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For Yamana, Extorre brings cheap reserves

Yamana Gold Inc. Chairman and Chief Executive Officer Peter Marrone speaks during the annual general meeting of shareholders in Toronto May 4, 2011.

MIKE CASSESE/REUTERS

Yamana Gold Inc. is getting a lot of potential cheap with its takeover of Extorre Gold Mines Ltd., thanks to its willingness to take the risk of operating in Argentina.

How cheap?

We're talking about something on the order of one half to two-thirds the price to buy a similar-stage deposit elsewhere in the world.

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The acquisition valuation on Extorre and its main Cerro Morre project in Argentina is about $169 an ounce, and the total cost to buy and develop Cerro Morre is about $600 an ounce, estimates analyst Tanya Jakusconek of Scotia Capital. That's about 40 per cent of the current spot price of gold, compared to about 65 per cent for the average takeover of a mine developer.

Similarly, TD Securities looks at the takeover as a multiple of net asset value, and finds that it's about half what other companies in comparable transactions have fetched.

TD opines that it's going to be "very disappointing" for Extorre shareholders because of a "large Argentina discount," and that there's room for a counteroffer.

Another bidder would have to get as comfortable as Yamana is with doing business in Argentina, land of capital controls and nationalization threats. So far, the market is pricing in little chance of that happening. Extorre stock is trading about at the offer price.

Yamana shares, meantime, are showing no signs of investor jitters about more Argentina exposure. The stock is up (albeit after Yamana also increased its dividend).

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