Vancouver’s Pan American Silver to acquire struggling Tahoe Resources in US$1.1-billion deal

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Vancouver’s Pan American Silver Corp. is buying U.S. competitor Tahoe Resources Inc. in an unusually structured US$1.1-billion deal aimed at resurrecting struggling Tahoe.

Nevada-based Tahoe’s shares soared nearly 50 per cent after the deal was announced Wednesday. The company’s shares had been trading near an all-time low and it has been under severe selling pressure from shareholders since last year when it was forced to stop production at its flagship mine in Guatemala after a legal setback.

In July, 2017, the Supreme Court of Guatemala suspended Tahoe’s licence at its Escobal silver mine after ruling local Indigenous populations weren’t adequately consulted before the licence was issued.

On Wednesday, Pan American said it is offering Tahoe shareholders US$3.40 in cash, or 0.2403 Pan American shares, for each of their units, a premium of 54 per cent compared with Tuesday’s close. But, the value of the deal could rise to US$4.10 a share, or roughly US$1.3-billion, if Pan American is successful in getting production restarted at Escobal.

In an interview, Michael Steinmann, chief executive of Pan American, acknowledged the unusual structure of the deal and explained the sweetener is so both Tahoe and Pan American shareholders could share the risk around Escobal.

While the premium offered by Pan American is large compared to where Tahoe has traded on a short-term basis, the silver and gold producer founded by former Goldcorp Inc. CEO Kevin McArthur is poised to cash out near an all-time low with the stock down about 90 per cent since peaking in 2014.

“They couldn’t have picked a worse moment to sell,” long-time shareholder John Tumazos, president of New Jersey-based Very Independent Research, said in an interview. Mr. Tumazos intends to vote against the deal. He questioned why Tahoe, whose debt is relatively low, couldn’t have hung on for a few more months, or simply done nothing.

“This transaction isn’t fair,” he said.

In a conference call with analysts on Wednesday, Tahoe’s Mr. McArthur said that while selling the company near its trough was a “concern,” Tahoe will be in better financial condition after the Pan American acquisition, and be on a stronger footing to navigate through its travails in Guatemala.

Tahoe shares rose 49 per cent on Wednesday to close at US$3.28 on the New York Stock Exchange.

Pan American shares fell by 10.4 per cent to close at $16.77 on the Toronto Stock Exchange, the worst performer in the 53 member materials index. Mr. Steinmann called it a “normal reaction on a premium deal,” and added that he doesn’t expect the selling pressure to threaten the deal.

Pan American, founded by well known mining entrepreneur Ross Beaty in 1994, hopes its long history of operating in Latin America will help it solve Tahoe’s problems in Guatemala. Mr. Steinmann said he didn’t want to put a time frame on how long the consultation process with Guatemala on Escobal might take, but said he was optimistic the dispute could be solved and the mine would eventually be back in production.

In a note to clients, Mark Mihaljevic, analyst RBC Dominion Securities Inc., called Pan American’s acquisition of Tahoe “a very opportunistic transaction to take control of a world-class silver mine in Escobal and a number of gold assets.” The deal should also improve Pan American’s free cash flow.

Pan American is the second biggest primary producer of silver in the world. Most silver is produced as a result of being mined as a byproduct of other metals such as gold, but Pan American’s mines are dedicated solely to mining silver.