Hecla goes hostile on U.S. Silver

In yet another sign that M&A continues to pick up steam Hecla Mining (HL-N) is seeking to derail a merger agreement reached last month between U.S. Silver (USA-T) and RX Gold & Silver (RXE-V) and scoop up U.S. Silver for itself in an all-cash hostile takeover offer.

Hecla’s $1.80 per share offer represents a 23% premium to U.S. Silver’s closing share price of $1.46 on July 24, and a premium of 30% over the company’s 20-day volume weighted average. It is also a 28% premium to the $1.41 per share imputed offer price under U.S. Silver’s proposed merger terms with RX Gold.

U.S. Silver’s board had agreed to the combination with RX Gold and Hecla’s hostile move comes less than two weeks before shareholders were expected to vote on the merger.

U.S. Silver operates the Galena mine in Idaho, which has a reserve base of 23 million oz. silver, 91.2 million lbs. lead and 11.7 million lbs. copper. The junior also owns the past-producing Coeur mine, which is expected to move into commercial production at the end of next year.

“U.S. Silver 2012 production guidance for the Galena mine of 2.4 million oz. would provide a significant increase in Hecla’s production pro-forma,” Andrew Kaip of BMO Nesbitt Burns writes in a research comment. “Hecla looks to be making a tuck-in acquisition that provides the company long-term regional synergies and a dominant land position within the Coeur Silver District in Idaho at an acquisition cost well within the company’s capabilities.”

At the end of the first quarter Hecla had cash of US$279 million and no bank debt.

In terms of valuation, Kaip says Hecla is currently trading at 0.9 times the 10% nominal net present value of US$5.23 per share at spot metal prices versus the intermediate silver peer average of 1.0 times.

“While BMO research has yet to incorporate the U.S. Silver assets into the Hecla valuation,” he adds, “the offer for U.S. Silver is expected to be neutral to NPV and slightly accretive to earnings per share.”

Phillips S. Baker Jr., Hecla’s president and chief executive, described his company’s offer in a press release as “by any measure, superior value relative to the RX proposal.”

Sprott Asset Management had signed a lock-up agreement supporting the U.S. Silver/RXGold & Silver combination. Sprott is the largest shareholder of both companies and as of June 7 held about 14% of U.S. Silver shares and 8% of Rx Gold shares.  A key objective of both junior companies had been to surpass production of 5 million ounces of silver at significantly lower cash costs by 2014.