Late yesterday, Yamana Gold (NYSE: AUY ) announced an agreement to merge with Northern Orion (AMEX: NTO ) , conditional upon the success of a joint bid for Meridian Gold (NYSE: MDG ) . Having noted the company's ambitious production growth targets, I'm not surprised that Yamana's pursuing a deal like this, but its sheer size is pretty startling. If successful, the three-way tie-up would roughly double Yamada's current scope.
If you read my tirade last month, you might expect me to rail against the shareholder dilution here. Yamana is, incidentally, set to issue more than 300 million new shares to Northern and Meridian share- and warrant holders. But I've calmed down a bit, and I've come to see how issuing new shares doesn't have to be a zero-sum game. Yamana CEO Peter Marrone explained it this way in Part 2 of our interview:
We compare multiple to net asset value and cash flow and earnings, along with other measures. If we can acquire a company with a lower multiple, the deal would be accretive to our shareholders. The accretion then should determine a higher share price once the business combination is completed. More than that, often we can get further value because of the growth, reduction in cost structure, or improvements we can make.
From this perspective, I think Yamana is doing all right by its shareholders here, even if the initial shock of the new share float drives down the stock price for a while. Northern Orion has a seriously sweet property in Agua Rica, an undeveloped copper/gold/molybdenum mine, in addition to an interest in cash flow monster Alumbrera. There was an interesting comment in the press release about consolidating the operations of these two closely situated properties, which could extend the mine life of the latter, and I assume bring down the cash costs of both.
The "new Yamana," if these deals go through, won't be a blockbuster overnight. But between Agua Rica, Meridian's Esquel, and others, it would have a very deep pipeline. All of its gold production would be unhedged, as well, so if you're looking for leverage to the price of gold, this one might be for you. Of course, that assumes you can stomach the ballooning share count. Don't expect this acquisition-hungry company to stop its quest to consolidate the Latin American market anytime soon.
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