Shares of Yamana Gold Inc. (AUY, Financial) fell 2.73% to $2.49 per share on Monday after the Canadian miner announced it agreed to sell its Chapada open-pit, gold-copper mine in Brazil to Lundin Mining Corp. (TSX:LUN, Financial) for more than $1 billion.
While the sale of Chapada, one of the company's main assets, will shrink total equivalent gold production by 12% to 15%, shareholders will benefit from share price appreciation.
According to the terms of the agreement, the miner will receive $800 million after the deal closes. In addition, depending on the average price of gold, the mining company will receive up to $125 million over the next five years.
If Lundin optimizes operations at Chapada through the building of a pyrite roaster, Yamana Gold will get another $100 million. Further, the agreement also entitles the miner to a 2% net smelter return royalty earned on gold production from the adjacent Suruca mineral reserve.
Considering Chapada hosts 4.55 million ounces of gold and 3.71 billion pounds of copper in proven and probable mineral reserves and has a 20-year life of mine, the consideration of $1 billion appears a fair valuation at price assumptions of $1,262 per ounce and $3 per pound.
In addition to benefiting from leverage reduction and improved financial flexibility and production outlook, the potential to earn an additional $125 million presents a real catalyst for the stock.
Yamana Gold will receive $50 million if gold prices average $1,350 per ounce, $100 million if gold averages $1,400 per ounce or $125 million if the precious metal averages at least $1,450 an ounce every year in the following five years after the deal closes.
The likelihood Yamana Gold will cash in the maximum amount, which is 500% higher than five-year average free cash flow, is not low because gold is gaining popularity among investors as a safe-haven investment against a potential U.S. recession. Further, investors' apprehension over slowing global economic growth, U.S. - China trade war and the persistence of the Federal Reserve' unchanged interest rates will help the yellow metal head higher.
The share price boost will follow the positive switch in the company's free cash flow.
Wall Street issued an overweight recommendation rating on Yamana Gold, meaning analysts expect the stock to outperform either the industry or the market within 52 weeks. The average target price of $3.48 reflects 39.8% growth from the closing share price of $2.49 9on Monday.
The stock has fallen 15% over the past year through April 15 to below the 100- and 50-day simple moving average lines. The share price is on par with the 200-day line, is 24.5% off the 52-week low of $2 and 29.7% below the 52-week high of $3.23. Yamana Gold has underperformed the VanEck Vectors Gold Miners (GDX, Financial) exchange-traded fund by more than 12% over the same period.
The stock has a market capitalization of $2.4 billion, a price-book ratio of 0.59 versus the industry median of 1.62 and an enterprise value-earnings before interest, taxes, depreciation and amortization ratio of 12.18 compared to the industry median of 8.71.
The 14-day relative strength index of 42 suggests the stock is neither oversold nor overbought.
In addition, from its deposits located in the Americas, the Toronto-based gold producer targets to produce one million ounces of equivalent gold in 2019 and 1.02 million ounces of equivalent gold in 2020 and 2021. The company aims to grow organically and through the acquisition of other companies or mineral properties.
Disclosure: I have no positions in any securities mentioned.
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