Frequently, mining companies opt to strengthen their portfolios through the acquisition of various projects, ranging from those in the exploration phase to those already in commercial production. But not Yamana Gold (NYSE:AUY). In 2017, management articulated its intent to seek growth through organic opportunities -- something it has demonstrated most recently through the development of the Cerro Moro mine. Evidently, management is also keen on taking a different tack to fortify the company's financial position while eschewing acquisitions.
On Monday, Yamana Gold announced its intent to sell Chapada, a wholly owned copper-gold mine located in Brazil, to Lundin Mining Corp. (NASDAQOTH:LUNMF) for a total consideration of over $1 billion, exceeding the current carrying value of the asset. Let's dig into the details to see what this deal means for both Yamana Gold and its investors.
What's the big deal?
Expected to close in the third quarter of 2019, the deal will net Yamana $800 million in cash payable at closing and up to an additional $125 million based on the price of gold. But it gets even better: The company will also receive a $100 million payment following the development of a pyrite circuit to optimize operations at Chapada, in addition to a 2% royalty on gold production from Suruca. Adjacent to Chapada, Suruca is a gold-only project whose oxide zone is expected to produce 50,000 ounces of gold per year during its first five years of production. Expanding the time horizon illustrates the potential additional value at Suruca: Yamana estimates that the project's underlying sulphide zone can achieve annual gold production of 120,000 ounces to 150,000 ounces.
Because Chapada is currently Yamana's only copper-producing asset -- 129 million pounds in 2018 -- the sale of the mine will concentrate the company's exposure to precious metals. It won't, however, eliminate its exposure to copper; it retains this through Agua Rica, a mine now in development in Argentina.
Weighing the sale in the balance
Speaking to the benefits of the transactions, management stated in the press release that the deal will result in "an immediate and significant improvement to the balance sheet while positioning [Yamana] as a dominant intermediate precious metals producer, consistent with the long-held strategic objective." How beneficial will the deal be for the balance sheet? For one thing, management expects to repay $295 million of a outstanding revolving credit facility. According to management, the early retirement of debt will result in annualized interest savings of more than $35 million. And with the up-front cash payment, the company will greatly reduce its amount of leverage -- one of management's oft-stated goals.
Whereas the company ended 2018 with a net debt-to-EBITDA ratio of 2.5, once the deal closes, the ratio will fall to 1.5. Moreover, management forecasts that the rebalanced portfolio will help the company to deleverage even further, resulting in a net debt-to-EBITDA ratio of 1 by 2021.
What else to do with all that capital?
Besides shoring up the balance sheet, management intends to reward shareholders through the raising of its dividend. Since the first quarter of 2016, Yamana's annual dividend has remained stagnant at $0.02 per share. Currently, this translates to a dividend yield of 0.8%. With news of the sale, however, management also announced an immediate doubling of its annual dividend to $0.04 per share, representing a 1.6% dividend yield. And the commitment to shareholders may not end there. Management stated in the presentation that "Progressive dividend increases [are] being evaluated as debt [is] repaid from cash flow and through asset monetizations."
Funding organic growth opportunities is another way in which management plans to allocate capital. At the Jacobina mine, for example, management is examining two scenarios that could increase annual gold production by more than 150,000 ounces, and at the Canadian Malartic mine, the company is evaluating opportunities for the Odyssey and East Malartic deposits that could add an additional 150,000 ounces in annual gold production.
The lustrous takeaway
Expected to close in Q3 2019, the sale of Chapada, a familiar sight in Yamana Gold's portfolio since it began mineral production in 2007, will result in a portfolio that has greater exposure to precious metals. For investors, news of the sale should be met with some fanfare, as the transaction will help strengthen the company's financial health and fatten shareholders' pockets with a significant dividend raise. In the coming quarters, investors should look for the company to stay true to its word, deploying the capital to fund organic growth projects and additional dividend raises.