Silvercorp to acquire Guyana Goldfields for $75m: Analysis

Matthew Hall 28 April 2020 (Last Updated April 28th, 2020 16:59)

Canadian precious metals producer Silvercorp Metals is to acquire Toronto-headquartered Guyana Goldfields in a deal worth around CAD105m ($75m) in cash and stock. The deal will create a diversified precious metals producer with two silver mines in China and a gold mine in Guyana.

Silvercorp to acquire Guyana Goldfields for $75m: Analysis
Guyana Goldfields operates the Aurora gold mine in Guyana. Image credit: Guyana Goldfields.

Canadian precious metals producer Silvercorp Metals is to acquire Toronto-headquartered Guyana Goldfields in a deal worth around CAD105m ($75m) in cash and stock. The deal will create a diversified precious metals producer with two silver mines in China and a gold mine in Guyana.

Silvercorp Metals currently produces silver, lead and zinc from its operations in China. The company will give Guyana Goldfields’ shareholders the option to receive CAD0.60 ($0.43) per share in cash, or 0.1195 of a common share in Silvercorp, up to a maximum cash consideration of CAD33.2m ($23.8m).

The two companies have also entered into a loan agreement whereby Silvercorp will lend Guyana Goldfields up to $15m, for purposes related to ongoing operations at Guyana Goldfields’ Aurora Underground Project as well as for working capital and general corporate purposes.

Understanding the acquisition

Guyana Goldfields has been under pressure from investors due to the poor performance of its only operating mine, Aurora, following a resources review. In 2019, the company announced that the amount of gold in proven and probable reserves at the operation had declined by just under 1.7Moz compared with 2018 estimates. What followed was a proxy battle for control of the company led by Guyana Goldfields’ former executive chair Patrick Sheridan, resulting in two new independent directors being appointed to the board, two existing independent directors stepping down, and a search for a new CEO commencing.

Guyana’s share price fell to its lowest since 2008 in October 2019, after the company revealed that its Aurora mine would fail to meet production guidance.

Silvercorp Metals’ rationale for acquiring the struggling company is that the combined company can benefit from enhanced strategic positioning and greater diversification, providing the opportunity for successful operations at Aurora following further development on the project. Silvercorp’s strong balance sheet will provide the capital to develop the Aurora project and pursue further M&A opportunities.

The combined company also stands to benefit from an attractive growth profile. In addition to development at Aurora, Silvercorp is considering strategic options for the BYP gold-lead-zinc mine in China, which it acquired in 2011.

Executives respond to the deal

Silvercorp chairman and CEO Rui Feng said: “This transaction will create a new globally diversified precious metals producer with the addition of Aurora to our growing asset portfolio. We believe this is a rare opportunity to leverage our underground mining expertise and strong balance sheet to unlock value for all shareholders through the development of the Aurora Underground Project as well as aggressive exploration programmes in a proven gold district.

“We look forward to partnering with the Government of Guyana to make a successful entry into the region, leveraging Guyana Goldfield’s existing team and relationships to ensure a smooth transition and continued development that benefits all stakeholders.”

Commenting on the deal, Guyana Goldfields President and CEO Alan Pangbourne said: “This transaction provides our shareholders with an immediate and significant upfront premium and exposure to a geographically diverse mid-tier precious metal company.  With a strong operating history, solid balance sheet and significant underground experience, Silvercorp’s management team is well-positioned to fund and continue to advance the underground project at Aurora.”

Silvercorp Metals company overview

Silvercorp Metals first entered China in 2003 to capitalise on the country’s largely underexplored resource potential, made possible by China’s 1997 Mineral Resource Law. This legislation opened the country to foreign mining companies, who could use advanced exploration technology and expertise to develop China’s natural resources.

Silvercorp has since become China’s premier silver producer, with 6.4Moz of silver produced in the 2018-2019 fiscal year.