Lundin Mining Corp. shares rose 8 per cent after it agreed to buy Yamana Gold Inc.’s Chapada mine in Brazil in a deal that could eventually top US$1-billion.
Cash-rich Lundin, based in Toronto, has been vocal about wanting to do a large mergers and acquisition (M&A) transaction for some time and came close last year with a different deal that fell through.
The transaction will help intermediate gold company Yamana, also based in Toronto, improve its financial condition, allowing it to pay down a good chunk of its debt.
Yamana will receive US$800-million in cash upon closing and may earn additional contingency payments up to US$225-million.
The transaction is the latest during a hectic period for M&As in the Canadian mining sector that has seen about US$18-billion worth of transactions unveiled in the past seven months.
Since selling $1.2-billion worth of copper assets in 2016, Toronto-based Lundin had been on the hunt for a suitable acquisition target.
“We’ve waited a long time and been very patient,” Marie Inkster, chief executive officer of Lundin, said in an interview. “We were under quite a bit of pressure from shareholders to do an acquisition and I think the patience has paid off.”
In 2018, Lundin tried to buy base metals company Nevsun Resources Ltd., based in Vancouver, for about US$1.4-billion, but China’s Zijin Mining Group Co. Ltd. outbid it.
The deal is the first one struck under Ms. Inkster, who succeeded long-time CEO Paul Conibear late last year, and the initial reaction from analysts and investors has been positive.
RBC Dominion Securities Inc. analyst Dan Rollins estimates the fair market value of the Chapada mine is US$1.56-billion, meaning Lundin would be getting it at about a 35-per-cent discount.
Lundin’s stock gain of 8 per cent on the Toronto Stock Exchange was its biggest jump in more than three months, while Yamana’s stock fell by 3.5 per cent.
In an interview, Peter Marrone, Yamana’s executive chair, said while the initial negative stock reaction in Yamana was “understandable,” he believes the market is overvaluing the asset. He argues the deal is a good one for Yamana and said its lower debt load will make it more attractive to potential investors. Yamana’s net debt is projected to fall to US$900-million from US$1.7-billion as of the end of last year.
The Chapada open pit copper gold mine began production in 2007 and is expected to operate for about another two decades. Last year, Chapada produced just under 59,000 tonnes of copper and 121,000 ounces of gold. Yamana had been studying a possible expansion of the facility, which would entail a capital infusion of about a quarter of a billion dollars.
Ms. Inkster said while Lundin would review the expansion plan already done by Yamana, which focused mainly on harnessing the gold in the deposit, it may pursue a different strategy that focuses more on the copper.
After the best part of a decade in the doldrums, M&A in the mining sector has roared back in the past six months. In January, Barrick Gold Corp. closed its US$6-billion acquisition of Randgold Resources Ltd. Meanwhile, Newmont Mining Corp. is scheduled to close its US$10-billion acquisition of Goldcorp Inc. later this quarter.
Mr. Marrone said Yamana itself would be open to a takeover by a larger company if the price is fair.
“We’re all for it. We would fully support it,“ he said.
While he wouldn’t comment on any M&A talks with specific companies, he singled out Newmont and Agnico Eagle Mines Ltd. as senior miners he holds in high regards. Yamana co-owns with Agnico the Canadian Malartic, one of the biggest gold mines in the country.