Pan American Silver Corp. plans to create a silver-producing powerhouse with the proposed $1.5-billion acquisition of Mexico-focused Minefinders Corp. But investors weren't impressed, driving down Pan American shares 10 per cent on Monday.
Pan American is offering cash or shares – or both – for fellow Vancouver-based company Minefinders, owner of the Dolores silver and gold mine in northern Mexico and the nearby La Bolsa property set to begin production later this year.
The deal will create a combined company valued at $4-billion and double Pan American's silver production to 50 million ounces by 2015, with eight mines across Latin America.
Still, Pan American shareholders showed concern about the dilution of their shares as a result of the transaction.
Minefinders investors have three options: 0.55 of a Pan American share and $1.84 in cash; or 0.6235 of a share; or $15.60 in cash. The $15.60 per-share proposal is a 36 per-cent premium to Minefinders' Friday closing price of $11.50 on the Toronto Stock Exchange.
"There was some expectation of a settle relative to a transaction where you are issuing shares and providing a premium," Pan American chief executive officer Geoff Burns said of the share price drop on Monday.
He also acknowledged that the deal strays from the company's previous organic-growth strategy, but also cited the scarcity of silver assets available around the world to help fuel growth as reason for making the company's largest acquisition to date.
"They just aren't out there," Mr. Burns said. "To us, it really has become a look at assets where we can see additional value to where they currently have been valued in the market. My view is that Minefinders' assets qualify."
Minefinders' shares rose 22 per cent on Monday to close at $14.06, still far off its record of $18.90 in September. The price of silver, alongside other industrial metals, has fallen 36 per cent from a record of just under $50 set last spring amid growing worries over Europe's debt crisis and a slowdown in the robust Chinese economy.
While silver is also valued as a currency, about half of its demand comes from industrial uses, ranging from cars to cellphones, which makes it more volatile as compared to its sister metal.
The two companies have been talking about a possible transaction for year, but talks started to get serious early last year, Mr. Burns said.
Minefinders wasn't in play, its CEO Mark Bailey said Monday, but has entertained interested parties in the past.
"We believe that the addition of the Dolores deposit along with a strong portfolio of exploration and development projects and a dedicated team of employees provides a significant contribution to the future growth and success of Pan American," Mr. Bailey said.
Minefinders produced about 3.6 million ounces of silver last year and about 74,000 ounces of gold, with annual sales of $241-million. It has targeted production will grow 80 per cent by 2015, once the La Bolsa mine starts pumping out metal.
Pan American currently has seven silver mines in Peru, Mexico, Argentina and Bolivia, as well as the Navidad project in Argentina, one of the largest undeveloped silver deposits in the world. It also has a joint venture with Orko Silver Corp. in the La Preciosa silver project in Mexico.
Analysts warned the deal might weigh on Pan American shares, but many saw the move as a necessary for the company to find future production growth.
"We view the transaction somewhat favourably," said Raymond James analyst Brad Humphrey, noting the move fills the near-term production growth gap and diversifies Pan American's assets in Latin America.
"We see this as modestly dilutive," Dahlman Rose & Co. analyst Adam Graf said in a note to clients, " but it should give it additional scale and gold exposure."
The deal is subject to the approval of shareholders from both companies, and if granted is expected to close by the end of March. It also requires regulatory approval from the Mexican government.
Pan American (PAA)
Close: $22.40, down $2.62