Only a few days ago we wrote about the proposed takeover of Orko Silver (OKOFF.PK) by First Majestic Silver (AG) which was scheduled to close at the end of February. Yesterday another unexpected chapter was added to the story. Coeur d'Alene Mines (CDE) submitted an alternative proposal to acquire Orko Silver and the bid was deemed to constitute a Superior Proposal by the Orko Silver board. CDE has since posted a presentation outlining the details of their offer and have performed a webcast with further information. First Majestic Silver now has five business days to amend their offer in order to avoid termination of their arrangement agreement with Orko Silver.
For those unfamiliar with the situation, here is a quick recap. Orko Silver's key asset is the La Preciosa deposit, one of the largest undeveloped known silver deposits. First Majestic Silver had made a takeover offer in December 2012 that was accepted by Orko Silver and was due to close at the end of February.
CDE's counter offer consists of a mix of cash, CDE shares and CDE warrants for each Orko Silver share. However, the total cash component of the mix is capped at $100M and the maximum number of new CDE shares to be issued is 11.6M. This is where the offer becomes a bit complicated. CDE lists three choices for Orko Silver shareholders.
- There is the 'all-shares' choice whereby each Orko Silver share is exchanged for 0.1118 CDE shares;
- then there is the 'all-cash' choice whereby each Orko Silver share is priced at $2.60;
- and then there is the 'mixed' choice whereby each Orko Silver share is exchanged for 0.0815 CDE shares and $0.70 in cash.
If either the cash cap or the share issue cap is reached, the available cash and shares are distributed pro-ration. If all shareholders choose either the 'all-cash' or the 'all shares' option, then everyone gets the 'mixed' option. On top of this, 0.01118 CDE warrants are issued for every Orko Silver share.
CDE claims, that the offer is based on a valuation of $2.70 per Orko Silver share. We would like to investigate this claim.
Let us get the warrants out of the way first. Each whole warrant will be exercisable for four years at a strike price of $30.00. The value of these warrants per Orko Silver share is assumed to be $0.1 in CDE's valuation. Considering the current CDE share price of $21.06, we conservatively assume that Orko Silver shareholders will not assign much value to these warrants, especially since it is still unclear whether these warrants can be traded.
The share component of the offer is based on the CDE share price prior to publication of the offer. Since then, the share price has fallen by more than 10% and it can be assumed that this slide will go a bit further before the share price consolidates again, especially since technical chart support has been broken in the process. In order to get a rough range of numbers, we assumed a consolidated CDE share price range of $19.50 as a lower bound and $21.50 as an upper bound. This would value each Orko share at somewhere between $2.18 and $2.40 using the 'all-shares' option (discounting the warrants). It can therefore be assumed that Orko Silver shareholders will overwhelmingly prefer the 'all cash' option, triggering the cash cap described above. In consequence, most shares will be exchanged using the 'mixed' option. Using our assumed CDE share price range leads to a valuation of somewhere between $2.29 and $2.45 per Orko share. This is a fair way below the $2.70 that CDE claim in their announcement.
First Majestic Silver's share price also dropped by about 10% in the aftermath of the takeover announcement in December, and has taken a slide since then. First Majestic Silver shares closed at $18.12 yesterday. Using this most current share price, each Orko Silver share would be worth $2.18 according to First Majestic Silver's offer. This is not too far off the mark set by CDE. Using First Majestic Silver's share price of $22.92 immediately prior to the takeover offer results in a valuation of $2.76.
This leads to another inconsistency in the CDE announcement and presentation. When comparing the two offers, CDE generously use the share price before the offer for valuations regarding their own bid. On the other hand they use First Majestic Silver's share price after the invariable drop and fall due to publication of the offer for comparisons. This, in our opinion, is like comparing apples and oranges.
However, where does this new development leave First Majestic Silver? They have five working days to increase their bid and try to beat CDE. We strongly believe that such an increase would have to consist of a cash payment on top of the existing script offer in order to avoid further dilution and associated share price erosion. We also believe that First Majestic's bid is currently less than $0.30 per share behind CDE's bid, and they have $70M in the bank.
Or will they decide to walk away from the deal and try their luck elsewhere?
Disclosure: I am long AG.