Shares of Toronto-based junior Andina Minerals (ADM-V) have nearly doubled, as it has agreed to a $130-million, all-cash takeover by Peru-based precious metals producer Hochschild Mining (HOC-L).
Hochschild is offering Andina shareholders 80¢ a share so that it can scoop up the junior’s wholly owned flagship Volcan gold project in Chile’s Atacama region.
This offer is double Andina’s Nov. 7 closing price the day before the bid was announced, and it represents a 106% premium to its 20-day, volume-weighted average price.
Pleased with the hefty premium, the junior’s board applauds the offer, noting that it allows a better-financed firm to advance Volcan in Chile’s Maricunga gold belt, which hosts Kinross Gold’s (K-T, KGC-N) Maricunga and La Coipa mines.
Andina president and CEO George Bee says the offer is appealing, and notes that his company’s shares had been dropping over the past year largely due to cost inflation at Volcan. The junior reached a 52-week high of 99¢ last December, and had been on a slide until this bid. Bee says that there had also been concerns about financing Volcan.
“After reviewing the alternatives available to our company, we believe that the offer is the best option for Andina shareholders,” he says in a statement.
Haywood Securities analyst Joe Mazumdar agrees. “This all-cash bid is a positive for Andina shareholders in light of the financing risk related to developing the project for Andina Minerals,” he writes in a note. He adds that Hochschild is better equipped to develop the project than Andina is in the current market environment.
The junior’s directors, officers and shareholder Mackenzie Financial — holding a combined 13.7% of Andina — have pledged to tender their shares to the bid.
As part of the transaction, Hochschild will provide a secured loan of $1.75 million 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 this, 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 says the acquisition would strengthen its presence in Chile, one of its preferred mining jurisdictions in the Americas.
The Lima-based 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 calls “company-makers.”
Hochschild CEO Ignacio Bustamante said the acquisition of Andina would give the company “further long-term optionality, as well as geographical balance.”
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 has a global gold resource, including Ojo de Agua Este, of roughly 10 million oz., which is part of a 300 sq. km land package, which Mazumdar says “provides exploration upside.”
According to a 2011 prefeasibility study, Dorado could produce 283,000 gold oz. a year throughout its 15-year life. Building the mine is estimated to cost US$547 million.
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 per oz. gold price and 5% discount rate.
Although Bustamante says the project has its “challenges,” he remains confident that his geological and operational teams can realize Volcan’s potential.
“Despite this transaction representing approximately four percent 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, and in late September found that the project study advanced through the first evaluation stage, Mazumdar explains.
He anticipates the company will receive the EIA approval and a go-ahead for development in the second half of 2013.
Meanwhile, Hochschild plans to mail its takeover 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 would have to pay Hochschild a $4.1-million termination fee.
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