Tahoe Takes Advantage of Cheap Loonie to Buy Lake Shore Gold

Why Canadian Miners Look Attractive to Global Buyers
  • Agrees to acquire Canada miner in $678 million all-stock deal
  • Deal may be precursor for surge in Canadian M&A, analyst says

Tahoe Resources Inc.’s purchase of Toronto-based miner Lake Shore Gold Corp. could be a forerunner of more deals as foreign mining companies look to Canada for its stable political environment and weak dollar.

Reno, Nevada-based Tahoe agreed to acquire Lake Shore on Monday in an all-stock deal valued at C$945 million ($678 million). From the perspective of Tahoe, which has mines in Latin America, the advantages are twofold, according to Barry Allan, a Toronto-based senior vice president at Mackie Research Capital Corp.

“It’s political diversification for these Tahoe shareholders,” Allan said by phone. “You’ve got stable Canada, thank you very much, an attractive currency. It’s just an insurance policy.”

Lake Shore operates the Timmins West and Bell Creek mines in Timmins, Ontario, while Tahoe has the Escobal operation in Guatemala and La Arena and Shahuindo mines in Peru.

‘Whole Series’

In the deal, Lake Shore investors will get 0.1467 of a Tahoe share for every share they own, the companies said Monday in a statement. The ratio implies C$1.71 per Lake Shore common share, based on Tahoe’s closing on Friday, representing a premium of about 15 percent to Lake Shore’s closing price that day, the companies said.

The acquisition will improve Tahoe’s growth profile and will be accretive to its net asset value and free cash flow per share, Tahoe’s founder and executive chairman Kevin McArthur said Monday during a call with analysts. “We will be positioned to generate industry-leading cash flows.”

While some miners have been shrinking, Tahoe has continued to expand. Last February, the company agreed to buy Rio Alto Mining Ltd. for about C$1.35 billion, expanding its operations with La Arena.

Monday’s offer is 29 percent more than Lake Shore’s closing price on Thursday, according to the statement. Lake Shore’s share price climbed 11 percent on Friday, leading the company to issue a statement saying it had “become aware of speculation concerning a potential transaction.”

‘Mixed Feelings’

Lake Shore climbed 5.4 percent to C$1.57 at 4 p.m. in Toronto, while Tahoe fell 6.4 percent to C$10.91.

Kerry Smith, a senior mining analyst with Haywood Securities Inc., said he had “mixed feelings” about whether the deal is a good one for Lake Shore shareholders, given that gold has been trading higher since the start of the year.

“If we’re right, and it’s the start of a new cycle, then probably they did sell too early, but their performance may be just as good in a larger vehicle,” Smith said by phone from Toronto.

Gold futures have gained 12 percent in 2016 on the Comex in New York, after slumping 10 percent last year in a third straight annual decline.

Lowly Loonie

The Canadian dollar has lost about 11 percent against the U.S. dollar in the past 12 months, which lowers the cost for mines operating in Canada and can make them more attractive to foreign buyers. Allan said he expects to see more such deals this year.

“We’ve got a whole series of these in Canada,” Allan said, citing Detour Gold Corp., Richmont Mines Inc., and Claude Resources Inc. as examples of mines that could attract interest. “All of these guys have really enjoyed the benefits of a weak currency and they’re nice standalone assets. It really underscores the value of these assets in an international portfolio.”

Tahoe’s bid for Lake Shore could be a “stepping stone” to acquire more assets in the Timmins area, the Bank of Nova Scotia’s mining sales desk wrote in a note to clients Monday. The note speculated that Goldcorp Inc.’s assets in Timmins, including its Borden project, could be up for sale and would be worth $870 million to $900 million in total, or $500 million without Borden.

Timmins Camp

Goldcorp owns 38,000 hectares of mining claims within Timmins through its Porcupine complex, according to Vancouver-based Goldcorp’s website. Its Borden Gold development project provides synergies with existing Porcupine infrastructure.

Christine Marks, a Goldcorp spokeswoman, said in an e-mail she doesn’t comment on rumor and speculation.

Goldcorp’s incoming chief executive officer, David Garofalo, recently mapped out his vision for the company which included expanding beyond the Americas for acquisitions. Last June, Goldcorp sold its 26 percent stake in Tahoe for C$998.5 million.

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