Stillwater to buy Peregrine Metals

Peregrine Metals (PGM-T) saw its shares surge more than 250%, after U.S. platinum miner Stillwater Mining (SWC-N) agreed to pay US$487.1 million for the junior and its large undeveloped copper-gold project in Argentina. 

Peregrine shareholders would receive 0.08136 of a Stillwater share and US$1.35 in cash for each share held. Based on Stillwater’s closing price on July 8 of US$23.72, the deal values Peregrine at $3.16 per share, a 400% premium to Peregrine’s closing price of 81¢ on July 8.   

Analyst George Topping at Stifel Nicolaus says the immediate premium bid from a Peregrine shareholder’s view is a great transaction. He says it brings forward the potential value of the company’s Altar porphyry deposit in Argentina’s San Juan province. 

Stillwater would pay US4.9¢ per lb. copper in the ground for the 10-billion-plus-pound deposit, which Topping says is an excellent price for an early-stage project. Peregrine had planned to complete a preliminary economic assessment on Altar by year-end, before the bid was announced.

Topping started coverage of Peregrine Metals in April 2011 with a “buy” recommendation, when he used a price of US3.5¢ per lb. in the ground to derive his previous target price of $2.25 per share. 

Stillwater says the project would give it an “immediate scale in copper resources,” and more exposure to gold.

 “For several years, one of Stillwater’s primary strategic goals has been to grow and diversify our business through the acquisition and development of high-quality mining assets,” Frank McAllister, Stillwater’s chairman and CEO, said in a press release. 

He added, “In combination with our PGM (platinum group metals) producing assets in Montana, and the continuing development of our Marathon assets in Canada, we are creating a leading mid-cap diversified company with a strong financial profile and a robust growth pipeline across attractive commodity classes and geographies.” 

The miner currently produces palladium and platinum from two mines in Montana, and last year acquired Marathon PGM and its huge feasibility-stage platinum-palladium-copper project for US$118 million. 

Topping writes in a recent note to clients that Stillwater’s move to buy the Marathon PGM-copper deposit in northern Ontario was a “small step outside of the pure PGM business model, but fit geographically and PGM-wise.”

He describes  the Peregrine transaction as a new experience.

“It’s a different commodity. It’s in a different region. It would have to be a very large-scale operation, you know. Maybe 120,000 tonnes per day is what I’m modelling.

“Right now, most of Stillwater’s experience, of course, is narrow-vein mining . . . (Copper mining) is about far as removed from the current company’s experience as you can think of.” 

However, analyst Rodney Cooper of Dundee Securities says it’s “very likely” that the Peregrine technical staff will help Stillwater develop Altar. “They have some very capable engineering and geological people on the Peregrine Metals staff. They certainly have the capability of advancing the project.” 

Topping agrees the Altar project is a valuable asset, but points out the deposit would have also been valuable to Xstrata (xta-l), which is advancing its El Pachon copper project 23 km to the south, and could have developed Altar as a satellite mine. El Pachon has a total resource of 1.7 billion tonnes at 0.509% copper for 20 billion lb. copper.

Topping assumes Xstrata has its plate full with its own development projects, and predicts a competing bid for Peregrine Metals is unlikely.    

But he says he won’t be surprised if Stillwater sold Altar for a profit in two years, and its shareholders may be “negatively surprised” by the Peregrine bid, and the capital needed to develop Altar. 

Cooper believes the platinum-palladium producer views Altar as a long-term opportunity as it diversifies into copper, which has strong fundamentals. “This is one of those world-class opportunities, so be it at an early-stage. But I would see Stillwater wanting to secure this, and develop it, and hold onto it, for a very long time.” 

It could cost about $2.5 billion to build Altar, Topping says, with first production expected in 2017. 

Stillwater plans to spend US$75 million over the next three years to delineate Altar’s resource and ramp-up exploration on the property, which it says has the potential to make the company one of the leading copper producers in the Americas. 

Altar hosts a large, undeveloped open-pit resource of 7.4 billion lbs. copper and 1.5 million oz. gold in the measured and indicated category, based on 802 million tonnes of 0.44% copper equivalent. It has another 4.3 billion lbs. copper and 880,000 oz. gold in inferred from 465.6 million tonnes at 0.44% copper equivalent. The deposit is open at depth and laterally in three directions. 

The agreement has been approved by both boards, and is expected to close by the end of September. 

Peregrine’s chairman and CEO Eric Friedland said he is pleased with the transaction, and believes Stillwater has the cash and proven operational track record to advance Altar. Friedland is also the CEO of Peregrine Diamonds (pgd-t), which is developing the Chidliak diamond project on Nunavut’s Baffin Island.

Once the deal goes through, Peregrine shareholders would own 10.5% of Stillwater on a fully diluted basis. 

On the acquisition news, Peregrine shares hit a new 52-week high of $2.94, before closing up $1.79 at $2.60 on 21.1 million shares traded. Stillwater dropped 22%, or US$5.26 per share, to US$18.46 on 21.6 million shares traded.