Coeur buys Goldcorp’s Wharf mine for US$105M

VANCOUVER — U.S.-based gold and silver producer Coeur Mining (TSX: CDM; NYSE: CDE) is wading into the acquisition pool for the second time in as many months with an all-cash deal for Goldcorp’s (TSX: G; NYSE: GG) Wharf heap-leach gold-silver mine located near Lead, South Dakota. 

The deal follows  Coeur’s US$161-million purchase of junior Paramount Gold and Silver (TSX: PZG; NYSE-MKT: PZG) and its San Miguel silver-gold discovery in Mexico.

“If we had our choice we probably would have picked a different time considering we’d just pulled off a separate deal, but Paramount is essentially a continuation of what we’re doing already at our Palmarejo operation,” commented Coeur president and CEO Mitchell Krebs during a conference call. 

“We’re leveraging our existing workforce and infrastructure, and that will be unaffected by what we’re doing with Wharf,” Krebs said. “The two transactions do different things for us, and at the corporate level I think all the recent changes have made us more scalable, and now we’re putting that notion to the test.”

Wharf is an open-pit mine in South Dakota’s Black Hills mining district, which is historically the second-largest gold producing district in the U.S. and includes the renowned Homestake mine. 

Wharf has been in production for over 30 years after beginning production with an estimated three-year mine life. Over that time, the operation has cranked out over 2 million oz. gold.

The mine is expected to produce between 85,000 and 90,000 oz. gold in 2015 at all-in sustaining costs ranging from US$800 to US$875 per oz. 

Coeur will acquire a 100% interest in Wharf for US$105 million in cash.

“It’s a pretty simple and efficient operation that has been in production for an extended period of time, and our rationale for the acquisition is quite straightforward. Wharf will add immediate free cash flow and growth from a second-quartile cost asset in a safe jurisdiction,” Krebs said. “It’s the kind of mine we know how to operate, since we’ve been doing it at our Rochester mine for the past 25 years. We believe the purchase price will result in a strong rate of return based on the current gold price.”

Wharf’s cost outlook is below Coeur’s historical and projected cost profile for its existing gold production. The operation is expected to boost the company’s total gold output by between 25% and 30%.

Although financing is not a condition to closing, Coeur has received term sheets for a senior secured line of credit for up to half of the purchase price in order to maintain its financial flexibility.

As of December 2013, Wharf’s proven and probable reserves stood at 21 million tonnes grading 0.68 gram gold per tonne and 2.5 grams silver per tonne for 560,000 contained oz. gold and 2.1 million contained oz. silver. 

Coeur says the acquisition will add 24% to its total gold reserves, and that the mine could operate another six years.

Goldcorp president and CEO Charles Jeannes commented that the Wharf sale shows the company’s “commitment to focusing on the core assets within [its] portfolio,” and that he believes the deal will “unlock additional value for shareholders.”

Holding the distinction of being one of Goldcorp’s longest-held assets, Wharf is also its last remaining U.S. operating asset, representing 2% of its total production.

Coeur estimates that Wharf will increase its earnings before interest, taxes, depreciation and amortization by over 30%, and boost free cash flows. The company said it intends to leverage its 25-year open-pit, heap-leach experience and benefit from “a strong social license, which has provided substantial benefits to the operation.” The mine’s local workforce totals 190 people.

BMO Capital Markets analyst Andrew Kaip calls the deal “potentially positive” for Coeur, and notes that “the acquisition appears to leverage [the company’s] open-pit and heap-leach expertise and reduces its overall geopolitical risk profile. Due to [Coeur’s] significant tax loss provisions in the U.S., the acquisition of Wharf reflects a meaningfully tax efficient transaction.” 

Kaip has a stock “underperform” rating on the company, along with a US$4 per share price target.

Coeur shares have traded within a 52-week range of US$3.37 and US$12.06, and dropped 6%, or 36¢, after news of the Wharf acquisition en route to a US$5.74-per-share close at press time. The company reported cash and equivalents of US$295 million at the end of the third quarter, and has 103 million shares outstanding for a $632-million market capitalization.