Agnico Eagle finds a novel way to reduce the political risk of acquiring Yamana’s South American mines

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Attractive gold deposits have an annoying habit of turning up in unattractive jurisdictions.

Canadian miners have scars from misadventures in countries such as Russia, Kyrgyzstan and Argentina, where governments have track records of inviting foreign capital but making it very difficult for money to leave. Which brings us to Agnico Eagle Mines Ltd.’s AEM-T canny approach to winning the US$4.8-billion bidding war for Yamana Gold Inc. YRI-T, owner of promising properties in an unpopular place.

Agnico and Yamana co-own the Malartic project in Quebec, one of the world’s largest gold mines. Yamana also has mines across South America, including three gold and silver projects in Argentina.

Yamana recently disclosed the two Toronto-based companies held merger talks last summer, one of five potential deals its board considered before embracing an all-stock offer from Johannesburg-based Gold Fields Ltd. GFI-N Yamana never specifically named its suitors, but its filings show a potential buyer that can only be Agnico, which was keen on the Quebec mine, but had no stomach for moving into South America.

In hindsight, the view was justified by the market’s reaction to Gold Fields’s bid. Its share price sank 23 per cent when it announced the deal, on investor concerns the South African company was paying a premium price for assets in jurisdictions where it had zero operating experience.

The drop in Gold Fields’s share price knocked back the value of its all-stock offer, opening the door for Agnico to take another shot. The second time around, Agnico found a partner to take the mines and risks it didn’t want.

Gold Fields dissident shareholder calls on miner to walk away from Yamana deal, buy back shares instead

Vancouver-based Pan American Silver Corp. PAAS-T has eight projects in South America, including two properties in Argentina. The company has been working on the continent since 1994. If the numbers made sense – if Pan American could add to gold and silver production at attractive valuations – investors weren’t going to get fussed over adding additional Latin American exposure.

Last Friday, the two Canadian miners trumped Gold Fields with a deal that will see Agnico pay US$1-billion in cash and issue shares to buy Yamana’s Canadian operations, while Pan American will make an all-stock purchase of the rest of its properties.

In addition, Agnico agreed to support its new partner by buying up to US$150-million of Pan American shares in the public market. In a press release, Agnico said this is “evidence of its belief in the opportunity for enhancement arising from the combination of Yamana and Pan American’s Latin American portfolios.”

Analysts agreed with this upbeat take, while flagging the political risks. “We see the deal as accretive on all metrics while increasing operating and development flexibility,” said Michael Siperco at RBC Capital Markets. “While Pan American has a strong track record of operations and strong local support, especially in Peru and Mexico, the risk of potential political and fiscal regime changes is relatively higher in the portfolio vs. peers.”

On Monday, Gold Fields said it will not raise its offer, effectively conceding defeat. The company can expect a US$300-million break fee. Gold Fields’s share price is up 3 per cent since Agnico and Pan American launched their bid.

A generation ago, resource-focused mutual funds run by portfolio managers such as Frank Mersch and Rohit Seagal would gladly back an established mining company such as Agnico as it made forays in new regions such as Argentina.

In the past two decades, those specialists gave way to index funds and generalist instructional managers who are far more risk-averse, and want to play precious metals by owning shares in the largest gold miners. There’s a far smaller investor base interested in high-risk, high-reward gold and silver mines, overseen by unpredictable governments.

The shift in market dynamics prompted Yamana’s board to put the company up for sale, and drove the innovative partnership that helped Agnico and Pan American win a hotly contested takeover.

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