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Mike Niehuser
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Mike Niehuser is the founder of Beacon Rock Research, LLC which produces research for an institutional audience and focuses on precious, base and industrial metals, and substitutes, oil and gas, alternative energy, as well as communications and human resources. Mr. Niehuser was nominated to... More
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  • Pan American Silver And Minefinders Corporation Merger A Good Fit 0 comments
    Feb 21, 2012 2:09 PM | about stocks: PAAS, PAAS
    Pan American Silver Corp.'s (NASDAQ:PAAS) acquisition of Minefinders Corporation Ltd. (MFN) is an example of how "fit" is important for companies coming together and increasing shareholder value. In this instance, both companies are already successful in bringing mines into production and have excellent growth profiles. In addition, both companies have strong balance sheets and attractive corporate structures with accomplished management teams. The upside of the proposed combination appears to be expanding and balancing their geographic presence while enhancing and diversifying growth profiles as a precious metal producer.

    Minefinders Expanding Production Growth Profile

    Our familiarity with Minefinders goes back to about 2005. We came to know Minefinders at a point where they had just brought the elements of a mine together and were proving themselves to the market, moving from "minefinders" to "minebuilders." We first visited Minefinders' flagship Dolores project in Chihuahua, Mexico, in February of 2007. At that point, Minefinders' CEO Mark Bailey had been at work on the project for over ten years since making the initial discovery. In addition, Minefinders had just completed upgrading a 92 kilometer road, which included 15 kilometers of new road. It is important to recognize that the Dolores project is located in challenging mountainous terrain in order to fully appreciate the accomplishment of bringing the mine to full commercial production.

    In 2011, Minefinders met a milestone as a precious metal company (silver-gold or gold-silver depending on metal prices), producing 74,193 ounces of gold and 3,572,357 ounces of silver. This surpassed their guidance for the year of 65,000 to 70,000 ounces of gold and 3.3 million to 3.5 million ounces of silver. This is impressive, considering that Minefinders had completed the construction of the Dolores mine and achieved a record level of production while preserving their capital structure with only 81.4 million shares outstanding (96.3 million shares diluted) at the end of 2011. In addition, Minefinders has about $250 million in the bank and minimal debt.

    Minefinders has additional opportunities for organic growth. They are fully funded for identified opportunities and have expanded the management team. The current low-cost heap-leach gold-silver operation at Dolores has always been a starting point to jumpstart production without blowing out Minefinders capital structure. Minefinders has made a decision to pursue a 6,500 to 8,000 tpd mill. The capital cost of which is estimated to range from $163 million to $200 million. The mill will improve recoveries of gold and silver and boost economics by increasing production earlier in the mine life in addition Minefinders has received board approval to commence the development of the resource below the current open pit this has the potential to add to production.

    Minefinders has also decided to spend $40 to $50 million at its La Bolsa project in Mexico, on the Arizona border, to construct a low-cost heap-leach gold operation. We have had the good fortune to visit La Bolsa and are pleased that Minefinders' decided to pursue this gold project. While the addition of a mill at Dolores and a new mine at La Bolsa should make clear a path for organic growth, we believe that Minefinders' La Virginia exploration project has not received much attention in the proposed merger. La Virginia is a "Dolores look-alike" due to its larger scale, but with higher grades of gold and silver and the potential to become an underground mine if results continue to be good. This project is however a grassroots initiative and much work is required before it may go into production.

    Pan American's Production and World Class Development Projects

    We are less intimate with Pan American Silver due to the advanced level of its projects upon our introduction and established investment profile. Pan American Silver also has a proven management team well regarded in the mining industry. They have seven operating silver mines located in Mexico, Peru, Bolivia and Argentina, that produced a total of 80,000 ounces of gold and 22.5 million ounces of silver in 2011.

    Most interesting to us in 2012 is the success of advancing Pan American Silver's two development projects in Argentina. This includes the Calcatreu project with Measured and Indicated resources of 6.6 million ounces of silver and 676,000 ounces of gold. This is important because the local province repealed the ban on the use of cyanide, specifically allowing the project to proceed. Pan American Silver's world-class Navidad silver project is 150 kilometers to the south in Chubut, Argentina. This project has a Measured and Indicated resource of 632.4 million ounces of silver and 2.9 million pounds of lead. Pan American Silver is confident that Navidad will proceed with the repeal of legislation banning open pit mining and the use of cyanide, which was completed in surrounding provinces, and is working to complete a Feasibility study.

    Combined Geographic Diversification of Production and Assets

    Pan American Silver is already an established silver producer, with a substantial growth profile, that pays a dividend. Upon completion of the merger, based on the combined company's silver production in 2011, the distribution of silver production in Mexico, Peru, Argentina and Bolivia, will be 52%, 21%, 15% and 12%, respectively. Combined silver resources will be weighted most heavily to Argentina, then Mexico, then Peru, and then Bolivia at 67%, 23%, 7% and 3%, respectively. From Pan American Silver's perspective, in addition to the additional production from Mexico, they get a nice gold kicker, almost doubling 2011 gold production, and subsequently reducing the overall production cost on a silver basis. In summary, the combined company will have improved geographic diversification and growth profile.

    The combined company should have a market cap of about $4.0 billion, with total annual production of 26.1 million ounces of silver and over 154 thousand ounces of gold. Total silver production may exceed 50 million ounces annually by 2015, by company estimates. The combined company will have cash of about $570 million, with negligible debt, and roughly only 160 million shares outstanding.

    The friendly acquisition has been unanimously approved by the board of directors of both Pan American Silver and Minefinders. Owners of Minefinders' common stock may exchange each share for 0.6235 shares of Pan American stock, 0.55 shares of Pan American stock plus $1.84 in cash, or $15.60 in cash. Stock may be the way to go with Pan American Silver trading near its 52-week low and the newly combined company's positive growth profile. Subject to approvals and conditions, the transaction is scheduled to close in March.

    We think the acquisition is very positive for both shareholders of Pan American Silver and Minefinders. While the acquisition is coincident with the merger between Glencore International PLC and Xstrata PLC, and positive for the mining industry, we don't necessarily believe this is the start of a new wave of acquisitions. On the other hand, the acquisition does improve Pan American Silver's dominance as a silver producer in the Americas. While not likely an immediate candidate for takeover, we suspect that other plumbs in the silver industry interesting to Pan American Silver may include South American Silver Corp. (SOHAF.PK), with one of the world's largest silver deposits in Bolivia, and Aurcana Corporation (OTCQX:AUNFF), which is rapidly advancing to mid-tier producer status with its Shafter silver project in Texas.
    The shares of Pan American Silver provide investors bullish on silver or precious metals exposure and leverage to higher metal prices. For silver bugs, Pan American provides a potentially competitive option for silver leverage in addition to Silver Wheaton (NYSE:SLW). Perhaps most important, for a management team who prided itself on exploration and beating the odds of bringing a discovery to production and beyond, this good fit with Pan American Silver provides long-term shareholders and management of Minefinders even better leverage to higher precious metals prices with potentially less risk.

    Disclosure: I am long PAAS, OTCQX:AUNFF.

    Themes: Gold, silver, Mexico, Peru, Bolivia, Argentina Stocks: PAAS, PAAS
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