ST. LOUIS (MineFund.com) -- American platinum group metals producer and recycler, Stillwater Mining [SWC], is taking advantage of the credit crisis induced crack in Marathon PGM's value to take over the Canadian company which is planning to mine a copper-palladium project in Northwest Ontario.
In the friendly arrangement, Stillwater came out with an equal offer of stock and cash amounting to US$118 million for Marathon, or C$3.56 per share, or an effective C$3.65 including a supplementary financing agreement. That almost doubled the value and offers an annualized rate of return of 1,232% presuming the deal closes in 90 days.
Those able to pick up the stock when it was staggering below C$0.50 are surely unlikely to reap another return on investment quite like this. Of course, it's only a great deal if you didn't buy your shares in 2007-2008 when Marathon traded above C$5 per share.
Stillwater will pay C$1.775 cash in cash plus 1.12 Stillwater common shares for each 100 outstanding Marathon share, the companies said on Tuesday. That will require Stillwater to inflate its shares outstanding by a modest 3.8%, and Marathon stockholders will hold almost the same proportion of the enlarged company. Notably, Stillwater is emptying its treasury to fund the cash portion of the deal.
Adding moderate complexity to the deal, Marathon's gold properties are being spun out into an eponymous entity focused on that metal. Stillwater will retain an interest in Marathon Gold as a result of the initial distribution of Marathon Gold shares to Marathon PGM shareholders. Stillwater has also been guaranteed an option to acquire up to 15% of Marathon Gold at the time of its first financing.
In addition, Stillwater has also agreed to purchase C$3 million of Marathon PGM common shares on a private placement basis with the price per share to be determined based on the five-day volume weighted average trading price, less a 15% discount, of the Marathon PGM shares on the TSX following the deal announcement.
Presuming Marathon's project is delivered to order in 2013 the new company would produce some 815,000 PGM ounces per year at an estimated cash cost of $291/oz. Cash costs could be much lower if copper prices remain where they are since the proceeds will be treated as a by-product. The PGM only reserve base would be around 25 million ounces, offering a stellar mine life of 31 years.
On the face of it, the deal is a steal for Stillwater.
Marathon has platinum and palladium reserves of 4.5 million ounces worth $2.4 billion at current prices. On an implied reserve value (IRV) basis that's worth $55 per share. When you factor in Marathon's gold, silver and copper the value almost doubles to $4.5 billion and you still haven't factored in the Geordie Lake property and other assets. Yet Marathon's stock was trading at just 0.03 times its PGM only IRV.
Even after the proposed deal it only trades at 0.07 x IRV. Compared with Stillwater at 0.56 x IRV, the gap seems ludicrous. The new company would boast a lowly multiple of 0.27 x IRV which looks like an invitation for a rerating.
On an all-in basis, Stillwater is paying just $127 per PGM reserve ounce for Marathon. When you impute total contained metal value and some other assets it's less than $100 per reserve ounce, which suggests there is almost $2 billion in gross margin on tap.
However, investors would be wise not to forget the travails that crashed Marathon's stock price. If you fear a double-dip recession, especially on any retracement in China, or simply a protracted state of low and slow growth, then the deal cannot be considered cheap.
Investors would also do well to remember that Stillwater has not exactly covered itself in glory since the Boulder mine came online. The investment case for the project was based on excessive optimism about PGM prices that were obviously in a bubble, as well as questionable due diligence in testing the ore body before developing it.
Stillwater once traded at $40 a share on those high expectations for Boulder. After suffering a near-death experience because of the project, Stillwater was gifted to Norilsk Nickel in an infamously political and one-sided transaction. That said, it can't have escaped Moscow's noticed that Stillwater has had a very hard ceiling around $15 per share. That's hard to swallow seven years later.
Marathon's project needs to be financed to the tune of $351 million, with an additional $143 millon needed for "stay-in-business" capital. Stillwater may be able to shave some costs, but likely not much. It will need to balance the time and costs of iterative feasibility studies against savings that will really be realized. Whatever the final price, it's going to be high and Stillwater shareholders face inevitable dilution from equity financing.
Stillwater should be able to secure project financing but we don't expect it to be especially favorable, so the pressure is on two primary alternatives to blunt the dilution factors - royalty and off-take agreements.
Stillwater's once dependable local auto customers are a quaint memory so off-take agreements won't be as helpful as in the past. At least it can look forward with some certainty to Silver Wheaton [SLW] taking its silver, although we expect a hard bargain. It's also likely that gold royalties could raise a reasonable sum, but the advantage lies with the royalty outfits. After all, buying a gold royalty in a mine that is driven by copper and palladium prices is a very different proposition to an all-gold royalty.
It will be very interesting to see if Franco-Nevada [FNV] expresses any interest given its existing association through the Stillwater Complex Royalties which have turned a pretty penny despite all the problems.
