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.
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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.
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Disclosures from Clarus Securities, Klondex Mines Ltd., March 20, 2018
The analyst has visited the Company's mining operations in Manitoba, Canada and Nevada, USA. Partial payment or reimbursement was received from the issuer for the associated travel costs.
Within the last 24 months, Clarus Securities Inc. has managed or co-managed a public offering of securities of this company.
Within the last 24 months, Clarus Securities Inc. has received compensation for investment banking services with respect to the securities of this company.
The research analyst and/or associates who prepared this report are compensated based upon (among other factors) the overall profitability of Clarus Securities and its affiliate, which includes the overall profitability of investment banking and related services. In the normal course of its business, Clarus Securities or its affiliate may provide financial advisory and/or investment banking services for the issuers mentioned in this report in return for remuneration and might seek to become engaged for such services from any of such issuers in this report within the next three months. Clarus Securities or its affiliate may buy from or sell to customers the securities of issuers mentioned in this report on a principal basis. Clarus Securities, its affiliate, and/or their respective officers, directors or employees may from time to time acquire, hold or sell securities discussed herein, or in related securities or in options, futures or other derivative instruments based thereon.
Each Clarus Securities research analyst whose name appears on the front page of this research report hereby certifies that (i) the recommendations and opinions expressed in the research report accurately reflect the research analyst’s personal views about the Company and securities that are the subject of this report and all other companies and securities mentioned in this report that are covered by such research analyst and (ii) no part of the research analyst’s compensation was, is, or will be directly or indirectly, related to the specific recommendations or views expressed by such research analyst in this report.
Disclosures from PI Financial, Klondex Mines Ltd., Corporate Update, March 19, 2018
I, Philip Ker, hereby certify that all of the views expressed in this report accurately reflect my personal views about the subject securities or issuers. I also certify that no part of my compensation was, is, or will be, directly or indirectly related to the specific recommendations or views expressed in this report. I am the research analyst primarily responsible for preparing this report.
Research Disclosures:
1) PI Financial Corp. and its affiliates’ holdings in the subject company’s securities, in aggregate exceeds 1% of each company’s issued and outstanding securities. No
2) The analyst(s) responsible for the report or recommendation on the subject company, a member of the research analyst’s household, and associate of the research analyst, or any individual directly involved in the preparation of this report, have a financial interest in, or exercises investment discretion or control over, securities issued by the following companies. No
3) PI Financial Corp. and/or its affiliates have received compensation for investment banking services for the subject company over the preceding 12-month period. No
4) PI Financial Corp. and/or its affiliates expect to receive or intend to seek compensation for investment banking services from the subject company. Yes
5) PI Financial Corp. and/or its affiliates have managed or co-managed a public offering of securities for the subject company in the past 12 months. No
6) The following director(s), officer(s) or employee(s) of PI Financial Corp. is a director of the subject company in which PI provides research coverage. No
7) A member of the research analyst’s household serves as an officer, director or advisory board member of the subject company. No
8) PI Financial Corp. and/or its affiliates make a market in the securities of the subject company. No
9) Company has partially funded previous analyst visits to its projects. Yes
10) Additional disclosure: No
Analysts are compensated through a combined base salary and bonus payout system. The bonus payout is amongst other factors determined by revenue generated directly or indirectly from various departments including Investment Banking. Evaluation is largely on an activity-based system that includes some of the following criteria: reports generated, timeliness, performance of recommendations, knowledge of industry, quality of research and investment guidance, and client feedback. Analysts and all other Research staff are not directly compensated for specific Investment Banking transactions.
Disclosures from Paradigm Capital, Klondex Mines, Research Note, March 20, 2018
The analyst (and associate) certify that the views expressed in this report accurately reflect their personal views about the subject securities or issuers. No part of their compensation was, is, or will be, directly or indirectly, related to the specific recommendations expressed in this research report.
Analysts are compensated through a combined base salary and bonus payout system. The bonus payout is determined by revenues generated directly or indirectly from various departments including Investment Banking, based on a system that includes the following criteria: reports generated, timeliness, performance of recommendations, knowledge of industry, quality of research and investment guidance and client feedback. Analysts are not directly compensated for specific Investment Banking transactions.
Paradigm Capital Inc. expects to receive or intends to seek compensation for investment banking services from the subject companies in the next 3 months.
