Lundin Mining's (TSX: LUN; NASDAQ: LUMI) proposed acquisition of Yamana Gold's (TSX: YRI; NYSE: AUY) Chapada copper-gold mine in Brazil for US$800 million in cash will boost its copper production over 25% per year, and add 100,000 oz. gold to annual production.
The open-pit operation in Goias state could produce 54,500 tonnes copper (120.2 million lb.) and 100,000 oz. gold this year, at co-product cash costs of US$1.60 per lb. to US$1.80 per lb. copper, and US$430 per gold-equivalent oz., according to Yamana's most recent guidance.
Last year, Chapada produced 129 million lb. copper and 121,000 oz. gold at co-product cash costs of US$1.74 per lb. and US$388 per equivalent oz. gold, generating revenue of US$475.4 million, and mine operating earnings of US$206.2 million, before capital expenses of US$44 million.
"This transaction is truly a win-win for both parties," Marie Inkster, Lundin's president and CEO, said on a conference call from the company's Candelaria copper mine in Chile. "The acquisition of Chapada furthers our strategic goals, is fully aligned with our stated acquisition criteria and complements our already strong portfolio of base metal mines."
Under the deal, Yamana retains a 2% net smelter return royalty on future gold production from the Suruca gold deposit on the mine property, and receives contingent consideration of up to US$125 million over five years, if certain gold price thresholds are met.
Chapada's three proximal open pits have operated for more than 11 years, and Yamana has been studying plant-expansion opportunities to increase processing rates from 23.4 million tonnes a year to between 28 million and 32 million tonnes per year.
"There is potential to sustain annual copper production in the range of 68,000 to 72,500 tonnes per annum and 100,000 to 210,000 oz. gold per annum under the expansion scenarios," Inkster said. "These and other potential expansion scenarios will be further evaluated by Lundin Mining."
Chapada's reserves support a 28-year mine life, with 664.6 million tonnes grading 0.25% copper and 0.16 gram gold per tonne for a contained 1.68 million tonnes copper and 3.48 million oz. gold.
"With Chapada comes further expansion opportunities and significant brownfield and greenfield exploration potential," Inkster said. "And while having accretively deployed our cash position, we retain low financial leverage and retain the flexibility to act on future opportunities."
Not only does the addition of Chapada bring high-quality, long-life expandable copper production at attractive cash costs that strengthen the quality of Lundin's base metal mine portfolio, she continued, but it is "immediately and clearly accretive on key operating and financial metrics, including earnings before interest, taxes, depreciation and amortization, and operating cash flow per share," as well as being accretive to the net asset values of Lundin's mineral assets.
Once the transaction is completed, Lundin remains copper dominant, with over 70% of its revenues expected to come from copper, she added.
Chapada is part of a large copper-gold mineralized system, 270 km northwest of the national capital of Brasilia.
Lundin expects the copper concentrate grade will be between 24% and 25% copper, with gold grades between 10 grams and 15 grams per tonne, and silver grades between 40 grams and 45 grams per tonne.
"This is a really well-run operation, and is one of the lowest-cost mines that you'll see in South America, or anywhere - the costs are very well controlled," Inkster said during the question-and-answer part of the call.
She also said that Lundin won't stop looking at other deals because of this one, and isn't ruling out future transactions.
"I don't think that this [deal] in any way hurts our ability to pursue other things," she said. "We still have a lot of capacity available in Lundin ... and we'll continue to look at other things and opportunities."
In response to Chapada's tailings dam facility, which has three dikes, Inkster said extensive due diligence was completed. "We are comfortable that this is a low-risk tailings facility."
News of the acquisition sent Lundin's shares on the Toronto Stock Exchange up 8.1%, or 55 ?, to $7.38, on a trading volume of 6.2 million shares, and at press time were trading at $7.54.
The company's shares are trading in a 52-week range of $4.70 to $8.96. Lundin has a $5.5-billion market capitalization.
The Chapada announcement sent Yamana's shares down 3.5% - or 12 ? - to $3.30, on 5.7 million shares, and at press time trading at $3.07. Yamana's shares trade in a 52-week range of $2.66 to $4.20.
Mining analyst Pierre Vaillancourt, who covers Lundin for Haywood Securities, has a $9-per-share target price, and reasons the deal makes good use of the company's cash.
"The acquisition of Chapada is a good deal for Lundin, making productive use of its $815-million cash reserves [at year-end], while providing more financial flexibility and precious metal focus for Yamana," Vaillancourt writes in a research comment. "The timing of the transaction is good, as capital spending at other projects falls beyond 2019."
Andrew Kaip, who covers Yamana for BMO Capital Markets, notes that the Chapada sale lowers BMO's Yamana net present value 5% - from $2.61 per share to $1.24 per share - and he has trimmed his target price on the stock from $3 to $2.30.
"It is clear, in our view, that the sale of Chapada is about removing the shackles of the current debt load of $1.66 billion," Kaip writes in a research note. "Yamana plans to use part of the proceeds to pay back the $295 million drawn on the revolving-credit facility. Further debt retirement would likely mean paying above face value. We also think that Yamana desired a better cash balance to look at other opportunities."