Spin-Off To Unlock Value: Coeur Mining, Inc. To Acquire Paramount Gold And Silver Corp.

| About: Coeur Mining, (CDE)
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Summary

The spin-off will unlock value to shareholders.

The regulatory approvals can take a long time. We can cash in before the transaction is consummated.

The merger makes a lot of sense (a lot of cost synergies).

Introduction

On Dec. 16, 2014, Coeur Mining, Inc. ("Coeur") (NYSE:CDE) entered into an Agreement and a Plan of Merger with Paramount Gold and Silver Corp. ("Paramount") (NYSEMKT:PZG). Under the terms and conditions of the agreement, first Paramount will pay dividends to its stockholders on its mining assets in Nevada (the spin-off) and second will exchange 0.2016 shares of Coeur for each share of Paramount. In addition, the merger has an output date as of September 2015 and is subject to the Mexican antitrust clearance.


Source: Merger Presentation

Merger Review

The transaction is said to be low risk since Coeur and Paramount work with the same materials. In addition, Coeur have been in the area and they are familiar with it. They have been there since 2009 (conference call):

Source: Merger Presentation

The merger is expected to provide significant cost synergies, increase production and cash flow. The new company will take advantage of the excess capacity and other infrastructure (Coeur will transition way from the open pit and from Palmarejo underground). In addition, the transaction is expected to be accretive on 2016.

Source: Merger Presentation

Deal Details

In order to make a quick review of the terms and conditions of the transaction, I have prepared the following table, including: the type of buyer and the type of target with links providing information about them, the conditions, and the potential profit.

Transaction: Coeur Mining, Inc. to Acquire Paramount Gold and Silver Corp.

Buyer

Target

Nationality: U.S.

Private/Public: Public

Market cap/AUM: $512.59 M

Strategic/Financial: Strategic
Dividends: No
Hostile: No

Nationality: U.S.
Price: Spin-off + 0.2016 of CDE

Market cap: $158.62 M

Dividends: No
Sector: Mining

Conditions

Cash/stock: stock

Premium: 35%

Termination fee: Parent 3.16% / Company 3.16%

Shareholder vote: 50%

Antitrust: Mexico

Financing condition: No

Special conditions: No
Go-shop: No

No solicitation of transactions: Yes
Tax Opinions: yes

Press release / SEC Filing

12/8/2014 Spread: 5.30%

12/8/2014 Annualized Spread: 10.61%

Outside date: Sept. 30 2015

Spread Calculation

The press release reads:

"Immediately following the completion of the Spin-Off, the parties will consummate the Merger, pursuant to which each issued and outstanding share of Paramount's common stock will be converted into the right to receive 0.2016 shares of common stock of Coeur."

The following spreadsheet calculates the spread:

Source: Yahoo Finance, Maudes Capital

For example, on Dec. 19, 2014, the payment would be as follows:

Offer = 0.2016 * 5.12 = $1.03

The spread is therefore:

(1.03/1 - 1) * 100 = 3.219%

The payment compared to the stock chart of Paramount is as follows:


Source: Yahoo Finance; Maudes Capital

The chart of the spread over the last days can be seen here:

Source: Yahoo Finance; Maudes Capital

If the merger closes within six months, the spread is the following:

Source: Yahoo Finance; Maudes Capital

Explanation of the spread

Source: Merger Presentation

The first remarkable factor is that the spread includes the spin-off. As the company distributes the new shares of the SpinCo., I expect the spread to diminish. This is actually a good opportunity to earn a good return, since we do not have to wait until the end to cash in.

Apart from this, the Mexican antitrust clearance -- which will take a lot of time -- enlarges the spread. In addition, the target stock price value is under $1 and it is a very small stock, which makes the big merger funds stay away (which makes this merger a good chance for small investors to gain alpha). Finally, the premium is not small (35%).

Investment concept and conclusion

This deal is very interesting because of the spin-off. The corporate transaction will unlock value to shareholders; therefore, buying both groups can return a significant profit. The best strategy in this case is waiting for the spin-off to be distributed. Then, we can exit the deal, since the regulatory approvals will take a lot of time.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.