Coeur Secures San Miguel, Paramount to Spin Off Nevada Assets

Not surprisingly, this month’s rumors that Coeur Mining (NYSE:CDE) was planning to acquire Paramount Gold and Silver (TSX:PZG) turned out to be true. The companies announced Wednesday morning that Coeur will acquire all outstanding shares of Paramount in an all-stock deal valued at $146 million, securing Paramount’s San Miguel project and the Don Ese deposit.

San Miguel is right next to Coeur’s silver-gold Palmarejo project, where some mining operations are expected to wind down over the next two years. The miner has accelerated development of its Guadalupe deposit 6 kilometers south of the main mine, and is planning to quickly integrate San Miguel into those operations.

“[It’s] a significant new ore source for us to mine and process back at our Palmarejo processing facility,” said Coeur CEO Mitchell J. Krebs. To be sure, the deal to secure San Miguel has seemed inevitable for quite some time.

“We first set foot on San Miguel in 2007, so we’ve had a dialogue with them for many years,” said Krebs. “It’s always been a forgone conclusion that ultimately their San Miguel project would become a part of what we have been doing at Palmarejo.”

Chris Crupi, CEO of Paramount Gold and Silver, agreed with that sentiment. He noted that partnering up with Coeur will allow him to avoid diluting Paramount shareholders by going out to raise $70 million to develop San Miguel independently. With the company completing a preliminary economic assessment for San Miguel in August and with the plant at Palmarejo ready to move towards more high-grade ore, the timing was finally right for the deal.

Crupi also noted that the deal gets San Miguel to production faster, and that Paramount shareholders will still have exposure to the project since they’ll get 0.2016 Coeur shares per Paramount share to end up owning about 24 percent of Coeur.

Furthermore, Coeur won’t be acquiring all of Paramount’s assets. Immediately before the merger Paramount will spin off its non-Mexican assets into a Paramount subsidiary that currently holds the company’s Nevada assets, including its 5.5-million-ounce Sleeper gold project. The new publicly traded company, expected to be called Paramount Nevada Gold, will get $10 million in cash from Coeur, while Coeur will get a 4.9-percent common interest in the company.

It’s a deal that Rob Chang of Cantor Fitzgerald believes Paramount shareholders should take. The analyst said that while the value of the deal is a bit lower relative to Cantor’s net asset value for Paramount, “the market premium is still quite high,” especially considering Paramount’s share price prior to a Reuters article released ahead of the agreement.

“On top of that, they’re getting a significant portion of Coeur, and Coeur is probably going to go higher because the overhang of Palmarejo being a underutilized operation will be removed with this acquisition,” he added. “It’s a win-win for everyone.”

For his part, Crupi seems excited about Paramount’s new direction, and pointed out that those who are shareholders of the company “before the record date goes final” will get a “bonus equity” in the spin-off company. It seems that the market agrees with him, as shares of the company gained nearly 30 percent on the Toronto Stock Exchange to close at $1.01. As for what’s next, Crupi is hoping for a repeat performance in Nevada.

“I would like to do the same thing that I did with the Mexican project and sell [Sleeper] to another group and make my shareholders a whole lot more money,” he said.

The deal is expected to close in the second quarter of 2015.

Securities Disclosure: I, Teresa Matich, hold no direct investment interest in any company mentioned in this article.