First Majestic bids for Primero in friendly deal

First Majestic Silver’s (TSX: FR; NYSE: AG) proposed acquisition of Primero Mining (TSX: P) and its San Dimas silver-gold mine would bring the number of its operating silver mines in Mexico to seven.

Keith Neumeyer, First Majestic’s president and CEO, said the friendly, all-share deal would take the company’s annual production to 30 million equivalent oz. silver a year, up from the 16.2-million equivalent oz. silver it produced in 2016.

“It’s a pretty big chunky asset,” Neumeyer told analysts and investors on a conference call. “This is very much a world-class asset and Durango is our backyard.”

Under the agreement, First Majestic will issue 6.4 million shares to Primero shareholders in an all-stock deal that comes in at 30¢ a share, or a 200% premium to the weighted average price of Primero’s shares for the 20-day trading period ended Jan. 10.

In addition, First Majestic will issue 21 million shares to Wheaton Precious Metals (NYSE: WPM), making the streaming company its largest shareholder. If the transaction is completed, Wheaton Precious Metals and current Primero shareholders would own 11% and 3% of First Majestic.

As part of the transaction, the streaming agreement between Wheaton Precious Metals and San Dimas would be replaced with a new one.

The San Dimas gold-silver operation 125 northwest of Mazatlán, Mexico. Credit: Primero Mining.

Under the new arrangement, Wheaton Precious Metals would be entitled to receive 25% of the gold production and 25% of the silver production converted to gold at a fixed exchange rate of 70 to 1, in exchange for ongoing payments equal to the lesser of $600 subject to a 1% annual inflation adjustment and the prevailing market price for each gold ounce delivered under the agreement.

The new stream would lower the amount of payable metal compared to the current stream, which First Majestic says would allow for greater free cash flow generation at San Dimas. In addition, basing the new stream on gold-equivalent production could heighten First Majestic’s exposure to silver.

“The stream is being reduced substantially going forward, and upon closing, the stream will apply to 25% of the gold-equivalent ounces, which is a 60% reduction from the current stream, so the mine will have a lot more room for growth,” Neumeyer said. “We all know that the mine needs investment and this is going to really allow us to go back and start reinvesting capital in this operation, and almost in a way rebuild San Dimas to where it was a few years ago.”

The transaction value is an estimated US$320 million, consisting of First Majestic equity to be issued to Primero shareholders and Wheaton Precious Metals, and including repayment of all amounts owing under Primero’s existing revolving credit facility, net of Primero’s cash-on-hand and the expected repayment of Primero’s US$75 million of outstanding convertible debentures. 

Over the last year, Primero has evaluated strategic alternatives to address the company’s debt maturity obligations.

Primero’s interim president and CEO Joseph Conway noted in a press release that the proposed combination with First Majestic will give its shareholders exposure to San Dimas, as well as First Majestic’s capital markets presence, liquidity, balance sheet and its deep experience in Mexico.

It also helps Primero shareholders leverage First Majestic’s long-term good standing with the local unions, community and Mexico’s tax regime. Last year, unionized workers at San Dimas launched a work stoppage on Feb. 15 that wasn’t resolved until April 18.

“One of the most critical things is that First Majestic has got a long and very solid relationship with the union, and that in itself is going to pay off benefits over and above just the financial aspects of the transaction,” Conway said on the conference call.

Employees at San Dimas belong to the National Union of Mine, Metal, Steel and Allied Workers of the Mexican Republic — the same union First Majestic works with at four of its current operations in the country.

An underground safety and coordination meeting in Primero Mining’s San Dimas gold-silver mine, 125 km northeast of Mazatlan, Mexico.  Credit: Primero Mining.

“We take great pride in our relationship with the union,” Neumeyer said in response to a question on the conference call about San Dimas’ history of labour issues. “We have had the odd challenge here and there, but we haven’t had huge challenges with the National Union, we have met with them on the San Dimas acquisition, so we’re comfortable. But the union is the union, and obviously there have been some historic challenges at San Dimas. We hope with our team and our efforts we will be able to get through those challenges.”

On the operations side, Neumeyer noted that “there is some low-hanging fruit we have already identified that we think are going to bring some operational efficiencies into the operation pretty quickly.”

The mining executive pointed out that after acquiring SilverCrest Mining and its Santa Elena silver-gold mine in Sonora state in mid-2015, First Majestic improved recoveries from 65% to over 80% in a couple of quarters, along with other operational efficiencies.

“I’m not saying that we’re going to see those kinds of dramatic improvements at San Dimas,” he said, “but we’re already identifying several areas or things that we’re going to attack pretty early in the ownership of the asset, so we think we can see some pretty good benefits.”

Neumeyer noted that the acquisition is accretive on all metrics.

“On a net asset value basis it’s 3% accretive; on a cash flow basis it’s 22% accretive; on an earnings basis it’s 17% accretive; on a production basis it’s 7% accretive; on a reserve basis it’s 12% accretive; and on a resource base it’s 9% accretive. There’s not a single metric that’s negative, so these are the types of analyses that we do with our banks when we’re looking at acquisitions.”

San Dimas — 125 km northeast of Mazatlan — has been operating for hundreds of years, and in Neumeyer’s estimation, it’s the most important silver-gold mine in Mexico after the Fresnillo mine.

When asked what San Dimas’ growth profile has looked like in recent years, Primero’s Conway said that the mine’s reserves and resources have been “pretty flat the last couple of years, and they’ve actually been fairly stable probably over the last seven or eight years. There have been some increases in certain years, but what’s really been increasing is the capacity of the mill and mine.

“Eight years ago it was about half the level of throughput that it is today, but obviously when you have a high-throughput mine, it requires capital, and if you do a little look at our company, unfortunately we don’t have the financial resources that a company like First Majestic has, and that makes a big difference. So I’m very comfortable that as money is being spent, the ability to increase production, reserves and resources are very real. That’s a real opportunity, but it does require that kind of investment.”

News of the acquisition on Jan. 12 sent Primero’s shares up 125%, or 15¢ to 27¢, with 18.5 million shares changing hands.

On Jan. 15, the company’s shares rose another 6% to 28.5¢ apiece.

For its part, Wheaton Precious Metals’ president and CEO Randy Smallwood said in a news release that with the new stream being linked to a combination of gold and silver production, San Dimas “will continue to deliver significant value” for many years, and cited First Majestic’s “long history of operating in Mexico and an expertise in mining narrow vein underground deposits similar to San Dimas.”