Premier Gold Mines (TSX: PG; US-OTC: PIRGF) has offered to buy Yamana Gold’s (TSX: YRI; NYSE: AUY) Mercedes mine in Mexico’s Sonora state for US$140 million, in a move that will transform the company into a precious metals producer.
“The acquisition of the Mercedes mine is a compelling and transformative transaction,” Premier’s president and CEO Ewan Downie writes on the company’s blog.
The underground gold-silver mine is set to become Premier’s first fully owned operating asset.
Cash flows from Mercedes and Premier’s upcoming South Arturo gold mine in Nevada should help fund development of the Hardrock asset in northern Ontario.
Premier holds 40% of South Arturo, with partner Barrick Gold (TSX: ABX; NYSE: ABX) owning the rest. The mine should start production later this year.
Yamana brought Mercedes online in 2011, and is mining three underground gold-silver deposits. From 2012 to 2015, the 2,000-tonne-per-day operation delivered an average 109,000 oz. gold a year.
This year, Mercedes should churn out 85,000 to 90,000 oz. gold and 345,000 to 365,000 oz. silver at estimated all-in sustaining costs of US$935 per oz. gold, on a co-product basis.
At the end of 2015, reserves at Mercedes stood at 2.4 million tonnes grading 4.33 grams gold per tonne and 348.8 grams silver per tonne. Measured, indicated and inferred resources added 7 million tonnes at lower gold grades.
The Thunder Bay, Ont.-based firm will pay Yamana US$122.5 million in cash, plus 6 million shares and 3 million warrants for the Mercedes mine and exploration properties in Sonora’s Cucurpe municipality. With the warrants, Yamana could buy 3 million Premier shares for $4.75 per share over two years.
On a recent conference call, Yamana’s CEO Peter Marrone said he was “pleased” with the deal, noting the proceeds would help pay down debt. “This is the first of a series of steps this year to decrease our overall debt,” he says.
The miner will also receive a 1% net smelter return royalty on the Mercedes mine on the earlier of either 450,000 equivalent oz. gold produced after the transaction closes or six years after the transaction close. The deal should conclude around Sept. 30.
Premier intends to fund the cash component of the acquisition from available sources of capital. The company had $49 million in cash at the end of March, a US$45-million debt facility with Orion Mine Finance, and the potential to access up to US$400 million from Orion for acquisitions, notes Rob Chang, an analyst at Cantor Fitzgerald.
“While our back-of-the-envelope calculations yield a net neutral impact to our net asset value, the result depends in large part to the financing package that Premier obtains to pay for the cash portion of this deal,” Chang writes.
But the analyst positively views the transaction, as it advances Premier into the producer category, and sets the stock up for a higher re-rating.
On the acquisition news, Premier jumped 6% to close July 29 at $4.96 per share.
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