Hecla Mining - Shareholders Overreact As Company Makes A Bid For Aurizon

| About: Hecla Mining (HL)

Shares of Hecla Mining (HL) saw a bad start to the trading week. Shares in the mining company focused on the development, production and marketing of silver, gold, lead and zinc fell more than 12% in Monday's trading session after the company announced its intentions to acquire Aurizon Mines (AZK).

Shares of the US listing of Aurizon rose 5.0% in a response to the news on Monday, but gave up all those gains on Tuesday.

The Deal

Hecla Mining announced that it has agreed to acquire Aurizon Mines, a Canadian-based gold producer with operations in the North-Western region of Quebec. Under terms of the deal, Hecla will acquire the shares of Aurizon for CAD $4.75 per share, or 0.9953 shares of Hecla.

In total Hecla will issue 57 million new shares and pay CAD $513.6 million to acquire the firm. The total deal values Aurizon at CAD $796 million, roughly the same amount in US dollars assuming both currencies trade at parity. This represents a 39% premium for Aurizon's shares, before competitor Alamos Gold made an offer for the company's shares.

CEO Phillips S. Baker Jr. commented on the deal, "We are pleased Aurizon's Board recommends support of Hecla's transaction. Hecla and Aurizon together create a unique precious metals company with three long-life, high-grade, low-cost mines in some of the best mining jurisdictions in the world. These three properties have in common strong exploration potential on very large and contiguous land positions as well as locations near communities that are supportive to mining."

Aurizon ended September of 2012 with $200 million in cash and equivalents and no outstanding debt. As such, operating assets of the firm are valued around $596 million.

For 2011, Aurizon generated annual revenues of $260.0 million on which it net earned $43.9 million. As such, the deal values operating assets at 2.3 times annual revenues and 13-14 times annual earnings. For the full year of 2012, results are expected to fall. In the first nine months of the year, Aurizon generated revenues of $167 million on which it net earned $22 million.

Under terms of the agreement, Aurizon is subject to a non-solicitation covenant. Hecla will furthermore have the right to match competing offers, and the arrangement requires Aurizon to pay $27.2 million if the deal breaks. The competition of the deal is subject to normal closing conditions and regulatory approval. The deal is expected to close in the second quarter of 2013.


A little over a week ago, Hecla Mining reported its fourth quarter results and full year results for the year of 2012. The company operates with $191.0 million in cash and equivalents. The company has $17.5 million in short and long term capital lease obligations outstanding, for a net cash position of roughly $175 million.

To further finance the proposed deal, Hecla has received a $500 million financing commitment from The Bank of Nova Scotia (BNS). The financing consists of a $200 million three-year amortizing loan, a $200 million three year revolving credit facility and a $100 million short term loan.

Hecla generated annual revenues of $321.1 million for the full year of 2012, down 32.8% on the year before. Net income fell over 90% to $15.0 million.

Hecla is currently valued around $1.15 billion by its shareholders, which values operating assets at little under a billion. This values the firm's operating assets around 3.0 times annual revenues and approximately 65 times annual earnings. Note that this does not include the deal with Aurizon.

Some Historical Perspective

Shares of Hecla Mining have seen quite some volatility over the past decade. Shares quadrupled from lows of $3 in 2005 to $12 in 2008, as the commodity boom boosted the company's profitability. Shares fell back to $1.5 during the crisis, but rebounded towards $11 at the start of 2011. From that point in time, shares have steadily lost ground and are currently trading around $4 per share, despite a modest rebound in the Autumn of 2012.

Between 2009 and 2012, Hecla Mining reported stagnating revenues around $320 million, after peaking around $478 million in 2011. Net income attributable to common shareholders rose from $54 million in 2009 to $151 million in 2011, before decimating in 2012. In the meantime, the shareholder base expanded by little over a quarter.

Bidding War?

It is not just Hecla Mining which is interested in the assets of Aurizon. Competitor Alamos Gold made an offer for the company already back in January.

On the 14th of January of this year Alamos Gold (NYSE:AGI) made an offer for Aurizon. Shares of the US-listing of Alamos fell more than 11% in a reaction to the offer at the time, as it acquired 23.5 million shares of Aurizon for CAD $4.65 per share in exchange for 6.6 million of its own shares. The company now holds 14% of Aurizon's shares outstanding and intends to acquire the remaining share base at equivalent terms.

The all-equity offer of Alamos is based on an equity swap in which shareholders of Aurizon receive 0.2801 shares of Alamos. Based on Tuesday's closing price of $13.39, the offer values Aurizon at $3.75 per share.

Note that Hecla Mining is confident that its bid for the company will succeed. The $514 million payment and 57 million shares of Hecla Mining value each share outstanding of Aurizon at around $4.50.

Not only is Hecla's offer much higher, it also includes a 68%
cash component while Alamos' offer is entirely based on shares. As a result, Aurizon's management has reiterated its support for the deal with Hecla Mining and it advises its shareholders to tender their shares.

Given the superior details of the deal with Hecla Mining, it is unlikely that a bidding war will emerge.

Investment Thesis

As a result of the deal and a weak environment for key global commodities, shares have fallen some 30% already since the start of 2013. Shares started the year around $6 before falling back to $5. The announcement of the deal sent shares to lows last seen in the summer of 2012, around $4 per share.

The deal has quite some implications for Hecla Mining's shareholders. The $796 million price tag of Aurizon Mining will be reduced by some $200 million in net cash which the company holds, for a net payment of $596 million.

To finance this net payment, Hecla will issue 57 million new shares, thereby paying some $230 million to Aurizon's shareholders in stock. As a result of the stock issuance, the market capitalization of the firm will increase from a current $1.15 billion towards the $1.4 billion mark.

Hecla's cash position of $175 million will consequently transform into a net debt position of a similar amount. Such a leverage position is perfectly manageable for a company the size of Hecla Mining.

For the first nine months of 2012, Aurizon generated $167 million in revenues on which it net earned $22 million. A simple extrapolation puts full year revenues around $220 million and earnings around $29 million. Combined with Hecla's full year results, the "new" Hecla will generate annual revenues of approximately $540 million, on which it earns around $45 million. This simple addition excludes integration costs and possible synergies.

The new combination will be valued at $1.40 billion, which values the firm at 2.6 times annual revenues and roughly 31 times annual earnings. Hecla will be able to acquire Aurizon's assets at cheaper valuation multiples than it is currently trading itself. It furthermore diversifies its operations, gears up to acceptable leverage ratios, and shareholders in Hecla will be able to capture most of the cost synergies.

The deal makes sense for Hecla Mining and shareholders who have punished the shares on Monday and appear to be overreacting. Rather they should applaud management's attempt to acquire at a counter-cyclical moment and avoid making acquisitions at the top of the market. The deal seems sound as concerns for a bidding war seem overdone.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.