Yamana revisits plans to divest 
Brio Gold portfolio

VANCOUVER — Last year Yamana Gold (TSX: YRI; NYSE: AUY) floated the idea that it could divest a number of “non-core” South American assets to optimize its operating portfolio, lower debt and improve market valuations.

The company went so far as to create the wholly owned Brio Gold subsidiary, and recruit a dedicated management team to pursue “strategic alternatives,” but a plan to monetize the assets via a private placement was scrapped in late 2015, due to poor market conditions.

On Oct. 17, Yamana unveiled a new divestiture plan through a preliminary prospectus related to a secondary offering of Brio Gold shares. The company is now proposing a spin-off, wherein it would retain an equity interest in the new company.

Yamana global mineral portfolio. Project priority designations provided by the company. Credit: Yamana Gold.

Shareholders would receive purchase rights to acquire part of Yamana’s interest in the subsidiary. The deal pricing and quantity of shares available was not disclosed at press time, but the company says it would eventually lower its equity ownership to 20% in the public company.

The Brio Gold umbrella includes the Fazenda Brasileiro gold mine, Pilar gold mine and C1 Santa Luz gold project in Brazil. Earlier this year Yamana added the Riacho dos Machados gold mine to the portfolio for $50 million. The company expects the business unit will generate 200,000 oz. gold this year at all-in sustaining costs ranging from US$940 to US$950 per oz. gold. The guidance does not include C1 Santa Luz, which would hit production in 2017.

Yamana has indicated that “operational improvements” at Fazenda and Pilar, as well as an “improved outlook” at Santa Luz, have given Brio the potential to produce 280,000 oz. gold annually at all-in sustaining costs of US$840 per oz. gold.

On a pro-forma basis, Brio would have US$6.6M in cash and no debt. It would also negotiate a credit facility totalling US$75 million.

BMO Capital Markets analyst Andrew Kaip said that the discussion to divest Brio a year ago was “premature,” but speculates that “investors appear to have a greater degree of comfort with the proposed turnaround plans, and we expect the offering to daylight value for the company, while retaining some optionality as a retained interest.”

BMO Research calculates a US$590-million net present value for the Brio assets at a 5% discount rate, and notes that it may prove challenging to “entice existing shareholders to contribute cash to an investment they already own.”

Yamana Gold’s Fazenda Brasileiro gold mine in Brazil, which would spin off into Brio Gold. Credit: Yamana Gold.

Meanwhile, Scotiabank analyst Tanya Jakusconek says that a 40% stake in Brio could be worth US$250 million before taxes and fees, and said the “key to the success of the deal” is tied to whether “the market will value Brio higher on a stand-alone basis than it is being valued within Yamana.”

GMP Securities analyst Steven Butler estimates a US$550-million net asset value for Brio at a 15% discount rate, and calculates that Yamana could raise “a mininum of US$190 million” by selling a 40% stake.

GMP Research speculates that “the exercise price of the purchase rights could be somewhere between an initial public offering discount and a rights offering discount” at 10–20%.

Yamana shares have traded within a 52-week range of $2 to $7.87, and closed at $4.96 per share at press time.

The company intends to use any proceeds from a Brio divestiture to lower outstanding debt, which totals US$1.8 billion.

Yamana has 948 million shares outstanding for a $4.7-billion market capitalization.