Yamana’s spin-out of Brio Gold draws limited interest

VANCOUVER — Yamana Gold’s (TSX: YRI; NYSE: AUY) efforts to monetize most of its stake in newly public Brio Gold (TSX: BRIO) have, once again, failed to generate much market interest.

The company has been trying to structure a deal to divest the assets for well over a year and made its most recent attempt in October, which involved a preliminary prospectus related to a secondary offering of Brio shares. Yamana had hoped to sell up to 56% of Brio for $195 million to help with its balance sheet, but the results fell short of that goal.

On Dec. 23 the company announced the results of the purchase rights offering, wherein it sold 15%, or 17.3 million shares, for gross proceeds of nearly $56 million. The terms value Brio at $3.25 per share.

Yamana Gold will focus its South American operations on the flagship Chapada gold-copper mine in Brazil. Credit: Yamana Gold.

In the event that all the rights had been exercised, as well as the additional distribution of 1.2 million shares being sold on a firm commitment basis, Yamana would have decreased its interest to 46.3%.

The company has been working on operational improvements at Brio’s two active mines — Pilar and Fazenda Brasileiro — which produced 143,000 oz. in 2015. The former subsidiary also acquired the Riacho dos Machados gold mine in Minas Gerais State, Brazil, which could add annualized production of 100,000 oz. gold at full capacity.

From a financial reporting perspective, Yamana will continue to fully consolidate the results of Brio, which involves disclosing the earnings attributable to Yamana shareholders alongside Brio earnings attributable to non-controlling shareholders.

“Now that Brio Gold is a stand-alone public company, we believe that its immediate value and value potential will be better realized,” chairman and CEO Peter Marrone said in prepared remarks. “It is our intention to work with the management and board of directors of Brio, and we will continue to consider all efforts that will realize better and full value.”

Yamana intends to put the proceeds towards lowering net debt that totals $1.5 billion, and will also likely leverage its share of Brio cash flow in pursuit of the goal. Scotiabank analyst Tanya Jakusconek noted that the “disappointing take up” of the offering could “muddle” Yamana’s deleveraging strategy, but adds that the company’s “balance sheet is expected to improve in 2018 and beyond, once Cerro Moro comes online.” Scotiabank has a “sector perform” rating on Yamana, along with a $3.38 one-year price target.

Meanwhile, BMO Capital Markets analyst Andrew Kaip said that “given the lackluster interest, large Yamana control block and uncertain divestiture plan, we expect shares of Brio to continue to trade at a discount relative to peers.”

He writes that 2017 may be a “challenging year” for Yamana given the current gold-price environment, and adds that “the company appears unlikely to meet management net debt reduction targets.” BMO Research has a “market perform” rating on Yamana, and a $3.25-per-share price target.

Yamana’s shares have traded in a 52-week range of $2 to $7.87, and closed at $4.27 per share at press time. The company has 948 million shares outstanding for a $4-billion market capitalization, and reported a US$244-million cash balance at the end of October.

Brio Gold started trading on Dec. 28 and closed at $3.41 per share at press time. The newly minted company has 112.5 million shares outstanding for a $372.5-million market capitalization.