Klondex Rejects Silvercorp’s Hostile Takeover Bid

Klondex Mines Ltd. (TSX: KDX) announced today that its Board of Directors is recommending that shareholders of Klondex Mines REJECT the unsolicited takeover bid from Silvercorp Metals Inc. (TSX: SVM; NYSE Amex: SVM) and NOT tender their shares to the Silvercorp Offer. Klondex shareholders need to “DO NOTHING” in order to reject the Silvercorp bid.

On June 15th, 2009, Silvercorp formally commenced an unsolicited offer to acquire all of the issued and outstanding common shares of Klondex on the basis of 0.50 of a Silvercorp common share for each Klondex common share. Based on yesterday’s closing price of Silvercorp, the value of the Silvercorp Offer is equivalent to CDN $2.12 per Klondex common share. The Silvercorp Offer will expire on July 21, 2009, unless withdrawn or extended.

Rationale for the Rejection of the Silvercorp Bid:

Based on the advice and recommendations from a Special Committee of independent directors, financial advisors and legal counsel, the Klondex Board unanimously recommends that Klondex Shareholders reject the Silvercorp Offer. All of the directors and officers of Klondex will neither accept the Silvercorp Offer nor tender their Klondex Shares to the Silvercorp Offer. Klondex’s directors and officers own or exercise control over an aggregate of more than 15% of the issued and outstanding Klondex Shares and 19.6% of Klondex Shares on a fully diluted basis.

The Board’s rationale for rejecting the Silvercorp Offer includes the following points. A more detailed explanation of all of the reasons for the Board’s unanimous recommendation will be provided in the Directors’ Circular to be mailed to shareholders.

  • The Silvercorp Offer Significantly Undervalues Klondex’s Assets. The Board believes that the Silvercorp Offer significantly undervalues Klondex’s assets and fails to adequately compensate Klondex Shareholders for the loss of the opportunity to participate in the development of the Fire Creek project. Based on the publicly disclosed measured and indicated resources of each of Silvercorp and Klondex, and current prices of gold, silver, lead and zinc, Klondex Shareholders are being offered approximately US$7 per Klondex Share of in situ gross metal value, which is significantly below their current in situ gross metal value of US$56 per Klondex Share. This is not necessarily indicative of the economic viability of any of the resources of either Silvercorp or Klondex. This information is provided simply as a measure of the relative value of the Silvercorp Offer without reference solely to relative share prices of Silvercorp and Klondex.
  • The Transaction Value Per Ounce Contemplated by the Silvercorp Offer is Significantly Below the Price Paid in Comparable Mining M&A Transactions. The Silvercorp Offer of approximately US$21 per ounce of gold resources is significantly below the average transaction value per ounce of gold resources paid in comparable mining M&A transactions since 2006, which ranged from approximately US$133 to US$113 per ounce of gold resources.
  • The Silvercorp Offer is Financially Inadequate. Scotia Capital has delivered an opinion that the consideration offered pursuant to the Silvercorp Offer is inadequate, from a financial point of view, to Klondex Shareholders (other than Silvercorp).
  • The Silvercorp Offer is Not a Cash Offer and the Share Consideration Offered by Silvercorp is Volatile and of Uncertain Value. Silvercorp is not offering cash – it is offering Silvercorp shares. The value of the consideration being offered is uncertain and dependent on the value of the Silvercorp shares. The Silvercorp shares are historically volatile. The market value of the Silvercorp shares has decreased by as much as 19% since Silvercorp announced its intention to make the Silvercorp Offer.
  • As a Company Operating Exclusively in China, Silvercorp Faces Significant Risks. All of Silvercorp’s properties are located in China which involves a significantly different risk profile than Klondex. Klondex’s operations are located in Nevada, generally deemed to be a preferred mining destination. If Silvercorp acquires Klondex, Klondex Shareholders will be exposed to this change in risk.
  • The Silvercorp Offer Represents an Undesirable Shift in Commodity Focus Away from Purely Gold. Silvercorp’s assets are silver/lead/zinc mineral properties. Operations at all but one of Silvercorp’s silver/lead/zinc mines were suspended and activities at another exploration project were also suspended in December 2008, resulting in a total of US$45.7 million in impairment charges. Further, Silvercorp derives approximately 50% of its revenues from the sale of lead and zinc, the markets for which are determined by economic variables different from gold. If the Silvercorp Offer succeeds, Klondex Shareholders will be exposed to this change in commodity risk.
  • Superior Proposals Delivering Greater Value for Klondex Shareholders May Emerge. Alternative transactions are being pursued that may provide greater value to Klondex Shareholders than the value offered by the Silvercorp Offer.
  • The Timing of the Silvercorp Offer is Opportunistic. The Board believes that the Silvercorp Offer is opportunistic, taking advantage of the recent decline in share prices generally, including those of mineral exploration and development companies, as a result of the current global economic crisis. Klondex expects that the permit necessary to commence underground work will be issued in July, 2009 and that bulk sample production at its Fire Creek project will commence within 12 months from the start of the underground program. The Silvercorp Offer will deny Klondex Shareholders the opportunity to capitalize on the higher valuations typically associated with companies as they move from development into production.
  • The Silvercorp Offer is not a Permitted Bid. The Silvercorp Offer is not a “Permitted Bid” under the Rights Plans. The Silvercorp Offer is coercive as it seeks to limit, to the statutory minimum, the period in which the Board and Special Committee has to develop, review and evaluate alternatives to the Silvercorp Offer.

Robert Sibthorpe, Chairman of the Special Committee, said, “We believe the Silvercorp Offer is financially inadequate and fails to compensate Klondex Shareholders for the current or future value of the Fire Creek deposit as the project moves towards underground in-fill drilling, bulk sampling and thereafter feasibility and full scale production. Silvercorp is asking Klondex Shareholders to trade a 100% interest in a world-class, high-grade gold asset for an approximately 10% fully-diluted interest in a combined company with a number of significant operational and financial risks, none of which are currently associated with an investment in Klondex.

“We believe there remains too much near term potential for Klondex and Fire Creek for shareholders to suffer dramatic dilution and accept this strategic commodity shift from pure gold to silver, zinc and lead at this time. Accordingly, the Board has unanimously recommended that shareholders reject Silvercorp’s Share Offer.”

Near Term Outlook for Klondex

Separately, Klondex announced today it has completed a private placement of 1,714,285 shares of common stock at CDN $1.75 per share to China Mineral United Management Limited (CMU), a new major investor in global mining projects, yielding gross proceeds of CDN $3.0 million. Proceeds of this financing, combined with approximately CDN $1.0 million generated from recent stock option and warrant exercises, will fund the Company’s near term operations, including:

  • Continued exploration drilling of the Fire Creek deposit from the surface
  • Securing U.S. Bureau of Land Management (BLM) and other permits for Klondex’s underground program
  • Posting a US $1.2 million BLM reclamation bond required under the BLM permit
  • Upcoming property payments
  • Securing strategic equity and/or debt investment to enable Klondex to initiate its underground program at Fire Creek comprised of a decline to the mineralization to enable in-fill drilling of the resource as well as the bulk sampling of the deposit for metallurgical testing.

The Silvercorp Offer contained two conditions relevant to the CMU private placement: first, that there has been no change or event that may have a material adverse effect on Klondex, and second that Klondex not issue any securities. Klondex completed the private placement to meet its near term financing needs, including making necessary payments to secure the needed permits and to move forward with the development of the Fire Creek project. These expenditures are consistent with the recommended work program disclosed in the most recent technical report on the Fire Creek project, entitled “Updated Technical Report on the Fire Creek Project, Lander County, Nevada” dated March 30, 2009, and are consistent with Silvercorp’s disclosure that, if the Silvercorp Offer is successful, it will proceed with the current plan to develop Fire Creek.

Exploration of Strategic Alternatives to Maximize Shareholder Value

The Board of Directors and the Special Committee, together with Klondex's management, financial advisors and legal advisors, are working to pursue alternative transactions aimed at enhancing Klondex Shareholder value. Klondex has been solicited by, and has initiated contact with, a number of third parties who have expressed an interest in considering alternative transactions.

Discussions are in progress with third parties with respect to such value-enhancing alternatives. Though impossible to predict whether any alternative transactions will emerge, the Board believes that Klondex and its assets are potentially very attractive to parties other than Silvercorp, including parties that are more aligned on the basis of geography, strategy, infrastructure and experience with Klondex’s focus on high-grade gold in Nevada.

Tendering Klondex Shares to the Silvercorp Offer before the Board of Directors and its advisors have had an opportunity to fully explore all available alternatives may preclude the possibility of a financially superior transaction emerging.

Directors’ Circular Availability

Shareholders are urged to read the Directors’ Circular in its entirety, a copy of which will be available on Klondex’s web site at www.Klondexmines.com and on SEDAR at www.sedar.com. Copies of the Directors’ Circular will also be mailed to all Klondex Shareholders. Shareholders may also contact David Collins, Ratula Velez Roy or Jim Leahy at Jaffoni & Collins toll free at 877-882-2587, 212/835-8505 or 212/835-8500 (switchboard) or via e-mail at kdx@jcir.com with any questions they have regarding the Silvercorp Offer and/or Klondex’s recommendation.

How to Withdraw Shares from the Silvercorp Offer

Shareholders who have already tendered their shares to the Silvercorp offer and wish to withdraw them, may do so by contacting Jaffoni & Collins Incorporated, the information agent retained by Klondex, toll free at 877-882-2587, 212/835-8505 or 212/835-8500 (switchboard) or via e-mail at kdx@jcir.com.

About Klondex Mines:

Klondex Mines Ltd. is a gold exploration company focused on the development and expansion of its 100%-owned, high-grade Fire Creek deposit in Nevada which consists of 11,098 acres of fee land and unpatented mining claims. In March 2009 Klondex defined and disclosed in a technical report entitled “Updated Report on the Fire Creek Gold Property Lander Co., Nevada” dated March 30, 2009, an Indicated Mineral Resource at Fire Creek estimated at 5,043,033 tonnes grading 10.11 grams per metric ton (gpt) containing 1,639,822 ounces of gold and an Inferred Mineral Resource Estimated at 1,833,423 tonnes grading 8.63 gpt for 508,799 ounces of gold equivalent. The Fire Creek deposit is classified as a “bonanza” grade epithermal gold deposit characterized by high-grade drill intervals including 1.52 meters grading 411 grams (13 oz.) per metric ton in hole FC0417. Richard Kern (P.Geo), Project Manager, of Reno, Nevada, is the Company’s qualified person on the project as required under NI 43-101and has reviewed the technical information contained in this press release.

Fire Creek is located in North Central Nevada, an area of prolific gold production, at the intersection of the Battle Mountain-Eureka Trend and the Northern Nevada Rift. The Company was founded over 35 years ago, and its property portfolio consists of four gold exploration projects, all in Nevada. 75-80 percent of Klondex’s known resource is on private land. For more information, please visit www.klondexmines.com.

Cautionary Statement:

This news release may contain forward-looking statements. Actual results may differ materially from those indicated by such statements. All statements, other than statements of historical fact, included in this news release, are forward looking statements that involve various risks and uncertainties. There can be no assurance that such statements will prove to be accurate and actual results and future events could differ materially from those anticipated in such statements.

Contacts:

Jaffoni & Collins Incorporated
David Collins, 212-835-8500
KDX@jcir.com

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