Editorial: Hecla’s one that got away

There was a time, not very long ago, when M&A activity sent shareholders’ pulses racing with excitement.  

Those were the days.

The latest battle between RX Gold & Silver and Hecla Mining over U.S. Silver and its prized silver assets in Idaho’s Silver Valley is underwhelming, to say the least.

What investors had to choose from was on one side a stake in a new company with new management but no premium, and on the other, a cash offer, which when broken down didn’t offer much of a premium, either.

At first blush Hecla’s white-knight offer seemed like a no-brainer for U.S. Silver shareholders. Where RX’s management team was looking to take control of the new company despite owning just a 30% stake, Hecla was offering $1.80 in cash.

But U.S. Silver management pushed for the RX deal from the get-go, possibly reasoning that a minority position on the board and in management was better than no position at all.

And its shareholders have gone along with management’s wishes, perhaps being swayed by their argument that when U.S. Silver’s current cash position is considered, as it should be when valuing a target company’s enterprise value, the Hecla offer falls to just $1.39 a share — right about what its shares traded for before the RX offer to merge.  

The vote in favour of the RX merger, which resulted in Hecla withdrawing its offer, represents a missed opportunity for Hecla, which seemed keen on getting U.S. Silver’s assets on the cheap.

It was a shrewd attempt by Hecla, which hoped to convince U.S. Silver shareholders that in this market, some cash was better than none. And while Hecla’s CEO downplayed the synergies Hecla would have unlocked if its offer was accepted, make no mistake — this deal was all about synergies.

The secret to good M&A deals is to snatch as much of the resulting synergies for the acquiring company’s shareholders as possible. When an acquirer is confident in those synergies, it will generally make an all-cash offer, as Hecla’s offer was, because it gets rid of the target company’s shareholders and preserves the synergies for its own.

If nothing else, Hecla’s offer shows its management team was on the ball and saw an opportunity to increase shareholder value at a time when it was flush with cash — roughly $233 million — and other companies’ shareholders may have been willing to take meager returns on their equity positions, given depressed market conditions.

But the idea of Hecla shareholders getting the deal of a lifetime didn’t sit well with U.S. Silver shareholders, so RX Gold winds up the big winner in this one. By keeping U.S. Silver shareholders on board in the new company and selling the idea that RX’s well-heeled management team would drive the company’s assets to greener pastures, RX had the right formula, while Hecla may be wishing it had offered just a bit more.

• In a year that has seen Bolivia expropriate South American Silver’s Malkhu Khota silver-indium-gallium project and Glencore International’s Colquiri lead-tin mine and Argentina seize YPF, the local subsidiary of Spain’s Repsol oil company, a news bulletin out of Guatemala has brought some much-needed relief. Reuters reported on Aug. 6 that the government of Guatemala is withdrawing proposed amendments to its constitution that would have given the state greater ownership in new mining projects. “We realized it was making a lot of noise internationally and we decided to withdraw it,” Fernando Carrera, a top advisor on the reform, told Reuters.

Under one of the proposed amendments, revisions to the mining code would have permitted state ownership of up to 40% in new mining projects through a state-run corporation. The government has also withdrawn an article that would have set up a Sovereign Wealth Fund supported by state-owned resource companies. Carrera did say, however, that the proposals could be included in legislative changes down the road. Andrew Kaip of BMO Capital Markets in Toronto notes that the decision “clearly demonstrates the Guatemalan government’s commitment to providing a legal framework conducive to foreign investment.” Guatemala ranked among the bottom-10 countries in the Fraser Institute’s annual 2011–2012 survey of mining jurisdictions.

Send your Letters-to-the-Editor and op-ed submissions to the Editor-in-Chief at: tnm@northernminer.com, fax: (416) 510-5138, or 80 Valleybrook Dr., Toronto, ON  M3B 2S9.