“To add the amount of ounces we’re adding, there are simply not a lot of opportunities — it was almost a must-have for us to add this asset to our portfolio,” First Majestic Silver (FR-T) president and CEO Keith Neumeyer says. He is describing Orko Silver’s (OK-V) La Preciosa project in Mexico, one of the largest undeveloped silver deposits in the world, and a project his company has been eyeing for more than two years.
Now it’s almost theirs: First Majestic is offering to buy Orko in a cash-and-share deal worth $387 million. The acquisition would boost First Majestic’s silver resource count and adds a perfectly situated and shovel-ready project to the company’s development timeline.
La Preciosa is in Durango state, which is home to First Majestic’s head office and two of its mines: La Parrilla and Del Toro. La Preciosa is also less than 50 km from First Majestic’s head office.
The 324-sq.-km project hosts a silver-vein system that dips gently, which means most of the resource can be mined from the surface. According to Orko’s latest estimate, open-pittable resources on the property total 29.6 million measured and indicated tonnes grading 104 grams silver per tonne and 47.7 million inferred tonnes grading 86 grams silver. There are also a few million tonnes of similar grade that could be mined using underground methods.
The project is accessible by paved highway, and close to an airport, power supply and a smelter.
The deal would see First Majestic exchange each Orko share for 0.1202 of its own shares, plus C$0.0001 in cash. The offer values Orko’s shares at C$2.72, which is a 69% premium to Orko’s 30-day, volume-weighted average price. Orko shareholders are set to own 13% of First Majestic’s outstanding shares once the transaction is complete.
Orko’s board unanimously approves of the deal and plans to support it at a special meeting for Orko shareholders in February. Two-thirds of voting shareholders must approve the amalgamation.
“We believe this transaction is highly attractive to Orko shareholders and is the culmination of the many years of success that Orko has had in growing and advancing one of the largest undeveloped silver deposits in the world,” Orko president and CEO Gary Cope said when he announced the news.
Cope says there were a lot of companies interested in La Preciosa.
“Some months ago we put it out to the market, to silver producers, that we were looking for a sale of La Preciosa,” he says. Eight companies signed confidentiality agreements and assessed the project, which Cope says led to multiple offers from two companies — a battle that First Majestic looks set to win.
“We are pleased to join forces with First Majestic in a transaction that brings the necessary capital and mine-building expertise that is required to advance La Preciosa to production,” Cope says.
Exactly how that mine-building process will look is yet to be seen. As part of its latest resource estimate, Orko designed a so-called super pit that encompassed almost the entirety of the known deposit. But Neumeyer was careful to point out that the super pit concept is not one that First Majestic supports.
Instead, the new owners of La Preciosa are leaning towards a mine based on two small open pits, combined with an underground operation.
“We’re looking at numbers that are a bit more conservative than their numbers,” he says. “We want to come up with a throughput number that makes sense. There have been so many numbers thrown at this by different companies, whether it’s 10,000 tonnes per day (tpd) or 5,000 tpd, so we want to look at all those options and figure out how to optimize the operation.”
Neumeyer says the company plans to come out with a preliminary economic assessment in mid-2013. He expects to spend this year planning and permitting the operation, the next two years building it and begin production “sometime in 2016.”
Part of the reason First Majestic has a slow-but-steady view towards its new acquisition is because the company already has its hands full. The company has four mines in production, including one undergoing a major expansion, while it commissions a fifth. All of its operations are in Mexico. In 2012 First Majestic is expected to produce 8.6 million oz. silver. By 2016, its five mines should be producing 16.8 million oz. per year. La Preciosa has the potential to increase that production profile by 5 million oz. per year.
First Majestic’s move on Orko comes half a year after Pan American Silver (PAA-T) abandoned the project. Pan American had carried the right to earn a 55% stake in La Preciosa by taking on 100% of the costs, but in May, it relinquished that right.
It seems First Majestic shareholders are tentative about the deal: on the news, the company’s share price lost $2.35, or 10%, to close at $20.29. Orko’s share price jumped to match the deal’s valuation, gaining 51% in a day to close at $2.39.
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