Pan American Silver buys Tahoe Resources for $1B

Canada’s Pan American Silver (TSX:PAA) (NASDAQ:PAAS) is buying precious metal miner Tahoe Resources (TSX:THO) (NYSE:TAHO) for $1.07 billion in cash and stock, creating one of the world’s largest silver producers.

Pan American, already the world’s second-largest primary silver miner, will effectively double its silver reserves with the acquisition, as Reno, Nevada-based Tahoe Resources owns a major, but troubled silver mine in Guatemala (Escobal), as well as gold mines in Peru and Canada.

Pan American, already the world’s second-largest primary silver miner, will effectively double its reserves of the precious metal with the acquisition of Tahoe Resources.

The Vancouver-based miner's president and CEO Michael Steinmann said Pan American would rely on its 25-year track record of operating mines in Latin America to work with the communities around Escobal and so gain their support to restart operations.

Escobal, the world's third largest silver mine, has been shut since July 2017 after Guatemala’s Supreme Court provisionally ordered its closure following an appeal from environment and human rights organization CALAS.

The group alleged the country’s Ministry of Energy and Mines (MEM) had not consulted with the local indigenous group before awarding the license to Tahoe’s local unit, Minera San Rafael.

Escobal, an underground operation, began commercial production in 2014 and, in 2016, produced a record 21.2 million ounces of silver in concentrate.

But it has also been a source of polemic. Last year, protesters blocked access to the mine, delaying shipments and supplies. Tahoe is also facing action in Canada’s court system by a group of Guatemalan for alleged violence at a protest outside Escobal in 2013.

Pan American Silver has had its share of issues in Latin America as well. In May, the company had to curtail operations in Mexico due to rising violence and crime. In particular, the company said at the time, it had faced several security incidents along the roads used to transport personnel and materials to its Dolores mine, in the state of Chihuahua, which borders Texas and New Mexico.

Tahoe shares have fallen 54% so far this year, mostly as a consequence of issues surrounding its Escobal mine in Guatemala.

Releasing details of the deal, Pan American noted its investors will own about three-fourths of the merged firm, while Tahoe shareholders will hold the rest and may elect to receive $3.40 in cash or 0.2403 Pan American share for each Tahoe share held.

The base purchase price of $3.40 per share represents a premium of about 55% to Tahoe’s last close. That price is limited to a maximum cash consideration of $275 million and a maximum issue of 56 million Pan American shares.

Tahoe shares have plunged 54% so far this year, mostly as a consequence of issues surrounding its Escobal mine. Today's agreement includes contingent value rights that will be paid out to Tahoe shareholders when the mine is up and running again.

The total consideration, including the base purchase price and the conditional payment, is $4.10 per share.

The transaction comes at a time of weak silver prices, which has taken a toll on miners’ shares. On Wednesday, silver fell below $14 an ounce to trade near its lowest level since 2009, as a strong dollar and rising U.S. interest rates dent its appeal.

As the boards of both companies have already approved the merger, it is expected to close in the first-quarter of 2019.