AuRico reflects changing investment landscape

While many market watchers see the depressed state of mining equities as a historic opportunity for increased M&A activity, some miners with hoards of cash are actually turning away from acquisitions, preferring to focus on returning capital to investors.

AuRico Gold (AUQ-T,AUQ-N) represents the latest example. The company announced a deal to sell a key Mexican assets for $750 million and immediately emphasized to the market that after paying off debt of some $300 million, the bulk of the funds will go back to investors in the form of a one time payment.

The decision shows AuRico’s president and chief executive, Scott Perry, has his finger on the market’s pulse as investors are showing a decided preference for conservative management and the payment of excess capital back to shareholders.

“We don’t subscribe to the philosophy that bigger is better,” Perry said on a conference call connected to the deal. “We’re focused on optimizing our share count and optimizing our yield.”

As for the deal itself, Minera Frisco (MSNFY-O) will acquire AuRico’s Ocampo mine — a project that has brought significant operational challenges to the company over the years — and the adjacent exploration projects Venus and Los Jarros. The $750 million in cash will also get Frisco a 50% stake in AuRico’s Orion project located in Mexico’s Nayarit State.

With the divestiture AuRico will focus its energy on it Young-Davidson mine, 60-km west of Kirkland Lake and its El Chanate mine, 37-km northeast of Coborca in Mexico’s Sonora State.

Young-Davidson is expected to produce 55 to 65,000 oz. of gold this year and roughly 150,000 oz. next year, while El Chanate is slated to produce between 78 and 88,000 oz. of gold this year and next.

“Our two assets are two key sources of free cash-flow going forward,” Perry explained, “and long term we would be looking to implement some kind of meaningful dividend yield strategy where we’d be paying out a portion of those free cash-flows.”

AuRico estimates that after it pays taxes on the cash received from Frisco it will have $675 million in proceeds left. Its current outstanding debt is roughly $300 million.

“So we’re talking about ballpark figure of $300 million that would go towards a one time return of capital,” Perry offered, but he said it was too early to determine if such a payout would be in the form of a dividend, a share repurchase or a combination of the two.

The market applauded the shift in corporate philosophy and sent AuRico shares up 20% or $1.22 to $7.48 on 7.45 million shares traded. Such positive early reaction stands in stark contrast to investor distaste for recent big acquisitions in the industry, as evidenced by the ouster of high profile CEO’s of both Barrick Gold (ABX-T, ABX-N) and Kinross Gold (K-T, KGC-N) after they made what were deemed to be costly acquisitions.

Canaccord Genuity’s analyst Rahul Paul upgraded AuRico to a buy from a hold on the news and adjusted his target price upward to US$9.50.

Paul said the offer from Frisco represents an “attractive valuation” of the assets being sold and that going forward the company should expect an improved market valuation on the basis of its long life and low cost remaining two mines.

With the influx of cash, AuRico is in a better position to fund underground development of Young Davidson, which should generate more cashflows at the mine — a scenario that has Paul onside with Perry’s prediction of a coming dividend policy. Paul said such a policy could be implemented in the near to medium term.

“The transaction also highlights management’s commitment to capital rationing and to generate attractive returns for shareholders (as opposed to simply growing larger) and should help substantially improve management’s credibility,” Paul wrote.