Bank towers are shown from Bay Street in Toronto's financial district, on June 16, 2010.Adrien Veczan/The Canadian Press
Pan American Silver Corp. PAAS-T has reached a friendly arrangement to buy its Canadian competitor MAG Silver Corp. MAG-T in a US$2.1-billion stock-and-cash deal that has not gone down well with shareholders.
Vancouver-based MAG’s sole producing asset is its 44-per-cent share in the Juanicipio silver mine, which is located in Mexico, and majority-owned and operated by Britain-incorporated Fresnillo PLC.
Founded by financier Ross Beaty, Pan American is one of the biggest silver producers on the planet with a portfolio of 10 mines in seven countries. The Vancouver-based company expanded its footprint considerably a few years ago when it bought a suite of South American mines from Canada’s Yamana Gold Inc.
For each share held, MAG investors can choose to receive US$20.54 in cash, 0.755 common shares of Pan American, or a combination of both. The maximum amount of cash that Pan American will pay out is US$500-million with the balance to be paid in stock.
The value of Pan American’s offer was 21 per cent above MAG’s Friday closing price, but it shrunk rapidly once the stocks started trading on Monday. MAG shares climbed by only 6.5 per cent on the Toronto Stock Exchange on Monday, while Pan American’s stock fell by 15.9 per cent.
Michael Siperco, analyst with RBC Dominion Securities, gave the deal a mixed review in a note to clients, calling it “a solid portfolio upgrade” for Pan American, but one that comes with a price.
While buying MAG would significantly increase the company’s near-term silver production, it would dilute its net asset value, earnings before interest, taxes, depreciation and amortization, as well as free cash flow, he added.
Pan American plans to issue roughly 60 million shares to MAG shareholders to pay for the deal.
Adding another layer of uncertainty is a lack of clarity about what Fresnillo thinks of the transaction. Apart from being the 56-per-cent owner of Juanicipio, it also holds a 9-per-cent equity stake in MAG. In a conference call with analysts on Monday, MAG chief executive officer George Paspalas was unable to confirm whether Fresnillo will back the deal.
When asked if Fresnillo had locked up its shares, a common occurrence when a major investor supports a transaction, Mr. Paspalas replied, “Not to my knowledge, no.”
At least two-thirds of votes cast by MAG shareholders in a shareholder meeting must be in favour for the deal to close, so Fresnillo’s equity stake could prove to be a factor in the outcome.
Also floated as a possibility is a takeover of MAG by Fresnillo.
Marina Calero, analyst with RBC Europe Ltd., wrote in a note to clients that the most natural acquirer of MAG is Fresnillo, given that it operates Juanicipio.
In an e-mail to The Globe and Mail, Fresnillo spokesperson Peter Ogden wrote that Fresnillo is evaluating the offer that Pan American has made for MAG. However, he did not answer whether Fresnillo will support the transaction.
Fresnillo has previously tried to buy MAG Silver to gain full control of Juanicipio, but did not succeed. MAG opposed the transaction, launched way back in 2008, dismissing the offer as too low.
Deal-making in the Canadian precious-metals sector has perked up over the past month as both gold and silver perform well. The gold sector in particular has seen several notable transactions, including Barrick Mining Corp. selling its Donlin Gold project for US$1-billion, Lumina Gold Corp. agreeing to a $581-million acquisition, and Mandalay Resources Corp. being bought for US$358-million.
The price of silver is up 11 per cent this year but is still well south of its all-time high.
Gold prices have hit multiple new all-time highs this year.