Yamana Gold Update: Wins Osisko

04/23/2014 5:40 pm EST


Jim Jubak

Founder and Editor, JubakPicks.com

The original bidder for this gold mining company walked away, which proved to be a big joint venture winner for two other leading companies, which is why MoneyShow's Jim Jubak is updating his target price, as of today, April 23.

And the prize goes to Yamana Gold (AUY) and Agnico Eagle Mines (AEM). The two companies have acquired Osisko Mining and will operate its mines through a joint venture. Goldcorp (GG), the original bidder for Osisko decided to walk away rather than top the $3.67 billion bid from Yamana and Agnico Eagle. (Yamana Gold and Goldcorp are both members of my Jubak’s Picks portfolio.)

The deal marks another stage in the consolidation of the gold mining sector as bigger companies look to buy low-cost assets in geographies that lower their political risk. A key to the interest in Osisko is that the company’s operating mine is in Quebec, one of the world’s most stable and mining-friendly regions. That’s an especially big deal for Yamana, in my opinion, since it reduces the company’s reliance on projects in the much-less stable Argentina.

Osisko’s Malartic mine was a very attractive asset, all in itself. It’s located in Quebec’s Abitibi Gold Belt and has a huge 10.1 million ounces in proven and probable reserves. (There are another 1.6 million ounces in measured and indicated reserves and 1.2 million ounces in inferred reserves.) The mine went into production in May 2011.

Yamana and Agnico Eagle also gain Osisko’s development pipeline: Hammond Reef (5.4 million ounces of measured and indicated reserves, plus 1.75 million inferred) and Upper Beaver-Kirkland Lake (2.1 million ounces measured and indicated and 1.8 million inferred). Importantly given mining companies’ need to find rich reserves that will result in low cost production, the Upper Beaver-Kirkland Lake project has shown high ore grades. (This morning, Osisko announced the results of its first drill intersection at its Odyssey North target about 2.7 miles from the Malartic mill complex. The results seem to indicate two potential ore bodies.)

Cash costs at Malartic fell to $713 an ounce at the end of 2013, from $804 an ounce at the beginning of the year. In the first two months of 2014, cash costs have declined further to $585 an ounce.

As of April 23, I’m increasing my end of the 2014 target price for Yamana Gold to $16 a share from the prior $14.50.

Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. When in 2010 I started the mutual fund I manage, Jubak Global Equity Fund, I liquidated all my individual stock holdings and put the money into the fund. The fund did not own shares of Yamana or any other stock mentioned in this post as of the end of December. In preparation for closing the fund at the end of May, as of the end of March I had moved the fund’s holdings almost totally to cash.

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