Summary:
Acquisition Details: Coeur Mining (CDE) announced a definitive agreement to acquire SilverCrest Metals (SILV) in an all-stock transaction valued at approximately $1.7 billion, offering a 1.6022 share exchange ratio with an 18% premium to SilverCrest shareholders.
Value Creation: The merger is expected to increase silver production to 21 million ounces and gold production to 432,000 ounces by 2025, adding the high-grade Las Chispas mine and creating significant value for CDE shareholders.
Strong Buy: With a pro forma price estimate of $7.71 per CDE share and the current price trading below this estimate, the stock presents a strong buying opportunity, excluding additional potential from margin expansion and underexplored resources.
The Announcement
On October 4, 2024, Coeur Mining Inc. (NYSE:CDE) announced its definitive agreement to acquire all of the issued and outstanding shares of SilverCrest Metals Inc. (TSX: SIL; NYSE: SILV). [1]
Transaction Details
" 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. " [1]
Proposed Value Addition
The merger between Coeur and SilverCrest creates a leading global silver company, expected to produce approximately 21 million ounces of silver and 432,000 ounces of gold by 2025 from five North American operations. Las Chispas, SilverCrest’s high-grade and low-cost mine, adds significant value to Coeur’s portfolio. The combined company is projected to generate $700 million in EBITDA and $350 million in free cash flow by 2025, accelerating Coeur’s deleveraging efforts by reducing its leverage ratio by 40%. Additionally, two SilverCrest directors, including CEO N. Eric Fier, will join Coeur’s board, while both companies remain committed to ESG leadership. [1]
Thesis
We begin by analyzing the impact of stock dilution resulting from this transaction on a per-share basis. Next, we assess the potential offsetting value added per share on a pro forma basis to develop a price target. Given the company's historically negative earnings, the primary driver of the value estimate will be revenue. To support this approach, we use the price-to-sales (P/S) ratio to guide our estimate and uncover a potential value range following the transaction.
Assessing Dilutive Impact
With a share exchange ratio of 1.6022 and a current share price of $6.18 USD per CDE share, we estimate an offer price of $9.89 USD per SILV share. [1] Based on SILV's latest quarterly filings, the estimated total offer value amounts to approximately $1.47 billion USD. [2] Given CDE's current share price, this implies a potential issuance of 238.18 million new CDE shares, representing a 59.6% increase in basic shares outstanding.
While the level of dilution appears significant, it's important to note that dilution alone does not fully capture the overall impact of the transaction.
Offsetting Dilution
The merger is projected to yield approximately 21 million ounces of silver and 432,000 ounces of gold by 2025 from five North American operations, including the addition of the Las Chispas mine under SILV [1]. This represents a significant value creation opportunity that is expected to directly benefit CDE shareholders. The four key existing mines—Palmarejo, Rochester, Kensington, and Wharf—currently contribute 32% of total gold production and 66% of total silver production, with Kensington and Wharf accounting for 27% and 29% of silver output, respectively, though neither site produces gold [4].
Historical sales-to-production ratios have been consistently strong, with no figures falling below 96% over the past five years, indicating robust demand for mined metals and minimal idle inventory [2]. The revenue impact from each metal type has also remained stable, with gold contributing approximately 70% and silver 30% to the overall revenue mix [2].
Based on management's estimated 2024 production figures and assuming a stable sales-to-production ratio, the addition of the Las Chispas mine is expected to boost gold revenue by 29%, with a significantly larger 75% increase in revenue from silver sales. Given the previously mentioned 70-30 revenue split between gold and silver, this is projected to raise the 2025 fiscal year-end revenue to approximately $1.2 billion, compared to the latest fiscal year-end levels. On a pro forma diluted basis, this equates to a revenue per share estimate of $2.25.
To estimate the pro forma price per share, we assume a constant price-to-sales (P/S) ratio based on the multiple the stock was trading at prior to the announcement, in our base case. This assumption relies on the notion that any news before the announcement was efficiently priced into the stock, allowing us to better isolate the impact of the specific catalyst. With the relative P/S multiple of 3.42 observed at the close of trading on the day prior to the announcement, we arrive at a pro forma estimate for CDE of $7.71 USD per share. Adjusting for the expected probability of acquisition completion, as measured by the spread (percentage difference between the SILV offer price and its current market price), the pro forma estimate is slightly lower at $7.64 USD per share.
Further Considerations
This analysis does not account for the potential margin expansion or deleveraging of CDE’s financial position upon completion of the transaction. Additionally, over 20 kilometers of underexplored vein strike length near the Las Chispas mine represents significant untapped value that has been excluded from our current projections. [1] Incorporating these potential upsides would further enhance the base case estimate outlined above.
Furthermore, our analysis relies on a single P/S ratio to determine both pre- and post-acquisition value per share of CDE. While this represents a conservative approach, particularly in light of the potential margin expansion and additional value drivers, the following table presents potential P/S ratio variations under different 2025 fiscal year-end revenue scenarios:
Sources:
[1] Press Release:
[2] Coeur Mining Inc. Q2'24 10-Q
[3] SilverCrest 10-Q
[4] Coeur Mining Inc. FY 2023 10-K