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Yamana launches a rare gold IPO – with unusual terms

Yamana’s operations in northern Brazil are seen in this file photo.

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An outright sale didn't work. Last year's private placement didn't either. So Yamana Gold Inc. has adopted a new, unique initiative to spin out its Brazilian assets: Take them public through a rights offering.

Late Monday, Yamana filed the paperwork for the initial public offering, and the prospectus lays out one of the more unusual structures that Canada has seen. Instead of simply selling off the assets in return for cash, the gold miner is giving its existing shareholders the right to purchase stock in the new company, called Brio Gold.

Shareholders have reason to be confused at first blush. They already own these assets, and now they have to pay to keep them as part of a separate company?

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Technically that's true. But it isn't so simple. Yamana has been trying to sell or spin out these Brazilian assets for a few years now – hence the sale process and the private placement – but hasn't had any luck. Now that the gold market is hot, it makes sense to try a full-blown IPO, but that comes with risk. Maybe the deal gets done, maybe it doesn't. Investors are still a bit shaky.

The rights offering is being sold as a hybrid approach. Yamana still gets funds to delever – possibly around $150-million (U.S.), according to someone familiar with the deal – and shareholders who don't want to participate in the offering should be able to sell the rights on the open market before their exercise date.

For those shareholders who do exercise their right, they will get to own assets that will hopefully trade at a better valuation multiple outside Yamana – because Brio will be less indebted than its current parent company.

And had the company gone down the traditional IPO route, it probably would have had to price the new shares at a deep discount to get them sold, which would limit the amount Yamana gets back for debt repayment. IPO shares also usually fall into the hands of big institutional shareholders, whereas the current structure at least gives all current owners the option to buy into the new deal.

It isn't yet known how much Yamana will be able to raise. The value of the rights also isn't clear. The miner is about to embark on a short marketing tour and pricing will be set after that.

Brio's assets are worth around $600-million, according to RBC Dominion Securities analyst Dan Rollins, assuming a long-term gold price of $1,300 per ounce. However, Yamana plans to sell only a portion of the Brio assets, with the miner is expected to sell the remaining part over time.

Because final terms have not been set, it's hard to determine how much debt Yamana will be able to pay down as part of the offering. Assuming 40 per cent of Brio can be spun out, Credit Suisse analyst Anita Soni believes that Yamana's net debt can fall by 0.21 to 0.5 times earnings before interest, taxes, depreciation and amortization.

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About the Author
Reporter and Streetwise columnist

Tim Kiladze is a business reporter with The Globe and Mail. Before crossing over to journalism, he worked in equity capital markets at National Bank Financial and in fixed-income sales and trading at RBC Dominion Securities. Tim graduated from Columbia University's Graduate School of Journalism and also earned a Bachelor in Commerce in finance from McGill University. More

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