Yamana pounces on Extorre

Following a tumultuous four months that saw its share price plummet and development options narrow, Vancouver-based explorer Extorre Gold Mines (XG-T, XG-X) has found a ­solution to its problem in the form of Toronto-based miner Yamana Gold (YRI-T, AUY-N), which has swooped in with a US$404-million cash-and-share offer.

Extorre shares plunged 66%, or $4.96 since the beginning of March, as the company rethought 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 progess at Cerro Moro in the form of three preliminary economic assessments (PEAs), it was widely speculated that the company was waiting for a takeover bid or new partner to shoulder capital development costs ranging from US$200 million to US$300 million.

Cerro Moro is notable for its high grades in gold and silver, holding indicated resources totalling 2.4 million tonnes carrying 7.4 grams gold per tonne and 499 grams silver for 1.4 million contained oz. gold equivalent.

Under the agreement’s terms, 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 share.

According to Yamana chairman and CEO Peter Marrone, the acquisition has the potential to bump the company’s gold-equivalent production by 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,” Marrone comments. “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 northwestern Argentina’s San Juan province. The producer has experience with gold-silver vein deposits like Cerro Moro, and with its larger size and asset diversification is arguably better equipped to handle regional political risks that plagued Extorre earlier this year — such as the recent oil and gas industry nationalization actions by the Argentinean government.

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

Along with Extorre acquisition, Yamana announced it would  bump 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. According to Marrone, it demonstrates Yamana’s confidence in the sustainability of higher cash-flow levels in the near-term, with its C1 Santa Luz gold and Ernesto and Pau-a-Pique gold projects expected to hit production later this year.

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

Under a US$284-million development plan, the operation would include both open-pit and underground operations cranking out 248,000 oz. gold equivalent per year at average costs of US$453 per oz. A comminution circuit design would process 1,300 tonnes per day and include a three-stage crushing circuit, followed by a single-stage closed circuit ball mill.

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

“Our share price has suffered dramatically over the past few months,” comments Extorre co-chairman Yale Simpson. “A number of factors contributed to the fall, including: global political and economic uncertainty impacting credit markets; a broad sell-off of all junior, non-producing 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 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 voiced 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 that shareholders move on to junior gold explorers with more upside potential, citing Detour Gold (DGC-T), Rainy River Resources (RR-T) and Belo Sun Mining (BSX-T) as possible alternatives.

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

In the wider scheme of things, it could be considered selling at a steep discount.
Though Yamana is offering a 68% premium, it is a far cry from Extorre’s 52-week high of $14.84 per share. The company is 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. Iamgold (IMG-T, IAG-N) acquired 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 Yamana, labels the acquisition a net positive for the gold producer, and maintains his “sector outperform” rating and target price of $22 per share.

Haughton notes that though Argentina has been viewed as a “less mining-friendly jurisdiction” Yamana has succeeded in the region, and he also cites Santa Cruz’s pro-mining history. The takeover represents a jump in Yamana’s exposure in Argentina, with the country accounting for 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 writes in a June 18 research update. “Extorre’s Cerro Moro project is attractive, with a ranking of nineteen from seventy-six 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 at $16.75 on 4.8 million share-trade volumes — marking a 2.4%, or 39¢ hike. The company has 746 million shares outstanding and a $12.5-billion presstime market capitalization.

The deal remains subject to approval by Extorre shareholders, and is scheduled
to wrap up in late August. Yamana is expected to fund more exploration 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,” Marrone comments.