Silver Companies Merging to Gain Scale in Rising Market

Compass, episode 15

Our previous episode: https://www.cruxinvestor.com/posts/exploration-financing-and-consolidation-fuel-mining-sector-optimism

Recording date: 14th May 2025

Recent developments in the mining sector show increasing M&A activity alongside robust Q1 performance, according to Olive Resource Capital executives Samuel Pelaez and Derek Macpherson.

Pan-American Silver's $2.1 billion acquisition of MAG Silver represents a modest 27% premium but trades at approximately 16-17 times earnings compared to Pan-American's 12 times multiple. The executives indicated they've increased their MAG position following the announcement, speculating that Fresnillo—MAG's joint venture partner at the Juanicipio mine—could potentially make a competing offer given their $1.3 billion cash position.

In another consolidation move, Silver47 and Summa Silver are merging in what the executives describe as a "creative transaction" that will create better scale and improve access to passive fund flows, with year-round exploration capabilities.

Q1 reporting from major gold producers shows strong cash generation, with gold prices increasing approximately 12% from Q1 to Q2. This price improvement could translate to 30-35% growth in free cash flow for efficient operators.

The executives highlighted AngloGold Ashanti as potentially undervalued, producing 720,000 ounces in Q1 with all-in sustaining costs of $1,640 per ounce. Despite generating roughly 30-50% less free cash flow than Agnico Eagle, AngloGold has only about half the market capitalization.

K92 Mining was singled out as an exceptional growth opportunity, with funded expansion plans to increase production from 180,000 to approximately 400,000 gold equivalent ounces annually. At its current $2 billion market cap, K92 could potentially generate a 35% cash flow yield once Phase 4 is complete.

The executives emphasize free cash flow (CFO + CFI) as the most reliable metric for evaluating mining companies, providing investors with a framework for analyzing companies in the current environment of elevated metal prices.

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