Yamana pounces on Extorre with US$404 million bid

VANCOUVER — Following a tumultuous four months that saw share prices plummet and development options narrow, Vancouver-based explorer Extorre Gold Mines found a solution to its problem in the form of Toronto-based producer Yamana Gold,...

VANCOUVER — Following a tumultuous four months that saw share prices plummet and development options narrow, Vancouver-based explorer Extorre Gold Mines found a solution to its problem in the form of Toronto-based producer Yamana Gold, which swooped in to make a US$404-million offer on its junior counterpart in mid-June.

In what has become a market reality for gold juniors, Extorre shares plunged 66% or $4.96 since the beginning of March, as the company was forced to rethink development options at its advanced stage Cerro Moro gold-silver project in Argentina's Santa Cruz province in the face of limited financing options.

Though Extorre has made development overtures at Cerro Moro under the guise of three preliminary economic assessments (PEAs), it was widely speculated that the company was waiting for a takeover or partnership bid to shoulder capital development costs ranging anywhere from US$200 million to US$300 million.

Cerro Moro is notable for its high grades in both gold and silver, holding indicated resources totalling 2.4 million tonnes carrying 7.4 g/t Au and 499 g/t Ag for 1.4 million contained gold equivalent oz.

Under terms of the agreement, Yamana will pay $3.50 in cash plus 0.0467 of its own shares for each share of Extorre, a total value of $4.26 per common unit. According to Yamana chairman and CEO Peter Marrone, the acquisition has the potential to bump the company's gold equivalent production by roughly 10%, while only costing US$385 million (net of cash) which represents 3% of Yamana's market capitalization.

“We indicated recently that Yamana would consider tuck-in acquisitions in mining friendly and familiar jurisdictions that fit our other criteria including opportunity for organic growth, accelerated path to development and production and high return,” commented Marrone. “Extorre represents one of these opportunities. It is one of the best undeveloped, high grade opportunities in the Americas. We have the operational, jurisdictional, and financial strength to advance the project on a timely basis which will be beneficial for all stakeholders involved.”

Yamana is a veteran South American mine developer, with seven active projects across the region, including its Gualcamayo gold-silver mine in Argentina's northern San Juan province. The Canadian producer has experience with vein type, gold-silver deposits like Cerro Moro, and is far better equipped to handle regional political risks that plagued Extorre earlier this year, such as recent nationalization overtures from the Argentinean government.

Yamana continued to demonstrate dependable growth figures through the first quarter, as production jumped to 278,800 AuEq oz at average cash costs of US$292 per oz. Along with higher realized gold prices, the production leap fueled a revenue boost of 18% to US$560 million, which left the company with US$220 million in operational cash flow.

Along with the acquisition of Extorre, Yamana announced it would be bumping shareholder dividends by 18% to 6.5¢ per share next quarter, marking a 117% year-on-year increase. It will be the fourth dividend hike by the company in the past 12 months, and according to Marrone demonstrates Yamana’s confidence in the sustainability of higher cash flow levels in the near term, with its C1 Santa Luz gold mine and Ernesto/Pau-a-Pique gold projects expected to hit production later this year.

Cerro Moro represents a convenient acquisition for Yamana insomuch as it fits perfectly into the company’s production and cost portfolio. Extorre’s most recent full scale PEA on the project in early April — tossing aside a subsequent staged development model that now appears to be a last ditch effort to stabilize share performance — Cerro Moro carries an after tax net present value of US$463 million, with a 47% internal rate of return at a 5% discount rate.

Under a US$284-million development plan the operation would include both open pit and underground aspects, producing 248,000 AuEq oz per year at average costs of roughly US$453 per oz. A comminution circuit design would process 1,300 t/d, and include a three stage crushing circuit followed by a single stage closed circuit ball mill.

According to management Extorre had explored various financing options for Cerro Moro, but concluded that any financing structure would have significantly diminished its value,

“Our share price has suffered dramatically over the past few months,” commented Extorre co-chairman Yale Simpson. “A number of factors contributed to the fall, including: global political and economic uncertainty impacting credit markets; a broad selloff of all junior nonproducing gold companies; concerns with respect to share dilution arising from a decision to develop the Cerro Moro project; and a series of events that have raised the perceived investment risk in Argentina.”

In a note to clients Bank of Montreal (BMO) Capital Markets analyst John Hayes labelled the acquisition a positive event for Extorre shareholders, increasing his target price to $4.29 and holding a “Sector Perform” rating,

“The company at a number of junctures had verbalized plans to advance Cerro Moro to production on the basis of the PEA level studies, something we viewed as presenting additional project risk,” Hayes wrote on June 18. “The proposed acquisition now appears to avoid that risk.”

Hayes recommends shareholders consider jumping to junior gold explorers with more significant upside potential, citing Detour Gold, Rainy River Resources, and Belo Sun Mining as possible alternatives.

Extorre predictably leapt to roughly acquisition value following the news as 53 million shares traded hands en route to a $4.27 press time close. The deal may trigger a sense of relief amongst shareholders who saw the company fall to $2.54 on June 15.

It could conversely be considered selling at a steep discount.

Though Yamana paid a 68% premium, it is a far cry from Extorre’s 52-week high of $14.84; the company is essentially still down 65% or $7.79 per share year-on-year. Junior gold explorers have increasingly seen shares discounted in comparison to cashed-up producers, as evidenced by IamGold’s acquisition of Trelawney Mining and Exploration earlier this year when the larger company paid roughly $3.30 per share after Trelawney’s stock had plummeted from highs of $6 in 2011.

BMO Capital Markets analyst David Haughton, who covers the Yamana side of the equation, labels the acquisition a net positive for the gold producer, maintaining his “Sector Outperform” rating and target price of $22 per share.

Haughton notes that though Argentina has recently been viewed as a “less mining friendly jurisdiction”, Yamana has achieved notable success in the region, also citing Santa Cruz’s pro-mining history. The takeover represents a jump in Yamana's exposure in Argentina, with the country now accounting for roughly 23% of the company's total gold resource base.

“[Yamana] appears to have paid a fair price for Extorre, to enhance its longer term growth profile while increasing its presence in Argentina,” Haughton wrote in a June 18 research update. “Extorre’s Cerro Moro project is attractive with a ranking of 19 from 76 in the Potential New Gold Mines Assessed report published by BMO Research in May.”

Yamana shares trended upwards following the news, rising to highs of $16.78 before settling out at $16.75 on 4.8 million share trade volumes, marking a 2.4% or 39¢ jump. The company has 746 million shares outstanding with a $12.5 billion press time market capitalization.

The deal remains subject to approval by Extorre shareholders, and is scheduled to complete in late August. Yamana is expected to fund additional ex ploration at Cerro Moro in a bid to expand gold-silver resources before undertaking an updated feasibility study.

"It is rare to find such a small transaction that could contribute meaningfully to increases in net asset value, production and cash flow," commented Marrone.

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