Yamana Shows the Gold World How It's Done
After lighting up the gold world with a phenomenal record of ballooning profitability and well-executed organic growth, Yamana Gold (NYS: AUY) is once again broadcasting the diversity of its talents by announcing a well-timed and well-priced acquisition of Extorre Gold (NYS: XG) .
While several major producers suffer through bouts of gastric distress following an array of vexing acquisitions -- certainly epitomized by Kinross Gold's (NYS: KGC) $2.94 billion writedown on its Tasiast project in Mauritania -- Yamana Gold is showing the gold world how it's done, with the reasonably priced acquisition of a high-quality gold project in Argentina called Cerro Moro. Valued at $395 million net of acquired cash, the proposed transaction offers a reasonable $290 for each of the project's 1.36 million gold-equivalent ounces in indicated resources.
As Yamana points out in a related presentation (opens a PDF file), Cerro Moro offers the second highest gold-equivalent resource grade among those development-stage assets in the Americas not already owned by a major miner. In first and third place, respectively, are the high-quality standouts I've been busily touting for Fools: Pretium Resources' Valley of the Kings in British Columbia, and Sabina Gold & Silver's (OTC: SGSVF) Back River project in Nunavut. Accordingly, Yamana Chairman and CEO Peter Marrone calls Cerro Moro "one of the best undeveloped, high-grade opportunities in the Americas."
To his well-deserved credit, former Fool contributor Toby Shute recognized the uncommon quality of the Cerro Moro asset even before it was spun off from Exeter Resource (NYS: XRA) a couple of years back. Fools heeding his sage advice could have enjoyed a prompt seven-bagger by the time Extorre's stock topped out above $15 during the summer of 2011! Then, in one of the more spectacular share collapses I've witnessed during this protracted bout of weakness for the precious metal miners, Extorre plunged mercilessly over the past year to track just above its debut price in the weeks before Yamana's bid.
The sector's broader malaise, concern over unnerving developments in Argentina like the expropriation of energy assets from Spain's REPSOL, and an uncertain outlook for Extorre's capacity to fund mine construction all contributed to the trailing malaise. Extorre co-chairman Yale Simpson conceded: "Management and the board of directors of Extorre diligently examined all of the available options to finance the Cerro Moro project to production, but given current market conditions, whatever financing mix was chosen, the result would be a serious erosion of the project returns."
The current jurisdictional challenges to operating in Argentina are not insignificant, but as an existing operator there, Yamana Gold possesses the expertise to weigh and navigate those challenges. For the second year in a row, Yamana has come through for shareholders with one of the year's more impressive value-generating transactions and in so doing offers further scope for sustained production growth beyond the 46% expansion to 1.75 million low-cost gold-equivalent ounces anticipated by 2014! Moreover, Yamana announced concurrently that it has increased its annual dividend by 18% to $0.26 per share, which reflects a yield of better than 1.5%.
I've been singing Yamana Gold's praises as a top-notch gold investment for several years running, and I remain steadfast in my conviction that fair-value lies well north of $30 per share. My bullish CAPScall on the stock has been in place since 2006 and is likely to remain in place for the remainder of this secular bull market for gold. The reasons to stockpile shares of Yamana Gold continue to pile up right alongside the reasons to stockpile gold itself. I encourage Fools to track my ongoing coverage of gold by bookmarking my article list or following me on Twitter, and I welcome your thoughts on Yamana's latest transaction in the comments section below.
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At the time this article was published Fool contributorChristopher Barkercan be foundblogging activelyand acting Foolishly within the CAPS community under the usernameTMFSinchiruna. Hetweets. He owns shares of Pretium Resources and Sabina Gold & Silver. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has adisclosure policy.