Pacific Trader: The Yamana takeover gives Pan American Silver a much needed upgrade

Pan American president and CEO Michael Steinmann projected the deal for Yamana Gold will double the company's gold output and boost its silver production by 50 percent.

Pan American Silver

Credit: Pan American Silver

The underperforming miner will receive an infusion of lower-cost projects

The stock: “What have you done for me lately?” investors might have asked Pan American Silver (TSX:PAAS) earlier this year. Though one of the world’s largest silver producers, its performance and profitability had been lagging behind its peers. Then, on Nov. 4, it emerged as a white knight, along with partner Agnico Eagle Mines (TSX, NYSE:AEM) of Toronto, in the $4.8-billion takeover of Toronto-based Yamana Gold (TSX:YRI). With the likely addition of Yamana’s assets, analysts are starting to change their tune on the mid-cap Vancouver-based precious metals producer that was founded by mining tycoon Ross Beaty in 1994.

The drivers: Under the terms of the cash-and-shares deal, Pan American will assume all of Yamana’s shares while Agnico Eagle acquires Canadian assets including the Malartic Mine. South African miner Gold Fields, which launched a takeover bid for Yamana last May, will receive a US$300-million termination fee. In a third-quarter earnings release Nov. 9, Pan American president and CEO Michael Steinmann projected the deal would double the company’s gold output and boost its silver production by 50 percent.

Pan American’s existing portfolio of mines and exploration projects in North, South and Central America produced 4.5 million ounces of silver and 128,800 ounces of gold in Q3. Revenues of US$338.9 million and a net loss of US$71.2 million were both below analysts’ expectations. Steinmann blamed the poor results on “softening precious metals prices combined with inflationary cost pressures.” As of Tuesday it was trading for $19.93 in Toronto.

But the gloom may be overdone. PAAS showed up recently on The Globe and Mail’s Top 25 most undervalued TSX stocks list based on Stockcalc data.

Word on the street: “In our view, the [quarterly] results highlight the potential benefits the transaction offers to PAAS, especially improving the quality of the producing portfolio of assets with lower cost mines and mitigating expected production declines,” wrote RBC Dominion Securities analyst Michael Siperco, who has a “sector perform” rating and $19 target on the stock.

Coming & going: Speaking of takeovers, some investors are publicly challenging Burnaby-based Ritchie Bros. Auctioneers’ (TSX, NYSE:RBA) US$7.3-billion bid for Chicago-headquartered IAA Inc. (NYSE:IAA), an auctioneer of used cars and trucks. IAA shareholder Ancora Holdings Group sent a letter to the company’s board urging directors to reject the proposal announced on Nov. 7 that the group says undervalues IAA.