VANCOUVER — According to Coeur Mining (NYSE: CDE) president and CEO Mitchell Krebs, the company’s friendly take-over of junior Paramount Gold and Silver (TSX: PZG; NYSE-MKT: PZG) is one of the most “logical and strategic acquisitions” across the industry.
Paramount’s San Miguel discovery directly borders Coeur’s Palmarejo silver-gold operation — located 15 km northwest of the town of Témoris in northern Mexico — and the potential operational synergies appear to have been too enticing for the producer to ignore, especially considering Coeur is in the midst of closing down Palmarejo’s open-pit operations in a bid to improve margins with higher-grade, underground ore.
Under terms of the agreement Coeur will acquire Paramount in an all-share transaction worth roughly US$146 million, wherein each Paramount shareholder receives 0.2016 Coeur shares per Paramount share held.
The purchase price equates to around 90¢ per Paramount share based on Coeur’s 20-day volume weighted average price of US$4.47, which represents a 20-day premium of roughly 19.8%.
The junior actually made out a bit better than that, however, as Coeur will also inject US$10 million into a spin-out company that will host Paramount’s non-Mexican assets. Tack on around US$5 million Coeur will pay for a 0.7% net smelter returns (NSR) royalty Paramount held at San Miguel, and the total price for the project eclipses US$160 million.
The immediate draw for Coeur is the addition of high-grade, silver-gold ounces to its near-term production profile at Palmarejo. Paramount’s biggest find at San Miguel has been the Don Ese deposit, which extends across a shared property boundary onto Coeur’s land holdings and is located around 800 metres from the producer’s Guadalupe deposit.
Coeur plans to develop Don Ese by a 1,000-meter decline adjacent to the existing Guadalupe surface infrastructure at an initial cost of roughly US$15 million next year. The company anticipates initial production from Don Ese by the end of 2015, ramping up to 2,500 tons per day by the end of 2017.
“This is a transaction that makes a ton of sense for both companies, and it has been a long time coming. It gives us a high-quality production profile that we expect will yield very strong free cash flow,” Krebs explains during a conference call. “It’s very low risk since it’s in the same area as our current development and mining activities, and we’ll be processing basically the same material.”
“We’re looking at something that has very low capital requirements. It takes advantage of our infrastructure as we transition away from Palmaerejo open-pit and underground. Things like equipment and labour can be transferred over to these new sources of mill feed,” he adds.
Don Ese currently hosts around 3.4 million measured-and-indicated tonnes grading 177 grams silver per tonne and 2.32 grams gold per tonne. Meanwhile, Guadalupe’s underground reserves total roughly 5.4 million tonnes averaging 111 grams silver and 1.59 grams gold. Coeur anticipates recovery rates of approximately 80% for silver and 95% for gold at Don Ese.
Assuming utilization of excess capacity at Palmarejo’s 6,000-tonnes-per-day processing facility, Coeur anticipates the combined Don Ese and Guadalupe deposits could produce an average of roughly 6 million oz. of silver and 110,000 oz. of gold annually over the next eight years. Comparably, 2014 production at Palmarejo is expected to be 6.7 million to 7.2 million oz. of silver and 87,000 oz. to 95,000 oz. of gold.
“Permitting is another synergistic area where we can take advantage of what we already have in place at Palmarejo. We’ve developing over to the property boundary, and no new permits will be needed given that we’d be developing from underground and not anticipating any new surface disturbances,” Krebs continues. “The ejido we’ll be dealing with is that same one that’s on our ‘side of the fence’ so to speak. Looking at the deal in comparison to a stand-alone acquisition activity, and we’re much more capable of mitigating the risks.”
Though Don Ese will be Coeur’s near-term focus, Krebs points out that the company will also be acquiring the greater 1,210 sq. km San Miguel property package that surrounds the Palmarejo complex. He says the project hold “a significant amount” of additional silver and gold resources in the form of seven other deposits that “provide lot of optionality on any future increases in metal prices.”
San Miguel’s global measured-and-indicated resources total 43 million tonnes grading 46 grams silver and 0.68 gram gold. Coeur has identified additional exploration potential on other high-grade structures near the shared property boundary in addition to several lower grade deposits.
“Don Ese actually goes over the shared property boundary onto our ground where it goes by the name of Independencia. As our exploration efforts at Palmajero have transitioned towards higher-grade, underground targets it has been a real focus of ours,” Krebs explains. “We plan to tunnel over to the combined deposit over the next twelve months. We’re confident that Palmerjo will be positioned to remain one of the largest silver and gold mines in Mexico with a compelling future ahead of it.”
One collateral upside for Coeur is the limiting of exposure to a royalty stream the company owes to Franco-Nevada (TSX: FNV; NYSE: FNV).
During the second quarter the companies agree to restructure the stream to “enhance the development economics” at Guadalupe. Franco agree to restructure the cost of delivery from US$408 per oz. gold to US$800 per oz. gold once the minimum 400,000 oz. has been delivered under the existing agreement. The royalty company also contributed US$22 million to Guadalupe’s development.
Following the acquisition of Paramount, Coeur estimates that 50% of Palmarejo’s mill feed will eventually come from Don Ese, which is outside of Franco’s streaming deal.
BMO Capital Markets analyst Andrew Kaip maintains a “stock underperform” rating on Coeur along with a US$4 per share price target.
According to BMO Research: “While positive to corporate net present value (NPV), the transaction implies a 1.5x multiple to acquire [Paramount] versus recent transactions that have valued assets at 1.0x NPV at 10% and spot metal prices. The [deal] looks to be expensive relative to recent transactions, but Coeur has used its premium to pay up for [the asset].”
Coeur has traded within a 52-week window of US$3.37 and US$12.06, and closed up 11%, or US49¢, following the Paramount news en route to a US$4.83 per share close at the time of writing. The company reported cash and equivalents of US$295 million at the end of the third quarter, and maintains 103 million shares outstanding for a US$481 million press time market capitalization.