Hochschild ties up loose ends with IMZ acquisition

With its proposed acquisition of International Minerals (TSX: IMZ), Hochschild Mining (LSE: HOC; US-OTC: HCHDF) will increase its ownership from 60% to 100% in two of its precious metal assets in southern Peru: the Pallancata underground silver mine, which produced 7.4 million oz. silver and 26,000 oz. gold last year, and the development-stage Inmaculada gold-silver deposit, 40 km south of Pallancata.

Under the plan of arrangement, which has been unanimously supported by International Minerals’ board of directors, shareholders will receive US$2.38 in cash for each share they hold of International Minerals and one common share in a new Canadian public company that will advance International Minerals’ wholly owned properties in Nevada. The new company will also receive the junior’s $58 million in cash and receivables.

The transaction represents a total consideration of $360 million to $400 million ($3.04 to $3.31 per share), or a 24–35% premium over the company’s 20-day, volume-weighted average price of $2.46 per share on the Toronto Stock Exchange, International Minerals says.

The Pallancata mine, 180 km southwest of the city of Cuzco, has been in production since the third quarter of 2007 and was ranked among the world’s top-five primary silver mines in 2010. (In 2011 it was the sixth-largest primary silver mine in the world.)

Pallancata is a low-to-intermediate sulphidation precious-metal epithermal vein deposit mined by cut-and-fill methods. Pallancata had measured and indicated resources of 4.5 million tonnes grading 352 grams silver per tonne and 1.7 grams gold per tonne.

The Inmaculada project — characterized by low-sulphidation and high-sulphidation epithermal mineralized systems, and hosted by veins, breccias and disseminations within Tertiary volcanics — is expected to start production in the second half of 2014. The project is 30 km southwest of Hochschild’s Selene–Explorador silver-gold mine.

Inmaculada has measured and indicated resources of 7.1 million tonnes grading 144 grams silver per tonne and 4.07 grams gold per tonne, and inferred resources of 4.9 million tonnes grading 3.9 grams gold and 152 grams silver. 

A feasibility study of an underground mine on the Angela Vein deposit at Inmaculada completed in January 2012 outlined average annual production of 124,000 oz. gold and 4.2 million oz. silver at all-in mine costs of US$680 to US$710 per oz. gold, net of silver credits. At a gold price of US$1,100 per oz., a silver price of US$18 per oz. and a 3,500-tonne-per-day operation, the feasibility study envisioned an initial mine life of 6.3 years, with a US$46-million post-tax net present value at an 8% discount rate, and a 12% internal rate of return.

The public company will hold International Mineral’s wholly owned Goldfield project and its Converse gold project, both in Nevada.

The Goldfield property has three gold deposits — Gemfield, Goldfield Main and McMahon Ridge — which altogether have measured and indicated resources of 31.1 million tonnes at an average grade of 1.2 grams gold.

In July 2012 the company completed a feasibility study on the Gemfield deposit, which contains 17 million tonnes at an average grade of 1 gram gold. At a base-case gold price of US$1,350 per oz. and a projected 6,000-tonne-per-day heap-leach processing throughput, an open-pit mine at Gemfield could return a US$75-million post-tax net present value at a 5% discount rate, and an 18% post-tax internal rate of return.

The Converse project is an open-pittable, low-grade deposit in the Battle Mountain trend with measured and indicated resources of 320.2 million tonnes grading 0.5 gram gold and 3.7 grams silver.

Hochschild’s proposed acquisition of International Minerals, which must be passed by two-thirds of the latter’s shareholders, was announced after markets closed on Oct. 1. When markets reopened, the news sent shares of International Minerals up 10%, or 26¢, to $2.87 per share.

Adam Graf of Cowen and Co. in New York values International Minerals’ 40% interest in the Peruvian assets at a net asset value of $260 million, or $2.15 per share, exclusive of the company’s $56 million in debt related to developing Inmaculada, which will be absorbed by Hochschild. “Factoring in International Minerals’ portion of the debt,” he says, “Hochschild’s US$2.38-a-share offer for the remaining 40% interest in both assets implies a 42.5% premium to our adjusted NAV per share.”

The mining analyst also puts the net asset value of the new public company’s assets in Nevada and cash at $178 million, or $1.47 per share, on a fully diluted basis. “Given the pre-construction and pre-permitting stage of the Nevada assets, we would expect the SpinCo to have a market value of 77¢ per share. This valuation is exclusive of the $58 million in cash and receivables the company expects to have on the balance sheet by closing.”

The $58 million consists of $45 million in cash and $13 million in contingency payments, related to selling the company’s assets in Ecuador.