After several attempts to sell or spin off its Brazilian assets, Yamana Gold Corp.'s finally found some luck.
Late last week, the Canadian gold producer filed a final prospectus for its initial public offering of Brio Gold Corp., a new, separate company that will hold the Brazilian properties.
The deal was a tricky sell when it first launched in October, because unlike a traditional IPO, Yamana decided to do this one by way of a rights offering. Under these terms, existing shareholders were given the right to purchase stock in the new company. Normally, spin-outs involve offering the shares to a mix of new and existing shareholders.
The bet seems to have paid off. Brio has now priced its new shares, and the deal is expected to close on Dec. 23. However, getting here required a compromise. The offering was priced at roughly a 60-per-cent discount to Brio's net asset value.
When the IPO launched, most analysts valued Brio's assets around $600-million (U.S.). The new offering, for 54 per cent of Brio, is worth $192-million (Canadian). Add in Yamana's 46-per-cent stake, which the miner will continue to hold, and you get a $355-million valuation. Convert that to U.S. dollars and it totals only $266-million (U.S.).
Such a deep discount was necessary, according to someone familiar with the deal, because investors were unsure of the unique structure. Yamana shareholders already own these assets, yet the rights offering required them to pay in order to keep holding them as part of a separate company.
Yamana felt it was a fair trade. The miner had been trying to sell or spin out these assets for a few years, but had no luck. Because the gold market rallied in 2016, management wanted to try again, but a full-blown IPO was risky because investors have been skittish for new deals.
The rights offering, then, was sold as a hybrid approach. Yamana gets $192-million to pay back debt, which will benefit its existing shareholders, and those who don't want to participate in the offering should be able to sell the rights on the open market before their exercise date. (The rights trade like shares until the deal closes.)
The price at which these rights will trade over the next month is tough to gauge. After rallying in the first half of the year, the gold price has been more volatile lately.
Should the sell-off continue, the rights might lose value. But if gold recovers, investors might snap them up to make a good profit.