HOCHSCHILD MINING's Crespo project in southern Peru, indefinitely sidelined by the company's bid this week for International Minerals Corp.

HOCHSCHILD MINING's Crespo project in southern Peru, indefinitely sidelined by the company's bid this week for International Minerals Corp.

Hochschild Blows Out Balance Sheet in $271m Consolidating Bid

Issue 58, October 2013

Peru-based silver group Hochschild Mining has bid $271m for International Minerals Corp, in a bold response to market queries over its balance sheet strength. The deal is being funded by a $340m bridging loan from Merrill Lynch and Goldman Sachs, who also acted as bookrunners in an equity raising on Wednesday, fetching a further £45m ($73m).

International Minerals owns 40 per cent of both Hochschild’s Pallancata underground mine and its Inmaculada project, due for production late 2014. The consolidation adds 3m ounces of silver to Hochschild’s attributable annual production of 20m silver ounces, with Inmaculada forecast to produce a further 12m ounces per annum over a minimum of 6 years.

The bid, unanimously approved by International Minerals’ board, would lift Hochschild’s Peruvian production to 85 per cent of overall output and demonstrates the company’s confidence in its existing pipeline. “This is the most logical acquisition we could make and something we have wanted for a long time,” said chief executive Ignacio Bustamante.

By undertaking 100 per cent of Inmaculada, Hochschild adds $92m to its immediate capital obligations, only partly offset by the indefinite deferral of $80m previously budgeted for its nearby Crespo project.

Hochschild has a successful record of mop-up acquisitions timed near the bottom of the cycle, issuing equity and debt to chase targets in 2009, including the co-owner of its Moris mine in Mexico. International Minerals has though outperformed Hochschild’s stock over one and three years, placing the equity component of the deal foul of accretive market timing.

Value to International Minerals’ shareholders is elevated further by the proposed spin-out to its investors of its non-Peruvian assets, including $58m in cash and receivables. Hochschild is due to inherit the company’s $56m of Inmaculada-linked debt, throwing the group firmly into a net debt position, after cash of $275m, borrowings prior to the deal of $148m and this week’s outlay. Bonds are due for refinancing in October 2014.

Shares in Hochschild Mining lost 11 per cent to £1.55, equal to Wednesday’s offer price but discounting the stock beyond dilution of 8.6 per cent.

“This is the most logical acquisition we could make.”

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