Three analysts shared the details and their
opinions of the proposed transaction.
Analyst Jamie Spratt with Clarus Securities reported in a March 20, 2018
research note that Klondex Mines Ltd. (KDX:TSX; KLDX:NYSE.MKT) announced Hecla Mining
Co.'s (HL:NYSE) offer to acquire all of its Nevada assets for $462
million ($462M), or $2.47 per share. This price represents a 59% premium to
the 30-day volume weighted average price. "In our view, the transaction
is positive," Spratt added.
Hecla's strong balance sheet and operating team with narrow vein mining
expertise "should allow unlocking of value of Klondex's prospective
Nevada properties," explained Spratt. In addition, the deal
"significantly reduces financial and execution risk while giving Klondex
shareholders an immediate premium."
A third-party bid is "unlikely given the valuation and the
significant premium paid by Hecla," Spratt pointed out. As such, Clarus
changed its rating on Klondex to Tender from Speculative Buy but maintains
its $3.25 per share target price.
PI Financial analyst Philip Ker agreed that the sale of Klondex's Nevada
assets is "positive," and "prevents Klondex shareholders from
potential equity dilution should the company have needed funding for upcoming
capital outlays," according to a March 19, 2018 research piece. However,
he pointed out that such a transaction would have been more accretive had it
taken place when Klondex had a higher valuation, rather than at its 52-week
low. At the same time, though, he noted that for Klondex to regain market
confidence and get a rerating, it would have had to reach major milestones.
In other words, he concluded, "the sale comes at the bottom but with
fewer hurdles."
Ker explained that Klondex's Canadian assets, the True North mine and
recently acquired Bison Gold property, which are not part of the Hecla deal,
would be spun out to existing shareholders in a company called "Klondex
Canada." "Hecla will also subscribe for a $7M or 13.46% equity
stake in the spin-co which has a pre-investment valuation of $45M."
In consideration of the transaction, PI Financial changed its rating on
Klondex to Tender from Neutral and has lowered its target price to $3.05 per
share from $3.35 per share.
Should the transaction close, Klondex could then better delineate the ore
body at True North and "should be cash flow neutral after production
from tailings processing," Ker purported. "A primary focus on
Canada should result in positive momentum" for that and the Bison Gold
projects.
A third analyst, Don Blyth with Paradigm Capital, expressed similar
sentiment in a March 20, 2018 research report, writing the Hecla bid is
"a good deal for Klondex shareholders," given the company's recent
and ongoing challenges. They include "declining grades at Fire Creek,
disappointing gold recovery rates for the Hollister ore and a decision to put
the True North mine into a 'care and maintenance' mode owing to poor
operational performance." Klondex's stock price had declined 73% over
the previous year, and a turnaround was expected to take months.
Blyth, too, stated Hecla is well positioned financially to outlay the
capital needed to effect improvements at the various Klondex operations in
Nevada and has a strong team with the experience to do so.
As for Hecla's bid, Blyth noted that it consists of a "mix of cash
and common shares of Hecla: $2.47 in cash (all-cash alternative) or 0.6272 of
a Hecla share (all-shares alternative)." He also wrote the offer
represents a 72% premium based on both companies' closing prices on March 16
and Klondex's board approves the proposed deal. A shareholder vote is
expected in June and closing thereafter, likely by the end of Q2/18.
Paradigm changed its rating on Klondex to Tender from Hold and has
suspended its price target. Klondex is currently trading at around $2.86 per
share.
