Pan American Silver offers $1.1 billion to buy out Tahoe

TORONTO (Reuters) - Pan American Silver Corp PAAS.TO said Wednesday it has agreed to buy Tahoe Resources Inc TAHO.N in a $1.07 billion cash and stock deal that would create a top global silver miner but also include some troublesome assets.

FILE PHOTO - A general view shows the Escobal Silver Mine, mine unit of Tahoe Resources Inc., in the town of San Rafael las Flores, Guatemala August 14, 2017. Picture taken August 14, 2017. REUTERS/Luis Echeverria

The offer, representing a near 35 percent premium to Tahoe’s average share price over the past 20 days of trade, sent Tahoe shares up 45 percent, while Pan American stock fell about 12.5 percent.

Reno, Nevada-based Tahoe was at $3.17 in early afternoon trade on New York, below the $3.40 bid, which could climb to $4.10 on a conditional payment.

There is a “defined path toward resuming production” at Tahoe’s Escobal mine, which was suspended last year, Pan American CEO Michael Steinmann said on a conference call.

A Guatemalan court ordered the completion of consultation with indigenous groups before the world’s second-largest silver mine can come back on line.

Steinmann said his company has a 25-year record of successful operations in Latin America and noted that a four-stage constitutional court mandate and government-led consultation process is well under way.

Still, the offer includes a conditional payment hinged on the restart of concentrate shipments from Escobal, which Steinmann said was a means of sharing risk.

Since 2011, Tahoe has spent more than $500 million developing Escobal.

“Pan American’s acquisition of Tahoe Resource could be a very opportunistic transaction...assuming the company is able to address recent social, geopolitical and operational challenges,” RBC analyst Mark Mihaljevic said in a note to clients.

John Tumazos, who holds modest stakes in both Pan American and Tahoe, said Tahoe seems to be selling “at the worst moment” with silver prices down 17 percent from last year and Tahoe shares 90 percent below their 2014 peak.

The acquisition is great for Pan American, said Doug Groh, co-manager of top 10 investor Tocqueville Gold Fund, demonstrating “value opportunities” in the precious metals sector.

The deal will double Pan American's silver reserve base to 576 million ounces, above rivals Fresnillo FRES.L, Hecla Mining HL.N, Coeur Mining CDE.N and Hochschild Mining HOCM.L, Steinmann said. Fresnillo will still lead production.

Vancouver-based Pan American is offering $3.40 in cash, or 0.2403 of a share, for each Tahoe share, giving it about three-fourths of the combined company.

The conditional payment tied to Escobal, which has a 10-year term, is currently valued at $221 million. Including that, Pan American said its offer represents a near 63 percent premium to Tahoe’s average share price over the last four weeks.

Reporting by Susan Taylor in Toronto and Bhargav Acharya in Bengaluru; Editing by Gopakumar Warrier, Jeffrey Benkoe and Cynthia Osterman