Hecla goes hostile on 
Dolly Varden in $12M bid

Dolly Varden Silver (TSXV: DV; US-OTC: DOLLF) shares have surged more than 45% since Hecla Mining (NYSE: HL) made a hostile takeover bid for all of the junior’s shares that it doesn’t currently own.

On June 27, Hecla proposed to buy each Dolly Varden share for 69¢ in cash, marking a 55% premium over the junior’s June 24 close of 44.5¢, and a 97% premium over the prior 20 trading days.

A day later, the junior’s shares opened on the TSX Venture at 74¢, before settling at 64¢ in midday trading.

In a release, Hecla’s president and CEO Phillips Baker said Dolly Varden could become a notable silver producer, but that he’s concerned with the current board’s “value destruction for shareholders.”

Baker argues Dolly Varden’s new loan would result in “substantial dilution.” To protect Hecla’s equity interest in the junior, the major is offering to acquire Dolly Varden and expects to spend $12 million on the transaction.

On June 13, Dolly Varden signed agreements with three lenders — Sprott Resource Lending Partnership, another Sprott affiliate and the K2 Principal Fund — for a new short-term loan to repay its existing loan from Hecla Canada and Robert Gipson, two of its largest shareholders, at 14.3% and 13.6%.

The six-month loan provides $2.5 million and bears a 4% annual interest rate. About $2.1 million would help repay the $2-million Hecla-Gipson loan, which matures on Oct. 1, 2016, and has a 5% annual interest rate. The junior would use the rest of the proceeds to pay a 2.5% finder’s fee, as well as working capital.

As part of the Sprott-K2 loan, Dolly Varden would offer 2.5 million warrants so that holders could buy one share for 30¢ over two years. (It offered the same amount of warrants in the Hecla-Gipson loan.)

Dolly Varden says restrictions in the old loan won’t let it issue securities without Hecla’s approval, noting the new loan offers “flexibility” to raise equity and repay the new lenders.

The junior’s board has had several discussions with Hecla this year about options to repay the old loan — including converting the debt to equity, a loan extension and equity financing — but failed to reach an agreement, it says.

After a difficult restructuring period last year, Dolly Varden is emerging as a leaner firm, with a focus on its namesake silver project in northern B.C., the junior’s president and interim CEO Rosie Moore said in a release. To realize the company’s potential, Dolly Varden needs to be debt free, she adds, noting the new loan brings the company a step closer in reaching that goal.

Moore didn’t immediately return requests for comment.

Responding to the Hecla bid, Dolly Varden advises shareholders to take no action. It expects to appoint a special committee to help its board evaluate the formal offer.

The major has entered into support agreements with shareholders, who collectively hold 2.5 million Dolly Varden shares and 1.25 million Dolly Varden warrants. The major and those shareholders hold a combined 5.1 million shares and 2.5 million warrants, or 34.4% of Dolly Varden’s shares on a fully diluted basis. (The warrants have a 30¢ strike price and are exercisable until Sept. 30, 2018.)

The offer calls for tendering more than half of the shares, which are not owned by Hecla.

The 88 sq. km Dolly Varden project sits in the historic silver-rich namesake mining camp north of Alice Arm, within the prolific Stewart complex.

A 2015 silver resource estimate on the project’s four known deposits — Dolly Varden, North Star, Torbrit and Wolf — include 31.8 million indicated oz. (3.1 million tonnes at 321.6 grams silver per tonne) and 10.8 million inferred oz. (900,000 tonnes at 373.3 grams silver).