Arizona Mining agrees to $1.8B buyout

In one of the largest mining deals this year, the board of directors of Vancouver-based Arizona Mining Corp., which is developing a zinc, lead and silver mine near the U.S.-Mexico border, have agreed to a $1.8-billion buyout by Australia’s South32 Ltd.

The all-cash bid of $6.20 per share represents a roughly 50-per-cent premium on Arizona’s Friday’s trading price — which has hovered around $4 for most of the year. Arizona shares surged 48 per cent to $6.13 on the news in Toronto on Monday. South32 was down 1.6 per cent in Sydney.

The deal comes as the prices of zinc, silver and lead have been sliding, while trade tensions mount, casting doubt on global economic growth.

“It’s always a tough call,” said Richard Warke, executive chairman of Arizona Mining, about the decision to sell. “This project has grown and is going to be one of the top five base metal mines in the world, so it’s not an easy decision.”

He noted that there’s a lot of uncertainty about future zinc prices and economic growth, and the cash offer “is very compelling, with much less risk.” Arizona’s board and management, which control roughly 34 per cent of the shares, have already agreed to the terms, and South32 already owns 17 per cent of the company. To proceed, at least 50 per cent of the remaining shareholders will need to approve the deal in September.

Alex Terentiew, an analyst with Bank of Montreal, says the deal is likely to succeed and downgraded Arizona Mining from “outperform, speculative” to “market perform” and changed the price target from $5.50 to $6.20.

Calling the mine one of “the premier base metal projects globally,” Terentiew noted that while he had expected Arizona Mining to sell a silver stream and take out debt to finance construction of a mine, South32 will likely be able to explore other options that may have higher rates of return for its shareholders. Based in Perth, South32 — which was spun off from BHP Billiton Ltd. in 2015 to invest in base metals — hosted a conference call on Monday, in which chief executive Graham Kerr stressed his company has been invested in Arizona Mining since May 2017, and believes that the project is nearly shovel-ready and likely to begin production around 2020. Arizona’s Hermosa deposit is located on privately owned land, which means the project, at least initially, is only subject to Arizona’s permitting process rather than the more rigorous federal regulations, Kerr said. Warke said that was the key that made the Hermosa project attractive.

“We can put the mines into production on the private lands and not go through the whole federal process for eight to nine years minimum,” he said. Arizona Mining, which counts former U.S. House of Representative Speaker John Boehner on its board, purchased the property from Asarco, a Tucson-based subsidiary of Grupo Mexico in 2006 and initially found silver and manganese, but discovered the Hermosa deposit, with lead, zinc and silver in 2014, which attracted South32.

It marks a string of successes for Warke, whose mining investment firm the Augusta Group sold the Ventana Gold Corp for $1.6 billion in 2011, and in 2014 sold Augusta Resource Corporation, which owns a copper project, for about $555 million to Hudbay Minerals Inc.