On Sunday, December 16 2012 First Majestic Silver (AG) announced the friendly takeover of Orko Silver (OKOFF.PK) by way of a plan of arrangement paying a considerable premium of 69% on the prevailing share price at the time. As a result of this proposed deal ex-Orko Silver shareholders will own 13% of the merged entity and Orko’s La Preciosa project will be added to the Mexican silver portfolio of First Majestic Silver. Closing of the deal is expected in late February 2013. Using today’s share price as a yardstick the transaction is worth approximately $315M, or $1.19 per known ounce in the ground at La Preciosa.

First Majestic Silver is a highly successful silver mining company producing 9.1M silver equivalent ounces in 2012. The market capitalisation is $2.3B with $72.8M cash at hand (not including the $50M of the recently announced forward sale of base metal by-products). First Majestic Silver is active in Mexico only and claims to be the purest silver mining company producing 91% silver and only 9% by-products. Three mines are in full production (La Encantada, La Parrilla and San Martin), the recently acquired La Guitarra mine is undergoing a cost reduction and mine plan revision program, and the Del Torro mine commenced production on January 25 2013.

First Majestic Silver’s market valuation as a producer depends on actual silver production much more than on silver resources in the ground which may be mined some time in the future. La Preciosa is a minimum of three years away from production and the proposed merger will reduce the EPS due to dilution (while increasing the NAVPS). This was clearly reflected in the share price which dropped by 10% upon the announcement of the deal and has been on the slide since then. However, it can be presumed that the rationale behind the proposed deal is long-term gain offsetting the present short-term share price pain.

Here is a brief history of the exploration of the La Preciosa deposit. Following the discovery of the Martha vein in 2007 Orko Silver embarked on an initial drill campaign in 2008. Based on these results a joint venture with Pan American Silver (PAAS) was formed and a detailed drill campaign was undertaken in 2009 and 2010 leading to the release of a PEA in 2011. The joint venture came to an end on April 5 2012 when Pan American Silver relinquished their interest in the project. Orko Silver continued to explore the deposit and published an updated NI 43-101 compliant resource estimate in November 2012 suggesting strongly improved economics for the project. Just a little more than a month later, First Majestic Silver announced the friendly takeover of Orko Silver.

Orko’s share price took a hard hit in April 2012 due to the termination of the PAAS joint venture. The premium offered by First Majestic Silver in the currently proposed friendly takeover more or less neutralises this hit and brings the Orko share price back to the level it traded at when the JV was still intact.

At 110M oz (indicated) and 154M oz (inferred) La Preciosa is hailed to be one of the largest undeveloped silver deposits by their current owners. Indeed, the impact on the total resource and therefore the NAV of the combined First Majestic Silver entity including Orko is significant, increasing total indicated and inferred resources by 78% and 77% respectively. Moreover, the nature of the deposit promises the possibility of low-cost mining methods.

Being long with great conviction on First Majestic Silver and having been intrigued by the La Preciosa deposit for quite some time we decided to find out a little more and contacted the two companies. Ben Whiting, chief geologist at Orko Silver was kind enough to reply on Orko’s behalf, and Todd Anthony took the time for First Majestic Silver. Here is what we received as answers to our queries.

Here are Ben Whiting’s answers to our questions:

Q: In your view, what where the reasons behind the termination of the Pan America Silver JV? What did First Majestic see that Pan American Silver missed in their evaluation?

BW: The reason for the termination of Pan American’s involvement was not a reflection on the quality of the La Preciosa asset. In the contract, Pan American had three years to complete a full feasibility and present a mine building schedule. As they were not ready to do that by April 2012, due to internal reasons, their courses of action were to buy out Orko, or withdraw from the joint venture. A few months earlier, Pan American had taken over Minefinders for their Dolores Mine. The Pan American directors were not prepared to undergo another significant takeover so quickly on the heels of Minefinders, so they terminated the Orko joint venture.

I reiterate, Pan American did not pull out of La Preciosa because there was something wrong with the geology of the deposit. They pulled out for reasons external to the geology of the La Preciosa Project.

First Majestic is not the only company to see the value of the La Preciosa deposit. There was a competitive bidding process, with another major company. It is a truly remarkable deposit.

Q: What timeline do you anticipate for the development of the La Preciosa deposit? And what is your view on the exploration upside around the current resource?

BW: I see the mine building scenario as ongoing engineering mine design and permitting in 2013, construction start up in 2014 and full production for 2016.

As the Chief Geologist of Orko and having been with the project since the very beginning, I have submitted to First Majestic a list of exploration target areas for further testing. There is a considerable upside to the discoveries at La Preciosa. I am intrigued by both the expansion of the current deposit to the southeast and down El Orito Ridge, as well as the Esmeralda Area, a multi-vein target area 12 km to the northwest and still on the property.

The involvement of Orko Silver Corp may be ending, but the story of wealth generation and discovery at La Preciosa is far from over.