Yamana-Extorre bid highlights value proposition of gold developers with scale, grade, and low cash cost projects - Positive for GLY and AZH - Buy. PIR - Hold
A gold major bids for developer. TSX-listed Yamana Gold (mkt cap C$12bn) announced yesterday it has entered into an agreement with Extorre Gold Mines to acquire the company for an EV of C$395M. Extorre is an explorer/developer, with its 100% owned flagship Cerro Moro gold-silver project in Argentina.
Scale, high grade, and low cash costs. Cerro Moro offers three attributes that are attractive to large predatory gold players – scale, high grade and low cash costs. The project comprises 2.41Moz (gold equivalent) of indicated and inferred resources, of which 1.1Moz is gold and the balance silver. The grade of the resource is extremely attractive at 12.8g/t Au equivalent, with resulting cash costs estimated to be US$303/oz Au eq from preliminary economic studies.
For the first five years +200koz Au equivalent production is targeted. Metallurgy is straightforward with high recoveries. The project comprises both open-pit and underground deposits.
Acquirer takes advantage of market conditions for developers. Extorre’s share price, like that of many other explorers and developers, has markedly fallen this year, declining 66% prior to the bid. Yamana’s bid is no doubt taking advantage of the tough market for developers, and the difficulty faced by the sector in accessing capital and progressing projects. The result is that it is becoming more attractive to purchase drilled-out resource ounces, rather than starting afresh drilling for new ounces.
Valuation metric A$171 per resource oz. Yamana’s bid was at a 54% premium to Extorre’s last traded share price, and valued Extorre atA$171/oz based on its Cerro Moro resource.
Which ASX-listed stocks might be targets similar to Extorre? Regrettably there does not exist any ASX listed gold stocks containing a resource in development stage with grade over 10g/t, resource north of 2Moz, and projected cash below $400/oz. Nevertheless we have screened out Azimuth Resources (AZH), Papillion (PIR), and Glory Resources (GLY) as the developers with projects that most closely resemble the attributes of Cerro Moro, particularly in possessing resource size of at least ca. 1Moz and 3g/t-plus grades.
Papillon Resources (PIR, $0.995, diluted mkt cap $312M). Papillon has 80% ownership of the Fekola project in Mali. The company expects to announce a maiden resource for the project by the end of mid-2012, which is only weeks away. Some analysts have estimated the maiden resource for Fekola based on the company’s announced drill results. These estimates suggest a size of 1.3 to 1.5Moz at ca. 2 to 3g/t. We would expect competitive cash costs at such grade and a potential operation of at least 100koz p.a.
However Papillon does look fully priced based on the EV/oz metrics – trading at ~$198-$223/oz assuming 1.3-1.5Moz for Fekola and the existing JORC resource of 0.3Moz for Medinandi. We believe there is certainly high expectation already built in the share price for Fekola’s high grade and large size, as well as for future resource upside. Hold.
I left out the parts on GLY and AZH but all can be found on:
