Mercator to buy Creston Moly for $195M

Mercator Minerals (ML-T) has agreed to buy Creston Moly (CMS-V) in a friendly merger with significant potential for synergies that values Creston at $195 million.

Creston Moly shareholders would get 0.15 of a Mercator share and 8¢ for each Creston share held, which translates to a 40% premium to each company’s 20-day volume-weighted average share price.

Both companies are billing the merger as a perfect match, combining Mercator’s producing Arizona-based Mineral Park copper-molybdenum project, and its El Pilar copper project just over the border in Mexico, with Creston Moly’s El Creston copper-moly project a little farther south in Mexico. With El Pliar set for development in 2012 and El Creston in 2013, the combined company could soon transition into a substantial producer.

“It was a transaction that could move Mercator certainly into a whole new league of players,” said Mike Surratt, current president and CEO of Mercator, in a conference call. “We’ll certainly move up to that intermediate level of producers and we’ll certainly enhance our access to capital.”

Combined, the company would be able use the cash stream from Mineral Park to help develop the advanced-stage El Pilar and El Creston, as well as use its larger pipeline of projects to potentially ease financing.

Surratt plans to step down as CEO once the companies merge, with Creston Moly’s president and CEO Bruce McLeod taking over the reins. Surratt will stay on as a technical adviser, while Gavin Thomas will continue as non-executive chairman. Commenting on the deal, McLeod staked his reputation on its soundness.

“My agreement to join the company as a CEO is, I hope, a resounding approval of the due diligence of Mercator and its assets,” said McLeod in the conference call.

Along with simple geographic and resource overlap, the two executives highlighted the strong parallels between the producing Mineral Park project and the prefeasibility-stage El Creston. The two projects have the same planned throughput and processing methods.

“We’ll just roll up the drawings and take them down and build it again,” said Surratt in the call. “There’s certainly that potential; that circuit would fit perfectly.”

Even given the need to adapt to a slightly different terrain and other variations, the parallels will significantly reduce detailed engineering costs and the need for trial and error in the design.

“We can put things in that we will know will run and work,” said Surratt.

Mercator also has several million dollars worth of equipment that could be used at one of the new projects, including an extra mill and transformers.

Rodney Cooper, senior mining analyst at Dundee Capital Markets, noted that the deal is positive for Creston shareholders, thanks both to the premium paid and because Creston can now participate in Mercator’s “impressive growth profile.” He wrote that Mercator’s 12-month consensus target is $4.90, a 33% lift from the closing price the day before the deal was announced.

Cooper also said that Bruce McLeod’s appointment is a “very positive move,” and that Mercator shares could go up further if Creston assets are given a higher value once they are held by an active producer.  

The El Creston project has a measured and indicated resource of 215.4 million tonnes grading 0.071% moly and 0.06% copper. A recent prefeasibility study estimated an after-tax net present value (NPV) of US$561.9 million at an 8% discount and an after-
tax internal rate of return (IRR) of 22.3%.

Mercator’s Mineral Park mine hosts reserves of 520 million tonnes of 0.13% copper, 0.039% molybdenum and 2.74 grams silver per tonne. Mercator’s El Pilar has 276 million reserve tonnes grading 0.31% copper, with an after-tax NPV of US$229 million and an after-tax IRR of 25.3%.

Creston Moly also holds the Moly Brook molybdenum property in Newfoundland and the Ajax molybdenum property in British Columbia.

The deal will take place through a plan of arrangement, with a shareholder vote in mid- to late June. Creston’s board has unanimously recommended the deal. Both companies have agreed to pay $5.5 million as a break fee.

Creston Moly currently has 286 million shares outstanding while Mercator has 200 million shares outstanding.

On April 12, the day the deal was announced, Creston Moly’s share price was up 11¢ to 57¢ on 40 million shares traded, and Mercator Minerals fell 33¢ to $3.36 per share on 4 million shares traded.