The Gold Report - Wed, Mar 21, 2018

Gold-Silver Mining Development Firm to Sell Its Nevada Assets

Three analysts shared the details and their opinions of the proposed transaction.

Klondex Projects

Analyst Jamie Spratt with Clarus Securities reported in a March 20, 2018 research note that Klondex Mines Ltd. (KDX:TSX; KLDX:NYSE.MKT) announced Hecla Mining Co.'s (HL:NYSE) offer to acquire all of its Nevada assets for $462 million ($462M), or $2.47 per share. This price represents a 59% premium to the 30-day volume weighted average price. "In our view, the transaction is positive," Spratt added.

Hecla's strong balance sheet and operating team with narrow vein mining expertise "should allow unlocking of value of Klondex's prospective Nevada properties," explained Spratt. In addition, the deal "significantly reduces financial and execution risk while giving Klondex shareholders an immediate premium."

A third-party bid is "unlikely given the valuation and the significant premium paid by Hecla," Spratt pointed out. As such, Clarus changed its rating on Klondex to Tender from Speculative Buy but maintains its $3.25 per share target price.

PI Financial analyst Philip Ker agreed that the sale of Klondex's Nevada assets is "positive," and "prevents Klondex shareholders from potential equity dilution should the company have needed funding for upcoming capital outlays," according to a March 19, 2018 research piece. However, he pointed out that such a transaction would have been more accretive had it taken place when Klondex had a higher valuation, rather than at its 52-week low. At the same time, though, he noted that for Klondex to regain market confidence and get a rerating, it would have had to reach major milestones. In other words, he concluded, "the sale comes at the bottom but with fewer hurdles."

Ker explained that Klondex's Canadian assets, the True North mine and recently acquired Bison Gold property, which are not part of the Hecla deal, would be spun out to existing shareholders in a company called "Klondex Canada." "Hecla will also subscribe for a $7M or 13.46% equity stake in the spin-co which has a pre-investment valuation of $45M."

In consideration of the transaction, PI Financial changed its rating on Klondex to Tender from Neutral and has lowered its target price to $3.05 per share from $3.35 per share.

Should the transaction close, Klondex could then better delineate the ore body at True North and "should be cash flow neutral after production from tailings processing," Ker purported. "A primary focus on Canada should result in positive momentum" for that and the Bison Gold projects.

A third analyst, Don Blyth with Paradigm Capital, expressed similar sentiment in a March 20, 2018 research report, writing the Hecla bid is "a good deal for Klondex shareholders," given the company's recent and ongoing challenges. They include "declining grades at Fire Creek, disappointing gold recovery rates for the Hollister ore and a decision to put the True North mine into a 'care and maintenance' mode owing to poor operational performance." Klondex's stock price had declined 73% over the previous year, and a turnaround was expected to take months.

Blyth, too, stated Hecla is well positioned financially to outlay the capital needed to effect improvements at the various Klondex operations in Nevada and has a strong team with the experience to do so.

As for Hecla's bid, Blyth noted that it consists of a "mix of cash and common shares of Hecla: $2.47 in cash (all-cash alternative) or 0.6272 of a Hecla share (all-shares alternative)." He also wrote the offer represents a 72% premium based on both companies' closing prices on March 16 and Klondex's board approves the proposed deal. A shareholder vote is expected in June and closing thereafter, likely by the end of Q2/18.

Paradigm changed its rating on Klondex to Tender from Hold and has suspended its price target. Klondex is currently trading at around $2.86 per share.

Disclosure:
1) Doresa Banning compiled this article for Streetwise Reports LLC and provides services to Streetwise reports as an independent contractor. She or members of her household own securities of the following companies mentioned in the article: None. She or members of her household are paid by the following companies mentioned in this article: None.
2) The following companies mentioned in this article are sponsors of Streetwise Reports: Klondex Mines Ltd. Streetwise Reports does not accept stock in exchange for its services. Click below for important disclosures about sponsor fees. The information provided above is for informational purposes only and is not a recommendation to buy or sell any security.
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