If you hold a beach ball underwater, you just might get smacked in the face when it surges through the surface.
London-listed silver miner Fresnillo attempted to hold joint-venture partner MAG Silver (AMEX: MVG ) underwater with its "take-under" bid announced last month, but investors used dollars instead of ballots to cast an early vote against the deal. I believe that the deal is as good as dead now that the beach ball has slipped through Fresnillo's hands, but I also suspect that MAG shareholders haven't heard the last from Fresnillo.
Until last week, shares of MAG Silver remained anchored near the $4.54-per-share offer price, even as the broader sector enjoyed a phenomenal end-of-year rally. In fact, the entire precious metals mining sector had itself been pressed deep underwater by a combination of factors, including forced liquidations by hedge funds, a counterintuitive rally in the U.S. dollar, a deep correction in silver prices, and severe weakness among base metals like copper and zinc.
Thanks to the sectorwide recovery in recent weeks, gold miners like Kinross Gold (NYSE: KGC ) and my top pick, Agnico-Eagle Mines (NYSE: AEM ) , are up well more than 100% from their lows of late 2008. Shares of Silver Wheaton (NYSE: SLW ) rose sharply enough to become my best call of the year. MAG Silver shares, however, remained in a stranglehold.
The beach ball bounces
All that changed last week, when a press release from MAG Silver indicating yet another discovery of excellent high-grade ore provided the catalyst for the ball to surge out of the water and effectively quash the hostile bid. Shares launched to almost $6 on Friday, or 30% above the bid price, before settling back down toward the $5 mark this week.
While I believe the current bid from Fresnillo is clearly doomed now that investors have cast their vote with their capital, I expect Fresnillo to follow up with a second bid. With some very rich ore-bearing veins right in Fresnillo's backyard, MAG Silver is too precious for Fresnillo to ignore. With leading silver miners like Pan American Silver (Nasdaq: PAAS ) and Coeur d'Alene Mines (NYSE: CDE ) struggling to withstand a very challenging market, I see no other silver miner in a position to outbid Fresnillo for MAG.