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Mining industry offering 'big premiums' for cheap stock

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Mining industry offering 'big premiums' for cheap stock

Juicy premiums in recent M&A offers suggest that some miners see value in beaten-down stocks, analysts said.

The premium in a proposed merger between Alio Gold Inc. and Rye Patch Gold Corp. was 35%, based on a 20-day volume-weighted average price, while Hecla Mining Co. offered a 59% premium to the 30-day volume-weighted average price in a takeover bid for Klondex Mines Ltd.

"Both show that the industry sees value; otherwise they wouldn't pay these big premiums," Kerry Smith, a Haywood Securities mining analyst, said in an email.

Don Blyth, a mining analyst with Paradigm Capital, said a recent decline in Klondex's share price drove the premium in the Hecla takeover.

"Given that negotiations between Hecla and Klondex have been going on for four months, and with the severe price decline in the Klondex shares, ultimately Hecla bought them for less than the share price [they traded at] when they started talking," he said in an email.

Brent Cook with Exploration Insights took a similar view of the deal. "Basically, Hecla knows underground mining, and Klondex was cheap and high-grade."

Cook thought less of the premium in the Alio/Rye Patch tie up. "The Alio deal shows what they think of Ana Paula," he said, referring to an Alio project. "In my opinion, not much."

Still, Blyth said he did not see the premiums on offer or the deal activity as an indication that M&A may be picking up in the mining sector. "It was certainly nice to see a 72% premium to the closing price, although I'm not sure there can be too much read-through for the sector."

Blyth considered the Hecla move a smart one. "Hecla is making a long-term call on the quality of Klondex's Nevada assets at a time that investors' outlook is very short-term. I think history will show this to be an intelligent acquisition."