DAILY NEWS Jul 28, 2015 3:25 PM - 0 comments

First Majestic pursues SilverCrest in $154M deal

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2015-07-28

First Majestic Silver (TSX: FR; NYSE:AG) is buying SilverCrest Mines (TSX: SVL) in a largely all-share $154 million deal to bulk up its treasury and asset base.

The two companies signed a confidential agreement in early April and have since been completing due diligence and negotiating, arriving to a definitive agreement on July 27.

“We are quite happy to finally get the deal cut,” SilverCrest CEO Scott Drever said on a conference call. The transaction diversifies SilverCrest’s single asset risk profile and provides exposure to First Majestic’s broad portfolio, operational expertise and trading liquidity.

Under the arrangement, SilverCrest shareholders will receive 0.2769 of a First Majestic share plus $0.0001 in cash. This implies a $1.30 value to each SilverCrest share, reflecting a 37% premium to its 30-day volume weighted average price and a 35% premium over its July 24 close. SilverCrest shareholders will hold 21% of First Majestic, once the transaction concludes.

Commenting on the timing of the deal, Eric Fier, SilverCrest’s chief operating officer, said, “You do a good deal in any market. We think this is a good deal to do today, whether it is a bad or a good market.”

The junior’s key asset is the Santa Elena silver-gold mine in Sonora, which is set to become First Majestic’s sixth producing silver mine in Mexico.

“The Santa Elena mine is an important Mexican mine, which we had our eyes on for some time. Its transition from an open pit to an underground [mine] interests us, as we are underground experts. We feel we could bring some synergies to that mine and further improvement,” First Majestic CEO Keith Neumeyer said on the call.

He adds the company would reveal the expected savings at that mine in October, after the transaction closes.

Santa Elena produced a record 1.62 million silver-equivalent oz. in the second quarter, bringing its half-year production to 2.97 million silver-equivalent oz. As a result, SilverCrest increased its annual output guidance from 4 million to 4.4 million silver equivalent oz. to 4.7 million to 5.1 million.

The junior may reduce its full-year all-in sustaining costs, estimated at US$14 to US$15 per silver equivalent oz., when it releases its second quarter financials in August.

The higher production is coming from better silver recoveries than budgeted due to the optimization at the mill, Fier says. Silver recovery in the second quarter was 74%, up from 60% in first quarter.

The mine has a 7-year life based on reserves of 295,000 oz. gold and 18.8 million oz. silver.

Neumeyer, who visited Santa Elena, said he was “very impressed” by the new 3,000 tonne-per-day mill, noting it would become First Majestic’s “most automated mill.”

As part of the deal, SilverCrest shareholders will receive 0.1667 of a share in a spinout entity, led by Fier and other members of SilverCrest’s current board and management team.

SilverCrest will transfer all its exploration properties except for La Joya and $5.25 million to the SpinCo, which will hold six properties, including First Majestic’s Guadalupe project. (First Majestic will retain La Joya, which sits near its La Parrilla mine, but does not have any immediate plans to advance the project.) First Majestic will hold 9.9% of the new company that should appear on the TSX Venture Exchange by year-end.

Raymond James’ analyst Chris Thompson comments the offer provides SilverCrest shareholders with a “healthy premium” and reflects the junior’s near-term value, while providing its management an opportunity to continue exploration via the SpinCo.

He notes the offer is “neutral to slightly accretive” to First Majestic shareholders on a net asset value basis. First Majestic will receive $30 million in cash (plus $15 million in debt) from SilverCrest and will benefit from Santa Elena’s “attractive economics.”

However, Desjardins analyst Michael Parkin views this deal as a very good one for First Majestic. Based on the reported first-quarter 2015 statements, SilverCrest generated US$2.99 per silver equivalent oz. in free cash flow (FCF), compared to First Majestic’s negative US$1.28 per silver equivalent oz., he explains.

“We believe there is potential for an interloper on this deal, given the Santa Elena mine is doing well, and SVL is generating FCF and has a relatively good balance sheet,” Parkin writes, noting there is an $8 million break free payable to First Majestic if another entity acquires SilverCrest.

BMO analyst Andrew Kaip acknowledges that the acquisition will enhance First Majestic’s pro forma cash flow profile and treasury, but argues the transaction is “slightly negative.”

“Using BMO Research metal price assumptions and a 5% discount rate, we calculate a 12% dilutive impact to the company’s net asset value per share.”

On the acquisition news, First Majestic shares declined 14% to close July 27 at $4.02, while SilverCrest rose 11.5% to $1.07 per share.

- See more at: http://www.northernminer.com/news/first-majestic-looks-to-snatch-silvercrest/1003696139/?ref=rss&ctid=1003696139#sthash.EK2QebwD.dpuf