Shares in struggling Canadian junior gold producer Klondex Mines Ltd. surged after U.S.-based Hecla Mining Co. announced it intends to pay a premium of almost 80 per cent to acquire the company in a transaction worth US$462-million.
Idaho-based Hecla's cash and stock offer is worth US$2.47 a share (about $3.23) – a roughly 79-per-cent premium compared with Friday's closing price.
Under the transaction, Hecla is acquiring Klondex's U.S. gold mines, but its Canadian assets are set to be spun out into a separate publicly traded company, to be owned by existing Klondex shareholders.
Klondex operates the Hollister and Midas mines, as well as the Fire Creek project, all in Nevada.
Vancouver-based Klondex shares closed up 59 per cent at $2.86 Monday on the Toronto Stock Exchange.
While the takeover offer represents a sizable premium to Klondex's recent share price, it is vastly below the more than $7 each the shares were trading at little over a year ago. One reason the company's stock had been under pressure is that it missed its gold production forecast last year. In 2017, Klondex produced just less than 189,500 ounces of gold equivalent.
"The Hecla offer represents a significant premium for a company coming off a weak 2017," M Partners analyst Steve King wrote in a note to clients.
"For long-time shareholders of Klondex, the offer represents a new beginning and a re-focus on the Nevada assets with the failed True North program excised to NewCo."
A new company, Klondex Canada, will be created out of Klondex's True North underground mine in Manitoba, which produced a little more than 24,500 ounces of gold equivalent last year. M Partners estimates its valuation will be approximately US$45-million.
Analysts also say Hecla's superior financial muscle will allow it to funnel much-needed capital into Klondex's undercapitalized properties. Hecla, a gold and silver mining company with a market capitalization of US$1.5-billion has operations in the United States, Canada and Mexico, and is well capitalized, holding about $220-million in cash.
"Hecla provides Klondex shareholders with underground mining expertise as well as an extensive portfolio of attractive assets," wrote Philip Ker, analyst with PI Financial in a note to clients.
"With a superior balance sheet, Hecla will be more adequately able to fund [Klondex's] capital outlays."
The transaction requires the support of at least two-thirds of shareholders, with a vote scheduled for June. Two of Klondex's biggest shareholders, CI Investments and Sentry Investments Inc., which together own 23.7 per cent of the company, have already agreed to the takeover.
CIBC World Markets Inc. and JPMorgan provided financial advice to Hecla, while GMP Capital Inc. and Infor Financial Inc. advised Klondex.
After a sluggish start to deal-making in 2018, the Canadian mining sector is showing signs of a recovery.
This deal is the biggest in the Canadian mining sector so far this year and the second notable transaction in the past week. Toronto-based First Cobalt Corp. announced on March 14 it is buying US Cobalt Inc. for $149.9-million.
The last major deal in the Canadian gold sector was Alamos Gold buying Richmont Mines for US$673-million in September, 2017.