Decision time for First Majestic in Orko bidding war

First Majestic and Coeur d'Alene are duking it out over Orko's La Preciosa deposit in Mexico - the next move must come by the end of Tuesday.

Author: Kip Keen
Posted: Monday , 18 Feb 2013


For First Majestic Silver, a takeover deadline fast approaches. It must decide whether to best Coeur d’Alene Mines (NYSE: CDE; TSX: CDM) in a bidding war for Orko Silver by tomorrow night - 11:59 PM, Pacific time, to be precise.

At stake for these two leading silver producers is one of the world’s largest, undeveloped, primary silver deposits, La Preciosa, and what could, for either First Majestic or Coeur d’Alene, become a top silver producing asset in Mexico.

On the face of it there is no obvious front runner.

Coeur d’Alene is the larger silver producer of the two, churning out close to 20 million ounces silver a year or about double First Majestic’s annual production.

But on most other metrics the two producers are a closer match.

Both have a marketcap around $2 billion. Thus, in promising new shares for Orko, First Majestic and Coeur d’Alene have a similar base to work with (that is, to potentially dilute).

Both have a history of operations in Mexico. Coeur d’Alene operates the Palmarejo silver mine in Chiahuahua state, which produces some 9 million ounces silver a year, making it one of the world’s top five primary silver mines, according to Coeur d’Alene.

First Majestic, meantime, has all its operations in Mexico and, is headquartered in Durango, the same state where La Preciosa is located.

Then there is cash, which may prove a particularly important consideration in a successful bid for Orko. Both have about the same amount, although here Coeur appears to have a modest edge as noted by one analyst who covers First Majestic in an email to Mineweb on Monday.

At the end of the last quarter Coeur d’Alene reported $144 million in cash versus First Majestic’s C$73 million.

But First Majestic undoubtedly has more than that as a couple days after bidding for Orko back in December, and after it reported its latest financials, it sold the rights to some of its future base metal production for $50 million, giving it something closer to C$123 million in cash.

And cash on offer - not Orko’s valuation - has been the major difference between First Majestic and Coeur d’Alene bids so far.

Indeed at the time both of these silver producers made their bids - First Majestic in December, Coeur d’Alene in mid-February - their respective offers valued Orko almost identically at just under C$400 million, including warrants.

In First Majestic’s case, this value has changed significantly as its shareprice has slid about 20 percent since December, heavily affecting its share dominant bid for Orko.

Thus when Coeur d’Alene made its bid a couple months after First Majestic, with up to C$100 million cash on offer versus a negligible amount of cash in First Majestic’s case, Orko’s board noted that it was a 20 percent premium to First Majestic’s proposal.

As for their respective appetites for Orko, both silver producers obviously want to grow, and both obviously like what they see in Orko’s La Preciosa deposit. There is a lot of silver here - 99 million ounces @ 104 g/t, indicated, and 140 million ounces @ 87 g/t, inferred - and in a country known for silver mines and favoured by both First Majestic and Coeur d’Alene.

So now the ball is in First Majestic’s court and with a day or so left to make a decision, it remains unclear what it will decide.

“It’s tough to say what First Majestic will do,” an analyst told Mineweb on Monday.

To get Orko, is First Majestic willing to part with a significant portion of its cash stores? or incur greater dilution than so far envisioned?

Tomorrow will tell.