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Boom Turns Bust for Stillwater Holders on Copper Deal: Real M&A

Stillwater Mining Co. is so sure commodities will keep surging that it’s willing to spend more than the Montana palladium producer itself is worth to buy and develop copper and gold projects in Argentina.

Stillwater, which offered to buy Peregrine Metals Ltd. for $487 million in cash and stock this week, projects it will cost as much as $2.5 billion to develop the Altar project in western Argentina over the next seven years, Chief Executive Officer Francis McAllister said on a conference call. The combined cost is about a billion dollars more than the Billings, Montana-based company’s market value, according to data compiled by Bloomberg.

The takeover will hand shareholders of Vancouver-based Peregrine a more than threefold gain after extracting from Stillwater the second-largest premium for any mining acquisition in the world, data compiled by Bloomberg show. While Stillwater is betting that it can profit from diversifying away from palladium as copper approached a record and gold climbed to an all-time high this week, the company’s shares slumped 23 percent since the deal was announced through yesterday.

“This foray into another continent to buy a different kind of metal that is far from developed and pay a high price -- it raises a lot of question marks,” said Jim Grefenstette, a Pittsburgh-based fund manager at Federated Investors Inc., which oversees $354.9 billion, including Stillwater shares. “It’s a disappointment.”

John Beaudry, a spokesman at Stillwater, and Peregrine’s Brooke Clements, didn’t return telephone calls seeking comment.

Acquisition Details

Stillwater -- once a unit of OAO GMK Norilsk Nickel, Russia’s biggest mining company -- gets more than half its revenue from palladium and platinum. Those precious metals are used in catalytic converters to make exhaust fumes less toxic.

The company agreed to pay $1.35 a share and 0.08136 of its own stock for each share held by holders of Peregrine, according to a statement on July 11.

Based on Stillwater’s closing price of $23.72 on July 8, the deal valued Peregrine Metals at $3.28 a share, the statement said. That’s 279 percent higher than the target’s price in the 20 trading days before the deal was announced, according to data compiled by Bloomberg. The premium is the second-highest for any announced deal over $100 million in the mining industry.

Peregrine shareholders have seen the value of their holdings increase 216 percent since the deal was announced through yesterday, boosting the company’s market capitalization by about C$207 million ($216 million) to C$302 million.

Pricing Power

Stillwater’s market value has decreased by about $570 million to less than $1.9 billion over the same period.

Shares of Stillwater slipped 6.9 percent to $16.94 in New York today. Peregrine fell 3.9 percent to C$2.46 in Toronto.

“I’d like to give them the benefit of the doubt that they did their due diligence and they know something that the rest of us don’t,” said Rick de los Reyes, a manager at T. Rowe Price Group Inc. in Baltimore, which oversees about $510 billion including Stillwater shares. “But it’s hard to believe the market is so inefficient that it’s pricing Peregrine at a huge discount.”

Stillwater’s bid for Peregrine came after copper and gold outperformed palladium this year. Palladium, which climbed more than fourfold from the end of 2008 through 2010, has slipped 2.4 percent this year through yesterday.

Copper for delivery in three months on the London Metal Exchange has more than tripled since the end of 2008 to $9,650 a ton, leaving it within 5.6 percent of a record of $10,190.

Metal Prices

While prices of copper and gold may peak in 2011, analysts estimate lower average prices in the next two years.

Copper, used in electric wire, roofing and plumbing, will average $10,000 next year before dropping to $8,542 in 2013, the median of analysts’ estimates compiled by Bloomberg showed.

Gold futures rose to a record $1,588.90 an ounce on the Comex in New York yesterday as a slump in the dollar and Europe’s debt crisis spurred demand for precious metals. The average price of gold will slide to $1,413 next year and $1,231 in 2013, analysts’ estimates show.

Peregrine’s Altar mine has the potential to produce an annual average of 280 million pounds (127 million kilograms) of copper and 24,000 troy ounces of gold with a 36-year mine life, according to Stillwater’s July 11 presentation.

At that level, the project would boost Stillwater’s annual copper production almost ninefold from the 37 million pounds its mine in Marathon, Ontario, is projected to extract each year, according to the company’s presentation and data compiled by Bloomberg. Stillwater got less than 5 percent of its sales from copper, gold, silver and nickel last year.

Head Scratcher

The acquisition also means Stillwater may lose investors who owned the company because they wanted to bet exclusively on palladium, said Keith Moore, an event-driven strategist at MKM Partners LP in Stamford, Connecticut.

“To get into a different field from what they know, it’s got me scratching my head,” said Peter Sorrentino, a senior portfolio manager at Huntington Asset Advisors in Cincinnati, which manages $14.8 billion. “The easy money in a lot of the metals has already been made.”

Stillwater’s shareholders will have to wait at least six years before the Altar mine produces any copper, according to Leon Esterhuizen, an analyst at RBC Capital Markets in London. Stillwater still needs to conduct more exploration, design the mine and raise more money to pay for the project, he said.

‘Nice Little Pocket’

Stillwater began mining palladium in 1986 and controls the “only significant source of platinum group metals in the United States,” according to its website. Buying an undeveloped mine in Argentina for copper and gold may be not be worth the risk, Federated’s Grefenstette said.

“This is a challenge, because they’ve gone into a geography they’ve never gone into before,” he said. “You have this nice little pocket in Montana, and that’s cool, because you can isolate your opportunities, you can isolate your risks.”

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