Shares of Vancouver-based Extorre Gold Mines Ltd (XG) are higher by more than 50% on Monday following a $404 million takeover by Yamana Gold Inc (AUY).
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As shown by the chart above, one reason for the deal is the steep decline in XG over the past year. Yamana most likely sees XG as too cheap to ignore at the current valuation.
Sell XG
I believe investors should use Monday's rally to sell XG as any potential upside is now limited. While it is possible that a higher bidder could come in, it is also possible that the deal could fall apart similar to what happened with Jaguar Mining (JAG). That being said, it seems as though the deal is a done deal. The deal is expected to close in August and Yamana does have the right to match any bid that XG might get.
Yamana CEO Peter Marrone Comment
It is a relatively small transaction in that it represents only 3 per cent of Yamana's market capitalization yet it could ultimately deliver more than 10 per cent of our total gold equivalent production.
In our view, it is one of the best undeveloped, high-grade opportunities in the Americas, Yamana has the operational, jurisdictional and financial strength to advance the project on a timely basis to benefit all stakeholders.
Other Trades
News of Yamana's takeover of XG could help other small mining stocks as it signals more M&A might be coming. Investors could consider buying the Market Vectors Junior Gold Miners ETF (GDXJ) as a play on more takeovers of small miners.
Yamana Dividend Increase
In addition to announcing the takeover of XG , AUY announced a 18% increase in its dividend to 26 cents per share per year.
Yamana
One thing that I will be watching following the deal is the stock performance of AUY. Typically, the stock of the acquiring company moves lower following a takeover as investors fear the acquiring company has overpaid. However, if the acquiring company's stock does not go down much or goes up, it is a very bullish sign. If AUY hold up well, I would consider it a sign that there is more upside to come in AUY.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
