An Amazing Day for a Bad Night

Say good night to Goldcorp's (NYSE: GG  ) tenure as operator of the silver-rich, low-cost San Dimas gold mine in central-west Mexico.

Say hello to the next superstar of emerging mid-tier miners.

Continuing an ongoing strategy to optimize its asset portfolio to hone in on "cornerstone" growth projects like Penasquito, Cochenour, and Pueblo Viejo, Goldcorp will transfer the historic San Dimas mine to acquisition-focused, micro-cap junior Mala Noche Resources. Mala Noche translates to bad night, and a name like that just won't to do convey the shareholder value that could grow from such a rocket-like launch into production under highly favorable terms. Accordingly, the purchasing company will be reborn as Primero Mining.

The deal of the decade
This transaction is a first-rate steal for Primero, which for $500 million will acquire a fully operational mine with more than $2.1 billion worth of proven and probable gold and silver reserves at present market prices. Permitting a competitive cost structure that saw 2009 production of 113,000 ounces of gold at total cash costs of just $287 per ounce, the ore grades for both gold and silver at San Dimas are simply phenomenal. But that's just a fraction of the story. You see, San Dimas has a history of production going back to 1757, and as Goldcorp explains:

The long history of continuous mining at San Dimas and the known occurrence of the mineral veins have overridden the need to prove up reserves for many years ahead. Consequently, the true potential of the deposits are neither fully realized nor reflected in the stated reserves and resources.

Goldcorp shareholders who may be inclined to decry the underpriced transaction will find substantial solace in the 30% equity stake in the new entity that Goldcorp will obtain. In a brilliant twist of the deal, I believe that Goldcorp's $175 million haul in soon-to-be-issued Primero Mining shares is bound to appreciate handsomely from the moment Primero hits the trading floors. The remainder of the $500 million will consist of $275 million in cash -- financed by the equity offering -- and a $50 million interest-bearing note.

When taken alongside Goldcorp's prior sale of the Escobal silver discovery in Guatemala for $505 million, Goldcorp continues to exhibit impressive expertise as a dealmaker …  both in its strategic purchases, and in strategic asset sales that retain upside exposure through significant equity interest.

An executive dream team
Completing the overnight transformation, Primero Mining will be led by incoming president and CEO Joseph Conway … who enjoyed noteworthy success in transforming IAMGOLD (NYSE: IAG  ) into one of the leading growth stories of the mid-tier gold producers. Topping off this influx of proven management, Eduardo Luna will oversee San Dimas operations as executive VP and president of the Primero's Mexico subsidiary. Not only did Luna execute an impressive production expansion at San Dimas over the course of 16 years as president of the Luismin operations (which Goldcorp acquired in 2005), but he has also served as chairman of my top equity pick in the entire precious metals sector: Silver Wheaton (NYSE: SLW  ) . Wade Nesmith, Mala Noche's Founder and CEO (and still a founding director at Silver Wheaton) will shift to the chairman's seat.

The adjusted silver stream
Speaking of Silver Wheaton, the silver stream specialist had to sign off on the deal given the pre-existing arrangement for sales of San Dimas silver. Silver Wheaton has amended the deal in a way that I consider a win-win for all parties involved. Instead of expiring in 2029, the agreement has now extended for the life of the mine. The new terms will permit Primero to enjoy extraordinarily low costs by reducing the initial silver volumes required to go to Silver Wheaton. Ultimately, Goldcorp is on the hook to provide an additional 1.5 million ounces of silver per year to Silver Wheaton for the first four years, and would face a penalty for any shortfall beneath 220 million ounces of total silver delivered over the next 20 years.

The value proposition
Going back to our discussion of San Dimas reserves above, Goldcorp's willingness to essentially guarantee 220 million ounces of payable silver production stands as a strong testament to the wide divide between San Dimas' stated mineable reserves of 60.9 million ounces and the far-greater production potential anticipated by the mine's operators. If the market fails to account for that divide in its initial pricing of Primero shares, this could inject a strong value component into what is already shaping up as a compelling growth stock.

Bred for growth
Peering further down the road, I see a Primero utilizing this imaginative transformation as a catapult into further acquisitive growth in the manner of New Gold (AMEX: NGD  ) and Eldorado Gold (NYSE: EGO  ) before it. Don't expect those deals to follow immediately since the company will first focus upon optimizing the San Dimas operation through 2011 -- but strong cash flow from San Dimas is likely to open up multiple opportunities for expansion by 2012. Primero has already signaled a Latin American focus for future acquisitions, which leads this Fool to ponder potential pairings with perpetually undervalued producers like Gammon Gold (NYSE: GRS  ) and Minefinders (AMEX: MFN  ) .

However Primero's promising future plays out, this new miner's first step into immediate production is the greatest leap I have ever witnessed from a small and little-known entity. With such an auspicious beginning, Fools are strongly encouraged to track the progress of this miner right from the primero moment.

Gold is a hot topic on the blogs at Motley Fool CAPS. Join the free service today and see just how many Fools are taking the long view when it comes to investing in gold. The "Gold" tag at CAPS lists 52 potential investments, and you'll find Christopher's comments on most of them.

Fool contributor Christopher Barker can be found blogging actively and acting Foolishly in the CAPS community under the username TMFSinchiruna. He tweets. He owns shares of Eldorado Gold, IAMGOLD, Gammon Gold, Minefinders, New Gold, and Silver Wheaton. The Motley Fool has a gilded disclosure policy.


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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 05, 2010, at 5:15 PM, silvermind wrote:

    Sinch,

    Great article. Thanks for the heads up! Would Mala Noche stock be open to purchase at this time?

    Bill

  • Report this Comment On June 05, 2010, at 6:24 PM, XMFSinchiruna wrote:

    Bill,

    I saw on the blogs that you've discovered Mala Noche shares halted trading before the announcement was made. Still no word on the precise timing when Primero shares will become available, but I will keep Fools posted.

  • Report this Comment On June 14, 2010, at 7:05 PM, wolf411 wrote:

    Primero showed up today on the new issue page at TD Waterhouse. Priced at $6.00 CDN per share.

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