Merger and Acquisition Opportunities In The Metals Resource Stocks – Part 5
Excelsior Prosperity w/ Shad Marquitz (10/05/2024)
On Friday, when the news dropped about SilverCrest Metals Inc. (TSX: SIL) (NYSE American: SILV) getting bought out by Coeur Mining, Inc. (NYSE: CDE), my jaw dropped… Wow!
It had crossed many people’s minds that SilverCrest could plow all the revenues it was generating into being on the other side of that equation; as the entity that would be doing the acquiring of other junior silver projects. It has gone from predator to prey.
Sure, I was cognizant that SilverCrest could itself be on the takeover menu as an acquisition target in its own right. After all, it is a high-grade and high-margin producer, with no debt, a solid balance sheet, churning out the revenues and free cashflow, with exploration upside, and upside leverage to rising metals prices.
Having said that… if they were to become incorporated into a larger company, then I was really hoping that SilverCrest wouldn't get taken over until much later in this precious metal’s bull run… once we saw silver eclipse the $35-$40+ range. So, this transaction came a bit too soon in this PM bull cycle for me to be elated about it.
As a current shareholder of both SilverCrest Metals and Coeur Mining, this is a real bittersweet moment for me considering the current precious metals backdrop. Yes, the new combined pro-forma company will absolutely be a force to be reckoned with, but there was still a lot of value yet to unlock in Silvercrest before I wanted to see it scooped up by another company. So, that’s a bit disappointing…
For example, many investors (me included) wanted to see what they’d tap into once they started doing more systematic exploration across their mostly unexplored land package this year. It’s a shame to see SilverCrest get picked off here before any of that potential value creation has had time to play out. The company had not really been doing much exploration the last few years, because they were laser-focused with the development work, construction of the mine, and ramp up into commercial production (and rightly so). However, now they had the opportunity to grow organically by plowing part of the incoming revenues into new drill campaigns. At least Coeur has a history of investing in exploration.
Additionally, I really respected the vocal position that SilverCrest has been championing within the PM community, where they have been stacking physical silver and gold on their balance sheet (versus holding so much fiat funny money). They’ve been encouraging other precious metals producers to take the same approach. If more PM producers would take a page from their book, then it would help hold back some available metals supply from the market (helping prices rise). Also, holding physical silver and gold could be a potential magnifier to the cash assets held if the metals prices keep appreciating. Personally, I wanted to see how their metals horde would appreciate over the next couple of years, as I anticipate higher prices for the PMs.
Silvercrest has also been an incredibly well-run company. They came in on time and under budget on the development of the Las Chispas Mine, then paid off their debt in less than a year, and now are racking up the revenues, and stacking up the physical silver and gold on their balance sheet. They played their hand very well.
Unfortunately, SilverCrest is getting nabbed here before the real fireworks have even begun in the silver stocks for this unfolding PM cycle.. The (SILV) shareprice could have gone up much higher, as sector sentiment is improving and margins and revenues keep expanding, but alas, those benefits will now go to Coeur Mining. At least the company has been on a good run in share price appreciation this year prior to this acquisition news being announced; so we got a takeover instead of a takeunder.
Regardless of whether someone reading is positioned in both companies or either of the companies, it’s still important to review this deal, as this is a very significant transaction for the silver producers in general. We’ve already seen another key high-grade single-asset silver producer taken off the playing board exactly a month ago, when on Sept 5th First Majestic Silver Corp. (NYSE: AG) (TSX: AG) announced that they are going to acquire Gatos Silver (TSX: GATO) (NYSE: GATO). We discussed that transaction in the first part of the prior article in this series in [Part 4]:
Merger and Acquisition Opportunities In The Metals Resource Stocks – Part 4
https://excelsiorprosperity.substack.com/p/merger-and-acquisition-opportunities-75f
So now with SilverCrest taken off the playing board too, that really only leaves MAG Silver Corp. (TSX / NYSE American: MAG) and Aya Gold & Silver Inc. (TSX: AYA; OTCQX: AYASF) as the last remaining high-grade, high-margin single-asset silver producers. So, in the spirit of speculating on M&A transactions, it would not be a surprise to see the larger to mid-tier producers go after those 2 companies in the not-so-distant future. After those 2 are acquired, the remaining producers are typically smaller higher-cost, lower-grade, multi-mine silver producers like Santacruz Silver, Americas Gold & Silver, Guanajuato Silver, Impact Silver, Andean Precious Metals, and Silver X.
This also puts investors looking for leverage in the PM sector at a slight disadvantage, as we have lost some of the best-in-class high-torque producers now that Gatos Silver and SilverCrest Metals have been plucked from the field of choices. Granted, their production profiles should be a big boost to both First Majestic and Coeur Mining respectively, so maybe those new combined companies will still see some of that torque. The field of silver producers was already a tiny sector, and now it just got compressed even further.
For this reason, I would not be surprised to see a counter-offer come in for (SILV) by another large to mid-tier producer. It has truly been one of the standouts in the sector for many years strictly because of the high-grade nature of the deposit, low costs, and high margins. I’ve been following it since day 1, because I was invested in Silvercrest Mining (1.0), that was taken over by First Majestic back in July of 2015, when Silvercrest Metals (2.0) was then spun out several months later.
Ever since they’ve worked to explore and drill Las Chispas, it showed more and more promise until it became an undeniable advanced exploration success, then a developmental project of significance, and now today a top quartile underground producing silver and gold mine. It’s made an epic run through the full spectrum.
Just have a look at the chart below of SilverCrest Metals (SILV) showing how far it has run from it’s humble beginnings at $0.11, dipping down to $0.08 in the Jan 2016 sector Major Low, and then the ascent up to $12.88 at the peak of the #SilverSqeeze in early 2021. These are the kinds of trajectories possible in the resource sector, and we all love the potential for outsized gains junior mining stocks can occasionally offer.
I’ve probably traded around a core position in SILV (early in the journey it was an OTC stock), about 40-50 times over the last 9 years, occasionally jumping completely out and then back into the stock. However, I’m an active trader and rebalance my portfolio every week or two making slight adjustments to a handful of positions. For example, with SilverCrest, I’ve normally averaged around a 3%-4% weighting in it over the years, so if it dipped down to a 1-2% position I’d add, and if it ratcheted up to a 5-6% position, then I’d trim it back down.
Overall, SILV has been a huge multi-bagger win for my portfolio when all those trades are added together over the years. For my final trade in the stock, it looks like a 64% gain as of close of business this Friday at $10.13.
I’m going to hold on to see about a competing bid coming in for this jewel of a mining asset as Las Chispas. If a meaningful arbitrage between SilverCrest and Coeur Mining forms, then I also may sell more (CDE) to buy more (SILJ), similar to what I’ve been doing between Integra Resources and Florida Canyon Gold during their process of merging.
Alright, with all of that said, let’s have a look at the terms for this acquisition and company combination, and dive into the projections for the pro-forma company.
“Under the terms of the Agreement, SilverCrest shareholders will receive 1.6022 Coeur common shares for each SilverCrest common share. The Exchange Ratio implies consideration of $11.34 per SilverCrest common share, based on the closing price of Coeur common shares on October 3, 2024. This represents an 18% premium based on 20-day volume-weighted average prices of Coeur and SilverCrest each as at October 3, 2024, respectively, and a 22% premium to the October 3, 2024 closing price of SilverCrest. Upon completion of the Transaction, existing Coeur stockholders and SilverCrest shareholders will own approximately 63% and 37% of the outstanding common stock of the combined company, respectively.”
I will say that pro-forma production profile of 21 million ounces of silver and 432,000 ounce of gold production, that Coeur Mining will have moving forward, is quite impressive. This combined company is going to be a real PM player now.
As is typical in these mergers of companies, there is a presentation out highlighting the advantages to both groups of shareholders. Again, it appears that the new combined company is going to be a precious metals juggernaut moving forward, but I feel the Coeur shareholders are getting the better end of this transaction overall.
Las Chispas is a Tier 1 asset, and really beefs up the (CDE) portfolio. As a Coeur shareholder, I’m thrilled, but as a Silvercrest Shareholder, I’m a little disappointed in the paltry 18% premium (and the stock was only up 10% today, due to Coeur falling by nearly the same amount during the day).
It reminds me of the also disappointing 16% premium offered to Gatos Silver by First Majestic. What is up with these really low takeover premiums in the silver space lately?
In contrast, Osisko Mining is being taken over by Gold Fields for a 55% premium!
Why are these management teams at Gatos or Silvercrest so willing to accept the lowball offers?
Why in the world are the other larger producers sitting by and watching the best dates get invited to the prom without making their own offers?
Do I hear a 30% premium counter-offer for SilverCrest anyone?
Of course, there is more to it than just the takeover premium, as there is the valuation rerating and trading multiple that can be applied to the new larger pro-forma company, and the diversification of assets, and more trading liquidity and company visibility to a larger swath of investors. I’ll likely keep a healthy CDE position.
Let’s have a look at the benefits the 2 companies outline for this transaction.
This transaction also shows Coeur quite comfortable expanding their presence in Mexico, at a time when many investors are still tenuous about the jurisdiction. They mention in the slide above that this transaction: “Leverages Coeur’s long track record of successfully operating the Palmarejo underground silver and gold mine in Chihuahua, Mexico.”
That is an interesting statement to make showing an encouraging outlook on being an operator in Mexico, and also because one of the market positioning points that Coeur Mining has had is its focus on North American mines, with the largest concentration being in the US. Yes, they had Canadian and Mexican exposure, but it was one of the few producers, other than Hecla Mining (NYSE: HL) that had a real silver and gold focus domestically in the US, and mostly outside of Mexico.
I feel like CDE gets a hard rap, and they have had some operation challenges the last few years, including a fire at one of the mines that wasn’t really their fault, but it’s still a pretty high-torque mid-tier silver-gold producer.
They have been working on their Rochester Expansion for years now and did a lot of work in late 2022 on improving their crushing of ore, and then in 2023 on the leach pad and Merill Crowe plant, and just launched the new 3-stage circuit this year and got commercial production going for the next phase of operations just in the last couple months. Rochester is going to be a significant mine contributing in their portfolio as well.
With Wharf they’re going to run out of ore at one point, but I believe they’ll eventually take over Dakota Gold (NYSE American: DC) for their Maitland Gold and and Richmond Hill projects and then replenish the mine feed stock for Wharf for many years to come. So there’s another future M&A deal percolating out there.
If they do end up keeping Silvercrest, without a competing offer coming in from another big-boy producer, then I could see a larger company eventually making a move on Coeur Ming to pick up their portfolio that would then also include Las Chispas.
Personally, I’ve done well trading around a core position in Coeur Mining for many many years now, and it offers quite a bit of torque for a mid-tier PM producer during bullish rally periods. Now through this acquisition it is beefing up into a much larger mid-tier producer or smaller senior producer.
There may be some investors focused on North American that don’t like this move to expand the exposure to Mexico a such an uncertain time in that jurisdiction. While some existing Coeur shareholders may not like the bold move to expand south of the border, it is hard to avoid the reality that some of the best silver assets are in Mexico, and Las Chispas is absolutely a crown jewel asset to have picked up in their portfolio of projects.
The markets seemed more animated by the regime change in Mexico this late week, due to the administration switch-over on October 1st, with new President, Claudia Sheinbaum taking office. We witnessed a bump higher in many Silver stocks since the middle of the week. I had an interesting chat about this change in the political administration in Mexico, at the KE Report with Glenn Jessome, President and CEO of Silver Tiger Metals (TSX.V:SLVR – OTCQX:SLVTF).
Bottom line: I believe Coeur Mining is being opportunistic by seizing one of the better underground silver gold mines in Mexico by scooping up the Las Chispas Mine and acquiring SilverCrest Metals; before the silver stocks really start their big move higher. This is a huge win longer-term for (CDE) shareholders, if the company can see this transaction close in their favor without a larger company coming in to make a counter-offer for the asset. It’s a monumental win for Coeur Mining if they actually get serious about exploration across the district scale land package held by SilverCrest.
There was a really good interview conducted by Kitco’s Paul Harris with Coeur Mining’s President and CEO, Mitchell Krebs, on this business combination with SilverCrest Metals, that aired on October 8th. While this interview was conducted after this article was published, I still wanted to add it in here for people that come across this article moving forward. Mitchell does a good job of explaining how the higher grades and lower costs of Las Chispas will impact the overall CDE global costs and margins, as well as bring in revenues to help them invest in some of their other projects.
More silver consolidation to come says Krebs
We’ll keep following along with the M&A deals in this sector, and digging in to the companies that could be next on the acquisition menu in this series.
Thanks for reading and may you have prosperity in your trading and in life!
- Shad