"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," said Keith Neumeyer, president and CEO of First Majestic Silver (FR-T). He was 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 theirs: First Majestic is buying Orko in a cash-and-share deal worth $387 million. The acquisition boosts First Majestic's silver resource count significantly and adds a perfectly situated, shovel-ready project to the company's development timeline.
La Preciosa is in Durango state, which is also home to First Majestic's head office and two of its mines: La Parrilla and Del Toro. In fact, La Preciosa is less than 50 km from FR's head office.
The 32,400-hectare 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.
Adding to La Preciosa's value: the project is accessible by paved highway and is close to an airport, power supply, and a smelter.
The deal will 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, a 69% premium to Orko's 30-day volume-weighted average price. Once the transaction is complete, Orko shareholders will own 13% of First Majestic's outstanding shares.
Orko's board of directors unanimously approved the deal and will vote in support of the merger at a special Orko shareholders meeting in February. Two-thirds of voting shareholders have to approve the amalgamation.
"We believe this transaction is highly attractive to Orko shareholders and is the culmination of many years of success Orko has had in growing and advancing one of the largest undeveloped silver deposits in the world," said Gary Cope, president and CEO of Orko, in announcing 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 said. Eight companies then signed confidentiality agreements and assessed the project carefully. Cope said the process led to multiple offers from two companies, a battle that First Majestic won.
"We are very 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 said.
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. However, 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 quite a bit more conservative than their numbers," he said. "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 its 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 new mine plan, in the form of a preliminary economic assessment, in mid-2013. In general, he expects to spend this year planning and permitting the operation, the next two years building it, and to start production "somewhere in 2016."
Part of the reason First Majestic has a slow-but-steady view towards its new acquisition is that the company already has its hands full. The company has four mines in production, including one undergoing a major expansion, and is currently commissioning 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 on the deal: the company's share price lost $2.35 or 10% on the news to close at $20.29. Orko's share price immediately jumped to match the deal's valuation, gaining 51% in a day to close at $2.39.
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