Scorpio and US Silver & Gold prepare to merge

VANCOUVER — Scorpio Mining (TSX: SPM; US-OTC: SMNPF) and U.S. Silver & Gold (TSX: USA; US-OTC: USGIF) plan to join their businesses in a merger of equals that could create a leading junior silver producer in the Americas.

“We are better together” has been the slogan at Scorpio during the merger talks, chairman Ewan Mason said in a conference call. Both parties say that the combined management team of mining veterans would be a key benefit of the merger.

Scorpio is a Toronto-based silver producer with mining assets in Mexico. Its Nuestra Senora underground mine in Sinaloa state’s Cosala district is 100% owned. El Cajon and San Rafael are two more exploration targets close to Nuestra that Scorpio plans to develop.

The Nuestra Senora processing facility has a 1,500-tonne-per-day capacity, with permitted expansion for 4,000 tonnes per day. The plant produces silver with zinc, lead and copper as by-products.

Scorpio holds 260 sq. km in the Cosala district, with several more exploration targets and opportunity for growth. 

The company also holds two high-grade silver properties in the Parral district of Chihuahua and Durango states.

In the third quarter Nuestra Senora processed 124,391 tonnes with silver recovery at 83% and silver head grades at 84 grams per tonne. Silver output was 277,796 oz., or 573,224 equivalent oz. silver at a cash cost of US$11.69 per oz. silver.

As of December 2012, Nuestra Senora had proven and probable reserves of 533,000 tonnes grading 98.2 grams silver per tonne. Nuestra’s net present value is pegged at $20.5 million, with a 5% discount rate and US$22 per oz. silver price.

Scorpio has been preparing for production at the El Cajon project, which could become a regular source of plant feed next year if its concession boundaries are confirmed. Production would help finance development at the San Rafael site.

U.S. Silver performed pre-merger due diligence and says El Cajon could contribute positive cash flows for three to four years at current silver prices. A 40–50% reduction of total resources was assumed at El Cajon for evaluating the transaction.

Silver and gold miner U.S. Silver is also based in Toronto. The Galena complex is its primary asset in the heart of the Silver Valley mining district in Shoshone County, Idaho. Galena is the second highest producing silver mine in the U.S., with over 250 million oz. produced to date.

The deposit at Galena is high-grade narrow vein with silver, copper and lead. In the third quarter, 39,000 tonnes were processed with a grade of 9.72 oz. silver per tonne or 13.5 oz. silver equivalent per tonne. Galena operates at a capacity of 1,000 tonnes per day.

A total of 358,000 oz. silver and 491,500 equivalent oz. silver was produced at Galena during the third quarter at a cash cost of US$16.43 per oz. silver, and an all-in sustaining cost of US$21.06 per oz.

Scorpio ended the third quarter with $13.9 million in its treasury and over $28 million in working capital, with no debt. At the end of the third quarter U.S. Silver’s cash balance totalled $6–7 million, with $8.5 million in debt.

If the merger is  approved, Darren Blasutti will be president and CEO — the same role he holds at U.S. Silver. 

Mason and Blasutti agree this it is the best way forward for small precious metal companies. They say their companies are trying to get ahead of others similar in size and from the same sector that may also merge. 

“We strongly think we have a competitive advantage in doing it first,” Blasutti said. 

Board members from both sides are in favour of the deal.

Tocqueville Asset Management holds and controls 15.9% of Scorpio’s shares, and Sprott Asset Management holds and controls 1.6% of Scorpio and 19.6% of U.S. Silver’s shares. Both have entered a lock-up agreement and will vote in favour of the deal.

In the transaction, U.S. Silver shareholders would receive 1.68 Scorpio shares per U.S. Silver share, which represents 33¢ a share. Afterwards the company — to be named Scorpio Mining — would have 335 million shares outstanding, with pre-merger Scorpio shareholders owning 59% and former U.S. Silver shareholders with 41%. The combined company would be valued at $65 million. 

Cutting corporate and mine site costs in half is a major objective, which management says could save up to $3 million a year. The team says another $2–3 million could be cut yearly in operational improvements, some of which are already underway.

U.S. Silver management brings cost-cutting experience to the table. In the last two years the team reduced all-in sustaining cash costs by nearly half at its Galena complex, with strict cost controls and improving productivity. 

The merger could allow for annual sustainable production of 5 million equivalent oz. silver from Scorpio’s Cosala operations and U.S. Silver’s Galena complex.

The two have pro forma working capital of $40 million. 

Once merged, the company could appeal to a broader institutional shareholder base and improve share-trading liquidity. The companies would have a stronger operating platform with two producing mines and a third in development.

For approval. U.S. Silver shareholders must vote 66.6% in favour of the merger, and a simple majority vote is needed on the Scorpio side. The deal is expected to close by year-end.