by Jason Hamlin
Yamana Gold (AUY) announced its intention to acquire Extorre Gold (XG) for $403 million in a cash and stock deal. The stock price for Extorre shot up more than 50% on the news. I view this as great deal for Yamana on a number of fronts and believe it will prove to be accretive to shareholders.
Extorre had become dirt cheap and significantly oversold, having dropped from $15 to $2.50 in the past year. I believe this sell-off was overdone and had more to do with global economic fears and the short-term correction in gold than any negative fundamental changes within Extorre. I also believe the political risk associated with Argentina has been overblown and exaggerated, helping to push Extorre's share price off a cliff.
Argentinian President Cristina Kirchner visited Extorre's main project during March of this year in a show of support. Only time will tell if the negative investor sentiment was warranted, but Yamana obviously views the political risk as minimal and manageable.
Extorre's flagship Cerro Moro project has an NI 43-101 compliant resource of 1.5 million gold equivalent ounces in the indicated category, in addition to over 1 million gold equivalent ounces in the inferred category. Within this resource estimate is a healthy and high-grade mix of both gold and silver. The CAPEX is estimated at just $120 million and average annual production during the first 5 years is forecast to be nearly 200,000 gold equivalent ounces. This equates to a 63% IRR (47% after taxes) and a $737 million NPV ($463 million after taxes). This is all assuming just $1,320 gold and $26 silver.
Despite the fact that Yamana is paying a premium of more than 60% to Extorre's closing price Friday, I still view this as a smart move by management. Another perspective on the cost/benefit of this acquisition was offered by Yamana CEO Peter Marrone, who stated:
"It is a relatively small transaction in that it represents only 3% of Yamana's market capitalization yet it could ultimately deliver more than 10% of our total gold equivalent production."
Watch for this move by Yamana to set off a string of acquisitions in the coming months, as the major miners look to replenish reserves and pick up oversold juniors for pennies on the dollar. While I advocate for owning physical metals in your possession first and foremost, the severe correction that we are witnessing in junior mining stocks has led to some incredible opportunities.
In my estimation, many of the quality companies that we follow are offering the best entry points since the start of this gold bull market. They are severely oversold and undervalued, leaving the potential for explosive gains once gold and silver resume their uptrend. With QE3 now on the table and several FED members advocating for additional easing, it will probably occur sooner rather than later.
Extorre has been on the Gold Stock Bull watch list for a while now. Subscribers that held the stock prior to this announcement should consider booking profits at this juncture as the upside is probably limited going forward. More conservative investors with a long-term buy-and-hold approach may wish to pick up shares of Yamana on any dip that might manifest this week. It is typical for the acquiring company to see its share price drop as investors weigh concerns about whether it paid a fair price. However, shares of Yamana have ended in the green the past two days, which is a very bullish sign.
Disclosure: No positions