Consolidation Continues as Tahoe Buys Rio Alto Mining

In a move that some believe marks a continued march towards consolidation in the precious metals space, Tahoe Resources (TSX:THO,NYSE:TAHO) and Rio Alto Mining (TSX:RIO,NYSE:RIOM) said Monday that they have agreed to combine their businesses. 

Tahoe, whose Guatemala-based Escobal mine began commercial production of silver, gold, lead and zinc in January 2014, will acquire Rio Alto in a friendly, mostly stock takeover valued at $1.3 billion. Rio Alto shareholders will receive 0.227 of a Tahoe share and C$0.001 in cash per share, with Rio and Tahoe shareholders ultimately owning 35 and 65 percent, respectively, of the new company.

Executives at both companies believe the combination will be positive for them, as well as — of course — shareholders. A few key benefits highlighted in Monday’s press release include:

• Leading intermediate precious metals producer: Tahoe describes Escobal as one of the largest and highest-grade silver mines in the world, while Rio Alto’s La Arena mine is an established gold producer in Peru. The companies believe that those assets, combined with Rio Alto’s Shahuindo gold project, which is set to begin production in 2016, will work well together.

• Low-cost production: Escobal and La Arena are both low-cost producers, an important consideration in today’s tough price environment.

• Long-term growth potential: Escobal is currently undergoing an expansion, and, as noted, Shahuindo is due to start producing next year. In addition, the companies note in their release that there is “potential for continued exploration success across the combined asset base.” 

Elaborating, Kevin McArthur, vice chair and CEO of Tahoe, commented, “[t]he combination of Tahoe and Rio Alto is designed to create a stronger and better positioned company going forward. In addition to diversifying our asset base into one of the most attractive precious metal producing regions in the world, this transaction establishes a strong platform for future growth.”

Meanwhile, Rio Alto’s president and CEO, Alex Black, said, “[i]n addition to Tahoe’s attractive dividend policy, this transaction positions our shareholders to realize superior returns as we become part of a larger and more diversified intermediate precious metals producer in the Americas with enhanced cash flow generating capability.”

Ultimately, Black will be CEO of the combined company, while McArthur will be its executive chairman of the board.

As mentioned, others are pleased for another reason: they believe the deal is an indication that some consolidation is about to hit the precious metals space. As a Reuters article states, it’s “the latest sign that precious metals miners … are slowly coming to grips with new market realities and beginning to focus on long-term growth once again.”

The news outlet points to last month’s announcement that Goldcorp (TSX:G,NYSE:GG) plans to buy Probe Mines (TSXV:PRB) as the start of the wave. Interestingly, Goldcorp owns 39 percent of Tahoe and has said that it supports the Rio Alto acquisition, which is expected to close in early April 2015.

At close of day Monday, shares of Rio Alto were up 11.28 percent, at $3.65, on the TSX, and up 10.93 percent, at $2.93, on the NYSE. Meanwhile, Tahoe’s share price was down 9.3 percent, at $16, on the TSX, and 8.93 percent, at $12.85, on the NYSE.

Securities Disclosure: I, Charlotte McLeod, hold no direct investment interest in any company mentioned in this article. 

Related reading: 

Goldcorp’s Probe Takeover Spurs Consolidation Talk