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The Canadian mining industry has always been a cozy enclave of related party deals and non-arm's length transactions, but rarely have things been this snug.
Yamana Gold Inc.'s agreement this week to sell three mines to junior miner Aura Minerals Inc. for $200-million (U.S.) in cash and stock had so much overlap and related party conflicts that neither company's chairman nor even Yamana's chief executive officer could be involved in the decision to do the deal.
Now, some analysts are raising questions about the price Yamana will be paid for the three South American mines and the fact that the asset sales will reduce Yamana's production and curtail the company's prospects for growth.
For Aura, however, the acquisition has the potential to vault the development company to a full-fledged mid-tier gold producer.
"It will be an extremely transformational transaction," Aura's chief executive officer Patrick Downey said in an interview yesterday.
The sale could also benefit Yamana's chairman and chief executive officer Peter Marrone. He owns more than 29 million Aura shares or almost 5 per cent of the company and is a member of Aura's board. Aura's shares surged 18 per cent yesterday on the news.
"The mining industry is a small industry, so from that perspective I'm sure that there is lots of commonality in many transactions. But I'm comfortable saying that we did the best that we could to deliver the best value for Yamana," Mr. Marrone said in an interview yesterday.
In addition to Mr. Marrone's position on both boards, Yamana's lead director Patrick Mars is also the chairman of Aura. Mr. Marrone said they were both recused from talks surrounding the sale of the three mines, the San Andres Mine in Honduras, and the Sao Francisco and Sao Vicente Mines in Brazil.
The negotiations were conducted by Mr. Downey and two independent Aura directors who faced off against executives and independent directors from Yamana who did not include Mr. Marrone or Mr. Mars.
Both companies received fairness opinions from outside investment banks that were retained to evaluate the merits of the transaction.
This is not the first time Yamana has done a deal with a company related to Mr. Marrone. Late in 2005, Yamana struck a $49-million deal to take over RNC Gold Inc. Mr. Marrone was on RNC's board and owned more than 500,000 RNC shares including options.
For Yamana, the proposed asset sale to Aura will streamline what had become an unwieldy collection of mines, reducing the company's operations to six mines from nine and lowering overall costs by about $25 an ounce this year, including credits from base metals.
But it will also see Yamana lose approximately 200,000 ounces of annual production, further exacerbating concerns about growth.
Credit Suisse analyst Anita Soni expects Yamana to produce 1.2 million ounces in 2009 and even less in 2010. "We fail to see how Yamana will grow in the near term without factoring an acquisition into the mix," Ms. Soni told clients in a report.
The analyst also said the $200-million price tag suggested Yamana was "not getting enough for the assets" that she values at $443-million at current gold prices ($960 an ounce) and $279-million at an $800 an ounce gold price.
CIBC analyst Barry Cooper also raised questions about the deal's valuations and the common executives at Aura and Yamana. "The market may view this as a non-arm's length transaction whereby the benefit is sided with the junior in hopes of creating a fledgling Yamana in which there will be ownership both by Yamana (100 million shares after the transaction) and potential personal gain," Mr. Cooper told clients.
The CIBC report noted that Yamana is selling 9.3 per cent of its reserves and 15.6 per cent of its measured and indicated resources for 2.4 per cent of its enterprise value.
"The transaction will test the forbidden waters that the whole is worth more than the sum of the parts. Traditionally it has been held that volumes are important in the gold industry and the goal of players is to grow production," Mr. Cooper said.
Mr. Marrone said Yamana had received proposals from "at least a couple" of other potential buyers for the assets that were not as high as Aura's bid. As for his own stake in Aura and the potential for personal gain, he said his individual interests dovetailed with his corporate responsibility.
"Your corporate interest should be aligned with your personal interest. I would not do something that I believed did not align the corporate interest with the personal interest," he said.
"I hope that everybody can make a lot of money on [Aura's]stock."
YAMANA GOLD (YRI)
Close: $11.24 (Cdn), down 42¢
AURA MINERALS (ORA)
Close: 52¢ (Cdn), up 8¢
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