Shares of Toronto-based junior Andina Minerals (ADM-T) nearly doubled as it agreed to a $130-million all-cash business combination with Peruvian-based precious metals producer Hochschild Mining (HOC-L).
The Latin American firm is offering Andina 80 cents a share so it could beef up its project pipeline, by scooping the junior’s flagship Volcan gold project in Chile’s Atacama Region.
That’s double Andina’s Nov.7 closing price, the day before the bid was announced, and represents a 106% premium to its 20-day volume weighted average price.
Pleased with the hefty premium, the junior’s board has applauded the offer, noting that it allows a better financed firm to advance its wholly owned Volcan project in Chile’s famed Maricunga gold belt, which hosts Kinross Gold’s (K-T, KGC-N) Maricunga and La Coipa mines.
Andina president and CEO George Bee said the offer is appealing, noting the company’s shares have dropped over the past year largely due to cost inflation. The junior reached a 52-week high of 99 cents early last December and has since seen its shares slide. Bee also mentioned there were concerns with how the company would finance Volcan.
“After reviewing the alternatives available to our company, we believe that the offer is the best option for Andina shareholders,” he said in a statement.
Haywood Securities analyst Joe Mazumdar agrees. “This all cash bid is a positive for Andina’s shareholders in light of the financing risk related to developing the project for Andina Minerals,” he writes in a note, adding Hochschild is better equipped to develop the project than Andina is in the current market environment.
To support the offer, the junior’s directors, officers and shareholder, Mackenzie Financial, holding a combined 13.7% of Andina have locked up their shares.
As part of the transaction, Hochschild will provide a secured loan of $1.75 million shortly to cover the junior’s general expenses, and another $3.75 million in escrow that Andina can access when Hochschild acquires its shares.
To do that, Hochschild requires approval from two-thirds of Andina shareholders. If the transaction fails, Andina will have to repay the loan and return the escrow funds.
Hochschild, headquartered in Lima, said the potential acquisition will strengthened its presence in Chile, one of its preferred mining jurisdictions in the Americas.
Currently, the gold-silver producer runs four underground epithermal vein mines, with three in southern Peru and one in Argentina. It has a handful of long-term projects throughout the Americas, including three in northern Chile that it has labelled as “company makers.”
Hochschild CEO Ignacio Bustamante said the potential acquisition of Andina gives the company “further long-term optionality as well as geographical balance” within its project pipeline with the Volcan project.
Andina also holds 49% of Hochschild’s Encrucijada project nearby, and 50% of the gold-silver Pampa Buenos Aires property in northern Chile.
Volcan’s Dorado deposit hosts gold reserves of 6.6 million oz. grading 0.73 gram gold in 283 million tonnes. It contains a global gold resource including Ojo de Agua Este of roughly 10 million oz., which is part of a 300-sq.-km land package, “providing exploration upside,” comments Mazumdar.
According to a 2011 prefeasibility study, Dorado could produce 283,000 gold oz. a year throughout its 15-year life. The project is estimated to cost US$547-million to build.
Dorado has an after-tax net present value of US$863 million and an internal rate of return of 23%, using a US$1,300 gold price and 5% discount.
Although Bustamante says the project has its “challenges,” he remains confident that his geological and operational teams could uncover its full potential.
“Despite this transaction representing approximately 4% of Hochschild’s market capitalization, it could ultimately deliver significant growth,” he says.
Andina submitted an environmental impact assessment (EIA) for the Dorado project to the Chilean authority in July 2012, and in late September were told that the project study advanced through the first evaluation stage, explains Mazumdar. He anticipates the company will receive the EIA approval and go-ahead for development in the second half of 2013.
Meanwhile, Hochschild plans to mail its take-over bid circular and Andina its Director’s circular recommending the bid, both by Nov. 22. The transaction is set to close by year end.
If Andina walks from the offer it will have to pay a termination fee of $4.1 million to Hochschild.
Andina closed Nov.8 up 95% at 78 cents, while Hochschild lost nearly 2% to end at £4.87.
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