Klondex board of directors rejects Silvercorp offer

Vancouver – Calling it “opportunistic” Klondex Mines‘ (KDX-T) board of directors have rejected an all-share hostile takeover bid made earlier in June by Silvercorp Metals (SVM-T, SVM-X).

Klondex announced that all members of its board of directors and its management, which control 19.6% of Klondex’s fully diluted shares or 15% of outstanding shares, will not ante up their shares to Silvercorp. They recommend other shareholders not to either.

Silvercorp has offered Klondex shareholders half a Silvercorp share for every Klondex share, which at the time of the offer, was a 59% premium over Klondex’s price as compared to Silvercorp’s.

In a lengthy objection to the offer Klondex paints Silvercorp’s bid, first, as undervaluing it and, second, as an ill-fitting match of company portfolios with different development trajectories.

On the first theme Klondex says Silvercorp’s offer equates the transaction value with US$21-per-oz. gold whereas it argues the going rate-per-oz.-gold paid out in mergers and acquisitions over the past three years is in the US$113 to US$133-per-oz. gold range, though it does not provide specific examples of such transactions.

Klondex, which says Scotia Capital advised it that the offer was inadequate, also notes that the all-share bid is subject to what it calls a “historically volatile” Silvercorp share price and as such the value of the offered shares is “uncertain”.

Furthermore, Klondex says, it is pursuing “superior proposals” that may deliver “greater value” to Klondex shareholders.

On how well the companies match, Klondex says that because Silvercorp operates exclusively in China it faces significant risks as compared to Klondex’s Nevada projects which are in what is “generally deemed to be a preferred mining destination.”

Klondex also says that if Silvercorp were to acquire it, it would mark an unwanted shift away from gold, the substance of Klondex’s chief assets, to silver, lead and zinc, the mainstays of Silvercorp.

“We believe there remains too much near term potential for Klondex and Fire Creek for shareholders to suffer dramatic dilution and accept this strategic commodity shift from pure gold to silver, zinc and lead at this time,” Robert Sibthorpe, chairman of the special committee that considered the offer, says in a statement.

At this point Silvercorp is considering its response, says Silvercorp corporate communications manager Shirley Zhou.

Will Silvercorp sweeten the deal? “We’ll have to take a look at what they’re doing first,” she says, adding that until Silvercorp formulates its response there is little she can say on the matter.

She says Silvercorp is currently working with its board of directors and a legal team to pour over the issues, gather all the facts and “try to understand what they’re (Klondex) trying to do (in their rejection).”

Zhou, however, reiterates Silvercorp’s position that Klondex shareholders are getting a good deal with its takeover offer.

In response to Klondex’s issue with the all-share bid and assertion that Silvercorp’s shares are historically volatile, Zhou says Silvercorp has certainly seen its ups and downs.

“We’re still a young company and it’s taken time for the market to recognize the value we’re creating for our mines,” she says.

But she believes that if anything the all-share offer has a significant upside, allowing Klondex shareholders to participate in the future advancement of Klondex’s flagship Fire Creek gold project where Klondex has outlined a 5 million tonne indicated resource grading 10.11 grams gold per tonne for 1.6 million oz. contained gold.

Zhou argues, because of cash-flow generated from its operating mines in China, Silvercorp is well funded and could advance Fire Creek without having to source financing.

Although at this point it is difficult to assess whether the differences between the two companies as outlined by Klondex’s management and board of directors are intractable or to which side of the fence shareholders will cross, certainly with 15% of outstanding shares the former wield significant influence over Klondex’s future.

As such Silvercorp seems likely to ratchet up its efforts to woo stakeholders as the July 21 deadline for its current offer approaches.

Zhou remarks: “Hold on to your seats because it’s going to be a pretty interesting ride.”

On news of the rejection Klondex’s share price lost 19¢ to close at $1.96 and Silvercorp’s dropped 18¢ to close at $4.06.