AuRico sale reflects changing investment landscape

While many market watchers see depressed mining equities as an opportunity for more mergers and acquisitions, miners with hoards of cash are turning away from acquisitions, preferring to return capital to investors.

AuRico Gold (AUQ-T, AUQ-N) is the latest example. The company announced a deal to sell key Mexican assets — and its last holdover from its Gammon Gold days — for $750 million, and said that after paying off its $300-million debt, the bulk of the remaining funds are expected to go back to investors in a one-time payment.

The decision shows that AuRico’s president and CEO Scott Perry has his finger on the market’s pulse, as investors show a preference for conservative management, and paying 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), which is controlled by Mexican billionaire Carlos Slim, will acquire AuRico’s Ocampo mine — a project that has brought operational challenges — and the adjacent Venus and Los Jarros projects. 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 its Young-Davidson mine 60 km west of Kirkland Lake, Ontario and on its El Chanate mine, 37 km northeast of Caborca in Mexico’s Sonora state.

Young-Davidson is expected to produce 55,000 to 65,000 oz. gold this year and 150,000 oz. next year, while El Chanate is slated to produce 78,000 to 88,000 oz. gold this year and slightly less in 2013.

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

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

“So we’re talking about a ballpark figure of $300 million that would go towards a one-time return of capital,” Perry offers, adding that it is too early to determine whether the payout will come as 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 contrasts with investor distaste for recent big acquisitions in the industry, such as the ouster of high-profile CEOs 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 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 says the offer from Frisco represents an “attractive valuation” of the assets being sold, and that the company should expect an improved market valuation based on its long life, and remaining low-cost mines.

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

At press time, in another cash-raising move, AuRico announced it had sold its 11 million shares, or 11.1% stake, of Endeavour Silver (EDR-T, EXK-N) for gross proceeds of C$95 million.