Tug-Of-War Over Aurizon Mines

| About: Hecla Mining (HL)

Hecla Mining (NYSE:HL) and Aurizon Mines (AZK) both announced on March 4 2013 that they have entered into a Definitive Agreement expected to close in Q2 2013 whereby Hecla Mining will acquire all outstanding shares of Aurizon Mines.

Established in 1891 Hecla Mining is the oldest North-American precious metal mining company currently operating two mines, the Greens Creek Mine in Alaska, and the Lucky Friday Mine in Idaho, which is currently in the process of ramping up again after a year of rehabilitation work. Hecla Mining has a market capitalization of $1.2B, a trailing P/E of 81 and a forward P/E of 9. They also have $191M of cash in the bank.

Aurizon Mines is a gold mining company with properties in the Val d'Or in Quebec, Canada. They have successfully put the Casa Berardi mine into production and have enjoyed constant output of around 140,000 to 150,000 ounces per year since 2007. The mine is currently in a transition phase caused by development works to access new ore bodies. This transition has impacted on 2012 production (just under 137,000 ounces) and will also impact on 2013 production. The share price has come under pressure last year when they announced a rather disappointing feasibility study for their Hosco pit project. The project did not show strong economics and development of the project was deferred subsequently. Their market capitalisation is $729M, the trailing P/E is listed at 16 and the forward P/E at 18 (data by yahoo.com). They have $204M of cash in the bank.

In January a hostile takeover bid by Alamos Gold (NYSE:AGI) was rejected by the Aurizon board. Alamos Gold currently owns 16% of the Aurizon. The board has rejected Alamos' bid and has confirmed their support of Hecla's friendly offer. One cannot help but note that the acceptance of the Hecla offer has a certain feel of last-ditch effort to fend off Alamos Gold to it.

Alamos Gold operates the Mulatos gold mine in Mexico and they are developing two advanced projects in Turkey. The market capitalization is $1.7B and the trailing and forward P/Es are 14 and 15 respectively. They have $365M of cash on their latest balance sheet. Their hostile offer for Aurizon was valued at $780M or $4.65 per Aurizon share. The offer closed on March 5 2013.

Hecla's bid values Aurizon shares at CAD$4.75 resulting in a total value of $796M for this proposed transaction. This represents a premium of 39% measured against the last unaffected Aurizon share price before the Alamos takeover bid which sat at a multi year low at this point in time. In Aurizon's latest corporate presentation a "street consensus NAV" of $795M is stated. The average analyst share price target is CAD$5.68. Hecla have lined up a $500M debt facility in order to finance the deal.

The price will be payable as a mixture of cash and Hecla shares with the most probable outcome for the ratio between the two being a cash consideration of CAD$3.11 plus 0.34462 Hecla shares being exchanged for each Aurizon share. This would mean that 59.8M new Hecla shares will be issued resulting in a dilution of Hecla stock by around 19%. Upon announcement of this deal Hecla's share price dropped by 12% and Aurizon's share price increased by 3%.

There will be significant dilution of Hecla stock which needs to be offset by value created from this deal. Hecla Mining was going to be measured against their performance in ramping up Lucky Friday in 2013. Suddenly the game has changed and Hecla Mining will also need to show how this new operation can be integrated into the company and how it can create value for all shareholders - existing and new ones.

Aurizon is a gold miner which will provide some degree of diversification for the combined Hecla company, but will take away the perception of Hecla being a pure silver play. Forecasted Aurizon production of 127,500 ounces of gold for 2013 equates to roughly 6.4M ounces of silver. Given Hecla's production forecast of 8M to 9M ounces of silver for the year 2013 this will mean that 43% of production for the combined entity will be in gold stemming from the Casa Berardi mine. Hecla has agreed to hedge $450M of the gold revenue as part of the debt financing.

Aurizon's Casa Berardi mine has significant near-mine exploration potential raising hopes for a long-life production center in a jurisdiction that bears very little country risk. Given the experience of Hecla operating low-cost underground mines the Casa Berardi mine could develop into a reliable production center for years to come. On the other hand, the jury still seems to be out on the Heva/Hosco advanced project that comes as part of the deal. Last year's disappointing feasibility study on the Hosco pit seems to have been one nail in Aurizon's coffin. However, the Heva and Hosco West Extension resources close to the Hosco pit have potential and could turn this project around over time. There is a component of refractory ore that could complicate matters with regards to this project. The nature of these deposits bears no similarity to Hecla's other assets suggesting that this project may be divested at some point in the future. The neighborhood of Aurizon's assets is impressive with numerous large mines in operation close by.

Closure of the deal is anticipated within the next three to four months and it will be interesting to observe if another bidder steps up and challenges Hecla's proposal. 66.7% of Aurizon shareholders will need to vote in favor of the deal for the Hecla takeover to succeed.

Alamos Gold has stated that they will not increase their bid. Alamos currently owns 16.1% of Aurizon shares and they will vote against the proposed Hecla takeover. They have also stated that "other large shareholders of Aurizon have confirmed to Alamos today that they are not supportive of the Hecla transaction, but will support the Alamos Offer, making it impossible for Hecla to get 66 2/3%." Obviously, Alamos will not be giving up without a fight. If Hecla's bid is voted against in the upcoming shareholder meeting it would mark the second time within a year that Hecla launches an unsuccessful takeover bid after their attempt to acquire U.S. Silver corporation in July 2012. A break fee of $27.2M has been agreed upon in that event, which Alamos believes might be illegal.

Disclosure: I am long HL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.