Tahoe Resources Inc. faced tough questions about its board's decision to support a US$1.07 billion takeover bid from Pan American Silver Corp., with one analyst and shareholder saying during a Nov. 14 conference call that he intended to vote against the deal.
Pan American Silver plans to acquire Tahoe Resources in a cash-and-stock deal that comes amid operational issues at Tahoe Resources' Escobal silver mine in Guatemala, which is on care and maintenance. The company declared force majeure at the mine in July 2017 after its mining licenses were suspended.
After a recent court decision, the mine now requires additional community consultation with indigenous people and reapprovals before it can be restarted.
The Escobal woes have contributed to a precipitous share price decline. Tahoe Resources, before the deal was announced, traded at about a tenth its share price four years ago and less than half of its share price at the start of the year.
The weakened stock and timing of the takeover came up during the call. Tahoe Resources Executive Chairman Kevin McArthur said he anticipated it would but defended the takeover as worth it to mitigate risk related to the Escobal restart plan and to bolster development of other projects in its pipeline.
"We knew there would be questions as to why we would sell at what looks like an all-time low, and this is a big concern of ours, of course," McArthur said during the call.
He said the deal would strengthen the company's balance sheet as it goes through the new, court-ordered consultation process over Escobal. "Furthermore we strongly believe in the projects, the mines and the future of the new Pan American," he said. "We're confident that the shares of the combined company will do well."
John Tumazos, of John Tumazos Very Independent Research, said he would not vote for the deal with either his Tahoe Resources or Pan American Silver shares and described the timing of the deal as poor for Tahoe Resources.
"In our opinion, Tahoe sold out at the worst possible moment," Tumazos told S&P Global Market Intelligence after the conference call, in which he expressed his view of the takeover and his voting intentions.
Tumazos said the deal comes amid the "height of tax-loss selling after being one of the worst stocks in the markets in the past two years, down 90% from a four-year high." He also noted precious metal prices are down these days and said there was not "any good news concerning its specific assets."
With those metrics and issues in mind, Tumazos suggested during the call that declining the bid might have been a better strategy. "Yes, that certainly [was] an option," McArthur responded.
The Tahoe Resources board recommended shareholders vote in favor of the deal and said two fairness opinions recognized the terms of the takeover as acceptable. McArthur also said shareholders that hold Pan American Silver shares after the deal closes could net gains through a re-rating if Escobal comes back online.
Pros and cons
Several analysts and a mining investment veteran pointed to the 34.9% premium on offer as significant. They also characterized the bid as a potential coup for Pan American Silver Chairman Ross Beaty, who is known for successfully building several companies in the sector.
"Ross Beaty has historically had impeccable timing and this could be another one," said one gold mining analyst who preferred not to be named. "Silver hit a 52-week low Nov. 13, and so his timing could be great."
Analysts also said Tahoe Resources may be better off as part of a bigger company. "They need to get bigger, and while they are selling at the bottom, they did get a great premium," the analyst said.
Mining investor Rick Rule, president and CEO of Sprott U.S. Holdings Inc., took a similar view.
"Tahoe holders benefit from an immediate and attractive premium from a very competent team," he said. "Both parties benefit from tremendous upside optionality at Escobal, Navidad and the deep mineralization at Dolores. In addition, I believe that the potential savings in combined general and administrative expenses will be attractive."
"Finally, the market has shown that larger, more liquid companies enjoy market capitalization advantages, relative to smaller issuers," Rule added. "Continuing shareholders need to remember that the surviving entity will face substantial social and political challenges in both Guatemala and Nicaragua."
On the issue of confronting challenges in Guatemala, Pan American Silver President and CEO Michael Steinmann said during the call that the company's team would bring critical expertise in community relations. It "will help a lot here," he said, noting the decades of experience on his team working and living in South America. "I'm confident about that."
Joe Mazumdar, an analyst and partner with Exploration Insights, took a more skeptical view, saying he doubted that Pan American Silver would do any better than Tahoe Resources at Escobal.
The analyst pointed to the experience of Tahoe Resources' management in building mines as comparable to Pan American Silver's in Latin America and also noted that Goldcorp Inc. had decided not to develop the project in selling it to Tahoe Resources in 2010.
"I don't think it's all Kevin McArthur on Guatemala," Mazumdar said. "There's a reason Goldcorp got out and sold that asset."