Is Yamana Gold Inc Still a Good Deal?

Yamana Gold (NYSE: AUY  ) and Agnico Eagle Mines (NYSE: AEM  ) have put in a $3.9 billion CAD offer for Osisko, outbidding Goldcorp (NYSE: GG  ) . While the deal is not finalized, Osisko hopes that with shareholder approval it will close by June 2014. At the end of the day, Yamana is paying a big price for growth. The deal dilutes both Yamana and Agnico Eagle, making their shareholders pay the price.

The economics of the deal 
Yamana and Agnico Eagle Mines are paying $6,671 per expected ounce of production from Osisko's Canadian Malartic mine, assuming a CAD/USD exchange rate of 0.91 and attributable 2014 production of 266,000 ounces.

Paying $6,671 per ounce is not cheap. The mine will boost Yamana's 2014 production by 19%, but it will dilute its shareholders by a slightly lesser amount. The cash and equity deal means that Yamana will have to issue around $1.15 billion CAD ($1.05 billion USD) in shares, a significant amount for a company with $7.2 billion USD in equity at the start of 2013. The new share issuance works out to be 14.6% of its 2013 equity.

Agnico Eagle Mines is not in a much better position. Just like Yamana, it will give Osisko's shareholders $2.43 CAD of Agnico Eagle Mines' shares per Osisko share. At the end of 2013, Agnico Eagle Mines had total shareholder equity of $3 billion USD, making this deal an even larger portion of its equity.

The long-term outlook
At the end of the day, Osisko's shareholders walk away with big gains while Yamana and Agnico Eagle Mines shareholders are paying a big price. The upside is that Yamana will maintain its status as a low-cost producer. Its new expected 2014 all-in sustaining cash cost (AISC) of $865 per gold equivalent ounce (GEO) is far below the current spot price of around $1,300 per ounce. Yamana's total debt-to-equity ratio of 0.17 is low enough that it has the flexibility to overspend on a mine or two.

Agnico Eagle Mines' 2013 AISC of $952 per ounce is higher than Yamana's costs, but it's still far enough below spot prices that Agnico Eagle Mines has room to breathe. This acquisition is a big boost to Agnico's growth plans. Back when it filed its 2013 results, it projected that its annual payable gold production would only grow from 1.1 million to around 1.27 million ounces from 2013 to 2016.

Goldcorp can walk away as one of the biggest winners from the Yamana-Agnico-Osisko deal. Goldcorp's shareholders do not face significant dilution, and the company will maintain its low total debt-to-equity ratio of 0.12.

Shareholders are glad that Goldcorp's costs are on a downward track. In 2013, Goldcorp's AISC ended up at $1,031 per ounce, though it expects that by the fourth quarter of 2014 its AISC will end up around $950 per ounce.

Goldcorp is not the only big miner tightening the purse strings. Its bigger competitor Barrick (NYSE: ABX  ) has had a great deal of success cutting costs. After rationalizing production and idling big projects like Pascua Lama, it was able to bring its 2013 AISC down to $915 per ounce. Barrick was also able to push back its debt payments. Now it only has $1 billion due between 2014 and 2017.

The Osisko deal shows that Barrick and Goldcorp face big competition for attractive assets. Both companies can bet on organic growth, but it is too optimistic to assume they can further reduce costs by buying existing low-cost mines at low prices.

The bottom line
Yamana is a good low-cost producer, but assuming that the Osisko deal is approved it will have to issue a big batch of new shares. Agnico Eagle Mines is in a similar situation, though its higher cost structure puts it a step below Yamana. For now, it looks like the best thing to do is hold off investing until the deal has gone through and new shares have been issued. 

Goldcorp's and Barrick's push to bring down costs shows that even big companies can be flexible. The challenge is that both of these miners run huge empires, and the ability of mid-tier miners like Yamana and Agnico Eagle Mines to engage in bidding wars hurts larger miners' ability to replace existing production.

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