Free Gold?


For reasons discussed in the past, I think that it is a good idea to own some gold. Here is a way to get some for no net cost.

Paramount Gold and Silver (NYSEMKT:PZG)

Paramount is a U.S.-based exploration and development company with advanced stage projects in northern Mexico and Nevada. The San Miguel Project in Mexico is near established, low cost production where the infrastructure already exists for cost-effective exploitation. The Sleeper Gold Project is located off a main highway near the town of Winnemucca, Nevada. Paramount bought the project in 2010.

Coeur's Acquisition of Paramount

On December, 17, 2014, Paramount entered into a merger in which shareholders will exchange their shares for 0.2016 shares of Coeur (NYSE:CDE). The definitive proxy statement will be mailed soon. The deal requires approvals from both sets of shareholders. The votes are scheduled for April 17, 2015. The deal secured Mexican regulatory approval. Approvals are not required in the US, EU, or Canada. PZG, up over 24% since the deal was announced, has largely traded in lockstep with CDE. This is a tax-efficient transaction; Paramount will not recognize any gain or loss for U.S. tax purposes as a result of the deal.

An investment that you may wish to consider is the following: buy PZG common shares for around $0.99 each. For every 100,000 shares that you buy of PZG, either short 20,160 shares of CDE at $5.05 per share or, alternatively, write 202 CDE April 17, 2015 $5 calls. These calls last traded at $0.35 and have a bid of $0.35 and an ask of $0.45. At today's prices, there is virtually zero spread (only a measly $0.026), so what is the attraction?

The Free Gold

Coeur is in it for the Mexican project. They are spinning off the Nevada projects and over $0.05 per share in cash to existing PZG holders.

So what is the SpinCo worth?

Based upon the Sleeper Technical Report, it appears to be worth at least $0.51 per share of NAV. Based on the price to NAV of comparable companies, it is reasonable to expect that this security will trade around a price of at least $0.20 per share. This will be a small company with a market capitalization of thirty to forty million dollars. While I would never want to sound ungrateful for such a gift, one must admit that this is too small to stay public. The rationale that led PZG to sell to a larger local operator should lead SpinCo holders to look for an exit over the course of the next year. Logical buyers would include Kinross Gold (NYSE:KGC) or Allied Nevada (NYSEMKT:ANV), which own a nearby operation. Based on KGC's recent job listings, they may be expanding their operations in that region. A sale for around $0.45 could benefit both the buyers and the sellers.

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Disclosure: The author is long PZG.

Additional disclosure: Chris DeMuth Jr is a portfolio manager at Rangeley Capital. Rangeley invests with a margin of safety by buying securities at deep ...

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