Hochschild offers $22.5 million for Southwestern

Vancouver – With its Boka troubles finally settled, Southwestern Resources (SWG-T) has found itself with a suitor: Hochschild Mining (HOC-L) has made a bid to acquire the Vancouver-based company in an all-cash deal.

The two companies signed a letter of agreement that Hochschild can acquire Southwestern for 50¢ per share, which values Southwestern at $22.5 million. The offer represents a 117% premium over Southwestern’s share price on March 6th.

“The motivation is that Hochschild made an offer for the company, an all-cash offer that offers a 150% premium, roughly, to yesterday’s close, which the board has a fiduciary duty to present to the shareholders,” says Timo Jauristo, Southwestern’s president and CEO. “The board is recommending it, subject to a fairness opinion that hasn’t yet been prepared.”

Jauristo could not provide an exact figure but said Southwestern has roughly $8 million in the bank, which means the Hochschild offer values the company itself at closer to $15 million.

Hochschild wants Southwestern’s Peruvian projects. The prize in Southwestern’s slate is the Liam property, a 282,000-hectare land package in southern Peru that hosts 47 separate hydrothermal systems. Ten of those prospects have seen drilling and two are nearing production decisions.

Hochschild already owns half of Liam, having paid Newmont Mining (NMC-T, NEM-N) US$33.3 million in August for its 50% interest. According to the Southwestern-Hochschild joint venture agreement, Hochschild is project operator and can earn an additional 20% interest in any single project within Liam by producing a positive feasibility study and financing costs to production. Hochschild is excited at the prospect of holding Liam outright and thus achieving “full upside potential” at the property.

Liam is also well located for Hochschild, sitting close to Hochschild’s four Peruvian mines

The London-based producer would also boost its interest in the Pacapausa property, in which it currently holds a 30% interest and Southwestern a 50% stake. Pacapausa is a precious metal epithermal vein target, with some additional potential for high-sulphidation gold mineralization, that sits between Hochschild’s Explorador and Selene silver mines to the north and the Pallancata silver mine to the south. Hochschild and partner International Minerals (IMZ-T) started production at Pallancata in late 2007 and view Pacapausa as a potential satellite ore source for the operation.

And in another synergy for Hochschild, Southwestern also owns the Millo project. Another project in southern Peru, Millo is an epithermal vein and high sulphidation gold-silver target. Yamana Gold (YRI-T, AUY-N) is earning a 70% interest in Millo by funding all exploration costs to produce a pre-feasibility study. Millo is adjacent to Azuca, one of Hochschild’s exploration-stage properties.

“I think it’s a good deal for Hochschild,” said Jauristo. “We’ll have to see how it plays out.”

At first turn it seemed to be playing out in favour of the takeover, as Southwestern’s share price gained 20.5¢ or 100% on the news to close at 41¢. The company has 45 million shares outstanding.

Southwestern has just started to emerge from a rough few years. In late 2006 the company’s shares traded near $14 based on a gold project in Yunnan province, China, called Boka that supposedly hosted more than 3 million oz. gold. Then, in mid-2007, the company detected deliberate, manual changes to its assay database that inflated gold grades.

The company’s CEO and qualified person at the time, John Patterson, immediately left his job and Southwestern brought legal action against him, charging fraud, breach of fiduciary, statutory, and contractual duties, and insider trading. The company’s share price fell to the $8 range until mid-2007, when a corrected estimate put Boka’s resource at just 337,000 oz. gold and the company’ share price plunged to below $1.

Angry investors brought a class action lawsuit against Patterson, his wife, and the company, accusing them of misleading investors and demanding as much as $320 million in compensation. The company managed to negotiate a settlement: the plaintiffs received $15.5 million, slightly more than half of which came from Patterson and his wife.

Southwestern then sold Boka to a Chinese company for US$9.4 million plus a 2.7% net smelter return and turned its attention to its other properties, most of which are in Peru.

The Hochschild deal is still subject to the completion of due diligence and the receipt of a fairness opinion from Southwestern’s advisors. The transaction must also garner approval from Southwestern’s shareholders.

And Southwestern shareholders need no reminders that acquisitions do not also go ahead as planned. Only a few weeks ago Southwestern announced a merger deal with Geoinformatics Exploration (GXL-V) that would have seen Southwestern issue 0.6 of a share for each Geoinformatics share. Two weeks later Geoinformatics notified Southwestern that it wanted out of the deal. Jausito explained that the Hochschild offer had been made and Geoinformatics made use of its right to back out.