Morningstar | Lowering Yamana’s Fair Value Estimate on Underwhelming Terms of Chapada Mine Sale. See Updated Analyst Note from 15 Apr 2019
On April 15, Yamana announced the sale of its Chapada mine to Lundin Mining for roughly $1 billion. We think Yamana received below fair value for the mine, especially since only $800 million of the purchase price is an upfront cash payment. The additional financial flexibility provided by the cash proceeds is helpful, but the mine sale puts additional pressure on Yamana to develop production elsewhere. This is concerning, given that certain mines from the company's last investment cycle have failed to deliver as planned.Having updated our valuation model to reflect the sale, we've lowered our exit multiple assumption to 6.5 times from 7.0 times to reflect higher reinvestment needs to maintain production volumes. As a result, we’re lowering our fair value estimates to $2.40 per share and CAD 3.20 per share, down from $3 and CAD 4, respectively. Our no-moat rating remains intact.
The Brazilian-based Chapada mine produced about 120,000 ounces of gold and 129 million pounds of copper in 2018. As Chapada was responsible for more than 10% of Yamana’s gold production and all of its copper production, its divestiture weakens what we already saw as an underwhelming growth profile.
The foregone production wouldn’t be so troubling if we thought the company received fair value for the asset. However, not only does the total price look low, 20% or more of the value of the deal is dependent on contingencies. The company can earn up to $125 million more if gold prices reach levels above $1,350 to $1,450 over the next five years. Today’s gold price below $1,300 per ounce leaves a lot of room before these contingent payments would be triggered. For reference, our long-term gold price forecast is $1,270 per once (in constant 2019 dollars). Other contingent payments are more likely, as Yamana will earn $100 million if Lundin develops a pyrite roaster at Chapada and a 2% net smelter return royalty if Lundin mines the Suruca deposit.
Yamana Gold is engaged in the exploration, development, extraction, processing and reclamation of gold and other precious metals mining throughout the Americas including Brazil, Argentina, Chile, Mexico and Colombia. As of Dec 31 2011, total proven reserves for gold, silver, cooper, zinc and molybdenum was 618,709,000 tonnes, 27,316,000 tonnes, 387,660,000 tonnes, 5,004,000 tonnes and 32,000,000 tonnes, respectively.
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