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Why gold mine takeovers work Add to ...

We're going to rev up the cliché-o-matic for a moment to take apart Aura Mineral's $200-million (U.S.) purchase of three gold mines that Yamana Gold no longer wanted.

One man's garbage is another man's treasure.

Aura is a previously low-profile play, with properties in Brazil and Mexico. Yamana chairman and CEO Peter Marrone is on the Aura board, so there is a connection between these two companies.

Aura, a company with a single producing mine, gains stature with investors by picking up three open pit mines. While small, they are expected to more than double cash flow in 2010, to something in the 13 cent a share neighbourhood.

In mining circles, Aura is on the verge of what's known as a re-rating, when analysts stop considering a company a risky exploration stock that commands a low valuation, and start speaking of the company as a serious producer, with a relatively high multiple.

"We believe analysts will have a high degree of comfort with the operations and will thus not apply unduly conservative assumptions in their valuations of the new Aura Minerals, setting up the potential for an accelerated re-rating of the company's shares," said a report on the company Thursday from mining analyst Steve Parsons at Wellington West.

Just how big a boost can re-rating give a mining stock?

Aura currently changes hands at 4.4 times its forecast 2010 cash flow, according to Mr. Parsons. Peers among junior producers command 11.2 times their forecast cash flow.

While the Yamana purchase gives Aura new financial firepower, the company still faces significant capital costs in developing its Brazilian project. Mr. Parsons expects Aura will soon sell a 40 per cent stake in the property for $100-million.

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