Yamana aims for big leagues through RNC merger

Vancouver A proposed merger with RNC Gold (RNC-T) would allow Yamana Gold (YRI-T, AUY-X, YAU-L) to dramatically boost gold production and reserves while lowering cash costs at an expanded roster of mines in Central and South America.

Assuming a majority of RNC shareholders approve the transaction early next year, the new Yamana would have five producing mines, a mine under construction, four development projects, and a large package of exploration properties in prospective regions of Central and South America. The transaction would boost Yamana’s existing production by more than 130,000 oz. to almost 400,000 oz. next year, 550,000 oz. in 2007, and 650,000 oz. by 2008.

During a conference call with analysts, Yamana President Peter Marrone said the share-for-share transaction will help the company reach a sustainable production level of 750,000 oz. gold by 2008. Through operating efficiencies and administrative synergies, the combined company would aim to slash cash costs to less than US$100 per oz. (including by-product credits) starting in 2007, well below the average of US$250 per oz. predicted for 2006.

“Yamana would be one of the largest intermediate gold producers, with one of the lowest cash costs per ounce, trading at a discount to peers with similar profiles,” Marrone noted.

Yamana’s existing mines in Brazil include Fazenda Brasileiro (85,000 to 100,000 oz. annually) in Bahia province and Fazenda Nova (30,000 to 35,000 oz. annually) in Goias province, and the newly commissioned Sao Francisco mine in Mato Grosso province. The Chapada copper-gold project in Goias is under construction and expected to produce 2 billion pounds of copper and 1.3 million oz. gold over a 19-year mine life. The company also holds exploration lands where three potential new mines are being explored and developed.

As for RNC, Marrone said the company has “valuable assets in need of capital,” including capital needed to acquire the producing San Andres mine in Honduras. He maintains the merger was deemed a better option than suffering dilution to fund the proposed acquisition through the equity markets.

Yamana’s US$49-million merger transaction is based on RNC shareholders receiving 0.12 of a Yamana common share for each RNC common share. The exchange ratio provides a 20.7% premium based on the 10-day volume-weighted-average trading price of about $5.66 for Yamana and 56 cents for RNC on Dec. 2.

Yamana also agreed to provide a US$18.9-million loan to help RNC buy a 75% interest in the San Andres mine. The company also plans to exercise RNC’s option to buy the remaining 25% interest for US$4 million, payable in shares. Yamana would then own 100% of the San Andres mine, as well as the company.

San Andres produces an estimated 70,000 oz. gold annually. Yamana is exploring opportunities to lower costs in various ways, including potential to replace diesel-generated electricity with geothermal power. RNC’s other main asset is La Libertad, an open-pit, heap-leach mine in Nicaragua that produces an estimated 65,000 oz. to 70,000 oz. annually. RNC produced 18,605 oz. gold in the third quarter of 2005 from La Libertad and Bonanza, also in Nicaragua. Cash costs averaged US$374 per oz, resulting in a loss of US$1.8 million for the period.

Yamana won’t be acquiring RNC’s Bonanza mine, but will hold a two-year option to buy the mine and exploration ground deemed prospective for large gold deposits near the minesite. Yamana would also gain the Cerro Quema gold project in Panama. The potential open-pit, heap-leach mine is expected to produce 50,000 oz. annually.

Marrone said the combined mines and exploration projects contain an estimated 11.2 million oz. in resources, including 5.2 million oz. of reserves, plus exploration upside as the properties have had little exploration because of capital constraints. “Simply put, this is an exceptional exploration portfolio, one of the best in Latin America.”

The boards of both companies have already approved the merger, based on an independent fairness opinion and the recommendation of an independent committee of RNC directors. The deal is still subject to a due diligence review of RNC and the San Andres mine by Yamana, and the approval of two-thirds of RNC shareholders at a meeting in February.

If the transaction doesn’t proceed as planned, RNC will pay a US$1.8-million break-up fee to Yamana. If it does go forward, Yamana’s present management team will remain unchanged, post-merger. The total number of Yamana shares outstanding would then total about 197 million, held 97% by existing Yamama shareholders and 3% by existing RNC shareholders.