Chap adds Swedish silver (November 29, 2004)

Wheaton River Minerals‘ (WRM-T) 75%-owned silver spinoff, Chap Mercantile (SLW-T), has inked a deal to buy all the silver produced from the Zinkgruvan mine in central Sweden.

Vancouver-based Lundin Mining (LUN-T) (formerly South Atlantic Ventures) acquired Zinkgruvan, which also produces zinc and lead, earlier this year by paying mining giant Rio Tinto (RTP-N) US$100 million in cash plus payments for working capital and a US$1-million non-refundable deposit. Lundin is also on the hook for up to US$5 million worth of price participation payments, based on the performance of zinc, lead and silver for up to two years.

Under the latest deal, Chap will pay Lundin US$75 million in the form of US$50 million in cash, plus 30 million shares and 30 million share warrants up front. Each warrant is good for an additional share at 80 apiece until Aug. 5, 2009. Thereafter, Chap will buy each ounce of silver for US$3.90 or the going market rate at the time of delivery, whichever is less.

Funding for the deal will take the form of a private placement of 64 million units priced at 75 apiece. The underwriters include GMP Securities, Canaccord Capital, Orion Securities, First Associates Investments, Fort House, Haywood Securities, Salman Partners, Scotia Capital, and Sprott Securities.

The $48 million in proceeds could grow to $60 million, as the underwriters can buy up to another 16 million like-priced units for two days prior to closing. One unit includes one Silver Wheaton share plus half a purchase warrant; one whole warrant is good for another share at $1.10 per share for five years.

“This is an extremely accretive transaction for [Chap Mercantile] shareholders,” says Wheaton CEO Ian Telfer. “While it increases sales, cash flow, earnings, and reserves and resources by more than twenty-five per cent, we expect dilution to current shareholders to be less than fifteen per cent.”

In 2003, Zinkgruvan produced 66,000 tonnes zinc, 32,000 tonnes lead, and 1.8 million oz. silver. The mine has produced continuously since 1857 and is expected to produce around 2 million oz. silver per year for the next 19 years.

At the end of 2003, proven reserves totalled 7.9 million tonnes grading 9.9% zinc, 5.2% lead and 103 grams silver per tonne, and probable reserves stood at 1.6 million tonnes grading 9.3% zinc, 2.8% lead, and 68 grams silver.

Wheaton says the acquisition boosts its silver reserves and resources to more than 200 million oz. Silver sales in 2005 are projected at 9.5 million, and more than 10 million oz. in 2006.

The transaction is subject to definitive agreements and regulatory approval. Closing is expected by mid-December.

Shareholders of Chap Mercantile will vote on a proposed name change to Silver Wheaton on Dec. 8. The company will also be looking for approval of 1-for-5-share consolidation and a bigger board.