The Mr. Scrooge of Silver Miners

• Email
• Share
• Print

Perhaps we all feel a bit tight-pocketed this holiday season, but within the mining industry many pockets have been sewn shut as capital is carefully hoarded. Seeking to capitalize on tough times, the world's largest silver producer has offered to buy a joint venture partner for a cash pittance.

Fresnillo, which operates the prolific Fresnillo Mine in Mexico's Sierra Madre mountains, this week offered $4.54 per share in cash for shares of MAG Silver (AMEX: MVG). (That's below MAG's closing price on the previous day!) Fresnillo already owns 19.8% of MAG shares after a big purchase back in October, and now seeks to consolidate its interests throughout the Fresnillo II development project. With "bonanza" ore grades above 1,000 grams of silver per tonne, the joint venture's 238 million ounces of inferred silver resources and 480,000 ounces of gold makes this one of the choicest silver-bearing ore bodies this Fool has ever seen.

Interestingly, these figures exclude the results of exploration in 2008, which encountered ore grades as high as 10,000 grams per tonne at Valdecanas, and more than 4,000 g/t in the nearby Juanicipio vein. High ore grades make for highly profitable mines, as the operating costs associated with processing ore into its metal components are significantly reduced.

From emerging superstar Yamana Gold (NYSE: AUY) to fixed-cost fixture Silver Wheaton (NYSE: SLW), shares of precious-metal miners have tanked in unison since gold and silver began this protracted correction. Pan American Silver (Nasdaq: PAAS) barely clung to profits last quarter. A quick look at charts for Coeur d'Alene Mines (NYSE: CDE) or Hecla Mining (NYSE: HL) makes it clear that the junior silver miners have been among the hardest hit. Without any silver production to generate revenue, the market ripped into MAG Silver, dragging shares from a 52-week high of $18 to below $5. Shares slid mercilessly even as bonanza-grade discoveries filed in, causing MAG shares to appear increasingly undervalued.

Accordingly, shareholders and analysts alike are dubbing Fresnillo's $4.54-per-share offer for MAG a "take-under" offer. In the words of MAG Silver CEO Dan MacInnis, "This may be the first time in history that a hostile bidder has announced a bid at a price lower than the closing market price of the target's shares on the trading day prior to announcement."

I view the bid price as truly Scrooge-like. Worse yet, since Fresnillo doesn't trade on a U.S. exchange, it effectively bars many investors from following the asset forward. Bah, humbug, Fresnillo!

Further Foolishness:

• A precious something to be thankful for.
• Silver Wheaton's timely production shortfall.
• Some of the best gold grades out there.