Precious Metals

US Silver wants shareholders to say no to Hecla’s cash and yes to a stock-for-stock deal with RX Gold.

US Silver (TSX:USA, OTCPINK:USSIF) and RX Gold and Silver (TSXV:RXE)  have a plan to merge into US Silver and Gold, a combined company with the goal of exceeding 5 million ounces of silver by 2014. Under the terms of the deal, US Silver shareholders will own approximately 70 percent of the new company and RX shareholders get 30 percent. However, Hecla Mining (NYSE:HL) has upped the ante by making an all-cash offer for US Silver, a deal that US Silver urges its shareholders to reject.

If their merger plans are successful, US Silver and RX Gold will merge and focus on “three strong assets”:

  • US Silver’s Galena silver-copper mine in Idaho, which  produced 559,027 ounces of silver in Q1 2012.
  • RX’s Drumlummon gold-silver mine in Montana, which produced 6,625 ounces of gold and 117,635 ounces of silver in Q1.
  • US Silver’s redevelopment projects in Idaho, such as Coeur mine, which is expected to go into production this year.

Operating as US Silver and Gold, the companies expect a production base of 2.7 million ounces of silver and 26,500 ounces of gold.

These figures will represent a 12 percent increase in silver production for US Silver, according to Mark Grothe, lead analyst at proxy firm Glass Lewis and Co. With RX’s gold, there is a 75 percent increase on a silver equivalent basis, which he says is significant.

The companies expect greater growth and development opportunities and that the geographical proximity of their operations will allow corporate, milling and production synergies that will promote efficiency and lower costs by  more than $10 million per year.

Other benefits are said to include improved liquidity and capital markets profile and management that can deliver results.

In a Business News Network interview, Darren Blasutti, president and CEO of RX, and CEO of the new US Silver and Gold, said US Silver has a very established asset but not a strong enough management team to unlock the necessary value. He believes this is a gap RX can fill since the company is formed by former Kinross (TSX: K,NYSE:KGC) and Barrick (TSX:ABX,NYSE:ABX) personnel, like him.

As with any merger, there are risks, and the benefits are not guaranteed. Time frames in which the potential benefits will be realized are unknown, and the expected results are largely contingent upon silver prices and mining valuations recovering.

Hecla makes an offer

Hecla believes it has a better plan – offering US Silver shareholders C$1.80 per share and C$.205 per outstanding common share purchase warrant.

This deal represents a 23 percent premium over US Silver’s closing share price on July 24, a 28 percent premium over the company’s one-month average, and a 28 percent premium over the offer price of $C 1.41 under the proposed RX merger.

This deal involves cash, which Hecla has on hand, but is contingent upon the RX merger not going through.

Weighing the options

US Silver says Hecla’s offer is inadequate and highly opportunistic.

While the Hecla deal offers a seemingly attractive premium from a short-term perspective, US Silver accuses Hecla of trying to take advantage of recently low silver and mining share prices saying the offer represents a 10 percent discount to the 180-day volume weighted average.

Glass Lewis also describes Hecla’s offer as being on “the low side.” Its proxy paper says the premiums are below the average paid for similar-sized takeover deals for silver mining companies and adds that the offer implies a 20 percent discount below the one year stock price.

US Silver further complains that the offer does not fully reflect the value of its assets and organic growth opportunities. It accuses Hecla of trying to take advantage of its cash balances to finance the offer. With approximately C$29 million in working capital, which represents 26 percent of funding for Hecla’s offer, US Silver says it is effectively only being valued at C$1.39 share.

With the stock-for-stock RX merger, US Silver claims it will acquire RX at a 34 percent discount below the stock price on the day of the announcement.

But Hecla warns shareholders that voting in favor of the RX merger will deliver significant risk, considerable debt and assets of questionable value.

US Silver has no debt and about $29 million in working capital. Hecla points out that as of March 31, RX had $1.4 million in cash and had drawn about $8 million on a credit facility.

RX responded saying that as of June 30, it had about $3 million in cash, had reduced the credit line to $7.9 million and had concentrate inventory with gross market value of approximately $6.1 million.

But Hecla’s warning didn’t stop with finances. The company says RX’s flagship property, Drumlummon, contains a number of risks and uncertainties related to achieving full production, such as the fact that it is currently operating under a smaller miners exclusion (SME), which limits a company to five acres or less of surface disturbance. Hecla says there is no certainty of obtaining full operating permits.

RX says the SME does not limit production.

Where is the added value for US Silver shareholders? Hecla asks.

US Silver board opposed to Hecla offer

Hecla does not believe the US Silver board protected shareholders rights to properly evaluate their unsolicited offer.

Hecla claims to have wanted a friendly transaction and approached US Silver on July 23. No agreement was reached and US Silver planned to proceed with the vote for the RX merger, so Hecla announced its intentions directly to shareholders July 25.

On July 26, US Silver said the board was in the process of  reviewing and analyzing the offer with outside financial and legal advisers. By July 30 US Silver said the board unanimously rejected the Hecla offer and urged votes in favor of the RX merger.

Gordon Pridham, Chairman & Interim CEO of US Silver, said the board believes the proposed strategic combination transaction with RX Gold is in the best interest of shareholders.

RX and US Silver also point to those who have reaffirmed support for their merger, such as Eric Sprott, CEO and CIO of Sprott Asset Management. Sprott is a major investor in both US Silver and RX. He is also the founder of Cormark Securities.

Cormark is US Silver’s financial adviser for the RX merger and will determine fairness for the shareholders.

Much ado has also been made about the fact that Glass Lewis and another top proxy advisory firm, ISS, reaffirmed their support for the RX merger after Hecla’s offer. Their updated recommendations for shareholders to vote in favor of the merger were reported on July 31, one day after the board’s rejection of Hecla’s offer.

That was within the normal time frame for Glass Lewis, according to Grothe.

It is against Glass Lewis policy for Grothe to reveal whether the top shareholders at US Silver or RX are among its clients.

He did, however, respond to a request for clarification as to why the Hecla offer is not compelling while finding that the RX merger is.

“We believe the expected benefits of the merger, including increased production base, exposure to Drumlummon, a strong management team, cost savings and synergies and an enhanced capital markets profile- – all at a price that implies a premium for US Silver – is superior to Hecla’s unsolicited offer which isn’t that much higher than the price implied by the merger,” he said.

He also noted that the market values junior and intermediate companies on the potential of their assets.

“As such, we believe paying a discount to the market for a company with claims to quality resources located adjacent to those already owned by the buyer is indeed strategically and financially compelling.”

But, what about Hecla’s concerns about risks and quality of RX assets?

“We made sure to acknowledge Hecla’s opinion,” Grothe said. “Beyond that we defer to the board’s judgment because we don’t think we’re in a better position than the board and its advisers to determine the true risks of production or quality of assets at RX Gold’s properties, especially considering the technical nature of evaluating mining assets and operating plans.”

Grothe also reiterates that the report states Hecla’s offer represents immediate and assured value in the form of liquidity without any operational, integration, or pricing risks.

US Silver shareholders will have to decide if their appetite is for potential, eventual value or risk-free ready cash.

After  Hecla’s offer announcement US Silver shares rose from about $1.40 to trade around $1.80. US Silver shareholders are scheduled to vote on August 7.

 

I, Michelle Smith, do not hold equity interest in any of the companies mentioned in this article.

 

 

 

 

 

 

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