Yamana Gold Inc. said Monday it will pay $395-million for Extorre Gold Mines Ltd., the owner of a gold and silver property in Argentina that has run into development difficulties.
Extorre's stock price has been so battered by global market uncertainty and local politics that the company can no longer develop the property itself with solid returns.
"Extorre's share price has suffered dramatically over the past few months due to a number of factors including: global political and economic uncertainty impacting credit markets; a broad selloff of all junior non-producing gold companies; concerns with respect to share dilution arising from a decision to develop the Cerro Moro project; and a series of events that have raised the perceived investment risk in Argentina," Extorre co-chairman Yale Simpson said in announcing the deal with Yamana.
The deal highlights a dichotomy in the mining industry currently. Well-capitalized companies with projects up and running can readily exploit opportunities at a time when development companies have seen their access to financing eroded amid political uncertainty and weakening commodity markets.
Moreover, the Extorre acquisition – to be paid mostly in cash – highlights the impact of a growing disconnect between gold prices near record highs, and rock-bottom valuations for the companies that mine them. Companies like Yamana that are already producing gold are cash-rich and have easy access to credit – as much as $1.6-billion in cash and credit in Yamana's case – while companies like Extorre struggle to finance development on reasonable terms.
"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," Mr. Simpson said.
At the equivalent of $4.26 a share, Yamana's offer was 54-per-cent higher than Extorre's average price over the last 20 days and 18-per-cent more than the 60-day average.
On the other hand, it was barely a shadow of the nearly $15 a share it was trading at about a year ago, before it was beaten up by political uncertainty in Argentina and economic turbulence abroad.
As recently as March, Extorre shares were trading at nearly $8, just before Argentine President Cristina Fernandez ordered the expropriation of partially state-owned energy company YPF SA from Spain's Repsol YPF, the latest in a series of populist moves since her election to a second term by a landslide in October.
"At the end of the day … jurisdictional issues, socioeconomic issues come and go, but grade is grade, and if you've got a deposit that is high-grade you can go through that process of the rough patches that some economies go through," Yamana Gold chairman and chief executive officer Peter Marrone said after the deal was announced on Monday.
The Toronto-based company is no stranger to South America, where it owns or has stakes in projects and mines in Chile, Argentina, Brazil and Colombia. In northern Argentina it already runs the open pit Gualcamayo gold mine.
Cerro Moro, a low-cost high-grade deposit in northern Argentina, will add about 10 per cent to Yamana's production profile, driving it toward the 2 million ounces per year mark by the time the mine is up and running in the next two to three years.
Also on Monday, Yamana announced an 18-per-cent hike in its annual dividend as it and other gold companies try to attract more shareholders to their stock.
"What the dividend does is it demonstrates that we are prepared to return value to shareholders and distinguish ourselves from the ETF," Mr. Marrone said in a telephone interview, predicting a turnaround in gold mining equity as investors come back to the sector. "We are at the inflection point of the equities over-performing the metal."