Shares of precious metals miner Gold Fields (GFI -0.73%) fell as much as 23% at the open of trading on May 31. Meanwhile, Yamana Gold (AUY) rose around 12%. Although both have pared their respective losses and gained a little, the moves are tied at the hip. That's because Gold Fields is buying peer Yamana, with the exact outcomes on their stock prices that you would expect.
The basics of the acquisition are that Gold Fields will buy Yamana in an all-stock deal. Yamana shareholders will receive 0.6 shares of Gold Fields for every Yamana share they own. At the time of the announcement, the implied value of Yamana was roughly $6.7 billion. Gold Fields shareholders will own roughly 61% of the combined entity with Yamana shareholders owning 39%. Given that the deal will result in Gold Fields issuing new shares, which will effectively dilute current Gold Fields shareholders, its stock fell. That's normal for an acquirer. And since Gold Fields agreed to pay a premium for Yamana's shares, its stock rose. Again normal.
The combined company will have a more geographically diversified portfolio and will sit in the No. 4 position within the gold mining space. More important for Gold Fields, however, is that Yamana's assets will give it an opportunity to increase production at a time when extracting gold from its own mines was becoming more difficult and expensive. In other words, growth is back on the table at Gold Fields.
The deal still has to be approved by shareholders, but it appears like a solid strategic move for Gold Fields. Yamana shareholders, meanwhile, need to decide if they want to end up Gold Fields shareholders or lock in the quick price advance by selling. There's no easy answer to that, of course, but the combined entity will be a major gold player with notably enhanced scale and solid growth prospects. That's clearly not a bad thing for investors that want a little exposure to the so-called barbarous metal.