425: First Majestic to Acquire Gatos Silver in $970M All-Share Deal

First Majestic Silver Corp. announces an agreement to acquire Gatos Silver, Inc. in an all-share transaction valued at approximately US$970 million, aiming to consolidate silver mining districts and enhance production profile.

Summary

• First Majestic Silver Corp. is set to acquire Gatos Silver, Inc. in an all-share deal worth approximately US$970 million.
• The transaction involves a fixed exchange ratio of 2.550 First Majestic shares per Gatos share.
• This implies a price of US$13.49 per Gatos share.
• The deal is expected to close in January 2025, pending shareholder and regulatory approvals.
• The acquisition aims to consolidate three world-class silver mining districts in Mexico.
• The combined entity anticipates annual production of 30-32 million ounces of silver equivalent, including 15-16 million ounces of silver.
• All-in sustaining costs are estimated at US$18.00-US$20.00 per silver equivalent ounce.
• Gatos is expected to immediately contribute approximately US$70 million in annual free cash flow.
• The pro forma market capitalization of the combined company is projected to approach US$3 billion, with average daily trading liquidity of approximately US$49 million.
• The combined entity will have a 350,000 ha land package.
• First Majestic shareholders will own approximately 62% and Gatos shareholders will own approximately 38% of the pro forma entity.
• The Electrum Group LLC will own approximately 12% of the pro forma entity.
• Termination fees of US$46M payable by First Majestic and US$28M payable by Gatos in certain circumstances.

Sentiment

Score: 7

Explanation: The document presents a positive outlook due to the strategic acquisition, potential synergies, and enhanced production profile. However, it also acknowledges risks and uncertainties associated with the transaction and market conditions.

Positives

• The acquisition consolidates three world-class silver mining districts in Mexico.
• The combined entity will have an enhanced production profile with strong margins.
• Gatos is expected to immediately contribute annual free cash flow of approximately US$70 million.
• The combined team has a strong track record of value creation in Mexico.
• The combined company maintains peer-leading exposure to silver, with over 50% of pro forma revenue derived from silver.
• The acquisition creates a 350,000 ha highly prospective land package.
• The resulting company will have a strengthened balance sheet, leading trading liquidity, and improved capital markets profile.
• The transaction is expected to realize meaningful synergies through corporate cost savings, supply chain efficiencies, and cross-pollination of expertise.

Negatives

• The transaction is subject to shareholder and regulatory approvals, which could delay or prevent the deal from closing.
• There are risks associated with integrating the acquired assets and operations.
• The value of the consideration to be issued in connection with the transaction is subject to market fluctuations.
• The diversion of management time on pending Transaction-related issues.

Risks

• Failure to obtain necessary shareholder, stock exchange, and regulatory approvals.
• Unanticipated difficulties or expenditures relating to the transaction.
• Risks related to the integration of acquisitions.
• Fluctuations in security markets.
• General economic conditions including inflation risks.
• Possible variations in ore reserves, grade or recovery rates.
• Operating or technical difficulties in connection with mining or development activities.
• Changes in climate conditions and extreme weather events.

Future Outlook

The combined company aims to become the world's largest primary silver producer, leveraging a diversified asset base and a strong track record of value creation.

Industry Context

This acquisition reflects a trend towards consolidation in the silver mining industry, with companies seeking to enhance their production profiles, diversify their asset bases, and improve their access to capital.

Comparison to Industry Standards

• The document mentions that over 50% of pro forma revenue is derived from silver compared to an average of ~30% for intermediate silver producing peers.
• Cerro Los Gatos (CLG) is compared to other primary silver mines globally, including Saucito, Juanicipio, Fresnillo, Greens Creek, San Julian, Palmarejo, San Dimas, Pirquitas, Las Chispas, and Santa Elena.
• CLG is highlighted as one of the lowest-cost silver mines currently in operation, with an AISC of $15.51 (H1'24) compared to a peer average of $14.73 (H1'24) for by-product AISC and $11.33 (H1'24) compared to a peer average of $8.42 (H1'24) for co-product AISC.
• The document compares First Majestic's ESG risk rating to the Metals & Mining industry average, noting that First Majestic's score improved to 31, above the industry average for the first time.

Legal Proceedings

• The Company has brought two arbitration proceedings against Mexico under Chapter 11 of the North American Free Trade Agreement (NAFTA) for violating its international law obligations.
• The first proceeding commenced in August 2021 and relates to a September 2020 decision by the Federal Court in Mexico to retroactively nullify an Advance Pricing Agreement (APA) that the Company had entered into with the Mexican tax authority, Servicio de Administracin Tributaria ( SAT ), in October 2012, with respect to metal sales from the San Dimas mine.
• The second NAFTA proceeding commenced in July 2023 and relates to the denial of access to certain VAT refunds.
• In addition to the arbitration challenges at the international-law level, the Company is also challenging the decision of the Federal Court domestically through the Mexican court system.
• In February 2024, Mexico filed a request to consolidate the two arbitration proceedings (Consolidation Request).
• A 3-person tribunal has been established to decide whether the two proceedings should be consolidated into one, and we expect the tribunal to issue a decision on the Consolidation Request in Q4 2024.

Stakeholder Impact

• Shareholders of both First Majestic and Gatos will be impacted by the transaction, with changes in ownership and potential for increased shareholder value.
• Employees of both companies may experience changes as a result of the integration of operations.
• Local communities in the mining districts may be affected by the combined company's operations and social responsibility initiatives.

Next Steps

• First Majestic and Gatos will seek shareholder approval for the transaction.
• The companies will pursue required regulatory approvals, including clearance from Mexican anti-trust authorities.
• Shareholder meetings are expected to be held before the end of 2024.
• The transaction is expected to close in calendar Q1 2025.

Key Dates