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Can the RDM Acquisition Unlock Value for Yamana’s Brio Gold?

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RDM acquisition 

One of the key highlights of Yamana Gold’s (AUY) 4Q15 earnings call was its announcement of the acquisition of Carpathian Gold’s RDM (Riacho dos Machados) gold mine for $51 million. On completion of the acquisition, which is expected to happen by the end of March, RDM will be owned by Brio Gold, a division of Yamana Gold.

RDM is an open-pit mine located in the Minas Gerais state of Brazil and is expected to produce 100,000 ounces of gold each year with AISC (all-in sustaining costs) of less than $800 per ounce. Yamana Gold expects the mine to produce 50,000 ounces of gold in 2016, as RDM is operating at reduced capacity due to water availability. Yamana Gold mentioned that there is potential to further increase production, reduce costs, and expand the reserves and resources base.

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Accretive transaction

Yamana Gold stated that RDM acquisition was calculated at a NAV (net asset value) of 0.3x, which is an attractive entry price. The company is looking at various funding alternatives for this transaction. The company had a $186 million balance in its revolving credit facility at the end of December 31, 2015. This might be one of the alternatives for the company to fund this transaction.

Maximizing the value of Brio Gold

RDM is in close proximity to Brio Gold’s existing mines, which can help facilitate the use of common infrastructure. The acquisition of RDM is accretive to Yamana Gold, as it will improve the production platform and value for Brio Gold. It will also help Brio Gold achieve a critical mass of smaller mines, mainly in Brazil. Investors should note that Yamana Gold previously had plans to monetize Brio Gold. However, late last year, it concluded that in the short to intermediate term, the division carried more value within the company.

Many other miners (GDX) such as Newmont Mining Corporation (NEM), Barrick Gold Corporation (ABX), AngloGold Ashanti (AU) and Kinross Gold Corporation (KGC) are eyeing portfolio optimization to reduce costs and increase margins. KGC makes up 2.8% of the VanEck Vectors Gold Miners ETF (GDX).

While this acquisition could help Yamana Gold maximize the value of Brio Gold, the requirements of additional capital to bring the mine to full production might place a financial burden on the company. As we’ll see in the next part of this series, Yamana Gold’s balance sheet is already highly leveraged compared to those of its peers.

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