Hecla makes bid to take over BC silver explorer
Last updated 7/3/2016 at Noon
Hecla Mining Company June 27 reported a takeover bid for all of the outstanding shares of Dolly Varden Silver Corp. that it does not already own.
At C69 cents per share, Hecla's offer reflects roughly a 97 percent premium based on the volume-weighted average price of the Dolly Varden shares on the TSX Venture Exchange for the 20 trading days ending on June 24.
Assuming exercise of the 1.25 million warrants it currently holds, Hecla owns and controls 3,870,291 Dolly Varden shares, or roughly 19.8 percent of the shares calculated on a partially diluted basis.
"To protect ourselves and other shareholders, we are offering to buy Dolly Varden shares for cash at C69 cents.
If we acquire all shares we expect to spend about $12 million." Earlier in June, Dolly Varden said it had entered definitive agreements with three lenders - Sprott Resource Lending Partnership, a second Sprott affiliate, and The K2 Principal Fund L.P. - for a C$2.5 million loan.
If finalized, roughly C$2.1 million of the proceeds would be used to repay its existing senior secured loan from Hecla Canada Ltd. and Robert Gipson.
"The new loans permit Dolly Varden to discharge the Hecla/Gipson loan and to complete an equity financing to repay the new loans prior to their maturity date without obtaining the consent of the new lenders," said Rosie Moore, interim president and CEO, Dolly Varden Silver.
In connection with the new loan, Dolly Varden agreed to issue 2.5 million warrants to the trio of investors that would entitle the warrant-holder to purchase one Dolly Varden share for a period of two years for a price equal to the greater of C30 cents, or the minimum price permitted by the TSX Venture Exchange on the date of issue.
"While we believe that Dolly Varden can one day be a significant silver producer, we are very concerned with the current board's value destruction for shareholders," said Hecla President and CEO Phillips Baker, Jr.
"These directors are not acting in shareholders' best interests with a new loan arrangement that causes substantial dilution at a low share price.
Their plan starts with issuing warrants with an 'option value' of C27.5 cents each and an exercise price of C30 cents, which is well below the current share price and our offer price.
The warrants are issued in exchange for a loan with maturity only three months longer than the existing loan and (that add) little to the treasury." Hecla has notified the TSX Venture Exchange of its concerns and requested that the exchange not approve the issuance of warrants to Dolly Varden's proposed new lenders.
Moore contends that "the warrants issued with the new loans are no more dilutive than the same number of warrants with a lower exercise price issued to Hecla and Gipson under the Hecla-Gipson loan." The Hecla-Gipson loan is set to expire in September.
Hecla, however, said it has been willing to extend the loan and offer Dolly Varden a loan with a longer maturity date, lower interest rate and double the new funding.
Restrictions on equity financings, however, seem to have been a sticking point in the negotiations.
"We've had a number of discussions this year with Hecla regarding options for Dolly Varden to repay the Hecla-Gipson loan.
Dolly Varden, Hecla and Gipson were not able to come to terms on converting debt to equity, a loan extension or an equity financing," Moore explained.
Dolly Varden said it will seriously consider Hecla's takeover proposal and notify shareholders of its recommendations.
Hecla has already entered into support agreements with shareholders who collectively hold 2.5 million Dolly Varden shares and 1.25 million Dolly Varden warrants.
Hecla and the supporting shareholders hold 5.12 million shares and 2.5 million warrants, or about 34.4 percent of Dolly Varden's shares on a fully diluted basis.
Each warrant entitles the holder to acquire one additional share at a price of C30 cents per share.