- Hecla to acquire Alexco for a pittance.
- Hecla also to acquire the silver stream on Keno Hill; at rather generous terms.
- This is a seller's market for royalties and streams, and even Wheaton Precious Metals seems to agree.
When Alexco Resources ( AXU ) announced the suspension of mining activities at its Keno Hill silver mining district in the Yukon in late June, it turned out to be the last of many nails in the coffin for this junior silver miner. The share price dropped to a multi-year low, and raising sufficient capital to speed up mine development below $0.40 per share seemed too much to stomach for a market that had paid $1.75 in the placement just a couple of months ago. However, this latest drop in share price provided the incentive needed for the logical buyer, Hecla Mining ( HL ), to finally step up and acquire Alexco Resources.
The proposed all-paper deal implies a valuation of $0.47 per Alexco share, or a 23% premium on said multi-year low. The implied price tag for Alexco comes to $79.9M, considering the 155.5M shares outstanding at the end of Q1, plus the 7.47M shares issued in the April placement, plus the 8.98M shares Hecla is subscribing to for C$0.50 (or $0.385 in the US denomination) to provide bridge financing until closure.
The Keno Hill Mine
Alexco has been developing the Keno Hill project since 2006. The company consolidated much of the historic silver mining district, built a new 400 tpd flotation mill, and a dry stack tailings facility, and operated the Bellekeno silver mine from 2011 until 2013. The last precious metals bear market put a preliminary end to production at the Keno Hill operations, and the company went back into exploration and development mode while waiting for a better price environment. This phase yielded the discovery of the Flame and Moth deposit, which eventually drove the re-opening plan for the Keno Hill operations when metal prices recovered in recent years. The April 2021 feasibility study outlined a mine plan with ore feed coming from four underground ore sources. The project described in this study has a mine life of nine years, an NPV (5%) of 154.3M, and an IRR of 295%. Unfortunately, for Alexco shareholders, project execution ran into problems, and Alexco ran out of capital to fix the problems.
Alexco carries the Keno Hill operation at a book value of C$177.6M, or $137M in the US denomination, and Hecla is paying just 60% of book value for the asset. For Alexco shareholders who have supported the company in its ultimately futile efforts to bring Keno Hill into sustainable production, the proposed price must feel frustratingly short of a consolation prize.
The Stream
There is a second component to this deal, namely a streaming agreement that was struck between Alexco and Wheaton Precious Metals ( WPM ) in 2008, and modified in 2020 in order to facilitate the mentioned Keno Hill re-start. In its modified incarnation, this deal gives Wheaton Precious Metals the right to 25% of silver production at Keno Hill in exchange for a highly discounted purchase price.
Talk about nails in the coffin, this stream was certainly one of them. Its original terms were simply too onerous to allow for the Keno Hill operation to operate profitably; and the same goes to say about its modified 2020 version. Skimming off 25% of silver output below cost was a recipe to strangle operations to the detriment of Alexco, the operator; but also to the detriment of Wheaton Precious Metals, as cash from this streaming agreement would only flow when the mine was operating.
Extinguishing the stream was, therefore, a prerequisite for Hecla in its quest to acquire Alexco. Wheaton Precious Metals seems to have driven a hard bargain nevertheless, as Hecla is paying $135M in the company's shares to terminate this stream -- and that's 1.7 times the price Hecla is paying for Alexco, and 2.7 times the price Wheaton paid for the stream back in 2008. Annualizing the return, Wheaton is scavenging an IRR of 7.4% over a period of time that included a significant metals bear market. That's a very respectable result, and more than just a face-saving way out of a head-aching investment.
Hecla's Side Of The Deal
Hecla is acquiring a fully permitted and (almost) operating mine with glitches that look like they will be rather simple to fix, especially considering Hecla's depth of underground mining experience and availability of capital. The Keno Hill operation is unencumbered for the first time in many years, and finally stands a fighting chance to operate profitably. However, the combined consideration of $215M seems like a rather hefty price tag, considering the after-tax NPV (5%) of just $154M shown in the latest technical report for Keno Hill. Hecla is obviously betting on the exploration potential of the district, but using the numbers above, that bet encompasses 40% of the total purchase price. This is Hecla's first major deal after the $462M acquisition of Klondex Mines in 2018, a deal that also relied heavily on the exploration potential of the acquired assets; and a deal that has gone spectacularly against Hecla Mining so far.
The Alexco acquisition is a bet that won't pay out in the short term, and it will require exploration investments to pay off in the mid-to-long term. As such, we argue that this deal carries disproportionate exploration risks. Given Hecla's large portfolio of exploration and development projects, we wonder if the capital to acquire Alexco couldn't have been invested more efficiently into one or the other development project in the company's pipeline.
Summary & Investment Thesis
Considering the respective share prices of Hecla and Alexco, there was virtually no arbitrage at all on offer at the time of writing, reflecting a market certain the deal will close.
In total, Hecla is paying $215M (in shares) for a relatively small silver mining operation in the Yukon, which is unencumbered for the first time in many years. Wheaton Precious Metals will be walking away with the lion's share of this consideration, a generous pay-out on a questionable investment at long last. Wheaton Precious Metals investors should be pleased with the outcome, indeed. We have been quipping more than once in the past year or two that this is a seller's market for precious metals royalties and streams, and this transaction confirms this view once again.
Alexco investors are getting less than most of them will view as a consolation prize. Their support of a gutsy junior development company will go mostly unrewarded after a long struggle.
And Hecla is ending up with another asset close to production, an asset that fits the company's profile as an underground silver miner, but comes with substantial exploration risks to justify the outlay. Bringing the Keno Hill investment to fruition will require sustained future exploration success, a characteristic shared with several projects in the miner's vast portfolio. This acquisition will expand the share registry by around 9%, and that's a high bar to clear for Hecla to make this deal profitable on a per-share basis.
Furthermore, Wheaton Precious Metals will own 5.6% of Hecla's share capital, and will most likely be looking to sell this position in due time. This aspect can be expected to act as an overhang over Hecla's share price in the foreseeable future.
For further details see:
Hecla To Buy Alexco - Wheaton Precious Metals Wins