Klondex Board Rejects Silvercorp Offer

VANCOUVER — Calling it “opportunistic,” Klondex Mines’ (KDX-T, KLNDF-O) board of directors has rejected an all-share hostile takeover bid made in June by Silvercorp Metals (SVM-T, SVM-X).

Klondex announced that all members of its board and management, who collectively control 19.6% of the company’s fully diluted shares or 15% of outstanding shares, will not ante up their shares to Silvercorp. They recommend other shareholders not to either.

Silvercorp has offered Klondex shareholders half a Silvercorp share for every Klondex share, which at the time of the offer, was a 59% premium based on Silvercorp’s closing price.

In a lengthy objection to the offer, Klondex paints Silvercorp’s bid, first, as undervaluing it and, second, as an ill-fitting match of company portfolios with different development trajectories.

Klondex says Silvercorp’s offer equates the transaction value with US$21-per-oz. gold. But it argues the going rate per oz. gold paid out in mergers and acquisitions over the past three years is in the US$113-to US$133-range, though it does not provide specific examples of such transactions.

Klondex, which says Scotia Capital advised it that the offer was inadequate, also notes that the all-share bid is subject to what it calls a “historically volatile” Silvercorp share price and as such, the value of the offered shares is “uncertain.”

Furthermore, Klondex says, it is pursuing “superior proposals” that may deliver “greater value” to Klondex shareholders.

On how well the companies match, Klondex says that because Silvercorp operates exclusively in China, it faces significant risks as compared to Klondex’s Nevada projects, which are in what is “generally deemed to be a preferred mining destination.”

Klondex also says that if Silvercorp were to acquire it, it would mark an unwanted shift away from gold, the substance of Klondex’s chief assets, to silver, lead and zinc, the mainstays of Silvercorp.

“We believe there remains too much near-term potential for Klondex and Fire Creek for shareholders to suffer dramatic dilution and accept this strategic commodity shift from pure gold to silver, zinc and lead at this time,” Robert Sibthorpe, chairman of the special committee that considered the offer, said in a statement.

At this point, Silvercorp is considering its response, says Silvercorp corporate communications manager Shirley Zhou.

Will Silvercorp sweeten the deal? “We’ll have to take a look at what they’re doing first,” she says, adding that until Silvercorp formulates its response, there is little she can say on the matter.

She says Silvercorp is currently working with its board of directors and a legal team to pore over the issues, gather all the facts and “try to understand what they’re (Klondex) trying to do (in their rejection).”

Zhou, however, reiterates Silvercorp’s position that Klondex shareholders are getting a good deal with its takeover offer.

In response to Klondex’s issue with the all-share bid and assertion that Silvercorp’s shares are historically volatile, Zhou says Silvercorp has certainly seen its ups and downs.

“We’re still a young company and it’s taken time for the market to recognize the value we’re creating for our mines,” she says.

But she believes that if anything, the all-share offer has a significant upside, allowing Klondex shareholders to participate in the future advancement of Klondex’s flagship Fire Creek gold project, which contains an indicated resource of 5 million tonnes grading 10.11 grams gold per tonne for 1.6 million oz.

Because of liquidity generated from its operating mines in China, Silvercorp is cashed-up and could advance Fire Creek without having to source financing, Zhou argues.

Although at this point, it is difficult to assess whether the differences between the two companies as outlined by Klondex’s management and board are intractable, or on which side of the fence shareholders will sit, certainly with 15% of outstanding shares, the former wield significant influence over Klondex’s future.

As such, Silvercorp seems likely to ratchet up its efforts to woo stakeholders as the July 21 deadline for its current offer approaches.

Zhou remarks: “Hold on to your seats because it’s going to be a pretty interesting ride.”

On news of the rejection, Klondex’s share price lost 19¢ to close at $1.96 and Silvercorp’s dropped 18¢ to close at $4.06.