Yamana snaps up beaten-down Extorre Gold Mines
Vancouver-based Extorre’s Cerro Moro gold-silver project in Argentina was among the assets purchased by Yamana on Monday in a deal worth about $414 million.
TORONTO — In the gold industry, the bargain-hunting is finally getting underway.
Yamana Gold Inc. unveiled a deal to buy Extorre Gold Mines Ltd. on Monday for about $414 million, or $4.26 a share. While Yamana offered a 68-per-cent premium, Extorre shares traded above $14.00 last summer.
Investors have anticipated deals like this one for several months. There are many junior gold miners that own high-quality projects but have suffered huge share-price declines amid the market volatility of recent months.
Extorre needed capital to build its Cerro Moro gold-silver project, and raising it could be very dilutive in this environment. That risk left a big overhang over the stock.
While that is a problem for many juniors right now, Extorre faced a couple of other issues. One is that Cerro Moro is located in Argentina, where political risk is elevated after the nationalization of YPF SA. Additionally, the Vancouver-based company was recently slapped down by the British Columbia Securities Commission for lapses in disclosure.
Yamana has been studying an Extorre acquisition for 15 months, and these factors gave the Toronto-based miner an opportunity to pick it up at an attractive price.
“Part of it was market conditions, and part of it is the coincidence that we completed our due diligence and came to the conclusion that there was value in the asset and value in the purchase,” Yamana chief executive Peter Marrone said in an interview.
Cerro Moro holds 1.36 million ounces of indicated gold-equivalent resources, and another 1.05 million ounces of inferred resources. Yamana expects production of more than 200,000 gold equivalent ounces a year with a relatively low upfront cost of less than $300 million US.
Analysts were quick to praise Yamana for picking up a high-quality asset at an excellent price. But reaction was more mixed on the Extorre side. According to analyst Daniel Earle of TD Newcrest, the valuation multiple on this deal is barely more than half that of comparable transactions.
“We view the implied valuation as being very disappointing for Extorre shareholders,” Earle wrote in a note, adding that there is plenty of room for a competing bid.
Extorre, which declined an interview request, defended the transaction by pointing out that financing Cerro Moro on its own would lead to a “serious erosion” of project value, no matter what financing mix is used. Striking the deal with Yamana effectively removes that risk.
The broader question for investors is whether this transaction leads to a flood of takeovers of other beaten-down junior gold companies. While the seniors have studied many potential acquisitions, they have been reluctant to pull the trigger amid an uncertain market. The only other notable takeover of recent months was Iamgold Corp.’s acquisition of Trelawney Mining and Exploration Inc., and that deal was criticized by Iamgold shareholders.
Marrone speculated that a lot of potential buyers are still busy doing their due diligence. “That’s what we’ve been doing [with Extorre] for the last 15 months,” he said.
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