A big development in the gold market this week was the acquisition of Extorre (XG) by Yamana (NYSE:AUY). Yamana paid $414 million for Extorre, and Yamana CEO Peter Marrone called Extorre's Cerro Moro project "one of the best undeveloped, high-grade opportunities in the Americas." Extorre's share price jumped from $2.66 to its current price of $4.18, representing an increase of over 57%.
This deal is important for those investing in gold stocks for a number of reasons:
1. First and most importantly is that Yamana decided to do this deal in spite of concerns that Argentina would not allow miners to repatriate profits (see my previous article on this issue). This acquisition may help warm sentiment up to the idea of investing Argentina. Personally, I think it increases the odds that the bottom is in on Argentine miners, which have been hit even harder than the rest of the mining sector.
2. Another consideration is how cheap this deal was. So it may not reflect that Yamana is entirely comfortable with the idea of investing more in Argentina, but rather that at Extorre's current price, the deal was sufficiently cheap enough to be worth giving a shot. Here's an excerpt from a Globe and Mail article on the acquisition that I thought was worth highlighting:
The acquisition valuation on Extorre and its main Cerro Morre project in Argentina is about $169 an ounce, and the total cost to buy and develop Cerro Morre is about $600 an ounce, estimates analyst Tanya Jakusconek of Scotia Capital. That's about 40% of the current spot price of gold, compared to about 65% for the average takeover of a mine developer.
Based on these considerations, will we see more acquisitions of discounted miners focused on Argentina? Is there an opportunity to search through miners in Argentina whose stock prices have fallen substantially and have projects near Cerro Morre and other geologically favorable areas in Argentina that may be worth buying now as imminent takeover targets?
Personally I stand by my assertion that I am only comfortable investing in companies operating in Argentina if they have sufficient jurisdictional diversification - meaning so long as Argentina isn't the only place they're doing business. The firms in Argentina that I'm a shareholder of are Goldcorp (NYSE:GG), Newmont (NYSE:NEM) and McEwen Mining (NYSE:MUX); MUX is by far the smallest of the three, the one with the most exposure to Argentina, and the one whose share price has shown sensitivity to news pertaining to the political risk in Argentina. MUX opened the week at $2.88 and is now trading at $3.26 - an increase of over 13%.
In sum, I think the Yamana acquisition is a bit of good news for those invested in Argentina. I still don't favor buying those who are focused solely on Argentina, but that strategy might be viable for those willing to do their homework and find speculative opportunities that might be good takeover targets. Yamana is also a good company that I think many who want a conservative portfolio of established gold producers would benefit from owning, although personally, I'd rather just take the risk of stocking up on Goldcorp , which I view as the safest gold producer with some of the best projects in the pipeline.