Yamana Gold: Benefits From Synergy, Potential Gold Price Rise, Call Premiums And Dividends

The December 28th 6K Report

Yamana Gold (NYSE:AUY)(TSX:YRI:CA) announced the deal in their December 28th 6K report with the following highlights:

• Under the terms of the Arrangement Agreement, Pan American funded Yamana with US$150 million in cash for the termination fee.
• Yamana shareholders get an immediate and specific value of US$1 billion, or US$1.0406 per Yamana Share, amidst heightened capital markets volatility and fluctuating share prices.
• Yamana Shareholders have the opportunity to benefit from potential appreciation in the share prices of Pan American and Agnico due to the positive impacts of the deal on their respective businesses, including potential synergies.

The deal provides the opportunity to unlock significant strategic and operational synergies through the streamlining and optimization of corporate and joint venture costs, leveraging existing assets and infrastructure, and the application of best practices and innovation across sites as Yamana’s Canadian platform is integrated into Agnico’s portfolio and through the combination of Yamana’s and Pan American’s Latin American portfolios. Yamana Shareholders will be exposed to these synergies through their retained ownership in Pan American (PAAS)(PAAS:CA) and Agnico (AEM)(AEM:CA).

Three independent directors of Yamana will be appointed to the Pan American board of directors to provide business continuity, mitigate integration risks, and support value delivery to shareholders.

The Arrangement requires approval by at least two-thirds of the votes cast by Yamana Shareholders and approval by at least a simple majority of Pan American Shareholders. It is not subject to review under the Investment Canada Act.

AUY Shareholders Will Own Shares of PAAS

Yamana Shareholders get 0.1598 of a common share of Pan American. Since PAAS closed at $17.74 on January 6th, this means $2.834852 to AUY shareholders if they can sell PAAS at $17.74. Of course, AUY shareholders may decide to keep the PAAS shares.

The December 28th 6K report also highlights the following.

Upon completion of the Arrangement, it is anticipated that Yamana Shareholders will own approximately 42.7% of the Combined Company, which would have significantly increased the production profile in 2022 to 1.4 million GEO per year comprised of 25.5 million ounces of silver and 1.08 million ounces of gold representing an approximate 90% increase in GEO production and approximately 60% and 100% growth in silver and gold production, based on 2022 guidance, excluding Manantial Espejo.

Yamana Shareholders will benefit from the extensive experience of the combined management team in Latin America and exposure to an enlarged portfolio with a diversified operating footprint consisting of 11 operating mines across mining-friendly jurisdictions in the Americas. In addition, Yamana Shareholders will be positioned to benefit from the potential re-opening of the Escobal silver mine, one of the world’s premier silver deposits, as well as the growth from the advancement of the La Colorada Skarn project.

AUY Shareholders Will Own Shares of AEM

Yamana Shareholders get 0.0376 of a common share of Agnico Eagle Mines. Since AEM closed at $55.28 on January 6th, this means $2.078528 to AUY shareholders if they can sell AEM at $55.28. Of course, AUY shareholders may decide to keep the AEM shares.

The December 28th 6K report also highlights the following.

Upon completion of the Arrangement, it is anticipated that Yamana Shareholders will own approximately 7.41% of pro forma Agnico. Agnico owns and operates a portfolio of mines in the leading mining jurisdictions of Canada, Australia, Finland, and Mexico, with over 80% of its production coming from Canada.

Yamana Shareholders will continue to have exposure to Canadian Malartic and benefit from the consolidation of ownership, including substantial expected future additional mill capacity at the mine that Agnico is uniquely positioned to fill given its extensive operations, exploration properties, and land position. In addition, Agnico will show immediate and meaningful growth in production and is well positioned to develop, build, and operate both the Odyssey underground and Wasamac development projects, given its extensive mine-building experience and expertise, and ability to leverage existing infrastructure in the Abitibi region.

Dividends

• AUY will pay a $0.03 dividend on January 13th with a December 29th Ex-Date.
• PAAS pays a $0.10 dividend quarterly, with the next due to be paid around the beginning of March.
• AEM pays a $0.40 dividend quarterly, with the next one due around the middle of March.

The Price of Gold and Silver

The price of gold has a significant impact on the price of AUY, PAAS, and AEM. The gold futures price closed at $1,870.50 on January 6th. I’ve added the red Fibonacci lines, using the high and low for the past year. It’s interesting to note how the market pauses or bounces off these Fibonacci lines, and they can be one clue as to where the price of gold may be headed. Gold is currently above the 50% Fibonacci retracement. Gold prices are tough to predict, but I suspect the stronger possibility is that gold will trend higher over the coming months rather than lower.

Silver is currently above the 61.8% Fibonacci retracement. Silver prices are also tough to predict, and I am presently less bullish on silver than gold in the coming months.

Institutional ownership in AUY has grown, as you can see in the chart below.

So, What’s an AUY Investor Do?

Everyone should have an investment plan considering both potential risk and reward. I won’t pretend to tell readers what they should do because we all have different interests, risk tolerances, and investment time horizons.

I will offer my observations. My preference is for ownership of AEM over PAAS because AEM mines in what I think are the more mining-friendly countries, although I may own both companies for a time. I am also more bullish on gold than silver for the coming months, and only AEM has positive free cash flow. AEM has a lower forward P/E ratio, better margins, return on equity, ROIC, and better dividend. AEM primarily operates gold mines in Canada. Still, they have operations in Finland and Mexico and exploration and development activities in Canada, Europe, Latin America, and the U.S.

Pan American Silver Corp may also do well as they primarily focus on the exploration and development of silver mines. The company operates mainly in Central and South America. It also sells the byproducts from its silver mining operations, including zinc, lead, copper, and gold.

If you are interested, I have owned AUY for years and made good money from covered call premiums and dividends. My position grew a bit too large over the years. I will probably trim my total precious metal investment somewhat in the coming months because I think better investments may develop in other sectors. If I own shares in AEM or PAAS after the dust settles, I will consider selling covered calls while I collect the dividends.