Yamana Gold completes sale of Chapada, begins debt repayment process
YAMANA GOLD announced it has completed the sale of its wholly-owned Chapada mine to Lundin Mining Corporation for total consideration of over $1B. Yamana has received the initial upfront cash consideration of $800M on closing. In addition to the initial cash payment, consideration also includes a $100M cash payment contingent on the development of a pyrite roaster at Chapada by Lundin, a two per cent net smelter return royalty on the Suruca gold project in the Chapada complex, and a right to receive up to $125M in additional cash consideration based on the price of gold over the five-year period from the date of closing as follows: $10M per year for each year over the next five years where the gold price averages over $1,350 per ounce, up to a maximum cash payment of $50M. An additional $10M per year for each year over the next five years where the gold price averages over $1,400 per ounce, up to a maximum cash payment of $50M. An additional $5M per year for each year over the next five years where the gold price averages over $1,450 per ounce, up to a maximum cash payment of $25M. While the Company recognized significant cash consideration from the sale, representing fair value, there is also considerable optionality from the non-cash components, a very substantial portion of which relates to gold and gold price, the result of which is that the Company preserves leverage to gold that it would otherwise have produced at Chapada without incurring operational risk. The Gold Price Instrument is structured as a separate right that increases in value when the price of gold rises. The Gold Price Instrument entitles the Company to be paid according to its terms, summarized above. Concurrently with the closing, the Company is using $385M to repay outstanding indebtedness under the revolving credit facility, the balance outstanding on June 30th and on close of the transaction. The remaining $415M in upfront cash consideration is being used by the Company to offer to prepay its senior notes issued in March 2012 and June 2013 on a pro rata basis. These Prepay Offers have been distributed simultaneously with the closing of the Chapada sale. The Prepay Offers indicated that in the event cash consideration remains available, the balance will be used to prepay indebtedness under the Company's senior notes issued in June 2014 and December 2017. The reduction in net debt immediately lowers Yamana's Net Debt/EBITDA leverage ratio, a measure of financial strength, to 1.5x. The Company continues to target Net Debt/EBITDA of 1.0x by the end of 2021. Beyond the leverage improvements, the Company will significantly reduce the annual carrying cost of interest on debt by approximately $40M, freeing up cash for other uses or to further improve its net debt position. As part of the debt Prepay Offers, the Company expects to pay a premium to reference or trading levels of its notes. The annual reduction of interest savings and, further, the present value of interest savings will be a multiple of the total premium offered in the prepayment transaction. Importantly, the resultant cash flow margin increases from interest savings improves the Company's resiliency and flexibility.