Stillwater buying Marathon PGM for US$118M

VANCOUVER — Stillwater Mining (SWC-N), the only significant producer of platinum and palladium in the United States, is paying an 89% premium to take over Marathon PGM (MAR-T) and get its hands on Marathon’s large, feasibility stage platinum-palladium-copper project in northern Ontario.

The US$118-million deal is an even split between cash and shares — Marathon investors will receive $1.775 and 0.112 Stillwater shares for each Marathon share held. The transaction values Marathon’s shares at $3.55 apiece, an 89% premium over the company’s closing price on Sept. 3, the day before the deal was announced. The deal will cost Stillwater 3.9 million shares and roughly $62 million.

And Marathon will still get to live on, in a sense, because the company’s gold assets will be spun out into a new company prior to the takeover. Marathon Gold, as it will be named, will debut with $6 million in cash, ready to focus on the promising Valentine Lake project in central Newfoundland. The current directors of Marathon PGM will head up Marathon Gold.

To provide Marathon with liquidity until the deal closes, Stillwater has agreed to purchase $3-million worth of Marathon shares, with the price to be set as the five-day volume-weighted average price of Marathon shares following the announcement, less a 15% discount. The private placement will also give Stillwater a stake in the new Marathon, as Marathon Gold shares will be distributed to shareholders after the placement. Stillwater will also have the option to acquire up to 15% of Marathon Gold in its first financing.

The prize in the deal is Marathon’s platinum group metals (PGM) and copper project, which is known simply as the Marathon PGM-Cu project. Home to reserves of 91.5 million tonnes grading 0.83 gram palladium per tonne, 0.24 gram platinum per tonne, 0.25% copper, 0.09 gram gold per tonne, and 1.44 grams silver per tonne, the property is currently going through the environmental assessment process. A feasibility study in late 2009 predicted a 17% after-tax internal rate of return and a $251-million net present value, using a 6% discount rate. The copper credits should take the cash cost to produce an ounce of PGM-gold to negative US$14.40.

The boards of both companies have approved the deal. Stillwater’s chairman and CEO Frank McAllister describes the Marathon PGMCu project as “one of the few near-t erm PGM development opportunities on this continent” and says the deal “solidifies our position as North America’s leading PGM producer.”

Stillwater aims to get the Marathon project into production in three years and intends to fund the $495-million development cost with its current cash balances and future cash flows. The company will also work to expand the resource, which remains open to the west and at depth. In addition the Geordie Lake project, 14 km to the west, hosts a PGM-copper deposit that could potentially be incorporated into a Marathon mine plan. An updated resource estimate for Geordie recently pegged resources there at 32 million measured and indicated tonnes grading 0.61 gram palladium, 0.04 gram platinum, and 0.37% copper plus 8 million inferred tonnes of similar grade.

Marathon’s share price responded to the takeover premium, jumping up 94% or $1.77 in a day to reach $3.65. A year ago, its shares traded as low as 64¢. Marathon has 32 million shares outstanding.