I don’t know if the management team at Yamana Gold (NYSE:AUY) thought about the ramifications of selling its Chapada copper and gold mine in Brazil other than substantially reducing its debt. However, it’s impossible not to think AUY stock will be affected by the move. Source: Shutterstock
In a good way.
AUY is now more attractive to potential suitors. Here’s why.
The Details of the Sale
Lundin Mining (TSX:LUN) is the company that bought Chapada. It is paying $800 million in cash for the mine with as much as an additional $125 million based on the price of gold, and another $100 million payment for fulfilling a couple of other considerations. You can read about the specifics here.
Who is Lundin Mining?
It’s a Toronto-based company with a market cap twice the size of Yamana’s. It produces mostly base metals like copper, zinc, and nickel. In 2019, Lundun Mining’s production guidance for gold was just 4%. The Chapada acquisition adds 59,000 tonnes of copper and 121,000 ounces of gold. Yamana had plans to expand the gold production at the mine. Lundin’s expected to focus on growing the copper production.
Lundin’s on the lookout for assets to buy; Chapada nicely fits the bill.
For Yamana, the cash will lower its debt from $1.7 billion to approximately $900 million, reducing its debt as a percentage of its market cap, from 77% before the sale to 43% after.
Yamana Production Post-Chapada
With the sale of the copper-gold mine, Yamana becomes a pure-play precious metals company, with 2019 gold equivalent output (85% gold, 15% silver) of 1 million ounces, increasing to 1.02 million ounces in 2020 and 2021.
Not only does Yamana’s balance sheet get stronger, but its free cash flow could also benefit from the deal. It expects its annual capital expenditures to fall by approximately $47 million over the next three years despite committing an additional $25 million annually to exploration.
The company’s focus for its individual mines is annual production of at least 130,000 ounces, which gives it the size and scale necessary to make the mine worthwhile from a capital investment and profitability perspective.
After Chapada, it will have seven out of eight mines producing at least this amount with its Minera Florida gold and silver mine in Chile expected to go over the minimum once it carries out further exploration activities at the site.
The Bottom Line on AUY Stock
The sale of Chapada makes it both a hunter with the financial wherewithal to buy assets from struggling miners, and an attractive M&A candidate to bigger precious-metal producers such as Agnico Eagle Mines (NYSE:AEM) and others searching for growth.
My InvestorPlace colleague discussed the M&A situation in February:
This is what Aaron Levitt wrote:
“For investors, this creates an interesting scenario. Already, many gold stocks have moved higher over the last year as prices for the precious metal have increased, profitability has improved and the situation in the sector isn’t so dire…But now, with the majors starting to wheel and deal, and the middle tier firms being forced to think about acquisitions as well, the whole sector should start to trade at a bit of a buyout premium. This is sort of exactly what happened back in 2006/2007 when the last round of major gold stock M&A happened.”
I can’t say what’s going to happen to AUY stock tomorrow or the day after.
What I do know is that long term, Yamana’s sale of Chapada puts AUY stock in a much better light. At current prices, if a gold play is your thing, I’d say buy away. If it drops below $2, I’d buy some more.
In this case, addition by subtraction makes Yamana a better buy.
At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.
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