Yamana lightens debt load with sale

$1B cash deal with lundin for Brazil mine

TORONTO • When the management teams at Yamana Gold Inc. and Lundin Mining Corp. look at copper and gold, both see a rising price environment ahead.

Despite the shared positive outlook, it was copper-focused Lundin that announced on Monday it would put down $1 billion in cash to purchase the Chapada copper-gold mine in Brazil from gold-focused Yamana, which needs cash to reduce its debt load.

In some ways the deal mirrors analysts’ optimistic predictions about copper compared to a more hazy outlook on gold equities, even in the face of a potential U.S. recession, and the possibility of a global economic slowdown amid persistent trade disputes. That’s in part because analysts see an emerging copper supply gap, while regardless of metal prices, many investors are staying away from Canadian gold mining companies as they repair their balance sheets.

“This now is a complete cleanup (of the balance sheet),” Peter Marrone, executive chairman and founder of Yamana, said in an interview. “And now we’re ready to move forward, and all the discussions about getting ahead of the leverage and debt at Yamana should be done.”

The company has US$1.6 billion in net debt, and Marrone said it plans to apply the entire proceeds from the Chapada mine sale to reduce that number. Investors remain unimpressed with Yamana Monday, sending its stock 3.5 per cent lower to $3.30 on the Toronto Stock Exchange.

Meanwhile, Lundin jumped eight per cent to $7.38.

Marie Inkster, CEO of Lundin, said her company had been looking to buy a copper mine since she started last October — not long after the company lost a bid to purchase a planned copper mine in Serbia.

“I don’t think there will ever be a deal on a really good copper asset,” Inkster told Financial Post, saying the price was “very fair.”

Whereas Lundin has been in acquisition mode in recent years, Marrone said yamana’s board is focused on investing in its own assets to increase gold production rather than buying anything.

yamana has said it can add at least 150,000 ounces of annual gold production by expanding its existing five mine complexes, located throughout Canada and South America.

“The starting point for us is what we’ve got in the portfolio,” said Marrone.

Before announcing the sale of Chapada, expected to close in the third quarter, the firm said it aims to produce 940,000 ounces of gold and 120 million pounds of copper. Chapada last year produced 121,000 ounces of gold and 129 million pounds of copper, and has an estimated mine life of 28 years.

Last May, the company announced expansion plans that required phased investments of us$9 million, $140 million and $100 million.

On a conference call with analysts, Marrone said the company would have struggled to make capital expenditures to keep up Chapada while investing in the rest of its portfolio and make debt payments.

“It would have been constrained, simply put,” he said, adding the value of Chapada would decline without the investment.

That created an impetus to sell Chapada, and Marrone said the board started looking at options and speaking to buyers last fall.

S&P Global ratings last week held “its gold price assumption the same” through 2021, citing the uncertainty in u.s. interest rates, slower economic growth and risks of a trade war. But it raised assumptions for copper prices based on a supply deficit expected to begin this year and grow through 2021.

“We believe copper prices have some room for further upside if deficits widen,” the company analysts wrote on Thursday.

yamana’s sale also allows it to unload a mine in Brazil — although it still holds another mine in the country — months after Vale SA’S Brumadinho iron ore mining tailings dam collapsed in January in a different part of the country. That collapse killed hundreds of people plus untold numbers of livestock, destroyed houses and left an environmental disaster in its wake.

Marrone said this “disaster” likely limited the number of companies willing to consider buying Chapada.

Indeed, in a conference call Inkster said Lundin closely studied the tailings storage dam facility at Chapada as part of its due diligence.

Her company has been on the prowl for a copper mine, since its unsuccessful bid to buy Nevsun’s planned copper mine in Serbia last summer.

Chapada would bring its estimated copper production in 2019 up 263 million pounds of copper, adding 26 per cent to mines in europe and the Americas.

As part of the deal to acquire Chapada, Lundin may be on the hook for an additional us$125 million in payments to yamana, based on the average price of gold during the next five years, plus an additional us$100 million payment depending if it builds a roaster that would optimize the performance of the mine.

Steve Gatley, vice-president of technical services for Lundin, said the difference in outlook on Chapada comes down to the balance sheets: “We perhaps won’t have the cash constraints that yamana would,” he said.

It would have been constrained, simply put.