Silvercorp Makes Play For Klondex

The largest silver miner in China, Silvercorp Metals (SVM-T, SVM-X), is turning its attention westward with an unsolicited all-share takeover bid for Klondex Mines (KDX-T, KLNDF-O), owner of the advanced Fire Creek gold project in north-central Nevada.

For each Klondex share, holders would receive half a Silvercorp share, valuing a Klondex share at $2.18 based on Silvercorp’s closing price on June 5. The offer, which values Klondex at $70 million overall, represents a 59% premium based on Silvercorp’s closing price, or a 63% premium based on both companies’ 20-day volume- weighted average price.

The offer is conditional on at least two-thirds of Klondex shares being tendered, and on Klondex’s shareholders’ rights plan being waived, invalidated or cease-traded.

In a release, Silvercorp said it decided to go directly to Klondex’s shareholders after being unable to engage the company in discussions on a friendly takeover.

William Solloway, Klondex’s president, responded to the bid in a statement, saying the company was surprised “by the haste of Silvercorp in making this unilateral bid” for the company’s assets. “We have come too far in developing our high-grade resource at Fire Creek to make any hasty decisions regarding the best path forward.”

At presstime, Klondex’s board was planning to meet to discuss the bid and make a formal recommendation to shareholders.

Silvercorp’s rationale for the merger is twofold: diversifying away from China, and buying into Fire Creek, a project it considers attractive both for its potential high margin and its geology. Silvercorp says the project, which hosts a high-grade, narrow-vein gold deposit, would allow it to use expertise gained on its high-grade, narrow-vein Ying silver mine in China.

Klondex has been advancing Fire Creek to a bulk-sample permit, and if the bid succeeds, Silvercorp intends to continue along this route. In a conference call with analysts, Rui Feng, Silvercorp’s chairman and CEO, said he expects a permit within three to six months. A US$1.5-million reclamation bond is required.

He estimates that, once a permit is granted, a capital investment of US$10 million would be necessary to go underground and start mining the bulk sample. A mining contractor would do the work, and Silvercorp is planning to use toll-milling in one of the mills in the area, which has infrastructure in place.

Feng anticipates a three-year bulk-sampling program, at 40,000 tonnes per year, grading an estimated 1.5 oz. per tonne. Silvercorp is planning to use the cash flow from the bulk sample to develop the mine and fund further exploration.

That cash flow could be substantial. During the conference call, Feng estimated mining costs at US$100 per tonne, or all-inclusive costs at US$200 per tonne.

At a cutoff grade of 5 grams gold per tonne, Fire Creek has indicated resources of 5 million tonnes grading 10.1 grams gold, for 1.64 million oz. gold equivalent, and inferred resources of 1.8 million tonnes grading 8.6 grams gold, for 510,000 oz. gold equivalent.

The 43-sq.-km project is located between the past-producing Mule Canyon to the north, and Barrick Gold’s (ABX-T, ABX-N) Pipeline and Cortez gold deposits to the south.

On March 31, Silvercorp had working capital of US$47.6 million. In the year to March 31, the company posted a net loss of US$16 million on sales of US$83.5 million, after impairment charges of US$50.7 million.

At the end of the first quarter, Klondex had current assets of $1.85 million, and current liabilities of $1.93 million.

On the news, Klondex shares gained 58¢ to $1.95, while Silvercorp shares fell 54¢ to $3.82. Klondex has 26.7 million shares outstanding, and Silvercorp 161.6 million shares.