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1/12/18

Primero/Wheaton/First Majestic: Winners and losers

Having started late this morning (couldn't get to sleep last night, finally nodded off 4am, thanks for asking) and catching up on the big news in the minepatch, that of the deal First Majestic (AG) (FR.to) has done to buy San Dimas from Primero (P.to) and re-jig the streaming deal with Wheaton Precious Metals (WPM) along the way, some thoughts on who wins and who loses. There are four entities:

Primero. Unless of course you're a latecomer who stuck their neck out...

...you are the big loser. Hubris, thy name is Conway.

As a few of you know (but most don't), I'd been looking at P late last year, all the time the revolver-boot-forward NRs were showing up, wondering if there was a spec trade there. But I was too chicken, so I do applaud those who had the cojones on the trade and now reap near-200% benefits. 

However, the vast majority are losers and thoughts go back for just one example to the $2.35 bought deal run by BMO in mid-2016 (plenty more where that IKN post came from, we've been tracking this trainwreck for years). Called your broker yet and fired him?

Wheaton Precious Metals. Clearly the big winner. For several months they've been staring down the barrel of losing a sizeable chunk of their stream income, but ignored their weak flank and played to a position of strength with FR.to. The deal they've done, getting quasi-cash (Fr.to) shares and a re-jigged stream deal that the mine can better support, means they've lifted a weight off their mind. They're also likely to be in less trouble with the Mexican tax people from now on. WPM's share price popped this morning on this news and quite right, too. Good deal guys, kudos.

First Majestic. Even though the stock opened 4% and 6% down on this deal (due to the share dilution) I don't think they've lost out that much, in the near term at least. Their hazard will come further down the line, because at least a part of this is the ego-driven "we can do a better job than the dumbos at Primero" attitude. Yes FR knows Mexico and just for that reason they're probably the best fit company for this deal (i doubt PAAS was interested), but the issues at San Dimas aren't just skin-deep or fixable by giving the workforce a pay rise. The mine is old and needs serious cash to modernize it and make it a safe and correct work environment (one of the main issues the unions have with conditions there). That costs real money and if they do it right, will also add to op-ex. It remains to be seen whether a) FR does the right thing by the employees and gets ops going smoothly again and b) does it in a budget that makes sense.

Mexico tax people. Also winners. With a line drawn under the previous stream agreement, the parties will now be able to come to a clean structure for paying duties on production to the country. 

Bottom line: I'm no fan of FR.to. I'm neutral on WPM. I've been warning you all about the impending death of Primero since the time it was a multiple dollar priced stock. Set those aside however and looking at today's deal without any background and I have to say that it's a good one. Long-term P shareholders were likely resigned to their fate anyway, near-term spec traders will hi-five everyone in the office today, WPM directors will be happy about securing revenue flow again from San Dimas. The question mark has to be over the head of FR.to, as even though the terms of the deal are reasonable they have the mid-term things to prove. San Dimas has been a money pit over two separate cycles, it's up to them to stop it from it happening a third time.

PS: The bottom bottom line: Learn how to read a balance sheet.

PPS: The Primero Mining homepage, right now:



Oh dear.