Yamana Gold (AUY) has recently announced that it has entered into agreement with Stifel GMP and Cormark Securities to sell 12 million units consisting of one common share of Equinox Gold (EQX) and one-half of a common share purchase warrant for gross proceeds to Yamana of C$120,000,000. In case all warrants are exercised, the total gross proceeds to Yamana will total C$201,000,000. Once the transaction is completed, Yamana Gold will hold 7,236,380 shares of Equinox. If all warrants are exercised, Yamana will dispose of 6,000,000 Equinox shares, and its stake in Equinox will total 1,236,380 shares. As per the press release, Yamana Gold intends to use the proceeds from the sale for general corporate purposes.
Put simply, Yamana decided to sell 12 million shares of Equinox at a price of $7.20. The deal also includes warrants exercisable at a price of about $9.71. The share sale price is well below recent highs that were reached in February 2020, while gold prices are at multi-year highs.
Currently, Equinox’s Los Filos Mine in Mexico and Pilar Mine in Brazil have temporarily suspended operations due to virus containment measures. Last year, the company generated $281.7 million of revenue and $59.7 million of operating cash flow, and finished the year with $67.7 million of debt.
Yamana Gold’s road to the stake in Equinox Gold began long ago, when the company decided to make its subsidiary Brio Gold a standalone public company back in 2016. In 2017, Yamana was selling shares in Brio Gold. In 2018, Brio Gold was purchased by Leagold Mining for a total consideration of $146.1 million, including $140.5 million in Leagold common shares and $7.1 million in Leagold share purchase warrants. In 2020, Leagold was purchased by Equinox Gold, and Yamana Gold received Equinox shares.
Apparently, Yamana Gold decided that this non-core asset should be divested at times of coronavirus crisis, although I’d note that there is absolutely no crisis on the gold price front. In fact, gold benefits from the current turmoil. Mining company shares have experienced a sell-off due to fears of production shutdowns and investors’ rush to raise cash. However, a higher gold price mitigates the negative impact from production shutdowns. In addition, shutdowns will come to an end, since mining is typically a very important business for host countries.
In this light, the decision to sell Equinox Gold shares at a price that is so much lower than the high level seen at the beginning of February looks strange. To me, it looks like Stifel GMP and Cormark Securities got a good deal. I suspect that Yamana Gold’s decision to sell the stake in Equinox was “automatic” as company management decided to boost liquidity at times of coronavirus crisis.
I recently wrote that Yamana Gold decided to draw $200 million from its $750 million revolving credit facility, but stated that it did not expect to use this money. Clearly, the focus of company management is on fiscal prudency, and the company will likely concentrate on dividend sustainability and debt repayment after the acute phase of the current crisis ends.
I maintain my bullish stance on Yamana Gold, as I believe that the market does not fully take into account the positive impact of higher gold prices on the company’s cash flow. While the timing of Equinox stake sale could have been better, the push for fiscal prudency is a pleasant change compared to prior years. The company has already made several steps on this front, selling assets and prioritizing the sustainability of the dividend, so the Equinox stake sale looks like a logical step in the same direction. In my opinion, Yamana Gold is well-positioned to deliver material positive cash flow in 2020, and its stock price will ultimately reflect the positive trend on the gold price front.
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Disclosure: I am/we are long AUY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I may trade any of the above-mentioned stocks.