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The Biggest Gold Deal of 2011

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The race is on, and already 2011 is gearing up to be another blockbuster year for dealmaking in gold and silver.

Marking a watershed moment in the fascinating and tumultuous growth trajectory of this low-cost production leader, Yamana Gold (NYSE: AUY  ) has opted to monetize the majority of its interest in its Agua Rica development project under terms that I believe could prove immensely profitable over the long term.

Under the proposed arrangement, Agua Rica would be subsumed under the existing framework of the Alumbrera joint venture between Swiss miner XSTRATA, Goldcorp (NYSE: GG  ) , and Yamana Gold. The Alumbrera mine in Argentina joins notable heavyweights like Freeport-McMoRan Copper & Gold's (NYSE: FCX  ) Grasberg mine among the largest (and lowest-cost) copper and gold mines in the world. Alumbrera, however, will approach the end of its productive life cycle by about 2016, and Yamana's Agua Rica is the natural choice for a replacement operation. The two properties are separated by only 35 kilometers. As a matter of fact, this sort of an arrangement was specifically contemplated by Yamana when the company acquired Agua Rica back in 2007.

With a 50% stake, XSTRATA is Alumbrera's operator, while Goldcorp and Yamana enjoy meaningful cost reductions to their consolidated gold production profiles thanks to their 37.5% and 12.5% ownership stakes (respectively). The same ownership structure would then be applied to Agua Rica, and its truly massive mineral reserves, comprising 6.56 million ounces of gold, 102.2 million ounces of silver, 9.79 billion pounds of copper, and 629 million pounds of molybdenum.

The going rate for a world-class mine
Yamana is slated to receive $310 million in multiple cash installments from XSTRATA and Goldcorp in consideration for their respective stakes in the property. That amounts to just over $41 for every ounce of gold-equivalent ounce (GEO) in reserves, which -- considering the incredible quantities of copper, and molybdenum, identified on the site -- looks on the surface like an insanely low sales price as compared to the $58 per GEO that Goldcorp paid for Camino Rojo in 2009. Before rushing to judgement on this transaction, however, take a moment to discover that for Yamana, the angel is in the details.

You see, this transaction provides for a potentially super-charged kicker for Yamana in the form of a deferred revenue stream from Agua Rica's gold production. In addition to its retained 12.5% ownership share of the project's net proceeds, Yamana would receive bonus revenue from 65% of payable gold production, subject to adjustments for prevailing gold prices, and terminating after that revenue stream reaches 2.3 million ounces.

At $1,400 gold, used here solely as a current reference, this deferred revenue stream would carry a notional value of $2.1 billion, for a total notional transaction value of $2.4 billion for the 87.5% stake to be sold. For the relevant portion of Agua Rica's 8.6 million GEOs in reserves (converting silver at a 50:1 ratio), XSTRATA and Goldcorp would collectively be paying $318 using that theoretical spot price of $1,400 gold. Practically speaking, of course, it is very problematic to predict a long-term average spot price for gold over the lengthy portion of the targeted 26.5-year mine life that will be required to reach the 2.3 million ounces of gold payable to Yamana.

In some ways, one could argue that this clause represents an innovative adaptation of the asset-stream model employed by Royal Gold (Nasdaq: RGLD  ) and Silver Wheaton (NYSE: SLW  ) . Instead of the coveted development capital that Silver Wheaton provides to its clients in return for a product stream, however, Yamana will dole out ownership stakes in this world-class mineral asset (and the lion's share of mine construction costs that go along with them).

In this Fool's view, Agua Rica will not only cement XSTRATA's place among the world's top copper producers, but will also extend the reign of Goldcorp and Yamana Gold as the industry's lowest-cost gold producers of their respective operating scales.

So it's a very big deal, but is it the biggest?
Of course, because of the spot-price component within Yamana's deferred revenue clause, we will have to wait many years before we can employ hindsight to properly assess the resulting sales price for Agua Rica. But I trust Fools will appreciate the potentially epic golden kicker that Yamana has sewn into this deal as proposed.

Using current gold prices, the deal carries a notional value that just barely squeezes past the $2.3 billion price tag for Newmont Mining's (NYSE: NEM  ) purchase of Fronteer Gold (AMEX: FRG  ) announced last month. The new year is yet young, and I expect further acceleration in the industry's consolidation trend to yield transactions of greater scale before the clock strikes 2012.

By unveiling arguably the largest, and certainly the most innovative transaction in the gold industry thus far in 2011, Yamana Gold has mobilized its cornerstone development asset onto a fast track for timely construction. Simultaneously, Yamana has proactively grasped the sort of strategic momentum that -- in conjunction with myriad operational achievements -- may finally trigger this stock's long-awaited ascent from the deep-value doldrums.

To witness and interpret Yamana's stock performance over time, be sure to add Yamana Gold to your personalized watchlist to track all the Fool's coverage of this significantly undervalued, low-cost miner.

Fool contributor Christopher Barker can be found blogging actively and acting Foolishly within the CAPS community under the username TMFSinchiruna. He tweets. He owns shares of Freeport-McMoRan Copper & Gold, Goldcorp, Royal Gold, Silver Wheaton, and Yamana Gold. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Read/Post Comments (3) | Recommend This Article (24)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 09, 2011, at 12:31 PM, EllenBrandtPhD wrote:

    I am calling a bottom in the XAU and TSX Gold indices right here!

    209 in the XAU with Gold hitting another record high - and about to hit several more - is so absurd, it's so absurd.

    TSX Gold and the juniors, we won't even talk about!

    Average Realized Gold Price for the quarter - the only metric which actually counts - will now come in about 75 dollars - that's 75 dollars - that's 75 dollars! - above what it was in the already spectacular fourth quarter of 2010.

    GG, of couse, will lead the way on Realized Price and the Spread once again.

    We now have achieved my target of getting within 2 1/2 points of ABX. Now we need to focus on the next target of 1 1/2 points within ABX.

    But the ENTIRE XAU and ENTIRE universe of Gold stocks should be bought very heavily now.

    Cramer's pandering to his cronies is just plain wrong.

    We do know, do we not, that over a hundred were hurt or killed by the Yemeni police at a massive raid on Yemen's main university overnight?

    This is the equivalent of about 20 Kent States, for those who remember Kent State, or what went on at Mexico's Plaza Mayor at about the same time.

    Only OUR radical students back then weren't actually terrorists hell bent on doing mischief in a certain large and oil rich country next door.

    I usually quite like Mr. Cramer. But he has been exactly wrong in his Gold sector calls the last three times out - and this one is the Biggie of Biggies.

    Like so many other US Market Gurus right now, his understanding of what's going on in the Middle East is impeded by bias and hope. Bias and hope should be eliminated, when one is making Market decisions.

  • Report this Comment On March 09, 2011, at 1:09 PM, XMFSinchiruna wrote:


    Out of curiosity, would you happen to have a link to Mr. Cramer's comments that you are referencing. I thought I had glimpsed him expressing strong bullishness for gold just last week. Thanks for posting if you have a link handy.

  • Report this Comment On March 10, 2011, at 10:39 PM, skypilot2005 wrote:

    TMFSinchiruna wrote:


    Out of curiosity, would you happen to have a link to Mr. Cramer's comments that you are referencing. I thought I had glimpsed him expressing strong bullishness for gold just last week. Thanks for posting if you have a link handy.


    I did a quick "Google" and here is what I found:

    "Mad Money Recap

    Cramer's 'Mad Money' Recap: Crisis Playbook (Final)


    Closing Comments

    In his "No Huddle Offense" segment, Cramer defended his comments Wednesday advocating selling gold in the short term. Cramer said he's not abandoning gold, he's just advising traders who bought into gold on his recommendation in late January to take profits and not lose their gains.

    Cramer said with governments still printing money as fast as they can, the demand for gold will be solid for a long time to come. Cramer told those investing in gold for the long term to take the short-term pain, because the long term gain is still coming.

    --Written by Scott Rutt in Washington, D.C. "

    Sky Pilot

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