San Gold ValueWith reference to the recent take-over of Viceroy Exploration (VYE-TSX) in a stock swap valued at approximately C$577 by Yamana Gold (YRI-TSX).
Right off the bat, I notice that Viceroy has a Measured and Indicated resource of 1,428,000 and an additional 611,000 in the Inferred category. It should be noted that Viceroy has recently announced that they have intersected a high-grade zone that could be the feeder zone, hence a higher probability of increasing their existing resource estimate.
My point is that given that Yamana is paying C$577 million for Viceroy in a stock swap, this translates into only a 25.5% premium.
In essenence, Yamana pays Viceroy C$577 million and then issues new shares to pay for the purchase. For the Yamana shareholders, their interest is diluted by the difference in the pre-takeover value in order to increase production/reserves. Now as for the Viceroy shareholders, they get the benefit of becoming shareholders in a producing company and together will finance the future development of the mine and infrastructure. Therefore, the Viceroy shareholders avoid the potential dilution or increase in debt to fund the development of the mine.
First of all one must realize that Yamana is paying C$577 million for the approximately 2,000,000 ounces of gold and the blue sky potential that they feel exists within the Viceroy property portfolio and for their own strategic reasons, not to mention that it is not a cash deal.
At San Gold, the shareholders are not going to take a 25% premium over the current price regardless who the acquirer is. However, they may be willing to accept a slightly lower offer from say a Goldcorp than they would from let's say Yamana, but would want substantially more than a 25% premium since San Gold already has a mill and is already producing.
Let's assume, that of the C$577 million price tag applied to Viceroy is the result allocating:
(1) C$30,000,000 due the transaction being a share swap instead of all cash deal and,
(2) C$547,000,000 is for the 2,000,000 ounces plus blue sky (another 1,000,000), therefore, a total of 3,000,000 ounces. This results in Yamana paying C$182.33 per ounce of gold.
what does this say regarding the value of San Gold?
If SGR were to announce a total resource of 2,000,000 in the near future based on San Gold #1, San Gold #3, San Antonio and Cartwright, plus another (1,000,000 ounces of gold) from the blue sky potential of the remaining 11 kilometres of unexplored property located in a highly prospective region, this would enable a direct comparison of SGR and Viceroy.
Therefore, C$547,000,000 divided by 150,000,000 shares gives us a per share value of $3.65.
Please not that I have not factored in the cost savings that would be realized from the existing mill and infrastructure and perhaps more importantly the absence of country risk. If one were to factor in these two important considerations, a price of C$4 to C$6 at a price of US$600/oz of gold could be justified.
Good Luck to those long SGR