email to chairman

I recently sent Norm Seckold (BSG Chairman) an email listing some concerns and asking some specific questions about the proposed merger of BSG/PJO with Coeur D’Alene Mines (CDE). Showing a genuine regard for small shareholders, Norm gave a quick turnaround to my email and approved the posting of it, together with his responses, on HotCopper. Here it is …

CONCERNS:

(Concern 1) … Little value has been attached to BSG's non-Palmarejo assets. Only about 8% of the offer consideration can be attributed to the non-Palmarejo assets.

[Norm’s response] … A question for the Independent Expert but we have drilled 77 holes at El Realito with what could best be described as modest results and we have landowner access issues at Yecora.

(Concern 2) … Thus under the offer, while PJO shareholders will receive a substantial premium for their shares, BSG shareholders will not.

[Norm’s response] … PJO shares were lagging the value placed on the project by the BSG share price by a significant degree. The maths indicated they actually received slightly less than us per percentage point of the Palmarejo project.

(Concern 3) … Serious issues at Coeur's new mines in Alaska (environmental, cost increases) and Bolivia (sovereign risk, taxation).

[Norm’s response] …I believe the Kensington tailings treatment issue is capable of resolution. In our view this is not a critical project. Turning to Bolivia, since the deal was announced there have been two very positive developments, which frankly were not great shocks to us. Firstly President Morales issued a Presidential Decree which grandfathered existing foreign owned mineral titles and confirmed that foreign investment would be required “…to meet the Economic and Social programs” of the government. Then about a week ago a new tax regime was introduced to parliament. This proposes a new additional mining tax of 12.5% of profits, compared with market expectations of a 10% gross revenue royalty. Please look at the Apex Silver share price for an indication of what the market’s reaction has been.

(Concern 4) … Discouragement of competing offers for BSG, by Directors giving Coeur call options over all their shares

[Norm’s response] … We believe that this has little practical difference to the lock up agreements traditionally entered into, and therefore would have no adverse impact on any party considering a counterbid.

QUESTIONS:

(Ques 1) … Call options over all Directors shares in BSG. Could conceivably the situation arise where the merger is voted down, but Coeur nevertheless exercises its options over Directors shares ? ... or is this possibility not allowed under the merger agreement ?

[Norm’s response] … In theory it would be possible for this to occur, however for practical reasons we think it would be highly unlikely.

(Ques 2) … Will BSG shareholders be provided with an independent expert's assessment of the merger ? So far the sharemarket has not embraced the deal.

[Norm’s response] … Yes indeed. Deloittes have been appointed and have started work.

(Ques 3) … What is the key reason(s) for the proposed merger being a better strategy than the status quo, i.e. BSG/PJO remaining independent and bringing the Palamarejo mine into production and receiving market ratings accordingly ?

[Norm’s response] …I would like to take the liberty of cutting and pasting the response to this question that I have made to a number of shareholders:

1. The merger will create the world's largest silver company.
2. It will be the lowest cost producer.
3. Both parties are currently selling on (third party broker calculated) NAV multiples of 1.1 times.
4. The average NAV multiple for the silver peer group is 2 times, with outliers up to 2.4 times.
5. CDE's Total Enterprise Value divided by 2008E silver production is $48. The industry average is $153.
6. CDE's 2008E price/ C is 7.1 times, versus industry average of 16.7 times.
7. TEV to measured and indicated resources is 28% of the industry average.

But let me add a few more points. The CDE register, with the exception of a few NY and Boston funds is made up of individual investors. What do you think the institutional shareholders of Pan American Silver, Apex Silver, Silver Standard et al are going to do when they are holding shares valued at +2 times NAV and they see the emergence of a new number 1 silver company (currently) selling at 1.1 times NAV?