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Gollum’s Syndrome: The Burden and the Treasure of Silver’s “The Precious”: Coeur d’Alene Mines Corporation (CDE)

“We wants it, we needs it. Must have the precious!” Channeling J.R.R. Tolkien’s Gollum, a second silver miner now joins the quest for Orko Silver‘s precious.

Coeur d’Alene Mines Corporation (NYSE:CDE) issued a competing bid Wednesday for Orko Silver and its coveted La Preciosa silver project in Mexico, and Orko’s board has blessed the $383 million proposal as a “superior offer” to the preceding courtship of First Majestic Silver Corp (NYSE:AG). Orko’s shares surged by as much as 20% on the news, while Coeur shareholders watched their stock tumble swiftly by 9%.

Coeur d'Alene Mines Corporation (NYSE:CDE)

We’ll call that the curse of the ring, since the market has now punished both suitors harshly for their respective pursuits of the precious. First Majestic’s shares currently stand roughly 18% beneath their preannouncement close of $22.92, yielding one of the most obvious buying opportunities that I’ve perceived in the silver industry in quite some time — perhaps rivaled only by the standout bargain of Endeavour Silver Corp. (CAN) (NYSE:EXK) . As I conveyed to my readers when presenting First Majestic as my top choice for silver investment exposure in 2013, the market’s demonstrated disdain for this world-class silver project that Pan American Silver Corp. (USA) (NASDAQ:PAAS) walked away from exactly one year ago is utterly unwarranted!

Like Smeagol, some investors may be hearing nasty voices in their heads, repeating ad infinitum the haunting statement by Pan American that La Preciosa was “unlikely to generate a rate of return that meets Pan American’s internal economic hurdle rate.” Clearly, two of Pan American’s principal rivals vehemently disagree with that assessment, assigning significant economic and strategic value to one of the world’s largest undeveloped primary silver deposits. Following “significant diligence conducted,” Coeur believes that an open-pit mine at La Preciosa can yield between 7 million and 9 million ounces of silver per year with a mine life greater than 15 years. Whichever of the two suitors walks away with the precious, I suspect that Pan American’s decision to abandon the project will not be remembered fondly.

The better competitor
Coeur d’Alene Mines may indeed have sweetened the pot a touch, raising the implied valuation some 25% and offering Orko shareholders a choice between shares, cash, or a combination of both (plus warrants). First Majestic Silver, meanwhile, brings a couple of noteworthy strengths to the table that Coeur simply cannot match.

For starters, First Majestic boasts a massive presence in the area of La Preciosa that will convert to powerful synergies as this project goes forward. The company’s new flagship Del Toro mine and recently expanded La Parilla mine are both well within what I would characterize as strategic proximity to La Preciosa, facilitating First Majestic’s effective strategy of inter-operation training and personnel rotations to cultivate highly capable operating teams throughout its growing mine portfolio.

And the nearby city of Durango — just a 29-mile drive down the highway from La Preciosa — is First Majestic’s entire base of Mexico operations, complete with an in-house team of mine engineers and construction personnel that has proved its value in spades with a series of cost-efficient construction projects culminating in the recent completion of the massive mill complex at Del Toro (which I visited in person in November). The company even boasts the capacity to completely rebuild and refurbish scoop mine equipment at its mechanical shop and warehouse, generating substantial savings over services typically provided by the manufacturers. Coeur’s major Mexico operation at Palmarejo, meanwhile, stands quite some distance away in Chihuahua.

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