A few weeks after rumours began swirling that the largest US silver producer, Coeur Mining, was in talks to acquire Canadian-listed Paramount Gold and Silver (PZG.TSX), the two companies announced this morning that the merger is real.
Coeur announced it will absorb Paramount in an all-stock transaction that values Paramount at $0.90 per share or $146 million (based on Coeur's 20-day VWAP), roughly a 20% premium to Paramount's 20-day VWAP, but only a 15% premium to yesterday's close ($0.78).
Shares in Paramount are up 24% to $0.97 at the time of writing.
Coeur will issue 0.2016 of a share for each Paramount share representing a total of 32.7 million Coeur shares to be issued. Paramount will own 24% of Coeur when all of the dust settles.
Paramount's board and management have recommended the merger and their 15% shareholder, FCMI Financial, signed a lockup agreement in support.
Paramount CEO, Christopher Crupi said: "This transaction unlocks the value we have created in San Miguel for our stockholders, by trading this asset for a substantial ownership in the major producer best able to maximize its value. We expect San Miguel to make a significant contribution to the future success of Coeur and Paramount stockholders will be able to share in this success as owners of Coeur."
The premium is small relative to precedent transactions, but when you ascribe some value to spinco, it becomes slightly better.
More importantly though, Paramount shareholders no longer have to worry about dilution or financing risk associated with the development of the San Miguel project. Overall, Coeur is getting a great deal, and Paramount still gets upside.
San Miguel's capex intensity is too high for this market; Paramount's management knows this and thus removes the financing risk, but keeps upside exposure to the project.
Based on a 2013 PEA completed by Paramount, the San Miguel project was expected to cost $243 million in upfront capital and another $227 million over the mine-life in sustaining capital. With the synergies Coeur is capable of achieving with its Palmarejo mine next door, the development exposure is fractional for them.
Coeur has $295 million worth of cash on its books.
Paramount's flagship San Miguel project is what Coeur is interested in. The project surrounds Coeur's Palmarejo mine which is one of the largest and highest grade silver mines in the world.
A competing bid seems highly unlikely, as the only acquirer that makes sense is Coeur, given San Miguel's proximity to their Palmarejo mining complex.
By acquiring San Miguel, Coeur will be able to extend the mine life at Palmarejo enabling it to continue utilizing the infrastructure it has built there.
Coeur says it will develop a 1,000 metre decline to access the Don Ese deposit (main deposit at San Miguel) adjacent to their Guadalupe surface infrastructure. They expect that will cost them $15 million next year and will be producing before year-end, ramping up to 2,500 tpd by the end of 2017. Coeur's 6,000 tpd Palmarejo plant is expected to have excess capacity by the end of 2015 as open pit mining there ends.
Coeur believes Don Ese, combined with Guadalupe, will produce an average of 6 million ounces of silver and 110,000 ounces of gold annually over the next 8 years.
Mitchell J. Krebs, Coeur’s President and CEO said, "By adding Paramount’s San Miguel Project and particularly the Don Ese deposit to the ongoing mining activities at our Guadalupe deposit, Palmarejo will be well-positioned to remain one of the world’s top producing silver and gold mines with significantly higher grades and lower costs."
Because that's all the Coeur is really interested in, they have agreed to spinout Paramount's non-Mexican assets, including their 2.4 million ounce low-grade Sleeper Gold project in Nevada.
The spinco will also get a $10 million cash injection from Coeur.
Besides their Palmarejo mine, Chicago-based Coeur Mining also owns the San Bartolomé silver mine in Bolivia, the Rochester silver-gold mine in Nevada and the Kensington gold mine in Alaska.
Coeur will be hosting a conference call and webcast (details below) this morning at 10:00AM EST which will outline their plans further.
(877) 768-0708 (U.S. and Canada)
(660) 422-4718 (International)
Conference ID: 506 44 810