Yesterday's top story: Yamana takeover not without 'mixed feelings' - Extorre co-chair

While Extorre's management team belives the Yamana deal is the best one on the table, the shareprice has been hammered by a number of factors recently and has been much higher.

Author: Kip Keen
Posted: Tuesday , 19 Jun 2012

HALIFAX, NS (MINEWEB) -

Yale Simpson, Extorre Gold Mines (TSX, AMEX: XG), co-chairman, was not acting the bubbly cheerleader singing good things regardless the score about Yamana Gold's (TSX, LSE, NYSE: AUY)C$414 million takeover offer - mostly in cash - for Extorre, which owns the high grade Cerro Moro gold-silver project in Argentina. In a definitive agreement announced Monday the duo agreed on C$3.50 in cash per Extorre share and 0.0467 of a Yamana share, implying a C$4.26 per share takeover price overall. While the offer amounts to a 54-percent premium over Extorre's average shareprice during the past 20 days, it comes far under Extorre's recent shareprice heights, which were nearly as high as C$15 in mid 2011.

Although the takeover price could disappoint those that have bought and held Extorre shares over the past two or so years, a period in which Extorre traded well above the going price in Yamana's offer, it nonetheless equates with a strong per ounce valuation: C$165 per gold-equivalent ounce. (This figure is based on 2.4 million ounces gold equivalent in indicated and inferred resources at Cerro Moro and the C$395 million net cash value of the Yamana offer.)

Simpson said on Monday afternoon he had "mixed feelings" about the deal with Yamana. It wasn't that he questioned whether Extorre was doing the right thing for shareholders by inking the definitive agreement with Yamana. The deal is signed and supported by Extorre management and directors and its finality now depends on shareholders and whether or not Yamana remains the only wolf in the gold pack after Extorre - a situation that has the potential to change one analyst told Mineweb.

While Simpson maintained the deal was the best option for shareholders, he did not ignore where Extorre's shareprice has been in the recent past and with it expectations on what Cerro Moro might have been worth. He pointed to his prepared statement, which he concluded "said it all."

In that statement Simpson reflected on a number of factors that have hammered away at Extorre stock. "Extorre's shareprice has suffered dramatically over the past few months due to a number of factors including: global political and economic uncertainty impacting credit markets; a broad sell-off of all junior non-producing gold companies; concerns with respect to share dilution arising from a decision to develop the Cerro Moro project; and a series of events that have raised the perceived investment risk in Argentina."

With that statement in mind, Simpson was blunt to Mineweb, saying: "It doesn't sound like we're euphoric. We're not."

But Simpson said that the Yamana deal was nonetheless better than the other option: Extorre going it alone. After the Yamana offer came in, unsolicited, Simpson said Extorre weighed it against in-house development of Cerro Moro. Yamana came out on top and Simpson concluded: "I've got to take this to shareholders."

The downsides to in-house development that Simpson emphasized were equity dilution and project delay. In part because of Argentine rules that make it hard to move equipment into the country and cash out, Simpson said it is difficult to bring "a project online, on time and on budget." There is the potential for "drift, drift, drift on your timing," he said.

A couple analysts contacted by Mineweb on Monday struck a similar theme, emphasizing the Argentine risk factor.

Adam Graf, Dahlman Rose managing director and senior mining analyst, said nobody could deny Extorre's shareprice has been battered and largely because of risks now associated with mining developments in Argentina. Some of these risks as perceived by the markets, he suggested, were justified; others not. In the latter category he put the nationalisation of the entire mining sector in Argentina. Not going to happen, Graf said. But under justified perceived risks he put, among others, some of the same issues Simpson raised: that it is hard to get equipment into the country and get cash out. He also noted significant inflation in Argentina.

Like Graf, John Hayes, a BMO mining analyst, pointed to project risk in a note to investors on Monday that described the impact of the deal as positive. Extorre "at a number of junctures had verbalized plans to advance Cerro Moro to production on the basis of the PEA level studies, something we viewed as presenting additional project risk," Hayes wrote. "The proposed acquisition now appears to avoid that risk. BMO Research considers this a good outcome for Extorre shareholders."

And with that risk overhang, Yamana is seizing an opportunity to go after Extorre, Graf suggested. "Yamana is taking advantage of the Argentine perceptions," Graf said. He added, "I think if the asset were anywhere else in the world this would be an C$8 to C$10 take out."

Indeed, for Yamana, the deal represents a chance to bring a high-grade gold-silver deposit in Argentina into production at an attractive price. Peter Marrone, Yamana chairman and CEO, noted in a prepared statement that the takeover price amounts to only three percent of Yamana's market capitalization yet, in Cerro Moro, Yamana could get more than 10 percent of its gold equivalent production.

But C$4.26 may not be the final score for Extorre. Other bidders could still emerge, a prospect that Graf didn't rule out.

While Graf said he doesn't think gold companies in general want to get into bidding wars these days, given the quality of the asset - widely recognized as top of its class grade wise - Cerro Moro "must be" attractive for operators already in Argentina that are taking a longer term view of issues there, perhaps, for example, AngloGold and Goldcorp.

"You got to think they're taking a look at it," Graf speculated, referring to AngloGold.

Part of Graf's rationale on the potential for new bidders is price. He values Extorre closer to C$11 per share. And so: "The price (of Yamana's offer) is such and the project is such we could get other bidders."

The Cerro Moro project also makes sense for operators in Argentina because of those protectionist rules now making it harder to move cash out of the country. Cerro Moro could offer an avenue to grow production by using cash already in the country (just what Argentina wants) and then these companies could also exploit synergies with existing operations.

Of course this is just speculation. Neither AngloGold nor Goldorp could be reached for comment on whether they had ruled out bids for Extorre as of presstime.

Though Simpson would not speculate and Extorre is hamstrung by a definitive agreement with Yamana - it can't run after other suitors now - he was willing to say on the question of additional bidders that in the "broader perspective, there are a whole number of producers that are well up on the project." As is normal business practise for advanced projects, Extorre has signed confidentiality agreements with other companies so they can take a look into the guts of Cerro Moro.

http://www.mineweb.com/mineweb/view/mineweb/en/page66?oid=153517&sn=Detail&pid=102055