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Coeur deviates from M&A focus, Paramount deal dilutive to NAV, says Dundee Capital

Coeur Mining (NYSE:CDE) is paying the price for medium term business improvement with its proposed acquisition of Paramount Gold and Silver (TSE:PZG), according to analysts at Dundee Capital Markets. 

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Coeur Mining (NYSE:CDE) is paying the price for medium term business improvement with its proposed acquisition of Paramount Gold and Silver (TSE:PZG), according to analysts at Dundee Capital Markets. 

The broker retained its neutral rating and price target of US$4.50, and said that while the acquisition is forecast to reduce unit costs company-wide and lower the burden of the Palmarejo royalty further, it sees the purchase as dilutive to net asset value and deviating from Coeur's M&A strategy.

Nevertheless, Dundee analyst Matthew O'Keefe said that the deal is still accretive to cash flow per share post 2015, and while execution and liquidity risk have increased for 2015/2016, the post 2016 outlook has improved.

Coeur, the largest U.S.-based primary silver producer with four precious metals mines in the Americas, said the addition of Paramount's San Miguel project, particularly the Don Ese deposit, will bolster activities at its Guadalupe deposit, and strengthen the long-term viability of its own Palmarejo mine throughout the price cycle.

Paramount's San Miguel project covers over 121,000 hectares surrounding Coeur's Palmarejo mine complex, with the Don Ese deposit extending across a shared property boundary onto Coeur's land holdings located about 800 metres from its Guadalupe deposit.

"The primary target at San Miguel is the Don Ese vein which is adjacent to CDE's Guadalupe deposit and carries grades which are 27% higher for silver and 12% higher for gold (reserve + M&I)," wrote O'Keefe in a note released to investors earlier Thursday.

"The plan is to drift 800m into Don Ese from Guadalupe and use it as a supplementary mill feed. The benefits are i) higher grade ore being sent to Coeur's existing mill at Palmarejo, ii) ore is not subject to FNV royalty and iii) low capex to move into production ($15MM for tunnel) plus development."

The deal sees Coeur paying 0.2016 per Paramount share as well as funding $10 million to a spin-out for Paramount's other exploration assets. 

"While San Miguel fits nicely into Palmarejo, ultimately the cost of the acquisition (including the payments to the spinco and for the royalty) results in a 7% dilution to our NAV, though 2016E-2018E CFPS (stream adjusted) is accretive with this deal," said Dundee.

Adding another project to its list, the company also increased its liquidity risk with the acquisition, as the spending for the deal further bolsters Coeur's net debt position.

"The M&A strategy the company highlighted previously was focused on producing assets in order to increase cash flow. While this acquisition has merit, it is a deviation from prior strategy but perhaps the best alternative available," Dundee said.

Quick facts: Coeur Mining

Price: 5.51 USD

NYSE:CDE
Market: NYSE
Market Cap: $1.34 billion
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