The Coeur/SilverCrest Merger Has My Blessing

seekingalpha10-07

I have been bullish on Coeur Mining and SilverCrest during 2024 due to their exposure to rising gold and silver prices, on relatively undervalued fundamental ratios.The proposed merger this week makes...

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(NYSE:CDE) and SilverCrest Metals Inc. (NYSE:SILV) in 2024. They are two of my favorite risk-adjusted plays on rising gold/silver prices, with some of the highest exposures to silver. My last article suggesting purchasing CDE was published in January here, at a price of $2.95. I just wrote on the bullish prospects for SILV a few weeks ago here, at a price of $7.39. The announcement this week that the two have agreed to merge in an all-stock transaction was not an event I expected, but the rationale for the marriage is actually very reasonable. In fact, the combination into a new entity fixes both the lagging financial issues at CDE and lack of production growth potential at SILV. It's truly a complimentary and value-adding merger for each set of shareholders, at a fair price. Under the terms of the Agreement, SilverCrest shareholders will receive 1.6022 Coeur common shares for each SilverCrest common share (the “Exchange Ratio”). The Exchange Ratio implies consideration of $11.34 per SilverCrest common share, based on the closing price of Coeur common shares on the New York Stock Exchange (“NYSE”) on October 3, 2024. This represents an 18% premium based on 20-day volume-weighted average prices of Coeur and SilverCrest each as at October 3, 2024 on the NYSE and NYSE American, respectively, and a 22% premium to the October 3, 2024 closing price of SilverCrest on the NYSE American. This implies a total equity value of approximately $1.7 billion based on SilverCrest’s common shares outstanding. Upon completion of the Transaction, existing Coeur stockholders and SilverCrest shareholders will own approximately 63% and 37% of the outstanding common stock of the combined company, respectively. Both have already been strong gainers vs. other investments, particularly gold/silver bullion or the S&P 500 index. We are talking about a rate of advance 3x and 4x the performance of other equities (including most Big Tech names).   YCharts - Coeur & SilverCrest vs. Gold/Silver/S&P 500 ETFs, 1-Year Total ReturnsAdvantages of Merger According to the press release, and corroborating my initial view of the deal, below are the transaction highlights:   Creates a Leading Global Silver Company – Together with Coeur’s growing silver production from its recently expanded Rochester mine in Nevada and its Palmarejo underground mine in northern Mexico, the addition of Las Chispas is expected to generate peer-leading 2025 silver production of approximately 21 million ounces from five North American operations, with approximately 56% of revenue generated from U.S.-based mines and approximately 40% of revenue from silver. In addition to the peer-leading silver production, the combined company is expected to produce approximately 432,000 ounces of gold next year1. Adds World-Class Las Chispas Operation to Coeur’s Portfolio – SilverCrest’s Las Chispas underground mine in Sonora, Mexico is one of the world’s highest-grade, lowest cost, and highest-margin silver and gold operations. Las Chispas commenced production in late 2022 and has delivered strong operational and financial results in 2023, selling approximately 10.25 million silver equivalent ounces at average cash costs of $7.73 per ounce. Significant and Immediate Addition to Coeur’s Rising Free Cash Flow – The combined company is expected to generate approximately $700 million of EBITDA1 and $350 million of free cash flow1 in 2025 at lower overall costs and higher overall margins. Dramatically Accelerates Coeur’s Deleveraging Initiatives – The combination of SilverCrest’s strong balance sheet consisting of total treasury assets of $122 million (cash and equivalents position of $98 million and $24 million of bullion) and no debt and its strong cash flow profile are expected to accelerate Coeur’s debt reduction initiative and result in an immediate 40% expected reduction in Coeur’s leverage ratio upon closing. Bolsters Coeur Board by Adding Two SilverCrest Directors – Upon closing, current SilverCrest Chief Executive Officer and Director, N. Eric Fier and one other current SilverCrest Director will join Coeur’s board of directors, adding extensive and relevant experience to an already distinguished board of directors. Continued Commitment to ESG Leadership – A shared commitment to ESG with a specific focus on water usage, emissions, community and workforce development, and leading governance practices.   After the dust settled for trading in the two stocks on Friday (October 4th, 2024), the combined equity market cap is around $4 billion with $350 million in expected free cash flow for 2025 (8%+ FCF yield). Coeur Mining - Merger Presentation, October 4th, 2024The merged company will have about $430 million in net debt, which could be paid down close to zero over the course of a year or a little longer, depending on new CAPEX initiatives at Coeur's SilverTip resource asset in Canada. Coeur Mining - Merger Presentation, October 4th, 2024So, Wall Street valuations of the two business should be re-rated higher with little net debt soon, substantial cash flows for reinvestment in its existing resource holdings (exploration and drilling), and perhaps minor asset additions in the sector going forward (after the deal closes). Coeur Mining - Merger Presentation, October 4th, 2024I am most excited about Coeur bringing SilverCrest's current CEO Eric Fier and another board member picked by his management team to the new outfit. I grade SILV's management and accomplishments at its Las Chispas operation in Mexico as \"A+\" vs. CDE's rather average decision-making experience of late as \"C\" for a score. In terms of guarding against reckless spending in the future, having new blood in the board room should be a huge advantage for the merged company. Final Thoughts The knock on the top independent silver producer, Pan American Silver Corp. (PAAS) has always been its asset focus largely on South American mines and reserves. So, the new CDE/SILV organization will have an investment safety advantage, with all of its holdings in the U.S., Canada and Mexico (North America). Coeur Mining - Merger Presentation, October 4th, 2024While PAAS has an $8 billion equity market value with $3 billion in estimated sales for 2025, the pro forma CDE/SILV enterprise is projected to have a market cap of $4 billion with $1.6 billion in revenue for 2025. The good news for our merged shareholder base is EBITDA and free cash flow from the two could be close to the same vs. Pan American.   YCharts - Coeur/SilverCrest vs. Pan American Silver, Gross Profit Margins, Since March 2023I would much prefer to own the higher-margin business, with less debt (PAAS holds around $500 million in net debt and $1 billion in net long-term liabilities) and a focus on assets in safer political jurisdictions, when given the choice. My feeling is other precious metals investment professionals will gravitate toward the newly married company with their capital, allowing further price gains for forward-looking investors. For a valuation example, a pro forma EV to EBITDA projection of 6x 2025 results remains a sizable discount to the major gold/silver mining group around 9x (although most large miners have a longer reserve life at current production rates). I know Coeur shareholders don't like the immediate price slide on the news, but it's long-term future is now much brighter as a consequence. I know the SilverCrest ownership base believes the slight premium is not enough. Yet, in the grand scheme of things, the combination should witness a rising valuation on existing production and cash flow estimates, while still providing substantial leverage to rising gold/silver bullion quotes. I see the transaction as a win-win for all stakeholders a year or two out, if you are willing to be patient. I rate both stocks a Buy for new investment, especially if you can purchase a position at lower quotes in the days and weeks ahead. Of course, if you are bearish on precious metals, I understand if you want to pass on owning mining assets in the space. Other risks include management adding to debt with overaggressive acquisitions after this merger is completed early next year (the current closing estimate by management), or any unexpected changes to mining regulations and tax rates in Mexico (Canada and the U.S. for that matter). However, with a personal forecast of US$3000+ gold and $40+ silver per ounce by the first half of 2025, it's really all systems go for investments in the precious metals sector (just like it has been all of 2024). Thanks for reading. Please consider this article a first step in your due diligence process. Consulting with a registered and experienced investment advisor is recommended before making any trade.  Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. 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