Published April 19, 2023

So, what do you do when you own a company and it is performing admirably, with about a 50-per-cent gain in less than two years, plus dividends, yet remains far from the initial sell target? We just sit and wait. But then what if it is acquired by two other companies in a rather complex deal that doesn’t fit into your investing style?

That is what happened to us with Toronto-based Yamana Gold, when Agnico Eagle Mines Ltd. AEM-T and Pan American Silver Corp. PAAS-T swooped in to acquire the Canadian miner.

The deal was reasonable, albeit not at a rich premium, with that striking the vein at 23 per cent. There was some cash offered, US$1.04 a share, along with 0.0376 of a share of Agnico Eagle and 0.1598 of a share of Pan American Silver. More cash would have been preferable, but que sera sera.

The transaction pushed a rival proposal from Gold Fields Ltd. GFI-N to the sidelines, albeit one can conclude this suitor was not a complete loser, grabbing an ultra-steep US$300-million break fee. It is hard to imagine why the management of Yamana agreed to such a rich number, as from this angle it makes zero sense. It smacks of a desperation to sell, when by all management’s prior statements, it was firing on all cylinders. We are skeptical that there was a close alignment between the interests of the top dogs and the wider shareholder base.

We know both Agnico and Pan American well and, decades ago, as gold went dramatically out of favour and the enterprises in the sector were suffering, Benj bought Agnico for just a few dollars. He then sold it for a lovely multiple, but if he had held on … woulda, coulda, shoulda. Having bought the stock so cheaply before, it is somewhat difficult to comprehend owning it again at the current TSX price around $75. Certainly, this miner has grown dramatically after a merger with Kirkland Lake Gold just over a year ago and much more now with this arrangement.

It is well-managed with revenue of about $5.74-billion and a reasonable debt load of $1.49-billion. Sales have been mounting year after year, and the bottom line has been a healthy black for the past decade, with one blemish in 2013. Its full ownership of the Canadian Malartic mine in Quebec, with an estimated mine life to 2039 and all-in sustaining costs that should be under $750 a gold ounce in the future, will animate the income statement. In addition, the Yamana transaction gives it other properties in Manitoba, Ontario and Quebec.

Pan American also has a healthy balance sheet. It normally makes money, too, but in the fourth quarter of 2022 it had a hefty net loss of $172-million. That is primarily because of the Yamana transaction, as there were $157-million in costs , most of which was related to the fat breakup fee with Gold Fields. Management at Pan American, though, is confident that production for the company will better than double in the short term, because of the Yamana deal, as the company has acquired four operating mines in Latin America to enhance its current foothold.

Setting initial sell targets for Agnico and Pan American is where things get complicated. In this case, we feel that the former could hit $85 and the latter $35. If the integration of the mines goes very well, these targets could be low.

A wild card in all of this is the gold price. It has popped recently as people once again search for safe assets with the shiny metal often attracting their eyes. We don’t buy into that logic. Being the elderly scribes that we are, we remember when gold popped above US$800 an ounce in 1980, before cascading to around US$250. In 2011, it flirted with US$1,800, but then fell dramatically to about US$1,060 in 2016.

So as a place to fly for safety, gold is not the real McCoy. What it is though is a reasonable place to diversify, make money by playing the commodity cycle correctly and enjoy when it is purchased as jewellery.

Some investors certainly sold as soon as the Yamana agreement went through and more are bailing now, content to take their moolah and run. But the key at the end of the day is to attempt to make the most out of the hand that you have been dealt. That is where we are at now, waiting patiently. We will collect reasonable dividends – both are north of 2 per cent – and hope for further capital appreciation.

Benj Gallander and Ben Stadelmann are co-editors of Contra the Heard Investment Letter