Two of the companies on our list, Pan American Silver Corp. (PAAS:TSX; PAAS:NASDAQ) and Agnico Eagle Mines Ltd. (AEM:TSX; AEM:NYSE), have joined forces to offer US$4.8 billion in cash and stock in an effort to outbid Gold Fields Ltd. (GFI:NYSE; GFI:JSE) for Yamana Gold Inc. (YRI:TSX; AUY:NYSE; YAU:LSE).
Three of the four involved companies are clear winners: Yamana gets a higher bid, while Gold Fields avoids the potential embarrassment of its own shareholders voting down the deal, which seems more than a remote possibility. It also collects a US$300 million break fee.
Agnico gains 50% of its prize mine, Malartic, that it does not already own, resulting in obvious synergies as well as giving it full ownership of Canada’s top gold mine.
Agnico will also get Yamana’s other Canadian project, Wasamac. It is paying above NAV for the assets, a fairly hefty price, and it is dilutive to its NAV and cash flow but a prize worth having.
Pan American Gains Ounces and Growth but at a Price
More uncertain is what this means for Pan American. Not surprisingly, it was the only one of the four stocks that fell Friday after the transaction was announced.
Stock of acquiring companies often fall. It is arguably paying a high price for increased exposure to Latin America, including two new countries in which it does not already operate (Chile and Brazil), adding to complexities for a company that has not outshone itself in operations recently.
It would also increase its pipeline in the region to become the leading precious metals miner in the continent, which it has operated for nearly 30 years.
The acquisition would take care of any concern about a decline in production profile after 2026 (ex-Escobal and Navidad, two large projects held up in political challenges). The transaction would double Pan American’s gold production and its silver production by around 50%.
The acquisition would be marginally accretive on most metrics despite Pan American's low stock price. The deal price, in cash and shares, is at a 15% premium to the contemporaneous value of
the Gold Fields offer, though less than the value when it was made. All of the cash would come from Agnico. Pan American and Agnico said they were restricted from speaking about the offer for the time being. It is scheduled to close next quarter.
Although the Yamana board has accepted the new offer, Gold Fields retains a right of first refusal; it is not certain that it will exercise that right given the opposition from many of its shareholders. On Friday, however, it put out a statement saying that its bid is “strategically and financially superior.”
The irony is that the surge in Gold Fields’ share price after Pan American made its offer, along with the decline in Pan Am’s price, has erased most of the premium in the PAAS/AEM bid; indeed, for much of Friday, Gold Fields’ was the higher offer.
The Outcome Is Not Certain
Given that Gold Fields still has to respond on the ROFR; that Pan American and Agnico still have to answer questions on their offer; and given that Yamana shareholders are scheduled to vote on Gold Fields’ offer on the 21st, as well as the continually changing stock prices, the outcome of this battle is unclear at this time, although the AEM/PAAS bid is the likely winner.
We would buy Agnico, despite the stock bounce on Friday. Were it to lose this bidding war, it would remain a quality company at a good price. Pan American stock, however, may drift lower.
There has been some speculation that Pan American’s move signals a lack of confidence that they will be able to get Escobal up and running smoothly.
It is likely that the local government will issue the mining permit once the Guatemala Supreme Court approves the court-ordered consultation process, but that does not guarantee a smooth operating path for Pan American.
At a minimum, gaining Yamana’s many mines would give Pan American a reason to delay the restart of Escobal if it deemed on-the-ground support was still lacking. Others dispute that assessment.
Separately, Pan American released results from 45 new drill holes at its La
Colorado Skarn project, expanding the high-grade silver zone identified in July.
This zone was not included in the mineral resource released in September, so an
updated resource estimate as well as the PEA expected next year, should see a
larger resource as well as a higher average grade. This will be a significant
contributor to production later in the decade.
In our portfolio, we own two of the four companies. We would buy Agnico, despite the stock bounce on Friday. Were it to lose this bidding war, it would remain a quality company at a good price. Pan American stock, however, may drift lower.
If the transaction goes ahead as proposed, there would be significant share dilution. Indeed, Yamana shareholders would hold 42% of the combined company, and it is not unreasonable to expect many of those shares to hit the market, though, under an agreement, Agnico could buy up to US$150 million in Pan Am shares at its discretion.
Still, Yamana shareholders would gain 154 million shares, while Agnico has the right to buy just under 11 million shares, so there could be a weight on the stock from selling.
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