TAKEOVER BATTLE A POSSIBILITY FOR SILVERCREST MINES

Canada’s silver-mining sector got some much-needed consolidation on Monday, as First Majestic Silver Corp. announced a friendly $154-million takeover bid for SilverCrest Mines Inc.

Desjardins Capital Markets analyst Michael Parkin thinks this all-stock deal is accretive and logical for First Majestic. By his calculation, SilverCrest’s Santa Elena mine in Mexico generated free cash flow of US$2.99 per ounce of silver equivalent production in the first quarter. That is an impressive figure in a market where many mines are producing negative cash flow.

Parkin noted that the deal boosts First Majestic’s production by about 26 per cent and improves its balance sheet by adding $30 million of cash (along with $15 million of debt). He also thinks Santa Elena may beat its guidance this year. The mine is expected to produce between four and 4.4 million silver equivalent ounces, but production in the first quarter reached a record 1.35 million.

Of course, there is always a chance another company could step in with a higher bid for SilverCrest. Takeover battles in the precious metals space have been extremely rare during the current bear market, but Parkin thinks it is a possibility in this case.

“We believe there is potential for an interloper on this deal, given the Santa Elena mine is doing well, and (SilverCrest) is generating (free cash flow) and has a relatively good balance sheet,” he said in a note.