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Tahoe Resources and Rio Alto Mining Combine Creating a Leading Intermediate Precious Metals Producer

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Tahoe Resources and Rio Alto Mining Combine Creating a Leading Intermediate Precious Metals Producer

 

 

 

 

 

 

Tahoe Resources Inc. (TSX:THO) (NYSE:TAHO) and Rio Alto Mining Limited (TSX:RIO) (LMA:RIO) (NYSE:RIOM) are pleased to announce that they have entered into a definitive agreement to combine their respective businesses and create a new, leading intermediate precious metals producer with several value-enhancing growth opportunities.
 

The combined company offers shareholders significant low cost production from the world-class Escobal silver mine in Guatemala and the established La Arena gold mine in Peru, in addition to long-term sustainable growth fueled by the development of the Shahuindo gold project with first production expected in early 2016. With strong operating margins and low capital risk, the combined company will boast industry-leading free cash flow generation, superior financial returns and a strong balance sheet with zero net debt. In addition, the combined company will benefit from a top-tier management team focused on delivering long-term shareholder returns.
 

Under the terms of the Arrangement Agreement, all of the Rio Alto issued and outstanding common shares will be exchanged on the basis of 0.227 of a Tahoe common share and C$0.001 in cash per Rio Alto share (Exchange Ratio). Upon completion of the Transaction, existing Tahoe and Rio Alto shareholders will own approximately 65 percent and 35 percent of the combined company, respectively.
 

Based on the closing price of Tahoe’s common shares on the Toronto Stock Exchange of C$17.64 on February 6, 2015, the offer implies consideration of C$4.00 per Rio Alto share which represents a premium of 22.1 percent to the closing price of Rio Alto shares of C$3.28 on the TSX on February 6, 2015 and a premium of 20.3 percent based on the volume weighted average prices of each respective company on the TSX for the 20-day period ending on February 6, 2015.
 

Highlights of the Transaction
 

Key investment highlights of the combined company include:

 

 
 
--  A leading precious metals producer: Combines one of the world's largest
    and highest grade silver mines with an established gold operation in
    Peru, a world-class mining jurisdiction, providing the combined company
    with a strong growth platform. 
    
--  Superior financial performance: Strong cash flow generation and
    industry-leading return on equity to drive shareholder returns and
    provide the financial flexibility to fund growth initiatives. 
    
--  Significant low-cost production: 2015 production guidance of 18-
    21million ounces (mozs) of silver at total cash costs of US$6.35-
    US$8.25/oz and all-in sustaining costs (AISC) of US$9.75-US$11.50/oz and
    210-220 thousand ounces (kozs) of gold at net cash costs of US$570-
    US$600/oz and AISC of US$730-US$765/oz expected to yield operating
    margins in excess of 50 percent based on consensus commodity price
    forecasts. 
    
--  Long-term sustainable growth: Growth to be driven by the completion of
    the Escobal mine expansion from 3,500 to 4,500 tpd and the planned 2015
    construction of Shahuindo, with potential for continued exploration
    success across the combined asset base. 
    
--  Highly experienced management and Board: Complementary management team
    with strong cultural fit and a rich history of substantial shareholder
    value creation and proven expertise in the construction and operation of
    both open pit and underground mines. 
    
--  Strong balance sheet: Zero net debt and one of the lowest debt-to-equity
    ratios in the mining industry. 
    
--  Attractive dividend policy: The Company plans to continue the monthly
    dividend policy of US$0.02 per share subject to Board of Directors
    approval. 
    
--  Enhanced capital markets presence: Combined US$3.25 billion market
    capitalization is expected to appeal to a broader institutional
    shareholder base, increase analyst coverage and improve share trading
    liquidity.
 

 

 

Management Team and Board of Directors

The management team and Board of Directors of the combined company will draw from the expertise of both companies. Kevin McArthur, current Vice Chair and Chief Executive Officer of Tahoe, will act as the Executive Chairman of the Board and Alex Black, current President and Chief Executive Officer of Rio Alto, will become the new Chief Executive Officer of the combined Company upon completion of the business combination. Ron Clayton will remain President and Chief Operating Officer of the combined company. The senior management team consists of the following:

 
 
Mark Sadler                        VP and Chief Financial Officer           
Eduardo Loret de Mola              COO - Peru Operations                    
Tim Williams                       VP Operations                            
Brian Brodsky                      VP Exploration                           
Edie Hofmeister                    VP Corporate Affairs
 

 

 

Upon completion of the transaction, the Board will initially be comprised of nine directors, with six directors from Tahoe and three directors nominated by Rio Alto.
 

The proposed Board of the combined company will consist of the following:

 

 
 
C. Kevin McArthur                  Executive Chairman                       
Alex Black                         Director                                 
Tanya Jakusconek                   Director                                 
A. Dan Rovig                       Director                                 
Paul B. Sweeney                    Director                                 
James S. Voorhees                  Director                                 
Drago Kisic Wagner                 Director                                 
Kenneth F. Williamson              Director                                 
Dr. Klaus Zeitler                  Director
 

 

 

Kevin McArthur, Vice Chair and Chief Executive Officer of Tahoe, said, “The combination of Tahoe and Rio Alto is designed to create a stronger and better positioned company going forward. In addition to diversifying our asset base into one of the most attractive precious metal producing regions in the world, this transaction establishes a strong platform for future growth.”
 

“As a larger combined entity with expanded management capabilities, we will remain focused on strong operating performance and plan to deliver superior financial returns to our shareholders over the near and long term,” added Mr. McArthur.
 

“Escobal is truly a world-class silver mine, and we believe this transaction represents a logical combination of two complementary, low cost asset bases that will continue to generate strong free cash flows into the future,” said Alex Black, President and Chief Executive Officer of Rio Alto.
 

“In addition to Tahoe’s attractive dividend policy, this transaction positions our shareholders to realize superior returns as we become part of a larger and more diversified intermediate precious metals producer in the Americas with enhanced cash flow generating capability. We are highly excited about the prospects of the combined company,” he added.
 

Benefits to Tahoe Shareholders

 

 
 
--  Establishes a significant operating presence in Peru, the second largest
    global silver producing country and largest gold producing country in
    Latin America. 
    
--  Enhanced production from a multi-mine producer with immediate high-
    margin gold production and near-term organic growth. 
    
--  Strengthens Tahoe's ability to provide superior shareholder returns
    through internal and external growth initiatives and through its leading
    dividend policy. 
    
--  Addition of significant exploration potential across all projects; large
    approx. 55,800 hectare land package in a prolific mining district. 
    
--  Adds open pit mining and heap leach capabilities to core operational
    strengths. 
    
--  Enhanced trading liquidity and capital structure will support increased
    financial flexibility.
 

 

 

Benefits to Rio Alto Shareholders

 

 
 
--  Immediate up-front premium, while maintaining exposure to future value
    creation through meaningful equity participation. 
    
--  Enhanced free cash flow generation and financial strength. 
    
--  Access to an attractive dividend to provide increased returns during the
    construction of Shahuindo. 
    
--  Adds a unique world-class mine with a robust, high-grade reserve base
    and strong exploration potential to sustain long life operations. 
    
--  Expands operational capabilities, adding proven expertise in underground
    mining. 
    
--  Increased trading liquidity, enhanced value proposition and capital
    markets profile.
 

 

 

Board of Directors’ Recommendations
 

Both Companies’ Boards of Directors have determined that the business combination is in the best interests of their respective shareholders based on a number of factors, including fairness opinions received from their respective financial advisors. Each company’s Board of Directors approved the terms of the proposed Transaction and recommends that their respective shareholders vote in favor of the business combination.
 

Scotiabank has provided a fairness opinion to a special committee of independent directors of Rio Alto. GMP Securities L.P. has provided a fairness opinion to the Board of Directors of Rio Alto and BMO Capital Markets and Raymond James Inc. have provided fairness opinions to the Board of Directors of Tahoe.
 

Transaction Summary
 

The proposed business combination will be effected by way of a Plan of Arrangement completed under the Business Corporations Act (Alberta). The Transaction will require approval by at least 66 2/3 percent of the votes cast by the shareholders of Rio Alto at a special meeting of Rio Alto shareholders. Officers and directors of Rio Alto, representing 2.3 percent of the Rio Alto common shares, have entered into voting support agreements, pursuant to which they will vote their common shares held in favor of the Transaction. The Transaction is also subject to obtaining approval by a simple majority of votes cast by the shareholders of Tahoe at a special meeting of Tahoe shareholders. Goldcorp Inc., which holds approximately 39 percent of the outstanding Tahoe common shares, has entered into an agreement to vote in favor of the Transaction. In addition, officers and directors of Tahoe, representing 3.5 percent of the Tahoe common shares, have entered into voting support agreements, pursuant to which they will vote their common shares held in favor of the Transaction. In addition to shareholder and court approvals, the Transaction is subject to applicable regulatory approvals and the satisfaction of certain other closing conditions customary in transactions of this nature.
 

The Arrangement Agreement includes customary deal-protection provisions including non-solicitation provisions, a right to match competing offers and a C$57.6 million termination fee payable to Tahoe under certain circumstances.
 

Timing
 

Full details of the Transaction will be included in the management information circulars of Tahoe and Rio Alto to be mailed to their respective shareholders by early March 2015. It is anticipated that both shareholder meetings and closing of the Transaction will take place in early April 2015.
 

Advisors and Counsel
 

GMP Securities L.P. acted as financial advisor to Rio Alto and Davis LLP acted as its legal advisor. Scotiabank has provided a fairness opinion to the Independent Committee and Torys LLP acted as legal advisor to the Independent Committee.
 

BMO Capital Markets acted as lead financial advisor to Tahoe and provided a fairness opinion to the Tahoe Board of Directors. Raymond James Ltd. also acted as financial advisor to Tahoe and provided a fairness opinion to the Tahoe Board of Directors. Bank of America Merrill Lynch acted as financial advisor to Tahoe. Macquarie Capital Markets Canada Ltd. and Beacon Securities Ltd. acted as strategic advisors to Tahoe. Cassels, Brock & Blackwell LLP acted as Tahoe’s legal advisor.
A copy of the merger investor presentation is also available on the Tahoe and Rio Alto investor pages at www.tahoeresourcesinc.com/merger.pdf and www.rioaltomining.com, respectively. An audio recording of the conference call will be made available shortly after the call on the Tahoe and Rio Alto investor pages.
 

About Tahoe

 

Tahoe’s strategy is to responsibly operate the Escobal mine to world standards, to pay significant shareholder dividends and to develop high quality precious metals assets in the Americas. Tahoe is a member of the S&P/TSX Composite and TSX Global Mining indices and the Russell 3000 on the NYSE. Tahoe is listed on the TSX as THO and on the NYSE as TAHO. Tahoe plans to seek a listing of its shares on the Bolsa de Valores de Lima S.A. (BVL).
 

About Rio Alto
 

Rio Alto is a mid-tier gold producer focused on optimizing production, exploration and if appropriate, making further acquisitions of precious metal properties in low risk regions of the Americas. Rio Alto is listed in the TSX and BVL as RIO BVL and the NYSE as RIOM.

Posted February 10, 2015

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