Silvercorp Metals (TSX: SVM; NYSE: SVM) is buying Guyana Goldfields (TSX: GUY) in a $105 million (US$75 million) cash and stock deal that creates a diversified precious metals producer with two silver mines in China and a gold operation in Guyana.
The Vancouver-based miner, which currently produces silver, lead and zinc from mines in China, will give Guyana’s shareholders the option to receive 60¢ per share in cash, or 0.1195 of a share in the company, to a maximum cash consideration of $33.2 million (US$24 million).
The 60¢ share price represents a 71% premium to the 20-day volume-weighted average price of the target company as of Friday’s close.
“This transaction will create a new globally diversified precious metals producer,” Silvercorp’s chairman and CEO, Rui Feng, stated in a press release. “We believe this is a rare opportunity to leverage our underground mining expertise and strong balance sheet to unlock value for all shareholders through the development of the Aurora underground project as well as aggressive exploration programs in a proven gold district.”
The two companies have also struck a loan agreement, whereby Silvercorp will lend Guyana Goldfields up to $15 million. The funding will be used for the ongoing underground expansion of Aurora and for working capital.
Guyana has been under investor pressure due to the poor performance of its flagship and only operating mine, Aurora, following a resources review.
The mid-tier gold producer shocked the market in March last year by announcing the amount of gold in proven and probable reserves at Aurora had declined by almost 1.7 million oz., compared to estimates published in 2018.
The news triggered a bitter battle for control of the company led by founder and former chairman Patrick Sheridan, which was settled in April 2019. The deal included the appointment of an interim director and chief executive, who was replaced in January by Alan Pangbourne, Guyana’s current president and CEO.
Shares in the company fell to the lowest since 2008 in October, after the embattled Canadian miner revealed Aurora would fail to meet production guidance. The company added that a mine plan review was underway.
Guyana Goldfields’ share price has steadily declined since then. So far this year, it is down 39%, last trading on April 24 at 42¢.
The miner’s current market capitalization is sitting at almost $73 million, about half the $167 million it was a year ago.
Guyana Goldfields updated its life-of-mine plan for Aurora late last month, estimating that recovered gold production will total 2.07 million ounces at an average head grade of 2.7 grams gold per tonne over a 14-year mine life, including a transition of the mine from open pit to underground operations by mid-2021.
The updated mine plan released on March 27 forecast annual production of 170,000 oz. gold during the first five full calendar years (2022-2026) of underground mining at all-in sustaining costs of US$970 per oz. The latest plan also reduced the maximum depth of the open pit at Rory’s Knoll by 65 metres, and indicated that most of the mineralized material that had been planned to be recovered by open-pit mining would be recovered from underground under the new scenario.
“This approach to the orebody is now considered more practical than continued deepening of the pit due to extensive pit stripping requirements and timing issues related to continuous ore release, among other factors,” Guyana Goldfields stated in a news release.
The company estimated that initial capex to develop the underground in 2020 and 2021 would be about US$141 million, which would be “partially funded by cashflows from the operations.”
In a research note, Ryan Thompson of BMO Capital Markets said he sees “the potential for this acquisition to have merits” but cautioned that “it may take some time for the market to ascribe full value for Aurora given the operation’s challenging past.”
“While details are sparse, conversations with management indicate that Silvercorp plans to take a different approach to the mine plan versus what was tabled in Guyana’s most recent technical report that was released in March 2020,” Thompson stated. “Silvercorp has built its own resource model with a different geological interpretation. Upon deal closing, Silvercorp’s plan is to bring a new contractor to site to begin underground development and definition drilling.”
Thompson added that while Silvercorp “appears to be paying an attractive price,” underground development capital is needed and “it could take more than a year for production to begin ramping up.”
Barry Allan, a mining analyst at Laurentian Bank Securities, noted that the deal provides “much needed financial support and market liquidity for Guyana shareholders.”
“While we recognize Silvercorp’s offer is below our theoretical NAV and target price for Guyana Goldfields, we do also recognize that GUY was facing substantial financial and operating hurdles that was jeopardizing the ability of the company to remain a going concern, and we believe Silvercorp are being opportunistic buying a fully built mill and a known resource — the true quality of which remains to be verified by good operating results,” he wrote in a research note. “At the very least, Silvercorp’s offer puts a nice floor under GUY’s share price.”
He also points to Silvercorp’s balance sheet (US$152.1 million in cash and short-term investments and working capital of US$133.7 million at the end of last year). “Silvercorp has significant market liquidity and substantial financial wherewithal, and clearly has an appetite for risk,” he said.
But Allan isn’t ruling out a competing bid. “We think there is a reasonable probability that additional interest may surface given the comparatively low barrier in making an offer.”