Yamana Gold Inc. (TSX:YRI) announced a $400-million cash-and-stock deal Monday to buy a junior miner with a promising gold-silver project in Argentina and raised its dividend.
Chairman and CEO Peter Marrone called Extorre Gold Mines’s Cerro Moro project “one of the best undeveloped, high-grade opportunities in the Americas.”
“It is a relatively small transaction in that it represents only three per cent of Yamana’s market capitalization yet it could ultimately deliver more than 10 per cent of our total gold equivalent production,” Marrone said in a statement.
Under the deal, Yamana will pay $3.50 in cash and 0.467 of a Yamana share for each Extorre Gold (TSX:XG) share. Holders of Extorre options are eligible for 0.2648 of a Yamana share for each Extorre share that would have been issuable.
Based on Yamana’s share price Friday, Extorre said the deal was worth about $414 million or about $4.26 per share. Yamana said the deal was worth about $395 million net of cash.
Extorre shares gained 68 per cent or $1.73 at $4.27 in heavy trading on the Toronto Stock Exchange on Monday. Yamana shares were up 39 cents at $16.75.
The junior company has a number of exploration and development stage precious metals projects, the most advanced is the Cerro Moro project, in which it holds a 95 per cent stake.
Yamana described the Argentine project as a high-grade, gold-silver deposit with approximately 1.36 million ounces of gold equivalent indicated mineral resources and 1.05 million ounces of gold equivalent inferred mineral resources.
Investors have been cautious about Argentina since the government moved earlier this year to nationalize YPF, the Argentine oil unit of Spanish energy firm Repsol.
Yamana already owns the Gualcamayo open-pit mine and holds a stake in the massive Alumbrera copper-and-gold mine in Argentina.
John Ing of Maison Placements Canada called it a “handsome price” for a project in a risky part of the world.
“The fact is that it’s in Argentina and that’s a big question mark,” he said, adding that Marrone has a strong history in Latin America.
“This is a project that has yet to pour their first gold or silver dore bar, so there will be a lot of negotiations I’m sure with the government.”
Ing noted that other Canadian companies, including Barrick Gold (TSX:ABX), are operating in Argentina and producing gold.
RBC Capital Markets analyst Michael Curran called the deal a “mild positive” for Yamana.
Yamana is already active in Argentina with its Gualcamayo gold mine, thus the addition of Cerro Moro fits well with the company’s existing asset base,” Curran wrote in a report to clients.
“The potential for a low cost mine at Cerro Moro also could lower Yamana’s overall cash cost profile. Santa Cruz remains one of the best provinces in Argentina in our view for mining.”
Curran noted the offer is low compared with recent deals in the sector and could attract a rival bid, but the risks associated with Argentina may have affected the price.
“At this point, we view the likelihood of an overbid to be low, as many of the potential players remain busy with other recent acquisitions and/or their respective development projects,” he said.
Yamana, although focused on organic growth, had indicated recently it would consider tuck-in acquisitions that offer an opportunity for an “accelerated path to development and production and high return.”
The deal, subject to regulatory review as well as approval by a two-thirds majority of Extorre shareholders, is expected to close in August.
Yale Simpson, co-chairman of Extorre, said the company had faced challenges in developing Cerro Moro on its own, noting that its share price had suffered dramatically over the past few months.
“Management and the board of directors of Extorre diligently examined all of the available options to finance the Cerro Moro project to production, but given current market conditions, whatever financing mix was chosen, the result would be a serious erosion of the project returns,” Simpson said.
“In conclusion, if Extorre were to lock into the current fiscal/operating environment, the value of the Cerro Moro project to shareholders would be significantly diminished. Aside from this, management did not believe shelving a development decision for any length of time would be viable.”
Meanwhile, Yamana said it would be increasing is quarterly dividend by a penny to 6.5 cents in the third quarter. The move increases its total annual payout to shareholders to 26 cents per share.
“This most recent dividend increase is the fourth dividend increase approved by the company in the past 12 months signalling, yet again, that Yamana is committed to delivering growth and value to shareholders across all measures, which includes dividends,” Marrone said.
Yamana is a Canadian-based gold producer with significant gold production, gold development stage properties, exploration properties and land positions in Brazil, Argentina, Chile, Mexico and Colombia.