CIBC Equity ResearchHECLA MINING COMPANY
Acquisition Of Alexco Resource
Our Conclusion
Hecla Mining announced the acquisition of all of the outstanding shares of
Alexco not already owned by Hecla at an exchange rate of 0.116 of a share
of Hecla for each share of Alexco, implying consideration of $0.47 per share
for a 23% premium based on the company’s five-day VWAP. We have
updated our model to include Keno Hill, and show that the transaction is
financially accretive to longer-term measures. Our new model shows cash
flow accretion beginning in 2024 (dilutive in 2022 and 2023). Overall, a small
transaction for HL, however, Keno Hill fits well within the company’s current
portfolio of assets with respect to jurisdiction and geology, and has the
potential to significantly increase consolidated silver production longer term.
Key Points
Keno Hill: Keno Hill is a high-grade Canadian silver asset located in the
Yukon, with the latest technical report contemplating an eight-year mine life
producing two concentrates: a high-grade silver-lead concentrate and zincsilver concentrate, with average annual silver production of 4.4Moz for LOM
production of ~37Moz. Mineralization is of the polymetallic silver-lead-zinc
vein type, and has characteristics similar to that of Coeur d’Alene, Idaho,
where Hecla owns and operates the Lucky Friday mine.
Transaction Terms:
Alexco shareholders will receive 0.116 of one Hecla
share for each Alexco share, implying consideration of $0.47 per Alexco
share, a 23% premium based on the company’s five-day VWAP. In addition
to the acquisition of Alexco, Hecla and Wheaton Precious Metals (WPM)
have entered into a definitive agreement to terminate WPM’s existing silver
stream on Keno Hill for total consideration of $135M of Hecla common
shares, conditional on the completion Hecla’s acquisition of Alexco. Upon
completion of the transactions,
WPM and Alexco shareholders will own
approximately 5.6% and 3.0%, respectively, of the outstanding common
shares of Hecla. Hecla is providing Alexco with a $30M secured loan facility
and purchasing ~9 million common shares of Alexco for ~C$4.5M, intended
to provide Alexco with immediate working capital to continue development
work at Keno Hill. These amounts are not conditional on the completion of
the transaction. The transaction is subject to customary closing conditions
and a termination fee of $10M, and is expected to close in Q3 2022
.
Updates To Our Model:
Based on the 2021 technical report published by
Alexco, we model an eight-year mine life with average annual production of
4.3Moz for LOM production of ~36Moz at AISC (after by-product credits) of
$9.27/oz (average LOM) for a 5% NPV of $158M. A production profile is
included in the bar and line graph in Exhibit 2. Despite the premium paid to
Alexco’s share price, the implied acquisition cost of $103M, including the
$30M loan, calculates to a ~0.65x P/NAV. After model updates for both
transactions, our revised model shows that the transaction is relatively
neutral to our NAV; however, it is cash-flow accretive starting in 2024.