Feb 9, 2015
Tahoe Resources Inc. (Tahoe) (TSX:THO)(NYSE:TAHO) and Rio Alto Mining Limited (Rio Alto) (TSX:RIO)(LMA:RIO)(NYSE:RIOM) are pleased to announce that they have entered into a definitive agreement (the Arrangement Agreement) to combine their respective businesses (the Transaction) and create a new, leading intermediate precious metals producer with several value-enhancing growth opportunities.
The combined company offers shareholders significant low cost production from the world-class Escobal silver mine in Guatemala and the established La Arena gold mine in Peru, in addition to long-term sustainable growth fueled by the development of the Shahuindo gold project with first production expected in early 2016. With strong operating margins and low capital risk, the combined company will boast industry-leading free cash flow generation, superior financial returns and a strong balance sheet with zero net debt. In addition, the combined company will benefit from a top-tier management team focused on delivering long-term shareholder returns.
Under the terms of the Arrangement Agreement, all of the Rio Alto issued and outstanding common shares will be exchanged on the basis of 0.227 of a Tahoe common share and C$0.001 in cash per Rio Alto share (Exchange Ratio). Upon completion of the Transaction, existing Tahoe and Rio Alto shareholders will own approximately 65 percent and 35 percent of the combined company, respectively.
Based on the closing price of Tahoe’s common shares on the Toronto Stock Exchange (TSX) of C$17.64 on February 6, 2015, the offer implies consideration of C$4.00 per Rio Alto share which represents a premium of 22.1 percent to the closing price of Rio Alto shares of C$3.28 on the TSX on February 6, 2015 and a premium of 20.3 percent based on the volume weighted average prices of each respective company on the TSX for the 20-day period ending on February 6, 2015.
Highlights of the Transaction
Key investment highlights of the combined company include:
- A leading precious metals producer: Combines one of the world’s largest and highest grade silver mines with an established gold operation in Peru, a world-class mining jurisdiction, providing the combined company with a strong growth platform.
- Superior financial performance: Strong cash flow generation and industry-leading return on equity to drive shareholder returns and provide the financial flexibility to fund growth initiatives.
- Significant low-cost production: 2015 production guidance of 18-21million ounces (mozs) of silver at total cash costs of US$6.35-US$8.25/oz and all-in sustaining costs (AISC) of US$9.75-US$11.50/oz and 210-220 thousand ounces (kozs) of gold at net cash costs of US$570-US$600/oz and AISC of US$730-US$765/oz expected to yield operating margins in excess of 50 percent based on consensus commodity price forecasts.
- Long-term sustainable growth: Growth to be driven by the completion of the Escobal mine expansion from 3,500 to 4,500 tpd and the planned 2015 construction of Shahuindo, with potential for continued exploration success across the combined asset base.
- Highly experienced management and Board: Complementary management team with strong cultural fit and a rich history of substantial shareholder value creation and proven expertise in the construction and operation of both open pit and underground mines.
- Strong balance sheet: Zero net debt and one of the lowest debt-to-equity ratios in the mining industry.
- Attractive dividend policy: The Company plans to continue the monthly dividend policy of US$0.02 per share subject to Board of Directors approval.
- Enhanced capital markets presence: Combined US$3.25 billion market capitalization is expected to appeal to a broader institutional shareholder base, increase analyst coverage and improve share trading liquidity.
Management Team and Board of Directors
The management team and Board of Directors of the combined company will draw from the expertise of both companies. Kevin McArthur, current Vice Chair and Chief Executive Officer of Tahoe, will act as the Executive Chairman of the Board and Alex Black, current President and Chief Executive Officer of Rio Alto, will become the new Chief Executive Officer of the combined Company upon completion of the business combination. Ron Clayton will remain President and Chief Operating Officer of the combined company. The senior management team consists of the following:
|Mark Sadler||VP and Chief Financial Officer|
|Eduardo Loret de Mola||COO – Peru Operations|
|Tim Williams||VP Operations|
|Brian Brodsky||VP Exploration|
|Edie Hofmeister||VP Corporate Affairs|
Upon completion of the transaction, the Board will initially be comprised of nine directors, with six directors from Tahoe and three directors nominated by Rio Alto.
The proposed Board of the combined company will consist of the following:
|C. Kevin McArthur||Executive Chairman|
|A. Dan Rovig||Director|
|Paul B. Sweeney||Director|
|James S. Voorhees||Director|
|Drago Kisic Wagner||Director|
|Kenneth F. Williamson||Director|
|Dr. Klaus Zeitler||Director|
Kevin McArthur, Vice Chair and Chief Executive Officer of Tahoe, said, “The combination of Tahoe and Rio Alto is designed to create a stronger and better positioned company going forward. In addition to diversifying our asset base into one of the most attractive precious metal producing regions in the world, this transaction establishes a strong platform for future growth.”
“As a larger combined entity with expanded management capabilities, we will remain focused on strong operating performance and plan to deliver superior financial returns to our shareholders over the near and long term,” added Mr. McArthur.
“Escobal is truly a world-class silver mine, and we believe this transaction represents a logical combination of two complementary, low cost asset bases that will continue to generate strong free cash flows into the future,” said Alex Black, President and Chief Executive Officer of Rio Alto.
“In addition to Tahoe’s attractive dividend policy, this transaction positions our shareholders to realize superior returns as we become part of a larger and more diversified intermediate precious metals producer in the Americas with enhanced cash flow generating capability. We are highly excited about the prospects of the combined company,” he added.
Benefits to Tahoe Shareholders
- Establishes a significant operating presence in Peru, the second largest global silver producing country and largest gold producing country in Latin America.
- Enhanced production from a multi-mine producer with immediate high-margin gold production and near-term organic growth.
- Strengthens Tahoe’s ability to provide superior shareholder returns through internal and external growth initiatives and through its leading dividend policy.
- Addition of significant exploration potential across all projects; large ~55,800 hectare land package in a prolific mining district.
- Adds open pit mining and heap leach capabilities to core operational strengths.
- Enhanced trading liquidity and capital structure will support increased financial flexibility.
Benefits to Rio Alto Shareholders
- Immediate up-front premium, while maintaining exposure to future value creation through meaningful equity participation.
- Enhanced free cash flow generation and financial strength.
- Access to an attractive dividend to provide increased returns during the construction of Shahuindo.
- Adds a unique world-class mine with a robust, high-grade reserve base and strong exploration potential to sustain long life operations.
- Expands operational capabilities, adding proven expertise in underground mining.
- Increased trading liquidity, enhanced value proposition and capital markets profile.
Board of Directors’ Recommendations
Both Companies’ Boards of Directors have determined that the business combination is in the best interests of their respective shareholders based on a number of factors, including fairness opinions received from their respective financial advisors. Each company’s Board of Directors approved the terms of the proposed Transaction and recommends that their respective shareholders vote in favor of the business combination.
Scotiabank has provided a fairness opinion to a special committee of independent directors (Independent Committee) of Rio Alto. GMP Securities L.P. has provided a fairness opinion to the Board of Directors of Rio Alto and BMO Capital Markets and Raymond James Inc. have provided fairness opinions to the Board of Directors of Tahoe.
The proposed business combination will be effected by way of a Plan of Arrangement completed under the Business Corporations Act (Alberta). The Transaction will require approval by at least 66 2/3 percent of the votes cast by the shareholders of Rio Alto at a special meeting of Rio Alto shareholders. Officers and directors of Rio Alto, representing 2.3 percent of the Rio Alto common shares, have entered into voting support agreements, pursuant to which they will vote their common shares held in favor of the Transaction. The Transaction is also subject to obtaining approval by a simple majority of votes cast by the shareholders of Tahoe at a special meeting of Tahoe shareholders. Goldcorp Inc., which holds approximately 39 percent of the outstanding Tahoe common shares, has entered into an agreement to vote in favor of the Transaction. In addition, officers and directors of Tahoe, representing 3.5 percent of the Tahoe common shares, have entered into voting support agreements, pursuant to which they will vote their common shares held in favor of the Transaction. In addition to shareholder and court approvals, the Transaction is subject to applicable regulatory approvals and the satisfaction of certain other closing conditions customary in transactions of this nature.
The Arrangement Agreement includes customary deal-protection provisions including non-solicitation provisions, a right to match competing offers and a C$57.6 million termination fee payable to Tahoe under certain circumstances.
Full details of the Transaction will be included in the management information circulars of Tahoe and Rio Alto to be mailed to their respective shareholders by early March 2015. It is anticipated that both shareholder meetings and closing of the Transaction will take place in early April 2015.
Advisors and Counsel
GMP Securities L.P. acted as financial advisor to Rio Alto and Davis LLP acted as its legal advisor. Scotiabank has provided a fairness opinion to the Independent Committee and Torys LLP acted as legal advisor to the Independent Committee.
BMO Capital Markets acted as lead financial advisor to Tahoe and provided a fairness opinion to the Tahoe Board of Directors. Raymond James Ltd. also acted as financial advisor to Tahoe and provided a fairness opinion to the Tahoe Board of Directors. Bank of America Merrill Lynch acted as financial advisor to Tahoe. Macquarie Capital Markets Canada Ltd. and Beacon Securities Ltd. acted as strategic advisors to Tahoe. Cassels, Brock & Blackwell LLP acted as Tahoe’s legal advisor.
Tahoe and Rio Alto will host a joint conference call on Monday, February 9, 2015 at 8:30 a.m. Eastern Time, or 5:30 a.m. Pacific, for members of the investment community to discuss the business combination. The call-in details are as follows:
- Canada & USA toll-free: 1-800-319-4610
- Outside of Canada & USA: 1-604-638-5340
A copy of the merger investor presentation is also available on the Tahoe and Rio Alto investor pages at www.tahoeresourcesinc.com/merger.pdf and www.rioaltomining.com, respectively. An audio recording of the conference call will be made available shortly after the call on the Tahoe and Rio Alto investor pages.
Tahoe’s strategy is to responsibly operate the Escobal mine to world standards, to pay significant shareholder dividends and to develop high quality precious metals assets in the Americas. Tahoe is a member of the S&P/TSX Composite and TSX Global Mining indices and the Russell 3000 on the NYSE. Tahoe is listed on the TSX as THO and on the NYSE as TAHO. Tahoe plans to seek a listing of its shares on the Bolsa de Valores de Lima S.A. (BVL).
About Rio Alto
Rio Alto is a mid-tier gold producer focused on optimizing production, exploration and if appropriate, making further acquisitions of precious metal properties in low risk regions of the Americas. Rio Alto is listed in the TSX and BVL as RIO BVL and the NYSE as RIOM.