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DAILY NEWS Jul 11, 2011 6:00 PM - 0 comments

Peregrine Metals' shares spike on acquisition news

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2011-07-11

Peregrine Metals (pgm-t) saw its shares surge more than 250% after U.S. platinum giant Stillwater Mining (swc-n) agreed to pay US$487.1 million for the junior and its large, yet undeveloped copper-gold project in Argentina.

Peregrine shareholders would receive 0.08136 of a Stillwater share and US$1.35 in cash for each share held. Based on Stillwater's closing price on July 8 of US$23.72, the deal values Peregrine at $3.16 per share, which is roughly a 400% premium to Peregrine's closing price of 81¢ on July 8.   

Analyst George Topping at Stifel Nicolaus says the immediate premium bid from a Peregrine shareholder's view is a great transaction. He adds it brings the potential value of the company's Altar porphyry deposit in Argentina's San Juan province forward.

He notes Stillwater would pay 4.9¢ per lb. copper in the ground for the 10-billion-plus-pound deposit, which he says is an excellent price for an early-stage project. (Peregrine had planned to complete a preliminary economic assessment on Altar by year-end, before the bid was announced.)

Topping started coverage of Peregrine Metals in April 2011 with a buy recommendation, where he used a price of 3.5¢ per lb. in the ground to derive his previous target price of $2.25 per share.

Stillwater says the project would give it an "immediate scale in copper resources" and more exposure to gold resources.

 "For several years, one of Stillwater's primary strategic goals has been to grow and diversify our business through the acquisition and development of high-quality mining assets," said Frank McAllister, Stillwater's chairman and CEO, in a press release.

He added, "In combination with our PGM (platinum group metals) producing assets in Montana and the continuing development of our Marathon assets in Canada, we are creating a leading mid-cap diversified company with a strong financial profile and a robust growth pipeline across attractive commodity classes and geographies."

The miner currently produces palladium and platinum from two mines in Montana, and last year acquired Marathon PGM Corp. and its huge feasibility-stage platinum-palladium-copper project for US$118 million.

However, Topping writes in a recent note to clients that Stillwater's move to buy the Marathon PGM-Cu deposit in northern Ontario was a "small step outside of the pure-PGM business model but fit geographically and PGM-wise." He opines the Peregrine transaction is a step away in terms of experience, questioning whether or not Stillwater is the right company to buy the sizable copper operation in South America.

"It's a different commodity. It's in a different region. It would have to be a very large-scale operation, y'know, maybe 120,000 tonnes per day is what I'm modeling.

"Right now, most of Stillwater's experience, of course, is narrow-vein mining... (Copper mining) is about far as removed from the current company's experience as you can think of."

Topping agrees the Altar project is a valuable asset. However, he points out the deposit would have been worth more to Xstrata (xta-l), which is advancing its El Pachon copper project, 23 km to the south, and could have developed Altar as a satellite mine. (El Pachon has a total resource of 1.7 billion tonnes at 0.509% copper for 20 billion lb. copper.)

Topping assumes Xstrata has its plate full with its own development projects and predicts a competing bid for Peregrine Metals is "unlikely."    

But he says he won't be surprised if Stillwater sold Altar for a profit in two or so years, adding for now its shareholders may be "negatively surprised" by the Peregrine bid and the capital needed to develop Altar.  

It would cost about $2.6 billion to build Altar, says Topping, with first production expected in 2017.

Stillwater plans to spend US$75 million over the next three years to delineate Altar's resource and ramp up exploration on the property, which it says has the potential to make the company one of the leading copper producers in the Americas.

Altar hosts a large, undeveloped open-pit resource of 7.4 billion lbs. copper and 1.5 million oz. gold in the measured and indicated category, based on 802 million tonnes grading 0.44% copper equivalent. It has another 4.3 billion lbs. copper and 880,000 oz. gold in inferred from 465.6 million tonnes at 0.44% copper equivalent. The deposit is open at depth and laterally in three directions.

The agreement has been approved by both companies' boards and is expected to close by the end of September.   

Peregrine's chairman and CEO Eric Friedland said he was pleased with the transaction and believes Stillwater has the cash and proven operational track record to advance Altar. (Friedland is also the CEO of Peregrine Diamonds [pgd-t], which is developing the Chidliak diamond project on Nunavut's Baffin Island.)

Once the deal goes through, Peregrine shareholders would own 10.5% of Stillwater on a fully diluted basis.

On the acquisition news, Peregrine shares hit a new 52-week high of $2.94, before closing up $1.79 at $2.60 on 21.1 million shares traded. Stillwater dropped 22% or US$5.26 per share to US$18.46 on 21.6 million shares traded.



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