Klondex And Paramount To Merge

VANCOUVER — After snubbing a takeover bid from Silvercorp Metals (SVM-T, SVM-X), Klondex Mines (KDX-T, KLNDF-O) has inked a merger deal with Paramount Gold and Silver (PZG-T, PZG-X).

The $80-million deal would see Paramount issue 1.45 shares for each Klondex share, which implies a share purchase price of $2.32 based on July 17 closing values. The offer represents a 33% premium to Klondex’s share price and a 30% premium to Silvercorp’s earlier offer.

In June, Silvercorp offered half a share for every Klondex share; when it was made, the offer represented a 59% premium to Klondex’s share price. Klondex’s board of directors rejected the offer, calling the valuation insufficient and the match of companies poor.

Klondex and Paramount, on the other hand, see their proposed merger as a good match. Both are working to expand resources and advance development plans at gold-silver projects in the Americas.

Klondex’s main focus is the Fire Creek project in central Nevada. In March, the company released an updated resource estimate for the project: Fire Creek is now home to 5 million indicated tonnes grading 10.11 grams gold per tonne, as well as 1.8 million inferred tonnes averaging 8.63 grams gold. Average mining width is 5.5 metres.

Paramount is advancing the San Miguel project, a large land package in the Sierra Madre Occidental gold-silver belt. Two sub-parallel mineralized structures, known as San Miguel (or Clavo 99) and La Union (or Clavo 66), host the majority of the defined resource. San Miguel contains 6.5 million inferred tonnes grading 4.24 grams gold; La Union hosts 4 million inferred tonnes averaging 4.87 grams gold. And six additional zones within the project contribute another 1.1 million contained ounces gold.

“The combination of Paramount and Klondex will create an exciting new company focused on developing high-grade gold projects in North America,” said Paramount CEO Christopher Crupi in a statement. The new company would own 1.7 million indicated oz. gold and 3.2 million inferred oz. gold, contained in two projects that have considerable expansion potential.

The deal still requires approval from two-thirds of Klondex’s shareholders and half of Paramount’s investors. Support from directors and certain shareholders have already guaranteed that 29% of Paramount shares and 18% of Klondex shares will be tendered to the deal. If the merger closes, the new Paramount would have 132 million shares outstanding; old Paramount shareholders would own roughly 62% of those shares with Klondex shareholders holding the other 38%.

Klondex recently started a summer drilling program at Fire Creek, which is in Lander County, near the centre of the Battle Mountain gold belt. The company plans to drill five holes totalling 1,900 metres to test the two high-grade, northwest-striking structures that make up the Main zone. Several holes in earlier programs returned above-average grades from these areas; Klondex wants to confirm those grades and demonstrate continuity.

The resource at Fire Creek remains open in both directions along strike. In addition, the property hosts numerous induced polarization- chargeability targets that warrant testing. The company’s immediate plans include developing a 1,500-metre underground exploration decline. Klondex applied for designation as a small-scale facility more than two years ago and expects to receive the necessary permits to begin underground work before the end of the year. The designation would allow Klondex to bulk sample its resource and produce gold from the sample, while simultaneously continuing exploration efforts from underground drill stations and advancing feasibility studies.

Paramount also got its summer drill program under way recently, with the first stage focused on target testing. The company plans to probe the San Miguel system while also testing at least seven new targets on the property. The targets span three geological models: synvolcanic structural basins with gold concentrated along the basin margin in veins and breccias, gold-bearing quartz veins with high-grade plunging shoots, and sheeted quartz vein zones with bulk-mining potential.

In March, Paramount welcomed a new investor: Toronto-based FCMI Financial, a company controlled by Albert Friedberg and family, bought 12 million units at 75¢ apiece for a total of $9 million. Each unit comprises one share and one warrant. The initial 12 million shares give FCMI a 14.5% stake in Paramount; if FCMI fully exercises its 12 million warrants, its ownership stake would rise to 25.4%. FCMI comes with two assets: access to funding and a 21.6% stake in Seabridge Gold (SEA-T, SA-X).

News of the merger pushed Paramount’s share price down 15¢ over three days to $1.45. The company has a 52-week trading range of 30.5¢-$2.10 and 83 million shares outstanding. Klondex investors liked the news more, lifting the company’s share price by 18¢ over three days to $1.92. Klondex has essentially the same 52-week trading range of 30¢-$2.12, with 29 million shares outstanding.