which priced in August, were also looking stronger. Goldcorp's convertibles, which are very short-dated, were not impacted significantly by the acquisition news, a trader said.

Elsewhere, health care and biotech names continued to make a splash. Salix Pharmaceuticals Inc.'s 1.5% convertible due 2019 traded up 5 points to 158.227 along with a jump in the underlying shares of the Raleigh, N.C.-based drug maker after the company significantly increased its full-year earnings forecast.

But Volcano Corp.'s 1.75% convertibles due 2017 were mostly quiet, although better on a dollar-neutral, or hedged, basis after the San Diego-based medical-device maker lowered guidance for full-year 2013. Volcano shares ended down 7.5%.

On another front, EnPro Industries Inc. jumped on an outright basis in active trade after the Charlotte, N.C.-based maker of sealing products, bearings and other engineered products won a court ruling that it won't have to set aside more money than already anticipated to cover mesothelioma claims against one of its subsidiaries in bankruptcy.

The EnPro 3.938% convertibles due 2015 were seen at 231.323 versus an underlying share price of $73.64 in the early going, a New York-based trader said. EnPro shares were up 24% in early trading. They ended 20% higher. The bonds traded at 3.25 points over parity, a trader said at the market close.

But Tower Group International Ltd.'s 5% convertibles were lower at 93.5 bid, 95.5 offered, which was down about 2 points, a Connecticut-based trader said, on no particular news for the Bermuda-based reinsurance company. These bonds jumped 10 points last week on news that the company has agreed to be bought by ACP Re Ltd., a privately owned reinsurance company, for $172 million.

Overall, the convertible market "has been OK," a trader said. New issuance remained absent on Monday, which deters participation in the secondary market as well; but, despite that there were trends lining up especially ahead of earnings reports eyed over the next several weeks.

Stocks extended losses after dropping on Friday's jobs report and amid concerns about corporate earnings as several companies lowered guidance. The S&P 500 stock index fell 23.17 points, or 1.26%, to 1,819.20; the Dow Jones industrial average lost 179.11 points, or 1.1%, to 16,257.94; and the Nasdaq stock market lost 61.36 points, or 1.5%, to 4,113.30.

Goldcorp deal spurs miners

Goldcorp's 2% convertibles due 2014 barely moved from their perch right around par, or at 100.45. The shares looked pretty steady as well, although under a little bit of pressure from the takeover bid news.

"They are so short dated, with only six months to go, they aren't going to be affected that much by the news," a trader said. They trade with a 1% yield to maturity, he added.

Goldcorp shares ended down 9 cents at $23.10.

But Detour Gold's 5% convertibles due 2017 traded up to 83 bid, 85 offered from 82 bid, 84 offered on Friday. The bonds don't have much equity sensitivity, but they traded up to the mid-80s with strong shares, the trader noted.

Detour's shares ended up 10% at $5.79 from a close of $5.27 on Friday on the Toronto Stock Exchange.

Detour was perhaps the most active miner name since it is viewed as a comparable to the Osisko Mining company, the trader said. But there are others like B2Gold's convertibles, which were also "better to buy" during the session, the trader said.

Newmont Mining Corp. and Silver Standard Resources Inc. also have convertible bonds.

Goldcorp's bid for Osisko comes as the mining sector has been hobbled by a 25% drop in gold prices in the past year. Miners have been focused on cutting costs and slowing down mining activities.

Goldcorp's bid to acquire Osisko's large Malartic deposit will boost Goldcorp's reserves, but the generally low-grade quality of the Malartic mine means those assets will be susceptible to any further weakening in gold prices, according to sources.

Vancouver, B.C.-based Goldcorp's bid was unsolicited but represented a 15% premium to Osisko's closing share price on Friday.

Goldcorp said Osisko shareholders would receive 0.146 of a Goldcorp share plus C$2.26 in cash for each share they own. The bid will be open until Feb. 19.

Goldcorp has obtained a $1.25 billion credit facility from Scotiabank, which, together with cash on hand and an undrawn $2 billion credit facility, will be enough for the cash portion of the cash and stock offer.

"The news out on Goldcorp doing an acquisition makes people wonder what is going to happen to the other miners in the convert space," the trader said.

Volcano quiet but strong

Volcano's 1.75% convertibles due 2017 were seen at 98.75 bid, 99.5 offered with the underlying shares up 7.5% at $21.38.

"They held up," a trader said. In fact, he marked the bonds higher by about 0.25 point on a dollar-neutral basis using about a 45% delta. But they didn't trade actively.

"There was about one outright print; that's it," the disappointed trader said.

Volcano announced Monday preliminary fourth-quarter revenue of $103.3 million, which edged consensus estimates for revenue of $102.72 million. But the company lowered prior guidance for full-year 2013 revenue to about $393.7 million.

Gains in the fourth quarter in its U.S. medical segment were offset by lower-than-expected growth in its functional measurement business in the United States and Japan.

Salix Pharmaceuticals also "threw out some numbers," a trader said, noting that companies presenting at the J.P. Morgan health care conference are likely to release figures.

EnPro jumps outright

EnPro Industries' 3.9375% convertibles due 2015 were seen at 231.323 versus an underlying share price of $73.64. Later the bonds were seen at about 220 with the underlying shares closer to $71.21, where they closed. The close represented a surge of 20%.

On Nov. 1, the bonds were around 175 with the shares at $57.00 when the company reported a quarterly earnings miss.

The $172.5 million of in-the-money bonds are currently convertible through March.

EnPro's shares and convertibles surged on a bankruptcy court ruling that involves more than 4,000 claims from mesothelioma patients as well as claims from people who develop the disease in the future.

The court agreed with EnPro subsidiary Garlock Sealing Technologies, which filed for Chapter 11 bankruptcy protection in June 2010, and said the company had little to no responsibility for the illnesses of the people who were suing it.

The bankruptcy court judge said $125 million was enough to cover current and future mesothelioma claims involving Garlock. EnPro said in late 2011 that it thought it would need to set aside $270 million to cover those liabilities, but in July it lowered that total to no more than $125 million.

Mentioned in this article:

B2Gold Corp. NYSE: BTG

Detour Gold Corp. Toronto: DGC

EnPro Industries Inc. NYSE: NPO

Goldcorp Inc. NYSE: GG

Intel Corp. Nasdaq: INTC

Newmont Mining Corp. NYSE: NEM

Silver Standard Resources Inc. Nasdaq: SSRI

Tower Group International Ltd. Nasdaq: TWGP

Volcano Corp. Nasdaq: VOLC

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