Canadian-based gold miner Yamana Gold (TSE: YRI) (AUY) has agreed to be acquired by South African gold miner Gold Fields (GFI). The offer is for an all-stock deal of 0.6 GFI shares for every Yamana Gold share.
Essentially, the purchase price per share will be 60% of Gold Field’s share price. As a result, the actual acquisition value will fluctuate as Gold Fields’ share price changes. This may not be ideal for Yamana shareholders, especially since Gold Fields fell over 23% after the announcement.
However, should Yamana Gold investors sell their shares or hold on and own the combined company?
The Rationale for the Yamana Gold Merger
An important component of a successfully integrated acquisition is synergy. The companies believe that the combined company will be able to unlock an additional US$40 million of value per year by streamlining overhead cost structures.
In addition, since both companies produce positive free cash flow, the combined entity will be able to more comfortably finance future growth initiatives, which could potentially lead to more value creation.
It is also good to see that both companies have similar cost profiles. Gold Fields expects all-in sustaining costs for Fiscal Year 2022 to be between US$1,140 to US$1,180 per ounce.
Similarly, Yamana Gold reported all-in sustaining costs of US$1,084 per ounce in the first quarter of 2022. This number is likely to increase slightly throughout the year due to inflation pressures, bringing it closer to Gold Fields’ estimate.
Dividend Yields of Gold Fields and Yamana Gold
For investors that are income-oriented, both companies offer a similar dividend yield. Gold Fields has a 2.62% dividend yield, while Yamana Gold has a 2.32% dividend yield. In the past several years, the dividend yields of both companies have trended upwards as the price of gold has increased.
Therefore, income-seeking investors that are bullish on precious metals are paying a good price relative to historical yields.
Wall Street’s Take
Turning to Wall Street, Yamana Gold has a Moderate Buy consensus rating based on five Buys and two Holds assigned in the past three months. The average Yamana Gold price target of C$9.73 implies 43.2% upside potential.
Conversely, Gold Fields now has 62.7% upside potential, given that its stock sold off following the announcement.
As a result, Yamana Gold investors might see even more upside potential as a combined entity rather than a stand-alone company.
Final Thoughts
For Yamana Gold investors that are bullish on gold, this merger might create more value for shareholders. Both companies are already profitable and have similar cost structures and dividend yields. Therefore, combining the two entities into one will likely reduce expenses while also allowing for the possibility of financing larger projects.
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