Yamana Gold's (AUY) purchase of Extorre Gold Mines Ltd (XG) allows investors to breathe a sigh of relief. The junior market has been under fire since the gold price peaked last August with most stocks down by more than 50% and calls from investors and banks for consolidation. This purchase in the gold sector shows increasing interest from majors, who it was thought were backing away from the sector.
Yamana will pay $3.50 in cash and .0467 shares for each Extorre share in a deal valued at slightly more than $410 million dollars based on Friday's close.
Extorre's main asset is the Cerro Moro deposit located in the Santa Cruz Province of Argentina, 70 kilometers southwest from the port of Puerto Deseado. More specifically, the deposit is located in the Deseado Massif gold-silver mining district which has seen increasing attention in the past few months. Just a little more than a month ago, Hunt Mining (GM:HMXZF) signed an Exploration Agreement with Eldorado Gold (EGO) regarding Hunt's properties in this area.
The most recent 43-101 from Cerro Moro shows Indicated Resources of 578,000 ounces of gold and 38,888,000 ounces of silver and Inferred Resources of 528,000 ounces of gold and 26,249,000 ounces of silver with significant upside potential. The financing market has been challenging at best even for those companies with attractive deposits. This purchase by Yamana will be seen as accretive for a company already on a strong expansion track.
From Yamana's perspective the dilution is only 3%, making the transaction very attractive. Now Extorre will not go through the difficult process of obtaining financing for the project further diluting shareholders in a very difficult market.
Also included in the deal is the Don Sixto Project located in the Mendoza Province of Argentina. Since 2007, mining has been restricted in the Mendoza Province and the project placed on hold. The roughly 900,000 ounce resource deposit can now be placed in the land bank awaiting development once mining laws change.
As a sign that the project will not encumber Yamana and of continued financial strength, the dividend was raised by 18% to $0.26 per year or $0.065 per quarter.
Investors looking at gold producers should be starting with Yamana as management is not content with sitting on their 50%+ production growth over the next few years. The dividend continues to increase as excess capital is returned to shareholders and management is on the acquisition prowl looking for attractive tuck-in acquisitions.
Disclosure: I am long AUY.