Yamana Gold Sells Chapada to Boost Shareholder Returns

After a disappointing 2018, Yamana Gold [stock_market_widget type="inline" template="generic" color="default" assets="YRI.TO" markup="(TSX: {symbol} {currency_symbol}{price} ({change_pct}))" api="yf"] is doing no better this year either as the stock’s performance so far in 2019 shows. Yamana Gold stock is down over 7% in 2019 as investors are not convinced about the company’s ability to deliver growth.

That’s not surprising as Yamana expects only a small increase in its output this year, but at the same time, its costs would remain identical year over year. As a result, the company has decided to take a different step to boost investor confidence.

Yamana Sells Chapada for Over $1 Billion

Yamana recently announced that it has struck an agreement to sell the wholly-owned Chapada mine for more than $1 billion to Lundin Mining. Yamana’s press release states that it will receive $800 million in cash for the sale, while an additional consideration of $125 million will be received based on the price of gold.

Also, another payment of $100 million is receivable by Yamana upon the development of a pyrite circuit to optimize the operation. The company will also receive a 2% net smelter return (NSR) royalty on the gold produced from the Suruca deposit. According to Yamana chairman Peter Marrone:

While Chapada has been a valued asset for Yamana, the Sale Transaction delivers a significant gain, delivers a high after-tax return and financially repositions the Company with a significant and immediate improvement to overall financial flexibility, thereby allowing the Company to pursue near-term value maximizing portfolio opportunities and also to increase shareholder returns, initially by way of a 100% increase in the annual dividend.

Clearly, Yamana has decided to sell off Chapada to improve its balance sheet and it has also tried to appease shareholders by way of a dividend increase.

What Does the Sale Do for Yamana?

Yamana believes that the sale of Chapada will eventually help it reduce the net debt to EBITDA to a multiple of 1.0x by the end of 2021, which would be an improvement over its earlier guidance of 1.5x.

Yamana points out that the upfront cash consideration it is receiving from the sale of the mine will reduce its net debt to EBITDA to 1.5x as compared to the 2.5x multiple at the end of 2018. The company will first pay off the outstanding revolving credit facility first using this money, after which it will clear off its near- and medium-term debt.

As a result of the debt repayments, Yamana says that it will clock more than $35 million in annualized interest savings. It will also redirect the cash flow that would have originally been spent on Chapada on other operations to create value.

Yamana believes that the sale of Chapada will eventually help it reduce the net debt to EBITDA to a multiple of 1.0x by the end of 2021, which would be an improvement over its earlier guidance of 1.5x.

The transaction is expected to close in the third quarter of the year and it won’t have a major impact on Yamana’s output for the year. The company will clock 1 million ounces of gold equivalent production for the next three years. At the same time, its sustaining capital expenses will drop $15 million, while the cost of adding stockpiles and depreciation and depletion will reduce by $25 million each this year.

In all, Yamana Gold’s overall balance sheet profile should improve because of this decision and help the company shareholder value going forward.

Harsh Singh Chauhan has a wealth of experience evaluating publicly-traded companies across several verticals, including technology, oil and gas, retail, and consumer goods. His financial writing has been published across platforms such as The Motley Fool, TheStreet, and Seeking Alpha. Harsh's philosophy is to find great businesses for the long run based on company fundamentals and industry prospects. Address: 682 Indian Road, Toronto, Ontario, M6P 2C9. Phone: 416-721-8257.


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