Yamana Gold Stock: A Restructuring And Strategic Acquisition (NYSE:AUY)

Investment Thesis

The prognosis for precious metals is highly sensitive to the dynamic between inflation and monetary policy. In 2023, precious metal prices will see both positive and negative forces. Prices would fall if monetary policy were tightened more severely in response to higher inflation. Still, they may rise if interest rate hikes were to stop or be reversed and geopolitical tensions were to increase.

While this interplay exists, it is the relative strengths of the companies and the opportunities available to them that will ultimately determine success. Mergers and acquisitions are among the strategic measures expected to help businesses in this sector compete this year. Numerous large corporations have stated they are considering M&A as a growth strategy; hence it is likely that M&A activity will persist through 2023. Shareholders would favor deals that spread out the company’s exposure to risk.

In light of the foregoing, I conclude that the proposed merger between Pan American Silver (PAAS) and Agnico Eagle Mines (AEM), and Yamana Gold Inc. (NYSE:AUY) is consistent with this strategic objective. This analysis aims to provide light on the implications of the acquisition for AUY investors, PAAS, and AEM, as well as how the synergy created by the merger sets up the combined business for future success.

The Acquisition

Pan American and Agnico agreed to buy the Canadian mining business Yamana Gold in November 2022. They signed a $4.8bn deal to do so. Mexico’s regulator approved the merger on March 24, 2023, and the firms said they had secured all the necessary regulatory, shareholder, and court clearances. They expect the proposal to be complete by March 31, 2023.

Having reached this point in the purchase process, I believe it is important to reflect on the deal’s original terms and determine their full significance for all parties involved. The total consideration includes $1.0 billion in cash from Agnico Eagle, 36,089,907 Agnico Eagle common shares, and 153,539,579 Pan American common shares. Under the Binding Offer, each Yamana Share would be exchanged for approximately $1.04 in cash, 0.1598 Pan American Shares, and 0.0376 Agnico Eagle Shares, for an aggregate value of $5.02 per share based on the closing prices of each on November 3, 2022. The Binding Offer did not require finance conditions or due diligence.

According to Pan American and Yamana’s projections, the Arrangement would make Pan American the largest producer of precious metals in Latin America, with annual outputs of between 28.5 and 30.0 million ounces of silver and between 1.1 and 1.2 million ounces of gold. Pan American has over 28 years of experience operating mines in Latin America, where most of the combined portfolio’s 12 operations will be focused. Pan American anticipates that the Arrangement will improve its overall financial position and enhance its capacity to internally fund development initiatives due to the acquisition of four operating mines yielding high free cash flow.

Consolidating the Canadian Malartic mine gives Agnico Eagle operational control over the remaining development term of the Odyssey project and future developments. It places a world-class asset in the hands of the best-positioned operator to exploit the mine’s full potential. Given its vast activities and advantageous geographical position in the region, Agnico Eagle is in a prime position to capitalize on the anticipated increase in mill capacity at the Canadian Malartic mine.

To the mutual benefit of all three companies’ shareholders and other stakeholders, Yamana has entered into an agreement with Pan American and Agnico Eagle to jointly operate and rapidly unlock further value from Yamana’s portfolio of assets. Pan American has an unmatched track record in Latin America, and Agnico Eagle has extensive existing knowledge of the Canadian Malartic mine and presence in the Abitibi region.

Strategic Justification

Pan American and Agnico Eagle’s acquisition of Yamana would produce tremendous value and benefit its shareholders:

• Through portfolio diversification, Pan American becomes a Latin American precious metals producer with unprecedented silver exposure. Pan American’s Latin American portfolio benefits from Yamana’s low-cost production expansion and long-life mineral reserves. The Arrangement will create a portfolio of 12 active mines and boost silver and gold production by 50–100%. Pan American would also have more Latin American growth opportunities. Pan American’s 28 years of experience establishing and operating Latin American mines makes it well-suited to maximize Yamana’s mines’ value.
• 100% ownership of Malartic mine in Canada. Through a joint management committee, Yamana and Agnico Eagle operate the Canadian Malartic mine, which they own 50% of. The mine’s top operator is Agnico Eagle, which has technological expertise. Given its vast operations and significant regional land position, Agnico Eagle is uniquely positioned to monetize future mill capacity at the Canadian Malartic mine.
• Synergies in Operations and Management. Opportunities for efficiencies in operations and management are abundant under the terms of the Binding Offer, particularly between Pan American and Yamana’s Canadian corporate offices, at Agnico Eagle and Yamana’s Canadian Malartic mine, and Agnico Eagle’s other operations in the region.

Benefits Accrued by Yamana Stockholders

The Binding Offer’s primary benefits to Yamana shareholders are as follows.

• Assuming a close of business on November 3, 2022, for both the Pan American Shares and the Agnico Eagle Shares, the total consideration is valued at US$4.8 billion, or US$5.02 per Yamana Share.
• As of the end of trading on November 3, 2022, the total premium paid to Yamana above its spot price was 23%.
• A 15% premium over the estimated price of Gold Fields’ initial offer calculated using the closing price of Gold Fields shares on the spot market on November 3, 2022.
• When the transaction closes, current Pan American shareholders own about 58% of Pan American, and Yamana shareholders own 42%. At the same time, Agnico Eagle would be owned by its current shareholders (about 93%) and Yamana shareholders (roughly 7%) at closing.

The Deal Is Almost Done, So What’s Next?

Once the acquisition is finalized at the end of the month, I believe the combined company will have a bright future. Synergies from the acquisition and encouraging market indicators are driving my upbeat outlook. After the Federal Reserve hiked interest rates by 25 basis points but signaled it would stop its monetary tightening cycle, gold futures rose because the U.S. dollar and Treasury yields fell. According to High Ridge Futures’ director of metals trading, David Meger, a “green light for the gold market” would be given if the Fed could not hike rates further because of persistently high inflation. In addition to the synergies that come with this transaction, which would further boost margins due to increased productivity and improved efficiencies, a price rise would be a significant stimulus for margin expansion.

I’d like to draw your attention to a few key factors that will help clarify how this merger will contribute to the continued growth and success of the combined companies.

• A Pro forma market valuation of $5.6 billion indicates significantly increased trading liquidity (+50%).
• Significant influence on output and profit, as shown by representative pro forma data for 2022. (9.5Moz more silver produced annually, 550koz more gold produced, and a lower total cost structure).
• By combining their Latin American portfolios, the companies stand to save between $40 and $60 million annually in operational efficiencies and corporate general and administrative costs through synergies.
• Boosts the potential of returning capital to shareholders.

In light of the foregoing, alongside other synergies discussed in previous sections, I believe that the combination of these companies through this transaction will serve as a significant growth accelerator, resulting in rapid expansion future to come.

Conclusion

This acquisition is highly mutual as all parties involved stand to gain substantially from its completion. The transaction provides several synergies in areas such as administration, increased productivity, enhanced liquidity, efficiency, and resource management. These synergies, when viewed in conjunction with positive market signals or even on their own, generate a great deal of optimism for the future success of the rising company. Therefore, I suggest keeping your current AUY shares until the purchase is finalized. At this point, you should consider purchasing more shares of the new and strengthened company, as its prospects are highly promising.