Silvercorp in unsolicited takeover bid for Klondex

China’s largest silver miner, Silvercorp Metals (SVM-T, SVM-X), is turning its attention westward with a planned unsolicited all-share takeover bid for Klondex Mines (KDX-T), owner of the advanced Fire Creek gold project in north-central Nevada. Based on Silvercorp’s closing price on June 5, the offer values Klondex at $70 million.

For each Klondex share, holders would receive one half of a Silvercorp share, valuing a Klondex share at $2.18 based on Silvercorp’s closing price on June 5, a 59% premium to Klondex’s closing price based on Silvercorp’s closing price, or a 63% premium to Klondex’s 20-day volume-weighted average price based on Silvercorp’s 20-day volume-weighted average price.

Silvercorp expects to launch its formal bid during the third week of June, and to have the offer open for at least 35 days. The offer is conditional on at least two-thirds of Klondex shares being tendered, and on Klondex’s shareholder rights plan (poison pill) being waived, invalidated or cease-traded.

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

Silvercorp’s rationale for the bid is twofold: diversifying away from China, and buying into Fire Creek, a project which it considers attractive both for its potential high margin and its geology. The project, which hosts a high-grade, narrow-vein gold deposit, would allow Silvercorp 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 to analysts, Rui Feng, Silvercorp’s chairman and CEO, said that he expected a permit within 3-6 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. The area has infrastructure.

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 per tonne, for 1.64 million oz. gold equivalent, and inferred resources of 1.8 million tonnes grading 8.6 grams gold per tonne, for 510,000 oz. gold equivalent.

The 43 sq. km Fire Creek project is located between the past-producing Mule Canyon to the north, and the Pipeline and Cortez gold deposits to the south.

In a release, William Solloway, Klondex’s president, said: “. . . (We) are surprised by the haste of Silvercorp in making this unilateral bid for our prized 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.”

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

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

On March 31, 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.