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BUSINESS ACQUISITION
 3 Months Ended
Mar. 31, 2012
BUSINESS ACQUISITION  
BUSINESS ACQUISITION

NOTE 2   BUSINESS ACQUISITION

 

On January 24, 2012, the Company completed the acquisition of Minera Andes (“the Arrangement”) through a court-approved plan of arrangement under Alberta, Canada law, under which Minera Andes, a Canadian company, became an indirect wholly-owned subsidiary of the Company.

 

The Company’s management and Board of Directors believes that the combination with Minera Andes is in the best interests of the Company and its shareholders because the combined company is expected to have a stronger combined cash position and balance sheet, sources of revenue, active mining operations, enhanced trading liquidity, a significant growth profile, industry leading costs, an expanded exploration program and additional technical expertise.

 

On the closing date of the Arrangement, holders of Minera Andes’ common stock received a number of exchangeable shares McEwen Mining Minera Andes Acquisition Corporation (“2012 Exchangeable Shares”), an indirect wholly-owned Canadian subsidiary of the Company, equal to the number of Minera Andes shares, multiplied by the exchange ratio of 0.45.  In the aggregate, former Minera Andes shareholders received 127,331,498 2012 Exchangeable Shares.  After closing of the Arrangement, the name of the Company was changed to McEwen Mining Inc.  The Company’s common stock began trading on the NYSE and TSX under the symbol “MUX” and the 2012 Exchangeable Shares began trading on the TSX under the symbol “MAQ” on January 27, 2012.

 

As a result of the Arrangement and on the date of closing, the combined company was held approximately 52% by then - existing McEwen Mining shareholders and 48% by former Minera Andes shareholders. On a diluted basis, the combined company was held approximately 53% by existing McEwen Mining shareholders and 47% by former Minera Andes shareholders.

 

In June 2011, Robert R. McEwen, the Company’s Chairman, President, Chief Executive Officer and largest shareholder and then also the Chairman, President, Chief Executive Officer and largest shareholder of Minera Andes, proposed the Arrangement.  In connection with the Arrangement, Mr. McEwen received approximately 38.7 million 2012 Exchangeable Shares.  Mr. McEwen owns approximately 25.1% of the shares of the Company.

 

The 2012 Exchangeable Shares are exchangeable for the Company’s common stock on a one-for-one basis.  Optionholders of Minera Andes received replacement options entitling them to receive, upon exercise, shares of the Company’s common stock, reflecting the exchange ratio of 0.45 with the appropriate adjustment of the exercise price per share.  The option life and vesting period of the replacement options has not changed from the option life granted under the Minera Andes option plan.

 

The estimated fair value of the vested portion of the replacement options of $3.2 million have been included as part of the purchase price consideration at their fair values based on the Black-Scholes pricing model as illustrated below.

 

The principal assumptions used in applying the Black-Scholes option pricing model were as follows:

 

 

 

January 24, 2012

Risk-free interest rate

 

0.02% to 0.39%

Dividend yield

 

n/a

Volatility factor of the expected market price of common stock

 

46% to 77%

Weighted-average expected life of option

 

1.4 years

 

The acquisition has been accounted for using the acquisition method in accordance with ASC Topic 805, Business Combinations, with the Company being identified as the acquirer.  The measurement of the purchase consideration was based on the market price of the Company’s common stock on January 24, 2012, which was $5.22 per share.  The total purchase price, including the fair value of the options, amounted to $667.8 million.  The total transaction costs incurred through March 31, 2012 by the Company was $5.3 million, of which $3.9 million was reported in the year ended December 31, 2011 in general and administrative expenses, and $1.4 million for the quarter ended March 31, 2012 in acquisition costs in the Consolidated Statements of Operations and Comprehensive Loss.

 

The allocation of the purchase price on a preliminary basis, based on approximate fair value of assets acquired and liabilities assumed, is summarized in the following table (in thousands).

 

 

 

Fair Value

 

Purchase price:

 

 

 

Exchangeable shares of McEwen Mining Minera Andes Acquisition Corp. issued on acquisition

 

$

664,671

 

Stock options to be exchanged for options of McEwen Mining

 

3,175

 

 

 

$

667,846

 

 

 

 

 

Net assets acquired:

 

 

 

Cash and cash equivalents

 

$

31,385

 

Short-term investments

 

4,952

 

Other current assets

 

9,828

 

Inventories

 

1,362

 

Mineral property interests

 

596,626

 

Investment in Minera Santa Cruz S.A.

 

224,999

 

Equipment

 

1,647

 

Accounts payable

 

(4,836

)

Deferred income tax liability

 

(198,117

)

 

 

$

667,846

 

 

The purchase consideration for the mineral property interests exceeded the carrying value of the underlying assets for tax purposes by approximately $566.0 million.  This amount has been applied to increase the carrying value of mineral property interests for accounting purposes.  However, this did not increase the carrying value of the underlying assets for tax purposes and resulted in a temporary difference between accounting and tax value.  The resulting estimated deferred income tax liability associated with this temporary difference is approximately $198.1 million, which is included in the deferred income tax liability balance of $274.6 million on the Consolidated Balance Sheet as at March 31, 2012.

 

For the purposes of the Company’s financial statements, the purchase consideration has been allocated to the fair value of assets acquired and liabilities assumed, based on an independent valuation report and management’s best estimates and taking into account all available information at the time these consolidated financial statements were prepared.  The allocation is still preliminary and is subject to change.

 

Unaudited Pro Forma Results

 

ASC Topic 805 requires supplemental information on a pro forma basis to disclose the results of operations for the interim period as though the business combination had been completed as of the beginning of the periods being reported.

 

The following table sets forth on a pro forma basis, the results of operations for McEwen Mining, had the acquisition of Minera Andes been completed on January 1, 2012 and 2011 (in thousands):

 

Three months ended March 31, 2012

 

McEwen Mining

 

Minera Andes (a)

 

Combined

 

 

 

 

 

 

 

 

 

Revenue

 

$

1,198

 

$

4,979

 

$

6,177

 

Net (loss) income for the period

 

(19,202

)

3,984

 

(15,218

)

 

Three months ended March 31, 2011

 

McEwen Mining

 

Minera Andes

 

Combined

 

 

 

 

 

 

 

 

 

Revenue

 

$

—

 

$

12,661

 

$

12,661

 

Net (loss) income for the period

 

(8,734

)

12,712

 

3,978

 

 

(a)          First quarter 2012 represents the results of Minera Andes’ operations from January 1, 2012 through January 24, 2012, closing date of the acquisition. Beginning January 25, 2012, the results of Minera Andes’ operations are included in McEwen Mining’s consolidated financial statements.