PREM14A 1 d546608dprem14a.htm PREM14A PREM14A
Table of Contents

 

 

SCHEDULE 14A INFORMATION

Proxy Statement Pursuant to Section 14(a) of the

Securities Exchange Act of 1934

(Amendment No.     )

 

 

Filed by the Registrant  ☒                             Filed by a Party other than the Registrant  ☐

Check the appropriate box:

 

 

Preliminary Proxy Statement

 

Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))

 

Definitive Proxy Statement

 

Definitive Additional Materials

 

Soliciting Materials under § 240.14a-12

Klondex Mines Ltd.

(Name of Registrant as Specified in its Charter)

N/A

(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

Payment of Filing Fee (Check the appropriate box):

 

No fee required.

 

Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.

 

(1)

 

Title of each class of securities to which transaction applies:

 

Common shares, no par value (“Klondex Shares”), of Klondex Mines Ltd. (“Klondex”)

 

(2)

 

Aggregate number of securities to which transaction applies:

 

The maximum number of Klondex Shares to which this transaction applies is estimated to be 195,649,339, which consists of: (A) 180,179,588 Klondex Shares issued and outstanding as of May 16, 2018; (B) 3,695,604 Klondex Shares issuable upon exercise of options to purchase Klondex Shares outstanding as of May 16, 2018; (C) 1,017,011 Klondex Shares underlying restricted share units outstanding as of May 16, 2018; (D) 395,528 Klondex Shares underlying performance-based restricted share units outstanding as of May 16, 2018; (E) 360,366 Klondex Shares underlying deferred share units outstanding as of May 16, 2018; and (F) 10,001,242 Klondex Shares issuable upon exercise of warrants to purchase Klondex Shares outstanding as of May 16, 2018.

 

(3)

 

Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11:

 

Solely for the purposes of calculating the filing fee, the maximum aggregate value of the transaction was determined based upon the sum of: (A) 180,179,588 Klondex Shares multiplied by the estimated share consideration of US$2.455 (estimated based on the average of the high and low prices of the Klondex Shares as reported on the NYSE American on May 16, 2018, the “Estimated Share Consideration”); (B) 1,028,334 Klondex Shares issuable upon vesting of options to purchase Klondex Shares (assuming a Company Share Value (as defined herein) of US$2.71) pursuant to the terms of the Arrangement (as defined herein) multiplied by the Estimated Share Consideration; (C) 1,017,011 Klondex Shares underlying restricted share units multiplied by the Estimated Share Consideration; (D) 395,528 Klondex Shares underlying performance-based restricted share units multiplied by the Estimated Share Consideration; (E) 360,366 Klondex Shares underlying deferred share units multiplied by the Estimated Share Consideration; and (F) 5,001,242 Klondex Shares issuable upon exercise of warrants to purchase Klondex Shares, with an exercise price of less than US$2.71, multiplied by the Estimated Share Consideration. In calculating the maximum aggregate value of the transaction, no value was attributed to (A) 300,000 Klondex Shares issuable upon exercise of options to purchase Klondex Shares with an exercise price greater than US$2.71, which will be cancelled under the Arrangement without any consideration, or (B) 5,000,000 Klondex Shares issuable upon exercise of warrants to purchase Klondex Shares with an exercise price greater than US$2.71, which will remain outstanding, subject to being adjusted as discussed herein.

 

(4)

 

Proposed maximum aggregate value of transaction:

 

US$461,495,978.17

 

(5)

 

Total fee paid:

 

US$57,456.25 (determined by multiplying 0.0001245 by the proposed maximum aggregate value of the transaction of US$461,495,978.17.)

 

Fee paid previously with preliminary materials.

 

Check the box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing.

 

(1)

 

Amount Previously Paid:

 

N/A

 

(2)

 

Form, Schedule or Registration Statement No.:

 

N/A

 

(3)

 

Filing Party:

 

N/A

 

(4)

 

Date Filed:

 

N/A

 

 

 


Table of Contents

These materials are important and require your immediate attention. They require securityholders of Klondex Mines Ltd. to make important decisions. If you are in doubt as to how to make such decisions, please contact your financial, legal or other professional advisor. If you have any questions, you may contact the proxy solicitation agent, D.F. King & Co., Inc., by telephone at 1(800) 330-8705 (toll-free in North America) or 1(212) 771-1133 (collect call outside North America), or by email at inquiries@dfking.com.

 

 

LOGO

NOTICE OF MEETING

and

MANAGEMENT INFORMATION CIRCULAR

for the

ANNUAL AND SPECIAL MEETING OF SECURITYHOLDERS

to be held on

[], 2018

DATED AS OF [], 2018

The accompanying management information circular and proxy is first being mailed to securityholders of Klondex Mines Ltd. on or about [], 2018.

 

The Board of Directors of Klondex Mines Ltd.

UNANIMOUSLY recommends that securityholders vote FOR the Arrangement Resolution.


Table of Contents

KLONDEX MINES LTD.

1055 West Hastings Street, Suite 2200

Vancouver, British Columbia V6E 2E9

[●], 2018

Dear Klondex Securityholder:

You are invited to attend an annual and special meeting (the “Meeting”) of the holders (“Klondex Shareholders”) of common shares (“Klondex Shares”) in the capital of Klondex Mines Ltd. (“Klondex” or the “Company”), holders of Klondex Options (as defined below) (“Klondex Optionholders”), holders of Klondex RSUs (as defined below) (“Klondex RSU Holders”) and holders of Klondex DSUs (as defined below) (collectively, the “Klondex Securityholders”), to be held at the Toronto Region Board of Trade, Lennox Hall East, 4th Floor, 77 Adelaide St. West, Toronto, Ontario on [●], 2018 at [8:00 a.m. (Eastern Daylight Time)].

At the Meeting, Klondex Securityholders will be asked, among other things, to consider and vote on a special resolution (the “Arrangement Resolution”) approving a statutory plan of arrangement (the “Plan of Arrangement”) pursuant to Section 288 of the Business Corporations Act (British Columbia) (the “Arrangement”), subject to the terms and conditions of an arrangement agreement (the “Arrangement Agreement”) dated March 16, 2018 entered into among Klondex, Hecla Mining Company (“Hecla”) and 1156291 B.C. Unlimited Liability Company (“Hecla Acquisition Subco”), a wholly-owned subsidiary of Hecla. Under the terms of the Arrangement Agreement, Hecla Acquisition Subco will acquire all of the outstanding Klondex Shares (including Klondex Shares issued to holders of In-the-Money Klondex Options (as defined herein) and Klondex RSUs pursuant to the Arrangement), and Klondex Shareholders will receive, for each Klondex Share, consideration as set out in the Plan of Arrangement (the “Arrangement Consideration”) consisting of: (i) the equivalent of US$2.47 in either cash, shares of Hecla common stock (“Hecla Shares”), or a combination of cash and Hecla Shares (the “Hecla Consideration”); plus (ii) 0.125 of a share (the “Havilah Shares”) of Havilah Mining Corporation (“Havilah”), a new company formed to hold Klondex’s Canadian assets.

With respect to the Hecla Consideration described in (i) above, Klondex Shareholders, Klondex Optionholders and Klondex RSU Holders may elect to receive, for each Klondex Share, either: (i) US$2.47 in cash (subject to proration) (the “Cash Consideration”); (ii) 0.6272 of a Hecla Share (subject to proration) (the “Share Consideration”); or (iii) US$0.8411 in cash and 0.4136 of a Hecla Share (the “Combination Consideration”). The Cash Consideration and the Share Consideration are subject to proration, as more particularly provided for in the Plan of Arrangement. Klondex Shareholders, Klondex Optionholders and Klondex RSU Holders who do not elect, or fail to properly elect, to receive either the Cash Consideration or the Share Consideration will be deemed to have elected to receive the Combination Consideration. Klondex Shareholders, Klondex Optionholders and Klondex RSU Holders who elect, or are deemed to elect, to receive the Combination Consideration will not be subject to proration. If all Klondex Shareholders, Klondex Optionholders and Klondex RSU Holders elect to receive the Cash Consideration or, alternatively, all Klondex Shareholders, Klondex Optionholders and Klondex RSU Holders elect to receive the Share Consideration, then under the proration provisions in the Plan of Arrangement, each Klondex Shareholder, Klondex Optionholder and Klondex RSU Holder would be entitled to receive, for each Klondex Share, US$0.8411 in cash and 0.4136 of a Hecla Share, in addition to 0.125 of a Havilah Share, for each Klondex Share.

Under the Arrangement, each: (a) option to acquire Klondex Shares (a “Klondex Option”) that is outstanding immediately prior to the effective time of the Arrangement and is “in-the-money” (an “In-the-Money Klondex Option”); (b) right to receive a Klondex Share awarded under the Share Incentive Plan dated May 9, 2013 of the Company or time-based restricted share unit awarded under the Share Option and Restricted Share Unit Plan dated May 13, 2016 of the Company which is outstanding immediately prior to the effective time

 

- i -


Table of Contents

of the Arrangement, whether or not vested (a “Klondex RSU”); and (c) deferred share unit (a “Klondex DSU”) issued under the Deferred Share Unit Plan dated May 13, 2016 of the Company which is outstanding immediately prior to the effective time of the Arrangement, will be exchanged for Klondex Shares or cash, as applicable, pursuant to the Plan of Arrangement. Under the Arrangement, each Performance RSU (as such term is defined in the Share Option and Restricted Share Unit Plan dated May 13, 2016 of the Company) will be settled by a cash payment to the holder thereof on the effective date of the Arrangement of an amount determined by Hecla to be properly due to such holder based on the terms of such Performance RSU.

The Independent Committee (as defined in the accompanying management information circular for the Meeting (the “Circular”)) and the board of directors of the Company (the “Klondex Board”) have unanimously determined that the Arrangement is in the best interests of the Company and that the Arrangement is fair to the Klondex Securityholders, and the Klondex Board has authorized the submission of the Arrangement Resolution to the Klondex Securityholders for their approval at the Meeting. The Klondex Board has unanimously determined to recommend to Klondex Securityholders that they vote FOR the Arrangement Resolution to approve the Arrangement. All of the directors and senior officers of the Company have entered into agreements with Hecla to support the Arrangement. In addition, two institutional Klondex Shareholders, exercising beneficial ownership or control over an aggregate of 23.60% of the outstanding Klondex Shares, have entered into agreements with Hecla agreeing to vote, or cause to be voted, all of the Klondex Shares that each such shareholder exercises control over in favour of the Arrangement Resolution. In reaching its conclusion that the Arrangement is fair to Klondex Securityholders and that the Arrangement is in the best interests of the Company, the Klondex Board considered and relied upon a number of factors and reasons, including those described under the headings “Part 7 – The Arrangement – Background to the Arrangement”, “Part 7 – The Arrangement – Reasons for the Arrangement” and “Part 7 – The Arrangement – Fairness Opinions” of the Circular.

To become effective, the Arrangement Resolution must be approved by at least two-thirds (66 23%) of the votes cast at the Meeting in person or by proxy by: (i) Klondex Shareholders; and (ii) Klondex Securityholders voting together as a single class. The Arrangement is also subject to certain other conditions, including the approval of the British Columbia Supreme Court.

In addition, at the Meeting, Klondex Shareholders will, among other things, be asked to consider and, if deemed advisable, to pass, with or without variation, an ordinary resolution to approve a share option plan for Havilah (the “Havilah Option Plan Resolution”), as more particularly described in the accompanying Circular, provided that such resolution shall not become effective unless the Arrangement becomes effective. The Klondex Board, after consultation with its legal counsel, has unanimously determined to recommend to Klondex Shareholders that they vote FOR the Havilah Option Plan Resolution.

To become effective, the Havilah Option Plan Resolution must be approved by at least a simple majority of the votes cast by the Klondex Shareholders who vote in person or by proxy at the Meeting.

The accompanying notice of annual and special meeting and Circular describe the Arrangement and include certain additional information to assist you in considering how to vote on the Arrangement Resolution. You are urged to read this information carefully and, if you require assistance, to consult your financial, legal, tax or other professional advisors.

Your vote is important regardless of the number of Klondex Shares, Klondex Options, Klondex RSUs or Klondex DSUs (collectively, the “Affected Securities”) that you own. Even if you are a registered holder of Affected Securities and plan to attend the Meeting in person, we encourage you to take the time now to follow the instructions on the enclosed forms of proxy so that your Affected Securities can be voted at the Meeting in accordance with your instructions. We encourage you to use the internet or telephone voting options to ensure your vote is received prior to the voting deadline. Alternatively, you can complete, sign, date and return the enclosed form by mail or fax. Registered holders of Klondex Shares are asked to complete the form of proxy printed on green paper, registered holders of Klondex Options are asked to complete the form of proxy

 

- ii -


Table of Contents

printed on pink paper, registered holders of Klondex RSUs are asked to complete the form of proxy printed on blue paper and registered holders of Klondex DSUs are asked to complete the form of proxy printed on yellow paper. If you hold more than one type of Affected Security, you will need to complete the applicable form of proxy for each of the different types of Affected Securities held by you.

If you hold your Affected Securities through a broker, trustee, financial institution or other intermediary, you will receive instructions from such intermediary, or Computershare Investor Services Inc. on the intermediary’s behalf, on how to vote your Affected Securities. We encourage non-registered holders of Affected Securities to carefully follow such instructions so that your Affected Securities can be voted at the Meeting.

If you are a registered holder of Klondex Shares, we encourage you to complete, sign, date and return the enclosed Letter of Transmittal and Election Form (printed on white paper), along with the share certificate(s) representing your Klondex Shares, to the Company’s depositary, Computershare Investor Services Inc., at the address specified in the Letter of Transmittal and Election Form. If you are a holder of Klondex Options or Klondex RSUs, we encourage you to complete, sign, date and return the enclosed Option/RSU Election Form (printed on grey paper) to the Company’s depositary, Computershare Investor Services Inc., at the address specified in the Option/RSU Election Form. If you are a registered holder of Klondex Shares as well as Klondex Options and/or Klondex RSUs, you will have to submit both the Letter of Transmittal and Election Form (printed on white paper) as it relates to your Klondex Shares and the Option/RSU Election Form (printed on grey paper) as it relates to your Klondex Options and/or Klondex RSUs.

The Letter of Transmittal and Election Form and the Option/RSU Election Form (together, the “Election Document(s)”) each contain other procedural information relating to the Arrangement and should be reviewed carefully. It is recommended that you complete, sign and return the applicable Election Document(s) (with accompanying Klondex Share certificate(s) if you are a registered holder of Klondex Shares) to Computershare Investor Services Inc., the Company’s depositary, as soon as possible.

To make a valid election as to the Hecla Consideration that you wish to receive under the Arrangement (subject to proration), you must sign and make a proper election in the applicable Election Document(s) and return it (with accompanying Klondex Share certificate(s) if you are a registered holder of Klondex Shares) to the Company’s depositary, Computershare Investor Services Inc., prior to 1:00 p.m. (Pacific Daylight Time) / 4:00 p.m. (Eastern Daylight Time) on [], 2018 or such later date as may be determined and published in accordance with the Arrangement Agreement (the “Election Deadline”). IF YOU FAIL TO MAKE A PROPER ELECTION PRIOR TO THE ELECTION DEADLINE, YOU WILL BE DEEMED TO HAVE ELECTED TO RECEIVE THE COMBINATION CONSIDERATION IN RESPECT OF EACH KLONDEX SHARE, KLONDEX OPTION AND KLONDEX RSU, AS APPLICABLE.

Subject to obtaining court approval and satisfying certain other conditions, including the approval of Klondex Securityholders, it is anticipated that the Arrangement will be completed in the second quarter of 2018, but no later than July 16, 2018 unless otherwise agreed to between Klondex and Hecla.

Completion of the Arrangement or approval of the Arrangement Resolution is not conditional upon the approval of the Havilah Option Plan Resolution.

If you have any questions or need assistance in your consideration of the Arrangement or with the completion and delivery of your proxy, please contact the Company’s proxy solicitation agent, D.F. King & Co., Inc., by telephone at 1(800) 330-8705 (toll-free in North America) or 1(212) 771-1133 (collect call outside North America), or by email at inquiries@dfking.com.

 

- iii -


Table of Contents

On behalf of the Klondex Board, I would like to thank all Klondex Securityholders for their ongoing support as we prepare to take part in this important event in the Company’s history.

Sincerely,

On behalf of the Board of Directors,

(Signed) “Paul Huet”

Paul Huet

Director, President and Chief Executive Officer

Klondex Mines Ltd.

 

- iv -


Table of Contents

KLONDEX MINES LTD.

1055 West Hastings Street, Suite 2200

Vancouver, British Columbia V6E 2E9

NOTICE OF ANNUAL AND SPECIAL MEETING

OF SECURITYHOLDERS

NOTICE is hereby given that the annual and special meeting (the “Meeting”) of the holders (“Klondex Shareholders”) of common shares (“Klondex Shares”) of Klondex Mines Ltd. (the “Company” or “Klondex”), holders of options to acquire Klondex Shares (“Klondex Options”), holders of certain rights to receive Klondex Shares (“Klondex RSUs”) and holders of deferred share units of Klondex (“Klondex DSUs”) (collectively, the “Klondex Securityholders” and the Klondex Shares, Klondex Options, Klondex RSUs and Klondex DSUs, collectively, the “Affected Securities”) will be held at the Toronto Region Board of Trade, Lennox Hall East, 4th Floor, 77 Adelaide St. West, Toronto, Ontario on [●], 2018 at [8:00 a.m. (Eastern Daylight Time)], for the following purposes:

 

1.

To consider pursuant to an interim order of the British Columbia Supreme Court dated [●], 2018 (the “Interim Order”) and, if thought advisable, to pass, with or without amendment, a special resolution of the Klondex Securityholders (the “Arrangement Resolution”), the full text of which is set forth in Appendix “B” to the accompanying management information circular (the “Circular”), to approve a statutory plan of arrangement (the “Plan of Arrangement”) under Section 288 of the Business Corporations Act (British Columbia) (the “BCBCA”) (the “Arrangement”), subject to the terms and conditions of an arrangement agreement dated March 16, 2018 entered into among Klondex, Hecla Mining Company (“Hecla”) and 1156291 B.C. Unlimited Liability Company, a wholly-owned subsidiary of Hecla.

 

2.

To consider and, if thought advisable, to pass, with or without amendment, an ordinary resolution of the Klondex Shareholders, the full text of which is set forth in Appendix “N” to the Circular, approving a share option plan for Havilah Mining Corporation (the “Havilah Option Plan Resolution”), all as more particularly set forth in the Circular, provided that such resolution shall not become effective unless the Arrangement becomes effective.

 

3.

For Klondex Shareholders to elect directors of the Company for the ensuing year (or, if the Arrangement Resolution is approved and the Arrangement is completed, for the period up to the effective time of the Arrangement).

 

4.

For Klondex Shareholders to receive the audited consolidated financial statements of the Company for the year ended December 31, 2017 and the report of the auditors thereon.

 

5.

For Klondex Shareholders to appoint the auditors of the Company for the ensuing year and to authorize the directors of the Company to fix their remuneration.

 

6.

For Klondex Shareholders to consider and, if deemed appropriate, to pass, with or without variation, a non-binding advisory resolution of the Klondex Shareholders on the Company’s approach to executive compensation.

 

7.

For Klondex Securityholders to authorize the adjournment of the Meeting if necessary or appropriate, including an adjournment to solicit additional proxies in the event that there are not sufficient votes at the time of the Meeting or adjournment or postponement thereof to approve the Arrangement Resolution (the “Adjournment Resolution”).

 

8.

To transact such further and other business as may properly come before the Meeting or any adjournment or adjournments thereof.

Completion of the Arrangement or approval of the Arrangement Resolution is not conditional upon the approval of any of items 2 to 6 above.

The directors of the Company have fixed the close of business on May 15, 2018 as the record date (the “Record Date”) for the determination of the Klondex Securityholders entitled to receive this notice of the

 

- i -


Table of Contents

Meeting (this “Notice of Meeting”). A Klondex Securityholder wishing to be represented by proxy at the Meeting or any adjournment thereof must deposit his, her or its duly executed form of proxy with the Company’s transfer agent and registrar, Computershare Investor Services Inc., by mail at 3rd Floor, 510 Burrard Street, Vancouver, British Columbia, V6C 3B9, Attention: Proxy Department, or by facsimile to (416) 263-9524 or 1(866) 249-7775, not later than 4:00 p.m. (Eastern Daylight Time) on [●], 2018 or, if the Meeting is adjourned, 48 hours (excluding Saturdays, Sundays and holidays) before any adjournment of the Meeting. A Klondex Securityholder may also vote by telephone or via the internet by following the instructions on the applicable form of proxy. If a Klondex Securityholder votes by telephone or via the internet, completion or return of the form of proxies is not needed. Registered holders of Klondex Shares are asked to complete the form of proxy printed on green paper, registered holders of Klondex Options are asked to complete the form of proxy printed on pink paper, registered holders of Klondex RSUs are asked to complete the form of proxy printed on blue paper and registered holders of Klondex DSUs are asked to complete the form of proxy printed on yellow paper. If you hold more than one type of Affected Security, you will need to complete the applicable form of proxy for each of the different types of Affected Securities held by you.

If you are a non-registered Klondex Securityholder, please refer to “Part 5 General Proxy Information – Non-Registered Klondex Securityholders” of the Circular for information on how to vote your Klondex Shares, Klondex Options, Klondex RSUs or Klondex DSUs, as applicable.

Take notice that, pursuant to the Interim Order, each registered Klondex Shareholder as of the Record Date has been granted the right to dissent in respect of the Arrangement Resolution and, if the Arrangement becomes effective, to be paid the fair value of the Klondex Shares in respect of which such registered Klondex Shareholder validly dissents, in accordance with the dissent procedures contained in Division 2 of Part 8 of the BCBCA, as modified and supplemented by the Interim Order, the Plan of Arrangement (as defined in the Circular) and the Final Order (as defined in the Circular). To exercise such right: (a) a written notice of dissent with respect to the Arrangement Resolution from the registered Klondex Shareholder must be received by Klondex at its address for such purpose, c/o Bennett Jones LLP at 3400 One First Canadian Place, P.O. Box 130, Toronto, Ontario, M5X 1A4, Attention: [●], by no later than 4:00 p.m. (Eastern Daylight Time) on [●], 2018, or two business days prior to any adjournment or postponement of the Meeting; (b) the registered Klondex Shareholder must not have voted in favour of the Arrangement Resolution; and (c) the registered Klondex Shareholder must have otherwise complied with the dissent procedures in Division 2 of Part 8 of the BCBCA, as modified and supplemented by the Interim Order, the Plan of Arrangement and the Final Order. The right to dissent is described in the Circular, and the text of each of the Plan of Arrangement, the Interim Order and Division 2 of Part 8 of the BCBCA is set forth in Appendix “E”, Appendix “F” and Appendix “H”, respectively, to the Circular.

Failure to strictly comply with the provisions of the BCBCA, as modified and supplemented by the Plan of Arrangement, the Interim Order and the Final Order, may result in the loss of any right of dissent.

The Circular accompanying this Notice of Meeting is incorporated into, and shall be deemed to form part of, this Notice of Meeting.

DATED as of the [●] day of [●], 2018.

By Order of the Board of Directors

(signed) “Paul Huet”

Paul Huet

Director, President and Chief Executive Officer

Klondex Mines Ltd.

 

ii


Table of Contents

TABLE OF CONTENTS

 

FREQUENTLY ASKED QUESTIONS ABOUT THE ARRANGEMENT AND THE MEETING

     5  

PART 1. GENERAL MATTERS

     16  

Defined Terms

     16  

Information Contained in this Circular

     16  

Information Contained in this Circular Regarding Hecla

     16  

Financial Information

     17  

Currency

     17  

PART 2. NOTICE TO SECURITYHOLDERS IN THE UNITED STATES

     17  

PART 3. CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

     19  

PART 4. SUMMARY

     21  

PART 5. GENERAL PROXY INFORMATION

     41  

Solicitation of Proxies

     41  

Appointment and Revocation of Proxies

     41  

Exercise of Discretion by Proxies

     41  

Voting Standards

     43  

Non-Registered Klondex Securityholders

     44  

PART 6. VOTING SECURITIES AND PRINCIPAL HOLDERS THEREOF

     45  

Record Date and Voting Securities

     45  

Principal Holders of Voting Securities

     45  

PART 7. THE ARRANGEMENT

     45  

Background to the Arrangement

     46  

Fairness Opinions

     55  

Recommendation of the Klondex Board

     56  

Reasons for the Arrangement

     57  

Arrangement Mechanics

     59  

Fractional Interests

     63  

Treatment of Klondex Options

     63  

Treatment of Klondex RSUs and Performance RSUs

     63  

Treatment of Klondex DSUs

     64  

Treatment of Klondex Warrants

     64  

Spin-off Transaction

     64  

Approval of Arrangement Resolution

     64  

Voting and Support Agreements

     65  

Interests of Certain Persons in the Arrangement

     66  

MI 61-101 Protection of Minority Security Holders in Special Transactions

     69  

Fees and Expenses

     70  

Court Approval of the Arrangement

     70  

Completion of the Arrangement

     71  

Withholding Rights

     71  

Limitation and Proscription After Three Years

     72  

Effects of the Arrangement on Klondex Securityholders’ Rights

     72  

PART 8. THE ARRANGEMENT AGREEMENT

     72  

Effective Date and Conditions of Arrangement

     72  

Representations and Warranties

     73  

Conditions to the Arrangement Becoming Effective

     73  

 

- 1 -


Table of Contents

Covenants of Klondex

     75  

Covenants of Hecla

     79  

Mutual Covenants

     80  

Non-Solicitation Covenant

     81  

Other Covenants

     84  

Termination

     87  

PART 9. OPINION OF MAXIT CAPITAL

     89  

Summary of Analysis

     92  

Certain Unaudited Prospective Financial Information

     98  

PART 10. OPINION OF GMP SECURITIES

     101  

Scope of Review

     102  

Fairness Methodology

     103  

PART 11. SECURITIES LAW MATTERS

     106  

Canadian Securities Law Matters

     106  

United States Securities Law Matters

     107  

PART 12. REGULATORY MATTERS

     108  

PART 13. STOCK EXCHANGE DE-LISTING AND REPORTING ISSUER STATUS

     109  

PART 14. DISSENTING SHAREHOLDERS’ RIGHTS

     110  

PART 15. RISK FACTORS RELATING TO THE ARRANGEMENT

     113  

PART 16. PROCEDURE FOR RECEIPT OF ARRANGEMENT CONSIDERATION

     117  

Consideration Election and Procedure

     117  

Proration

     118  

Exchange Procedure

     119  

Fractional Interests

     120  

PART 17. CERTAIN CANADIAN FEDERAL INCOME TAX CONSIDERATIONS

     121  

PART 18. CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS

     129  

Scope of Disclosure

     129  

U.S.  Federal Income Tax Consequences of the Arrangement to U.S. Holders

     131  

U.S. Federal Income Tax Consequences to U.S. Holders Related to the Ownership and Disposition of Hecla Shares

     134  

U.S.  Federal Income Tax Consequences to U.S. Holders Related to the Ownership and Disposition of Havilah Shares

     134  

Additional Considerations Relevant to U.S. Holders of Havilah Shares

     139  

U.S. Federal Income Tax Consequences to Non-U.S. Holders Related to the Arrangement

     141  

U.S.  Federal Income Tax Consequences to Non-U.S. Holders Related to the Ownership and Disposition of Hecla Shares

     142  

Additional Considerations Relevant to Non-U.S. Holders of Hecla Shares

     143  

PART 19. MANAGEMENT CONTRACTS

     144  

PART 20. INFORMATION CONCERNING THE COMPANY

     145  

Price Ranges and Trading Volumes

     145  

Ownership of Securities

     147  

Previous Purchases and Sales of Securities

     147  

Previous Distribution of Klondex Shares

     148  

Financial Statements and Management’s Discussion and Analysis

     162  

Dividends

     162  

 

- 2 -


Table of Contents

PART 21. INFORMATION CONCERNING HAVILAH

     163  

Description of Mineral Properties

     163  

Additional Information on Havilah

     163  

PART 22. INFORMATION CONCERNING HECLA

     163  

Additional Information about Hecla

     164  

PART 23. INFORMATION CONCERNING THE COMBINED COMPANY

     164  

Description of Mineral Properties

     165  

Directors and Executive Officers of the Combined Company

     165  

Capital Structure

     165  

Unaudited Pro Forma Condensed Combined Financial Information

     165  

Auditors, Transfer Agent and Registrar

     165  

PART 24. HAVILAH OPTION PLAN

     165  

PART 25. ANNUAL MATTERS

     166  

Annual Financial Statements

     166  

Proposal One: Election of Directors

     166  

Proposal Two: Appointment of Auditors

     169  

Proposal Three: Non-Binding Advisory “Say on Pay” Vote

     170  

Proposal Four: Adjournment

     171  

PART 26. LEGAL MATTERS

     172  

PART 27. OTHER MATTERS

     172  

PART 28. INFORMATION CONCERNING THE BOARD OF DIRECTORS AND EXECUTIVE OFFICERS

     172  

Directors and Executive Officers of the Company

     172  

Committees of the Klondex Board

     175  

Cease Trade Orders, Bankruptcies, Penalties and Sanctions

     176  

PART 29. STATEMENT OF EXECUTIVE COMPENSATION

     177  

Compensation Discussion and Analysis

     177  

Compensation and Governance Committee Report

     188  

Summary Compensation Table

     189  

Incentive Plan Awards

     191  

Securities Authorized for Issuance Under Equity Compensation Plans

     195  

Termination and Change of Control Benefits

     195  

PART 30. REPORT ON DIRECTOR COMPENSATION

     200  

Compensation Discussion and Analysis

     200  

Director Compensation Table

     201  

Compensation and Governance Committee Report

     202  

Director Option-Based and Share-Based Awards

     202  

Indebtedness of Officers and Directors

     203  

Directors’ and Officers’ Liability Insurance

     203  

PART 31. COMPENSATION PLANS

     203  

Summary of the Klondex 2016 Stock Option Plan

     203  

Summary of Klondex DSU Plan

     213  

PART 32. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     218  

PART 33. AUDIT COMMITTEE INFORMATION

     221  

Audit Committee

     221  

Relevant Education and Experience

     221  

 

- 3 -


Table of Contents

PART 34. STATEMENT OF CORPORATE GOVERNANCE PRACTICES

     222  

Klondex Board Mandate

     222  

Position Descriptions

     222  

Composition of the Klondex Board

     224  

Directorships

     225  

Committees of the Klondex Board

     225  

Compensation and Governance Committee Interlocks and Insider Participation

     227  

Majority Voting Policy

     227  

Director Orientation and Continuing Education

     227  

Ethical Business Conduct

     228  

Klondex Board Decision Making

     228  

Assessment of the Klondex Board’s Performance

     228  

Director Term Limits and Other Mechanisms of Board Renewal

     229  

Composition of the Klondex Board

     229  

Diversity Policy

     230  

Certain Relationships and Related Person Transactions

     230  

Legal Proceedings

     231  

Section 16(a) Beneficial Ownership Reporting Compliance

     231  

PART 35. INTEREST OF INFORMED PERSONS IN MATERIAL TRANSACTIONS

     231  

PART 36. INTEREST OF CERTAIN PERSONS OR COMPANIES IN MATTERS TO BE ACTED UPON

     232  

PART 37. KLONDEX SHAREHOLDER COMMUNICATION WITH THE KLONDEX BOARD

     232  

PART 38. KLONDEX SHAREHOLDER PROPOSALS

     232  

PART 39. ADDITIONAL INFORMATION

     233  

PART 40. INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE

     233  

Hecla

     233  

Klondex

     233  

APPROVAL

     235  

CONSENT OF MAXIT CAPITAL LP

     236  

CONSENT OF GMP SECURITIES L.P.

     237  

APPENDIX “A” GLOSSARY OF TERMS

     A-1  

APPENDIX “B” ARRANGEMENT RESOLUTION

     B-1  

APPENDIX “C” MAXIT CAPITAL FAIRNESS OPINION

     C-1  

APPENDIX “D” GMP SECURITIES FAIRNESS OPINION

     D-1  

APPENDIX “E” PLAN OF ARRANGEMENT

     E-1  

APPENDIX “F” INTERIM ORDER

     F-1  

APPENDIX “G” NOTICE OF APPLICATION FOR FINAL ORDER

     G-1  

APPENDIX “H” DIVISION 2 OF PART 8 OF THE BCBCA

     H-1  

APPENDIX “I” INFORMATION CONCERNING HAVILAH

     I-1  

APPENDIX “J” CARVE OUT U.S. GAAP FINANCIAL STATEMENTS OF HAVILAH

     J-1  

APPENDIX “K” INFORMATION CONCERNING HECLA

     K-1  

APPENDIX “L” PRO FORMA FINANCIAL STATEMENTS OF THE COMBINED COMPANY

     L-1  

APPENDIX “M” MANDATE OF THE KLONDEX BOARD

     M-1  

APPENDIX “N” HAVILAH OPTION PLAN RESOLUTION

     N-1  

APPENDIX “O” COMPARISON OF SHAREHOLDER RIGHTS BETWEEN HECLA AND KLONDEX

     O-1  

APPENDIX “P” ARRANGEMENT AGREEMENT

     P-1  

 

- 4 -


Table of Contents

FREQUENTLY ASKED QUESTIONS ABOUT THE ARRANGEMENT AND THE MEETING

The following are some questions that you, as a Klondex Securityholder, may have relating to the Meeting and answers to those questions. These questions and answers do not provide all of the information relating to the Meeting or the matters to be considered at the Meeting and are qualified in their entirety by the more detailed information contained elsewhere in, or incorporated by reference into, this Circular. You are urged to read this Circular in its entirety including the appendices to this Circular, any documents incorporated by reference herein, the forms of proxy and the applicable Election Document(s) before making a decision related to your Affected Securities. All capitalized terms used but not defined herein have the meanings ascribed to them in the “Glossary of Terms” at Appendix “A” of this Circular.

 

Q:

What am I voting on?

 

A:

In connection with the Meeting, Klondex Securityholders are being asked to consider and vote on the Arrangement Resolution which, if approved and if the Arrangement is completed, will result in: (i) Hecla, through its wholly-owned subsidiary Hecla Acquisition Subco, acquiring all of the issued and outstanding Klondex Shares (including Klondex Shares issued to holders of In-the-Money Klondex Options and Klondex RSUs pursuant to the Arrangement); and (ii) Klondex Shareholders (other than Dissenting Shareholders) receiving the Arrangement Consideration for each Klondex Share held by them.

In addition, Klondex Shareholders will be asked to vote on the Havilah Option Plan Resolution which, if approved, will become effective when the Arrangement becomes effective. Completion of the Arrangement or approval of the Arrangement Resolution is not conditional upon the approval of the Havilah Option Plan Resolution.

In connection with the Meeting, Klondex Shareholders also are being asked to approve certain other matters, including the election of the directors of the Company, the appointment of auditors of the Company and a non-binding advisory resolution on the Company’s approach to executive compensation and such other business that may properly come before the Meeting. In addition to the Arrangement Resolution, Klondex Securityholders are being asked to approve the adjournment of the Meeting if necessary or appropriate, including for purposes of soliciting additional proxies to approve the Arrangement Resolution.

 

Q:

When and where is the Meeting?

 

A:

The Meeting will be held at the Toronto Region Board of Trade, Lennox Hall East, 4th Floor, 77 Adelaide St. West, Toronto, Ontario on [●], 2018 at [8:00 a.m. (Eastern Daylight Time)].

 

Q:

What constitutes a quorum for the Meeting?

 

A:

A quorum for the transaction of business at the Meeting is the presence of one person who holds, or who represents by proxy one or more Klondex Shareholders who hold, in the aggregate, at least 5% of the issued and outstanding Klondex Shares entitled to be voted at the Meeting.

 

Q:

Who is soliciting my proxy?

 

A:

Your proxy is being solicited by senior management of Klondex. This Circular is furnished in connection with that solicitation. While it is anticipated that solicitation of proxies for the Meeting will be made primarily by mail, proxies may be solicited personally or by telephone by the directors and regular employees of Klondex at nominal cost paid by Klondex. In addition, Klondex has engaged D.F. King as Proxy Solicitation Agent in connection with the Meeting.

If you have questions or need assistance completing your form of proxy or voting instruction form, please contact the Company’s Proxy Solicitation Agent, D.F. King, by telephone at 1(800) 330-8705 (toll-free in North America) or 1(212) 771-1133 (collect call outside North America), or by email at inquiries@dfking.com.

 

- 5 -


Table of Contents
Q:

What is the recommendation of the Klondex Board with respect to the Arrangement Resolution?

 

A:

After taking into consideration, among other things, the merits of the Arrangement, the Fairness Opinions and the unanimous recommendation of the Independent Committee, the Klondex Board has concluded that the Arrangement is in the best interests of Klondex and fair to the Klondex Securityholders, and unanimously recommends that Klondex Securityholders vote FOR the Arrangement Resolution to approve the Arrangement.

 

Q:

Why is the Klondex Board making this recommendation?

 

A:

In reaching its conclusion that the Arrangement is fair to Klondex Securityholders and that the Arrangement is in the best interests of Klondex, the Klondex Board considered and relied upon a number of factors and reasons, including those described under the headings “Part 7 – The Arrangement – Background to the Arrangement”, “Part 7 – The Arrangement – Reasons for the Arrangement”, “Part 7 – The Arrangement – Fairness Opinions”, “Part 9 – Opinion of Maxit Capital” and “Part 10 – Opinion of GMP Securities” of this Circular.

 

Q:

What is the recommendation of the Klondex Board with respect to the Havilah Share Option Resolution?

 

A:

At the request of the proposed directors of Havilah, and after taking into consideration, among other things, the role a stock option plan or similar share incentive plan plays in the motivation, attraction and retention of key employees, directors and consultants of Havilah due to the opportunity offered to them to acquire a proprietary interest in Havilah, and after consultation with its legal counsel, the Klondex Board has unanimously determined to recommend to Klondex Shareholders that they vote FOR the Havilah Option Plan Resolution.

 

Q:

Have the Klondex Directors and officers of Klondex entered into Klondex Voting Agreements or Klondex Support Agreements?

 

A.

Yes. Hecla has entered into a Klondex Voting Agreement or a Klondex Support Agreement with each of the Klondex Directors and the officers of Klondex. Hecla has entered into Klondex Voting Agreements with each of William Matlack, Blair Schultz, Paul Huet, Richard Hall, Barry Dahl, James Haggarty and Rodney Cooper, pursuant to which each of the aforementioned Klondex Directors and officers of Klondex has agreed to, among other things, support the Arrangement and to vote their Klondex Shares and Other Affected Securities (including any Klondex Shares issued upon the exercise or exchange of any Other Affected Securities) in favour of the Arrangement Resolution. Additionally, Hecla has entered into Klondex Support Agreements with each of Brian Morris, Charles Oliver, John Antwi, Mark Daniel and Michael Doolin, pursuant to which each of the aforementioned Klondex Directors and officers of Klondex has agreed to, among other things, cooperate with Klondex and Hecla to successfully complete the Arrangement.

One of the directors of Klondex who has entered into a Klondex Voting Agreement intends to pledge his Klondex Shares to a third party lender for personal financial planning purposes. The director will still have complete control and direction over voting of the Klondex Shares and will continue to be subject to the Klondex Voting Agreement.

As of the Record Date, 6,897,535 of the 185,152,053 outstanding Affected Securities were held by Klondex Directors or officers of Klondex that were subject to Klondex Voting Agreements and Klondex Support Agreements, representing approximately 3.73% of the votes which may be cast by Klondex Securityholders at the Meeting.

 

Q:

Have any institutional shareholders entered into Klondex Support Letter Agreements?

 

A.

Yes. Hecla has entered into Klondex Support Letter Agreements with two institutional Klondex Shareholders. The Klondex Support Letter Agreements entered into by the two institutional Klondex

 

- 6 -


Table of Contents
 

Shareholders set forth, among other things, their agreement to support the Arrangement and to vote, or cause to be voted, any Klondex Shares that such Klondex Shareholder exercises beneficial control over in favour of the Arrangement Resolution.

As of the Record Date, 42,495,259 of the 180,079,072 outstanding Klondex Shares were subject to the Klondex Support Letter Agreements with voting requirements, representing approximately 23.60% of the votes which may be cast by Klondex Securityholders at the Meeting.

 

Q:

What is the recommendation of the Klondex Board with respect to the other matters to be approved at the Meeting?

 

A:

The Klondex Board unanimously recommends that Klondex Shareholders vote FOR each of the other proposals set forth in this Circular, including the election of the directors of the Company, the appointment of auditors of the Company, a non-binding advisory resolution on the Company’s approach to executive compensation, the adjournment of the Meeting if necessary or appropriate, including for purposes of soliciting additional proxies to approve the Arrangement Resolution, and such other business that may properly come before the Meeting.

 

Q:

Who can attend and vote at the Meeting?

 

A:

Only Klondex Securityholders of record as of the close of business on May 15, 2018, being the Record Date for the Meeting, are entitled to receive notice of and to attend, and vote at, the Meeting or any adjournment(s) or postponement(s) of the Meeting. Registered holders of Klondex Shares will be entitled to vote with respect to all matters at the Meeting, whereas registered holders of Other Affected Securities will only be entitled to vote at the Meeting with respect to the Arrangement Resolution and the Adjournment Resolution, and not with respect to any other matters at the Meeting.

 

Q:

How many Affected Securities are entitled to be voted?

 

A:

As of the Record Date, there were 180,079,072 Klondex Shares entitled to be voted at the Meeting. Each Klondex Shareholder is entitled to one vote for each Klondex Share held by such holder in respect of all matters at the Meeting. In addition, as of the Record Date, there were 3,695,604 Klondex Options outstanding, 1,017,011 Klondex RSUs outstanding, and 360,366 Klondex DSUs outstanding. Pursuant to the Interim Order, each Klondex Option, Klondex RSU and Klondex DSU carries one vote with respect to the vote on the Arrangement Resolution and the Adjournment Resolution. Klondex Options, Klondex RSUs and Klondex DSUs are not entitled to a vote on any matter at the Meeting other than the approval of the Arrangement Resolution and the Adjournment Resolution.

 

Q:

How do I vote if I am a Registered Klondex Securityholder?

 

A:

If you are a Registered Klondex Securityholder, you can vote your Affected Securities:

 

  1)

by voting in person at the Meeting;

 

  2)

by signing and returning the applicable enclosed proxy form by mail appointing the named persons or some other person you choose, who need not be a Klondex Securityholder, to represent you as proxyholder and vote your Affected Securities at the Meeting;

 

  3)

by telephone at 1(866) 732-VOTE (8683); or

 

  4)

via the internet at www.investorvote.com.

 

    

If you are a Registered Klondex Shareholder, you should complete the form of proxy printed on green paper. If you are a holder of Klondex Options, you should complete the form of proxy printed on pink paper. If you are a holder of Klondex RSUs, you should complete the form of proxy printed on blue paper. If you are a registered holder of Klondex DSUs, you should complete the form of proxy printed on yellow paper. If you hold more than one type of Affected Security, you will need to complete the applicable form of proxy for each of the different types of Affected Securities held by you.

 

- 7 -


Table of Contents
Q:

How do I vote if I am a Non-Registered Klondex Securityholder?

 

A:

If you are a Non-Registered Klondex Securityholder, you should receive voting instructions from your nominee.

 

Q.

If I am a Non-Registered Klondex Securityholder, can I vote in person at the Meeting?

 

A:

Yes. To vote in person at the Meeting, print your own name in the space provided on the applicable proxy form or the voting instruction form sent to you by your nominee and return it by following the instructions included. In doing so you are instructing your nominee to appoint you as a proxyholder. Please register with Klondex’s Transfer Agent and Registrar, Computershare Investor Services Inc., when you arrive at the Meeting as the Company has no access to the names of Non-Registered Klondex Securityholders; if you attend the meeting without following this procedure, the Company will have no record of your security holdings or entitlement to vote.

 

Q:

How do I vote if I am both a Registered Klondex Securityholder and a Non-Registered Klondex Securityholder?

 

A:

If you hold some Affected Securities as a Registered Klondex Securityholder and others as a Non-Registered Klondex Securityholder, you will have to use the separate voting methods described above, as applicable, for those of your Affected Securities for which you are a Registered Klondex Securityholder and for those of your Affected Securities for which you are a Non-Registered Klondex Securityholder.

 

Q:

What will I receive under the Arrangement if I am a Klondex Shareholder?

 

A:

Under the Arrangement, Klondex Shareholders will be entitled to receive, for each Klondex Share held: (i) the Hecla Consideration, as described in more detail below; and (ii) the Havilah Consideration, consisting of 0.125 of a Havilah Share (after giving effect to the Havilah Share Consolidation). For purposes of the following, references to Klondex Shareholders include holders of In-the-Money Klondex Options and Klondex RSUs who receive Klondex Shares pursuant to the Arrangement.

With respect to the Hecla Consideration, Hecla has agreed to pay to each Klondex Shareholder the equivalent of US$2.47 per Klondex Share (based on the relative values of the Klondex Shares and Hecla Shares as at March 16, 2018). The Hecla Consideration to be received by each Klondex Shareholder will consist of either: (i) the Cash Consideration; (ii) the Share Consideration; or (iii) the Combination Consideration, depending on which form of Hecla Consideration the Klondex Shareholder elects to receive (or is deemed to have elected to receive), all as more particularly described below. Klondex Shareholders will be entitled to make an election as to the form of Hecla Consideration they wish to receive with respect to all, but not less than all, of their Klondex Shares. The actual Hecla Consideration received by a Klondex Shareholder will depend upon such Klondex Shareholder’s consideration election (or deemed election) and, in the case of Klondex Shareholders electing to receive the Cash Consideration or Share Consideration, on the effect of proration.

Klondex Shareholders who elect to receive the Combination Consideration will receive 0.4136 of a Hecla Share and US$0.8411 in cash for each Klondex Share held by them. Klondex Shareholders (other than Dissenting Shareholders) who do not elect to receive the Cash Consideration or the Share Consideration, or who fail to make a valid election as to the form of Hecla Consideration that they wish to receive, will be deemed to have elected to receive the Combination Consideration for each Klondex Share held by them. Klondex Shareholders who elect, or who are deemed to have elected, to receive the Combination Consideration will not be subject to any proration with respect to the cash and Hecla Shares to be received by them.

Set forth below is a summary description of the proration calculations arising as a result of the Maximum Cash Consideration and Maximum Shares Consideration that Hecla is required to deliver under the

 

- 8 -


Table of Contents

Arrangement. As a result of the maximums on both cash and Hecla Shares that Hecla is required to deliver under the Arrangement, along with the proration calculations that ensue from those maximums, it is likely that Klondex Shareholders who elect to receive either the Cash Consideration or the Share Consideration will end up receiving both cash and Hecla Shares, notwithstanding their election. If all Klondex Shareholders were to elect to receive either the Cash Consideration or the Share Consideration, then as a result of proration the Hecla Consideration received by each Klondex Shareholder would consist of 0.4136 of a Hecla Share and US$0.8411 in cash for each Klondex Share.

Klondex Shareholders who validly elect to receive the Cash Consideration will, subject to the proration mechanism described below, be entitled to receive US$2.47 in cash for each Klondex Share held by them. The Maximum Cash Consideration that Hecla is required to deliver under the Arrangement is US$157,410,417. The Maximum Cash Consideration will be allocated, first, to Klondex Shareholders who elect, or who are deemed to have elected, to receive the Combination Consideration, to the extent of US$0.8411 per Klondex Share. Consequently, Klondex Shareholders who elect to receive the Cash Consideration will only be entitled to receive the Cash Consideration in respect of each Klondex Share held by them if other Klondex Shareholders elect to receive the Share Consideration in respect of an equivalent or greater number of Klondex Shares. If the number of Klondex Shares in respect of which Klondex Shareholders elect to receive the Share Consideration is less than the number of Klondex Shares in respect of which Klondex Shareholders elect to receive the Cash Consideration, Klondex Shareholders who elect to receive the Cash Consideration will, instead of receiving US$2.47 in cash for each Klondex Share, receive a lesser amount of cash (which shall be not less than US$0.8411) and a portion of a Hecla Share (not exceeding 0.4136 of a Hecla Share) for each Klondex Share, all as more particularly provided for in the Plan of Arrangement. If all Klondex Shareholders validly elect to receive the Cash Consideration, or if no Klondex Shareholders elect to receive the Share Consideration, a Klondex Shareholder electing to receive the Cash Consideration would receive US$0.8411 in cash and 0.4136 of a Hecla Share for each Klondex Share held by them.

Klondex Shareholders who validly elect to receive the Share Consideration will, subject to the proration mechanism described below, be entitled to receive 0.6272 of a Hecla Share for each Klondex Share held by them. The Maximum Shares Consideration that Hecla is required to pay under the Arrangement is 77,411,859 Hecla Shares. The Maximum Shares Consideration will be allocated, first, to Klondex Shareholders who elect, or who are deemed to have elected, to receive the Combination Consideration, to the extent of 0.4136 of a Hecla Share per Klondex Share. Consequently, Klondex Shareholders who elect to receive the Share Consideration will only be entitled to receive the Share Consideration in respect of each Klondex Share held by them if other Klondex Shareholders elect to receive the Cash Consideration in respect of an equivalent or greater number of Klondex Shares. If the number of Klondex Shares in respect of which Klondex Shareholders elect to receive the Cash Consideration is less than the number of Klondex Shares in respect of which Klondex Shareholders elect to receive the Share Consideration, Klondex Shareholders who elect to receive the Share Consideration will, instead of receiving 0.6272 of a Hecla Share for each Klondex Share, receive a lesser portion of a Hecla Share (which shall not be less than 0.4136 of a Hecla Share) and cash (not exceeding US$0.8411) for each Klondex Share, all as more particularly provided for in the Plan of Arrangement. If all Klondex Shareholders validly elect to receive the Share Consideration, or if no Klondex Shareholders elect to receive the Cash Consideration, a Klondex Shareholder electing to receive the Share Consideration would receive US$0.8411 in cash and 0.4136 of a Hecla Share for each Klondex Share held by them.

To the extent the aggregate number of Hecla Shares or Havilah Shares that a Klondex Shareholder would otherwise be entitled to receive under the Arrangement includes a fractional share, the actual number of Hecla Shares or Havilah Shares, as applicable, to be received by the Klondex Shareholder will, without additional compensation, be rounded down to the nearest whole number of shares.

Any cash component of the Arrangement Consideration payable pursuant to the Arrangement that is less than one cent will be rounded down to the next whole cent.

 

- 9 -


Table of Contents
Q:

What will I receive under the Arrangement if I am a Klondex Option, RSU or DSU Holder?

 

A:

Under the Arrangement:

 

  (i)

each In-the-Money Klondex Option outstanding immediately prior to the Effective Time will be deemed to be unconditionally vested and transferred to Klondex in exchange for that number of Klondex Shares (rounded down to the nearest whole number) obtained by dividing (i) the In-the-Money Amount of such option, by (ii) the Company Share Value, while each Out-of-the-Money Klondex Option will be cancelled without any payment therefor;

 

  (ii)

each Klondex RSU outstanding immediately prior to the Effective Time will be deemed to be assigned and transferred to Klondex in exchange for one Klondex Share for each such Klondex RSU; and

 

  (iii)

each Klondex DSU outstanding immediately prior to the Effective Time will be cancelled in exchange for a cash payment equal to the Company Share Value,

all as more particularly set out in the Plan of Arrangement.

Each holder of In-the-Money Klondex Options and/or Klondex RSUs who, pursuant to the Arrangement, receives Klondex Shares in exchange for their In-the-Money Klondex Options or Klondex RSUs, as applicable, will, pursuant to the Arrangement, be entitled to receive the Hecla Consideration and the Havilah Consideration for each such Klondex Share to the same extent as Klondex Shareholders (including making an election as to which form of Hecla Consideration they wish to receive).

Each Performance RSU will be settled by a cash payment to the holder thereof on the Effective Date of the Arrangement of an amount determined by Hecla to be properly due to such holder based on the terms of such Performance RSU.

 

Q:

How do I elect which form of Hecla Consideration I would like to receive?

 

A:

Each Registered Klondex Shareholder will have the right to elect to receive the Cash Consideration (subject to proration), the Share Consideration (subject to proration), or the Combination Consideration in respect of all, but not less than all, of their Klondex Shares by delivering to the Depositary by the Election Deadline a duly completed Letter of Transmittal and Election Form (printed on white paper) specifying their election.

Each holder of Klondex Options and/or Klondex RSUs will have the right to elect to receive the Cash Consideration (subject to proration), the Share Consideration (subject to proration), or the Combination Consideration in respect of all, but not less than all, of the Klondex Shares to be received by them upon the exchange of their In-the-Money Klondex Options or Klondex RSUs pursuant to the Arrangement, by delivering to the Depositary by the Election Deadline a duly completed Option/RSU Election Form (printed on grey paper) delivered specifying their election.

Non-Registered Klondex Securityholders should contact their broker, investment dealer or other Intermediary for instructions and assistance in making an election with respect to the form of Hecla Consideration they wish to receive.

If you fail to make a specific election by the Election Deadline, or the Depositary determines that your election was not properly made with respect to any Klondex Shares, Klondex Options or Klondex RSUs held by you, then you will be deemed to have elected to receive the Combination Consideration in respect of any such securities.

 

Q:

Who is Hecla?

 

A:

Hecla is a reporting issuer in each of the provinces of Canada and its shares are registered under the U.S. Exchange Act. Hecla is a company incorporated under, and governed by, the Laws of the State of Delaware. The principal executive office of Hecla is located at 6500 North Mineral Drive, Suite 200, Coeur d’Alene, Idaho, 83815-9408, United States of America, and the telephone number is (208) 769-4100.

Hecla is a U.S.-based precious and base metals mining company engaged in the exploration, acquisition, development, production and marketing of silver, gold, lead and zinc. In business since 1891, Hecla is

 

- 10 -


Table of Contents

among the oldest U.S.-based precious metals mining companies and one of the lowest-cost primary silver producers in North America. Hecla produces both metal concentrates, which it sells to smelters and brokers, and unrefined gold and silver precipitate and bullion bars (doré), which are sold as precipitate and doré, or are further refined before sale, to refiners and precious metals traders. Hecla has producing precious metals mining operations in Alaska, Idaho, Québec and Durango, Mexico and additional development and exploration projects in Alaska, Idaho, Canada and Mexico.

The Hecla Shares are listed for trading on the NYSE under the trading symbol “HL”.

 

Q:

What vote is required at the Meeting to approve the Arrangement Resolution?

 

A:

The Arrangement Resolution must be approved by: (a) at least two-thirds (66 23%) of the votes cast at the Meeting by Klondex Shareholders present in person or represented by proxy and entitled to vote at the Meeting; and (b) at least two-thirds (66 23%) of the votes cast at the Meeting by Klondex Securityholders voting together as a single class, present in person or represented by proxy and entitled to vote at the Meeting.

 

Q.

What vote is required at the Meeting to approve the proposals at the Meeting, other than the Arrangement Resolution?

 

A:

With respect to the election of directors, directors are elected by a plurality of votes. This means nominees receiving the eight highest number of votes at the Meeting will be elected. However, Klondex has adopted a majority voting policy which stipulates that in an uncontested election, as is the case at this Meeting, any nominee for director who receives more “withhold” votes than “for” votes must tender his resignation to the Klondex Board.

With respect to the appointment of auditors, the auditors are appointed by a plurality of votes. This means that auditors receiving the highest number of votes at the Meeting will be appointed.

To be effective, each of: (i) the Havilah Option Plan Resolution; and (ii) the proposal concerning “Say on Pay” must be approved by at least a simple majority of the votes cast at the Meeting by Klondex Shareholders, present in person or represented by proxy and entitled to vote at the Meeting.

To be effective, the Adjournment Resolution must be approved by at least a simple majority of the votes cast at the Meeting by Klondex Securityholders voting together as a single class, present in person or represented by proxy and entitled to vote at the Meeting.

See “Part 5 – General Proxy Information – Voting Standards” of this Circular.

 

Q:

What if I return my proxy but do not mark it to show how I wish to vote?

 

A:

If your proxy relating to your Klondex Shares is signed and dated and returned without specifying your voting choice (or specifying both voting choices), then your Klondex Shares will be voted FOR: (a) the Arrangement Resolution in accordance with the recommendation of the Klondex Board; (b) the Havilah Option Plan Resolution; (c) the election of the nominated directors as set out on the form of proxy; (d) the appointment of PwC as the auditors of the Company for the ensuing year and authorizing the directors of the Company to fix their remuneration; (e) the non-binding advisory resolution on the Company’s approach to executive compensation; (f) the adjournment of the Meeting if necessary or appropriate, including an adjournment to solicit additional proxies in the event that there are not sufficient votes at the time of the Meeting or adjournment or postponement thereof to approve the Arrangement Resolution; and (g) the transaction of such further and other business as may properly come before the Meeting or any adjournment or adjournments thereof, all in accordance with the recommendation of the Klondex Board.

If your proxy relating to any Other Affected Securities is signed and dated and returned without specifying your voting choice (or specifying both voting choices), then your Other Affected Securities will be voted

 

- 11 -


Table of Contents

FOR the Arrangement Resolution and the Adjournment Resolution in accordance with the recommendation of the Klondex Board.

 

Q:

When is the cut-off time for delivery of proxies?

 

A:

Proxies must be delivered to Klondex’s Transfer Agent and Registrar, Computershare Investor Services Inc., by mail to 3rd Floor, 510 Burrard Street, Vancouver, British Columbia, V6C 3B9 or by fax to (416) 263-9524 or 1(866) 249-7775, not less than 48 hours (excluding Saturdays, Sundays and holidays) before the time of the Meeting or any adjournment or postponement thereof. In this case, assuming no adjournment or postponement, the proxy-cut off time is 4:00 p.m. (Eastern Daylight Time) on [•], 2018. The deadline for deposit of proxies may be waived or extended by the Chairman of the Meeting at his discretion, without notice.

 

Q:

What are broker non-votes?

 

A:

A broker non-vote occurs when shares held by a broker for the account of a beneficial owner are not voted for or against a particular proposal because the broker has not received voting instructions from that beneficial owner and the broker does not have discretionary authority to vote those shares. Klondex Shares constituting broker non-votes are not counted or deemed to be present in person or by proxy for the purpose of voting on a non-routine matter at the Meeting and, therefore, are not counted for the purpose of determining whether Klondex Shareholders and/or Klondex Securityholders have approved any matter except the proposal to appoint the auditors of the Company, because all proposals at the Meeting, except the proposal to appoint the auditors, are considered non-routine. If you do not provide voting instructions to your broker, your broker will have discretion to vote your Klondex Shares only on the proposal to appoint the auditors of the Company, because the Company expects that matter to be considered a routine matter.

 

Q:

What are the effects of broker non-votes and “withhold” votes?

 

A:

Brokers are permitted to exercise their discretion and vote without specific instruction on the proposal relating to the appointment of the auditors. Accordingly, the Company does not expect there to be any broker non-votes in connection with the proposal on the appointment of auditors. On all of the other proposals at the Meeting, broker non-votes will have no effect on the outcome of the vote.

With respect to the election of directors and appointment of auditors, Klondex Shareholders will have the option of voting “for” or “withhold”. A “withhold” vote will have no effect on the proposal in respect of the appointment of auditors but because of Klondex’s Majority Voting Policy, may have an effect on the election of directors should a director receive more “withhold” votes than “for” votes.

See “Part 5 – General Proxy Information – Voting Standards” of this Circular.

 

Q:

Can I abstain from voting?

 

A:

Depending on the matter being voted on at the Meeting, under the BCBCA, Klondex Shareholders have the option to either vote “for”, “against” or “withhold” on the matter and Klondex Option, RSU and DSU Holders have the option to either vote “for” or “against” the Arrangement Resolution or the Adjournment Resolution at the Meeting. A Registered Klondex Securityholder present in person at the Meeting who has not provided a proxy may abstain from voting by not casting a vote. However, a proxyholder cannot similarly abstain as he or she must vote in accordance with the direction of the Klondex Securityholder completing the proxy. If no choice is specified in the form of proxy, the Affected Securities will be voted FOR the relevant proposal(s).

 

Q:

Can I revoke my proxy or change my vote after I submit a signed proxy?

 

A:

Yes. In addition to revocation in any other manner permitted by law, a proxy may be revoked by an instrument in writing executed by the Klondex Securityholder or by his or her attorney authorized in writing

 

- 12 -


Table of Contents
 

deposited either at the registered office of the Company at any time up to and including the last business day preceding the day of the Meeting, or any adjournment thereof, at which the proxy is to be used or with the Chairman of the Meeting on the day of the Meeting, or adjournment thereof, and upon either of such deposits, the proxy is revoked. If you revoke your proxy and do not replace it with another that is deposited with the Company before the deadline, then you can still vote your Affected Securities, but to do so, you must attend the Meeting in person.

 

Q.

In addition to the approval of the Klondex Securityholders, are there any other approvals required for the Arrangement?

 

A:

Yes. The Arrangement requires the approval of the Court and also is subject to the receipt of certain regulatory approvals.

See “Part 7 – The Arrangement – Court Approval of the Arrangement” and “Part 12– Regulatory Matters” of this Circular.

 

Q:

Does Hecla need to obtain approval from its shareholders?

 

A:

Hecla is not required to obtain shareholder approval for the Arrangement.

 

Q:

Do any Klondex Directors or executive officers of Klondex have any interests in the Arrangement that are different from, or in addition to, those of the Klondex Securityholders?

 

A:

In considering the unanimous recommendation of the Klondex Board to vote in favour of the matters discussed in this Circular, Klondex Securityholders should be aware that certain of the Klondex Directors and executive officers of Klondex have interests in the Arrangement that are different from, or in addition to, the interests of Klondex Shareholders generally.

See “Part 7 – The Arrangement – Interests of Certain Persons in the Arrangement”, “Part 7 – The Arrangement – MI 61-101 Protection of Minority Security Holders in Special Transactions”, “Part 11 – Securities Law Matters” and “Part 12 – Regulatory Matters” of this Circular.

 

Q:

Will the Klondex Shares continue to be listed on the TSX and the NYSE American after the Arrangement?

 

A:

No. The Klondex Shares will be de-listed from the TSX and the NYSE American when the Arrangement is completed.

 

Q:

Should I send in my Election Document(s) now?

 

A:

Yes. It is recommended that: (a) all Registered Klondex Shareholders complete, sign and return the Letter of Transmittal and Election Form (printed on white paper), together with accompanying Klondex Share certificate(s) or DRS Statement, to the Depositary as soon as possible; and (b) all registered holders of Klondex Options and Klondex RSUs complete, sign and return the Option/RSU Election Form (printed on grey paper) to the Depositary as soon as possible. To make a valid election as to the form of Hecla Consideration you wish to receive, you must sign and return the applicable Election Document(s) to the Depositary prior to the [●], 2018 Election Deadline. If you fail to make a specific election by the Election Deadline, or the Depositary determines that your election was not properly made with respect to any Klondex Shares, Klondex Options or Klondex RSUs, as applicable, then you will be deemed to have elected to receive the Combination Consideration in respect of such securities.

Non-Registered Klondex Securityholders whose Klondex Shares, Klondex Options and Klondex RSUs, as applicable, are registered in the name of a broker, investment dealer, bank, trust company, trustee or other nominee should contact that nominee for assistance in depositing such securities and should follow the instructions of such nominee in order to make their election and deposit such securities.

 

- 13 -


Table of Contents

See “Part 16 – Procedure for Receipt of Arrangement Consideration” of this Circular.

 

Q:

When can I expect to receive the Arrangement Consideration for my Affected Securities?

 

A:

If you are a holder of Klondex Shares, then, provided that a duly completed Letter of Transmittal and Election Form, along with the applicable Klondex Share certificate(s) or DRS Statement for such Klondex Shares and all other required documents, have been received by the Depositary, you should receive the Arrangement Consideration due to you under the Arrangement promptly after the Arrangement becomes effective.

If you are a holder of In-the-Money Klondex Options or Klondex RSUs, you should receive the Arrangement Consideration due to you under the Arrangement promptly after the Arrangement becomes effective.

See “Part 16 – Procedure for Receipt of Arrangement Consideration” of this Circular.

 

Q:

What assets will Havilah hold?

 

A:

Upon completion of the Arrangement, Havilah will hold all of the legal and beneficial right, title and interest in Klondex’s Canadian assets, including True North and the Bison Manitoba properties, as well as additional Manitoba and Ontario mineral interests.

 

Q:

Who will be on the management team and board of directors of Havilah?

 

A:

The following individuals are anticipated to be on the management team of Havilah: (a) John Antwi, Interim President and Chief Executive Officer; and (b) Blair Schultz, Interim Chief Financial Officer.

The following individuals are anticipated to be on the board of directors of Havilah: Messrs. Blair Schultz (Chairman), John Antwi, Brian Morris, James Haggarty, Michael Hoffman and Paul Huet.

 

Q:

Will Havilah Shares be publicly listed?

 

A:

It is a condition to the completion of the Arrangement that one of the TSX, the TSXV or the Canadian Securities Exchange conditionally approve the listing of the Havilah Shares to be distributed under the Arrangement. Havilah has applied to have the Havilah Shares listed on the TSXV. Listing is subject to the approval of the TSXV in accordance with its original listing requirements. The TSXV has not conditionally approved the listing of the Havilah Shares on the TSXV and there is no assurance that the TSXV will approve the listing application. There is no present intention to list Havilah Shares for trading on any national securities exchange in the United States.

 

Q:

How will I know when the Arrangement will be implemented?

 

A:

The Effective Date will only occur following satisfaction or waiver of all of the conditions to the completion of the Arrangement. If the Arrangement Resolution is approved at the Meeting, and all other required approvals are obtained and conditions satisfied or waived, then the Effective Date is expected to occur in the second quarter of 2018, but no later than July 16, 2018, unless otherwise agreed to between Klondex and Hecla. On the Effective Date, upon completion of the Arrangement, Klondex and Hecla will publicly announce that the Arrangement has been implemented.

 

Q:

Are there risks I should consider in deciding whether to vote for the Arrangement Resolution?

 

A:

Yes. Klondex Securityholders should carefully consider the risk factors relating to the Arrangement. Some of these risks include, but are not limited to the following: (a) Hecla and Klondex may not integrate

 

- 14 -


Table of Contents
 

successfully; (b) uncertainty surrounding the Arrangement could adversely affect Klondex’s retention of customers and suppliers and could negatively impact Klondex’s future business and operations; (c) the pro forma condensed combined financial statements are presented for illustrative purposes only and may not be an indication of the Combined Company’s financial condition or results of operations following the Arrangement; (d) directors and executive officers of Klondex may have interests in the Arrangement that are different from those of Klondex Securityholders generally; (e) the issuance of a significant number of Hecla Shares, or securities convertible into Hecla Shares, could adversely affect the market price of the Hecla Shares; (f) the Arrangement Agreement may be terminated in certain circumstances, including in the event of a change having a Klondex Material Adverse Effect; (g) there can be no certainty that all conditions precedent to the Arrangement will be satisfied; (h) the exchange ratio is fixed and will not be adjusted to reflect any change in the market value of the Hecla Shares or Klondex Shares prior to the closing of the Arrangement; (i) Klondex will incur costs even if the Arrangement is not completed and may have to pay the Klondex Termination Fee to Hecla in certain circumstances; (j) if the Arrangement is not approved by the Klondex Securityholders, or the Arrangement is otherwise not completed, then the market price for Klondex Shares may decline; (k) if the Arrangement Resolution is not approved by the Klondex Securityholders, Klondex will continue as a standalone entity and will need to consider and secure financing alternatives; (l) owning Hecla Shares will expose Klondex Shareholders to different risks; (m) the value of the Havilah Shares may fluctuate; and (n) the TSXV may not approve Havilah’s listing application. The foregoing list is not exhaustive. Please carefully read all of the risks disclosed elsewhere in this Circular as well as risks disclosed in Klondex’s and Hecla’s publicly disclosed documents available on SEDAR and EDGAR.

See “Part 15 – Risks Factors Relating to the Arrangement” of this Circular.

 

Q:

What are the Canadian income tax consequences of the Arrangement?

 

A:

For a summary of certain Canadian income tax consequences of the Arrangement applicable to a Klondex Shareholder, see “Part 17 – Certain Canadian Federal Income Tax Considerations”. Such summary is not intended to be legal or tax advice to any particular Klondex Shareholder. Klondex Shareholders should consult their own tax advisors with respect to their particular circumstances. In addition, holders of Other Affected Securities should consult their own tax advisors with respect to their particular circumstances.

 

Q:

What are the U.S. federal income tax consequences of the Arrangement?

 

A:

For a summary of certain material U.S. federal income tax consequences of the Arrangement applicable to a U.S. Holder (as defined herein) and a non-U.S. Holder (as defined herein), see “Part 18 – Certain United States Federal Income Tax Considerations”. Such summary is not intended to be legal or tax advice to any particular Klondex Securityholders. Klondex Securityholders should consult their own tax advisors with respect to their particular circumstances.

 

Q:

Am I entitled to Dissent Rights?

 

A:

The Interim Order and Plan of Arrangement provides Registered Klondex Shareholders with Dissent Rights in connection with the Arrangement. Registered Klondex Shareholders considering exercising Dissent Rights should seek the advice of their own legal counsel and tax and investment advisors and should carefully review the description of such rights set forth in this Circular, the Interim Order and the Plan of Arrangement, and must comply with the dissent procedures in Division 2 of Part 8 of the BCBCA, as modified and supplemented by the Interim Order, the Plan of Arrangement and the Final Order. The right to dissent is described in this Circular, and the texts of each of the Plan of Arrangement, the Interim Order and Division 2 of Part 8 of the BCBCA is set forth in Appendix “E”, Appendix “F” and Appendix “H”, respectively, to this Circular.

See “Part 14 – Dissenting Shareholders’ Rights” in this Circular.

 

- 15 -


Table of Contents

KLONDEX MINES LTD.

MANAGEMENT INFORMATION CIRCULAR

This management information circular (this “Circular”) and accompanying forms of proxy are furnished in connection with the solicitation of proxies by the management of Klondex Mines Ltd. (the “Company” or “Klondex”) for use at the annual and special meeting (the “Meeting”) of Klondex Securityholders to be held at the Toronto Region Board of Trade, Lennox Hall East, 4th Floor, 77 Adelaide St. West, Toronto, Ontario on [•], 2018 at [8:00 a.m. (Eastern Daylight Time)], and at any adjournment or postponement thereof, for the purposes set forth in the accompanying notice of annual and special meeting (the “Notice of Meeting”). All summaries of, and references to, the Arrangement Agreement, the Plan of Arrangement, the Arrangement Resolution, the Maxit Capital Fairness Opinion and the GMP Securities Fairness Opinion in this Circular are qualified in their entirety by reference to the complete text of those documents, each of which is either included as an appendix to this Circular or filed under the Company’s issuer profile on the System for Electronic Document Analysis and Retrieval (“SEDAR”) at www.sedar.com and Electronic Data Gathering, Analysis, and Retrieval system (“EDGAR”) at www.sec.gov/edgar. Klondex Securityholders are urged to carefully read the full text of these documents.

PART 1. GENERAL MATTERS

Defined Terms

In this Circular, unless otherwise indicated or the context otherwise requires, terms defined in Appendix “A” – Glossary of Terms shall have the meanings attributed thereto. Words importing the singular include the plural and vice versa and words importing gender include all genders.

Information Contained in this Circular

The information contained in this Circular, unless otherwise indicated, is given as of [•], 2018.

No person has been authorized by the Company to give any information (including any representations) in connection with the matters to be considered at the Meeting other than the information contained in this Circular. This Circular does not constitute an offer to buy, or a solicitation of an offer to acquire, any securities, or a solicitation of a proxy, by any person in any jurisdiction in which such an offer or solicitation is not authorized or is unlawful. Information contained in this Circular should not be construed as legal, tax or financial advice, and Klondex Securityholders should consult their own professional advisors concerning the consequences of the Arrangement in their own circumstances.

This Circular and the transactions contemplated by the Arrangement Agreement and the Plan of Arrangement have not been approved or disapproved by any securities regulatory authority nor has any securities regulatory authority passed upon the fairness or merits of such transactions or upon the accuracy or adequacy of the information contained in this Circular. Any representation to the contrary is unlawful.

Information Contained in this Circular Regarding Hecla

Certain information included or incorporated by reference in this Circular pertaining to Hecla Mining Company (“Hecla”), including, but not limited to, Hecla’s Annual Report on Form 10-K filed with the SEC on February 15, 2018, Hecla’s Quarterly Report on Form 10-Q filed with the SEC on May 10, 2018, Hecla’s definitive proxy statement filed with the SEC on April 9, 2018, and the information pertaining to Hecla set forth in Appendix “K” of this Circular, is derived from Hecla’s public filings with the SEC or has been furnished by Hecla. With respect to this information, the Company has relied exclusively upon Hecla, without independent

 

- 16 -


Table of Contents

verification by the Company. Although the Company does not have any knowledge that would indicate that such information is untrue or incomplete, neither the Company nor any of its directors or officers assumes any responsibility for the accuracy or completeness of such information, or for the failure by Hecla to disclose events or information that may affect the completeness or accuracy of such information.

For further information regarding Hecla, please refer to Hecla’s filings with the securities regulatory authorities which may be obtained under Hecla’s issuer profile on SEDAR at www.sedar.com and EDGAR at www.sec.gov/edgar. See also Appendix “K” of this Circular.

Financial Information

Unless otherwise indicated, all historical financial statements included or incorporated by reference in this Circular relating to Klondex, Hecla and the Combined Company are reported in United States dollars and prepared in accordance with U.S. GAAP. Certain historical financial statements included or incorporated by reference in this Circular relating to Havilah are reported in: (a) Canadian dollars and prepared in accordance with IFRS; or (b) United States dollars and prepared in accordance with U.S. GAAP.

Currency

All references to “$”, “US$” or “dollars” set forth in this Circular are to United States dollars, and all references to “C$” set forth in this Circular are to Canadian dollars.

PART 2. NOTICE TO SECURITYHOLDERS IN THE UNITED STATES

THE ARRANGEMENT AND THE SECURITIES TO BE ISSUED IN CONNECTION WITH THE ARRANGEMENT HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SEC OR THE SECURITIES REGULATORY AUTHORITIES OF ANY STATE OF THE UNITED STATES, NOR HAS THE SEC OR THE SECURITIES REGULATORY AUTHORITIES OF ANY STATE OF THE UNITED STATES PASSED UPON THE FAIRNESS OR MERITS OF THE ARRANGEMENT OR UPON THE ADEQUACY OR ACCURACY OF THIS CIRCULAR. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENCE.

The Hecla Shares and the Havilah Shares to be issued to Klondex Securityholders in connection with the Arrangement have not been and will not be registered under the U.S. Securities Act or the securities laws of any state of the United States, and such securities are being issued in reliance upon the exemption from the registration requirements of the U.S. Securities Act provided by Section 3(a)(10) thereof on the basis of the approval of the Court, which will consider, among other things, the fairness of the Arrangement to Klondex Securityholders as further described in “Part 11 – Securities Law Matters – United States Securities Law Matters” of this Circular, and in reliance on exemptions from or qualifications under the registration requirements under any applicable securities laws of any state of the United States. Section 3(a)(10) of the U.S. Securities Act provides an exemption from the registration requirements of the U.S. Securities Act for securities issued in exchange for one or more bona fide outstanding securities, or partly in such exchange and partly for cash, where the terms and conditions of the issuance and exchange of such securities have been approved by a court authorized to grant such approval after a hearing upon the fairness of the terms and conditions of the issuance and exchange at which all persons to whom the securities will be issued have the right to appear and have received adequate notice thereof.

The U.S. Securities Act imposes restrictions on the resale of Hecla Shares received pursuant to the Arrangement by persons who will be “affiliates” of Hecla after the Effective Time or who have been “affiliates” of Hecla within the 90 days preceding the Effective Time. The U.S. Securities Act also imposes restrictions on the resale of Havilah Shares received pursuant to the Arrangement by persons who will be “affiliates” of Havilah after the Effective Time or who have been “affiliates” of Havilah within the 90 days preceding the Effective Time.

 

- 17 -


Table of Contents

As used in this Circular, as it relates to Klondex and Havilah only, the terms “mineral reserve”, “proven mineral reserve” and “probable mineral reserve” are Canadian mining terms as defined in accordance with NI 43-101 and the Canadian Institute of Mining, Metallurgy and Petroleum (CIM)-CIM Definition Standards on Mineral Resources and Mineral Reserves, adopted by the CIM Council, as amended.

These definitions differ from the definitions in SEC Industry Guide 7. However, despite the differences in the definition between NI 43-101 and SEC Industry Guide 7, the proven and probable mineral reserves reported herein for Fire Creek Mine, Midas Mine, Hollister Mine and True North are equivalent to those that would have been reported had they been prepared under SEC Industry Guide 7 standards.

The terms “mineral resource”, “measured mineral resource”, “indicated mineral resource” and “inferred mineral resource” are defined in, and required to be disclosed by NI 43-101; however, these terms are not defined terms under SEC Industry Guide 7 and are normally not permitted to be used in reports and registration statements filed with the SEC. Investors are cautioned not to assume that all or any part of a mineral deposit in these categories will ever be converted into mineral reserves. “Inferred mineral resources” have a lower level of confidence than an “indicated mineral resource” and may not be converted to a mineral “reserve”. The quantity and grade of reported “Inferred Mineral Resources” in this estimation are uncertain in nature and there has been insufficient exploration to define these “Inferred Mineral Resources” as an “Indicated or Measured” Mineral Resource and it is uncertain if further exploration will result in upgrading them to an “Indicated or Measured” Mineral Resource category. Under Canadian rules, estimates of inferred mineral resources may not form the basis of feasibility or pre-feasibility studies, except in rare cases.

Disclosure of “contained ounces” in a mineral resource is permitted disclosure under Canadian regulations; however, the SEC normally only permits issuers to report in place tonnage and grade without reference to unit measures for mineralization that does not constitute “reserves” by SEC standards. Accordingly, information contained in this Circular contains descriptions of the Company’s mineral deposits that may not be comparable to similar information made public by U.S. companies subject to the reporting and disclosure requirements under the United States federal securities laws and the rules and regulations thereunder.

The term “mineralized material” as used in this Circular, although permissible under SEC Industry Guide 7, does not indicate “reserves” by SEC Industry Guide 7 standards. The Company cannot be certain that any part of the mineralized material will ever be confirmed or converted into SEC Industry Guide 7 compliant “reserves”. Investors are cautioned not to assume that all or any part of the mineralized material will ever be confirmed or converted into mineral reserves or that mineralized material can be economically or legally extracted.

Financial statements included or incorporated by reference in this Circular relating to Klondex, Hecla and the Combined Company are reported in United States dollars and prepared in accordance with U.S. GAAP. Financial statements included or incorporated by reference in this Circular relating to Havilah are reported in: (a) Canadian dollars and prepared in accordance with IFRS; and (b) United States dollars and prepared in accordance with U.S. GAAP.

Klondex Securityholders should be aware that the Arrangement described in this Circular may have tax consequences in both the United States and Canada. Klondex Shareholders who are resident in, or citizens of, the United States are advised to review the summaries contained in this Circular under the headings “Part 17 – Certain Canadian Federal Income Tax Considerations” and “Part 18 – Certain United States Federal Income Tax Considerations” and to consult their own tax advisors to determine the particular Canadian and United States tax consequences to them of the Arrangement in light of their particular situation, as well as any tax consequences that may arise under the laws of any other relevant foreign, state, local, or other taxing jurisdiction.

The enforcement by Klondex Securityholders of civil liabilities under U.S. Securities Laws may be affected adversely by the fact that Klondex is incorporated or organized outside the United States, that some of the Company’s respective directors and officers and the experts named in this Circular are not residents of the United

 

- 18 -


Table of Contents

States and that a portion of the Company’s assets and all or a substantial portion of the assets of said persons may be located outside the United States. As a result, Klondex Securityholders in the United States may be unable to effect service of process within the United States upon certain officers and directors or the experts named herein, or to realize against them upon judgments of courts of the United States predicated upon civil liabilities under the federal securities laws of the United States or any applicable securities laws of any state of the United States. In addition, Klondex Securityholders in the United States should not assume that the courts of Canada: (a) would enforce judgments of United States courts obtained in actions against such persons predicated upon civil liabilities under the federal securities laws of the United States or any applicable securities laws of any state of the United States; or (b) would enforce, in original actions, liabilities against such persons predicated upon civil liabilities under the federal securities laws of the United States or any applicable securities laws of any state of the United States.

PART 3. CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

This Circular and the documents incorporated into this Circular by reference contain “forward-looking statements” and “forward-looking information” within the meaning of applicable U.S. and Canadian securities legislation (forward-looking statements and forward-looking information being collectively referred to as “forward-looking information”) that are based on expectations, estimates and projections as at the date of this Circular or the dates of the documents incorporated by reference, and as applicable, are intended to be covered by the safe harbors provided by such legislation. Forward-looking information may include, without limitation, statements and information concerning: the Arrangement; the anticipated timing for completion of the Arrangement; the anticipated benefits of the Arrangement; the likelihood of the Arrangement being completed; the principal steps of the Arrangement; statements made in, and based upon, the Maxit Capital Fairness Opinion and the GMP Securities Fairness Opinion; statements relating to the business and future activities of the Company and Hecla after the date of this Circular and prior to the Effective Time; statements relating to the business and future activities of Hecla and Havilah after the Effective Time; Klondex Securityholder and Court approval of the Arrangement; regulatory approval of the Arrangement; and other statements that are not historical facts.

Any statements that express or involve discussions with respect to predictions, expectations, beliefs, plans, projections, objectives, assumptions or future events or performance (often, but not always, identified by words or phrases such as “expects” or “does not expect”, “is expected”, “anticipates” or “does not anticipate”, “believes”, “budget”, “scheduled”, “forecasts” “plans”, “projects”, “estimates”, “assumes”, “intends”, “strategy”, “goals”, “objectives”, “potential”, “possible” or variations thereof or stating that certain actions, events, conditions or results “may”, “could”, “would”, “should”, “might” or “will” be taken, occur or be achieved, or the negative of any of these terms and similar expressions) are not statements of historical fact and may be forward-looking information and are intended to identify forward-looking information.

Forward-looking information is based on the beliefs, expectations and opinions of the management of Klondex and Hecla, as well as on assumptions and other factors, which management of Klondex and Hecla believes to be reasonable based on information available at the time such information was given. Such assumptions include, among other things, the satisfaction of the terms and conditions of the Arrangement, including the approval of the Arrangement and its fairness by the Court, and the receipt of the required governmental and regulatory approvals and consents.

By its nature, forward-looking information is based on assumptions and involves known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of Klondex and Hecla to be materially different from any future results, performance or achievements expressed or implied by the forward-looking information, including, without limitation: the Arrangement Agreement may be terminated in certain circumstances; general economic conditions; industry conditions; volatility of commodity prices; currency fluctuations; environmental risks; competition from other industry participants; and stock market

 

- 19 -


Table of Contents

volatility. This list is not exhaustive of the factors that may affect any of the forward-looking information of Klondex and Hecla.

Forward-looking information is information about the future and is inherently uncertain. There can be no assurance that the forward-looking information will prove to be accurate. Actual results could differ materially from those reflected in the forward-looking information as a result of, among other things, the matters set out or incorporated by reference in this Circular generally and economic and business factors, some of which may be beyond the control of Klondex and Hecla. Some of the more important risks and uncertainties that could affect forward-looking information are described further under the heading “Part 15 – Risk Factors Relating to the Arrangement”. Additional risks are discussed in filings by Klondex and Hecla with the SEC and with Canadian regulatory authorities on EDGAR and SEDAR, respectively, including under the heading “Item 1A. Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017 filed with the SEC on March 14, 2018, as amended by Amendment No. 1 on Form 10-K/A filed with the SEC on April 30, 2018 (as amended, the “2017 Annual Report on Form 10-K”), and under the heading “Item 1A. Risk Factors” in Hecla’s Annual Report on Form 10-K for the year ended December 31, 2017 and under the heading “Part II – Item IA. Risk Factors” in Hecla’s Quarterly Report on Form 10-Q for the three months ended March 31, 2018, each of which is incorporated herein by reference. Klondex and Hecla expressly disclaim any intention or obligation to update or revise any information contained in this Circular (including forward-looking information) except as required by applicable laws, and Klondex Securityholders should not assume that any lack of update to information contained in this Circular means that there has been no change in that information since the date of this Circular and should not place undue reliance on forward-looking information.

 

- 20 -


Table of Contents

PART 4. SUMMARY

The following is a summary of the principal features of the Arrangement and certain other matters and should be read together with the more detailed information contained elsewhere, or incorporated by reference, in this Circular, including the appendices hereto. Capitalized terms have the meanings ascribed to such terms in the “Glossary of Terms” included in Appendix “A” of this Circular. This summary is qualified in its entirety by the more detailed information appearing or referred to elsewhere herein.

The Meeting and Record Date

The Meeting will be held at the Toronto Region Board of Trade, Lennox Hall East, 4th Floor, 77 Adelaide St. West, Toronto, Ontario on [●], 2018 at [8:00 a.m. (Eastern Daylight Time)].

The Klondex Board has fixed the close of business on May 15, 2018 as the Record Date for the determination of the Klondex Securityholders entitled to receive notice of, and vote at, the Meeting. Only Klondex Securityholders whose names have been entered in the applicable register of the Company as of the close of business on the Record Date will be entitled to receive notice of, and to vote at, the Meeting. Holders of Other Affected Securities will only be entitled to vote such securities with respect to the Arrangement Resolution and the Adjournment Resolution, in the manner and to the extent provided for in the Interim Order, and not on any other matter to be considered at the Meeting.

Purpose of the Meeting

In addition to the consideration of the annual meeting matters by Klondex Shareholders, as set out under the heading “Part 25 – Annual Matters” of this Circular, the purpose of the Meeting is for Klondex Securityholders to consider and vote upon the Arrangement Resolution.

To be effective, the Arrangement Resolution must be approved by: (a) at least two-thirds (66 23%) of the votes cast at the Meeting by Klondex Shareholders, present in person or represented by proxy and entitled to vote at the Meeting; and (b) at least two-thirds (66 23%) of the votes cast at the Meeting by Klondex Securityholders voting together as a single class, present in person or represented by proxy and entitled to vote at the Meeting.

To be effective, each of: (i) the Havilah Option Plan Resolution; and (ii) the proposal concerning “Say on Pay”, must be approved by at least a simple majority of the votes cast at the Meeting by Klondex Shareholders, present in person or represented by proxy and entitled to vote at the Meeting.

To be effective, the Adjournment Resolution must be approved by at least a simple majority of the votes cast at the Meeting by Klondex Securityholders voting together as a single class, present in person or represented by proxy and entitled to vote at the Meeting.

See “Part 7 – The Arrangement – Approval of Arrangement Resolution” and “Part 5 – General Proxy Information Voting Standards” of this Circular.

Background to the Arrangement

The provisions of the Arrangement Agreement are the result of arm’s length negotiations between representatives of Klondex and Hecla and their respective financial advisors and legal counsel. A summary of the material events leading up to the negotiation of the Arrangement Agreement and the material meetings, negotiations and discussions between the Company and Hecla that preceded the execution and public announcement of the



 

- 21 -


Table of Contents

Arrangement Agreement is set out under the heading “Part 7 – The Arrangement – Background to the Arrangement” of this Circular.

Fairness Opinions

GMP Securities and INFOR Financial were engaged to act as financial co-advisors to the Company in connection with the Arrangement, while Maxit Capital was retained to advise the Independent Committee. GMP Securities and Maxit Capital provided oral fairness opinions to the Klondex Board and the Independent Committee, respectively, on March 16, 2018. Each of the Fairness Opinions states that, as of the date of such Fairness Opinion, and subject to the assumptions, limitations and qualifications set out therein, the Arrangement Consideration to be received by Klondex Shareholders pursuant to the Arrangement, is fair, from a financial point of view, to the Klondex Shareholders. The full text of each of the Fairness Opinions, which set forth, among other things, the respective assumptions made, matters considered and limitations on the review undertaken in connection with the respective Fairness Opinion, is attached as Appendix “C” and Appendix “D” of this Circular. Klondex Shareholders are urged to, and should, read the Fairness Opinions in their entirety. This summary is qualified in its entirety by reference to the full texts of the Fairness Opinions. See “Part 7 – The Arrangement – Fairness Opinions”, “Part 9 – Opinion of Maxit Capital” and “Part 10 – Opinion of GMP Securities” of this Circular.

Subject to the terms of their respective engagements, each of GMP Securities and Maxit Capital has consented to the inclusion in this Circular of its respective Fairness Opinion in its entirety, together with the summary herein and other information relating to GMP Securities and Maxit Capital, respectively. The Fairness Opinions were provided to the Klondex Board and Independent Committee, as applicable, for their exclusive use only in considering the Arrangement and may not be relied upon by any other person or for any other purpose or published or disclosed to any other person, relied upon by any other person or used for any other purpose without the express written consent of GMP Securities or Maxit Capital, as applicable. The Fairness Opinions address only the fairness, from a financial point of view, of the Arrangement Consideration to be received by the Klondex Shareholders pursuant to the Arrangement, and are not, and should not be construed as, valuations of Klondex, Hecla or Havilah (or any of their respective affiliates) or their respective assets, liabilities or securities or as a recommendation to any Klondex Securityholder as to how to vote with respect to the Arrangement Resolution or any other matter at the Meeting.

Recommendation of the Klondex Board

The Klondex Board, after careful consideration and having consulted with its financial co-advisors and legal counsel and having taken into account the Fairness Opinions and such other matters as it considered necessary and relevant, including the factors set out below under the heading “Part 7 – The Arrangement – Reasons for the Arrangement” and the unanimous recommendation of the Independent Committee, has unanimously determined that the Arrangement is in the best interests of Klondex and is fair to the Klondex Securityholders. Accordingly, the Klondex Board unanimously recommends that Klondex Securityholders vote FOR the Arrangement Resolution.

All of the Klondex Directors and officers of Klondex have entered into either Klondex Voting Agreements or Klondex Support Agreements with Hecla. Under the Klondex Voting Agreements, each of the following Klondex Directors and officers of Klondex has agreed to, among other things, support the Arrangement and to vote his Klondex Shares and Other Affected Securities (including any Klondex Shares issued upon the exercise or exchange of any Other Affected Securities) in favour of the Arrangement Resolution: William Matlack, Blair Schultz, Paul Huet, Richard Hall, Barry Dahl, James Haggarty and Rodney Cooper. Under the Klondex Support Agreements, each of the following Klondex Directors and officers of Klondex has agreed to, among other things, cooperate with Klondex and Hecla to successfully complete the Arrangement: Brian Morris, Charles Oliver, John Antwi, Mark Daniel and Michael Doolin.



 

- 22 -


Table of Contents

See “Part 7 – The Arrangement – Recommendation of the Klondex Board”, “Part 7 – The Arrangement – Reasons for the Arrangement” and “Part 7 – The Arrangement – Voting and Support Agreements” of this Circular.

Reasons for the Arrangement

The Independent Committee and the Klondex Board reviewed and considered a significant amount of information and considered a number of factors relating to the Arrangement, with the benefit of advice from Klondex Management, and the respective financial advisors and legal advisors of the Independent Committee and the Klondex Board. The following is a summary of the principal reasons for the unanimous recommendation of the Independent Committee and the Klondex Board that Klondex Securityholders vote FOR the Arrangement Resolution. For the purposes of the following, references to Klondex Shareholders include holders of In-the-Money Klondex Options and Klondex RSUs who receive Klondex Shares pursuant to the Arrangement:

 

   

Significant Premium. The Hecla Consideration represents a value of US$2.47 per Klondex Share, which represents a premium of approximately 59% based on the 30-day VWAP of the Klondex Shares on the NYSE American on March 16, 2018, the last trading day prior to the announcement of the Arrangement, and a premium of approximately 72% based on the closing price of Klondex Shares on the NYSE American on March 16, 2018. In addition to the Hecla Consideration, Klondex Shareholders will also receive 0.125 of a Havilah Share for each Klondex Share held.

 

   

Meaningful Ownership in a Stronger Combined Company that Can Better Maximize the Value of Klondex Assets. The Arrangement will provide Klondex Shareholders who receive Hecla Shares in connection with the Arrangement with exposure to a diversified precious metals producer with operating mines in Québec, Alaska, Idaho, Mexico and Nevada that has a proven track record of successfully acquiring and optimizing underground assets, has a broader asset and commodity base delivering cash flow diversification and risk mitigation and superior financial strength and flexibility, with a lower cost of capital, to support development and exploration programs at the Fire Creek Mine, Hollister Mine and Midas Mine. It is expected that upon completion of the Arrangement, existing stockholders of Hecla and former Klondex Shareholders will own approximately 83.8% and 16.2%, respectively, of the outstanding Hecla Shares.

 

   

Alternatives Considered. The Independent Committee and the Klondex Board considered the financing options and other potential alternatives and strategies available to Klondex if it did not enter into the Arrangement Agreement and continued with a stand-alone plan, the financial condition of Klondex, the fact that none of the potential investors that had been contacted appeared to be interested in making a strategic investment in Klondex in the near-term, that discussions with these counterparties were not progressing quickly and that none of these entities had expressed an interest in acquiring all of Klondex, and determined that entering into the Arrangement Agreement was the best alternative for Klondex Securityholders and in the best interest of Klondex.

 

   

Enhanced Liquidity. The Hecla Shares receivable under the Arrangement will provide Klondex Shareholders with enhanced liquidity compared to Klondex Shares. The Hecla Shares are listed on the NYSE, and Hecla has significantly greater balance sheet strength, market capitalization and trading liquidity than Klondex. As at March 16, 2018, Hecla’s market capitalization was US$1.5 billion and Klondex’s was US$259 million, while Hecla’s average daily trading value during 2017 was US$29.1 million on the NYSE, whereas Klondex’s was US$10.3 million on the NYSE American.

 

   

Ownership of Havilah Shares. Klondex’s Canadian assets, including True North, the Bison Manitoba properties as well as additional Ontario and Manitoba mineral interests, will be transferred to Havilah and Klondex Shareholders will receive Havilah Shares pursuant to the Arrangement. In addition, Hecla



 

- 23 -


Table of Contents
 

will subscribe for US$7,000,000 of Havilah Shares, representing a 13.46% interest in the outstanding common shares of Havilah, providing important capital for Havilah. The Havilah Shares provide Klondex Shareholders with continued exposure to Klondex’s Canadian assets. It is a condition to the completion of the Arrangement that one of the TSX, TSXV or the Canadian Securities Exchange conditionally approve the listing of the Havilah Shares to be distributed under the Arrangement. Havilah has applied to have the Havilah Shares listed on the TSXV. Listing is subject to the approval of the TSXV in accordance with its original listing requirements. The TSXV has not conditionally approved the listing of the Havilah Shares on the TSXV and there is no assurance that the TSXV will approve the listing application. There is no present intention to list Havilah Shares for trading on any national securities exchange in the United States.

 

   

Fairness Opinions. GMP Securities, financial co-advisor to Klondex, and Maxit Capital, financial advisor to the Independent Committee, have each provided a fairness opinion concluding that as of the date thereof, and subject to and based on the assumptions, limitations and qualifications set out therein, the Arrangement Consideration to be received by Klondex Shareholders pursuant to the Arrangement is fair, from a financial point of view, to the Klondex Shareholders.

 

   

Acceptance by Klondex Directors and Officers of Klondex. All of the Klondex Directors and officers of Klondex have entered into either Klondex Voting Agreements or Klondex Support Agreements with Hecla. Under the Klondex Voting Agreements, each of the following Klondex Directors and officers of Klondex has agreed to, among other things, support the Arrangement and to vote their Klondex Shares and Other Affected Securities (including any Klondex Shares issued upon the exercise or exchange of any Other Affected Securities) in favour of the Arrangement Resolution: William Matlack, Blair Schultz, Paul Huet, Richard Hall, Barry Dahl, James Haggarty and Rodney Cooper. Under the Klondex Support Agreements, each of the following Klondex Directors and officers of Klondex has agreed to, among other things, cooperate with Klondex and Hecla to successfully complete the Arrangement: Brian Morris, Charles Oliver, John Antwi, Mark Daniel and Michael Doolin.

 

   

Support by Two Institutional Klondex Shareholders. Pursuant to the Klondex Support Letter Agreements, two of the Company’s institutional shareholders have agreed, among other things, to vote, or cause to be voted, all of the Klondex Shares that such shareholders exercise control over, representing in aggregate approximately 23.60% of the issued and outstanding Klondex Shares as of the Record Date, in favour of the Arrangement Resolution.

 

   

Ability to Respond to Unsolicited Superior Proposals. Under the terms of the Arrangement Agreement, the Klondex Board is able to respond to any unsolicited bona fide written proposal that, having regard to all of the terms and conditions of such proposal, if consummated in accordance with its terms, may lead to a Superior Proposal.

 

   

Negotiated Transaction. The Arrangement Agreement is the result of an arm’s length negotiation process and has been unanimously recommended by the Independent Committee, consisting of independent directors.

 

   

Securityholder Approval. The Arrangement must be approved by: (i) at least two-thirds (66 23%) of the votes cast at the Meeting by Klondex Shareholders, present in person or represented by proxy and entitled to vote at the Meeting; and (ii) at least two-thirds (66 23%) of the votes cast at the Meeting by Klondex Securityholders voting together as a single class, present in person or represented by proxy and entitled to vote at the Meeting.

 

   

Court Approval. The Arrangement must be approved by the Court, which will consider, among other things, the substantive and procedural fairness and reasonableness of the Arrangement to Klondex Securityholders.



 

- 24 -


Table of Contents
   

Dissent Rights. The Interim Order provides that any Registered Klondex Shareholder may, upon strict compliance with certain conditions, exercise Dissent Rights and, if ultimately successful, receive the fair value of their Dissent Shares in accordance with the Plan of Arrangement.

The foregoing summary of the information considered by the Klondex Board is not, and is not intended to be, exhaustive. In view of the wide variety of factors and information considered in connection with their evaluation of the Arrangement, the Klondex Board did not find it practicable to, and therefore did not, quantify or otherwise attempt to assign any relative weight to each specific factor or item of information considered in reaching their conclusions and recommendations.

See “Part 3 – Cautionary Statement Regarding Forward-Looking Information”, “Part 7 The Arrangement – Reasons for the Arrangement” and “Part 15 – Risk Factors Relating to the Arrangement” of this Circular.

Arrangement Mechanics

Under the Plan of Arrangement, commencing at the Effective Time, the following principal steps shall occur and shall be deemed to occur, without any further act or formality, in the order and with the timing set out below.

 

  (a)

Hecla will subscribe for common shares of Hecla Acquisition Subco in an amount equal to the value of the Maximum Cash Consideration and Maximum Shares Consideration, and the Depositary will hold the Maximum Cash Consideration and Maximum Shares Consideration on behalf of Hecla Acquisition Subco in satisfaction of the subscription price payable by Hecla.

 

  (b)

Each In-the-Money Klondex Option outstanding immediately prior to the Effective Time (whether vested or unvested) will, notwithstanding the terms of the Klondex Option Plans, be deemed to be fully vested and transferred to Klondex (free and clear of all Encumbrances) in exchange for that number of Klondex Shares (rounded down to the nearest whole number) obtained by dividing (i) the In-the-Money Amount of such option, by (ii) the Company Share Value, and upon such exchange the holder shall cease to have any rights as a holder in respect of such In-the-Money Klondex Option (other than the right to participate in the remainder of the Arrangement as a holder of the Klondex Shares received in exchange for such In-the-Money Klondex Option).

 

  (c)

Each Out-of-the-Money Klondex Option outstanding immediately prior to the Effective Time (whether vested or unvested) will, notwithstanding the terms of the Klondex Option Plans, be cancelled without any payment therefor, and the holder shall cease to have any rights in respect of such Out-of-the-Money Klondex Option.

 

  (d)

Each Klondex RSU outstanding immediately prior to the Effective Time (whether vested or unvested) will, notwithstanding the terms of the Klondex Option Plans, be deemed to be fully vested and transferred to Klondex (free and clear of all Encumbrances) in exchange for one Klondex Share, and upon such exchange the holder shall cease to have any rights as a holder in respect of such Klondex RSU (other than the right to participate in the remainder of the Arrangement as a holder of the Klondex Shares received in exchange for such Klondex RSU).

 

  (e)

Each Performance RSU outstanding immediately prior to the Effective Time (whether vested or unvested) will, notwithstanding the terms of the Klondex 2016 Stock Option Plan, be deemed to be fully vested and transferred to Klondex (free and clear of all Encumbrances) in exchange for a cash payment in an amount determined by Hecla to be properly due to such holder based on the terms of such Performance RSU, and upon such exchange the holder shall cease to have any rights in respect of such Performance RSU.

 

  (f)

The Klondex Option Plans will be cancelled.



 

- 25 -


Table of Contents
  (g)

Each Klondex Share held by a Dissenting Shareholder will be deemed to be surrendered to Klondex (free and clear of all Encumbrances) and cancelled, and such Dissenting Shareholder will cease to have any rights as a holder of Klondex Shares other than a claim to be paid the fair value of such Klondex Share by Klondex in accordance with Article 4 of the Plan of Arrangement.

 

  (h)

Klondex will transfer all of its legal and beneficial right, title and interest in the Havilah Property to Havilah in exchange for that number of Havilah Shares equal to the number of Klondex Shares issued and outstanding immediately following the preceding steps of the Arrangement (including the Klondex Shares issued to former holders of In-the-Money Klondex Options and Klondex RSUs, but excluding any Klondex Shares in respect of which Dissenting Shareholders have exercised Dissent Rights), all in accordance with the terms of the Havilah Contribution Agreement.

 

  (i)

In the course of a reorganization of Klondex’s authorized and issued share capital:

 

  (i)

the notice of articles and articles of Klondex will be amended to create a new class of shares, to be designated (the “Class A Shares”), having the rights and restrictions set out in Schedule “A” to the Plan of Arrangement; and

 

  (ii)

each Klondex Share issued and outstanding immediately following the preceding steps of the Arrangement will be exchanged with Klondex (free and clear of any Encumbrances) for one Class A Share and one Havilah Share, and upon such exchange each exchanged Klondex Share will be cancelled.

 

  (j)

The Initial Havilah Share held by Klondex will be cancelled without any payment thereon.

 

  (k)

All of the issued and outstanding Havilah Shares held by a holder of Havilah Shares will be consolidated on the basis of one post-consolidation Havilah Share for each eight pre-consolidation Havilah Shares, and any fractional Havilah Shares resulting from such consolidation will be cancelled without payment or compensation therefor.

 

  (l)

Each Class A Share held by a Participating Former Securityholder who: (i) has duly and validly completed and delivered the applicable Election Document(s) electing to receive the Combination Consideration; or (ii) has not completed and delivered the applicable Election Document(s) by the Election Deadline or who has otherwise failed to make a valid election to receive the Cash Consideration or Share Consideration in respect of such Participating Former Securityholder’s Klondex Shares, will be deemed to be transferred to Hecla Acquisition Subco (free and clear of all Encumbrances) in exchange for the Combination Consideration, consisting of US$0.8411 in cash and 0.4136 of a Hecla Share.

 

  (m)

Each Class A Share held by a Participating Former Securityholder who has duly and validly completed and delivered the applicable Election Document(s) electing to receive either (i) the Cash Consideration, or (ii) the Share Consideration in respect of all of such Participating Former Securityholder’s Klondex Shares will be deemed to be transferred to Hecla Acquisition Subco (free and clear of all Encumbrances) in exchange for:

 

  (i)

in the case of a Participating Former Securityholder validly electing to receive the Cash Consideration, the Cash Consideration (subject to proration as described in paragraph (n) below); and

 

  (ii)

in the case of a Participating Former Securityholder validly electing to receive the Share Consideration, the Share Consideration (subject to proration as described in paragraph (o) below).

 

  (n)

In the event that the sum of (A) the aggregate Combination Consideration Cash payable pursuant to paragraph (l) above and (B) the Aggregate Elected Cash, exceeds the Maximum Cash Consideration, each Participating Former Securityholder who validly elects to receive the Cash Consideration in



 

- 26 -


Table of Contents
 

respect of all of such Participating Former Securityholder’s Klondex Shares shall, notwithstanding paragraph (m) above:

 

  (i)

only be entitled to receive the Cash Consideration for that portion of their Class A Shares equal to a fraction, rounded to six decimal places, the numerator of which is the Maximum Cash Consideration minus the aggregate Combination Consideration Cash payable pursuant to paragraph (l) above, and the denominator of which is the Aggregate Elected Cash; and

 

  (ii)

be entitled to receive the Share Consideration for the remaining portion of their Class A Shares (including, for the avoidance of doubt, a corresponding portion of the Share Consideration for any fractional Class A Share included in such remaining portion).

 

  (o)

In the event that the sum of (A) the aggregate Combination Consideration Shares payable pursuant to paragraph (l) above and (B) the Aggregate Elected Shares, exceeds the Maximum Shares Consideration, each Participating Former Securityholder who validly elects to receive the Share Consideration shall, notwithstanding paragraph (m) above:

 

  (i)

only be entitled to receive the Share Consideration for that portion of their Class A Shares equal to a fraction, rounded to six decimal places, the numerator of which is the Maximum Shares Consideration minus the aggregate Combination Consideration Shares payable pursuant to paragraph (l) above, and the denominator of which is the Aggregate Elected Shares; and

 

  (ii)

be entitled to receive the Cash Consideration for the remaining portion of their Class A Shares (including, for the avoidance of doubt, any fractional Class A Share included in such remaining portion).

 

  (p)

The resignations of those persons who are directors of the Company immediately prior to the Effective Time, and the appointment of the New Klondex Directors, shall be deemed to be effective immediately following the transfers of the Class A Shares to Hecla Acquisition Subco pursuant to paragraphs (l) and (m) above.

 

  (q)

Upon the resignation of the those persons who are directors of the Company immediately prior to the Effective Time becoming effective, each Klondex DSU outstanding immediately prior to the Effective Time shall be cancelled in exchange for a cash payment by Klondex to the holder of such Klondex DSU equal to the Company Share Value.

 

  (r)

The Klondex DSU Plan will be terminated.

 

  (s)

The notice of articles of 0985472 will be altered to provide that 0985472 will become an unlimited liability company, and that the name of 0985472 will be “0985472 Unlimited Liability Company”.

 

  (t)

The notice of articles of Klondex will be altered to provide that Klondex will become an unlimited liability company, and that the name of Klondex will be “Klondex Unlimited Liability Company”.

 

  (u)

Klondex and 0985472 will amalgamate under Section 288 of the BCBCA to form Amalco One ULC, which will be named “Klondex Mines Unlimited Liability Company”.

 

  (v)

Hecla Acquisition Subco and Amalco One ULC will amalgamate under Section 288 of the BCBCA to form one unlimited liability company continuing under the name “Klondex Mines Unlimited Liability Company”.

 

  (w)

Havilah will issue Havilah Shares to Hecla equal to 15.5535% of the issued and outstanding Havilah Shares immediately prior to the step in this paragraph (w) in exchange for US$7,000,000, such that Hecla will hold approximately 13.46% of the issued and outstanding Havilah Shares immediately following the completion of the Arrangement.

See Appendix “E” of this Circular for a copy of the Plan of Arrangement.



 

- 27 -


Table of Contents

Spin-off Transaction

Pursuant to the Plan of Arrangement and the Havilah Contribution Agreement, Klondex will transfer all of its legal and beneficial right, title and interest in and to the Havilah Property to Havilah in consideration for the issuance by Havilah to Klondex of the Distribution Havilah Shares. The Distribution Havilah Shares will then be distributed to holders of Klondex Shares as part of a reorganization of the capital of Klondex, following which the Havilah Shares will be consolidated on the basis of one post-consolidation Havilah Share for each eight pre-consolidation Havilah Shares. Hecla will then subscribe for Havilah Shares in exchange for cash consideration of US$7,000,000, so that immediately following the completion of the Arrangement, Hecla will hold approximately 13.46% of the issued and outstanding Havilah Shares, while former holders of Klondex Shares (including any Klondex Shares issued to holders of In-the-Money Klondex Options and Klondex RSUs pursuant to the Arrangement) will hold approximately 86.54% of the issued and outstanding Havilah Shares.

See “Part 7 – The Arrangement – Spin-off Transaction” of this Circular.

Voting and Support Agreements

Effective March 16, 2018, Hecla entered into Klondex Support Agreements or Klondex Voting Agreements, as applicable, with each of the Klondex Directors and officers of Klondex, as well as Klondex Support Letter Agreements with two institutional Klondex Shareholders. The Klondex Voting Agreements and Klondex Support Letter Agreements set forth, among other things, the agreement of certain of the Klondex Locked-up Securityholders to vote their Klondex Shares and Other Affected Securities in favour of the Arrangement Resolution.

As of the Record Date, 46,416,374 of the outstanding 185,152,053 Affected Securities were subject to either a Klondex Voting Agreement or a Klondex Support Letter Agreement, representing approximately 25.07% of the votes which may be cast by Klondex Securityholders at the Meeting.

See “Part 7 – The Arrangement – Support Agreements” of this Circular.

Information Concerning the Company

Klondex is a reporting issuer in each of the provinces of Canada, except Québec. Klondex’s head office is located at 1055 West Hastings Street, Suite 2200, Vancouver, British Columbia, V6E 2E9, and its principal executive offices are located at 6110 Plumas Street, Suite A Reno, Nevada 89519. The Company’s telephone number is (775) 284-5757.

Klondex is a Canadian based precious metals mining company focused on the exploration, development and production of its 100%-owned gold and silver projects in north central Nevada, being the Fire Creek Mine located in Lander County, Nevada, the Hollister Mine located in Elko County, Nevada and the Midas Mine located in Elko County, Nevada. Klondex also has a 100% ownership interest in True North, which was placed on care and maintenance in 2018; however, True North, which will be owned by Havilah upon the completion of the Arrangement, will continue to process tailings, as contained in its mineral resource estimate, through the mill for the foreseeable future.

The Klondex Shares are listed and posted for trading on the TSX under the symbol “KDX” and on the NYSE American under the symbol “KLDX”.

For further information regarding Klondex, see “Part 20 – Information Concerning the Company” of this Circular.



 

- 28 -


Table of Contents

Information Concerning Havilah

Pursuant to the Plan of Arrangement and the Havilah Contribution Agreement, Klondex will transfer all of its entire legal and beneficial right, title and interest in and to the Havilah Property to Havilah in consideration for the Distribution Havilah Shares, following which the Distribution Havilah Shares will be distributed to former Klondex Shareholders. Additionally, Hecla will subscribe for Havilah Shares in the aggregate amount of US$7,000,000, such cash consideration to be contributed to the stated capital account of Havilah.

On completion of the Arrangement, former Klondex Shareholders will own approximately 86.54% of Havilah and Hecla will own approximately 13.46% of Havilah. After completion of the Arrangement, the business and operations of Havilah will be managed and operated as a stand-alone corporation. The principal executive office of Havilah will be located at 1055 West Hastings Street, Suite 2200, Vancouver, British Columbia, V6E 2E9.

For more information on Havilah, see “Part 21 – Information Concerning Havilah” of this Circular and Appendix “I” and Appendix “J” of this Circular.

Information Concerning Hecla

Hecla is a reporting issuer in each of the provinces of Canada and its shares are registered under the U.S. Exchange Act. Hecla is a company incorporated under, and governed by, the Laws of the State of Delaware. The principal executive office of Hecla is located at 6500 North Mineral Drive, Suite 200, Coeur d’Alene, Idaho, 83815-9408, United States of America, and the telephone number is (208) 769-4100.

Hecla is a U.S.-based precious and base metals mining company engaged in the exploration, acquisition, development, production and marketing of silver, gold, lead and zinc. In business since 1891, Hecla is among the oldest U.S.-based precious metals mining companies and one of the lowest-cost primary silver producers in North America. Hecla produces both metal concentrates, which it sells to smelters and brokers, and unrefined gold and silver precipitate and bullion bars (doré), which are sold as precipitate and doré, or are further refined before sale, to refiners and precious metals traders. Hecla has producing precious metals mining operations in Alaska, Idaho, Québec and Durango, Mexico and additional development and exploration projects in Alaska, Idaho, Canada and Mexico.

The Hecla Shares are listed for trading on the NYSE under the trading symbol “HL”.

For more information on Hecla, see “Part 21 – Information Concerning Hecla” of this Circular and Appendix “K” of this Circular.

Information Concerning the Combined Company

On completion of the Arrangement, Hecla will directly or indirectly own all of the issued and outstanding shares in the capital of Klondex. After completion of the Arrangement, the business and operations of Klondex will be managed and operated as a subsidiary of Hecla. Hecla expects that the business and operations of Hecla and Klondex will be consolidated and the principal executive office of the Combined Company will be located at Hecla’s current principal executive office, being 6500 North Mineral Drive, Suite 200, Coeur d’Alene, Idaho, 83815-9408, United States of America, and the telephone number will be (208) 769-4100.

For more information on the Combined Company, see “Part 23 – Information Concerning the Combined Company” of this Circular and Appendix “L” of this Circular.

Interests of Certain Persons in the Arrangement

In considering the unanimous recommendation of the Klondex Board with respect to the Arrangement, Klondex Securityholders should be aware that certain members of Klondex Management and the Klondex Board have



 

- 29 -


Table of Contents

certain interests in connection with the Arrangement that may present them with actual or potential conflicts of interest in connection with the Arrangement. The Klondex Board is aware of these interests and considered them along with other matters described under “Part 7 – The Arrangement – Reasons for the Arrangement” of this Circular.

Fees and Expenses

All expenses incurred in connection with the Arrangement and the transactions contemplated thereby shall be paid by the party incurring such expense, subject to an Expense Reimbursement Event. The estimated fees, costs and expenses of Klondex in connection with the Arrangement, including without limitation, financial advisors’ fees, filing fees, legal and accounting fees, proxy solicitation fees, run-off insurance and other administrative and professional fees and printing and mailing costs, are anticipated to be approximately US$[4.735] million (excluding any success fees), based on certain assumptions.

See “Part 7 – The Arrangement – Fees and Expenses” of this Circular.

Court Approval of the Arrangement

An arrangement under the BCBCA requires Court approval.

Interim Order

On [●], 2018, Klondex obtained the Interim Order providing for the calling and holding of the Meeting, the Dissent Rights and certain other procedural matters. The text of the Interim Order is set out in Appendix “F” of this Circular.

Final Order

Subject to the terms of the Arrangement Agreement, provided the Arrangement Resolution is approved by Klondex Securityholders at the Meeting in the manner required by the Interim Order, Klondex intends to make an application to the Court for the Final Order.

The application for the Final Order approving the Arrangement is currently scheduled for [●], 2018 at [● a.m./p.m. (Pacific Daylight Time)], or as soon thereafter as counsel may be heard, at the Vancouver Law Courts located at 800 Smithe Street, Vancouver, British Columbia, or at any other date and time as the Court may direct. Any Klondex Securityholder or any other interested party who wishes to appear or be represented and to present evidence or arguments at that hearing of the application for the Final Order must file and serve a response to petition and any evidence upon which they intend to rely no later than [● a.m./p.m. (Pacific Daylight Time)] on [●], 2018 along with any other documents required, all as set out in the Interim Order and the Notice of Petition, the text of which are set out in Appendix “F” to this Circular, and satisfy any other requirements of the Court. Such persons should consult with their legal advisors as to the necessary requirements. In the event that the hearing is adjourned, then, subject to further order of the Court, only those persons having previously filed and served a response to petition will be given notice of the adjournment.

The Court has broad discretion under the BCBCA when making orders with respect to the Arrangement. The Court will consider, among other things, the fairness and reasonableness of the Arrangement, both from a substantive and a procedural point of view. The Court may approve the Arrangement, either as proposed or as amended, on the terms presented or substantially on those terms. Depending upon the nature of any required amendments, Klondex and/or Hecla may determine not to proceed with the Arrangement.



 

- 30 -


Table of Contents

The Hecla Shares and the Havilah Shares to be issued to Klondex Securityholders pursuant to the Arrangement have not been and will not be registered under the U.S. Securities Act or the Securities Laws of any state of the United States and will be issued and exchanged in reliance upon the exemption from the registration requirements of the U.S. Securities Act provided by Section 3(a)(10) thereof and exemptions provided from the Securities Laws of each state of the United States in which Klondex Securityholders reside. Section 3(a)(10) of the U.S. Securities Act exempts the issuance of any securities issued in exchange for one or more bona fide outstanding securities from the general requirement of registration where the terms and conditions of the issuance and exchange of such securities have been approved by a court of competent jurisdiction that is expressly authorized by law to grant such approval, after a hearing upon the fairness of the terms and conditions of such issuance and exchange at which all persons to whom it is proposed to issue the securities have the right to appear and receive timely and adequate notice thereof. The Court will be advised prior to the hearing of the application for the Final Order that if the terms and conditions of the Arrangement, and the fairness thereof, are approved by the Court, the Hecla Shares and Havilah Shares to be received by Klondex Securityholders pursuant to the Arrangement will not require registration under the U.S. Securities Act. Accordingly, the Final Order of the Court will, if granted, constitute a basis for the exemption from the registration requirements of the U.S. Securities Act with respect to the issuance and exchange of the Hecla Shares for the Klondex Shares and the issuance of the Havilah Shares pursuant to the Arrangement.

See “Part 11 – Securities Law Matters – United States Securities Law Matters” of this Circular. For a copy of the Interim Order, see Appendix “F” of this Circular and for a copy of the notice of application for the Final Order, see Appendix “G” of this Circular.

The Arrangement Agreement

A description of certain provisions of the Arrangement Agreement is included in this Circular under the heading “Part 8 – The Arrangement Agreement”. The description is not comprehensive and is qualified in its entirety by the full text of the Arrangement Agreement which is attached to this Circular as Appendix “P” and has been filed under the Company’s issuer profile on SEDAR at www.sedar.com.

Regulatory Matters

The Klondex Shares are listed and posted for trading on the TSX and NYSE American and the Hecla Shares are listed and posted for trading on the NYSE. It is a condition of the Arrangement that the NYSE shall have approved for listing the Hecla Shares to be issued in connection with the Arrangement. NYSE approval for the listing of the Hecla Shares to be issued in connection with the Arrangement is required to be obtained prior to the closing of the Arrangement. Hecla will apply to have the Hecla Shares listed on the NYSE. Listing is subject to the approval of the NYSE in accordance with its original listing requirements, and there is no assurance that the NYSE will approve the listing application.

It is also a condition to the completion of the Arrangement that one of the TSX, TSXV or the Canadian Securities Exchange conditionally approve the listing of the Havilah Shares to be distributed under the Arrangement. Havilah has applied to have the Havilah Shares listed on the TSXV. Listing is subject to the approval of the TSXV in accordance with its original listing requirements. The TSXV has not conditionally approved the listing of the Havilah Shares on the TSXV and there is no assurance that the TSXV will approve the listing application. There is no present intention to list Havilah Shares for trading on any national securities exchange in the United States.

For information on the notifications under the HSR Act required, See “Part 12 – Regulatory Matters”. For more information regarding the Interim Order and the Final Order, see “Part 7 – The Arrangement – Court Approval of the Arrangement” and Appendix “F” and Appendix “G” of this Circular.



 

- 31 -


Table of Contents

Securities Law Matters

The Hecla Shares and the Havilah Shares will generally be freely transferable under United States federal securities laws, except for restrictions on affiliates.

Klondex Shareholders are urged to obtain independent advice in respect of the consequences to them of the Arrangement having regard to their particular circumstances. Each Klondex Shareholder is urged to consult his or her professional advisors to determine the conditions and restrictions applicable to trades in Hecla Shares and Havilah Shares.

For more information, see “Part 11 – Securities Law Matters – Canadian Securities Law Matters” and “Part 11 – Securities Law Matters – United States Securities Law Matters” of this Circular.

Dissenting Klondex Shareholders’ Rights

The Interim Order expressly provides Registered Klondex Shareholders with the right to dissent with respect to the Arrangement Resolution. Each Dissenting Shareholder is entitled to be paid the fair value (determined immediately before the Arrangement Resolution is approved) of all, but not less than all, of the holder’s Klondex Shares, provided that the holder validly dissents to the Arrangement Resolution and the Arrangement becomes effective.

To exercise Dissent Rights, a Klondex Shareholder must dissent with respect to all Klondex Shares of which he, she or it is the registered and beneficial owner. A Registered Klondex Shareholder who wishes to dissent must deliver written notice of dissent to Klondex and such notice of dissent must strictly comply with the requirements of Section 242 of the BCBCA, as modified and supplemented by the Plan of Arrangement, the Interim Order and the Final Order. Any failure by a Klondex Shareholder to fully comply with the provisions of the BCBCA, as modified and supplemented by the Plan of Arrangement, the Interim Order and the Final Order, may result in the loss of that holder’s Dissent Rights. Voting against the Arrangement Resolution does not satisfy the notice requirements under Division 2 of Part 8 of the BCBCA. Non-Registered Klondex Shareholders who wish to exercise Dissent Rights must cause each Registered Klondex Shareholder holding their Klondex Shares to deliver the notice of dissent, or, alternatively, make arrangements to become a Registered Klondex Shareholder.

To exercise Dissent Rights, a Registered Klondex Shareholder must prepare a separate notice of dissent for himself, herself or itself, if dissenting on his, her or its own behalf, and for each other Non-Registered Klondex Shareholder who beneficially owns Klondex Shares registered in the Registered Klondex Shareholder’s name and on whose behalf the Registered Klondex Shareholder is dissenting; and must dissent with respect to all of the Klondex Shares registered in his, her or its name or if dissenting on behalf of a Non-Registered Klondex Shareholder, with respect to all of the Klondex Shares registered in his, her or its name and beneficially owned by the Non-Registered Klondex Shareholder on whose behalf the Registered Klondex Shareholder is dissenting. The notice of dissent must set out the number of Klondex Shares in respect of which the Dissent Rights are being exercised (the “Notice Shares”) and: (a) if such Notice Shares constitute all of the Klondex Shares of which the Klondex Shareholder is the registered and beneficial owner and the Klondex Shareholder owns no other Klondex Shares beneficially, a statement to that effect; (b) if such Notice Shares constitute all of the Klondex Shares of which the Klondex Shareholder is both the registered and beneficial owner, but the Klondex Shareholder owns additional Klondex Shares beneficially, a statement to that effect, including the names of the Registered Klondex Shareholder(s) of such additional Klondex Shares, the number of such additional Klondex Shares held by each such Registered Klondex Shareholder and a statement that written notices of dissent are being or have been sent with respect to such other Klondex Shares; or (c) if the Dissent Rights are being exercised by a Registered Klondex Shareholder who is not the beneficial owner of such Notice Shares, a statement to that effect including



 

- 32 -


Table of Contents

the name and address of the Non-Registered Klondex Shareholder(s) of such Klondex Shares and a statement that each such Registered Klondex Shareholder is dissenting with respect to all Klondex Shares of the Non-Registered Klondex Shareholder registered in such Registered Klondex Shareholder’s name.

Each Klondex Shareholder wishing to avail himself, herself or itself of Dissent Rights should carefully consider and comply with the provisions of the Interim Order and Division 2 of Part 8 of the BCBCA, which are attached to this Circular as Appendix “F” and Appendix “H”, respectively, and seek his, her or its own legal advice.

It is a condition of the Arrangement that holders of no more than 5% of the issued and outstanding Klondex Shares shall have exercised Dissent Rights, or have instituted proceedings to exercise Dissent Rights, in connection with the Arrangement.

See “Part 14 – Dissenting Shareholders’ Rights” of this Circular.

Risk Factors Relating to the Arrangement

Klondex Securityholders should carefully consider the risk factors relating to the Arrangement. Some of these risks include, but are not limited to: (a) Hecla and Klondex may not integrate successfully; (b) uncertainty surrounding the Arrangement could adversely affect Klondex’s retention of customers and suppliers and could negatively impact Klondex’s future business and operations; (c) the pro forma condensed combined financial statements are presented for illustrative purposes only and may not be an indication of the Combined Company’s financial condition or results of operations following the Arrangement; (d) directors and executive officers of Klondex may have interests in the Arrangement that are different from those of Klondex Securityholders generally; (e) the issuance of a significant number of Hecla Shares, or securities convertible into Hecla Shares, could adversely affect the market price of the Hecla Shares; (f) the Arrangement Agreement may be terminated in certain circumstances, including in the event of a change having a Klondex Material Adverse Effect; (g) there can be no certainty that all conditions precedent to the Arrangement will be satisfied; (h) the exchange ratio is fixed and will not be adjusted to reflect any change in the market value of the Hecla Shares or Klondex Shares prior to the closing of the Arrangement; (i) Klondex will incur costs even if the Arrangement is not completed and may have to pay the Klondex Termination Fee to Hecla in certain circumstances; (j) if the Arrangement is not approved by the Klondex Securityholders, or the Arrangement is otherwise not completed, then the market price for Klondex Shares may decline; (k) if the Arrangement Resolution is not approved by the Klondex Securityholders, Klondex will continue as a standalone entity and will need to consider and secure financing alternatives; (l) owning Hecla Shares will expose Klondex Shareholders to different risks; (m) the value of the Havilah Shares may fluctuate; and (n) the TSXV may not approve Havilah’s listing application.

See “Part 3 – Cautionary Statement Regarding Forward-Looking Information” and “Part 15 – Risk Factors Relating to the Arrangement” of this Circular.

Additional risks and uncertainties, including those currently unknown or considered immaterial by Klondex, may also adversely affect the trading price of the Klondex Shares, the Hecla Shares, the Havilah Shares and/or the businesses of Klondex, Hecla and Havilah following the Arrangement. In addition to the risk factors relating to the Arrangement set out below, Klondex Securityholders should also carefully consider the risk factors associated with the businesses of Klondex and Hecla included in this Circular. See “Part 15 – Risk Factors Relating to the Arrangement” of this Circular and “Part 20 – Information Concerning the Company” of this Circular. See Appendix “K” of this Circular for a description of these risks relating to Hecla.



 

- 33 -


Table of Contents

Procedure for Receipt of Arrangement Consideration

Consideration Election and Procedure

Registered Klondex Shareholders and registered holders of Klondex Options and/or Klondex RSUs will have the right to elect the form of Hecla Consideration they wish to receive under the Arrangement, as described in greater detail below. Such election must be made by delivering to the Depositary the applicable validly completed Election Document(s) (with accompanying Klondex Share certificate(s) or DRS Statement if you are a Registered Klondex Shareholder) prior to the Election Deadline, which is 1:00 p.m. (Pacific Daylight Time) / 4:00 p.m. (Eastern Daylight Time) on [●], 2018. If Klondex and Hecla determine that the Effective Date is not reasonably likely to occur by the tenth Business Day after [●], 2018, they may by agreement determine a new Election Deadline (which Klondex and Hecla expect to be not more than ten Business Days before the Effective Date), in which case notice of the new Election Deadline will be published.

The determination of the Depositary as to whether elections have been properly made and when elections were received by it will be binding. REGISTERED KLONDEX SHAREHOLDERS AND HOLDERS OF KLONDEX OPTIONS AND KLONDEX RSUS WHO DO NOT MAKE A SPECIFIC ELECTION PRIOR TO THE ELECTION DEADLINE, OR FOR WHOM THE DEPOSITARY DETERMINES THAT THEIR ELECTION WAS NOT PROPERLY MADE WITH RESPECT TO ANY KLONDEX SHARES, IN-THE-MONEY KLONDEX OPTIONS OR KLONDEX RSUS, AS APPLICABLE, WILL BE DEEMED TO HAVE ELECTED TO RECEIVE THE COMBINATION CONSIDERATION IN RESPECT OF SUCH SECURITIES.

See “Part 16 – Procedure for Receipt of Arrangement Consideration” of this Circular.

Each Registered Klondex Shareholder may elect, in a duly completed Letter of Transmittal and Election Form delivered to the Depositary prior to the Election Deadline, to receive, on account of the Hecla Consideration receivable for all, but not less than all, of the Klondex Shares held by such Klondex Shareholder, either: (a) the Cash Consideration; (b) the Share Consideration; or (c) the Combination Consideration (with the Combination Consideration being the default election for those who do not make an election or who do not properly make an election), provided that any election to receive the Cash Consideration or Share Consideration will be subject to proration as described below. Similarly, each registered holder of Klondex Options and/or Klondex RSUs may elect, in a duly completed Option/RSU Election Form delivered to the Depositary prior to the Election Deadline, to receive, on account of the Hecla Consideration receivable for each Klondex Share to be received by such holder for their In-the-Money Klondex Options and/or Klondex RSUs pursuant to the Arrangement, either: (a) the Cash Consideration; (b) the Share Consideration; or (c) the Combination Consideration (with the Combination Consideration being the default election for those who do not make an election or who do not properly make an election), provided that any election to receive the Cash Consideration or Share Consideration will be subject to proration as described below.

Proration

Set forth below is a summary description of the proration calculations arising as a result of the Maximum Cash Consideration and Maximum Shares Consideration that Hecla is required to deliver under the Arrangement. For purposes of the following, references to Klondex Shareholders include holders of In-the-Money Klondex Options and Klondex RSUs who receive Klondex Shares pursuant to the Arrangement. As a result of the maximums on both cash and Hecla Shares that Hecla is required to deliver under the Arrangement, along with the proration calculations that ensue from those maximums, it is likely that Klondex Shareholders who elect to receive either the Cash Consideration or the Share Consideration will end up receiving both cash and Hecla Shares, notwithstanding their election. If all Klondex Shareholders were to elect to receive either the Cash Consideration or the Share Consideration, then as a result of proration the Hecla Consideration received by each Klondex Shareholder would consist of 0.4136 of a Hecla Share and US$0.8411 in cash for each Klondex Share.



 

- 34 -


Table of Contents

Cash Consideration Proration

Klondex Shareholders who validly elect to receive the Cash Consideration will, subject to the proration mechanism described below, be entitled to receive US$2.47 in cash for each Klondex Share held by them. The Maximum Cash Consideration that Hecla is required to deliver under the Arrangement is US$157,410,417. The Maximum Cash Consideration will be allocated, first, to Klondex Shareholders who elect, or who are deemed to have elected, to receive the Combination Consideration, to the extent of US$0.8411 per Klondex Share. Consequently, Klondex Shareholders who elect to receive the Cash Consideration will only be entitled to receive the Cash Consideration in respect of each Klondex Share held by them if other Klondex Shareholders elect to receive the Share Consideration in respect of an equivalent or greater number of Klondex Shares. If the number of Klondex Shares in respect of which Klondex Shareholders elect to receive the Share Consideration is less than the number of Klondex Shares in respect of which Klondex Shareholders elect to receive the Cash Consideration, Klondex Shareholders who elect to receive the Cash Consideration will, instead of receiving US$2.47 in cash for each Klondex Share, receive a lesser amount of cash (which shall be not less than US$0.8411) and a portion of a Hecla Share (not exceeding 0.4136 of a Hecla Share) for each Klondex Share, all as more particularly provided for in the Plan of Arrangement. If all Klondex Shareholders validly elect to receive the Cash Consideration, or if no Klondex Shareholders elect to receive the Share Consideration, a Klondex Shareholder electing to receive the Cash Consideration would receive US$0.8411 in cash and 0.4136 of a Hecla Share for each Klondex Share held by them.

Share Consideration Proration

Klondex Shareholders who validly elect to receive the Share Consideration will, subject to the proration mechanism described below, be entitled to receive 0.6272 of a Hecla Share for each Klondex Share held by them. The Maximum Shares Consideration that Hecla is required to deliver under the Arrangement is 77,411,859 Hecla Shares. The Maximum Shares Consideration will be allocated, first, to Klondex Shareholders who elect, or who are deemed to have elected, to receive the Combination Consideration, to the extent of 0.4136 of a Hecla Share per Klondex Share. Consequently, Klondex Shareholders who elect to receive the Share Consideration will only be entitled to receive the Share Consideration in respect of each Klondex Share held by them if other Klondex Shareholders elect to receive the Cash Consideration in respect of an equivalent or greater number of Klondex Shares. If the number of Klondex Shares in respect of which Klondex Shareholders elect to receive the Cash Consideration is less than the number of Klondex Shares in respect of which Klondex Shareholders elect to receive the Share Consideration, Klondex Shareholders who elect to receive the Share Consideration will, instead of receiving 0.6272 of a Hecla Share for each Klondex Share, receive a lesser portion of a Hecla Share (which shall not be less than 0.4136 of a Hecla Share) and cash (not exceeding US$0.8411) for each Klondex Share, all as more particularly provided for in the Plan of Arrangement. If all Klondex Shareholders validly elect to receive the Share Consideration, or if no Klondex Shareholders elect to receive the Cash Consideration, a Klondex Shareholder electing to receive the Share Consideration would receive US$0.8411 in cash and 0.4136 of a Hecla Share for each Klondex Share held by them.

Fractional Interests

No fractional Hecla Shares or Havilah Shares shall be issued to any Participating Former Securityholder pursuant to the Arrangement. The number of Hecla Shares and Havilah Shares to be issued to a Participating Former Securityholder shall in each case be rounded down to the nearest whole number of shares, and such Participating Former Securityholder shall not be entitled to any compensation in respect of any such fractional Hecla Share or Havilah Share.

Any cash component of the Arrangement Consideration payable to a Participating Former Securityholder pursuant to the Arrangement that is less than one cent will be rounded down to the next whole cent.



 

- 35 -


Table of Contents

Withholding Rights

Klondex, Hecla, Hecla Acquisition Subco, Havilah and the Depositary will be entitled to deduct and withhold from any consideration otherwise payable to any Former Securityholder under the Plan of Arrangement and from any and all dividends or other distributions otherwise payable to any Former Securityholder (including any payment to Dissenting Shareholders) such amounts as they are required to deduct and withhold with respect to such payment under the Tax Act, the U.S. Tax Code or any provision of any applicable federal, provincial, state, local or foreign tax law or treaty, in each case, as amended, and may sell on behalf of any Former Securityholder any Hecla Shares or Havilah Shares deliverable to such Former Securityholder, in order to remit to a taxing authority a sufficient amount to comply with such tax laws. To the extent that amounts are so withheld, such withheld amounts shall be treated for all purposes hereof as having been paid to the particular person, provided that such amounts are actually remitted to the appropriate Governmental Authority by or on behalf of Klondex, Hecla, Hecla Acquisition Subco, Havilah or the Depositary, as the case may be.

Conditions to the Arrangement Becoming Effective

In order for the Arrangement to become effective, certain conditions must have been satisfied or waived which conditions are summarized below.

Mutual Conditions

The respective obligations of Klondex and Hecla to complete the Arrangement are subject to the satisfaction, or mutual waiver by the Parties, on or before the Effective Date, of, among other things, each of the following conditions:

 

  (a)

the Arrangement Resolution will have been approved by the Klondex Securityholders at the Meeting in accordance with the Interim Order and applicable Laws;

 

  (b)

each of the Interim Order and Final Order will have been obtained in form and substance satisfactory to each of Klondex and Hecla each acting reasonably, and will not have been set aside or modified in any manner unacceptable to either Klondex or Hecla, each acting reasonably, on appeal or otherwise;

 

  (c)

the Arrangement Filings required to be sent to the Registrar in accordance with the Arrangement Agreement and the BCBCA will be in form and content satisfactory to Klondex and Hecla, each acting reasonably;

 

  (d)

all necessary filings pursuant to the HSR Act will have been made and all applicable waiting periods thereunder will have expired or been terminated;

 

  (e)

there will not be any Law or order in effect (whether temporary, preliminary or permanent) that has the effect of prohibiting the consummation of the Arrangement, and no litigation instituted by any Governmental Authority seeking to prohibit the consummation of the Arrangement will be pending;

 

  (f)

Klondex and Havilah shall have entered into the Havilah Contribution Agreement; and

 

  (g)

one of the TSX, the TSXV or the Canadian Securities Exchange shall have conditionally approved the listing of the Havilah Shares to be distributed pursuant to the Arrangement.

The foregoing conditions are for the mutual benefit of the Parties and may be waived by mutual consent of Klondex and Hecla in writing at any time.



 

- 36 -


Table of Contents

Klondex Conditions

The obligation of Klondex to complete the Arrangement is subject to the satisfaction, or waiver by Klondex, of, among other things, the following additional conditions on or before the Effective Date:

 

  (a)

Hecla and Hecla Acquisition Subco will have complied in all material respects with their obligations, covenants and agreements in the Arrangement Agreement to be performed and complied with on or before the Effective Date;

 

  (b)

the representations and warranties of Hecla will be true and correct, subject to certain exceptions as set forth in the Arrangement Agreement;

 

  (c)

no: (i) Law shall have been enacted, issued, promulgated, enforced, made, entered, issued or applied; or (ii) proceeding shall have been taken, or be pending or threatened under any Laws or by any Governmental Authority (whether temporary, preliminary or permanent), that makes the Arrangement illegal or otherwise directly or indirectly cease trades, enjoins, restrains or otherwise prohibits completion of the Arrangement;

 

  (d)

Hecla shall have complied with its obligations under Section 2.18 of the Arrangement Agreement to deliver to the Depositary the Maximum Cash Consideration and Maximum Shares Consideration payable to Klondex Securityholders pursuant to the Arrangement and the Canadian dollar equivalent of US$7,000,000 determined as at the close of business on the second business day immediately preceding the Effective Date, and the Depositary shall have confirmed receipt of such Maximum Cash Consideration, Maximum Shares Consideration and the Canadian dollar equivalent of US$7,000,000; and

 

  (e)

there shall not have occurred, prior to the Effective Time, a Hecla Material Adverse Effect.

The foregoing conditions are for the exclusive benefit of Klondex and may be waived by Klondex in whole or in part, in its sole discretion, at any time without prejudice to any other rights that Klondex may have.

Hecla and Hecla Acquisition Subco Conditions

The obligations of Hecla and Hecla Acquisition Subco to complete the Arrangement are subject to the satisfaction, or waiver by Hecla, of, among other things, the following additional conditions on or before the Effective Date:

 

  (a)

Klondex shall have complied in all material respects with its obligations, covenants and agreements in the Arrangement Agreement to be performed and complied with on or before the Effective Date;

 

  (b)

the representations and warranties of Klondex will be true and correct, subject to certain exceptions as set forth in the Arrangement Agreement;

 

  (c)

no Law shall have been enacted, issued, promulgated, enforced, made, entered, issued or applied; or proceeding shall have been taken, or be pending or threatened under any Laws or by any Governmental Authority (whether temporary, preliminary or permanent), that: (i) makes the Arrangement illegal or otherwise directly or indirectly cease trades, enjoins, restrains or otherwise prohibits completion of the Arrangement or the payment of the Arrangement Consideration; (ii) prohibits, restricts or imposes terms or conditions (beyond those terms and conditions which Hecla is required to accept pursuant the Arrangement) on the ownership or operation by Hecla of the business or assets of Hecla, their affiliates and related entities, Klondex or any of Klondex’s subsidiaries and related entities; (iii) compels Hecla to dispose of or hold separate any of the business or assets of Hecla, their affiliates and related entities, Klondex or any of Klondex’s subsidiaries and related entities as a result of the Arrangement; or (iv) materially impedes, prevents or delays the consummation of the Arrangement, or if the Arrangement were to be consummated, has a Klondex Material Adverse Effect;



 

- 37 -


Table of Contents
  (d)

each of the consents, approvals and notices required from any third party under any Contracts or as otherwise required to proceed with the transactions contemplated by the Arrangement Agreement will have been obtained;

 

  (e)

Klondex Shareholders will not have exercised Dissent Rights, or have instituted proceedings to exercise Dissent Rights, other than Klondex Shareholders representing not more than 5% of the Klondex Shares then outstanding;

 

  (f)

Hecla shall have received a form of payout letter from Investec that is acceptable to Hecla, acting reasonably, providing that Investec will discharge the security interests granted by Klondex and its subsidiaries in connection with the Investec Facility Agreement upon receipt by Investec of the amounts set out in the payout letter; and

 

  (g)

there will not have occurred, prior to the Effective Time: (i) a Klondex Material Adverse Effect; or (ii) any event, occurrence, circumstance or development that could reasonably be expected to have a Klondex Material Adverse Effect.

The foregoing conditions are for the exclusive benefit of Hecla and may be waived by Hecla in whole or in part, in its sole discretion, at any time without prejudice to any other rights that Hecla may have.

Non-Solicitation of Acquisition Proposals

Pursuant to the Arrangement Agreement, Klondex has agreed not to, directly or indirectly, solicit, initiate, encourage or facilitate any Acquisition Proposals. However, the Klondex Board does have the right to consider and accept a Superior Proposal under certain conditions. Hecla has the right to offer to amend the terms of the Arrangement Agreement in response to any Acquisition Proposal that the Klondex Board has determined is a Superior Proposal in accordance with the Arrangement Agreement. If Klondex accepts a Superior Proposal and either party terminates the Arrangement Agreement, then Klondex must pay Hecla the Termination Fee.

See “Part 8 – The Arrangement Agreement – Non-Solicitation of Acquisition Proposals” of this Circular.

Termination of Arrangement Agreement and Termination Fee

The Arrangement Agreement may be terminated prior to the Effective Time in certain circumstances, many of which lead to payment by Klondex to Hecla of the Termination Fee.

Hecla is entitled to be paid a termination fee in the amount of US$21 million upon the occurrence of any of the following events:

 

  (a)

each of the following has occurred: (i) the Arrangement Agreement has been terminated as a result of the Arrangement failing to be completed by the Outside Date or the Arrangement Resolution not being approved by the Klondex Shareholders; (ii) prior to such termination, another person has publicly announced an Acquisition Proposal or a proposed or intended Acquisition Proposal (and it was not withdrawn); and (iii) within 365 days of the termination, an Acquisition Proposal is consummated or Klondex has entered into an Acquisition Agreement in respect of any Acquisition Proposal, which Acquisition Proposal is subsequently completed, provided, however, that for the purposes of this paragraph all references to “20%” in the definition of Acquisition Proposal will be changed to “50%”;

 

  (b)

the Arrangement Agreement has been terminated by Hecla as a result of a Change of Recommendation, other than a Change of Recommendation in connection with a Hecla Material Adverse Effect;

 

  (c)

the Arrangement Agreement has been terminated by Hecla as a result of a withdrawal in recommendation by Klondex, the Klondex Board or any committee thereof;



 

- 38 -


Table of Contents
  (d)

the Arrangement Agreement has been terminated by Hecla as a result of an endorsement of any Acquisition Proposal by Klondex, the Klondex Board or any committee thereof; or

 

  (e)

the Arrangement Agreement has been terminated by Klondex as a result of the Klondex Board approving or authorizing a definitive agreement for the implementation of a Superior Proposal, provided Klondex has otherwise complied with its obligations in that regard.

In the case of the occurrence of the Expense Reimbursement Event, Klondex will reimburse Hecla for its reasonable and documented out-of-pocket expenses incurred in connection with the Arrangement, including all legal, accounting, taxation, technical and engineering and investment banking fees and disbursements. In the event Klondex pays Hecla the termination fee of US$21 million, no fees for the Expense Reimbursement Event will be reimbursed by Klondex.

Klondex is entitled to be paid the Hecla termination fee in the amount of US$21 million if the Arrangement Agreement has been terminated by Hecla in the event Hecla enters into a definitive written agreement concerning a Hecla Acquisition Proposal, provided that the termination of the Arrangement Agreement is required by the party acquiring Hecla. Where termination of the Arrangement Agreement is required, either Hecla or the party acquiring Hecla will advance or otherwise provide the Hecla termination fee to Klondex in accordance with the Arrangement Agreement.

See “Part 8 – The Arrangement Agreement – Termination” and “Part 8 – The Arrangement Agreement – Termination Fee” of this Circular.

Limitation and Proscription After Three Years

To the extent that a Participating Former Securityholder has not complied with the provisions of the Plan of Arrangement described under the heading “Part 16 – Procedure for Receipt of Arrangement Consideration” of this Circular, on or before the date that is three years after the Effective Date, then the aggregate cash forming part of the Hecla Consideration to which such Participating Former Securityholder was entitled under the Arrangement shall be returned to Hecla and the Hecla Shares and Havilah Shares that such Participating Former Securityholder was entitled to receive shall be automatically cancelled without any repayment of capital in respect thereof and the certificates representing such Hecla Shares and the Havilah Shares shall be delivered by the Depositary to Hecla or Havilah, as applicable, and the interest of the Participating Former Securityholder in such cash, Hecla Shares and Havilah Shares to which it was entitled shall be terminated.

Effects of the Arrangement on Klondex Shareholders’ Rights

Klondex Shareholders receiving Hecla Shares under the Arrangement will become stockholders of Hecla. Hecla is incorporated under the laws of the State of Delaware.

The rights of a stockholder of a Delaware corporation differ from the rights of a shareholder of a BCBCA corporation. See Appendix “O” of this Circular for a summary comparison of the rights of Klondex Shareholders and stockholders of Hecla. The rights of Klondex Shareholders are governed by the BCBCA and by Klondex’s notice of articles and articles. Following the Arrangement, Klondex Shareholders who receive Hecla Shares as part of the Arrangement will become stockholders of Hecla and as such their rights will be governed by the Delaware General Corporation Law, as amended (the “DGCL”) and by Hecla’s certificate of incorporation and by-laws. Klondex Shareholders are encouraged to consult with their legal advisors for greater detail with respect to these differences.

Certain Canadian Federal Income Tax Considerations

For a summary of the principal Canadian federal income tax considerations generally applicable under the Tax Act to certain Klondex Shareholders who exchange their Klondex Shares for the Arrangement Consideration



 

- 39 -


Table of Contents

pursuant to the Arrangement, see “Part 17 – Certain Canadian Federal Income Tax Considerations” of this Circular.

The summary at “Part 17 – Certain Canadian Federal Income Tax Considerations” of this Circular is not intended to be legal or tax advice to any particular Klondex Shareholder. Accordingly, Klondex Shareholders are urged to consult their own tax advisors with respect to their particular circumstances.

Holders of Other Affected Securities should consult their own tax advisors with respect to the Canadian federal income tax considerations applicable to them in connection with the exchange of their Other Affected Securities pursuant to the Arrangement.

Certain United States Federal Income Tax Considerations

Klondex intends, and this summary assumes, that the exchange by the Klondex Shareholders of the Klondex Shares for Class A Shares and Havilah Shares will properly be treated as a distribution by Klondex of the Havilah Shares.

Subject to the PFIC (as defined below) rules discussed below, a U.S. Holder (as defined below) of Klondex Shares which receives Havilah Shares will generally receive such Havilah Shares as a dividend to the extent of Klondex’s current “earnings and profits” (as determined for U.S. federal income tax purposes), with any excess treated first as a non-taxable return of capital with respect to a Klondex Share to the extent of such U.S. Holder’s adjusted tax basis in each Klondex Share and thereafter as gain from the sale or exchange of each such Klondex Share. A U.S. Holder’s exchange of Klondex Shares for the Hecla Consideration pursuant to the Arrangement will be a taxable transaction for U.S. federal income tax purposes.

A non-U.S. Holder (as defined below) generally will not be subject to U.S. federal income tax (including withholding tax) on gain upon the receipt of Havilah Shares or the exchange of Klondex Shares for the Hecla Consideration unless (i) such gain is effectively connected with such non-U.S. Holder’s conduct of a trade or business in the United States within the meaning of Section 871(b) or Section 882(a) of the U.S. Tax Code and, if an applicable tax treaty applies, is attributable to a permanent establishment maintained by the non-U.S. Holder in the United States; or (ii) the non-U.S. Holder is an individual who is present in the United States for 183 days or more in the taxable year of sale, exchange or other disposition and certain additional conditions are met.

The foregoing summary is qualified in its entirety by the more detailed summary set forth in this Circular under “Part 18 – Certain United States Federal Income Tax Considerations” below, and neither this description nor the longer discussion is intended to be legal or tax advice to any particular Klondex Securityholder. Accordingly, U.S. Holders should consult their own tax advisors with respect to their particular circumstances.

See “Part 18 – Certain United States Federal Income Tax Considerations” of this Circular.

Annual and Other Matters

Please see the discussion under the headings “Part 25 – Annual Matters” and “Part 27 – Other Matters” of this Circular for a more detailed description of the annual and other business to be transacted at the Meeting.



 

- 40 -


Table of Contents

PART 5. GENERAL PROXY INFORMATION

Solicitation of Proxies

This Circular and the accompanying forms of proxy are furnished in connection with the solicitation of proxies by management of the Company for use at the Meeting to be held on [], 2018, at the time and place and for the purposes set forth in the accompanying Notice of Meeting. It is expected that the solicitation of proxies will be primarily made by mail and may be supplemented by telephone or other personal contact by the directors, officers and employees of the Company. Directors, officers and employees of the Company will not receive any extra compensation for such activities. The cost of solicitation by management will be borne by the Company. The Company has retained D.F. King as its Proxy Solicitation Agent to assist in the solicitation of proxies and may also retain other persons as it deems necessary to aid in the solicitation of proxies with respect to the Meeting. The Company and D.F. King entered into an engagement agreement with customary terms and conditions, which provides that the Proxy Solicitation Agent will be paid a fee of up to US$30,000 plus out-of-pocket expenses. It is expected that this Circular, the accompanying Notice of Meeting, the forms of proxy and Election Document(s) will first be made available to Klondex Securityholders on or about [●], 2018.

Appointment and Revocation of Proxies

The persons named in the enclosed forms of proxy are directors and officers of the Company. A Klondex Securityholder desiring to appoint some other person (who need not be a Klondex Securityholder) to represent the Klondex Securityholder at the Meeting and any adjournment thereof may do so either by inserting such person’s name in the blank space provided in the applicable form of proxy or by completing another proper form of proxy and, in either case, depositing his or her duly executed form of proxy with the Company’s Transfer Agent and Registrar, Computershare Investor Services Inc., by mail at 3rd Floor, 510 Burrard Street, Vancouver, British Columbia, V6C 3B9, Attention: Proxy Department, or by facsimile to (416) 263-9524 or 1-866-249-7775 not later than 4:00 p.m. (Eastern Daylight Time) on [], 2018 or, if the Meeting is adjourned, 48 hours (excluding Saturdays, Sundays and holidays) before any adjournment of the Meeting. A Klondex Securityholder may also vote by telephone or via the internet by following the instructions on the applicable form of proxy. A Klondex Securityholder voting by telephone or via the internet shall not complete or return the proxy form by mail.

Registered Klondex Shareholders are asked to complete the form of proxy printed on green paper, registered holders of Klondex Options are asked to complete the form of proxy printed on pink paper, registered holders of Klondex RSUs are asked to complete the form of proxy printed on blue paper and registered holders of Klondex DSUs are asked to complete the form of proxy printed on yellow paper. If you hold more than one type of Affected Security, you will need to complete the applicable form of proxy for each of the different types of Affected Securities held by you.

In addition to revocation in any other manner permitted by law, a proxy may be revoked by an instrument in writing executed by the Klondex Securityholder or by his or her attorney authorized in writing deposited either at the registered office of the Company at any time up to and including the last business day preceding the day of the Meeting, or any adjournment thereof, at which the proxy is to be used or with the Chairman of the Meeting on the day of the Meeting, or adjournment thereof, and upon either of such deposits, the proxy is revoked. If you revoke your proxy and do not replace it with another that is deposited with the Company before the deadline, then you can still vote your Affected Securities, but to do so, you must attend the Meeting in person.

Exercise of Discretion by Proxies

The person named in the enclosed forms of proxy will vote or withhold from voting in respect of the Affected Securities in respect of which he or she is appointed in accordance with the direction of the appointing Klondex Securityholder. If the Klondex Securityholder specifies a choice with respect to any matter to be acted upon, the Affected Securities will be voted accordingly.

 

- 41 -


Table of Contents

Affected Securities held or represented by proxy by persons present at the Meeting in respect of which the Klondex Securityholder or proxy holder does not vote, with respect to any resolution are counted for purposes of establishing a quorum. When a beneficial owner holds Affected Securities through an intermediary (an “Intermediary”), such as a bank, trust company, securities dealer or broker and trustee or administrator of self-administered registered retirement savings plans, registered retirement income funds, registered education savings plans and similar plans, the beneficial owner is considered to be a non-registered holder (a “Non-Registered Klondex Securityholder”) who holds their Affected Securities in “street name”. When a Non-Registered Klondex Securityholder does not provide the Intermediary with voting instructions as to any matter on which the Intermediary is not permitted to exercise its discretion and without specific instruction, a “broker non-vote” occurs, in which case the Intermediary informs the scrutineer of the Meeting that it does not have the authority to vote on the matter with respect to those Affected Securities. Broker non-votes will be counted for purposes of establishing a quorum. Other than as provided below for “routine matters”, if a quorum is present, broker non-votes will not be counted as votes in favor of such matter or, in the case of election of directors, as votes “withheld” with respect to such election, and also will not be counted as Affected Securities voting on such matter.

Under the rules of the NYSE, Intermediaries are entitled to vote shares held for a beneficial owner on “routine” matters, such as the appointment of the Company’s auditors, without instructions from the beneficial owner of those shares. However, absent instructions from the beneficial owner of such shares, an Intermediary is not entitled to vote shares held for a beneficial owner on certain matters that are considered “non-routine”. All matters to be decided at the Meeting, except the appointment of the Company’s auditors, are considered non-routine matters. Accordingly, Klondex Securityholders holding Affected Securities in street name must arrange to exercise their voting rights if such Klondex Securityholders want their votes to count on the Arrangement Resolution and the Adjournment Resolution. Klondex Shareholders must arrange to exercise their voting rights if such Klondex Shareholders want their votes to count on all matters to be decided at the Meeting, other than the appointment of the Company’s auditors.

The enclosed forms of proxy confer discretionary authority upon the person named therein with respect to the matters identified in the Notice of Meeting, as well as with respect to any amendments, variations or other matters which may properly come before the Meeting. As of the date hereof, management of the Company knows of no such amendments, variations or other matters to come before the Meeting. However, if any such amendment, variation or other matter properly comes before the Meeting, the enclosed forms of proxy, when properly completed and delivered and not revoked, will confer discretionary authority upon the person named therein to vote on such other business in accordance with his or her best judgment, subject to any limitations imposed by applicable Law.

A form of proxy must be signed by the Klondex Securityholder or the duly appointed attorney thereof authorized in writing or, if the Klondex Securityholder is a corporation, by an authorized officer of such corporation. A form of proxy signed by the person acting as attorney of the Klondex Securityholder or in some other representative capacity, including an officer of a corporation which is a Klondex Securityholder, should indicate the capacity in which such person is signing. A Klondex Securityholder or his or her attorney may sign the form of proxy or a power of attorney authorizing the creation of a proxy by electronic signature provided that the means of electronic signature permits a reliable determination that the document was created or communicated by or on behalf of such Klondex Securityholder or by or on behalf of his or her attorney, as the case may be.

 

- 42 -


Table of Contents

Voting Standards

The following chart describes the proposals to be considered at the meeting, the voting options, the vote required for each matter, and the manner in which votes will be counted:

 

Matter

 

Voting Options

 

Required Vote

 

Impact of Broker
Non-Votes

 

Impact of
Withhold Votes

Arrangement Resolution  

For; Against

 

Special majority, as follows:

 

(a)   At least two-thirds (66 23%) of the votes cast at the Meeting by Klondex Shareholders present in person or by proxy; and

 

(b)   At least two-thirds (66 23%) of the votes cast at the Meeting by Klondex Securityholders, voting together as a single class, present in person or by proxy.

 

No effect

 

Not applicable

Havilah Option Plan Resolution  

For; Against

 

Simple majority of votes cast at the Meeting by Klondex Shareholders present in person or by proxy.

 

No effect

 

Not applicable

Election of Directors  

For; Withhold

 

Plurality of votes – the eight nominees receiving the highest number of votes cast at the Meeting by Klondex Shareholders present in person or by proxy will be elected(1).

 

No effect

 

May have an effect(1)

Appointment of Auditors  

For; Withhold

 

Plurality of votes – the auditors receiving the highest number of votes cast at the Meeting by Klondex Shareholders present in person or by proxy will be appointed.

 

Not applicable(2)

 

No effect

Say on Pay

 

For; Against

 

Simple majority of votes cast at the Meeting by Klondex Shareholders present in person or by proxy.

 

No effect

 

Not applicable

Adjournment Resolution

 

For; Against

 

Simple majority of votes cast at the Meeting by Klondex Securityholders, voting together as a single class, present in person or by proxy.

 

No effect

 

Not applicable

Notes:

 

(1)

Klondex has adopted a majority voting policy which stipulates that, in an uncontested election such as is the case at this Meeting, if the number of votes “withheld” for any nominee exceeds the number of votes “for” the nominee, then the nominee shall tender his or her written resignation to the Klondex Board, effective on acceptance by the Klondex Board. Ordinarily, a “withhold vote” will not have an effect on the vote of a proposal under a plurality standard. However, the standard required for this proposal (often referred to as “plurality plus”) differs from an ordinary plurality standard due to Klondex’s majority voting policy. A “withhold” vote on this proposal may have an effect if the number of “withhold” votes exceeds the number of votes in favour of a nominee resulting in such nominee’s submission of their resignation to the Klondex Board pursuant to Klondex’s majority voting policy. See “Part 34 – Statement of Corporate Governance Practices – Majority Voting Policy” of this Circular for additional detail.

 

- 43 -


Table of Contents
(2)

Brokers are permitted to exercise their discretion and vote without specific instruction on this matter. Accordingly, there are not expected to be any broker non-votes.

Non-Registered Klondex Securityholders

Only Registered Klondex Securityholders or the person they appoint as their proxy are entitled to attend and vote at the Meeting. The Affected Securities beneficially owned by a Non-Registered Klondex Securityholder are registered either: (i) in the name of an Intermediary with whom the Non-Registered Klondex Securityholder deals in respect of the Affected Securities; or (ii) in the name of a clearing agency (such as CDS Clearing Depositary Services Inc.) of which the Intermediary is a participant. In accordance with the requirements of NI 54-101, the Company will have distributed copies of the Notice of Meeting, this Circular and the forms of proxy (collectively, the “meeting materials”) to the clearing agencies and Intermediaries for onward distribution to Non-Registered Klondex Securityholders. The Company intends to pay for Intermediaries to forward objecting beneficial owners under NI 54-101 the proxy-related materials and Form 54-101F7Request for Voting Instructions Made by Intermediary.

Non-Registered Klondex Securityholders who have not waived the right to receive meeting materials will receive either a voting instruction form or, less frequently, a form of proxy. The purpose of these forms is to permit Non-Registered Klondex Securityholders to direct the voting of the Affected Securities they beneficially own. Non-Registered Klondex Securityholders should follow the procedures set out below, depending on which type of form they receive.

 

1.

Voting Instruction Form. In most cases, a Non-Registered Klondex Securityholder will receive, as part of the meeting materials, a voting instruction form. If the Non-Registered Klondex Securityholder does not wish to attend and vote at the Meeting in person (or have another person attend and vote on the Non-Registered Klondex Securityholder’s behalf), the voting instruction form must be completed, signed and returned in accordance with the directions on the form. Voting instruction forms in some cases permit the completion of the voting instruction form by telephone or through the internet. If a Non-Registered Klondex Securityholder wishes to attend and vote at the Meeting in person (or have another person attend and vote on the Non-Registered Klondex Securityholder’s behalf), the Non-Registered Klondex Securityholder must complete, sign and return the voting instruction form in accordance with the directions provided and a form of proxy giving the right to attend and vote will be forwarded to the Non-Registered Klondex Securityholder.

 

2.

Form of Proxy. Less frequently, a Non-Registered Klondex Securityholder will receive, as part of the meeting materials, a form of proxy that has already been signed by the Intermediary (typically by a facsimile, stamped signature) which is restricted as to the number of Affected Securities beneficially owned by the Non-Registered Klondex Securityholder but which is otherwise uncompleted. If the Non-Registered Klondex Securityholder wishes to vote but does not wish to attend and vote at the Meeting in person (or have another person attend and vote on the Non-Registered Klondex Securityholder’s behalf), the Non-Registered Klondex Securityholder must complete the applicable form of proxy and deposit it with the Corporate Secretary of the Company c/o Computershare Investor Services Inc., Attention: Proxy Department, 3rd Floor, 510 Burrard Street, Vancouver, British Columbia, V6C 3B9 or by facsimile to (416) 263-9524 or 1(866) 249-7775 or vote by telephone or internet as described above. If a Non-Registered Klondex Securityholder wishes to attend and vote at the Meeting in person (or have another person attend and vote on the Non-Registered Klondex Securityholder’s behalf), the Non-Registered Klondex Securityholder must strike out the names of the persons named in the proxy and insert the Non-Registered Klondex Securityholder’s (or such other person’s) name in the blank space provided.

Non-Registered Klondex Securityholders should follow the instructions on the forms they receive and contact their Intermediaries promptly if they need assistance.

 

- 44 -


Table of Contents

PART 6. VOTING SECURITIES AND PRINCIPAL HOLDERS THEREOF

Record Date and Voting Securities

The record date for the determination of Klondex Securityholders entitled to receive the Notice of Meeting has been fixed as May 15, 2018 (the “Record Date”). Only Klondex Securityholders of record at the close of business on the Record Date who either attend the Meeting in person or complete, sign and deliver a voting instruction form or applicable form of proxy in the manner and subject to the provisions described above will be entitled to vote or to have their Affected Securities voted at the Meeting. A quorum for the transaction of business at the Meeting is the presence of one person who holds, or who represents by proxy one or more Klondex Shareholders who hold, in the aggregate, at least 5% of the issued and outstanding Klondex Shares entitled to be voted at the Meeting.

The authorized capital of the Company consists of an unlimited number of Klondex Shares. As of the Record Date, the Company had outstanding an aggregate of 180,079,072 Klondex Shares, each carrying the right to one vote per Klondex Share with respect to all matters to be voted on at the Meeting. No cumulative rights are authorized, and dissenters’ rights are not applicable to the matters being voted upon, except for the Arrangement Resolution.

As of the Record Date, there were 3,695,604 Klondex Options outstanding, 1,017,011 Klondex RSUs outstanding, and 360,366 Klondex DSUs outstanding. Pursuant to the Interim Order, each Klondex Option, Klondex RSU and Klondex DSU carries one vote with respect to the vote on the Arrangement Resolution and the vote on the Adjournment Resolution. Klondex Options, Klondex RSUs and Klondex DSUs are not entitled to a vote on any other matter at the Meeting.

Principal Holders of Voting Securities

To the knowledge of the directors and senior officers of the Company, as at the Record Date no persons beneficially own or exercise control or direction over 10% or more of the votes attached to the Klondex Shares, except Cambridge Global Asset Management, Waterton Mining Parallel Fund Offshore Master, LP and Hecla (by virtue of the Klondex Voting Agreements and Klondex Support Letter Agreements), all as set out below under the heading “Part 32 – Security Ownership of Certain Beneficial Owners and Management”.

PART 7. THE ARRANGEMENT

At the Meeting, Klondex Securityholders will be asked to consider, and, if determined advisable, to pass, the Arrangement Resolution to approve the Arrangement under the BCBCA pursuant to the terms of the Arrangement Agreement and the Plan of Arrangement. The Arrangement, the Plan of Arrangement and the terms of the Arrangement Agreement are summarized below. This summary does not purport to be complete and is qualified in its entirety by reference to the Arrangement Agreement, which is attached to this Circular as Appendix “P” and has been filed under Klondex’s issuer profile on SEDAR at www.sedar.com, and the Plan of Arrangement, which is attached to this Circular as Appendix “E”.

In order to become effective, the Arrangement Resolution must be approved by: (a) at least two-thirds (66 23%) of the votes cast at the Meeting by the Klondex Shareholders, present in person or represented by proxy and entitled to vote at the Meeting; and (b) at least two-thirds (66 23%) of the votes cast at the Meeting by Klondex Securityholders voting together as a single class, present in person or represented by proxy and entitled to vote at the Meeting. A copy of the Arrangement Resolution is set out in Appendix “B” of this Circular. The Arrangement is also subject to certain other conditions, including the approval of the Court.

Unless otherwise directed, it is Klondex Management’s intention to vote FOR the Arrangement Resolution. If you do not specify how you want your Affected Securities voted, the persons named as proxyholders will cast the votes represented by your proxy at the Meeting FOR the Arrangement Resolution.

 

- 45 -


Table of Contents

If the Arrangement is approved at the Meeting and the Final Order approving the Arrangement is issued by the Court and the other applicable conditions to the completion of the Arrangement are satisfied or waived, the Arrangement will take effect commencing at the Effective Time (which will be at 12:01 a.m. (Pacific Daylight Time)) on the Effective Date (which is expected to occur in the second quarter of 2018, but no later than July 16, 2018 unless otherwise agreed to between Klondex and Hecla).

Background to the Arrangement

Background to the Hecla Proposal Letter

In the fall of 2017, Klondex received a number of unsolicited expressions of interest from various mining companies, including Hecla, to conduct exploratory due diligence reviews on Klondex and its assets. Following its regularly scheduled strategy session held on November 9, 2017, the Klondex Board held an in camera session during which members of the Klondex Board shared their preliminary views regarding the level of interest received by Klondex. Although Klondex was not considering a sale of the company, the Klondex Board determined to allow such mining companies to conduct due diligence on Klondex and its assets both to keep interested parties up to date on the affairs of the Company, and in the event they might propose a value enhancing transaction on acceptable terms that would be of interest to Klondex. As such, Klondex entered into, or proposed to enter into, confidentiality agreements with each such party and started to update its data room to provide access to information to such parties on a confidential basis. On November 15, 2017, Klondex executed a confidentiality agreement with Hecla.

On November 10, 2017, the closing trading price of Klondex Shares on the NYSE American declined sharply (by US$0.40, from US$2.90 to US$2.50) in response to the release of Klondex’s earnings results for its third quarter ended September 30, 2017. As a result, the Klondex Board and Klondex Management began to discuss potential measures to improve Klondex’s financial condition and results, including looking for a strategic equity investor, undertaking a broader equity financing or debt refinancing, and streamlining operations at True North. Such initiatives would be based on Klondex Management’s proposed budget which was scheduled to be presented to the Klondex Board in early December 2017.

In mid-November 2017, an existing Klondex investor provided an unsolicited non-binding term sheet (the “Financing Proposal”) to Paul Huet, the President and Chief Executive Officer of Klondex, for the purchase of 10 million Klondex Shares (representing approximately 5.57% of the then issued and outstanding Klondex Shares) at a proposed price of C$3.00 per Klondex Share, which represented a discount of approximately 8% to the then trading price of Klondex Shares. On November 20, 2017, the Klondex Board held a meeting to consider the Financing Proposal. At that meeting, Klondex Management and legal counsel to Klondex provided a summary of the Financing Proposal. Klondex Management then provided the Klondex Board with an update on the current financial position of the Company and its expected cash position by year-end 2017 and early 2018. At that time, Klondex Management believed Klondex had sufficient cash on hand and would generate sufficient cash from operations such that it did not need the funds from the Financing Proposal immediately, and that there was sufficient time to explore other financing alternatives. Representatives of GMP Securities also attended the meeting, having been asked by Klondex Management the previous day to test the market for other possible investors for a private placement of common equity. At the meeting, GMP Securities indicated that they had contacted a select number of parties on a “no names basis” regarding a potential equity private placement in Klondex, and that the responses were generally not positive. GMP Securities indicated that the responses received likely reflected the fact that it would be difficult for parties with little background information on the Company to be responsive within a short time-frame.

At the November 20, 2017 meeting, the Klondex Board, with Klondex Management present, engaged in a comprehensive review and discussion of the Financing Proposal and its relative merits. The Klondex Board was concerned about the short time frame within which to accept the Financing Proposal, and the importance of having sufficient time to give careful thought and consideration to any significant transaction such as that

 

- 46 -


Table of Contents

proposed in the Financing Proposal. After deliberation, the Klondex Board determined that it would be preferable to give Klondex Management additional time to prepare a budget and cash flow forecast for 2018, along with a suggested plan, to be presented to the Klondex Board at a previously scheduled meeting of the Klondex Board to be held on December 12, 2017. In deciding not to proceed with the Financing Proposal, the Klondex Board considered, among other factors, that under the terms of the Financing Proposal: (i) the investor would be granted representation on the Klondex Board and all of its committees; (ii) Klondex was required to agree not to issue any equity to raise capital for a period of 90 days from closing; (iii) Klondex was required to give the investor a pre-emptive right with respect to future equity raises; and (iv) an increase in the investor’s holdings of Klondex would give the investor significant influence over Klondex. Accordingly, the Klondex Board determined to reject the Financing Proposal and directed Klondex Management to engage GMP Securities, along with INFOR Financial, to seek out potential strategic equity investors in the Company on a private placement basis. The meeting was followed by an in camera session of the Klondex Board, during which the members of the Klondex Board shared their preliminary views on the various strategies and financing alternatives available to Klondex.

Following the November 20, 2017 Klondex Board meeting, Klondex retained GMP Securities and INFOR Financial as financial co-advisors to, among other things, assist Klondex in seeking potential strategic equity investors.

On November 21, 2017, Hecla was granted access to a digital data room which contained overview data about Klondex’s assets in Nevada, USA and Manitoba, Canada.

On December 12, 2017, the Klondex Board met to receive and review the proposed budget with Klondex Management.

In early December 2017, Klondex informed Hecla management that Klondex had hired two financial co-advisors to advise it in connection with a potential transaction and indicated that Klondex was seeking a strategic investor. Hecla acknowledged Klondex’s desire to bring in a strategic investor but communicated that it was not in a position, at the time, to determine its level of interest in Klondex, since it was still conducting preliminary due diligence on the Company and its assets. Between December 2017 and January 2018, GMP Securities and INFOR Financial contacted a number of potentially interested parties regarding a strategic equity investment in Klondex. As a result of this process, two additional parties executed confidentiality agreements to perform due diligence on Klondex.

In early January 2018, following its initial due diligence data review, Hecla requested due diligence site visits to review the Klondex operations in the United States and Canada. On January 10, 2018, Hecla conducted a site visit to the Fire Creek Mine, followed by site visits to the Hollister Mine and Midas Mine on January 11, 2018. During these site visits Hecla received notification through a press release that True North in Canada would be placed on care and maintenance.

On or about January 22, 2018, Hecla retained CIBC World Markets and J.P. Morgan as its financial advisors with respect to a potential transaction with Klondex. On January 23, 2018, CIBC Capital Markets contacted GMP Securities and INFOR Financial advising that Hecla was contemplating making a proposal to Klondex. In addition, on January 23, 2018, Hecla contacted Klondex Management indicating that a proposal was forthcoming. Klondex Management indicated to Hecla that the Klondex Board was reviewing its financing alternatives and its primary focus was in pursuing a strategic equity investment for a non-controlling interest in Klondex, and that any proposal to acquire Klondex would need to be at a significant premium to market to merit a change in approach to this plan. Following that discussion with Hecla, Klondex Management notified members of the Klondex Board, GMP Securities and INFOR Financial that they expected to receive an acquisition proposal from Hecla and asked GMP Securities and INFOR Financial to provide Klondex with an evaluation of its strategic alternatives and provide an opinion as to the fairness, from a financial point of view, of the consideration being offered pursuant to any transaction.

 

- 47 -


Table of Contents

The Initial Hecla Proposal Letter

On January 24, 2018, Hecla delivered to Klondex a proposal letter (the “Initial Hecla Proposal Letter”) that set forth a non-binding proposal to acquire all of the issued and outstanding Klondex Shares by way of a plan of arrangement for an aggregate purchase price of US$630 million, payable in cash, Hecla Shares or combination thereof, which represented a purchase price per Klondex Share of US$3.35 and a 44.1% premium to Klondex’s January 23, 2018 closing price on the NYSE American and a 44.2% premium to Klondex’s 20-day VWAP on the NYSE American. The proposal had an expiry date of January 29, 2018 and included a binding provision for a 30 day exclusivity period to allow Hecla to complete its technical, legal and financial due diligence and negotiate a definitive agreement with Klondex on satisfactory terms. The Initial Hecla Proposal Letter also contemplated that voting support agreements be entered into between Hecla and the Klondex Directors, senior management of Klondex and certain Klondex Shareholders to be agreed upon by Klondex and Hecla.

Upon receipt of the Initial Hecla Proposal Letter, a meeting of the Klondex Board was called for January 26, 2018 (the “January 26, 2018 Meeting”) to consider Hecla’s proposal. Klondex Management also requested that GMP Securities and INFOR Financial conduct a “market check” of those entities who were conducting due diligence on Klondex, to determine the likelihood of receiving any proposal from such entities.

At the January 26, 2018 Meeting, the Klondex Board considered the Initial Hecla Proposal Letter. Also at the January 26, 2018 Meeting, GMP Securities and INFOR Financial advised that none of the potential investors that had been contacted appeared to be interested in making a strategic investment in Klondex in the near-term, that discussions with these counterparties were not progressing quickly, and that none of these entities had expressed an interest in acquiring all of Klondex.

At the January 26, 2018 Meeting, legal counsel to Klondex summarized the terms of the Initial Hecla Proposal Letter, and GMP Securities and INFOR Financial provided the Klondex Board with a financial analysis of the proposal from Hecla. At the January 26, 2018 Meeting, legal counsel to Klondex also advised the Klondex Board of its legal and fiduciary obligations and the appropriate process to follow upon receipt of an offer or proposal from a potential acquiror.

At the January 26, 2018 Meeting, the Klondex Board considered, with advice from its financial and legal advisors, whether to engage in a broader market check for other potential buyers of all of the issued and outstanding Klondex Shares. Klondex’s financial co-advisors indicated to the Klondex Board that they thought if Klondex were to commence a broader market check for other potential buyers of all of the issued and outstanding Klondex Shares and not grant exclusivity to Hecla, Hecla would likely withdraw its proposal, which proposal represented a significant premium to the trading price of the Klondex Shares. In addition, Klondex’s financial co-advisors noted that Hecla was well into its due diligence review of Klondex; furthermore, given the initial lack of interest or urgency from other parties to make a strategic equity investment, it was unlikely that another party would be prepared to offer a similar premium to that proposed by Hecla. The Klondex Board also considered the fact that the exclusivity requested by Hecla was for a relatively short period of time and could be re-evaluated, and that any final agreement with Hecla would not preclude superior third party offers, subject to the payment of a termination fee. Klondex Management also indicated that the Company had initiated initial discussions with Investec in order to request a potential revision of the Investec Facility Agreement in order to increase the Company’s credit facility from US$40 million (of which US$35 million had been drawn-down) to US$75 million. On February 13, 2018, the Investec Facility Agreement was amended to increase the borrowing capacity by US$5 million from US$40 million to US$45 million.

Based on the foregoing, and after considering the advice of GMP Securities and INFOR Financial and legal counsel, the Klondex Board determined at the January 26, 2018 Meeting not to conduct a broader market check for other potential buyers of all of the issued and outstanding Klondex Shares referred to above. Accordingly, the Klondex Board agreed it was in the best interests of the Company and Klondex Shareholders to pursue the Hecla proposal. The Klondex Board therefore directed Klondex Management, GMP Securities and INFOR Financial to continue to pursue the Hecla proposal, subject to the following changes: (i) an increase in the total consideration

 

- 48 -


Table of Contents

payable to US$667 million (or US$3.50 per Klondex Share); (ii) deal protection terms more favourable to Klondex, including a termination fee equal to 3% of the equity value of the transaction (the Initial Hecla Proposal Letter had a termination fee of 4%); (iii) a reverse break-fee of 3% of the equity value of the transaction in favour of Klondex in certain circumstances; (iv) a condition in favour of Klondex to carry out confirmatory due diligence on Hecla; and (v) a US$15 million line of credit from Hecla on or prior to the execution of the definitive agreement.

At the January 26, 2018 Meeting, the Klondex Board also determined that, in light of the ongoing negotiations with Hecla, it would be appropriate to form an independent committee of Klondex directors, and, accordingly, the Klondex Board passed a resolution to create the Independent Committee comprised of Richard Hall (Chair), Rodney Cooper, Charles Oliver and Blair Schultz. The Independent Committee’s mandate included, among other things: (i) to review and assess Hecla’s proposal; (ii) to assess the competing strategic alternatives (including an assessment of a stand-alone plan) available to Klondex; (iii) to assist in the negotiation of any definitive agreement and other ancillary documents relating thereto, should the Independent Committee decide that was the appropriate course to follow; and (iv) to make recommendations to the Klondex Board with respect to Hecla’s proposal and any other strategic transaction to be considered or entered into by Klondex.

Execution of the Revised Hecla Proposal Letter

On January 28, 2018, the Klondex Board instructed GMP Securities and INFOR Financial to submit Klondex’s proposed revisions to the Initial Hecla Proposal Letter to CIBC Capital Markets, Hecla’s financial advisor. That evening, Phil Baker, the President and Chief Executive Officer of Hecla and Richard Hall, Chair of the Klondex Board and Chair of the Independent Committee, had a telephone discussion regarding Klondex’s comments on the Initial Hecla Proposal Letter.

On January 29, 2018, CIBC Capital Markets, Hecla’s financial advisor, delivered to GMP Securities and INFOR Financial a revised proposal letter (the “Revised Hecla Proposal Letter”) responding to Klondex’s comments and setting a deadline of 5:00 p.m. Pacific Standard Time on January 30, 2018 for Klondex to respond. The Revised Hecla Proposal Letter proposed: (i) an aggregate purchase price of US$647 million (or US$3.44 per Klondex Share) for the purchase of all of the outstanding Klondex Shares, with the consideration being payable in Hecla Shares or a combination of Hecla Shares and cash to be agreed upon by Klondex and Hecla after considering the tax and securities law implications for both parties and their respective securityholders; (ii) a break-fee equal to US$25 million (equal to 3.9% of the aggregate equity value of the transaction) payable to Hecla in certain circumstances upon termination of the definitive agreement; (iii) a reverse break-fee in the amount of US$25 million payable to Klondex upon termination of the definitive agreement by Hecla in order to permit Hecla to enter into a transaction pursuant to which Hecla would be acquired by a third party; and (iv) an exclusivity period to February 25, 2018. Hecla also proposed to allow Klondex to carry out due diligence on Hecla and was receptive to granting Klondex a line of credit (which Klondex later determined it did not require). The non-binding proposal was also subject to a further detailed due diligence review by Hecla to be conducted during the exclusivity period.

Upon receipt of the Revised Hecla Proposal Letter, a meeting was called for January 30, 2018 for each of the Independent Committee and the Klondex Board (the “January 30, 2018 Meeting”) to consider the Revised Hecla Proposal Letter. At the January 30, 2018 Meeting, the Klondex Board discussed the Revised Hecla Proposal Letter, together with Klondex Management and Klondex’s legal counsel and financial co-advisors. After a detailed discussion, the Klondex Board adjourned the January 30, 2018 Meeting to permit the Independent Committee to consider the Revised Hecla Proposal Letter, with the other members of the Klondex Board and legal counsel being present at the invitation of the Independent Committee. The Independent Committee then met in camera and agreed upon its recommendation to the Klondex Board with respect to the Revised Hecla Proposal Letter. Immediately following the Independent Committee meeting, the Klondex Board reconvened the adjourned January 30, 2018 Meeting from earlier that afternoon. At the reconvened January 30, 2018 Meeting, the Independent Committee provided its unanimous recommendation to the Klondex Board that

 

- 49 -


Table of Contents

Klondex proceed with executing the Revised Hecla Proposal Letter. In light of the recommendation of the Independent Committee, and following further discussion, the Klondex Board resolved that Klondex execute the Revised Hecla Proposal Letter. Following the January 30, 2018 Meeting, Klondex executed the Revised Hecla Proposal Letter with Hecla.

The Independent Committee met on February 10, and 12, 2018 in connection with the process of reviewing and selecting an independent financial advisor to the Independent Committee, which included interviews with two potential candidates for the role of financial advisor to the Independent Committee. Maxit Capital was subsequently engaged as financial advisor to the Independent Committee effective February 12, 2018.

On February 11, 2018, Mr. Baker met with Mr. Hall to discuss the potential definitive transaction between Hecla and Klondex, including the possibility of spinning out Klondex’s Canadian assets to Klondex Shareholders through a new publicly-listed Canadian corporation (Havilah), since Hecla had determined that it was only interested in Klondex’s Nevada assets and not its Canadian assets. As part of Hecla’s proposal for a possible spinout of Klondex’s Canadian assets, Hecla also raised the possibility of a potential cash investment by Hecla into Havilah. Mr. Baker and Mr. Hall agreed that the spinout structure would likely prolong the time needed to structure and complete a definitive transaction, and discussed the effect it would have on Hecla’s exclusivity, which was to expire on February 25, 2018. Mr. Hall also indicated that there would be a number of factors that the Klondex Board would have to consider regarding a spinout, including the proportion of the aggregate consideration that would be allotted to each of Havilah and Klondex, the amount of cash that Hecla would invest in Havilah and the makeup of a management team and board of directors of Havilah. Mr. Baker indicated that Hecla would provide Klondex with a revised written proposal that reflected the spin-out structure.

Throughout February 2018, Hecla and its legal counsel and financial advisors engaged in legal, financial and technical due diligence of Klondex and its material assets. Hecla’s due diligence included a review of the documents uploaded to Klondex’s data room, attending technical meetings with Klondex Management and conducting site visits to certain Klondex mines including True North in Manitoba, Canada. During this time, Klondex Management, under the supervision of the Independent Committee, also conducted confirmatory legal, financial and technical due diligence on Hecla and its material properties, which included site visits to Hecla’s Casa Berardi mine in Québec and the Greens Creek mine in Alaska by certain members of the Independent Committee and Klondex Management.

During February 2018, the trading price of the Klondex Shares declined sharply (from a closing price of US$2.27 on the NYSE American on February 1, 2018 to a closing price of US$1.32 on the NYSE American on February 28, 2018) following the release of Klondex’s production results for 2017 and production guidance for 2018, as well as an updated report on mineral reserves and resources at Fire Creek that was released by Klondex on February 6, 2018 (the “R&R Statement”) that showed a decline in both contained gold ounces and gold grade. Subsequent to the announcement of the R&R Statement, Hecla focused further attention and resources on reconciling the revised R&R Statement and the potential impact on the mine plan for Fire Creek.

In light of the revised R&R Statement and drop in the trading price of the Klondex Shares, discussions between the respective financial advisors of Klondex and Hecla during the exclusivity period focused on potential revisions to the proposed consideration reflected in the Revised Hecla Proposal Letter, as well as on further due diligence of the Klondex assets, specifically Fire Creek. In light of these discussions, the Klondex Board became concerned about Hecla repricing its proposal to a much lower amount or even walking away from the transaction. The Klondex Board, with assistance from Klondex’s legal counsel and financial co-advisors, therefore began to explore other potential alternative options, including a potential rights offering and preparing a short form base shelf prospectus to access the capital markets in the event that a transaction with Hecla did not proceed.

On February 16, 2018, Mr. Baker contacted Mr. Hall and indicated that Hecla and Klondex would not be able to settle a definitive Arrangement Agreement by the expiry date of the exclusivity period of February 25, 2018,

 

- 50 -


Table of Contents

given that Hecla’s due diligence of Klondex was still on-going (which included a request from Hecla for an additional site visit in Nevada) and because the structure of the Arrangement still needed to be settled. Mr. Baker confirmed that the proposed Arrangement structure would include a spin-out of the Klondex Canadian assets. There was no indication from Mr. Baker on whether there would be a repricing of the Arrangement by Hecla.

On February 16, 2018, Hecla, through its legal counsel, provided an initial draft of the Arrangement Agreement to Klondex’s legal counsel. The initial draft of the Arrangement Agreement did not contain pricing terms for the Arrangement.

On February 23, 2018, Mr. Baker contacted Mr. Hall indicating that Hecla was planning on providing a revised proposal, which would include a revised price, a spin-out of the Klondex Canadian assets, and an extended exclusivity period expiring on March 12, 2018.

On February 25, 2018, a meeting of the Klondex Board was called (the “February 25, 2018 Meeting”), which was attended by the legal counsel and co-financial advisors of Klondex. At the February 25, 2018 Meeting, Klondex Management provided an update regarding the financial performance of Klondex and expectations regarding the cash position of Klondex at the end of the first quarter of 2018. Klondex’s cash position was expected to be significantly below budget as a result of lower than expected production. Mr. Hall, GMP Securities and INFOR Financial then provided a summary of their respective discussions with Hecla and the request by Hecla to extend the exclusivity period to March 12, 2018. The Klondex Board held a detailed discussion regarding the financing options and other potential alternatives and strategies available to Klondex if Klondex determined not to extend Hecla’s exclusivity period or if a transaction did not materialize with Hecla. As part of this discussion, Klondex’s legal counsel and financial co-advisors provided the Klondex Board with a detailed analysis and timeline for the completion of a rights offering. The Klondex Board discussed whether a US$20 million to US$25 million rights offering would be achievable and at what price. In addition, Klondex Management noted that in light of the Company’s production concerns, it was looking into entering into processing arrangements with third parties to process stockpiles from the Hollister Mine in order to realize additional ounces in a shorter time period. Ultimately, the Company did not pursue a rights offering but did enter into processing arrangements with third parties to process stockpiles from the Hollister Mine in the ordinary course of business.

After detailed discussion, the Klondex Board adjourned the February 25, 2018 Meeting to permit the Independent Committee to discuss the potential extension of Hecla’s exclusivity period to March 12, 2018. The Independent Committee then met in camera and agreed upon its recommendation to the Klondex Board with respect to the extension of the exclusivity period until March 5, 2018, with the understanding that if on or before the expiry of the exclusivity period satisfactory progress was made on the Arrangement, and there was greater clarity with respect to Hecla’s pricing of Klondex in respect of the Arrangement, including a value attributed to Havilah and a determination of the amount of cash Hecla would be proposing to invest in Havilah, then Klondex would consider extending Hecla’s exclusivity to March 12, 2018.

On February 26, 2018, Hecla agreed to an extension of the exclusivity period from February 28, 2018 to March 5, 2018 with a potential further extension of the exclusivity period to March 12, 2018. The additional requested due diligence site visit in Nevada was conducted by Hecla between February 28 and March 2, 2018.

At the end of February 2018, while the exclusivity period with Hecla was ongoing, Mr. Huet was contacted by the Chairman and Chief Executive Officer of a third-party mining company to discuss a potential “merger of equals” between the two parties. In accordance with Klondex’s exclusivity obligations to Hecla, Mr. Huet did not entertain such discussions. Additionally, in early March 2018, while the exclusivity period with Hecla was ongoing, Mr. Huet was contacted by another Chief Executive Officer of a producing mining company to discuss the potential acquisition of Klondex (no purchase price was mentioned) and again Mr. Huet, in accordance with Klondex’s exclusivity obligations to Hecla, did not entertain such discussions. The Klondex Board discussed with its financial co-advisors the likelihood of a transaction materializing with one of these counterparties should the Hecla exclusivity expire. The view of the Klondex Board and financial co-advisors was that a merger of

 

- 51 -


Table of Contents

equals would not address the financial problems of the Company; furthermore, it was the view of the Klondex Board and financial co-advisors that it would take another potential counterparty a significant amount of time to complete sufficient due diligence on Klondex before it would be in a position to determine whether to make a compelling offer for the Company, and, even if such offer did materialize, there was no guarantee such offer would exceed the Hecla proposal. Legal counsel also advised the Klondex Board that any agreement with Hecla would not preclude third party superior offers, subject to the payment of a termination fee.

Between the end of February 2018 through early March 2018, representatives of Hecla and Klondex, along with their respective legal counsel and financial advisors, engaged in continued discussions and negotiations regarding the structure of the Arrangement transaction and the terms of the draft Arrangement Agreement. During this time, Hecla also conducted additional site visits to certain of Klondex’s properties.

On March 5, 2018, CIBC Capital Markets, Hecla’s financial advisor, delivered to GMP Securities and INFOR Financial a revised draft of the Revised Hecla Proposal Letter which contemplated: (i) an aggregate purchase price equal to US$507 million (of which a portion was attributed to the Havilah Shares to be distributed to Klondex Shareholders, with the balance payable in cash, Hecla Shares or a combination thereof), which represented a purchase price per Klondex Share of US$2.66 and a 78% premium to the closing trading price of the Klondex Shares on the NYSE American on March 2, 2018 (being the last trading day prior to March 5, 2018) (or a 53% premium excluding the Havilah Shares) and a 66% premium to Klondex’s 20-day VWAP on the NYSE American (or a 43% premium excluding the Havilah Shares); (ii) an extension of the expiry date of the exclusivity period from March 5, 2018 to March 12, 2018; and (iii) a reciprocal break fee of US$20 million (3.9% of the equity value of the transaction with Hecla). The revised draft of the Revised Hecla Proposal Letter ascribed a value of US$70 million to Havilah, and also provided that Hecla would subscribe for US$5 million of Havilah common shares. CIBC Capital Markets also indicated to GMP Securities and INFOR Financial that the decrease in aggregate purchase price was due to Hecla’s diminished view of Klondex’s prospects.

Upon receipt of the revised draft of the Revised Hecla Proposal Letter, a meeting was called for March 6, 2018 for each of the Independent Committee and the Klondex Board (the “March 6, 2018 Meeting”) to consider the terms of the revised draft of the Revised Hecla Proposal Letter. At the March 6, 2018 Meeting, the Klondex Board discussed the revised draft of the Revised Hecla Proposal Letter, together with Klondex Management and Klondex’s legal counsel and financial co-advisors. At the March 6, 2018 Meeting, GMP Securities and INFOR Financial provided a detailed analysis of the terms of the revised draft of the Revised Hecla Proposal Letter. GMP Securities and INFOR Financial highlighted for the Klondex Board that Hecla’s proposal, as it related to the value attributable to Klondex, represented a significant premium to the trading price of Klondex. However, GMP Securities and INFOR Financial also indicated that they believed the US$70 million value being attributed to Klondex’s Canadian assets was too high. GMP Securities and INFOR Financial advised the Klondex Board that while Hecla’s proposal still represented a significant premium, it would be reasonable for the Company to request an increased price based on a number of factors, including a reallocation of the value Hecla attributed to Klondex’s Canadian assets relative to its Nevada assets.

After a detailed discussion, the Klondex Board adjourned the March 6, 2018 Meeting to permit the Independent Committee to consider the terms of the revised draft of the Revised Hecla Proposal Letter, with the other members of the Klondex Board and its legal advisors being present at the invitation of the Independent Committee. The Independent Committee then met in camera and agreed upon its recommendation to the Klondex Board with respect to the revised draft of the Revised Hecla Proposal Letter. Immediately following the Independent Committee meeting, the Klondex Board reconvened the adjourned March 6, 2018 Meeting from earlier that afternoon. At the reconvened March 6, 2018 Meeting, the Independent Committee provided its unanimous recommendation to the Klondex Board that Klondex: (i) further negotiate with Hecla to request an increased price of US$555 million; and (ii) extend the exclusivity period with Hecla to March 12, 2018. In light of the recommendations of the Independent Committee, and following further discussion, the Klondex Board resolved that Klondex further negotiate with Hecla as recommended by the Independent Committee and extend the exclusivity period with Hecla to March 12, 2018.

 

- 52 -


Table of Contents

Execution of Final Hecla Proposal Letter

On March 7, 2018, Mr. Hall contacted Mr. Baker indicating that the Klondex Board had considered the terms of the revised draft of the Revised Hecla Proposal Letter and that (i) Klondex requested that the total consideration be increased to US$555 million, including a reallocation of the value being attributed to Klondex’s Canadian assets and Nevada assets, (ii) Klondex preferred that the consideration consist of Hecla Shares to the maximum extent permissible without triggering the requirement for a Hecla shareholder meeting, and (iii) Klondex would be agreeable to extending the exclusivity period with Hecla to March 12, 2018.

On March 8, 2018, CIBC Capital Markets, Hecla’s financial advisor, delivered to GMP Securities and INFOR Financial a further revised draft of the Revised Hecla Proposal Letter (the “Final Hecla Proposal Letter”) which was a best and final proposal and contemplated an increase in the total price to US$515 million, which represented a purchase price per Klondex Share of US$2.71 and a 94% premium to the closing price of the Klondex Shares on the NYSE American on March 8, 2018 (or a 77% premium excluding the value attributed to the Havilah Shares) and a 76% premium to Klondex’s 20-day VWAP on the NYSE American (or a 61% premium excluding the value attributed to the Havilah Shares). The consideration would be payable in a combination of: (i) Hecla Shares and cash totaling US$470 million, to be agreed upon by Klondex and Hecla in the definitive agreement, provided the issuance of Hecla Shares would not exceed more than 19.9% of the issued and outstanding Hecla Shares; and (ii) Havilah Shares with an ascribed value of US$45 million. The reciprocal break fee in respect of the transaction was proposed to remain at 3.9% of the equity value of the transaction. The Final Hecla Proposal Letter also reiterated Hecla’s previous request for voting support agreements in favor of Hecla entered into by Klondex Management and certain specified institutional shareholders of Klondex.

Upon receipt of the Final Hecla Proposal Letter, a meeting was called for March 9, 2018 for each of the Independent Committee and the Klondex Board (the “March 9, 2018 Meeting”) to consider the terms of the Final Hecla Proposal Letter. As the Final Hecla Proposal Letter still contemplated the support of certain shareholders of Klondex, the Klondex Board instructed GMP Securities and INFOR Financial to reach out to two institutional Klondex Shareholders and discuss with them the broad terms of the Final Hecla Proposal Letter ahead of the March 9, 2018 Meeting.

The Klondex Board convened the March 9, 2018 Meeting to discuss the Final Hecla Proposal Letter, together with Klondex Management and Klondex’s legal counsel and financial advisors. At the March 9, 2018 Meeting, GMP Securities and INFOR Financial provided a detailed analysis of the terms of the Final Hecla Proposal Letter. GMP Securities and INFOR Financial advised the Klondex Board that the terms of the Final Hecla Proposal Letter presented a significant premium and that Hecla confirmed that the Final Hecla Proposal Letter would be its best and final proposal and under no condition would Hecla negotiate further and that Hecla set a deadline of 12:00 p.m. (Pacific Daylight Time) on March 11, 2018 for Klondex to respond. GMP Securities and INFOR Financial also summarized their discussions with two institutional Klondex Shareholders exercising beneficial control over approximately 23.60% of the issued and outstanding Klondex Shares regarding supporting the transaction and confirmed that these two institutional Klondex Shareholders were very supportive of the proposed transaction with Hecla. GMP Securities and INFOR Financial further added that the two institutional Klondex Shareholders were informed that Klondex had previously been exploring a strategic investment or recapitalization alternatives, which led to the Initial Hecla Proposal Letter, and that they were not supportive of any such alternative transactions.

After a detailed discussion, the Klondex Board adjourned the March 9, 2018 Meeting to permit the Independent Committee to consider the terms of the Final Hecla Proposal Letter, with the other members of the Klondex Board and legal counsel being present at the invitation of the Independent Committee. The Independent Committee then met in camera and agreed upon its recommendation to the Klondex Board with respect to the Final Hecla Proposal Letter. Immediately following the Independent Committee meeting, the Klondex Board reconvened the adjourned March 9, 2018 Meeting from earlier that afternoon. At the reconvened March 9, 2018 Meeting, the Independent Committee provided its unanimous recommendation to the Klondex Board that

 

- 53 -


Table of Contents

Klondex proceed with executing the Final Hecla Proposal Letter. In light of the recommendation of the Independent Committee, and following further discussion, the Klondex Board resolved that Klondex execute the Final Hecla Proposal Letter. Following the March 9, 2018 Meeting, Klondex executed the Final Hecla Proposal Letter with Hecla.

Negotiation of a Definitive Arrangement Agreement and Approval of the Arrangement

In the days following the March 9, 2018 Meeting through to March 16, 2018, representatives of Hecla and Klondex, along with their respective legal counsel and financial advisors, engaged in continued discussions and negotiations regarding the terms of the Arrangement Agreement, the Arrangement and the negotiation of Klondex Voting Agreements and Klondex Support Agreements with the Klondex Directors and officers of Klondex and the negotiation of Klondex Support Letter Agreements with two institutional Klondex Shareholders. During this time, Hecla also conducted additional site visits to certain of Klondex’s properties. On March 12, 2018, Hecla held an oral due diligence session for Klondex and its advisors.

During this period, the Independent Committee, with the assistance of its legal and financial advisors, reviewed and provided comments on multiple drafts of the Arrangement Agreement and considered various specific components thereof, including conditions to closing, tax considerations, due diligence on the Midas tailings dam facility, and the treatment of holders of Other Affected Securities. During its negotiations with Hecla, Klondex paid particular attention to matters that potentially impacted deal certainty, including structuring the transaction in a manner that would not require a Hecla stockholder vote and reducing the number and the nature of the conditions to be met by Klondex in respect of the Arrangement.

On March 16, 2018, a meeting of the Klondex Board was called (the “March 16, 2018 Meeting”) which was attended by the legal counsel and financial advisors of Klondex. At the March 16, 2018 Meeting, legal counsel and financial advisors to Klondex as well as Klondex Management provided an update regarding certain outstanding items that would need to be resolved prior to settling the definitive Arrangement Agreement with Hecla, including: (i) receipt of a definitive voting support agreement from a third institutional Klondex Shareholder; (ii) the VWAP calculation to be used in determining the Hecla Consideration; (iii) receipt of a definitive voting support agreement from all of the Klondex Directors; (iv) certain representations and warranties contained in the Arrangement Agreement; and (v) the treatment of Performance RSUs. Then, GMP Securities and INFOR Financial, financial co-advisors to Klondex, gave a detailed presentation to the Klondex Board which concluded with GMP Securities orally advising (subsequently confirming in writing) that, on the basis of the assumptions, limitations and qualifications to be set forth in the GMP Securities Fairness Opinion subsequently delivered by GMP Securities, as of the date of the GMP Securities Fairness Opinion, the Arrangement Consideration to be received by Klondex Shareholders in respect of the Arrangement, was fair, from a financial point of view.

After a detailed discussion, the Klondex Board adjourned the March 16, 2018 Meeting to permit the Independent Committee to consider the terms of the Arrangement Agreement, with the other members of the Klondex Board and legal counsel being present at the invitation of the Independent Committee. At the meeting of the Independent Committee, Maxit Capital, financial advisor to the Independent Committee, provided its oral opinion to the Independent Committee which concluded with Maxit Capital advising (subsequently confirming in writing) that, on the basis of the assumptions, limitations and qualifications to be set forth in the Maxit Capital Fairness Opinion subsequently delivered by Maxit Capital, as of the date of the Maxit Capital Fairness Opinion, the Arrangement Consideration to be received by Klondex Shareholders in respect of the Arrangement, was fair, from a financial point of view. The Independent Committee then met in camera and agreed to accept the oral fairness opinion received from Maxit Capital. After careful consideration by the Independent Committee, including a thorough review of the Arrangement and the Maxit Capital Fairness Opinion, subject to the assumptions, limitations and qualifications set out therein, as to the fairness, from a financial point of view, of the Arrangement Consideration to be received by the Klondex Shareholders pursuant to the Arrangement, as well as a thorough review of other matters, including matters discussed with respect to the Arrangement Agreement, and

 

- 54 -


Table of Contents

taking into account the best interests of Klondex and the impact on Klondex’s stakeholders, and consultation with its financial advisors and legal advisors, the Independent Committee unanimously determined that the Arrangement and the entering into of the Arrangement Agreement were in the best interests of Klondex and fair to the Klondex Securityholders.

Immediately following the Independent Committee meeting, the Klondex Board reconvened the adjourned March 16, 2018 Meeting from earlier that afternoon. At the reconvened March 16, 2018 Meeting, the Independent Committee provided its unanimous recommendation to the Klondex Board that, subject to the outstanding matters on the Arrangement Agreement being resolved on acceptable terms, Klondex enter into the Arrangement Agreement with Hecla and Hecla Acquisition Subco. In light of the recommendation of the Independent Committee, and following further discussion, the Klondex Board resolved and determined: (i) to accept the oral fairness opinion received from GMP Securities that the Arrangement Consideration was fair, from a financial point of view, to the Klondex Shareholders; (ii) that the Arrangement was in the best interests of Klondex and fair to the Klondex Securityholders; (iii) that Klondex enter into the Arrangement Agreement with Hecla, subject to the finalization of any outstanding items on acceptable terms, and that Klondex perform its obligations thereunder; (iv) that the Klondex Securityholders be asked to consider, and, if thought advisable, approve, the Arrangement Resolution; and (v) that the Klondex Board unanimously recommend that Klondex Securityholders vote in favour of the Arrangement Resolution.

In the hours following the March 16, 2018 Meeting, representatives of Hecla and Klondex, along with their respective legal and financial advisors, engaged in continued discussions and negotiations regarding the terms of the Arrangement Agreement, and were able to resolve the outstanding matters on acceptable terms (including the receipt of definitive Klondex Support Letter Agreements from two institutional Klondex Shareholders and Klondex Voting Agreements and Klondex Support Agreements, as applicable, from all of the Klondex Directors and certain officers of Klondex), which ultimately resulted in Hecla, Hecla Acquisition Subco and Klondex executing the Arrangement Agreement in the evening on March 16, 2018.

Klondex and Hecla subsequently issued a joint press release announcing that the parties had entered into the Arrangement Agreement, and, on March 19, 2018, a joint conference call with Hecla was hosted by Hecla with Messrs. Baker and Huet presenting the proposed transaction. Upon the announcement of the entering into of the Arrangement Agreement, all standstill provisions contained in confidentiality agreements between Klondex and certain third parties automatically terminated.

Fairness Opinions

Pursuant to the GMP/INFOR Engagement Letter, Klondex retained GMP Securities and INFOR Financial to act as financial co-advisors to enhance shareholder value, including without limitation, with respect to, potentially, a strategic investment in the Company by a third party, a recapitalization of the Company, the payment of a special dividend or other distribution to Klondex Shareholders, or the acquisition of shares, assets or businesses of another entity but excluding certain transactions. Subsequent to the retention of GMP Securities and INFOR Financial, the Klondex Board requested that GMP Securities evaluate the fairness, from a financial point of view, of the Arrangement Consideration to be received by Klondex Shareholders pursuant to the Arrangement. Under the GMP/INFOR Engagement Letter, as consideration for the services provided by GMP Securities and INFOR Financial, the Company agreed to pay a monthly work fee as well as a contingency fee based on the completion of certain categories of transactions (for greater certainty, including the Arrangement) that were brought by GMP Securities and INFOR Financial to the Company during a twelve-month period ending November 30, 2018 or during the nine month period following any termination of the GMP/INFOR Engagement Letter. Also, the Company agreed to pay an aggregate fee upon delivery of the final version of a fairness opinion requested from one or both of GMP Securities or INFOR Financial, whether or not a transaction is completed which fee shall be credited against any fee assessed with the completion of the Arrangement or any alternative transaction.

Pursuant to the Maxit Capital Engagement Letter, the Independent Committee retained Maxit Capital to act as its financial advisor in connection with the Arrangement and any alternative transaction and to provide a fairness

 

- 55 -


Table of Contents

opinion, from a financial point of view, of the Arrangement Consideration to be received by Klondex Shareholders pursuant to the Arrangement. Under the Maxit Capital Engagement Letter, a fee was payable to Maxit Capital by the Company upon delivery of the Maxit Capital Fairness Opinion. The fee was not conditioned on whether or not the Maxit Capital Fairness Opinion was favourable or the transaction that the Maxit Capital Fairness Opinion relates to is completed.

On March 16, 2018, the Independent Committee received the oral opinion of Maxit Capital and the Klondex Board received the oral opinion from GMP Securities, to the effect that, as of the date of the Maxit Capital Fairness Opinion and the GMP Securities Fairness Opinion, respectively, subject to the assumptions, limitations and qualifications set out therein, the Arrangement Consideration is fair, from a financial point of view, to the Klondex Shareholders. The oral opinions were subsequently confirmed by delivery of the written Fairness Opinions. The Independent Committee and the Klondex Board reviewed and accepted the Maxit Capital Fairness Opinion and the GMP Securities Fairness Opinion, respectively.

This summary is qualified in its entirety by reference to the full texts of the Fairness Opinions. The full text of each of the Fairness Opinions, which set forth, among other things, the respective assumptions made, matters considered and limitations and qualifications set out therein, is attached as Appendix “C” and Appendix “D” to this Circular. Klondex Shareholders are urged to, and should, read the Fairness Opinions in their entirety. For more information, see “Part 9 – Opinion of Maxit Capital” and “Part 10 – Opinion of GMP Securities” of this Circular.

Under the terms of their respective engagements, Klondex has agreed to reimburse GMP Securities and Maxit Capital for their reasonable out-of-pocket expenses, whether or not the Arrangement is completed, and to indemnify GMP Securities and Maxit Capital against certain potential liabilities and expenses arising from their respective engagements.

Subject to the terms of their respective engagements, each of GMP Securities and Maxit Capital has consented to the inclusion in this Circular of its respective Fairness Opinion in its entirety, together with the summary herein and other information relating to GMP Securities and Maxit Capital, respectively. The Fairness Opinions were provided to the Klondex Board and Independent Committee, as applicable, for its exclusive use only in considering the Arrangement, and may not be relied upon by any other person or for any other purpose or published or disclosed to any other person, without the express written consent of GMP Securities and Maxit Capital, as applicable. The Fairness Opinions address only the fairness, from a financial point of view, of the Arrangement Consideration to be received by the Klondex Shareholders pursuant to the Arrangement and do not and should not be construed as valuations of Klondex, Hecla or Havilah (or any of their respective affiliates) or their respective assets, liabilities or securities or as a recommendation to any Klondex Securityholder as to how to vote with respect to the Arrangement or any other matter at the Meeting.

Recommendation of the Klondex Board

The Klondex Board, after consultation with its financial co-advisors and legal counsel and having taken into account the Fairness Opinions and such other matters as it considered necessary and relevant, including the factors set out below under the heading “Part 7 – The Arrangement – Reasons for the Arrangement” and the unanimous recommendation of the Independent Committee, has unanimously determined that the Arrangement is in the best interests of Klondex and is fair to the Klondex Securityholders. Accordingly, the Klondex Board unanimously recommends that Klondex Securityholders vote FOR the Arrangement Resolution.

All of the Klondex Directors and officers of Klondex intend to vote all of their Affected Securities in favour of the Arrangement Resolution, subject to the terms of the Arrangement Agreement and the Klondex Support Agreements or the Klondex Voting Agreements, as applicable. Hecla has entered into Klondex Voting Agreements with each of William Matlack, Blair Schultz, Paul Huet, Richard Hall, Barry Dahl, James Haggarty and Rodney Cooper, pursuant to which each of the aforementioned Klondex Directors and officers of Klondex

 

- 56 -


Table of Contents

has agreed to, among other things, support the Arrangement and to vote their Klondex Shares and Other Affected Securities (including any Klondex Shares issued upon the exercise or exchange of any Other Affected Securities) in favour of the Arrangement Resolution. Additionally, Hecla has entered into Klondex Support Agreements with each of Brian Morris, Charles Oliver, John Antwi, Mark Daniel and Michael Doolin, pursuant to which each of the aforementioned Klondex Directors and officers of Klondex has agreed to, among other things, cooperate with Klondex and Hecla to successfully complete the Arrangement.

One of the directors of Klondex who has entered into a Klondex Voting Agreement intends to pledge his Klondex Shares to a third party lender for personal financial planning purposes. The director will still have complete control and direction over voting of the Klondex Shares and will continue to be subject to the Klondex Voting Agreement.

Reasons for the Arrangement

The Independent Committee and the Klondex Board reviewed and considered a significant amount of information and considered a number of factors relating to the Arrangement, with the benefit of advice from Klondex Management, and the respective financial advisors and legal advisors of the Independent Committee and the Klondex Board. The following is a summary of the principal reasons for the unanimous recommendation of the Independent Committee and the Klondex Board that Klondex Securityholders vote FOR the Arrangement Resolution. For the purposes of the following, references to Klondex Shareholders include holders of In-the-Money Klondex Options and Klondex RSUs who receive Klondex Shares pursuant to the Arrangement:

 

   

Significant Premium. The Hecla Consideration represents a value of US$2.47 per Klondex Share, which represents a premium of approximately 59% based on the 30-day VWAP of the Klondex Shares on the NYSE American on March 16, 2018, the last trading day prior to the announcement of the Arrangement, and a premium of approximately 72% based on the closing price of Klondex Shares on the NYSE American on March 16, 2018. In addition to the Hecla Consideration, Klondex Shareholders will also receive 0.125 of a Havilah Share for each Klondex Share held.

 

   

Meaningful Ownership in a Stronger Combined Company that Can Better Maximize the Value of Klondex Assets. The Arrangement will provide Klondex Shareholders who receive Hecla Shares in connection with the Arrangement with exposure to a diversified precious metals producer with operating mines in Québec, Alaska, Idaho, Mexico and Nevada that has a proven track record of successfully acquiring and optimizing underground assets, has a broader asset and commodity base delivering cash flow diversification and risk mitigation and superior financial strength and flexibility, with a lower cost of capital, to support development and exploration programs at the Fire Creek Mine, Hollister Mine and Midas Mine. It is expected that upon completion of the Arrangement, existing stockholders of Hecla and former Klondex Shareholders will own approximately 83.8% and 16.2%, respectively, of the outstanding Hecla Shares.

 

   

Alternatives Considered. The Independent Committee and the Klondex Board considered the financing options and other potential alternatives and strategies available to Klondex if it did not enter into the Arrangement Agreement and continued with a stand-alone plan, the financial condition of Klondex, the fact that none of the potential investors that had been contacted appeared to be interested in making a strategic investment in Klondex in the near-term, that discussions with these counterparties were not progressing quickly and that none of these entities had expressed an interest in acquiring all of Klondex, and determined that entering into the Arrangement Agreement was the best alternative for Klondex Securityholders and in the best interest of Klondex.

 

   

Enhanced Liquidity. The Hecla Shares receivable under the Arrangement will provide Klondex Shareholders with enhanced liquidity compared to Klondex Shares. The Hecla Shares are listed on the NYSE, and Hecla has significantly greater balance sheet strength, market capitalization and trading liquidity than Klondex. As at March 16, 2018, Hecla’s market capitalization was US$1.5 billion and

 

- 57 -


Table of Contents
 

Klondex’s was US$259 million, while Hecla’s average daily trading value during 2017 was US$29.1 million on the NYSE, whereas Klondex’s was US$10.3 million on the NYSE American.

 

   

Ownership of Havilah Shares. Klondex’s Canadian assets, including True North, the Bison Manitoba properties as well as additional Ontario and Manitoba mineral interests, will be transferred to Havilah and Klondex Shareholders will receive Havilah Shares pursuant to the Arrangement. In addition, Hecla will subscribe for US$7,000,000 of Havilah Shares, representing a 13.46% interest in the outstanding common shares of Havilah, providing important capital for Havilah. The Havilah Shares provide Klondex Shareholders with continued exposure to Klondex’s Canadian assets. It is a condition to the completion of the Arrangement that one of the TSX, the TSXV or the Canadian Securities Exchange conditionally approve the listing of the Havilah Shares to be distributed under the Arrangement. Havilah has applied to have the Havilah Shares listed on the TSXV. Listing is subject to the approval of the TSXV in accordance with its original listing requirements. The TSXV has not conditionally approved the listing of the Havilah Shares on the TSXV and there is no assurance that the TSXV will approve the listing application. There is no present intention to list Havilah Shares for trading on any national securities exchange in the United States.

 

   

Fairness Opinions. GMP Securities, financial co-advisor to Klondex, and Maxit Capital, financial advisor to the Independent Committee, have each provided a fairness opinion concluding that as of the date thereof, and subject to and based on the assumptions, limitations and qualifications set out therein, the Arrangement Consideration to be received by Klondex Shareholders pursuant to the Arrangement is fair, from a financial point of view, to the Klondex Shareholders.

 

   

Acceptance by Klondex Directors and Officers of Klondex. All of the Klondex Directors and officers of Klondex have entered into either Klondex Voting Agreements or Klondex Support Agreements with Hecla. Under the Klondex Voting Agreements, each of the following Klondex Directors and officers of Klondex has agreed to, among other things, support the Arrangement and to vote their Klondex Shares and Other Affected Securities (including any Klondex Shares issued upon the exercise or exchange of any Other Affected Securities) in favour of the Arrangement Resolution: William Matlack, Blair Schultz, Paul Huet, Richard Hall, Barry Dahl, James Haggarty and Rodney Cooper. Under the Klondex Support Agreements, each of the following Klondex Directors and officers of Klondex has agreed to, among other things, cooperate with Klondex and Hecla to successfully complete the Arrangement: Brian Morris, Charles Oliver, John Antwi, Mark Daniel and Michael Doolin.

 

   

Support by Two Institutional Klondex Shareholders. Pursuant to the Klondex Support Letter Agreements, two of the Company’s institutional shareholders have agreed, among other things, to vote, or cause to be voted, all of the Klondex Shares that such shareholders exercise beneficial control over, representing in the aggregate approximately 23.60% of the issued and outstanding Klondex Shares as of the Record Date, in favour of the Arrangement Resolution.

 

   

Ability to Respond to Unsolicited Superior Proposals. Under the terms of the Arrangement Agreement, the Klondex Board is able to respond to any unsolicited bona fide written proposal that, having regard to all of the terms and conditions of such proposal, if consummated in accordance with its terms, may lead to a Superior Proposal.

 

   

Negotiated Transaction. The Arrangement Agreement is the result of an arm’s length negotiation process and has been unanimously recommended by the Independent Committee, consisting of independent directors.

 

   

Securityholder Approval. The Arrangement must be approved by: (i) at least two-thirds (66 23%) of the votes cast at the Meeting by Klondex Shareholders, present in person or represented by proxy and entitled to vote at the Meeting; and (ii) at least two-thirds (66 23%) of the votes cast at the Meeting by Klondex Securityholders voting together as a single class, present in person or represented by proxy and entitled to vote at the Meeting.

 

- 58 -


Table of Contents
   

Court Approval. The Arrangement must be approved by the Court, which will consider, among other things, the substantive and procedural fairness and reasonableness of the Arrangement to Klondex Securityholders.

 

   

Dissent Rights. The Interim Order provides that any Registered Klondex Shareholder may, upon strict compliance with certain conditions, exercise Dissent Rights and, if ultimately successful, receive the fair value of their Dissent Shares in accordance with the Plan of Arrangement.

The foregoing summary of the information considered by the Klondex Board is not, and is not intended to be, exhaustive. In view of the wide variety of factors and information considered in connection with their evaluation of the Arrangement, the Klondex Board did not find it practicable to, and therefore did not, quantify or otherwise attempt to assign any relative weight to each specific factor or item of information considered in reaching their conclusions and recommendations.

Arrangement Mechanics

Under the Plan of Arrangement, commencing at the Effective Time, the following principal steps shall occur and shall be deemed to occur, without any further act or formality, in the order and with the timing set out below.

 

  (a)

Hecla will subscribe for common shares of Hecla Acquisition Subco in an amount equal to the value of the Maximum Cash Consideration and Maximum Shares Consideration, and the Depositary will hold the Maximum Cash Consideration and Maximum Shares Consideration on behalf of Hecla Acquisition Subco in satisfaction of the subscription price payable by Hecla.

 

  (b)

Each In-the-Money Klondex Option outstanding immediately prior to the Effective Time (whether vested or unvested) will, notwithstanding the terms of the Klondex Option Plans, be deemed to be fully vested and transferred to Klondex (free and clear of all Encumbrances) in exchange for that number of Klondex Shares (rounded down to the nearest whole number) obtained by dividing (i) the In-the-Money Amount of such option, by (ii) the Company Share Value, and upon such exchange the holder shall cease to have any rights as a holder in respect of such In-the-Money Klondex Option (other than the right to participate in the remainder of the Arrangement as a holder of the Klondex Shares received in exchange for such In-the-Money Klondex Option).

 

  (c)

Each Out-of-the-Money Klondex Option outstanding immediately prior to the Effective Time (whether vested or unvested) will, notwithstanding the terms of the Klondex Option Plans, be cancelled without any payment therefor, and the holder shall cease to have any rights in respect of such Out-of-the-Money Klondex Option.

 

  (d)

Each Klondex RSU outstanding immediately prior to the Effective Time (whether vested or unvested) will, notwithstanding the terms of the Klondex Option Plans, be deemed to be fully vested and transferred to Klondex (free and clear of all Encumbrances) in exchange for one Klondex Share, and upon such exchange the holder shall cease to have any rights as a holder in respect of such Klondex RSU (other than the right to participate in the remainder of the Arrangement as a holder of the Klondex Shares received in exchange for such Klondex RSU).

 

  (e)

Each Performance RSU outstanding immediately prior to the Effective Time (whether vested or unvested) will, notwithstanding the terms of the Klondex 2016 Stock Option Plan, be deemed to be fully vested and transferred to Klondex (free and clear of all Encumbrances) in exchange for a cash payment in an amount determined by Hecla to be properly due to such holder based on the terms of such Performance RSU, and upon such exchange the holder shall cease to have any rights in respect of such Performance RSU.

 

  (f)

The Klondex Option Plans will be cancelled.

 

  (g)

Each Klondex Share held by a Dissenting Shareholder will be deemed to be surrendered to Klondex (free and clear of all Encumbrances) and cancelled, and such Dissenting Shareholder will cease to have any rights as a holder of Klondex Shares other than a claim to be paid the fair value of such Klondex Share by Klondex in accordance with Article 4 of the Plan of Arrangement.

 

- 59 -


Table of Contents
  (h)

Klondex will transfer all of its legal and beneficial right, title and interest in the Havilah Property to Havilah in exchange for that number of Havilah Shares equal to the number of Klondex Shares issued and outstanding immediately following the preceding steps of the Arrangement (including the Klondex Shares issued to former holders of In-the-Money Klondex Options and Klondex RSUs, but excluding any Klondex Shares in respect of which Dissenting Shareholders have exercised Dissent Rights), all in accordance with the terms of the Havilah Contribution Agreement.

 

  (i)

In the course of a reorganization of Klondex’s authorized and issued share capital:

 

  (i)

the notice of articles and articles of Klondex will be amended to create a new class of shares, to be designated the Class A Shares having the rights and restrictions set out in Schedule “A” to the Plan of Arrangement; and

 

  (ii)

each Klondex Share issued and outstanding immediately following the preceding steps of the Arrangement will be exchanged with Klondex (free and clear of any Encumbrances) for one Class A Share and one Havilah Share, and upon such exchange each exchanged Klondex Share will be cancelled.

 

  (j)

The Initial Havilah Share held by Klondex will be cancelled without any payment thereon.

 

  (k)

All of the issued and outstanding Havilah Shares held by a holder of Havilah Shares will be consolidated on the basis of one post-consolidation Havilah Share for each eight pre-consolidation Havilah Shares, and any fractional Havilah Shares resulting from such consolidation will be cancelled without payment or compensation therefor.

 

  (l)

Each Class A Share held by a Participating Former Securityholder who: (i) has duly and validly completed and delivered the applicable Election Document(s) electing to receive the Combination Consideration; or (ii) has not completed and delivered a the applicable Election Document(s) by the Election Deadline or who has otherwise failed to make a valid election to receive the Cash Consideration or Share Consideration in respect of such Participating Former Securityholder’s Klondex Shares, will be deemed to be transferred to Hecla Acquisition Subco (free and clear of all Encumbrances) in exchange for the Combination Consideration, consisting of US$0.8411 in cash and 0.4136 of a Hecla Share.

 

  (m)

Each Class A Share held by a Participating Former Securityholder who has duly and validly completed and delivered the applicable Election Document(s) electing to receive either (i) the Cash Consideration, or (ii) the Share Consideration in respect of all of such Participating Former Securityholder’s Klondex Shares will be deemed to be transferred to Hecla Acquisition Subco (free and clear of all Encumbrances) in exchange for:

 

  (i)

in the case of a Participating Former Securityholder validly electing to receive the Cash Consideration, the Cash Consideration (subject to proration as described in paragraph (n) below); and

 

  (ii)

in the case of a Participating Former Securityholder validly electing to receive the Share Consideration, the Share Consideration (subject to proration as described in paragraph (o) below).

 

  (n)

In the event that the sum of (A) the aggregate Combination Consideration Cash payable pursuant to paragraph (l) above and (B) the Aggregate Elected Cash, exceeds the Maximum Cash Consideration, each Participating Former Securityholder who validly elects to receive the Cash Consideration in respect of all of such Participating Former Securityholder’s Klondex Shares shall, notwithstanding paragraph (m) above:

 

  (i)

only be entitled to receive the Cash Consideration for that portion of their Class A Shares equal to a fraction, rounded to six decimal places, the numerator of which is the Maximum Cash Consideration minus the aggregate Combination Consideration Cash payable pursuant to paragraph (l) above, and the denominator of which is the Aggregate Elected Cash; and

 

- 60 -


Table of Contents
  (ii)

be entitled to receive the Share Consideration for the remaining portion of their Class A Shares (including, for the avoidance of doubt, a corresponding portion of the Share Consideration for any fractional Class A Share included in such remaining portion).

 

  (o)

In the event that the sum of (A) the aggregate Combination Consideration Shares payable pursuant to paragraph (l) above and (B) the Aggregate Elected Shares, exceeds the Maximum Shares Consideration, each Participating Former Securityholder who validly elects to receive the Share Consideration shall, notwithstanding paragraph (m) above:

 

  (i)

only be entitled to receive the Share Consideration for that portion of their Class A Shares equal to a fraction, rounded to six decimal places, the numerator of which is the Maximum Shares Consideration minus the aggregate Combination Consideration Shares payable pursuant to paragraph (l) above, and the denominator of which is the Aggregate Elected Shares; and

 

  (ii)

be entitled to receive the Cash Consideration for the remaining portion of their Class A Shares (including, for the avoidance of doubt, any fractional Class A Share included in such remaining portion).

 

  (p)

The resignations of those persons who are directors of the Company immediately prior to the Effective Time, and the appointment of the New Klondex Directors, shall be deemed to be effective immediately following the transfers of the Class A Shares to Hecla Acquisition Subco pursuant to paragraphs (l) and (m) above.

 

  (q)

Upon the resignation of the those persons who are directors of the Company immediately prior to the Effective Time becoming effective, each Klondex DSU outstanding immediately prior to the Effective Time shall be cancelled in exchange for a cash payment by Klondex to the holder of such Klondex DSU equal to the Company Share Value.

 

  (r)

The Klondex DSU Plan will be terminated.

 

  (s)

The notice of articles of 0985472 will be altered to provide that 0985472 will become an unlimited liability company, and that the name of 0985472 will be “0985472 Unlimited Liability Company”.

 

  (t)

The notice of articles of Klondex will be altered to provide that Klondex will become an unlimited liability company, and that the name of Klondex will be “Klondex Unlimited Liability Company”.

 

  (u)

Klondex and 0985472 will amalgamate under Section 288 of the BCBCA to form Amalco One ULC, which will be named “Klondex Mines Unlimited Liability Company”.

 

  (v)

Hecla Acquisition Subco and Amalco One ULC will amalgamate under Section 288 of the BCBCA to form one unlimited liability company continuing under the name “Klondex Mines Unlimited Liability Company”.

 

  (w)

Havilah will issue Havilah Shares to Hecla equal to 15.5535% of the issued and outstanding Havilah Shares immediately prior to the step in this paragraph (w) in exchange for US$7,000,000, such that Hecla will hold approximately 13.46% of the issued and outstanding Havilah Shares immediately following the completion of the Arrangement.

See Appendix “E” of this Circular for a copy of the Plan of Arrangement.

Consideration Election and Proration

Under the Arrangement, Klondex Shareholders will be entitled to receive, for each Klondex Share held: (i) the Hecla Consideration, as described in more detail below; and (ii) the Havilah Consideration, consisting of 0.125 of a Havilah Share (after giving effect to the Havilah Share Consolidation). Holders of Klondex Options and/or Klondex RSUs whose In-the-Money Klondex Options and/or Klondex RSUs are exchanged for Klondex Shares pursuant to the Arrangement will also be entitled to receive, for each such Klondex Share, the Hecla

 

- 61 -


Table of Contents

Consideration and Havilah Consideration in the same manner as Klondex Shareholders. For purposes of the following, references to Klondex Shareholders include holders of In-the-Money Klondex Options and/or Klondex RSUs who receive Klondex Shares pursuant to the Arrangement.

With respect to the Hecla Consideration, Hecla has agreed to pay to each Klondex Shareholder the equivalent of US$2.47 per Klondex Share (based on the relative values of the Klondex Shares and Hecla Shares as at March 16, 2018). The Hecla Consideration to be received by each Klondex Shareholder will consist of either: (i) the Cash Consideration; (ii) the Share Consideration; or (iii) the Combination Consideration, depending on which form of Hecla Consideration the Klondex Shareholder elects to receive (or is deemed to have elected to receive), all as more particularly described below and in the Plan of Arrangement. The actual Hecla Consideration received by a Klondex Shareholder will depend upon such Klondex Shareholder’s consideration election (or deemed election) and, in the case of Klondex Shareholders electing to receive the Cash Consideration or Share Consideration, on the effect of proration.

Klondex Shareholders who elect to receive the Combination Consideration will receive 0.4136 of a Hecla Share and US$0.8411 in cash for each Klondex Share held by them. Klondex Shareholders (other than Dissenting Shareholders) who do not elect to receive the Cash Consideration or the Share Consideration, or who fail to make a valid election as to the form of Hecla Consideration that they wish to receive, will be deemed to have elected to receive the Combination Consideration for each Klondex Share held by them. Klondex Shareholders who elect, or who are deemed to have elected, to receive the Combination Consideration will not be subject to any proration with respect to the cash and Hecla Shares to be received by them.

Set forth below is a summary description of the proration calculations arising as a result of the Maximum Cash Consideration and Maximum Shares Consideration that Hecla is required to deliver under the Arrangement. As a result of the maximums on both cash and Hecla Shares that Hecla is required to deliver under the Arrangement, along with the proration calculations that ensue from those maximums, it is likely that Klondex Shareholders who elect to receive either the Cash Consideration or the Share Consideration will end up receiving both cash and Hecla Shares, notwithstanding their election. If all Klondex Shareholders were to elect to receive either the Cash Consideration or the Share Consideration, then as a result of proration the Hecla Consideration received by each Klondex Shareholder would consist of 0.4136 of a Hecla Share and US$0.8411 in cash for each Klondex Share.

Klondex Shareholders who validly elect to receive the Cash Consideration will, subject to the proration mechanism described below, be entitled to receive US$2.47 in cash for each Klondex Share held by them. The Maximum Cash Consideration that Hecla is required to deliver under the Arrangement is US$157,410,417. The Maximum Cash Consideration will be allocated, first, to Klondex Shareholders who elect, or who are deemed to have elected, to receive the Combination Consideration, to the extent of US$0.8411 per Klondex Share. Consequently, Klondex Shareholders who elect to receive the Cash Consideration will only be entitled to receive the Cash Consideration in respect of each Klondex Share held by them if other Klondex Shareholders elect to receive the Share Consideration in respect of an equivalent or greater number of Klondex Shares. If the number of Klondex Shares in respect of which Klondex Shareholders elect to receive the Share Consideration is less than the number of Klondex Shares in respect of which Klondex Shareholders elect to receive the Cash Consideration, Klondex Shareholders who elect to receive the Cash Consideration will, instead of receiving US$2.47 in cash for each Klondex Share, receive a lesser amount of cash (which shall be not less than US$0.8411) and a portion of a Hecla Share (not exceeding 0.4136 of a Hecla Share) for each Klondex Share, all as more particularly provided for in the Plan of Arrangement. If all Klondex Shareholders validly elect to receive the Cash Consideration, or if no Klondex Shareholders elect to receive the Share Consideration, a Klondex Shareholder electing to receive the Cash Consideration would receive US$0.8411 in cash and 0.4136 of a Hecla Share for each Klondex Share held by them.

Klondex Shareholders who validly elect to receive the Share Consideration will, subject to the proration mechanism described below, be entitled to receive 0.6272 of a Hecla Share for each Klondex Share held by them.

 

- 62 -


Table of Contents

The Maximum Shares Consideration that Hecla is required to deliver under the Arrangement is 77,411,859 Hecla Shares. The Maximum Shares Consideration will be allocated, first, to Klondex Shareholders who elect, or who are deemed to have elected, to receive the Combination Consideration, to the extent of 0.4136 of a Hecla Share per Klondex Share. Consequently, Klondex Shareholders who elect to receive the Share Consideration will only be entitled to receive the Share Consideration in respect of each Klondex Share held by them if other Klondex Shareholders elect to receive the Cash Consideration in respect of an equivalent or greater number of Klondex Shares. If the number of Klondex Shares in respect of which Klondex Shareholders elect to receive the Cash Consideration is less than the number of Klondex Shares in respect of which Klondex Shareholders elect to receive the Share Consideration, Klondex Shareholders who elect to receive the Share Consideration will, instead of receiving 0.6272 of a Hecla Share for each Klondex Share, receive a lesser portion of a Hecla Share (which shall not be less than 0.4136 of a Hecla Share) and cash (not exceeding US$0.8411) for each Klondex Share, all as more particularly provided for in the Plan of Arrangement. If all Klondex Shareholders validly elect to receive the Share Consideration, or if no Klondex Shareholders elect to receive the Cash Consideration, a Klondex Shareholder electing to receive the Share Consideration would receive US$0.8411 in cash and 0.4136 of a Hecla Share for each Klondex Share held by them.

Fractional Interests

To the extent the aggregate number of Hecla Shares or Havilah Shares that a Klondex Shareholder would otherwise be entitled to receive under the Arrangement includes a fractional share, the actual number of Hecla Shares or Havilah Shares, as applicable, to be received by the Klondex Shareholder will, without additional compensation, be rounded down to the nearest whole number of shares.

Any cash component of the Arrangement Consideration payable pursuant to the Arrangement that is less than one cent will be rounded down to the next whole cent.

Treatment of Klondex Options

Under the Arrangement, each In-the-Money Klondex Option outstanding immediately prior to the Effective Time will be deemed to be unconditionally vested and transferred to Klondex in exchange for that number of Klondex Shares (rounded down to the nearest whole number) obtained by dividing (i) the In-the-Money Amount of such option, by (ii) the Company Share Value. Each holder of In-the-Money Klondex Options who, pursuant to the Arrangement, receives Klondex Shares in exchange for their In-the-Money Klondex Options will, pursuant to the Arrangement, be entitled to receive the Hecla Consideration and the Havilah Consideration for each such Klondex Share to the same extent as a Klondex Shareholder (including making an election as to the form of Hecla Consideration they wish to receive).

Under the Arrangement, each holder of Out-of-the-Money Klondex Option outstanding immediately prior to the Effective Time (whether vested or unvested) will, notwithstanding the terms of the Klondex Option Plans, be cancelled without any payment therefor, and neither Klondex nor Hecla will be obligated to pay the holder any amount in respect of such Out-of-the-Money Klondex Option.

Treatment of Klondex RSUs and Performance RSUs

Under the Arrangement, each Klondex RSU outstanding immediately prior to the Effective Time (whether vested or unvested) will, notwithstanding the terms of the Klondex Option Plans, be deemed to be assigned and transferred to Klondex in exchange for one Klondex Share. Each holder of a Klondex RSU who, pursuant to the Arrangement, receives a Klondex Share in exchange for such Klondex RSU will, pursuant to the Arrangement, be entitled to receive the Hecla Consideration and the Havilah Consideration for each such Klondex Share to the same extent as a Klondex Shareholder (including making an election as to the form of Hecla Consideration they wish to receive).

 

- 63 -


Table of Contents

Each Performance RSU outstanding immediately prior to the Effective Time (whether vested or unvested) will, notwithstanding the terms of the Klondex 2016 Stock Option Plan, be settled by a cash payment to the holder thereof on the Effective Date of the Arrangement of an amount determined by Hecla to be properly due to such holder based on the terms of such Performance RSU.

Treatment of Klondex DSUs

Under the Arrangement, each Klondex DSU outstanding immediately prior to the Effective Time will, upon the resignation of the holder of such Klondex DSU as an officer or director of Klondex in accordance with the Plan of Arrangement, be cancelled in exchange for a cash payment by the Company to the holder of such Klondex DSU equal to the Company Share Value.

Treatment of Klondex Warrants

Klondex Warrants are not subject to the Arrangement. Upon completion of the Arrangement, any Klondex Warrants that have not been exercised will be adjusted such that, upon exercise of such warrant after the completion of the Arrangement, the holder of the Klondex Warrant will receive consideration which such holder is entitled to receive under the terms of such Klondex Warrant.

See “Note 2. Description of the Arrangement” of the pro forma financial statements of the Combined Company in Appendix “L” of this Circular and “Description of Capital StructureHavilah Warrants” in Appendix “I” of this Circular.

Spin-off Transaction

Pursuant to the Plan of Arrangement and the Havilah Contribution Agreement, and in connection therewith, Klondex will transfer all of its legal and beneficial right, title and interest in and to the Havilah Property to Havilah in consideration for the issuance by Havilah to Klondex of the Distribution Havilah Shares. The Distribution Havilah Shares will then be distributed to holders of Klondex Shares as part of a reorganization of the capital of Klondex, following which the Havilah Shares will be consolidated on the basis of one post-consolidation Havilah Share for each eight pre-consolidation Havilah Shares. Hecla will then subscribe for Havilah Shares in exchange for cash consideration of US$7,000,000, so that immediately following the completion of the Arrangement, Hecla will hold approximately 13.46% of the issued and outstanding Havilah Shares.

Approval of Arrangement Resolution

At the Meeting, Klondex Securityholders will be asked to consider, and if thought advisable, to approve the Arrangement Resolution, the full text of which is set out in Appendix “B” of this Circular. In order for the Arrangement to become effective, as provided in the Interim Order and by the BCBCA, the Arrangement Resolution must be approved by: (a) at least two-thirds (66 23%) of the votes cast on the Arrangement Resolution at the Meeting by Klondex Shareholders, present in person or represented by proxy and entitled to vote at the Meeting; and (b) at least two-thirds (66 23%) of the votes cast at the Meeting by Klondex Securityholders voting together as a single class, present in person or represented by proxy and entitled to vote at the Meeting (see “Part 11 – Securities Law Matters – Canadian Securities Law Matters” and “Part 12 – Regulatory Matters” of this Circular). If the Arrangement Resolution is not approved at the Meeting by the requisite majorities as provided above, the Arrangement will not be completed.

The Klondex Board has approved the terms of the Arrangement Agreement and the Plan of Arrangement and unanimously recommends that Klondex Securityholders vote FOR the Arrangement Resolution.

See “Part 7 – The Arrangement – Recommendation of the Klondex Board” of this Circular above.

 

- 64 -


Table of Contents

Voting and Support Agreements

Effective March 16, 2018, Hecla entered into Klondex Support Agreements or Klondex Voting Agreements, as applicable, with each of the Klondex Directors and officers of Klondex, as well as Klondex Support Letter Agreements with two institutional Klondex Shareholders. The Klondex Voting Agreements and Klondex Support Letter Agreements set forth, among other things, the agreement of certain of the Klondex Locked-up Securityholders to vote their Klondex Shares and Other Affected Securities in favour of the Arrangement Resolution.

As of the Record Date, 46,416,374 of the outstanding 185,152,053 Affected Securities were subject to either a Klondex Voting Agreement or a Klondex Support Letter Agreement, representing approximately 25.07% of the votes which may be cast by Klondex Securityholders at the Meeting.

Klondex Voting Agreements and Klondex Support Agreements

All of the Klondex Directors and officers of Klondex have entered into either Klondex Voting Agreements or Klondex Support Agreements, under which the Klondex Director and officers of Klondex are prohibited from exercising Dissent Rights at any time prior to the completion of the Arrangement.

Under the Klondex Voting Agreements, each of the following Klondex Directors and officers of Klondex has agreed to, among other things, support the Arrangement and to vote their Klondex Shares and Other Affected Securities (including any Klondex Shares issued upon the exercise or exchange of any Other Affected Securities) in favour of the Arrangement Resolution and against any Acquisition Proposal and/or any action, proposal, transaction or agreement that could reasonably be expected to impede, interfere with, delay, discourage, adversely affect or inhibit the timely consummation of the Arrangement: William Matlack, Blair Schultz, Paul Huet, Richard Hall, Barry Dahl, James Haggarty and Rodney Cooper. One of the directors of Klondex who has entered into a Klondex Voting Agreement intends to pledge his Klondex Shares to a third party lender for personal financial planning purposes. The director will still have complete control and direction over voting of the Klondex Shares and will continue to be subject to the Klondex Voting Agreement.

Under the Klondex Support Agreements, each of the following Klondex Directors and officers of Klondex has agreed to, among other things, cooperate with Klondex and Hecla to successfully complete the Arrangement: Brian Morris, Charles Oliver, John Antwi, Mark Daniel and Michael Doolin.

Under the terms of the Klondex Voting Agreements and Klondex Support Agreements, Hecla has acknowledged that any Klondex Locked-up Securityholder who is also a Klondex Director or an officer of Klondex is bound under the Klondex Voting Agreements or Klondex Support Agreements, as applicable, only in such person’s capacity as a Klondex Securityholder, and not in his or her capacity as a Klondex Director or officer of Klondex.

The Klondex Voting Agreements and the Klondex Support Agreements terminate upon, among other things: (a) mutual agreement; (b) the election of the Klondex Locked-up Securityholder if Hecla and Klondex amend the terms of the Arrangement Agreement in a manner that reduces the amount of consideration payable to such securityholder without such securityholder’s prior written consent; (c) a party’s election following a breach of the other party’s covenant, representation or warranty; (d) the completion of the Arrangement; and (e) the date of termination of the Arrangement Agreement in accordance with the terms thereof.

Klondex Support Letter Agreement

Hecla has entered into Klondex Support Letter Agreements with two institutional Klondex Shareholders. The Klondex Support Letter Agreements set forth, among other things, the agreement of each of the two institutional Klondex Shareholders to vote, or cause to be voted, any Klondex Shares that such Klondex Shareholder exercises control over in favour of the Arrangement Resolution.

 

- 65 -


Table of Contents

The Klondex Support Letter Agreements terminate upon, among other things: (a) the election of the Klondex Locked-up Securityholder if Hecla and Klondex amend the terms of the Arrangement Agreement in a manner that reduces the amount of consideration payable to such securityholder without such securityholder’s prior written consent; (b) if the Arrangement Agreement is terminated for any reason; (c) if the outside date set out in the Arrangement Agreement is extended beyond the date which is four months after the date of the Klondex Support Letter Agreement without prior written consent of such shareholder; (d) if the Klondex Directors withdraw their approval of the Arrangement or approve or recommend any Superior Proposal in respect of Klondex in a manner that complies with the Arrangement Agreement; or (e) if the representations and warranties of each of Hecla and Hecla Acquisition Subco as set forth in the Arrangement Agreement are not true and correct or Hecla or Hecla Acquisition Subco have not complied with all of their covenants to Klondex contained in the Arrangement Agreement and such non-compliance has not been cured within five business days after receipt of written notice of such non-compliance, delivered by the Klondex Locked-up Securityholder or Klondex.

Interests of Certain Persons in the Arrangement

In considering the unanimous recommendation of the Klondex Board with respect to the Arrangement, Klondex Securityholders should be aware that certain members of Klondex Management and the Klondex Board have certain interests in connection with the Arrangement that may present them with actual or potential conflicts of interest in connection with the Arrangement. The Klondex Board is aware of these interests and considered them along with other matters described under “Part 7 – The Arrangement – Reasons for the Arrangement” of this Circular above.

Klondex Management and the Klondex Directors beneficially own, directly or indirectly, or exercise control or direction over, in the aggregate:

 

   

3,207,178 Klondex Shares (excluding Klondex Shares issuable upon the exercise of Affected Securities and Performance RSUs), representing approximately 1.78% of the 180,079,072 Klondex Shares outstanding as of the close of business on May 15, 2018;

 

   

410,824 Klondex RSUs, representing approximately 40.4% of the 1,017,011 Klondex RSUs outstanding as of the close of business on May 15, 2018;

 

   

2,919,167 Klondex Options, representing approximately 78.99% of the 3,695,604 Klondex Options outstanding as of the close of business on May 15, 2018;

 

   

395,528 Performance RSUs, representing 100% of the 395,528 Performance RSUs outstanding as of the close of business on May 15, 2018; and

 

   

360,366 Klondex DSUs, representing 100.00% of the 360,366 Klondex DSUs outstanding as of the close of business on May 15, 2018.

All of the Affected Securities and Performance RSUs held by Klondex Management and the Klondex Directors will be treated in the same fashion under the Arrangement as Affected Securities and Performance RSUs held by any other Klondex Securityholder or any other holder of Performance RSUs. For a summary of the Affected Securities and Performance RSUs beneficially owned or controlled or directed by each of the members of Klondex Management and each Klondex Director, see “Part 20 – Information Concerning the Company – Ownership of Securities”. Klondex Management and employees of the Company have “change of control” provisions (also referred to as “change-in-control” provisions) as part of their employment, consulting or change of control agreements, as applicable, with the Company. Upon completion of the Arrangement, Klondex Management will be entitled to change of control payments to the extent that within 180 days following the Effective Date their employment is terminated (i) without just cause or (ii) by the employee for “good reason” pursuant to their respective employment or consulting agreements, as applicable. For change of control payments payable when employment is terminated not for “good reason”, see “Part 29 – Statement of Executive Compensation – Termination in the Event of a Change of Control” of this Circular. Listed below is a summary of

 

- 66 -


Table of Contents

the estimated lump sum change of control payments (the “Lump Sum Payments”) applicable to the members of Klondex Management as of the date of this Circular:

 

Name and Position

   Estimated Change of Control
Payment (US$)
 

Paul Huet

  

President and Chief Executive Officer

  

Cash severance entitlement(1)

     2,106,800  

Acceleration of equity awards(2)

     1,057,258  

In-the-Money Option Value(2)

     132,352  

Group benefits entitlement(3)

     78,560  
  

 

 

 

Total Termination Entitlement

     3,374,970  
  

 

 

 

Barry Dahl

  

Chief Financial Officer and Corporate Secretary

  

Cash severance entitlement(1)

     683,833  

Acceleration of equity awards(2)

     351,169  

In-the-Money Option Value(2)

     164,154  

Group benefits entitlement(3)

     52,373  
  

 

 

 

Total Termination Entitlement

     1,251,529  
  

 

 

 

John Antwi

  

Senior Vice President, Corporate Development and Planning

  

Cash severance entitlement(1)

     491,200  

Acceleration of equity awards(2)

     163,586  

In-the-Money Option Value(2)

     —    

Group benefits entitlement(3)

     45,827  
  

 

 

 

Total Termination Entitlement

     700,613  
  

 

 

 

Michael Doolin

  

Chief Operating Officer

  

Cash severance entitlement(1)

     813,233  

Acceleration of equity awards(2)

     398,035  

In-the-Money Option Value(2)

     204,113  

Group benefits entitlement(3)

     32,551  
  

 

 

 

Total Termination Entitlement

     1,447,932  
  

 

 

 

Brian Morris

  

Senior Vice President of Exploration

  

Cash severance entitlement(1)

     500,250  

Acceleration of equity awards(2)

     250,463  

In-the-Money Option Value(2)

     385,661  

Group benefits entitlement(3)

     36,471  
  

 

 

 

Total Termination Entitlement

     1,172,845  
  

 

 

 

TOTAL:

     7,947,889  
  

 

 

 

Notes:

 

(1)

Represents cash payments based on base salary and target STIP Bonus amounts, as modified for length of service (other than for Mr. Huet), as further described under “Part 29 – Statement of Executive Compensation – Termination and Change of Control Benefits – NEO Employment Agreements of this Circular.

(2)

Represents cash value in respect of (i) in-the-money value of stock options upon completion of the Arrangement including any accelerated vesting, where the value is based on the difference between US$2.71 and the exercise price of the options which was converted from C$ to US$ based on the exchange

 

- 67 -


Table of Contents
 

rate on May 11, 2018 of US$1.00 per C$1.2779; and (ii) cash value for accelerated vesting of time-based Klondex RSUs and Performance RSUs, based on the offer price of the Klondex Shares of US$2.71. The Performance RSUs will fully vest and, to the extent unearned, will vest at target. Under the terms of the Arrangement Agreement, the stock options and Klondex RSUs referred to above will effectively be vested immediately prior to the Effective Time, with the holders thereof receiving Klondex Shares, and ultimately receiving the Arrangement Consideration for such Klondex Shares. As a result, the amounts attributable to the stock options and the Klondex RSUs in the table above would not represent an additional payment following the Effective Time, but would effectively be received in the form of Arrangement Consideration.

(3)

Represents amounts received in respect of total Group Benefits, as modified for length of services (other than for Mr. Huet), as further described under “Part 29 – Statement of Executive Compensation –Termination and Change of Control Benefits – NEO Employment Agreements” of this Circular.

Indemnification and Insurance

Consistent with standard practice in similar transactions, in order to ensure that Klondex Directors do not lose or forfeit their protection under liability insurance policies maintained by Klondex, the Arrangement Agreement provides for the maintenance of such protection for six years.

Pursuant to the Arrangement Agreement, prior to the Effective Time, Klondex may purchase prepaid non-cancellable “run-off” directors’ and officers’ liability insurance providing coverage for a period of six years from the Effective Date with respect to claims arising from or related to facts or events which occur on or prior to the Effective Date, provided that the total cost of such run-off directors’ and officers’ liability insurance shall not exceed 200% of Klondex’s current annual aggregate premium for directors’ and officers’ liability insurance currently maintained by the Company and its subsidiaries, as disclosed to Hecla prior to the date of the Arrangement Agreement.

Hecla and Klondex have agreed that all rights to indemnification existing in favour of the present and former Klondex directors and officers of Klondex (each such present or former director or officer of the Company being herein referred to as an “Indemnified Party” and such persons collectively being referred to as the “Indemnified Parties”) as provided by contracts or agreements to which the Company is a party and in effect as of the date of the Arrangement Agreement, will: (i) survive, and continue in full force and effect following, the completion of the transaction contemplated by the Arrangement Agreement; and (ii) shall not be modified by such completion, and from and after the Effective Time, Hecla will and will cause the Company and any successor to the Company to continue to honour such rights of indemnification and indemnify the Indemnified Parties pursuant thereto, with respect to actions or omissions of the Indemnified Parties occurring prior to the Effective Time, for six years following the Effective Date.

Klondex Options, Klondex RSUs, Performance RSUs, Klondex DSUs and Klondex Warrants

Under the Arrangement, each In-the-Money Klondex Option outstanding immediately prior to the Effective Time (whether vested or unvested) will, notwithstanding the terms of the Klondex Option Plans, be deemed to be fully vested and will be exchanged for that number of Klondex Shares (rounded down to the nearest whole number) obtained by dividing: (i) the In-the-Money Amount of such option, by (ii) the Company Share Value. Holders of such In-the-Money Klondex Options will be entitled to participate in the Arrangement in respect of the Klondex Shares received by them to the same extent as other Klondex Shareholders.

Under the Arrangement, each Out-of-the-Money Klondex Option outstanding immediately prior to the Effective Time (whether vested or unvested) will, notwithstanding the terms of the Klondex Option Plans, be cancelled without any payment therefor, and neither Klondex nor Hecla will be obligated to pay the holder any amount in respect of such Out-of-the-Money Klondex Option.

Under the Arrangement, each Klondex RSU outstanding immediately prior to the Effective Time (whether vested or unvested) will, notwithstanding the terms of the Klondex Option Plans, be deemed to be fully vested and

 

- 68 -


Table of Contents

transferred to Klondex in exchange for one Klondex Share. Holders of such Klondex RSUs will be entitled to participate in the Arrangement in respect of the Klondex Shares received by them to the same extent as other Klondex Shareholders.

Under the Arrangement, each Performance RSU outstanding immediately prior to the Effective Time (whether vested or unvested) will, notwithstanding the terms of the Klondex 2016 Stock Option Plan, be deemed to be fully vested and transferred to Klondex (free and clear of all Encumbrances) in exchange for a cash payment in an amount determined by Hecla to be properly due to such holder based on the terms of such Performance RSU.

Each Klondex DSU outstanding immediately prior to the Effective Time will, upon the resignation of the holder of such Klondex DSU as an officer or director of Klondex pursuant to the Plan of Arrangement, be cancelled in exchange for a cash payment by the Company to the holder of such Klondex DSU equal to the Company Share Value.

Klondex Warrants are not subject to the Arrangement. Upon completion of the Arrangement, the Klondex Warrants will be adjusted such that, upon exercise of such warrant after the completion of the Arrangement, the holder the Klondex Warrant will receive consideration which such holder is entitled to receive under the terms of such Klondex Warrant. See “Note 2. Description of the Arrangement” of the pro forma financial statements of the Combined Company in Appendix “L” of this Circular and “Description of Capital Structure – Havilah Warrants” in Appendix “I” of this Circular.

MI 61-101 Protection of Minority Security Holders in Special Transactions

The Arrangement is subject to the requirements of MI 61-101. MI 61-101 is intended to regulate certain transactions to ensure equality of treatment among shareholders, generally requiring enhanced disclosure, approval by a majority of shareholders excluding interested or related parties, independent valuations and, in certain instances, approval and oversight of the transaction by a special committee of independent directors. The protections of MI 61- 101 apply to a reporting issuer proposing to carry out a “business combination” (as defined in MI 61-101).

A transaction such as the Arrangement constitutes a “business combination” for purposes of MI 61-101 if, at the time the Arrangement is agreed to, a “related party” of the Company, such as a Klondex Director, a member of Klondex Management or a 10% Klondex Shareholder, is entitled to receive, as a consequence of the transaction, a “collateral benefit”.

A “collateral benefit” is broadly defined for purposes of MI 61-101 and means, subject to certain specified exclusions, any benefit that a related party of the issuer is entitled to receive, directly or indirectly, as a consequence of the transaction, including, without limitation, an increase in salary, a lump sum payment, a payment for surrendering securities or other enhancement in benefits related to past or future services as an employee, director or consultant of the issuer or of another person, regardless of the existence of any offsetting costs to the related party or whether the benefit is provided, or agreed to, by the issuer or another party to the transaction.

The definition of “collateral benefit” contains certain exclusions. In that regard, a benefit received by a related party of the Company is not considered to be a collateral benefit if the benefit is received solely in connection with the related party’s services as an employee, director or consultant of the Company or an affiliated entity and: (i) the benefit is not conferred for the purpose, in whole or in part, of increasing the value of the consideration paid to the related party for securities relinquished under the Arrangement; (ii) the conferring of the benefit is not, by its terms, conditional on the related party supporting the Arrangement in any manner; (iii) full particulars of the benefit are disclosed in this Circular; and (iv) either (A) at the time the Arrangement was agreed to, the related party and its associated entities beneficially own or exercise control or direction over less than 1% of the outstanding Klondex Shares, or (B) (x) if the transaction is a “business combination”, the related party discloses to the Independent Committee the amount of consideration that the related party expects it will be

 

- 69 -


Table of Contents

beneficially entitled to receive, under the terms of the Arrangement, in exchange for equity securities beneficially owned by the related party, (y) the Independent Committee, acting in good faith, determines that the value of the benefit, net of any offsetting costs to the related party, is less than 5% of the value referred to in (x), and (z) the Independent Committee’s determination is disclosed in this Circular.

As set out under the heading “Part 7 – The Arrangement – Interests of Certain Persons in the Arrangement” of this Circular above, certain members of Klondex Management may be entitled to change of control payments, severance payments and/or other benefits in connection with the completion of the Arrangement. The Lump Sum Payments to which certain members of Klondex Management are entitled to are set out in “Part 7 – The Arrangement – Interests of Certain Persons in the Arrangement” of this Circular.

None of the Lump Sum Payments were conferred for the purpose, in whole or in part, of increasing the value of the consideration paid to such individuals for securities relinquished under the Arrangement and the making of such payments is not conditional on any of such individuals supporting the Arrangement. The Lump Sum Payments will be effected pursuant to each individual’s existing employment or consulting agreement.

As each of Messrs. Huet, Dahl, Antwi, Doolin and Morris beneficially owns or exercises control or direction over less than 1% of the outstanding Klondex Shares, any Lump Sum Payments to which such individuals are or may be entitled do not constitute a “collateral benefit” for purposes of MI 61-101.

Given that the Arrangement does not constitute a “business combination” under which a “related party” of the Company, such as a Klondex Director, a member of Klondex Management or a 10% Klondex Shareholder, is entitled to receive, as a consequence of the transaction, a “collateral benefit”, MI 61-101 does not apply to the Arrangement.

Fees and Expenses

All expenses incurred in connection with the Arrangement and the transactions contemplated thereby shall be paid by the party incurring such expense, subject to an Expense Reimbursement Event. The estimated fees, costs and expenses of Klondex in connection with the Arrangement, including without limitation, financial advisors’ fees, filing fees, legal and accounting fees, proxy solicitation fees, run-off insurance and other administrative and professional fees and printing and mailing costs, are anticipated to be approximately US$[4.735] million (excluding any success fees), based on certain assumptions.

Court Approval of the Arrangement

An arrangement under the BCBCA requires Court approval.

Interim Order

On [●], 2018, Klondex obtained the Interim Order providing for the calling and holding of the Meeting, the Dissent Rights and certain other procedural matters. The text of the Interim Order is set out in Appendix “F” of this Circular.

Final Order

Subject to the terms of the Arrangement Agreement, provided the Arrangement Resolution is approved by Klondex Securityholders at the Meeting in the manner required by the Interim Order, Klondex intends to make an application to the Court for the Final Order.

The application for the Final Order approving the Arrangement is currently scheduled for [●], 2018 at [● a.m./p.m. (Pacific Daylight Time)], or as soon thereafter as counsel may be heard, at the Vancouver Law Courts

 

- 70 -


Table of Contents

located at 800 Smithe Street, Vancouver, British Columbia, or at any other date and time as the Court may direct. Any Klondex Securityholder or any other interested party who wishes to appear or be represented and to present evidence or arguments at that hearing of the application for the Final Order must file and serve a response to petition and any evidence upon which they intend to rely no later than [● a.m./p.m. (Pacific Daylight Time)] on [●], 2018 along with any other documents required, all as set out in the Interim Order and the Notice of Petition, the text of which are set out in Appendix “F” to this Circular, and satisfy any other requirements of the Court. Such persons should consult with their legal advisors as to the necessary requirements. In the event that the hearing is adjourned, then, subject to further order of the Court, only those persons having previously filed and served a response to petition will be given notice of the adjournment.

The Court has broad discretion under the BCBCA when making orders with respect to the Arrangement. The Court will consider, among other things, the fairness and reasonableness of the Arrangement, both from a substantive and a procedural point of view. The Court may approve the Arrangement, either as proposed or as amended, on the terms presented or substantially on those terms. Depending upon the nature of any required amendments, Klondex and/or Hecla may determine not to proceed with the Arrangement.

The Hecla Shares and the Havilah Shares to be issued pursuant to the Arrangement have not been and will not be registered under the U.S. Securities Act or the Securities Laws of any state of the United States and will be issued and exchanged in reliance upon the exemption from the registration requirements of the U.S. Securities Act provided by Section 3(a)(10) thereof and exemptions provided from the Securities Laws of each state of the United States in which Klondex Securityholders reside. Section 3(a)(10) of the U.S. Securities Act exempts the issuance of any securities issued in exchange for one or more bona fide outstanding securities from the general requirement of registration where the terms and conditions of the issuance and exchange of such securities have been approved by a court of competent jurisdiction that is expressly authorized by law to grant such approval, after a hearing upon the fairness of the terms and conditions of such issuance and exchange at which all persons to whom it is proposed to issue the securities have the right to appear and receive timely and adequate notice thereof. The Court will be advised prior to the hearing of the application for the Final Order that if the terms and conditions of the Arrangement, and the fairness thereof, are approved by the Court, the Hecla Shares and Havilah Shares to be received by Klondex Securityholders pursuant to the Arrangement will not require registration under the U.S. Securities Act. Accordingly, the Final Order of the Court will, if granted, constitute a basis for the exemption from the registration requirements of the U.S. Securities Act with respect to the issuance and exchange of the Hecla Shares for the Klondex Shares and the issuance of the Havilah Shares pursuant to the Arrangement.

See “Part 11 – Securities Law Matters – United States Securities Law Matters” of this Circular. For a copy of the Interim Order, see Appendix “F” of this Circular.

Completion of the Arrangement

Subject to the provisions of the Arrangement Agreement, the Arrangement will become effective at the Effective Time on the Effective Date, being the date upon which all of the conditions to completion of the Arrangement as set out in the Arrangement Agreement have been satisfied or waived in accordance with the Arrangement Agreement, all documents agreed to be delivered thereunder have been delivered to the satisfaction of the recipient, acting reasonably, and the filings required under the BCBCA have been filed with the Registrar. Completion of the Arrangement is expected to occur in the second quarter of 2018, but no later than July 16, 2018, unless otherwise agreed to between Klondex and Hecla.

Withholding Rights

Klondex, Hecla, Hecla Acquisition Subco, Havilah and the Depositary will be entitled to deduct and withhold from any consideration otherwise payable to any Former Securityholder under the Plan of Arrangement and from any and all dividends or other distributions otherwise payable to any Former Securityholder (including any

 

- 71 -


Table of Contents

payment to Dissenting Shareholders) such amounts as they are required to deduct and withhold with respect to such payment under the Tax Act, the U.S. Tax Code or any provision of any applicable federal, provincial, state, local or foreign tax law or treaty, in each case, as amended, and may sell on behalf of any Former Securityholder any Hecla Shares or Havilah Shares deliverable to such Former Securityholder, in order to remit to a taxing authority a sufficient amount to comply with such tax laws. To the extent that amounts are so withheld, such withheld amounts shall be treated for all purposes hereof as having been paid to the particular person, provided that such amounts are actually remitted to the appropriate Governmental Authority by or on behalf of Klondex, Hecla, Hecla Acquisition Subco, Havilah or the Depositary, as the case may be.

Limitation and Proscription After Three Years

To the extent that a Participating Former Securityholder has not complied with the provisions of the Plan of Arrangement described under the heading “Part 16 – Procedure for Receipt of Arrangement Consideration” of this Circular, on or before the date that is three years after the Effective Date, then the aggregate cash forming part of the Hecla Consideration to which such Participating Former Securityholder was entitled under the Arrangement shall be returned to Hecla and the Hecla Shares and Havilah Shares that such Participating Former Securityholder was entitled to receive shall be automatically cancelled without any repayment of capital in respect thereof and the certificates representing such Hecla Shares and the Havilah Shares shall be delivered by the Depositary to Hecla or Havilah, as applicable, and the interest of the Participating Former Securityholder in such cash, Hecla Shares and Havilah Shares to which it was entitled shall be terminated.

None of Klondex or Hecla, or any of their respective successors, will be liable to any person in respect of any Arrangement Consideration (including any consideration previously held by the Depositary in trust for any such former holder) which is forfeited to Klondex or Hecla or delivered to any public official pursuant to any applicable abandoned property, escheat or similar law. Accordingly, former Klondex Shareholders who deposit with the Depositary Klondex Share certificates or a DRS Statement representing Klondex Shares after the third anniversary of the Effective Date will not receive Hecla Shares or any other consideration in exchange therefor and will not own any interest in Klondex or Hecla, and will not be paid any compensation.

Effects of the Arrangement on Klondex Securityholders’ Rights

Klondex Shareholders receiving Hecla Shares under the Arrangement will become stockholders of Hecla. Hecla is incorporated under the Laws of the State of Delaware.

The rights of a stockholder of a Delaware corporation differ from the rights of a shareholder of a BCBCA corporation. See Appendix “O” of this Circular for a summary comparison of the rights of Klondex Shareholders and stockholders of Hecla. The rights of Klondex Shareholders are governed by the BCBCA and by Klondex’s notice of articles and articles. Following the Arrangement, Klondex Shareholders who receive Hecla Shares as part of the Arrangement will become stockholders of Hecla and as such their rights will be governed by the DGCL and by Hecla’s certificate of incorporation and by-laws. Klondex Shareholders are encouraged to consult with their legal advisors for greater detail with respect to these differences.

PART 8. THE ARRANGEMENT AGREEMENT

The description of the Arrangement Agreement, both below and elsewhere in this Circular, is a summary only, is not exhaustive, is not intended as a substitute for reviewing the Arrangement Agreement, and is qualified in its entirety by reference to the full text of the Arrangement Agreement, which is attached to this Circular as Appendix “P” and can also be found under the Company’s issuer profile on SEDAR at www.sedar.com and on EDGAR at www.sec.gov/edgar.

The Arrangement Agreement has been included in this Circular to provide Klondex Securityholders with information regarding terms of the Arrangement. It is not intended to provide any other factual information about

 

- 72 -


Table of Contents

the Parties to the Arrangement Agreement or their respective subsidiaries or affiliates. See “Part 8 – The Arrangement Agreement – Representations and Warranties” below for additional detail.

Effective Date and Conditions of Arrangement

If the Arrangement Resolution is passed, the Final Order of the Court is obtained approving the Arrangement, every requirement of the BCBCA relating to the Arrangement has been complied with and all other conditions to the Arrangement Agreement as summarized under “Part 8 – The Arrangement Agreement – Conditions to the Arrangement Becoming Effective” are satisfied or waived, the Arrangement will become effective at 12:01 a.m. (Pacific Daylight Time) on the Effective Date. It is currently expected that the Effective Date will be on or about [●], 2018.

Representations and Warranties

The Arrangement Agreement contains representations and warranties made by Klondex to Hecla and representations and warranties made by Hecla to Klondex. Those representations and warranties were made solely for purposes of the Arrangement Agreement and may be subject to important qualifications, limitations and exceptions agreed to by the Parties in connection with negotiating its terms. In particular, some of the representations and warranties are subject to a contractual standard of materiality or Klondex Material Adverse Effect or Hecla Material Adverse Effect standard, which is different from that generally applicable to public disclosure to Klondex Securityholders, or are used for the purpose of allocating risk between the Parties to the Arrangement Agreement. Klondex Securityholders are not third-party beneficiaries under the Arrangement Agreement and should not rely on the representations and warranties contained in the Arrangement Agreement as statements of factual information at the time they were made or otherwise.

The representations and warranties provided by Klondex in favour of Hecla are extensive and relate to, among other things, organization and qualification, standing and power, charter documents, minutes, subsidiaries, books and records, authority relative to the Arrangement Agreement, required approvals and consents, no violation, capital structure, compliance with laws, compliance with Securities Laws, compliance with anti-bribery and anti-money laundering laws, expropriation, permits, securities filings, litigation, environmental matters, real property, personal property, mining claims, technical reports, Taxes, data privacy and security, intellectual property, insurance, this Circular, insolvency, material relationships, Aboriginal matters, confidentiality agreements, brokers, take-over statutes, appraisal rights, fairness opinions, the Independent Committee and Klondex Board approval, arrangements with securityholders, regulatory filings, access to information, disclaimers, data room information, Klondex’s budget, public reporting requirements, reporting issuer status, investment company, stock exchanges, Securities Laws non-compliance, audit, financial statements, undisclosed liabilities, internal controls, disclosure controls and procedures, Klondex’s auditors, off-balance sheet arrangements, Sarbanes-Oxley Act compliance, derivative transactions, affiliate transactions, absence of certain changes, employees and benefits and material contracts.

The representations and warranties provided by Hecla in favour of Klondex relate to organization and qualification, charter documents, authority relative to the Arrangement Agreement, Hecla Board approval, required approvals and consents, no violation, capitalization, orders, brokers, this Circular, securities filings, compliance with Securities Laws, stock exchanges, financial statements, internal controls, disclosure controls and procedures, off balance sheet arrangements, Sarbanes-Oxley Act compliance, disclosure under SEC Industry Guide 7, the Hecla Shares, insolvency, expropriation, compliance with anti-bribery and anti-money laundering laws, absence of certain changes, litigation, reporting issuer status, compliance with laws, permits, environmental matters and sufficient funds.

Conditions to the Arrangement Becoming Effective

In order for the Arrangement to become effective, certain conditions must have been satisfied or waived which conditions are summarized below.

 

- 73 -


Table of Contents

Mutual Conditions

The respective obligations of Klondex and Hecla to complete the Arrangement are subject to the satisfaction, or mutual waiver by the Parties, on or before the Effective Date, of, among other things, each of the following conditions:

 

  (a)

the Arrangement Resolution will have been approved by the Klondex Securityholders at the Meeting in accordance with the Interim Order and applicable Laws;

 

  (b)

each of the Interim Order and Final Order will have been obtained in form and substance satisfactory to each of Klondex and Hecla each acting reasonably, and will not have been set aside or modified in any manner unacceptable to either Klondex or Hecla, each acting reasonably, on appeal or otherwise;

 

  (c)

the Arrangement Filings required to be sent to the Registrar in accordance with the Arrangement Agreement and the BCBCA will be in form and content satisfactory to Klondex and Hecla, each acting reasonably;

 

  (d)

all necessary filings pursuant to the HSR Act will have been made and all applicable waiting periods thereunder will have expired or been terminated;

 

  (e)

there will not be any Law or order in effect (whether temporary, preliminary or permanent) that has the effect of prohibiting the consummation of the Arrangement, and no litigation instituted by any Governmental Authority seeking to prohibit the consummation of the Arrangement will be pending;

 

  (f)

Klondex and Havilah shall have entered into the Havilah Contribution Agreement; and

 

  (g)

one of the TSX, the TSXV or the Canadian Securities Exchange shall have conditionally approved the listing of the Havilah Shares to be distributed pursuant to the Arrangement.

The foregoing conditions are for the mutual benefit of the Parties and may be waived by mutual consent of Klondex and Hecla in writing at any time.

Klondex Conditions

The obligation of Klondex to complete the Arrangement is subject to the satisfaction, or waiver by Klondex, of, among other things, the following additional conditions on or before the Effective Date:

 

  (a)

Hecla and Hecla Acquisition Subco will have complied in all material respects with their obligations, covenants and agreements in the Arrangement Agreement to be performed and complied with on or before the Effective Date;

 

  (b)

the representations and warranties of Hecla will be true and correct, subject to certain exceptions as set forth in the Arrangement Agreement;

 

  (c)

no: (i) Law shall have been enacted, issued, promulgated, enforced, made, entered, issued or applied; or (ii) proceeding shall have been taken, or be pending or threatened under any Laws or by any Governmental Authority (whether temporary, preliminary or permanent), that makes the Arrangement illegal or otherwise directly or indirectly cease trades, enjoins, restrains or otherwise prohibits completion of the Arrangement;

 

  (d)

Hecla shall have complied with its obligations under Section 2.18 of the Arrangement Agreement to deliver to the Depositary the Maximum Cash Consideration and Maximum Shares Consideration payable to Klondex Securityholders pursuant to the Arrangement and the Canadian dollar equivalent of US$7,000,000 determined as at the close of business on the second business day immediately preceding the Effective Date, and the Depositary shall have confirmed receipt of such Maximum Cash Consideration, Maximum Shares Consideration and the Canadian dollar equivalent of US$7,000,000; and

 

  (e)

there shall not have occurred, prior to the Effective Time, a Hecla Material Adverse Effect.

 

- 74 -


Table of Contents

The foregoing conditions are for the exclusive benefit of Klondex and may be waived by Klondex in whole or in part, in its sole discretion, at any time without prejudice to any other rights that Klondex may have.

Hecla and Hecla Acquisition Subco Conditions

The obligations of Hecla and Hecla Acquisition Subco to complete the Arrangement are subject to the satisfaction, or waiver by Hecla, of, among other things, the following additional conditions on or before the Effective Date:

 

  (a)

Klondex shall have complied in all material respects with its obligations, covenants and agreements in the Arrangement Agreement to be performed and complied with on or before the Effective Date;

 

  (b)

the representations and warranties of Klondex will be true and correct, subject to certain exceptions as set forth in the Arrangement Agreement;

 

  (c)

no Law shall have been enacted, issued, promulgated, enforced, made, entered, issued or applied; or proceeding shall have been taken, or be pending or threatened under any Laws or by any Governmental Authority (whether temporary, preliminary or permanent), that: (i) makes the Arrangement illegal or otherwise directly or indirectly cease trades, enjoins, restrains or otherwise prohibits completion of the Arrangement or the payment of the Arrangement Consideration; (ii) prohibits, restricts or imposes terms or conditions (beyond those terms and conditions which Hecla is required to accept pursuant the Arrangement) on the ownership or operation by Hecla of the business or assets of Hecla, their affiliates and related entities, Klondex or any of Klondex’s subsidiaries and related entities; (iii) compels Hecla to dispose of or hold separate any of the business or assets of Hecla, their affiliates and related entities, Klondex or any of Klondex’s subsidiaries and related entities as a result of the Arrangement; or (iv) materially impedes, prevents or delays the consummation of the Arrangement, or if the Arrangement were to be consummated, has a Klondex Material Adverse Effect;

 

  (d)

each of the consents, approvals and notices required from any third party under any Contracts or as otherwise required to proceed with the transactions contemplated by the Arrangement Agreement will have been obtained;

 

  (e)

Klondex Shareholders will not have exercised Dissent Rights, or have instituted proceedings to exercise Dissent Rights, other than Klondex Shareholders representing not more than 5% of the Klondex Shares then outstanding;

 

  (f)

Hecla shall have received a form of payout letter from Investec that is acceptable to Hecla, acting reasonably, providing that Investec will discharge the security interests granted by Klondex and its subsidiaries in connection with the Investec Facility Agreement upon receipt by Investec of the amounts set out in the payout letter; and

 

  (g)

there will not have occurred, prior to the Effective Time: (i) a Klondex Material Adverse Effect; or (ii) any event, occurrence, circumstance or development that could reasonably be expected to have a Klondex Material Adverse Effect.

The foregoing conditions are for the exclusive benefit of Hecla and may be waived by Hecla in whole or in part, in its sole discretion, at any time without prejudice to any other rights that Hecla may have.

Covenants of Klondex

Covenants relating to Conduct of Business

Klondex has made certain covenants to Hecla, including that, until the earlier of, respectively, the Effective Time and the time that the Arrangement Agreement is terminated in accordance with its terms, except (i) as disclosed by Klondex to Hecla, (ii) as expressly permitted or specifically contemplated by the Arrangement Agreement or

 

- 75 -


Table of Contents

Plan of Arrangement, (iii) as is otherwise required by applicable Law, or (iv) unless otherwise consented to in writing by Hecla:

 

  (a)

the businesses of Klondex and its subsidiaries will be conducted only in the ordinary course and in accordance with the Klondex Budget, and applicable Law, Klondex and its subsidiaries will comply in all material respects with the terms of all Contracts and Klondex and its subsidiaries will use commercially reasonable best efforts to maintain and preserve intact its business organizations, assets, properties, rights, goodwill and business relationships and file all forms, reports, schedules, statements and other documents required pursuant to any applicable Laws or Securities Laws (provided that Klondex will consult with Hecla prior to making any filing pursuant to applicable Securities Laws or issuing any news releases);

 

  (b)

Klondex will not, directly or indirectly: (i) alter or amend the charter documents of Klondex or its subsidiaries; (ii) declare, set aside or pay any dividend on or make any distribution or payment or return of capital in respect of the Klondex Shares (other than dividends, distributions, payments or return of capital made to Klondex by any of its subsidiaries); (iii) split, divide, consolidate, combine, reclassify, nor undertake any other capital reorganization in respect of the Klondex Shares or any other securities of Klondex or its subsidiaries; (iv) reduce the stated capital of the Klondex Shares or any other securities of Klondex or its subsidiaries; (v) other than as required by Section 4.1(c) and Section 4.10(b) of the Arrangement Agreement, increase any coverage under any directors’ and officer’s insurance policy; (vi) issue, grant, sell or pledge or otherwise encumber, or authorize or approve or agree to issue, grant, sell, pledge or otherwise encumber any Klondex Shares or other securities of Klondex or its subsidiaries, or securities convertible into or exchangeable or exercisable for or otherwise evidencing a right to acquire Klondex Shares or other securities of Klondex or its subsidiaries, including but not limited to the issue or award of any Klondex Options, Klondex DSUs, Klondex RSUs or Klondex Warrants but excluding issuances of Klondex Shares pursuant to the exercise of outstanding Klondex Options or Klondex Warrants; (vii) redeem, purchase or otherwise acquire (or offer to redeem, purchase or otherwise acquire) any of its outstanding Klondex Shares or other securities or securities convertible into or exchangeable or exercisable for Klondex Shares or any such other securities or any shares or other securities of its subsidiaries except according to their terms; (viii) amend the terms of any securities of Klondex or its subsidiaries or amend the terms of any outstanding indebtedness of Klondex or its subsidiaries; (ix) adopt a plan of liquidation or resolution providing for the liquidation or dissolution of Klondex or its subsidiaries; (x) reorganize, recapitalize, restructure, amalgamate or merge with any other person and will not cause or permit its subsidiaries to reorganize, recapitalize, restructure, amalgamate or merge with any other person; (xi) create any subsidiary or enter into any Contracts or other arrangements regarding the control or management of the operations, or the appointment of governing bodies or enter into any Joint Ventures; (xii) engage in any transaction with any related parties other than with its wholly-owned subsidiaries in the ordinary course; (xiii) make any changes to any of its accounting policies, principles, methods, practices or procedures, except as disclosed in the Klondex Public Disclosure Record, as required by applicable Laws or under U.S. GAAP; or (xiv) enter into, modify or terminate any Contract with respect to any of the foregoing;

 

  (c)

Klondex will immediately notify Hecla orally and then promptly notify Hecla in writing of: (i) any change in any “material fact” or any “material change” in relation to Klondex or its subsidiaries; (ii) any event, circumstance or development that has had or would reasonably be expected to have, individually or in the aggregate, a Klondex Material Adverse Effect; (iii) notice or other communication from any person alleging that consent is or may be required in connection with the Arrangement Agreement or the Arrangement; (iv) notice or other communication from any Governmental Authority in connection with the Arrangement Agreement; (v) filings, actions, suits, claims, investigations or proceedings commenced, or threatened, against, or otherwise affecting Klondex and its subsidiaries or its material assets, including the Klondex Properties; (vi) any breach of the Arrangement Agreement by Klondex; or (vii) any event occurring after the date of the Arrangement

 

- 76 -


Table of Contents
 

Agreement that would render a representation or warranty inaccurate such that certain conditions in the Arrangement Agreement would not be satisfied or would result in the failure of Klondex to comply with or satisfy any covenant, condition or agreement required to be complied with or satisfied prior to the Effective Time;

 

  (d)

Klondex will not, and will not cause or permit its subsidiaries to, directly or indirectly, except in connection with the Arrangement Agreement: (i) sell, pledge, lease, surrender, license, mortgage, dispose of or encumber any assets or properties of Klondex or its subsidiaries, other than inventory or immaterial personal property in the ordinary course of business; (ii) other than in the ordinary course, acquire or commit to acquire any corporation, partnership, association or other business organization or division thereof or any property or asset, or make any investment by the purchase of securities, contribution of capital, property transfer, or purchase of any property or assets of any other person; (iii) other than intercompany loans, advances in the ordinary course of business or drawdowns of funds pursuant to the Investec Facility Agreement, not to exceed amounts set out in the Klondex Budget, incur any expenses or incur any indebtedness or issue any debt securities, or assume, guarantee, endorse or otherwise become liable for such obligations or the obligations of any other person, or make any loans or advances (other than intercompany loans or advances in the ordinary course of business); (iv) incur or commit to capital expenditures or development expenses unless such capital expenditures or development expenses have been approved prior to the date of the Arrangement Agreement by the Klondex Board in the ordinary course of business or are contemplated by the Klondex Budget; (v) enter into any interest rate, currency, equity or commodity swaps, hedges, derivatives, forward sales contracts or similar financial instruments other than in the ordinary course of business consistent with past practice; (vi) make any Tax election, information schedule, return or designation, except as required by Law and in a manner consistent with past practice; settle or compromise any Tax claim, assessment, reassessment or liability; file any amended Tax return; enter into any agreement with a Governmental Authority with respect to Taxes; surrender any right to claim a Tax abatement, reduction, deduction, exemption, credit or refund, consent to the extension or waiver of the limitation period applicable to any material Tax matter; or amend or change any of its methods or reporting income, deductions or accounting for income Tax purposes except as may be required by Law; (vii) pay, discharge or satisfy any claim, liability or obligation prior to the same being due, other than the payment, discharge or satisfaction of the same, in the ordinary course, in accordance with their terms, or voluntarily waive, release, assign, settle or compromise any proceeding; (viii) engage in any new business, enterprise or other activity that is inconsistent with the existing businesses of Klondex; or (ix) authorize any of the foregoing, or enter into or modify any Contract to do any of the foregoing;

 

  (e)

Klondex will not, and will not cause or permit its subsidiaries to, directly or indirectly, except in the ordinary course of business: (i) terminate, fail to renew, cancel, waive, release, grant or transfer any rights; (ii) enter into any Contract which would be a Material Contract, or terminate, cancel, extend, renew or amend, modify or change any Material Contract, except in connection with matters otherwise permitted under the Arrangement Agreement; (iii) enter into any lease or sublease of real property, or modify, amend or exercise any right to renew any lease or sublease of real property or acquire any interest in real property; or (iv) enter into any transaction or perform any act which could reasonably be expected to materially impede, prevent or delay, or be inconsistent with the successful completion of the transactions contemplated in the Arrangement Agreement;

 

  (f)

subject to certain exceptions, neither Klondex nor its subsidiaries will: (i) grant to any officer, director, employee or consultant of Klondex or its subsidiaries an increase in compensation in any form; (ii) grant any general salary increase, fee or pay any bonus or other compensation to the directors, officers, employees or consultants of Klondex and its subsidiaries; (iii) take any action with respect to the grant or increase of any severance, change of control, retirement, retention or termination pay; (iv) enter into or modify any employment or consulting agreement with any employee, consultant, officer, or director of Klondex or its subsidiaries; (v) terminate the employment or consulting arrangement of any senior management employees, except for cause; (vi) increase any benefits payable

 

- 77 -


Table of Contents
 

under its current severance or termination pay policies; (vii) adopt or amend or make any contribution to or any award under any bonus, profit sharing, pension, retirement, deferred compensation, insurance, incentive compensation, or other similar plan, agreement, trust, fund or arrangement for the benefit of any director, officer, or employee or former director, officer or employee of Klondex or its subsidiaries; or (viii) take any action to accelerate the time of payment of any compensation or benefits, amend or waive any performance or vesting criteria or accelerate vesting under the Klondex 2013 Share Incentive Plan, the Klondex 2016 Stock Option Plan or the Klondex DSU Plan;

 

  (g)

neither Klondex nor its subsidiaries will make any loan to any officer, director, employee or consultant of Klondex or its subsidiaries;

 

  (h)

Klondex will use commercially reasonable efforts to cause the current insurance policies maintained by Klondex not to be cancelled or terminated and to prevent any of the coverage thereunder from lapsing, provided, however, that Klondex will not obtain or renew any insurance policy for a term exceeding 12 months;

 

  (i)

Klondex will use commercially reasonable efforts to retain the services of its and its subsidiaries’ existing employees and consultants until the Effective Time and will promptly notify Hecla of any resignation or termination of its key employees or consultants;

 

  (j)

neither Klondex nor its subsidiaries will make an application to amend, terminate, allow to expire or lapse or otherwise modify any of its Permits or take any action or fail to take any action which would result in the loss, expiration or surrender or loss of any benefit under, or reasonably be expected to cause any Governmental Authority to institute proceedings for the suspension, revocation or limitation of rights under, any Permit necessary to conduct the business of Klondex;

 

  (k)

Klondex will not, and will not cause or permit its subsidiaries to, settle or compromise any action, claim or other proceeding (i) brought against it for damages or providing for the grant of injunctive relief or other non-monetary remedy (“Litigation”) or (ii) brought by any present, former or purported holder of its securities in connection with the transactions contemplated by the Arrangement Agreement or the Arrangement;

 

  (l)

Klondex will not, and will not cause or permit its subsidiaries to, commence any Litigation, subject to certain exceptions set forth in the Arrangement Agreement;

 

  (m)

Klondex will not, and will not cause or permit its subsidiaries to, enter into or renew certain Contracts, including among other things, Contracts that would reasonably be expected to materially impede, prevent or delay the completion of the Arrangement;

 

  (n)

Klondex will not, and will not cause or permit any of its subsidiaries to, take any action which would render, or which reasonably may be expected to render, any representation or warranty made by Klondex in the Arrangement Agreement untrue or inaccurate in any respect;

 

  (o)

immediately prior to the Effective Time, Klondex shall ensure that Havilah on a consolidated basis (including Bison and Klondex Canada) shall not have more than US$1.00 in cash and doré; and

 

  (p)

Klondex will not, and will not cause or permit its subsidiaries to, agree, announce, resolve, authorize or commit to do any of the foregoing.

Covenants relating to the Arrangement

Klondex has also agreed with Hecla that it will and will cause its subsidiaries to perform all obligations required to be performed by Klondex under the Arrangement Agreement, cooperate with Hecla in connection therewith, and use commercially reasonable efforts to do such other acts and things as may be necessary or desirable in order to complete the Arrangement and the other transactions contemplated by the Arrangement Agreement, including:

 

  (a)

publicly announcing the execution of the Arrangement Agreement, the support of the Klondex Board of the Arrangement, the recommendation of the Klondex Board to the Klondex Shareholders to vote in

 

- 78 -


Table of Contents
 

favour of the Arrangement Resolution and the support of each of the Klondex Directors and Klondex officers pursuant to the Klondex Voting Agreements and the Klondex Support Agreements, as applicable; and

 

  (b)

using commercially reasonable efforts to obtain and maintain all third party or other consents, waivers, permits, exemptions, orders, approvals, agreements, amendments or confirmations that are necessary or advisable under the Material Contracts, or required in order to maintain the Material Contracts in full force and effect following completion of the Arrangement,

in each case, on terms that are reasonably satisfactory to Hecla, and without paying, and without committing itself or Hecla to pay, any consideration or incur any liability or obligation without the prior written consent of Hecla.

In the event that Hecla reasonably concludes that it is necessary or desirable to proceed with another form of transaction (such as a formal take-over bid or amalgamation) whereby Hecla or its affiliates would effectively acquire all of the Klondex Shares within approximately the same time periods and on economic terms and other terms and conditions which are equivalent to or better than those contemplated by the Arrangement Agreement (an “Alternative Transaction”), Klondex agrees to support the completion of such Alternative Transaction in the same manner as the Arrangement and shall otherwise fulfill its covenants contained in the Arrangement Agreement in respect of such Alternative Transaction. In particular, but without limitation, Klondex agrees that the “initial deposit period” in respect of any such Alternative Transaction that is structured as a formal take-over bid shall be the period determined by Hecla so long as it is not less than 35 days. In the event of any proposed Alternative Transaction, any reference in the Arrangement Agreement to the Arrangement shall refer to the Alternative Transaction to the extent applicable, all terms, covenants, representations and warranties of the Arrangement Agreement shall be and shall be deemed to have been made in the context of the Alternative Transaction and all references to time periods regarding the Arrangement, including the Effective Time, therein shall refer to the date of closing of the transactions contemplated by the Alternative Transaction (as such date may be extended from time to time).

Covenants relating to Operations

The Company has agreed to take all commercially reasonable actions requested by Hecla regarding the following:

1. The Company has covenanted to undertake actions to the satisfaction of Hecla to regain freeboard at the tailings impoundment facility at the Midas Property.

2. The Company has covenanted to undertake the staking of certain land near Fire Creek.

3. The Company has covenanted to complete conversion of all remaining leach tanks to carbon in leach configuration.

4. The Company has covenanted to procure and install sampler systems for the mill feed and final tails streams.

5. The Company has covenanted not to sell stockpile or ore from the mines without approval from Hecla.

Covenants of Hecla

Covenants relating to Conduct of Business

Hecla has made certain covenants to Klondex, including that, until the earlier of the Effective Time and the time that the Arrangement Agreement is terminated in accordance with its terms, unless otherwise agreed to in writing

 

- 79 -


Table of Contents

by Klondex, such agreement not to be unreasonably withheld or delayed, or as is otherwise expressly permitted or contemplated by the Arrangement Agreement:

 

  (a)

Hecla will promptly notify Klondex orally and then promptly notify Klondex in writing of: (i) any event, circumstance or development that has had or would reasonably be expected to have, individually or in the aggregate, a Hecla Material Adverse Effect; (ii) any notice or other communication from any person alleging that the consent (or waiver, permit, exemption, order, approval, agreement, amendment or confirmation) of such person (or another person) is or may be required in connection with the Arrangement Agreement or the Arrangement; (iii) any notice or other material communication from any Governmental Authority in connection with the Arrangement Agreement (and contemporaneously provide a copy of any such written notice or communication to Klondex); (iv) any breach of the Arrangement Agreement by Hecla or Hecla Acquisition Subco; or (v) any event occurring after the date of the Arrangement Agreement that would: (A) render a representation or warranty, if made on that date or the Effective Date, untrue or inaccurate such that any of the conditions in Section 7.2(b) of the Arrangement Agreement would not be satisfied; or (B) result in the failure in any material respect of Hecla to comply with or satisfy any covenant, condition or agreement (without giving effect to, applying or taking into consideration any qualification already contained in such covenant, condition or agreement) to be complied with or satisfied prior to the Effective Time; and

 

  (b)

Hecla will not, directly or indirectly do or permit any of the following: (i) make any amendment to its charter documents that would have a material adverse effect on its ability to consummate the transactions contemplated by the Arrangement Agreement or change its authorized share capital; (ii) split, combine, subdivide or reclassify its capital stock; (iii) acquire, by merger, consolidation, acquisition of stock or assets, or otherwise, any business or person or division thereof or make any loans, advances, or capital contributions to or investments in any person, in each case that would reasonably be expected to materially prevent, impede, or delay the consummation of the Arrangement or other transactions contemplated by the Arrangement Agreement; (iv) adopt or effect a plan of complete or partial liquidation, dissolution, restructuring, recapitalization or other reorganization; (v) take any action that is intended to individually or in the aggregate materially prevent, impede or delay the consummation of the Arrangement or the other transactions contemplated by the Arrangement Agreement; or (vi) agree or commit to do any of the foregoing.

Covenants relating to the Arrangement

Hecla has also agreed with Klondex that it will perform, and will cause Hecla Acquisition Subco to perform, all obligations required to be performed under the Arrangement Agreement and the Plan of Arrangement, and cooperate with Klondex in connection therewith, and use commercially reasonable efforts to do such other acts and things as may be necessary or desirable in order to complete the Arrangement and the other transactions contemplated by the Arrangement Agreement, including: (a) cooperating with Klondex in connection with, and using its commercially reasonable efforts to assist Klondex in obtaining certain waivers, consents and approvals; (b) applying for and using commercially reasonable efforts to obtain conditional approval of the listing and posting for trading on the NYSE of the Maximum Shares Consideration; (c) using its commercially reasonable efforts to effect all necessary registrations, filings and submissions required by any Governmental Authority relating to the Arrangement required to be completed prior to the Effective Time; and (d) forthwith carrying out the terms of the Interim Order and Final Order to the extent applicable to it and Hecla Acquisition Subco.

Mutual Covenants

Hecla, Klondex and Hecla Acquisition Subco have also agreed, that subject to the terms and conditions of the Arrangement Agreement, until the earlier of the Effective Time and the time that the Arrangement Agreement is terminated in accordance with its terms, it will:

 

  (a)

use commercially reasonable efforts to satisfy (or cause the satisfaction of) the conditions precedent to its obligations set forth the Arrangement Agreement to the extent the same is within its control;

 

- 80 -


Table of Contents
  (b)

use commercially reasonable efforts to take, or cause to be taken, all other action and to do, or cause to be done, all other things necessary and commercially reasonable to permit the completion of the Arrangement and cooperate with the other Party in connection therewith, including using commercially reasonable efforts to: (i) obtain all Regulatory Approvals required to be obtained by it; (ii) effect or cause to be effected all necessary registrations, filings and submissions of information requested by Governmental Authorities required to be effected by it; (iii) oppose, lift or rescind any injunction or restraining order against it or other order or action against it seeking to stop, or otherwise adversely affecting its ability to make and complete, the Arrangement; (iv) defend all lawsuits or other legal, regulatory or other proceedings against the other Party or its directors or officers challenging or affecting the Arrangement Agreement or the completion of the Arrangement; and (v) cooperate with the other Party in connection with the performance by it of its obligations thereunder;

 

  (c)

use commercially reasonable efforts to not take or cause to be taken any action which is inconsistent with the Arrangement Agreement or which would reasonably be expected to materially impede, prevent or delay the completion of the Arrangement; and

 

  (d)

use commercially reasonable efforts to execute and do all acts, further deeds, things and assurances as may be required in the reasonable opinion of the other Party’s legal counsel to permit the completion of the Arrangement.

Non-Solicitation Covenant

Klondex has covenanted to Hecla and agreed that it, and its subsidiaries, will not, directly or indirectly, through any Representatives or otherwise, and will not permit any such person to, except as permitted in accordance with the Arrangement Agreement:

 

  (a)

make, initiate, solicit or encourage (including by way of furnishing or affording access to information or any site visit), or otherwise take any other action that facilitates, directly or indirectly, any inquiry, proposal or offer that constitutes or that reasonably could be expected to lead to, an Acquisition Proposal;

 

  (b)

enter into, or otherwise engage or participate in any discussions or negotiations with, furnish information to, or otherwise co-operate in any way with, any person (other than Hecla and its Representatives) regarding an Acquisition Proposal or any inquiry, proposal or offer that reasonably could be expected to lead to an Acquisition Proposal;

 

  (c)

take no position or remain neutral with respect to, or agree to, accept, approve or recommend, or propose publicly to agree, approve, endorse or recommend any Acquisition Proposal (it being understood that publicly taking no position or a neutral position with respect to an Acquisition Proposal for a period of three Business Days after such Acquisition Proposal has been publicly announced will be deemed not to constitute a violation of this section);

 

  (d)

make or propose publicly to make a Change of Recommendation;

 

  (e)

accept, enter into, or propose publicly to accept or enter into, any agreement, understanding or arrangement effecting or related to any Acquisition Proposal or potential Acquisition Proposal (other than an Acceptable Confidentiality Agreement in accordance with the Arrangement Agreement); or

 

  (f)

make any public announcement or take any other action inconsistent with the approval or recommendation of the Klondex Board of the transactions contemplated by the Arrangement Agreement.

Klondex and its Representatives have also covenanted to Hecla that they will and will cause Klondex’s subsidiaries to immediately cease and terminate any solicitation, encouragement, discussion or negotiation with any person (other than Hecla and its subsidiaries) with respect to any Acquisition Proposal or inquiry, proposal, or offer that could reasonably be expected to lead to an Acquisition Proposal and, in connection therewith,

 

- 81 -


Table of Contents

Klondex will discontinue access to any of its confidential information, including access to any data room, virtual or otherwise, to any person (other than access by Hecla and its Representatives), and promptly request the return or destruction of all copies of such confidential information.

Klondex further agrees not to release (or allow any of its subsidiaries to release) any person from, grant any permission under or terminate, modify, amend or waive the terms of, any confidentiality agreement or standstill agreement, similar provisions in any such confidentiality agreement (it being acknowledged and agreed that the automatic termination of any standstill provisions of any such agreement as the result of the entering into an announcement of the Arrangement Agreement will not be a violation of this section); and to, and to cause each of its subsidiaries to, take all necessary action to enforce on a timely basis each confidentiality, standstill or similar agreement or restriction to which Klondex or any subsidiary is a party.

Notwithstanding anything to the contrary contained in the Arrangement Agreement, if Klondex receives a bona fide written Acquisition Proposal from any person after the date of the Arrangement Agreement, and prior to the Meeting that did not otherwise result from a breach of the non-solicitation provisions of the Arrangement Agreement, then subject to Klondex’s compliance with the non-solicitation provisions of the Arrangement Agreement, Klondex and its Representatives may (i) contact such person solely to clarify the terms and conditions of such Acquisition Proposal so as to determine whether such Acquisition Proposal is, or could reasonably be expected to lead to, a Superior Proposal, (ii) furnish information with respect to it to such person pursuant to an Acceptable Confidentiality Agreement, (iii) allow such person a single ten (10) calendar day period to conduct a due diligence investigation of Klondex, and (iv) participate in any discussions or negotiations regarding such Acquisition Proposal; provided, however, that, (v) prior to taking any action described in clauses (i) to (iv) above, the Klondex Board determines in good faith, after consultation with its financial advisors and outside legal counsel, that such Acquisition Proposal is or is reasonably likely to result in a Superior Proposal and failure to take such action would violate the fiduciary duties of such directors under applicable Law; (vi) such person was not restricted from making such Acquisition Proposal pursuant to an existing confidentiality agreement, standstill, permitted use, business purpose or similar restriction with Klondex or any of its subsidiaries or Representatives; (vii) Klondex has been, and continues to be, in compliance with its non-solicitation provisions of the Arrangement Agreement; and (viii) prior to or concurrently with providing any such copies, access, or disclosure, Klondex: (A) enters into and provides a copy of an Acceptable Confidentiality Agreement to Hecla promptly; and (B) contemporaneously provides to Hecla a list of and access to all information concerning Klondex that is provided to such person which was not already provided to Hecla or its Representatives.

Klondex has agreed to promptly (and, in any event, within 24 hours) notify Hecla, of any Acquisition Proposal received by Klondex, any inquiry, proposal, offer or request (or any amendment or supplement thereto) received by Klondex, relating to an Acquisition Proposal or any request for discussions or negotiations or other communications relating to or that could reasonably be expected to lead to an Acquisition Proposal, or any request received by Klondex, its subsidiaries or any Representatives for non-public information relating to Klondex or for access to properties, books, records or the provision of a list of securityholders of Klondex by any person in connection with, or that reasonably could be expected to result in, an Acquisition Proposal, including a copy of the Acquisition Proposal, inquiry, proposal, offer or request and any amendments thereto, a description of its material terms and conditions, the identity of the person making such Acquisition Proposal, inquiry, proposal, offer or request and details of all related communications, and promptly provide to Hecla such other information concerning such Acquisition Proposal, inquiry or request as Hecla may reasonably request, and promptly inform Hecla of the status and details of any such Acquisition Proposal, inquiry, proposal, offer or request.

Right to Match

If Klondex receives a bona fide Acquisition Proposal that is a Superior Proposal from any person after the date of the Arrangement Agreement and prior to the Meeting, then the Klondex Board may, prior to the Meeting,

 

- 82 -


Table of Contents

withdraw, modify, qualify or change in a manner adverse to Hecla its approval or recommendation of the Arrangement and/or approve or recommend such Superior Proposal and/or enter into an Acquisition Agreement with respect to such Superior Proposal, but only if:

 

  (a)

the person making the Superior Proposal is not restricted from making such Superior Proposal pursuant to an existing confidentiality, standstill, use, business purpose or similar restriction with Klondex or any of its subsidiaries;

 

  (b)

Klondex did not breach any of the non-solicitation provisions of the Arrangement Agreement in connection with the preparation or making of such Acquisition Proposal and Klondex has been and continues to be in compliance with the non-solicitation provisions of the Arrangement Agreement;

 

  (c)

Klondex has given written notice to Hecla that it has received such Superior Proposal and that the Klondex Board has determined that: (i) such Acquisition Proposal constitutes a Superior Proposal; and (ii) the Klondex Board intends to withdraw, modify, qualify or change in a manner adverse to Hecla its approval or recommendation of the Arrangement (including the recommendation that the Klondex Shareholders vote in favour of the Arrangement Resolution) and/or enter into an Acquisition Agreement with respect to such Superior Proposal (in each case, written notice to be provided promptly following the making of such determination), and provides to Hecla a copy of the proposed Acquisition Agreement (together with a copy of such agreement and any supporting materials, including any financing documents supplied to Klondex in connection therewith), and written notice from the Klondex Board regarding the value and financial terms that the Klondex Board has, in consultation with its financial advisors, determined should be ascribed to any non-cash consideration offered in such Acquisition Proposal, it being acknowledged and agreed that the financial value ascribed by the Klondex Board to such non-cash consideration shall be expressed as a single value and not a range of values;

 

  (d)

a period of five full Business Days (such period being the “Superior Proposal Notice Period”) has elapsed from the later of the date Hecla received the notice from Klondex and the date on which Hecla received the copy of the Acquisition Proposal and supporting materials. During the Superior Proposal Notice Period, Hecla will have the right to propose to amend the terms of the Arrangement Agreement and the Arrangement;

 

  (e)

after the Superior Proposal Notice Period, the Klondex Board will have determined, after consultation with its outside legal counsel and financial advisors, and will have advised Hecla in writing that such Acquisition Proposal remains a Superior Proposal compared to the Arrangement as proposed to be amended by Hecla, and the failure to recommend the Acquisition Agreement would be inconsistent with its fiduciary duties;

 

  (f)

Klondex concurrently terminates the Arrangement Agreement; and

 

  (g)

Klondex has, previously or concurrently, paid to Hecla the Klondex termination fee equal to US$21 million.

Klondex has covenanted to Hecla that the Klondex Board will review promptly, diligently and in good faith any offer made by Hecla to amend the terms of the Arrangement Agreement and the Arrangement in order to determine, in consultation with its financial advisors and outside legal counsel, whether the proposed amendments would, upon acceptance, result in the Acquisition Proposal previously constituting a Superior Proposal ceasing to be a Superior Proposal. Subject to the Company’s disclosure obligations under applicable Securities Laws, the fact of the making of, and each of the terms of, any proposed amendments will be kept strictly confidential and will not be disclosed to any person (including without limitation, the person having made the Superior Proposal), other than the Company’s Representatives, without Hecla’s prior written consent.

If the Klondex Board determines that such Acquisition Proposal would cease to be a Superior Proposal as a result of the amendments proposed by Hecla, then Klondex will promptly thereafter accept the offer by Hecla to amend the terms of the Arrangement Agreement and the Arrangement.

 

- 83 -


Table of Contents

If the Klondex Board continues to believe in good faith, after consultation with its financial advisors and outside legal counsel, that such Acquisition Proposal remains a Superior Proposal and therefore rejects Hecla’s offer to amend the Arrangement Agreement and the Arrangement, then Klondex may, subject to compliance with the other provisions of the Arrangement Agreement, terminate the Arrangement Agreement, in accordance with Section 6.1(d)(i) of the Arrangement Agreement, and enter into an Acquisition Agreement in respect of such Superior Proposal.

The Klondex Board will reaffirm its recommendation in favour of the Arrangement by news release promptly after (a) the Klondex Board has determined that any Acquisition Proposal is not a Superior Proposal if the Acquisition Proposal has been publicly announced or made; or (b) the Klondex Board makes the determination that an Acquisition Proposal that has been publicly announced or made and which previously constituted a Superior Proposal has ceased to be a Superior Proposal. Hecla will be given a reasonable opportunity to review and comment on the form and content of any such news release, and Klondex will give reasonable consideration to all amendments to such release. Such news release will state that the Klondex Board has determined that such Acquisition Proposal is not a Superior Proposal.

Klondex and/or any of its subsidiaries will not become a party to any Contract with any person subsequent to the date of the Arrangement Agreement that limits or prohibits Klondex from providing: (a) or making available to Hecla and its affiliates and Representatives any information provided or made available to such person or its officers, directors, employees, consultants, advisors, agents or other representatives (including accountants, investment bankers, financial advisors and legal counsel) pursuant to any confidentiality agreement described in Section 5.1 of the Arrangement Agreement; or (b) Hecla and its affiliates and Representatives with any other information required to be given to it by the Company under Section 5.1 of the Arrangement Agreement.

Subject to the provisions of the Arrangement Agreement, the Klondex Board has the right to respond, within the time and in the manner required by applicable Securities Laws, to any take-over bid made for the Klondex Shares that it determines is not a Superior Proposal, provided that: (a) the Klondex Directors, acting in good faith and upon the advice of outside legal counsel, will have first determined that the failure to so respond would result in a breach of applicable Securities Laws; (b) Hecla and its counsel has been provided with a reasonable opportunity to review and comment on any such response and the Klondex Board will give reasonable consideration to such comments; and (c) notwithstanding that the Klondex Board may be permitted to respond in the manner set out above to an Acquisition Proposal, the Klondex Board will not be permitted to withdraw, modify, change or qualify its approval or recommendation to vote in favour of the Arrangement Resolution in any manner adverse to Hecla or to make any disclosure that is inconsistent with such approval and recommendation except in accordance with the terms of Section 5.1(g) or Section 5.1(k)(ii) of the Arrangement Agreement.

Prior to the Meeting, Klondex and the Klondex Board is not prohibited from making any disclosure to Klondex Shareholders, and from making a Change of Recommendation if: (a) a Hecla Material Adverse Effect has occurred and is continuing; and (b) the Klondex Board has reasonably determined in good faith after consultation with Klondex’s outside legal counsel that the failure to do so would be inconsistent with the duties of the members of the Klondex Board under applicable Law.

Any violation of the restrictions set forth in Article 5 of the Arrangement Agreement by Klondex will be deemed a breach of Article 5, and nothing in Article 5 will limit, in any way, the obligation of Klondex to convene and hold the Meeting in accordance with the Arrangement Agreement while the Arrangement Agreement remains in force.

Other Covenants

Insurance and Indemnification

Klondex may purchase prepaid non-cancellable run-off directors’ and officers’ liability insurance, at a cost not exceeding 200% of Klondex’s current annual aggregate premium for directors’ and officers’ liability insurance

 

- 84 -


Table of Contents

currently maintained by Klondex and its subsidiaries, providing coverage for a period of six years from the Effective Date with respect to claims arising from or related to facts or events which occur on or prior to the Effective Date.

Employment Agreements

Prior to the Effective Time, Klondex shall use commercially reasonable efforts to cause, and it shall cause any of its subsidiaries to use commercially reasonable efforts to cause, all directors of Klondex and its subsidiaries to resign as on the Effective Date, which resignations shall become effective immediately following the acquisition by Hecla of all of the issued and outstanding shares in the capital of Klondex pursuant to the Plan of Arrangement.

Klondex will provide releases from liability to such individuals as at the Effective Time in form and substance satisfactory to Klondex and Hecla, each acting reasonably, in exchange for the execution of full and final releases of Klondex and its subsidiaries from all liability and obligations in favour of Klondex (excluding any indemnification obligations set out in Section 4.10 of the Arrangement Agreement) and in form and substance satisfactory to Hecla, acting reasonably.

Prior to the Effective Time, Klondex shall use commercially reasonable efforts to cause, and it shall cause any of its subsidiaries to use commercially reasonable efforts to either: (i) cause those of the executive officers of Klondex and its subsidiaries as may be identified by Hecla to Klondex in writing to provide resignations; or (ii) terminate the employment of such executive officers effective as at the Effective Time, in exchange for the prescribed payments.

Klondex will provide releases from liability to such resigned or terminated executive officers as at the Effective Time in form and substance satisfactory to Klondex and Hecla, acting reasonably, in exchange for the execution of full and final releases, by the executive officers in favour of Klondex and its subsidiaries, from all liability and obligations (excluding any indemnification obligations set out in Section 4.10 of the Arrangement Agreement) and in form and substance satisfactory to Hecla, acting reasonably.

From and after the Effective Time, Hecla shall honour and comply with, or cause Klondex, its subsidiaries and any successor to Klondex to honour and comply with the terms of all of the severance payment obligations of Klondex or its subsidiaries under the existing employment, consulting, change of control and severance agreements of Klondex or its subsidiaries.

Covenants regarding Pre-Spinout Reorganization

Klondex has covenanted that on the day prior to the Effective Date, provided that certain conditions as described in the Arrangement Agreement have been satisfied or waived, Klondex shall, and shall cause Havilah to, enter into an agreement of purchase and sale (the “Havilah Contribution Agreement”), pursuant to which Klondex shall agree to transfer the Havilah Property to Havilah on the Effective Date pursuant to and in accordance with the Plan of Arrangement in consideration for the issuance by Havilah to Klondex of the Distribution Havilah Shares.

Pre-Acquisition Reorganization

Hecla and Hecla Acquisition Subco agree that, prior to the Effective Date, Klondex and its affiliates shall be entitled to enter into the pre-closing transactions outlined in Schedule G to the Arrangement Agreement.

Klondex agrees that, upon the request of Hecla, Klondex shall: (i) perform such additional reorganizations of its corporate structure, capital structure, business, operations and assets or such other transactions as Hecla may request, acting reasonably (each a “Pre-Acquisition Reorganization”), and (ii) cooperate with Hecla and its advisors to determine the nature of any Pre-Acquisition Reorganization that might be undertaken and the manner in which such Pre-Acquisition Reorganization would most effectively be undertaken.

 

- 85 -


Table of Contents

Hecla must provide written notice to Klondex of any proposed Pre-Acquisition Reorganization at least ten (10) Business Days prior to the Effective Date.

Hecla agrees that it will be responsible for all costs and expenses (including any professional fees and expenses) associated with any Pre-Acquisition Reorganization to be carried out at its request and shall indemnify and save harmless Klondex and its affiliates from and against any and all liabilities, losses, damages, claims, costs, taxes, expenses, interest awards, judgements and penalties suffered or incurred by any of them in connection with or as a result of any such Pre-Acquisition Reorganization if after participating in any Pre-Acquisition Reorganization the Arrangement is not completed other than due to a breach by Klondex of the terms and conditions of the Arrangement Agreement.

Hecla acknowledges and agrees that the Pre-Acquisition Reorganization shall not: (i) materially impede, prevent or delay completion of the Arrangement; (ii) in the opinion of Klondex, acting reasonably, prejudice the Klondex Shareholders in any respect; (iii) require Klondex to obtain the approval of the Klondex Shareholders or contravene any applicable Laws, Klondex’s constating documents or any Material Contract; (iv) unreasonably interfere in any material operations of Klondex or its subsidiaries prior to the Effective Time; (v) be considered in determining whether a representation, warranty or covenant of Klondex has been breached; (vi) require Klondex or any subsidiary to contravene any Laws, their respective organizational documents or any Material Contract; or (vii) result in any Taxes being imposed on, or any adverse Tax or other consequences to, any securityholder of Klondex incrementally greater than the Taxes or other consequences to such party in connection with the consummation of the Arrangement in the absence of any Pre-Acquisition Reorganization.

Control of Business

Nothing in the Arrangement Agreement gives either Party, directly or indirectly, the right to control or direct the operations of the other Party prior to the Effective Time. Prior to the Effective Time, each Party shall exercise, consistent with the terms and conditions of the Arrangement Agreement, complete control and supervision over its and each of its subsidiaries’ respective operations.

Change of Name

As soon as practicable after the Effective Time, subsidiaries of Havilah will change their respective corporate names to remove the word “Klondex” as a constituent element of such corporate names.

Operations

Klondex shall take all commercially reasonable actions requested by Hecla regarding certain operational matters.

Employee Matters

From and after the Effective Time, Hecla shall honour and perform, or cause Klondex to honour and perform, all of the obligations of Klondex and any of its subsidiaries under duly executed and delivered written employment and other agreements and the Klondex employee plans with current or former Klondex employees.

Investec Facility Agreement

Prior to the Effective Time, Hecla shall have made arrangements to pay to Investec all funds properly owed to Investec and its affiliates by Klondex and its subsidiaries pursuant to the Investec Facility Agreement and all security interests granted by Klondex and its subsidiaries pursuant to, or arising from, the Investec Facility Agreement shall be discharged and the security interests on the Havilah Property pursuant to or arising from the Investec Facility Agreement will be discharged on or prior to the Effective Date.

 

- 86 -


Table of Contents

Termination

The Arrangement Agreement may be terminated prior to the Effective Time in certain circumstances, including:

 

1.

by mutual written agreement of Hecla and Klondex;

 

2.

by either Hecla or Klondex, if:

 

  (a)

the Effective Time does not occur on or before the Outside Date, except that such right to terminate the Arrangement Agreement will not be available to any Party whose failure to fulfil any of its covenants or obligations or breach of any of its representations and warranties under the Arrangement Agreement has been a principal cause of, or resulted in, the failure of the Effective Time to occur by such date;

 

  (b)

the Meeting is held and the Arrangement Resolution is not approved by the Klondex Securityholders in accordance with applicable Laws and the Interim Order; or

 

  (c)

any Law makes the completion of the Arrangement or the transactions contemplated by the Arrangement Agreement illegal or otherwise prohibited, and such Law has become final and non-appealable.

 

3.

by Hecla, if:

 

  (a)

the Klondex Board or any committee fails to publicly make a recommendation that the Klondex Shareholders vote in favour of the Arrangement Resolution or fails to reaffirm its recommendation by the third Business Day following receipt of a request by Hecla to do so (and if the Meeting is scheduled to occur within such period, then prior to the third Business Day prior to the Meeting) (each of the foregoing a “Change of Recommendation”);

 

  (b)

Klondex or the Klondex Board, or any committee thereof, withdraws, modifies, qualifies or changes in a manner adverse to Hecla its approval or recommendation of the Arrangement, endorses or recommends any Acquisition Proposal or takes no position or remains natural with respect to any publicly announced Acquisition Proposal for a period exceeding three Business Days (or if the Meeting is scheduled to occur within such period, then for a period beyond the third Business Day prior to the Meeting);

 

  (c)

Klondex or the Klondex Board accepts, approves, endorses or recommends any Acquisition Proposal or publicly proposes an intention to do so;

 

  (d)

Klondex enters into an Acquisition Agreement in respect of an Acquisition Proposal (other than an Acceptable Confidentiality Agreement) or breaches its material obligations or material covenants set forth in section 4.1 of the Arrangement Agreement;

 

  (e)

subject to compliance with the notice and cure provisions in the Arrangement Agreement, Klondex breaches any of its representations, warranties, covenants or agreements contained in the Arrangement Agreement, which breach would cause any of the mutual conditions precedent or the conditions precedent to the obligations of Hecla in the Arrangement Agreement not to be satisfied, provided, however, that Hecla is not then in breach of the Arrangement Agreement;

 

  (f)

a Klondex Material Adverse Effect has occurred and is continuing; or

 

  (g)

Hecla enters into a definitive written agreement concerning a Hecla Acquisition Proposal provided the prior termination of the Arrangement Agreement is required by the acquirer of Hecla completing such Hecla Acquisition Proposal (a “Hecla Alternative Agreement”) and Hecla has previously or concurrently paid, or the terms of the Hecla Alternative Agreement provide that the acquirer of Hecla will advance or otherwise provide to Hecla the cash required to pay, the Hecla Termination Fee in accordance with the Arrangement Agreement.

 

4.

by Klondex, if:

 

  (a)

the Klondex Board approves, and authorizes Klondex to enter into, a definitive agreement providing for the implementation of a Superior Proposal prior to the Meeting and has paid or concurrently pays

 

- 87 -


Table of Contents
 

the Klondex termination fee in the amount of US$21 million and has complied with the non-solicitation provisions of the Arrangement Agreement;

 

  (b)

subject to compliance with the notice and cure provisions in the Arrangement Agreement, Hecla breaches any of its representations, warranties, covenants or agreements contained in the Arrangement Agreement, (other than with respect to any of the covenants of Hecla set out in Section 4.2 of the Arrangement Agreement regarding the provision of Hecla diligence information to Klondex), which breach would cause any of the mutual conditions precedent or the conditions precedent to the obligations of Klondex in the Arrangement Agreement not to be satisfied, provided, however, that Klondex is not then in breach of the Arrangement Agreement; or

 

  (c)

a Hecla Material Adverse Effect has occurred and is continuing.

Termination Fee

Hecla is entitled to be paid the Klondex termination fee in the amount of US$21 million upon the occurrence of any of the following events:

 

  (a)

each of the following has occurred: (i) the Arrangement Agreement has been terminated as a result of the Arrangement failing to be completed by the Outside Date or the Arrangement Resolution not being approved by the Klondex Shareholders; (ii) prior to such termination, another person has publicly announced an Acquisition Proposal or a proposed or intended Acquisition Proposal (and it was not withdrawn); and (iii) within 365 days of the termination, an Acquisition Proposal is consummated or Klondex has entered into an Acquisition Agreement in respect of any Acquisition Proposal, which Acquisition Proposal is subsequently completed, provided, however, that for the purposes of this paragraph all references to “20%” in the definition of Acquisition Proposal will be changed to “50%”;

 

  (b)

the Arrangement Agreement has been terminated by Hecla as a result of a Change of Recommendation, other than a Change of Recommendation in connection with a Hecla Material Adverse Effect;

 

  (c)

the Arrangement Agreement has been terminated by Hecla as a result of a withdrawal in recommendation by Klondex, the Klondex Board or any committee thereof;

 

  (d)

the Arrangement Agreement has been terminated by Hecla as a result of an endorsement of any Acquisition Proposal by Klondex, the Klondex Board or any committee thereof; or

 

  (e)

the Arrangement Agreement has been terminated by Klondex as a result of the Klondex Board approving or authorizing a definitive agreement for the implementation of a Superior Proposal, provided Klondex has otherwise complied with its obligations in that regard.

In the case of the occurrence of the Expense Reimbursement Event, Klondex will reimburse Hecla for its reasonable and documented out-of-pocket expenses incurred in connection with the Arrangement, including all legal, accounting, taxation, technical and engineering and investment banking fees and disbursements. In the event Klondex pays Hecla the termination fee of US$21 million, no fees for the Expense Reimbursement Event will be reimbursed by Klondex.

Klondex is entitled to be paid the Hecla termination fee in the amount of US$21 million if the Arrangement Agreement has been terminated by Hecla in the event Hecla enters into a definitive written agreement concerning a Hecla Acquisition Proposal, provided that the termination of the Arrangement Agreement is required by the party acquiring Hecla. Where termination of the Arrangement Agreement is required, either Hecla or the party acquiring Hecla will advance or otherwise provide the Hecla termination fee to Klondex in accordance with the Arrangement Agreement.

 

- 88 -


Table of Contents

PART 9. OPINION OF MAXIT CAPITAL

The Independent Committee engaged Maxit Capital as a financial advisor. In connection with this engagement, the Independent Committee requested that Maxit Capital render an opinion to the Independent Committee as to the fairness, from a financial point of view, of the Arrangement Consideration to be received by Klondex Shareholders pursuant to the Arrangement. On March 16, 2018, the Independent Committee held a meeting to evaluate the Arrangement. Maxit Capital rendered an oral opinion, which was confirmed by delivery of a written opinion dated March 16, 2018, to the Independent Committee that, as of March 16, 2018 and based on and subject to assumptions made, procedures followed, matters considered and qualifications and limitations on the review undertaken described in such Maxit Capital Fairness Opinion, the Arrangement Consideration to be received by Klondex Shareholders pursuant to the Arrangement was fair, from a financial point of view, to such holders.

The full text of Maxit Capital’s written opinion, dated March 16, 2018, which describes the assumptions made, procedures followed, matters considered and qualifications and limitations on the review undertaken, is attached as Appendix “C” to this Circular. The description of the Maxit Capital Fairness Opinion set forth in this Circular is qualified in its entirety by reference to the full text of the Maxit Capital Fairness Opinion, which is incorporated by reference herein in its entirety. The Maxit Capital Fairness Opinion was for the benefit of the Independent Committee (in its capacity as such) in connection with its evaluation of the Arrangement and did not address any terms or other aspects of the Arrangement other than the Arrangement Consideration to the extent expressly specified in the Maxit Capital Fairness Opinion. The Maxit Capital Fairness Opinion did not address the relative merits of the Arrangement as compared to any other transaction or business strategy in which Klondex might engage or the merits of the underlying decision by Klondex to engage in the Arrangement. The Maxit Capital Fairness Opinion is not intended to and does not constitute a recommendation to any Klondex Securityholder as to how any such Klondex Securityholder should vote or act with respect to the Arrangement or any matter relating thereto.

In connection with rendering the Maxit Capital Fairness Opinion, Maxit Capital reviewed and considered, and where Maxit Capital deemed appropriate, relied upon, or carried out, among other things, the following:

 

  (a)

a draft of the Arrangement Agreement;

 

  (b)

a draft of the Plan of Arrangement;

 

  (c)

drafts of the Klondex Voting Agreements, Klondex Support Agreements and Klondex Support Letter Agreements;

 

  (d)

publicly available documents regarding Klondex and Hecla, including annual and quarterly reports, financial statements, annual information forms, management circulars and other filings deemed relevant;

 

  (e)

certain internal financial, operating, corporate and other information prepared or provided by or on behalf of Klondex and Hecla concerning the business operations, assets, liabilities and prospects of Klondex and Hecla;

 

  (f)

internal management forecasts, development and operating projections, estimates (including future estimates of mineable resources) and budgets prepared or provided by or on behalf of Klondex and Hecla;

 

  (g)

discussions with management of Klondex relating to the business, financial condition and prospects of Klondex;

 

  (h)

due diligence meetings with senior executives of Hecla and Klondex concerning past and current operations and financial conditions and prospects of Hecla and Klondex;

 

- 89 -


Table of Contents
  (i)

selected public market trading statistics and relevant financial information of Klondex, Hecla and other public entities;

 

  (j)

selected financial statistics and relevant financial information with respect to relevant precedent transactions;

 

  (k)

selected technical reports on the assets of Klondex and Hecla, and selected reports published by equity research analysts and industry sources regarding Klondex, Hecla and other comparable public entities;

 

  (l)

a certificate addressed to Maxit Capital, dated March 16, 2018, from two senior officers of Klondex as to the completeness and accuracy of the Information (as defined in the Maxit Capital Fairness Opinion); and

 

  (m)

such other information, analyses, investigations, and discussions as Maxit Capital considered necessary or appropriate in the circumstances.

In arriving at the Maxit Capital Fairness Opinion, Maxit Capital relied upon and assumed the completeness, accuracy and fair presentation of all financial and other information, data, documents, materials, advice, opinions and representations obtained by it, including information provided by the Company or Hecla in relation to the Company and Hecla, data, advice, opinions and representations obtained by Maxit Capital from public sources, or provided to Maxit Capital by the Company, Hecla or Klondex’s affiliates or advisors or otherwise obtained by Maxit Capital pursuant to its engagement, and the Maxit Capital Fairness Opinion is conditional upon such completeness, accuracy and fair presentation. Maxit Capital has not been requested to or attempted to verify independently the accuracy, completeness or fairness of presentation of any such information, data, advice, opinions and representations.

With respect to the historical financial data, operating and financial forecasts and budgets provided to Maxit Capital concerning the Company or Hecla and utilized in its financial analyses, Maxit Capital has assumed that they have been reasonably prepared on bases reflecting the most reasonable assumptions, estimates and judgments of management of the Company or Hecla, as applicable, having regard to the Company’s or Hecla’s, as applicable, business, plans, financial condition and prospects.

Maxit Capital was not asked to, and did not, prepare an independent evaluation, formal valuation or appraisal of the securities or assets of Klondex, Hecla or any of their respective affiliates, nor was Maxit Capital provided with any such evaluations, valuations or appraisals. Maxit Capital did not conduct any physical inspection of the properties or facilities of Klondex or Hecla. Furthermore, the Maxit Capital Fairness Opinion does not address the solvency or fair value of Klondex or Hecla under any applicable laws relating to bankruptcy or insolvency. The Maxit Capital Fairness Opinion should not be construed as advice as to the price at which the securities of Klondex, Havilah or Hecla may trade at any time and does not address any legal, tax, regulatory, actuarial or accounting aspects of the Arrangement.

Maxit Capital are not legal, tax or accounting experts and they express no opinion concerning any legal, tax, regulatory, actuarial or accounting matters concerning the Arrangement. The Maxit Capital Fairness Opinion is rendered on the basis of securities markets, economic and general business and financial conditions prevailing as at the date of the Maxit Capital Fairness Opinion and the conditions and prospects, financial and otherwise, of the Company and Hecla as they are reflected in the information provided to Maxit Capital in connection with the Maxit Capital Fairness Opinion and as they were represented to Maxit Capital in its discussions with management of the Company or Hecla or their affiliates and advisors. In its analyses and in connection with the preparation of the Maxit Capital Fairness Opinion, Maxit Capital made numerous assumptions with respect to industry performance, general business, markets and economic conditions and other matters, many of which are beyond the control of any party involved in the Arrangement.

The Maxit Capital Fairness Opinion does not address the relative merits of the Arrangement as compared to other business strategies or transactions that might have been available to the Company or in which the Company

 

- 90 -


Table of Contents

might have engaged. In connection with Maxit Capital’s engagement, Maxit Capital was not authorized to, and it did not, solicit indications of interest from third parties regarding a potential transaction with the Company. The Maxit Capital Fairness Opinion is not intended to and does not constitute a recommendation to any Klondex Securityholder as to how any such Klondex Securityholder should vote or act with respect to the Arrangement or any matter relating thereto. Additionally, Maxit Capital does not express any opinion as to the prices at which the Klondex Shares, Havilah Shares or Hecla Shares may trade at any time.

Maxit Capital believes that its financial analyses must be considered as a whole and that selecting portions of its analyses and the factors considered by it, without considering all factors and analyses together, could create a misleading view of the process underlying the Maxit Capital Fairness Opinion. The preparation of an opinion is complex and is not necessarily susceptible to partial analysis or summary description and any attempt to carry out such could lead to undue emphasis on any particular factor or analysis.

The Maxit Capital Fairness Opinion is given as of the date it was given and although Maxit Capital reserves the right to change or withdraw the Maxit Capital Fairness Opinion if it learns that any of the Information that it relied upon in preparing the Maxit Capital Fairness Opinion was inaccurate, incomplete or misleading in any material respect, Maxit Capital disclaims any obligation to change or withdraw the Maxit Capital Fairness Opinion, to advise any person of any change that may come to its attention or to update the Maxit Capital Fairness Opinion after the date of the Maxit Capital Fairness Opinion.

In rendering the Maxit Capital Fairness Opinion, Maxit Capital assumed, with the consent of Klondex, that the Arrangement would be consummated on the terms described in the Arrangement Agreement, without any waiver or modification of any material terms or conditions. Representatives of Klondex advised Maxit Capital, and Maxit Capital assumed, that the Arrangement Agreement, when executed, would conform to the draft reviewed by Maxit Capital in all material respects. Maxit Capital did not express any opinion as to any tax or other consequences that might result from the Arrangement, nor does the Maxit Capital Fairness Opinion address any legal, tax, regulatory, actuarial or accounting matters, including, without limitation, the potential impact of tax laws, regulations and governmental and legislative policies on Klondex, Hecla or the Arrangement. Maxit Capital expressed no view or opinion as to any terms or other aspects (other than the Arrangement Consideration to the extent expressly specified in the Maxit Capital Fairness Opinion) of the Arrangement, including, without limitation, the form or structure of the Arrangement or any agreements or arrangements entered into in connection with, or contemplated by, the Arrangement. In addition, Maxit Capital expressed no view or opinion as to the fairness of the amount or nature of, or any other aspects relating to, the compensation to any officers, directors or employees of any parties to the Arrangement, or class of such persons, relative to the Arrangement Consideration pursuant to the Arrangement or otherwise.

In connection with the Maxit Capital Fairness Opinion, Maxit Capital performed a variety of financial and comparative analyses, including those described below. The summary of the analyses below and certain factors considered is not a comprehensive description of all analyses undertaken or factors considered by Maxit Capital. The preparation of a financial opinion or analyses is a complex process involving various determinations as to the most appropriate and relevant methods of financial analysis and the application of those methods to the particular circumstances and, therefore, a financial opinion and related analyses is not readily susceptible to summary description. Maxit Capital arrived at the Maxit Capital Fairness Opinion based on the results of all analyses undertaken and assessed as a whole, and did not draw, in isolation, conclusions from or with regard to any one factor or method of analysis. Accordingly, Maxit Capital believes that the analyses and factors summarized below must be considered as a whole and in context. Maxit Capital further believes that selecting portions of the analyses and factors or focusing on information presented in tabular format, without considering all analyses and factors or the narrative description of the analyses and factors, could create a misleading or incomplete view of the processes underlying Maxit Capital’s analyses and opinion.

In performing its financial analyses, Maxit Capital considered industry performance, general business and economic, market and financial conditions and other matters existing as of the date of the Maxit Capital Fairness

 

- 91 -


Table of Contents

Opinion. No company, business or transaction reviewed is identical or directly comparable to Klondex, Hecla or their respective businesses or the Arrangement and an evaluation of these analyses is not entirely mathematical; rather, the analyses involve complex considerations and judgments concerning financial and operating characteristics and other factors that could affect the public trading, acquisition or other values of the companies, businesses or transactions reviewed. The estimates of the future performance of Klondex and Hecla in or underlying Maxit Capital’s analyses are not necessarily indicative of actual values or actual future results, which may be significantly more or less favorable than those estimates or those suggested by such analyses. These analyses were prepared solely as part of Maxit Capital’s analysis of the fairness, from a financial point of view, of the Arrangement Consideration to be received by Klondex Shareholders pursuant to the Arrangement and were provided to the Independent Committee in connection with the delivery of the Maxit Capital Fairness Opinion. The analyses do not purport to be appraisals or to reflect the prices at which a company might actually be sold or the prices at which any securities have traded or may trade at any time in the future. Accordingly, the assumptions and estimates used in, and the ranges of valuations resulting from, any particular analysis described below are inherently subject to substantial uncertainty and should not be taken as the views of Maxit Capital regarding the actual values of Klondex or Hecla.

Maxit Capital did not recommend that any specific consideration constituted the only appropriate consideration in the Arrangement. The type and amount of consideration payable in the Arrangement was determined through negotiations between Klondex and Hecla, and was approved by the Klondex Board. The decision to enter into the Arrangement was solely that of the Klondex Board and the Hecla Board. The Maxit Capital Fairness Opinion and analyses were only one of many factors considered by the Independent Committee and the Klondex Board in its evaluation of the proposed Arrangement and the Arrangement Consideration and should not be viewed as determinative of the views of the Independent Committee and Klondex or management with respect to the Arrangement or the consideration payable pursuant to the Arrangement.

Summary of Analysis

The summary of the financial analyses described in this section entitled “Part 9 – Opinion of Maxit Capital – Summary of Analysis” is a summary of the material financial analyses provided by Maxit Capital in connection with the Maxit Capital Fairness Opinion, dated March 16, 2018, to the Independent Committee. The summary set forth below is not a comprehensive description of all analyses undertaken by Maxit Capital in connection with the Maxit Capital Fairness Opinion, nor does the order of the analyses in the summary below indicate that any analysis was given greater weight than any other analysis. The financial analyses summarized below include information presented in tabular format. In order to fully understand the financial analyses performed by Maxit Capital, the tables must be read together with the text of each summary. The tables alone do not constitute a complete description of the financial analyses performed by Maxit Capital. Considering the data set forth in the tables below without considering the full narrative description of the financial analyses, including the methodologies and assumptions underlying the analyses, could create a misleading or incomplete view of the financial analyses performed by Maxit Capital. Future results may differ from those described and such differences may be material. Except as otherwise noted, the following quantitative information, to the extent that it is based on market data, is based on market data as it existed on or before March 16, 2018, the last full trading day before the meeting of the Independent Committee and Klondex Board to consider and approve the Arrangement, and is not necessarily indicative of current market conditions. None of Klondex, Hecla, Maxit Capital or any other person assumes responsibility if future results are materially different from those discussed. Any estimates contained in these analyses are not necessarily indicative of actual values or predictive of future results or values, which may be significantly more or less favorable than as set forth below. In addition, analyses relating to the value of the businesses do not purport to be appraisals or reflect the prices at which the businesses may actually be sold.

On March 16, 2018, Klondex, Hecla and Hecla Acquisition Subco entered into the Arrangement Agreement pursuant to which Klondex Shareholders may elect to receive as Hecla Consideration either the Cash Consideration, Share Consideration or Combination Consideration, subject to proration. Based on the closing

 

- 92 -


Table of Contents

price on the NYSE of Hecla Shares on March 16, 2018, the Combination Consideration, assuming full proration, represented an implied price per Klondex share, excluding Havilah, of US$2.43 rounded down to two decimal places. Maxit Capital principally assessed the Hecla Consideration in the context of the implied Combination Consideration, based on closing prices as of March 16, 2018, of US$2.43. Based on closing prices as of March 16, 2018, the Combination Consideration represented a premium of 69% to the last undisturbed closing price. Maxit Capital also noted that based on Hecla’s 60-day VWAP as of the relevant date of US$3.94 per Hecla Share, the Combination Consideration and Share Consideration represented an implied price of US$2.47 per Klondex Share, excluding Havilah.

In support of the Maxit Capital Fairness Opinion, Maxit Capital has performed certain analyses on Klondex, based on those methodologies and assumptions that Maxit Capital considered appropriate in the circumstances for the purposes of providing the Maxit Capital Fairness Opinion. In the context of the Maxit Capital Fairness Opinion, Maxit Capital considered, among others, the following methodologies:

 

  (a)

net asset value (“NAV”) analysis;

 

  (b)

the Comparable Trading with Control Premium Approach (as defined below); and

 

  (c)

the Precedent Transaction Approach (as defined below).

NAV Analysis

Maxit Capital performed a NAV analysis to determine a range of implied values per share for Klondex excluding Havilah. The NAV analysis was comprised of: (a) a discounted cash flow analysis for mining assets and corporate costs where financial forecasts could reasonably be estimated by management of Klondex; (b) a carrying value assigned to certain mining assets where financial forecasts could not be reasonably estimated by management of Klondex; and (c) the book value of cash and other current assets less the book value of debt and other current liabilities as of December 31, 2017, as applicable.

The discounted cash flow analysis was based on projected unlevered, after-tax free cash flows from the time period beginning January 1, 2018 and discounted back to that date using the mid-year convention. The unlevered, after-tax free cash flows were projected based on assumptions and estimates provided by management of Klondex. The present value of the projected unlevered, after-tax free cash flows was determined using a 5.0% to 7.0% discount rate. Maxit Capital believes that these rates are appropriate to reflect the risks associated with such assets and liabilities, as applied, and are consistent with rates used by independent research analysts and industry participants in evaluating comparable assets and liabilities.

Maxit Capital conducted the NAV analysis using commodity price assumptions from consensus equity research analyst median estimates per FactSet and available equity research reports as of the relevant date. The resulting commodity prices were as follows:

 

Commodity Price Assumptions

   2018      2019      2020      2021      2022+  

Gold Price (US$/oz)

     1,300        1,300        1,300        1,300        1,300  

Silver Price (US$/oz)

     17.64        18.00        18.50        18.50        18.50  

Copper Price (US$/lb)

     3.09        3.08        3.05        3.15        3.05  

Zinc Price (US$/lb)

     1.50        1.40        1.30        1.20        1.10  

Lead Price (US$/lb)

     1.14        1.09        1.05        1.00        1.00  

In addition, Maxit Capital was provided with a NAV analysis of Hecla performed by Hecla using the commodity price assumptions in the table above. The information ultimately considered by Maxit Capital in its NAV analysis was produced by Maxit Capital after making adjustments to the information provided by Hecla to reflect changes in book values of debt and cash based on public disclosure of subsequent events. Maxit Capital further assumed that the internal work performed by Hecla to support its analysis was done on a reasonable basis.

 

- 93 -


Table of Contents

For Klondex, Maxit Capital observed a model NAV per share, excluding Havilah, of US$2.05. Maxit Capital noted that the model figure had a variance within 10% of the available median equity research analyst NAV per share adjusted for Havilah of US$2.23. Maxit Capital relied on both the model and adjusted median equity research analyst estimates in its analysis.

For Hecla, Maxit Capital attributed a NAV per share of US$4.10 based on the adjusted NAV analysis described above. Maxit Capital noted that the model NAV per share in the information provided by Hecla had a variance in excess of 10% from the available median equity research analyst NAV per share of US$2.50. Maxit Capital believed that the variance was primarily driven by the carrying value ascribed to Hecla’s development assets based on available equity research analyst reports providing a sum-of-the-parts breakdown of NAV. Based on its evaluation of the analyst reports and comparison of those to information provided by Hecla, Maxit Capital, to be conservative, primarily relied on the median equity research analyst estimates in assessing the share consideration to be received and pro forma Hecla.

Comparable Trading with Control Premium Approach

Maxit Capital reviewed public market trading statistics of comparable production stage gold companies and premiums paid to shareholders on acquisition transactions of comparable production stage gold companies (the “Comparable Trading with Control Premium Approach”). Maxit Capital principally considered multiples based on price to NAV (“P/NAV”) and price to forward calendar year operating cash flow per share (“P/Cash Flow”) with a primary emphasis placed on P/NAV as cash flow related metrics do not account for the life of a mining operation or the value of non-operating assets that do not generate cash flow over the respective period. Estimated financial data for the selected comparable companies was based on publicly available equity research analysts’ estimates and public disclosure by the selected companies. Maxit Capital also reviewed equity research analysts’ reports and analysis on Klondex in addition to Klondex’s internal model. Maxit Capital applied a range of selected multiples to the corresponding data for Klondex, excluding Havilah, to develop an implied equity value and thereon applied a range of selected premiums based upon the review of acquisition transactions.

With respect to Klondex, the selected comparable companies were:

Alacer Gold

Argonaut Gold

Guyana Goldfields

McEwen Mining

Premier Gold Mines

Roxgold

Teranga Gold Corporation

TMAC Resources

Wesdome Gold Mines

Maxit Capital calculated the range and median of multiples observed and selected a representative multiple range and applied a range of selected premiums which was then applied to Klondex’s respective values as of the relevant date to calculate an implied value per share range. The results of the Comparable Trading with Control Premium Approach is summarized below:

 

Principal Multiples

   Low      High      Median      Representative
Company Range
     Representative
Premium Range
 

P/NAV

     0.47x        0.83x        0.74x        0.60x – 1.00x        25.0% - 35.0%  

P/Cash Flow

     2.59x        23.15x        4.67x        3.50x – 6.00x        25.0% - 35.0%  

Based on the representative company and premium range for Klondex, the Comparable Trading with Control Premium Approach indicated the following approximate implied values per Klondex Share, comparable to the implied Hecla Consideration of US$2.43 as outlined above, of US$1.54 to US$3.01 on a P/NAV basis and US$1.93 to US$4.18 on a P/Cash Flow basis.

 

- 94 -


Table of Contents

No company or transaction utilized in the Comparable Trading with Control Premium Approach is identical to Klondex, Hecla or the Arrangement. Accordingly, an analysis of the results of the foregoing necessarily involves complex considerations and judgements concerning the differences in financial and operating characteristics of Klondex and Hecla, the Arrangement and other factors that could affect the trading value and aggregate transaction values of the companies and transactions to which they are being compared.

Precedent Transaction Approach

Maxit Capital reviewed publicly available information on acquisition transactions of production stage gold companies and assets (the “Precedent Transaction Approach”) that Maxit Capital, based on its experience in the metals and mining industry, deemed relevant. Maxit Capital principally considered these transactions based upon the implied multiples of P/NAV and P/Cash Flow with a primary emphasis on P/NAV. Maxit Capital then applied a range based upon these transactions to the corresponding data of Klondex, excluding Havilah.

The selected precedent transactions were:

 

Date Announced

  

Acquirer

  

Target

Jan-18

   Leagold    Brio Gold

Sep-17

   Alamos    Richmont

Aug-17

   McEwen Mining    Black Fox (Primero)

Apr-17

   Shandong    50% Veladero (Barrick)

Jan-17

   Leagold    Los Filos (Goldcorp)

Sep-16

   Kirkland Lake    Newmarket

Jul-16

   Premier Gold    Mercedes (Yamana)

Mar-16

   Silver Standard    Claude

Feb-16

   Tahoe    Lake Shore

Nov-15

   Kirkland Lake    St Andrew Goldfields

Nov-15

   Kinross    Nevada Operations (Barrick)

Jun-15

   Newmont    Cripple Creek & Victor (AngloGold)

May-15

   Zijin    47.5% Porgera (Barrick)

May-15

   Evolution Mining    Cowal (Barrick)

Apr-15

   OceanaGold    Waihi (Newmont)

Apr-15

   Evolution Mining    La Mancha Australia

Feb-15

   Tahoe    Rio Alto

Jan-15

   Coeur    Wharf (Goldcorp)

Maxit Capital calculated the range and median of multiples observed and selected a representative transaction multiple range which was then applied to Klondex’s respective values as of the relevant date to calculate an implied value per share range. The results of the Precedent Transaction Approach is summarized below:

 

Principal Multiples

   Low      High      Median      Representative
Company Range
 

P/NAV

     0.41x        1.72x        1.19x        1.00x – 1.50x  

P/Cash Flow

     2.79x        11.50x        7.34x        5.00x – 9.00x  

Based on the representative transaction ranges, this analysis indicated the following approximate implied value per Klondex Share, comparable to the implied Hecla Consideration of US$2.43 as outlined above, of US$2.05 to US$3.34 on a P/NAV basis and US$2.20 to US$4.65 on a P/Cash Flow basis.

No company or transaction utilized in the Precedent Transactions Approach analysis is identical to Klondex, Hecla or the Arrangement. Accordingly, an analysis of the results of the foregoing necessarily involves complex considerations and judgements concerning the differences in financial and operating characteristics of Klondex

 

- 95 -


Table of Contents

and Hecla, the Arrangement and other factors that could affect the trading value and aggregate transaction values of the companies and transactions to which they are being compared.

Transaction Premiums Analysis

Maxit Capital reviewed premiums paid to shareholders of acquired companies in these transactions as at the last undisturbed date prior to the announcement of the transaction and based on the VWAPs over the preceding 20-day period. Maxit Capital then applied a range of selected premiums based upon these transactions to the corresponding data of Klondex.

The selected precedent transactions for transaction premiums analysis represent the corporate transactions used in the Precedent Transaction Approach and were:

 

Date Announced

  

Acquirer

  

Target

Jan-18

   Leagold    Brio Gold

Sep-17

   Alamos    Richmont

Sep-16

   Kirkland Lake    Newmarket

Mar-16

   Silver Standard    Claude

Feb-16

   Tahoe    Lake Shore

Nov-15

   Kirkland Lake    St Andrew Goldfields

Feb-15

   Tahoe    Rio Alto

Maxit Capital calculated the range and median of premiums observed and selected a representative premium range which was then applied to Klondex’s share price on the relevant date to calculate an implied value per share range. The results of the transaction premiums analysis are summarized below:

 

     Low     High     Median     Representative
Premium Range
 

Premium to Last Undisturbed

     9.4     60.5     24.7     25.0% – 35.0%  

Premium to 20-Day VWAP for Each

     20.3     58.4     30.4     25.0% – 35.0%  

Based on the representative premium range, this analysis indicated the following approximate implied values per Klondex Share, comparable to the Arrangement Consideration, of US$1.80 to US$1.94 on a premium to last undisturbed basis and US$1.79 to US$1.93 on a premium to 20-day VWAP basis. Maxit Capital also compared the implied values to the implied Hecla Consideration of US$2.43 as outlined above. The implied Hecla Consideration, which excludes Havilah, represented a premium of 69% to the last undisturbed closing price and a premium of 70% on a 20-day VWAP for each basis as of March 16, 2018.

No company or transaction utilized in the transaction premiums analysis is identical to Klondex, Hecla or the Arrangement. Accordingly, an analysis of the results of the foregoing necessarily involves complex considerations and judgements concerning the differences in financial and operating characteristics of Klondex and Hecla, the Arrangement and other factors that could affect the trading value and aggregate transaction values of the companies and transactions to which they are being compared.

Klondex Analysis

Maxit Capital combined the Comparable Trading with Control Premium Approach and the Precedent Transaction Approach, including the transaction premiums analysis, for Klondex to estimate an overall value range for Klondex Shares. This estimated value range was compared to the value of the Hecla Consideration, based on the Hecla analysis discussed below.

Hecla Analysis

Maxit Capital applied certain analysis methodologies to Hecla in order to analyze the value of the Hecla Shares to be received as the Combination Consideration under the Arrangement. Pursuant to the Arrangement, Klondex

 

- 96 -


Table of Contents

Shareholders will receive 0.4136 Hecla Shares, assuming full proration, for each share of Klondex. The shares of Hecla received by Klondex Shareholders will represent a minority position in Hecla and will not allow such holders to affect control of Hecla.

In considering the Hecla Consideration being offered, Maxit Capital primarily relied upon the market trading approach, among other things. The market trading approach was deemed by Maxit Capital to be an appropriate basis for assessing the Hecla Consideration under the transaction after considering, among other things, the following factors:

 

   

Liquidity: the last twelve-month average daily trading volume of Hecla common stock was approximately 5 million shares, representing an aggregate traded value of approximately US$6 billion;

 

   

Market Float: the aggregate value of Hecla’s publicly traded common stock (excluding insiders and holders of greater than 10% of shares outstanding) is approximately US$1.4 billion;

 

   

Market Familiarity: Hecla is well-known to market professionals, with over 10 analysts providing research coverage;

 

   

Size of Transaction: upon completion of the transaction, Klondex Shareholders, assuming full proration, would own 16% of the Hecla Shares outstanding; and

 

   

Public Disclosure: Hecla senior management advised there was no material information regarding Hecla that had not been publicly disclosed that would otherwise reasonably be expected to materially affect Hecla, its objectives or strategies.

Maxit Capital also reviewed equity research analysts’ reports, the information provided by Hecla at consensus prices and analysis with respect to, among other things, Hecla’s production, cash costs, cash flow, NAV and financial prospects. Maxit Capital also evaluated and assessed the operating profile of Hecla pro forma completion of the Arrangement with Klondex.

In addition, Maxit Capital, among other considerations, calculated Hecla’s NAV per share pro forma the Arrangement, assuming full proration, as US$2.64 per pro forma Hecla Share based on consensus analyst estimates and US$3.91 per pro forma Hecla Share based on the NAV analysis as outlined above. To be conservative, Maxit Capital did not assume any synergies in its calculation of Hecla’s NAV pro forma the Arrangement. Precious metals mining companies generally trade at a multiple to their NAV and Maxit Capital reviewed the pro forma P/NAV, using closing prices as of March 16, 2018, in the context of available median equity research estimates for pro forma Hecla peers.

Havilah Share Consideration Analysis

Pursuant to the Arrangement, Klondex Shareholders (other than Hecla and its affiliates) will receive, in aggregate, approximately 86.54% of the Havilah Shares. Maxit Capital’s analysis of Havilah considers Klondex’s Canadian assets will be held by Havilah, including True North. Maxit Capital also considered the fact that Hecla will be contributing US$7 million for an approximate 13.46% interest in Havilah based on a pre-investment valuation of US$45 million. Maxit Capital also compared the pre-investment valuation primarily with Klondex Management’s own internal views and median observable equity research analyst estimates which were both lower than the pre-investment valuation. Maxit Capital noted that the basis on which Hecla is contributing cash for an equity interest in Havilah, and in the context of the Arrangement among other things, compares favourably relative to the pre-investment values primarily considered.

General

The Independent Committee retained Maxit Capital based on, among other things, Maxit Capital’s qualifications, experience and expertise. Maxit Capital is an independent advisory firm with expertise in mergers and acquisitions. In the ordinary course, Maxit Capital and its affiliates and employees may trade securities of Klondex and Hecla for their own accounts and may at any time hold a long or short position in such securities.

 

- 97 -


Table of Contents

The issuance of the Maxit Capital Fairness Opinion was approved for release by its managing partners, each of whom is experienced in merger, acquisition, divestiture and valuation matters. Under the terms of the Maxit Capital Engagement Letter, Maxit Capital provided the Maxit Capital Fairness Opinion. Maxit Capital will be paid a fixed fee of US$1.8 million for rendering the Maxit Capital Fairness Opinion, no portion of which is conditional upon the Maxit Capital Fairness Opinion being favourable. The Company has also agreed to reimburse Maxit Capital for its reasonable out-of-pocket expenses and to indemnify Maxit Capital in respect of certain liabilities that might arise out of its engagement. In the past two years prior to the date of the Maxit Capital Fairness Opinion, Maxit Capital had not been engaged to provide any financial advisory services nor has it participated in any financings involving Klondex, Hecla or any of their respective associates or affiliates other than acting as a financial advisor to the Independent Committee pursuant to the Maxit Capital Engagement Letter. Maxit Capital may, in the ordinary course of business, provide financial advisory, investment banking, or other financial services to one or more of the interested parties from time to time.

Certain Unaudited Prospective Financial Information

Klondex Prospective Financial Information

Klondex as a matter of course does not make public long-term projections as to its unlevered free cash flow or other results (although in the past Klondex has provided guidance for its next fiscal year with regard to production, cash costs on a by-product basis and capital expenditures) because of, among other reasons, the uncertainty of the underlying assumptions and estimates. However, in connection with the Arrangement, Klondex Management prepared certain non-public, unaudited prospective financial information for Klondex. Klondex is including the following summary of the unaudited prospective financial information solely because that information was made available to the Klondex Board, Hecla and to their respective financial advisors. The prospective financial information was not prepared with a view toward public disclosure or with a view toward complying with the guidelines established by the American Institute of Certified Public Accountants (“AICPA”) for preparation and presentation of prospective financial data, published guidelines of the SEC regarding forward-looking statements or U.S. GAAP. The below information is being included in this Circular to give Klondex Shareholders access to non-public information that was provided to the Klondex Board, Hecla and their respective financial advisors in the course of evaluating the proposed Arrangement, and is not intended to influence your decision whether to vote for adoption of the Arrangement Resolution or any other proposal at the Meeting. In addition, the inclusion of the below information should not be regarded as an indication that any of Klondex, Hecla or their respective financial advisors or any other recipient of this information considered – or now considers – it to be necessarily predictive of actual future results.

The unaudited prospective financial information prepared by Klondex Management was, in general, prepared solely for Klondex’s internal use and is subjective in many respects. While presented with numerical specificity, the prospective financial information of Klondex is based upon a variety of estimates and assumptions relating to the business of Klondex and to commodity prices that are inherently uncertain, though considered reasonable by Klondex Management as of the date of its preparation. There can be no assurance that the prospective results will be realized or that actual results will not be significantly higher or lower than estimated. Because the unaudited prospective financial information covers multiple years, that information by its nature becomes less predictive with each successive year. You are urged to review the SEC filings for Klondex for a description of risk factors with respect to its business, as well as “Part 15 – Risk Factors Relating to the Arrangement” of this Circular. See also “Part 3 – Cautionary Statement Regarding Forward-Looking Information” and “Part 39 –Additional Information” of this Circular.

Because the unaudited prospective financial information was developed on a stand-alone basis without giving effect to the Arrangement, the unaudited prospective financial information does not give effect to the Arrangement or any changes to Klondex’s operations or strategy that may be implemented after the completion of the Arrangement, including any potential synergies with Hecla realized as a result of the Arrangement, or to any costs related to, or that may arise in connection with, the Arrangement.

 

- 98 -


Table of Contents

All of the unaudited prospective financial information summarized below was prepared by Klondex Management. PwC, Klondex’s independent registered public accounting firm, has not examined, compiled or otherwise performed any procedures with respect to the unaudited prospective financial information and, accordingly, PwC has not expressed any opinion or given any other form of assurance with respect thereto and they assume no responsibility for the prospective financial information. The reports of PwC included in documents incorporated by reference into this Circular relate to the historical financial information of Klondex. Such reports do not extend to the unaudited prospective financial information and should not be read to do so.

Readers of this Circular should not place undue reliance on the unaudited prospective financial information.

THE BELOW UNAUDITED PROSPECTIVE FINANCIAL INFORMATION DOES NOT REPRESENT FINANCIAL PROJECTIONS, BUT RATHER POTENTIAL SCENARIOS BASED ON VARYING DEGREES OF SUCCESS. ACCORDINGLY, AMOUNTS SHOWN ARE DEPENDENT ON THE OUTCOME OF FUTURE COMMODITY PRICES, PRODUCTION, SALES, OPERATING COSTS, CAPITAL EXPENDITURES, TAX RATES, PROCESSING RECOVERIES, MINERAL RESOURCE CONVERSION INTO RESERVES AND RESERVES CONVERSION INTO SALEABLE METALS, EXPLORATION SUCCESS, DRILLING RESULTS, RECLAMATION COSTS, PERMITTING, AND OTHER ACTIVITIES, WHICH ARE SUBJECT TO SIGNIFICANT RISK AND UNCERTAINTY. EXCEPT AS MAY BE REQUIRED BY LAW, KLONDEX DOES NOT INTEND TO UPDATE OR REVISE THE PROSPECTIVE FINANCIAL INFORMATION TO REFLECT CIRCUMSTANCES EXISTING AFTER THE DATE IT WAS PREPARED OR TO REFLECT THE OCCURRENCE OF FUTURE EVENTS, EVEN IN THE EVENT THAT SOME OR ALL OF THE ASSUMPTIONS ARE DETERMINED TO BE INACCURATE OR ERRONEOUS.

The following table presents a summary of the estimated principal Klondex mine sites prospective unlevered, after-tax free cash flows, provided to Maxit Capital by management at the commodity price assumptions listed in “Part 9 – Opinion of Maxit Capital  Summary of Analysis – NAV Analysis” of this Circular:

 

     Unlevered, After-tax Free Cash Flows for the Years Ending December 31,
(in millions of US$)
 

Mining Operation

   2018      2019      2020     2021      2022      2023      2024     2025      2026      2027      2028     2029     2030  

Fire Creek

     57.4        44.5        37.6       35.6        28.8        7.2        (1.8     —          —          —          —         —         —    

Midas

     2.8        9.4        11.7       12.3        12.3        12.4        12.4       12.4        12.4        12.4        (4.8     (11.5     —    

Hollister

     0.5        0.4        (5.8     2.6        19.1        19.1        19.1       19.1        19.1        19.1        18.6       3.3       (4.0

The above cash flow information does not represent projections but rather potential results dependent on a variety of factors including, without limitation, future commodity prices, production, sales, operating costs, capital expenditures and other activities and factors which are subject to significant risk and uncertainty.

Hecla Prospective Financial Information

Hecla as a matter of course does not make public projections as to its NAV or other results (although in the past Hecla has provided guidance for its next fiscal year with regard to production, cash costs and all-in sustaining costs on a by-product basis and capital expenditures) because of, among other reasons, the uncertainty of the underlying assumptions and estimates. However, in connection with the Arrangement, management of Hecla prepared certain non-public, unaudited prospective financial information for Hecla. The following summary of the unaudited prospective financial information of Hecla is being included below solely because that information was made available to Klondex and its financial advisors. The prospective financial information was not prepared with a view toward public disclosure or with a view toward complying with the guidelines established by AICPA for preparation and presentation of prospective financial data, published guidelines of the SEC regarding forward-looking statements or U.S. GAAP. The below information is being included in this Circular to give Klondex Shareholders access to non-public information that was provided to Klondex and its financial advisors

 

- 99 -


Table of Contents

in the course of evaluating the proposed Arrangement, and is not intended to influence your decision whether to vote for adoption of the Arrangement Resolution or any other proposal at the Meeting. In addition, the inclusion of the below information should not be regarded as an indication that any of Klondex, Hecla or their respective financial advisors or any other recipient of this information considered – or now considers – it to be necessarily predictive of actual future results.

The unaudited prospective financial information prepared by management of Hecla was, in general, prepared solely for Hecla’s internal use and is subjective in many respects. While presented with numerical specificity, the prospective financial information of Hecla is based upon a variety of estimates and assumptions relating to the business of Hecla and to commodity prices that are inherently uncertain, though considered reasonable by Hecla’s management as of the date of its preparation. There can be no assurance that the prospective results will be realized or that actual results will not be significantly higher or lower than estimated. You are urged to review the SEC filings for Hecla for a description of risk factors with respect to its business, as well as “Part 15 – Risk Factors Relating to the Arrangement” of this Circular. See also “Special Note on Forward-Looking Statements” and “Where You Can Find More Information” in Appendix “K” to this Circular (Information Concerning Hecla).

Because the unaudited prospective financial information was developed on a stand-alone basis without giving effect to the Arrangement, the unaudited prospective financial information does not give effect to the Arrangement or any changes to Hecla’s operations or strategy that may be implemented after the completion of the Arrangement, including any potential synergies with Klondex realized as a result of the Arrangement, or to any costs related to, or that may arise in connection with, the Arrangement.

All of the prospective financial information summarized below was prepared by Hecla management. BDO USA, LLP (“BDO”), Hecla’s independent registered public accounting firm, has not examined, compiled or otherwise performed any procedures with respect to the unaudited prospective financial information and, accordingly, BDO has not expressed any opinion or given any other form of assurance with respect thereto and they assume no responsibility for the prospective financial information. The reports of BDO included in documents incorporated by reference into this Circular relate to the historical financial information of Hecla. Such reports do not extend to the unaudited prospective financial information and should not be read to do so.

Readers of this Circular should not place undue reliance on this unaudited financial prospective financial information.

THE BELOW UNAUDITED PROSPECTIVE FINANCIAL INFORMATION DOES NOT REPRESENT FINANCIAL PROJECTIONS, BUT RATHER POTENTIAL SCENARIOS BASED ON VARYING DEGREES OF SUCCESS. ACCORDINGLY, AMOUNTS SHOWN ARE DEPENDENT ON THE OUTCOME OF FUTURE COMMODITY PRICES, PRODUCTION, SALES, OPERATING COSTS, CAPITAL EXPENDITURES, TAX RATES, PROCESSING RECOVERIES, MINERAL RESOURCE CONVERSION INTO RESERVES AND RESERVES CONVERSION INTO SALEABLE METALS, EXPLORATION SUCCESS, DRILLING RESULTS, RECLAMATION COSTS, PERMITTING, THE RESTART OF PRODUCTION IN 2019 AT HECLA’S LUCKY FRIDAY MINE WHICH IS CURRENTLY EXPERIENCING A STRIKE BY UNIONIZED WORKERS, AND OTHER ACTIVITIES, WHICH ARE SUBJECT TO SIGNIFICANT RISK AND UNCERTAINTY. EXCEPT AS MAY BE REQUIRED BY LAW, HECLA DOES NOT INTEND TO UPDATE OR REVISE THE PROSPECTIVE FINANCIAL INFORMATION TO REFLECT CIRCUMSTANCES EXISTING AFTER THE DATE IT WAS PREPARED OR TO REFLECT THE OCCURRENCE OF FUTURE EVENTS, EVEN IN THE EVENT THAT SOME OR ALL OF THE ASSUMPTIONS ARE DETERMINED TO BE INACCURATE OR ERRONEOUS.

The following tables present: (i) a summary of Hecla’s aggregate estimated NAV based on the unlevered, after-tax, cash flows of Hecla’s principal operating mines and an in-situ valuation of exploration projects and; (ii) a

 

- 100 -


Table of Contents

summary of estimated five (5) years consolidated Hecla prospective unlevered, after-tax cash flows from operations, in each case provided to Maxit Capital by Hecla management at the commodity price assumptions listed in “Part 9 Opinion of Maxit Capital Summary of Analysis – NAV Analysis” of this Circular:

Hecla Mining Company

 

NAV Summary        At Maxit Capital’s
Consensus Price Deck
 
         After-Tax     Per Share  
         US$MM     US$/share  

Total Mining Assets

   5% DCR   $ 1,722     $ 4.29  

Total Financial assets

   as of Dec 31, 2017   $ (606   $ (1.51

Sub Total Net Asset Value

     $ 1,117     $ 2.78  

Total Exploration Assets

   In-Situ Value   $ 539     $ 1.34  

TOTAL Net Asset Value

     $ 1,656     $ 4.13  

Year Ending December 31,

(in millions of US$)

 

     2018      2019      2020      2021      2022  

Consolidated cash flow from operations

     182.2        180.1        193.3        201.4        207.4  

The above NAV and cash flow information does not represent projections but rather potential results dependent on a variety of factors including, without limitation, future commodity prices, production, sales, operating costs, capital expenditures, the strike at Hecla’s Lucky Friday mine and other activities and factors which are subject to significant risk and uncertainty.

PART 10. OPINION OF GMP SECURITIES

Under the GMP/INFOR Engagement Letter, the Klondex Board requested that GMP Securities deliver an opinion to the Klondex Board as to the fairness, from a financial point of view, of the Arrangement Consideration to be received by Klondex Shareholders pursuant to the Arrangement. Neither GMP Securities nor any of its affiliates is an insider, associate or affiliate of Klondex or Hecla or any of their respective associates or affiliates. With Klondex’s approval and as provided for in the GMP/INFOR Engagement Letter, GMP Securities has relied upon and has assumed the completeness, accuracy and fair representation of all budgets, strategic plans, financial forecasts, projections, models, estimates, financial information, business plans, and other information, data and representations obtained by GMP Securities from public sources, including information relating to Klondex and Hecla, or provided to GMP Securities by Klondex and its affiliates or advisors or otherwise pursuant to GMP Securities’ engagement (collectively, the “Information”) and the GMP Securities Fairness Opinion is conditional upon such completeness, accuracy and fairness. Subject to the exercise of professional judgment and except as expressly described herein, GMP Securities has not attempted to verify independently the accuracy or completeness of any such Information. Senior officers of Klondex have represented to GMP Securities, in separate certificates delivered on March 16, 2018, among other things, that the Information provided to GMP Securities by Klondex (verbal or written): (i) in respect of itself is true and correct at the date the Information was provided to GMP Securities and did not, and does not, contain a misrepresentation; and (ii) in respect of Hecla, to its knowledge, is true and correct as at the date the information was provided to GMP Securities, and that, since the date of the Information, there has been no material change, or new material fact, financial or otherwise, in Klondex’s or, to its knowledge, Hecla’s financial condition, assets, liabilities (contingent or otherwise), business, operations or prospects and there has been no new material fact which is of a nature as to render the Information or any part of the Information untrue or misleading in any material respect or which could reasonably be expected to have a material effect on the GMP Securities Fairness Opinion.

 

- 101 -


Table of Contents

Scope of Review

GMP Securities acted as financial advisor to the Klondex Board in respect of the Arrangement and certain related matters. In this context, and for the purpose of preparing the GMP Securities Fairness Opinion, GMP Securities analyzed financial, operational and other information relating to Klondex and Hecla, including information derived from meetings and discussions with Klondex Management. Except as expressly described in the GMP Securities Fairness Opinion, GMP Securities has not conducted any independent investigations to verify the accuracy and completeness thereof.

In connection with rendering the GMP Securities Fairness Opinion, and among other things, GMP Securities attended to the following:

 

  (a)

reviewed a substantially complete version of the Arrangement Agreement between Klondex, Hecla and 1156291 Unlimited Liability Company;

 

  (b)

reviewed the forms of voting support agreement provided by the directors, officers and certain shareholders of Klondex;

 

  (c)

reviewed and analyzed certain publicly available information relating to the business, operations, financial condition and trading history of Klondex including but not limited to its financial statements, technical reports, continuous disclosure documents and other information GMP Securities considered relevant;

 

  (d)

reviewed and analyzed certain publicly available information relating to the business, operations, financial condition and trading history of Hecla including but not limited to its financial statements, technical reports, continuous disclosure documents and other information GMP Securities considered relevant;

 

  (e)

reviewed public information relating to the business and financial condition of other selected public mining companies GMP Securities considered relevant;

 

  (f)

performed a comparison of the multiples implied under the terms of the Arrangement to an analysis of recent precedent acquisitions involving companies GMP Securities deemed relevant and the consideration paid for such companies or the shares thereof;

 

  (g)

performed a comparison of the multiples implied under the terms of the Arrangement to an analysis of the trading levels of similar companies GMP Securities deemed relevant under the circumstances;

 

  (h)

performed a comparison of the Arrangement Consideration to be received by Klondex Shareholders to the recent trading levels of securities of Klondex;

 

  (i)

discussions with members of the Klondex Board and Klondex Management with regard to, among other things, the business, past and current operations, current financial condition and future potential of Klondex and Havilah and reviewed certain analyses prepared by Klondex Management relating to the respective assets of Klondex (including certain prospective financial information – see “Part 9. Opinion of Maxit Capital – Certain Unaudited Prospective Financial Information”);

 

  (j)

discussions with the management of Hecla with regard to, among other things, the business, past and current operations, current financial condition and future potential of Hecla and reviewed certain analysis prepared by the management of Hecla relating to the respective assets of Hecla (including certain prospective financial information – see “Part 9. Opinion of Maxit Capital – Certain Unaudited Prospective Financial Information”);

 

  (k)

consulted with legal advisors to the Klondex Board;

 

  (l)

reviewed the officer’s certificate addressed to GMP Securities and executed and delivered by each of the Chief Executive Officer and Chief Financial Officer of Klondex dated the date of the GMP Securities Fairness Opinion setting out representations as to certain factual matters and the completeness and accuracy of the Information upon which the GMP Securities Fairness Opinion is based;

 

  (m)

reviewed various equity research reports and industry sources regarding Klondex, Hecla and the mining industry;

 

- 102 -


Table of Contents
  (n)

performed a comparison of the relative contribution of assets, cash flow, earnings, net asset value, production and reserves/resources by Klondex and Hecla to the relative pro forma ownership of Klondex and Hecla if the Arrangement is completed;

 

  (o)

reviewed the proposed management and board of directors of Havilah as well as trading multiples of selected junior gold exploration companies GMP Securities deemed relevant for the purpose of evaluating Havilah;

 

  (p)

reviewed historical metal and commodity prices and considered the impact of various commodity pricing assumptions on the respective business, prospects and financial forecasts of Klondex and Hecla; and

 

  (q)

considered such other corporate, industry and financial market information, investigations and analyses as GMP Securities considered necessary or appropriate in the circumstances.

In its assessment, GMP Securities considered several methodologies, analyses and techniques and used the combination of these approaches to determine its opinion as to the fairness, from a financial point of view, of the Arrangement Consideration. GMP Securities based the GMP Securities Fairness Opinion upon a number of quantitative and qualitative factors as deemed appropriate based on GMP Securities’ experience in rendering such opinions.

GMP Securities was not engaged to review any legal, regulatory, tax or accounting aspects of the Arrangement and accordingly expresses no view thereon. The Arrangement is subject to a number of conditions outside the control of Klondex and Hecla, and GMP Securities has assumed all conditions precedent to the completion of the Arrangement can be satisfied in due course and all consents, agreements, permissions, exemptions or orders of relevant regulatory and governmental authorities will be obtained, without adverse conditions or qualification and that the Arrangement can be completed as currently planned without additional material costs or liabilities to Klondex or Hecla. GMP Securities has also assumed that the Arrangement will be completed in accordance with the terms and conditions of the Arrangement Agreement without waiver of, or amendment to, any term or condition that is in any way material to GMP Securities’ analyses, that the Arrangement will be completed in compliance with applicable laws and that the disclosure relating to Klondex, Havilah, Hecla and the Arrangement in any disclosure documents will be accurate and will comply with the requirements of applicable laws.

GMP Securities was not engaged to provide any financial advisory services nor has it participated in any underwriting involving Klondex or Hecla or any of their respective associates or affiliates during the two-year period preceding the date GMP Securities was first contacted in respect to the Arrangement other than in July 2016 when GMP Securities provided financial services to Klondex as exclusive financial advisor and joint bookrunner on a C$130 million financing in connection with the acquisition of Carlin Resources, LLC. An aggregate amount of C$6.4 million was paid to the underwriters in connection with such financing. There are no understandings, agreements or commitments between GMP Securities and Klondex or Hecla or any of their respective associates or affiliates with respect to any future business dealings, however, GMP Securities may in the future, in the ordinary course of business, seek to perform financial advisory services for any one or more of them from time to time.

On March 16, 2018, at meetings of the Klondex Board held to evaluate the Arrangement, GMP Securities delivered an oral opinion, which was subsequently confirmed by delivery of the written GMP Securities Fairness Opinion dated March 16, 2018, to the effect that, as of that date, and based upon and subject to the scope of review, assumptions and limitations, and fairness methodology set forth in its opinion, the Arrangement Consideration to be received by the Klondex Shareholders pursuant to the Arrangement is fair, from a financial point of view, to the Klondex Shareholders.

Fairness Methodology

In support of the GMP Securities Fairness Opinion, GMP Securities performed certain analyses on Klondex, Hecla and the Combined Company, based on those methodologies and assumptions that GMP Securities

 

- 103 -


Table of Contents

considered appropriate in the circumstances for the purpose of providing the GMP Securities Fairness Opinion. In the context of the GMP Securities Fairness Opinion, GMP Securities considered, among other things, the following methodologies:

 

  i.

historical share price trading analysis;

 

  ii.

consideration analysis;

 

  iii.

precedent transaction analysis;

 

  iv.

comparable multiple analysis; and

 

  v.

certain other qualitative factors.

Trading and Historical Share Price Analysis

GMP Securities reviewed the trading history of Klondex on the TSX and the NYSE American and of Hecla on the NYSE, taking into consideration the historical exchange ratio, relative performance, 52-week intraday low to high per share trading price ranges, and other market statistics GMP Securities deemed relevant in its analysis of the Arrangement Consideration.

Consideration Analysis

GMP Securities applied certain analysis methodologies to Hecla in order to analyze the value of the Hecla Shares to be received as part of the Hecla Consideration under the Arrangement. The primary methodology used in this analysis was the review of equity research analysts’ reports and analysis on Hecla with respect to, among other things, the net asset value per share ascribed to Hecla Shares, cash flow per share and total mineral reserves/resources. GMP Securities then reviewed public market trading statistics of comparable precious metal companies to Hecla. Estimated financial data for the selected comparable companies was based on publicly available research analysts’ estimates and public disclosure by the selected companies.

Precedent Transaction Analysis

The precedent transaction analysis considers transaction multiples paid in the context of the purchase or sale of a public company or assets. GMP Securities reviewed publicly available information in connection with 22 transactions involving the acquisition of producing precious metals companies since 2008 with a transaction value between approximately US$125 million and US$2.7 billion, excluding hostile and merger of equals transactions. GMP Securities considered the multiples of price to net asset value (“P/NAV”) and price to cash flow per share (“P/CF”) to be the most relevant metrics for Klondex in consideration of precedent transactions analysis.

GMP Securities also reviewed premiums paid to shareholders of target companies in those 22 change of control transactions considered by GMP Securities to be relevant and compared those to the premium represented by the Arrangement Consideration, calculated with reference to the closing prices of Klondex Shares on the TSX and NYSE American on March 16, 2018 and the Hecla Shares on the NYSE on March 16, 2018, as well as the VWAP of each of the companies’ shares for the 20 day period ending on March 16, 2018.

No company or transaction utilized in the Precedent Transactions Analysis approach is identical to Klondex, Hecla or the Arrangement. Accordingly, an analysis of the results of the foregoing necessarily involves complex considerations and judgements concerning the differences in financial and operating characteristics of Klondex and Hecla, the Arrangement and other factors that could affect the trading value and aggregate transaction values of the companies and transactions to which they are being compared.

 

- 104 -


Table of Contents

Comparable Multiple Analysis

GMP Securities compared public market trading statistics of Klondex and Hecla to corresponding data from selected publicly-traded precious metal producing companies that GMP Securities considered relevant (the “Comparable Companies Trading Analysis”). GMP Securities considered the multiples of P/NAV and P/CF and enterprise value to in-situ gold resources (“EV/oz”) to be the most relevant metrics for purposes of the Comparable Companies Trading Analysis. GMP Securities examined multiples based on P/NAV, P/CF and EV/oz for each of the comparable companies and then compared those multiples to Klondex and Hecla.

No company or transaction utilized in the Comparable Multiple Analysis approach is identical to Klondex, Hecla or the Arrangement. Accordingly, an analysis of the results of the foregoing necessarily involves complex considerations and judgements concerning the differences in financial and operating characteristics of Klondex and Hecla, the Arrangement and other factors that could affect the trading value and aggregate transaction values of the companies and transactions to which they are being compared.

Certain Other Qualitative Factors

GMP Securities considered other qualitative factors with respect to the Arrangement, including but not limited to the strategic fit of Klondex’s assets within Hecla’s asset portfolio and the capital market profile of the Combined Company including liquidity, access to capital and future prospects. GMP Securities also considered the different risks Klondex is currently exposed to which include but are not limited to exploration, development and financing risks.

The full text of the written GMP Securities Fairness Opinion describing the scope of review, assumptions and limitations, and fairness methodology undertaken by GMP Securities is attached as Appendix “D” to this Circular and forms part of this Circular. Klondex Shareholders are encouraged to carefully read the GMP Securities Fairness Opinion in its entirety.

The GMP Securities Fairness Opinion is only one of many factors considered by the Klondex Board in their evaluation of the Arrangement and should not be viewed as determinative of the views of the Klondex Board with respect to the Arrangement or the Arrangement Consideration provided for under the Arrangement.

The terms of the GMP/INFOR Engagement Letter provide that GMP Securities will be paid a fixed opinion fee in the amount of C$300,000 for its services, payable irrespective of whether the Arrangement is completed, in addition to reimbursement of all reasonable out-of-pocket expenses. Additionally, GMP Securities and INFOR Financial will be paid a work fee of C$150,000 for their services performed pursuant to the terms of the GMP/INFOR Engagement Letter. GMP Securities and INFOR Financial will also receive additional compensation in the amount of approximately C$7.5 million if the Arrangement is approved at the Meeting. In addition, GMP Securities and its affiliates and their respective directors, officers, employees, agents and controlling persons are to be indemnified by Klondex under certain circumstances from and against certain liabilities arising out of the performance of professional services rendered to Klondex.

GMP Securities is a wholly-owned subsidiary of GMP Capital Inc. which is a publicly traded investment banking firm listed on the TSX. GMP Securities is a Canadian investment dealer focused on investment banking and institutional equities for corporate clients and institutional investors. GMP Securities is regularly engaged in the valuation of securities in connection with mergers and acquisitions, public offerings and private placements of listed and unlisted securities and regularly engages in market making, underwriting and secondary trading of securities in connection with a variety of transactions.

GMP Securities has consented to the inclusion in this Circular of the GMP Securities Fairness Opinion in its entirety, together with the summary herein and other information relating to GMP Securities and the GMP Securities Fairness Opinion.

 

- 105 -


Table of Contents

PART 11. SECURITIES LAW MATTERS

The following is a brief summary of the securities law considerations applicable to the Arrangement and transactions contemplated thereby. This summary is of a general nature only and is not intended to be, and should not be construed to be, legal or business advice to any particular Klondex Shareholder. This summary does not include any information regarding securities law considerations for jurisdictions other than Canada and the United States. Klondex Shareholders are urged to obtain independent advice in respect of the consequences to them of the Arrangement having regard to their particular circumstances.

Canadian Securities Law Matters

Each Klondex Shareholder is urged to consult his or her professional advisors to determine the Canadian conditions and restrictions applicable to trades in Hecla Shares.

Status under Canadian Securities Laws

Klondex is a reporting issuer in each of the provinces of Canada, except Québec. The Klondex Shares currently trade on the TSX. Following the Effective Date, the Klondex Shares will be delisted from the TSX (anticipated to be effective two or three Business Days following the Effective Date) and Hecla expects to apply to the applicable Canadian securities regulators to have Klondex cease to be a reporting issuer.

Hecla is a reporting issuer in each of the provinces and territories of Canada. Pursuant to National Instrument 71-102 – Continuous Disclosure and Other Exemptions Relating to Foreign Issuers, Hecla will be generally exempt from Canadian statutory financial and other continuous and timely reporting requirements, including the requirement for insiders of Hecla to file reports with respect to trades of Hecla securities, provided Hecla complies with the requirements of U.S. Securities Laws and U.S. market requirements in respect of all financial and other continuous and timely reporting matters and Hecla files with the relevant provincial securities regulatory authorities copies of its documents filed with the SEC under the U.S. Exchange Act. The Hecla Shares are listed on the NYSE.

Upon completion of the Arrangement, Havilah will become a reporting issuer in all of the provinces of Canada, except Québec, and will become subject to informational reporting requirements under applicable Canadian Securities Laws. Havilah Shares to be issued to Klondex Shareholders pursuant to the Arrangement may be subject to certain trading restrictions under U.S. Securities Laws. Further information applicable to Klondex U.S. Shareholders is disclosed under the heading “Part 2 – Notice to Securityholders in the United States” of this Circular.

Distribution and Resale of Hecla Shares and/or Havilah Shares under Canadian Securities Laws

The distribution of the Hecla Shares and Havilah Shares pursuant to the Arrangement will constitute a distribution of securities that is exempt from the prospectus requirements of Canadian securities legislation and is exempt from or otherwise is not subject to the registration requirements under applicable securities legislation. The Hecla Shares and Havilah Shares received pursuant to the Arrangement will not be legended and may be resold in each of the provinces of Canada provided that: (i) the trade is not a “control distribution” (as defined in National Instrument 45-102 Resale of Securities); (ii) no unusual effort is made to prepare the market or to create a demand for Hecla Shares and Havilah Shares; (iii) no extraordinary commission or consideration is paid to a person in respect of such sale; and (iv) if the selling securityholder is an insider or officer of Hecla or Havilah, as applicable and as the case may be, the selling securityholder has no reasonable grounds to believe that Hecla or Havilah, as applicable and as the case may be, is in default of applicable Canadian Securities Laws.

MI 61-101 Protection of Minority Security Holders in Special Transactions

Under the Plan of Arrangement, all Klondex Shareholders are treated identically and no Klondex Shareholder receives any “collateral benefit” as defined in MI 61-101. Pursuant to the individual employment agreements or

 

- 106 -


Table of Contents

equivalent agreements Klondex has entered into with each of the members of the Klondex Management, the completion of the Arrangement will also result in the payment by Klondex of the Lump Sum Payments. Any Lump Sum Payments to which each of the members of the Klondex Management are or may be entitled to do not constitute a “collateral benefit” for purposes of MI 61-101.

See “Part 7 – The Arrangement – Interests of Certain Persons in the Arrangement” and “Part 7 – The Arrangement – MI 61-101 Protection of Minority Security Holders in Special Transactions” of this Circular.

United States Securities Law Matters

The following discussion is a general overview of certain requirements of U.S. federal Securities Laws that may be applicable to Klondex U.S. Shareholders. All Klondex U.S. Shareholders are urged to consult with their own legal counsel to ensure that any subsequent resale of Hecla Shares to be received in exchange for their Klondex Shares pursuant to the Arrangement complies with applicable securities legislation.

Further information applicable to Klondex U.S. Shareholders is disclosed under the heading “Part 2 – Notice to Securityholders in the United States” of this Circular.

The following discussion does not address the Canadian Securities Laws that will apply to the issue of Hecla Shares or the resale of these securities within Canada by Klondex Shareholders in the United States. Klondex Shareholders in the United States reselling their Hecla Shares in Canada must, in addition to complying with U.S. Securities Laws, comply with all applicable Canadian Securities Laws. See “Part 11 – Securities Law Matters –Canadian Securities Law Matters – Distribution and Resale of Hecla Shares and/or Havilah Shares under Canadian Securities Laws” of this Circular.

Exemption from the Registration Requirements of the U.S. Securities Act

The Hecla Shares and the Havilah Shares to be received by Klondex Shareholders in exchange for their Klondex Shares pursuant to the Arrangement will not be registered under the U.S. Securities Act or the Securities Laws of any state of the United States and will be issued and exchanged in reliance upon the exemption from registration provided by Section 3(a)(10) of the U.S. Securities Act and exemptions from or qualifications under the registration requirements under the Securities Laws of applicable states of the United States. Section 3(a)(10) of the U.S. Securities Act exempts the issuance of any securities issued in exchange for one or more bona fide outstanding securities, or partly in such exchange and partly for cash, from the registration requirements of the U.S. Securities Act, where the terms and conditions of the issuance and exchange of such securities have been approved by a court of competent jurisdiction that is expressly authorized by law to grant such approval, after a hearing upon the substantive and procedural fairness of the terms and conditions of such issuance and exchange at which all persons to whom it is proposed to issue the securities have the right to appear and have received timely and adequate notice thereof. The Court is authorized to conduct a hearing at which the fairness of the terms and conditions of the Arrangement will be considered. Accordingly, the Final Order will, if granted, constitute a basis for the exemption from the registration requirements of the U.S. Securities Act provided by Section 3(a)(10) thereof with respect to the Hecla Shares to be received by Klondex Shareholders in exchange for their Klondex Shares and the issuance of the Havilah Shares pursuant to the Arrangement.

Resales of Hecla Shares After the Effective Date

The Hecla Shares to be received by Klondex Shareholders in exchange for their Klondex Shares pursuant to the Arrangement will be freely transferable under U.S. federal Securities Laws, except by persons who are “affiliates” of Hecla after the Effective Date, or were “affiliates” of Hecla within 90 days prior to the Effective Date. Persons who may be deemed to be “affiliates’” of an issuer include individuals or entities that control, are controlled by, or are under common control with, the issuer, whether through the ownership of voting securities, by contract or otherwise, and generally include executive officers and directors of the issuer as well as principal shareholders of the issuer.

 

- 107 -


Table of Contents

Resale of Hecla Shares by such affiliate (or, if applicable, former affiliates) may be subject to additional restrictions under applicable U.S. Securities Laws absent an exemption such as Rule 144.

Resales of Havilah Shares After the Effective Date

The Havilah Shares to be received by Klondex Shareholders in exchange for their Klondex Shares pursuant to the Arrangement will be freely transferable under U.S. federal Securities Laws, except by persons who are “affiliates” of Havilah after the Effective Date, or were “affiliates” of Havilah within 90 days prior to the Effective Date.

Any resale of Havilah Shares by such an affiliate (or, if applicable, former affiliate) may be subject to additional restrictions under the U.S. Securities Act, absent an exemption therefrom such as Rule 144 or Rule 904.

Ongoing United States Reporting Obligations of Klondex

Klondex Shares currently trade on the NYSE American and Klondex is subject to the periodic reporting requirements of the U.S. Exchange Act. After the Arrangement, Hecla intends to delist the Klondex Shares from the NYSE American and deregister the Klondex Shares under the U.S. Exchange Act, and terminate its reporting obligations under the U.S. Exchange Act.

United States Reporting Obligations of Havilah

Havilah expects to qualify for the exemption from reporting provided by Rule 12g3-2(b) under the U.S. Exchange Act, and as a result, does not expect to be a reporting company under the U.S. Exchange Act following the Arrangement.

New York Stock Exchange Approval

Hecla Shares currently trade on the NYSE. Hecla will apply to list the Hecla Shares issuable by Hecla under the Arrangement on the NYSE.

Section 16 Matters

Prior to the Effective Time, Klondex intends to take all actions to cause any dispositions of equity securities of Klondex (including any derivative securities with respect to any equity securities of the Company) pursuant to the transactions contemplated by the Arrangement by each individual who is a director or officer of Klondex, and who would otherwise be subject to Rule 16b-3 under the U.S. Exchange Act, to be exempt under U.S. Exchange Act Rule 16b-3.

PART 12. REGULATORY MATTERS

The Klondex Shares are listed and posted for trading on the TSX and NYSE American and the Hecla Shares are listed and posted for trading on the NYSE. It is a condition of the Arrangement that the NYSE shall have approved for listing, the Hecla Shares to be issued in connection with the Arrangement. NYSE approval for the listing of the Hecla Shares to be issued in connection with the Arrangement is required to be obtained prior to the closing of the Arrangement. Hecla will apply to have the Hecla Shares listed on the NYSE. Listing is subject to the approval of the NYSE in accordance with its original listing requirements, and there is no assurance that the NYSE will approve the listing application.

It is also a condition to the completion of the Arrangement that one of the TSX, the TSXV or the Canadian Securities Exchange conditionally approve the listing of the Havilah Shares to be distributed under the

 

- 108 -


Table of Contents

Arrangement. Havilah has applied to have the Havilah Shares listed on the TSXV. Listing is subject to the approval of the TSXV in accordance with its original listing requirements. The TSXV has not conditionally approved the listing of the Havilah Shares on the TSXV and there is no assurance that the TSXV will approve the listing application. There is no present intention to list Havilah Shares for trading on any national securities exchange in the United States.

Hart – Scott – Rodino Antitrust Improvements Act

Under the HSR Act, certain transactions may not be completed until each party has filed a Notification and Report Form with the Antitrust Division of the U.S. Department of Justice (the “DOJ”) and with the U.S. Federal Trade Commission (the “FTC”) and the HSR Act’s 30 calendar-day waiting period has expired or been earlier terminated. The transactions contemplated by the Arrangement are subject to the HSR Act. Accordingly, Klondex and Hecla filed the requisite Notification and Report Forms on April 13, 2018, and the FTC granted early termination of the waiting period effective April 23, 2018. The termination of the waiting period does not bar the FTC or the DOJ from subsequently challenging the Arrangement.

In addition, prior to acquiring their Hecla Shares, Klondex Shareholders who as a result of the Arrangement will hold Hecla Shares with a value in excess of US$84.4 million may, unless exempt, be subject to the filing and waiting period requirements of the HSR Act. This would require each such Klondex Shareholder, as well as Hecla, to file a Notification and Report Form with the FTC and the DOJ and to observe an initial 30 calendar-day waiting period. The initial waiting period may be terminated before its expiration or extended by a request for additional information. Issuance of such a request requires the observation of an additional 30 calendar-day waiting period after the request is complied with (unless extended by court order for failing to provide an adequate response). Therefore, compliance with the HSR procedures could delay the acquisition of Hecla Shares by affected Klondex Shareholders and/or the effective date of the Arrangement. Any Klondex Securityholder that believes that it may have a filing and waiting obligation under the HSR Act in connection with this transaction should contact Hecla at its head office at 6500 North Mineral Drive, Suite 200 Coeur d’Alene, Idaho 83815-9408 and consult its own legal counsel.

Other Regulatory Approvals

Other than the Final Order, the notifications under the HSR Act, described above, and the necessary conditional approvals, or approvals, as the case may be, of the TSXV and the NYSE having been obtained, Klondex is not aware of any material approval, consent or other action by any federal, provincial, state or foreign government or any administrative or regulatory agency that would be required to be obtained in order to complete the Arrangement. In the event that any such approvals or consents are determined to be required, such approvals or consents will be sought. Any such additional requirements could delay the Effective Date or prevent the completion of the Arrangement. While there can be no assurance that any regulatory consents or approvals that are determined to be required will be obtained, Klondex currently anticipates that any such consents and approvals that are determined to be required will have been obtained or otherwise resolved by the Effective Date. Subject to approval of the Arrangement Resolution at the Meeting in accordance with the Interim Order, receipt of the Final Order and the satisfaction or waiver of all other conditions specified in the Arrangement Agreement, the Effective Date is expected to occur in the second quarter of 2018, but no later than July 16, 2018 unless otherwise agreed to between Klondex and Hecla. No approvals from the NYSE American are required for the Arrangement or delisting of Klondex.

PART 13. STOCK EXCHANGE DE-LISTING AND REPORTING ISSUER STATUS

The Klondex Shares are currently listed and posted for trading on the TSX under the symbol “KDX” and on the NYSE American under the symbol “KLDX”. The Hecla Shares are listed on the NYSE under the symbol “HL”.

 

- 109 -


Table of Contents

It is a condition to the completion of the Arrangement that one of the TSX, the TSXV or the Canadian Securities Exchange conditionally approve the listing of the Havilah Shares to be distributed under the Arrangement. Havilah has applied to have the Havilah Shares listed on the TSXV. Listing is subject to the approval of the TSXV in accordance with its original listing requirements. The TSXV has not conditionally approved the listing of the Havilah Shares on the TSXV and there is no assurance that the TSXV will approve the listing application. There is no present intention to list Havilah Shares for trading on any national securities exchange in the United States.

It is expected that the Klondex Shares will be de-listed from the TSX and the NYSE American, and deregistered under the U.S. Exchange Act, following the consummation of the Arrangement, subject to the rules of the TSX, the NYSE American, and the SEC respectively.

The Company will also seek a ruling of applicable Canadian securities regulators that the Company cease to be a reporting issuer under applicable Securities Laws.

PART 14. DISSENTING SHAREHOLDERS’ RIGHTS

The following is a summary of the provisions of the BCBCA relating to a Registered Klondex Shareholder’s dissent and appraisal rights in respect of the Arrangement Resolution. Such summary is not a comprehensive statement of the procedures to be followed by a Dissenting Shareholder who seeks payment of the fair value of his, her or its Klondex Shares and is qualified in its entirety by reference to the full text of Division 2 of Part 8 of the BCBCA (which is attached to this Circular as Appendix “H”), as modified and supplemented by the Plan of Arrangement, the Interim Order and the Final Order.

The statutory provisions dealing with the right of dissent are technical and complex. Any Dissenting Shareholders should seek independent legal advice, as failure to comply strictly with the provisions of Division 2 of Part 8 of the BCBCA, as modified and supplemented by the Plan of Arrangement, the Interim Order and the Final Order, may result in the loss of all Dissent Rights.

The Interim Order expressly provides Registered Klondex Shareholders with the right to dissent with respect to the Arrangement Resolution. Each Dissenting Shareholder is entitled to be paid the fair value (determined immediately before the Arrangement Resolution is approved) of all, but not less than all, of the holder’s Klondex Shares, provided that the holder validly dissents to the Arrangement Resolution and the Arrangement becomes effective.

Klondex Option, RSU or DSU Holders will not be entitled to exercise Dissent Rights in respect of their Klondex Options, Klondex RSUs or Klondex DSUs. When a beneficial owner holds Klondex Shares through an Intermediary such as a bank, trust company, securities dealer or broker and trustee or administrator of self-administered registered retirement savings plans, registered retirement income funds, registered education savings plans and similar plans, the beneficial owner is considered to be a non-registered holder (a “Non-Registered Klondex Shareholder”). In many cases, Klondex Shares beneficially owned by a holder are registered either: (i) in the name of an Intermediary that the Non-Registered Klondex Shareholder deals with in respect of such shares, such as, among others, banks, trust companies, securities brokers, trustees and other similar entities; or (ii) in the name of a depository, such as CDS & Co., of which the Intermediary is a participant. Accordingly, a Non-Registered Klondex Shareholder will not be entitled to exercise his, her or its rights of dissent directly (unless the Klondex Shares are reregistered in the Non-Registered Klondex Shareholder’s name).

With respect to Klondex Shares subject to the Arrangement, pursuant to the Interim Order, a Registered Klondex Shareholder as of the Record Date, other than an affiliate of Klondex, may exercise rights of dissent under Division 2 of Part 8 of the BCBCA, as modified and supplemented by the Plan of Arrangement, the Interim

 

- 110 -


Table of Contents

Order and the Final Order; provided that, notwithstanding Section 242(2) of the BCBCA, the written objection to the Arrangement Resolution must be sent to Klondex c/o Bennett Jones LLP at 3400 One First Canadian Place, P.O. Box 130, Toronto, Ontario, M5X 1A4, Attention: [●], by not later than [● a.m./p.m. (Eastern Daylight Time)] on [●], 2018 or on the date which is two Business Days prior to any adjournment or postponement of the Meeting.

To exercise Dissent Rights, a Klondex Shareholder must dissent with respect to all Klondex Shares of which he, she or it is the registered and beneficial owner. A Registered Klondex Shareholder who wishes to dissent must deliver written notice of dissent to Klondex and such notice of dissent must strictly comply with the requirements of Section 242 of the BCBCA, as modified and supplemented by the Plan of Arrangement, the Interim Order and the Final Order. Any failure by a Klondex Shareholder to fully comply with the provisions of the BCBCA, as modified and supplemented by the Plan of Arrangement, the Interim Order and the Final Order, may result in the loss of that holder’s Dissent Rights. Voting against the Arrangement Resolution does not satisfy the notice requirements under Division 2 of Part 8 of the BCBCA. Non-Registered Klondex Shareholders who wish to exercise Dissent Rights must cause each Registered Klondex Shareholder holding their Klondex Shares to deliver the notice of dissent, or, alternatively, make arrangements to become a Registered Klondex Shareholder.

To exercise Dissent Rights, a Registered Klondex Shareholder must prepare a separate notice of dissent for himself, herself or itself, if dissenting on his, her or its own behalf, and for each other Non-Registered Klondex Shareholder who beneficially owns Klondex Shares registered in the Registered Klondex Shareholder’s name and on whose behalf the Registered Klondex Shareholder is dissenting; and must dissent with respect to all of the Klondex Shares registered in his, her or its name or if dissenting on behalf of a Non-Registered Klondex Shareholder, with respect to all of the Klondex Shares registered in his, her or its name and beneficially owned by the Non-Registered Klondex Shareholder on whose behalf the Registered Klondex Shareholder is dissenting. The notice of dissent must set out the number of Notice Shares and: (a) if such Notice Shares constitute all of the Klondex Shares of which the Klondex Shareholder is the registered and beneficial owner and the Klondex Shareholder owns no other Klondex Shares beneficially, a statement to that effect; (b) if such Notice Shares constitute all of the Klondex Shares of which the Klondex Shareholder is both the registered and beneficial owner, but the Klondex Shareholder owns additional Klondex Shares beneficially, a statement to that effect, including the names of the Registered Klondex Shareholder(s) of such additional Klondex Shares, the number of such additional Klondex Shares held by each such Registered Klondex Shareholder and a statement that written notices of dissent are being or have been sent with respect to such other Klondex Shares; or (c) if the Dissent Rights are being exercised by a Registered Klondex Shareholder who is not the beneficial owner of such Notice Shares, a statement to that effect including the name and address of the Non-Registered Klondex Shareholder(s) of such Klondex Shares and a statement that each such Registered Klondex Shareholder is dissenting with respect to all Klondex Shares of the Non-Registered Klondex Shareholder registered in such Registered Klondex Shareholder’s name.

If the Arrangement Resolution is approved at the Meeting, Klondex will notify registered holders of Notice Shares of Klondex’s intention to act upon the Arrangement Resolution, and pursuant to Section 243 of the BCBCA, in order to exercise Dissent Rights, such Klondex Shareholder must, within one month after Klondex gives such notice, send to Klondex or its Transfer Agent and Registrar a written notice that such holder requires the purchase of all of the Notice Shares. Such written notice must be accompanied by the certificate or certificates or DRS Statement representing those Notice Shares (including a written statement prepared in accordance with Section 244(2) of the BCBCA if the dissent is being exercised by the Registered Klondex Shareholder on behalf of a Non-Registered Klondex Shareholder). Upon such written notice, and subject to the provisions of the BCBCA relating to the termination of Dissent Rights, the Klondex Shareholder becomes a Dissenting Shareholder, and is bound to sell and Klondex (or any successor by amalgamation) is bound to purchase all of those Notice Shares. Such Dissenting Shareholder may not vote, or exercise or assert any rights of a Klondex Shareholder in respect of such Notice Shares, other than the rights set forth in Sections 237 to 247 of the BCBCA, as modified and supplemented by the Plan of Arrangement, the Interim Order and the Final Order.

 

111


Table of Contents

Dissenting Shareholders who exercise Dissent Rights and who are:

 

  (a)

ultimately entitled to be paid fair value for their Klondex Shares, will be paid an amount equal to such fair value by Klondex (or any successor by amalgamation), and will be deemed to have irrevocably transferred such Klondex Shares to Klondex as of the Effective Time, free and clear of all Encumbrances; or

 

  (b)

ultimately not entitled, for any reason, to be paid fair value for their Klondex Shares, will be deemed to have participated in the Arrangement, as of the Effective Time, on the same basis as a non-Dissenting Shareholder.

If a Dissenting Shareholder is ultimately entitled to be paid by Klondex for their Dissent Shares, then such Dissenting Shareholder may enter into an agreement with Klondex (or any successor by amalgamation) for the fair value of such Dissent Shares. If such Dissenting Shareholder does not reach an agreement regarding the fair value of their Dissent Shares, then such Dissenting Shareholder, or Klondex, may apply to the Court, and the Court may determine the payout value of the Dissent Shares and make consequential orders and give directions as the Court considers appropriate. There is no obligation on Klondex to make an application to the Court. The Dissenting Shareholder will be entitled to receive the fair value that the Klondex Shares had immediately before the Arrangement Resolution is approved. After a determination of the fair value of the Dissent Shares, Klondex must then promptly pay that amount to the Dissenting Shareholder.

In no case will Hecla, Klondex, the Depositary or any other person be required to recognize Dissenting Shareholders as Klondex Shareholders after the Effective Time, and the names of such Dissenting Shareholders will be deleted from the central securities register as Klondex Shareholders at the Effective Time.

In no circumstances will Hecla, Klondex, or any other person be required to recognize a person as a Dissenting Shareholder: (a) unless such person is the holder of the Klondex Shares in respect of which Dissent Rights are purported to be exercised immediately prior to the Effective Time and has strictly complied with the procedures for exercising Dissent Rights set out in Division 2 of Part 8 of the BCBCA, as modified and supplemented by the Plan of Arrangement, the Interim Order and the Final Order and does not withdraw such notice of dissent prior to the Effective Time; or (b) if such person has voted or instructed a proxy holder to vote such Notice Shares in favour of the Arrangement Resolution.

Dissent Rights with respect to Notice Shares will terminate and cease to apply to the Dissenting Shareholder if, before full payment is made for the Notice Shares, the Arrangement is abandoned or by its terms will not proceed, a court permanently enjoins or sets aside the corporate action approved by the Arrangement Resolution, the Dissenting Shareholder withdraws the notice of dissent with Klondex’s written consent, or any of the other events set out in Section 246 of the BCBCA occur. If any of these events occur, Hecla must return the share certificate(s) or DRS Statement representing the Klondex Shares to the Dissenting Shareholder, the Dissenting Shareholder regains the ability to vote and exercise its rights as a Klondex Shareholder and the Dissenting Shareholder must return any money paid to the Dissenting Shareholder in respect of the Notice Shares.

The discussion above is only a summary of the Dissent Rights, which are technical and complex. A Klondex Shareholder who intends to exercise Dissent Rights must strictly adhere to the procedures established in Division 2 of Part 8 of the BCBCA, as modified and supplemented by the Plan of Arrangement, the Interim Order and the Final Order, and failure to do so may result in the loss of all Dissent Rights.

Persons who have their Klondex Shares registered in the name of an Intermediary, or in some other name, who wish to exercise Dissent Rights should be aware that only the registered owner of such Klondex Shares is entitled to dissent.

If you dissent, then there can be no assurance that the amount you receive as fair value for your Klondex Shares will be more than or equal to the Arrangement Consideration under the Arrangement.

 

- 112 -


Table of Contents

Each Klondex Shareholder wishing to avail himself, herself or itself of Dissent Rights should carefully consider and comply with the provisions of the Interim Order and Division 2 of Part 8 of the BCBCA, which are attached to this Circular as Appendix “F” and Appendix “H”, respectively, and seek his, her or its own legal advice.

It is a condition of the Arrangement that holders of no more than 5% of the issued and outstanding Klondex Shares shall have exercised Dissent Rights, or have instituted proceedings to exercise Dissent Rights, in connection with the Arrangement.

See “Part 8 – The Arrangement Agreement – Conditions to the Arrangement Becoming Effective” of this Circular.

PART 15. RISK FACTORS RELATING TO THE ARRANGEMENT

In evaluating the Arrangement, Klondex Securityholders should carefully consider the following risk factors relating to the Arrangement. The following risk factors are not a definitive list of all risk factors associated with the Arrangement. Additional risks and uncertainties, including those currently unknown or considered immaterial by Klondex, may also adversely affect the trading price of the Klondex Shares, the Hecla Shares, the Havilah Shares and/or the businesses of Klondex, Hecla and Havilah following the Arrangement. In addition to the risk factors relating to the Arrangement set out below, Klondex Securityholders should also carefully consider the risk factors associated with the businesses of Klondex, Hecla and Havilah included in this Circular and in the documents incorporated by reference herein, including the risks found in the 2017 Annual Report on Form 10-K and Klondex’s Quarterly Report on Form 10-Q for the three months ended March 31, 2018, as updated by any subsequent Quarterly Report on Form 10-Q and Current Reports on Form 8-K, and the risks found in Hecla’s Annual Report on Form 10-K for the fiscal year ended December 31, 2017 and Hecla’s Quarterly Report on Form 10-Q for the three months ended March 31, 2018, as updated by any subsequent Quarterly Reports on Form 10-Q and Current Reports on Form 8-K. If any of the risk factors materialize, the expectations, and the predictions based on them, may need to be re-evaluated. The risks associated with the Arrangement include:

Hecla and Klondex may not integrate successfully.

If approved, the Arrangement will involve the integration of companies that previously operated independently. As a result, the Arrangement will present challenges to management, including the integration of the operations, systems and personnel of the two companies, and special risks, including possible unanticipated liabilities, unanticipated costs, diversion of management’s attention and the loss of key employees.

The difficulties management encounters in the transition and integration process could have an adverse effect on the revenues, level of expenses and operating results of the Combined Company. As a result of these factors, it is possible that any benefits expected from the Arrangement will not be realized.

Uncertainty surrounding the Arrangement could adversely affect Klondex’s retention of customers and suppliers and could negatively impact Klondex’s future business and operations.

Because the Arrangement is dependent upon satisfaction of certain conditions, its completion is subject to uncertainty. In response to this uncertainty, Klondex’s customers and suppliers may delay or defer decisions concerning Klondex. Any delay or deferral of those decisions by customers and suppliers could have an adverse effect on the business and operations of Klondex, regardless of whether the Arrangement is ultimately completed.

 

- 113 -


Table of Contents

The pro forma condensed combined financial statements are presented for illustrative purposes only and may not be an indication of the Combined Company’s financial condition or results of operations following the Arrangement.

The pro forma condensed combined financial statements contained in this Circular are presented for illustrative purposes only and may not be an indication of the Combined Company’s financial condition or results of operations following the Arrangement for several reasons. For example, the pro forma condensed combined financial statements have been derived from the historical financial statements of Hecla and Klondex and certain adjustments and assumptions have been made regarding the Combined Company after giving effect to the Arrangement. The information upon which these adjustments and assumptions have been made is preliminary, and these kinds of adjustments and assumptions are difficult to make with complete accuracy. Moreover, the pro forma condensed combined financial statements do not reflect all costs that are expected to be incurred by the Combined Company in connection with the Arrangement. For example, the impact of any incremental costs incurred in integrating Hecla and Klondex is not reflected in the pro forma condensed combined financial statements. In addition, the assumptions used in preparing the pro forma condensed combined financial information may not prove to be accurate, and other factors may affect the Combined Company’s financial condition or results of operations following the Arrangement. The Combined Company’s stock price may be adversely affected if the actual results of the Combined Company fall short of the pro forma condensed combined financial statements contained in this Circular. See “Part 23 Information Concerning the Combined Company – Unaudited Pro Forma Condensed Combined Financial Information” and the unaudited pro forma condensed combined financial statements of the Combined Company attached as Appendix “L” to this Circular.

Directors and executive officers of Klondex may have interests in the Arrangement that are different from those of Klondex Securityholders generally.

Certain executive officers and directors of Klondex may have interests in the Arrangement that may be different from, or in addition to, the interests of Klondex Securityholders generally, including, but not limited to, the receipt of certain change of control payments as discussed under the heading “Part 29 – Statement of Executive Compensation – Termination and Change of Control Benefits” of this Circular. The Klondex Board retained its own financial co-advisers in respect of the Arrangement. In addition, the Klondex Board established an Independent Committee comprised of independent directors to evaluate the Arrangement and advise the full Klondex Board on whether the Arrangement is in the best interests of Klondex and fair to the Klondex Securityholders. The Independent Committee also had its own independent financial advisors. The Independent Committee and the Klondex Board each recommended in favour of the Arrangement. Nevertheless, Klondex Securityholders should consider these interests in connection with their vote on the Arrangement Resolution, including whether these interests may have influenced Klondex’s executive officers and directors to recommend or support the Arrangement.

The issuance of a significant number of Hecla Shares, or securities convertible into Hecla Shares, could adversely affect the market price of the Hecla Shares.

If the Arrangement is completed, a significant number of additional Hecla Shares will be issued and will become available for trading in the public market. Further, payment of the Cash Consideration will consume a significant portion of Hecla’s current cash, cash equivalents and short term investments, and as a result Hecla may issue additional Hecla Shares, or other securities, including securities convertible into Hecla Shares, from time to time, including before the completion of the Arrangement. Any increase in the number of Hecla Shares, or any new offering of Hecla securities, may lead to sales of such shares or the perception that such sales may occur, either of which may adversely affect the market for, and the market price of, Hecla Shares. See the following risk factors in Hecla’s Annual Report on Form 10-K for the year ended December 31, 2017, as filed with the SEC on February 15, 2018, which is incorporated herein by reference: “Additional issuances of equity securities by us would dilute the ownership of our existing stockholders and could reduce our earnings per share”, “The issuance of additional shares of our preferred or common stock in the future could adversely affect holders of common

 

- 114 -


Table of Contents

stock” and “If a large number of shares of our common stock are sold in the public market, the sales could reduce the trading price of our common stock and impede our ability to raise future capital”.

The Arrangement Agreement may be terminated in certain circumstances, including in the event of a change having a Klondex Material Adverse Effect.

Each of Klondex and Hecla has the right to terminate the Arrangement Agreement and Arrangement in certain circumstances. Accordingly, there is no certainty, nor can Klondex provide any assurance, that the Arrangement Agreement will not be terminated by either Klondex or Hecla before the completion of the Arrangement. For example, Hecla has the right, in certain circumstances, to terminate the Arrangement Agreement if changes occur that, in the aggregate, have a Klondex Material Adverse Effect. There is no assurance that a change having a Klondex Material Adverse Effect will not occur before the Effective Date, in which case Hecla could elect to terminate the Arrangement Agreement and the Arrangement would not proceed.

There can be no certainty that all conditions precedent to the Arrangement will be satisfied.

The completion of the Arrangement is subject to a number of conditions precedent, certain of which are outside the control of Klondex, including receipt of the Final Order and receipt of other regulatory approvals. There can be no certainty, nor can Klondex provide any assurance, that these conditions will be satisfied or, if satisfied, when they will be satisfied.

The exchange ratio is fixed and will not be adjusted to reflect any change in the market value of the Hecla Shares or Klondex Shares prior to the closing of the Arrangement.

Under the Arrangement, Klondex Shareholders will receive the Hecla Consideration with a value of US$2.47 per Klondex Share. The Hecla Consideration will be satisfied by the delivery of one of the following, depending on the election (or deemed election) of a Klondex Shareholder: (a) the Share Consideration (subject to proration); (b) the Cash Consideration (subject to proration); or (c) the Combination Consideration. For purposes of the foregoing, the Hecla Shares have been attributed a value of US$3.85 per share, being the closing price of Hecla Shares on the NYSE on March 16, 2018, which is the date the Arrangement Agreement was entered into. Because the number of Hecla Shares to be received in respect of each Klondex Share under the Arrangement will not be adjusted to reflect any change in the market price of the Hecla Shares, the value of the Hecla Shares received under the Arrangement may vary significantly from the closing price of the Hecla Shares on March 16, 2018. If the market price of the Hecla Shares increases or decreases, the value of the Hecla Shares included in the Hecla Consideration that Klondex Shareholders receive pursuant to the Arrangement will correspondingly increase or decrease. There can be no assurance that the market price of the Hecla Shares on the Effective Date will not be lower than the price used to calculate the number of Hecla Shares included in the Share Consideration or Combination Consideration. In addition, the number of Hecla Shares being issued in connection with the Arrangement will not change as a result of decreases or increases in the market price of the Klondex Shares or Hecla Shares. Many of the factors that affect the market price of the Hecla Shares and the Klondex Shares are beyond the control of Hecla and Klondex, respectively. These factors include fluctuations in commodity prices, fluctuations in currency exchange rates, changes in the regulatory environment, adverse political developments, prevailing conditions in the capital markets and interest rate fluctuations.

Klondex will incur costs even if the Arrangement is not completed, and has agreed to pay the Termination Fee to Hecla in certain circumstances.

Certain costs related to the Arrangement, such as legal, accounting and certain financial advisor fees, must be paid by Klondex and Hecla even if the Arrangement is not completed. Klondex and Hecla are each liable for their own costs incurred in connection with the Arrangement. If the Arrangement is not completed, Klondex may be required to pay Hecla the Termination Fee of US$21 million if the Arrangement Agreement is terminated in certain circumstances or in the event there occurs an Expense Reimbursement Event. See “Part 8 – The Arrangement Agreement –Termination” of this Circular.

 

- 115 -


Table of Contents

The Termination Fee may discourage other parties from attempting to acquire Klondex Shares or otherwise making an Acquisition Proposal to Klondex, even if those parties would otherwise be willing to offer greater value to Klondex Securityholders than that offered by Hecla under the Arrangement.

If the Arrangement is not approved by the Klondex Securityholders, or the Arrangement is otherwise not completed, then the market price for the Klondex Shares may decline.

If the Arrangement is not approved by the Klondex Securityholders, or the Arrangement is otherwise not completed, then the market price of the Klondex Shares may decline to the extent that the current market price of the Klondex Shares reflects an assumption by the market that the Arrangement will be completed. If the Arrangement Resolution is not approved and the Klondex Board decides to seek another merger or Arrangement, there can be no assurance that it will be able to find a party willing to pay an equivalent or more attractive price than the total Arrangement Consideration to be paid pursuant to the Arrangement.

If the Arrangement Resolution is not approved by the Klondex Securityholders, Klondex will continue as a standalone entity and will need to consider and secure financing alternatives.

If the Arrangement Resolution is not approved and Klondex continues as a standalone entity, it will need to consider and secure financing alternatives. The mining, processing, development and exploration of the properties of Klondex may require substantial additional capital above and beyond what Klondex currently expects in 2018 and later years. Current global financial conditions have been subject to significant volatility, and access to public financing, particularly for resource companies, has been negatively impacted in recent years. These factors may impact Klondex’s ability to obtain equity or debt financing in the future and additional financing may not be available if needed or, if available, the terms of such financing may be unfavorable to Klondex. Failure to obtain sufficient financing may result in the delay or indefinite postponement of exploration, development or production on any or all of Klondex’s properties, or even a loss of property interest.

Owning Hecla Shares will expose Klondex Shareholders to different risks.

Hecla is subject to different risks than those to which Klondex is subject: for a full description of such risks please see the section “Risk Factors” in Hecla’s Annual Report on Form 10-K for the year ended December 31, 2017, dated February 15, 2018, and the section “Risk Factors” in Hecla’s Quarterly Report on Form 10-Q for the three months ended March 31, 2018, dated May 10, 2018, each of which is incorporated by reference herein. Hecla conducts some of its operations outside of Canada and the U.S., and as such Hecla’s operations are exposed to various risks normally associated with the conduct of business in foreign countries, including various levels of political and economic risk and other risks and uncertainties. The existence or occurrence of one or more of the following circumstances or events could have a material adverse impact on Hecla’s profitability or the viability of Hecla’s affected foreign operations, which could have a Hecla Material Adverse Effect on Hecla’s future cash flows earnings, results of operations and financial condition. These risks related to doing business in foreign jurisdictions vary from country to country and include but are not limited to: uncertain or unpredictable political, legal or economic environments; delays in obtaining or the inability to obtain necessary governmental permits; labour disputes; invalidation of governmental orders; war, acts of terrorism and civil disturbances; changes in laws or policies of particular countries; taxation; government seizure of land or mining claims; limitations on ownership of property or mining rights; restrictions on the convertibility of currencies; limitations on the repatriation of earnings; and increased financing costs.

The value of the Havilah Shares may fluctuate.

Under the Arrangement, Klondex Shareholders will be entitled to receive, for each Klondex Share held, the Havilah Consideration, consisting of 0.125 of a Havilah Share (after giving effect to the Havilah Share Consolidation). There is currently no public market for Havilah Shares and there can be no assurance that an active trading market for Havilah Shares will develop as a result of the spin-off transaction or be sustained in the

 

- 116 -


Table of Contents

future. The lack of an active market may make it more difficult to sell Havilah Shares and could lead to the price of Havilah Shares being depressed or more volatile. The prices at which Havilah Shares may trade after the spin-off transaction is uncertain. The market price for Havilah Shares may fluctuate widely, depending on many factors, some of which may be beyond Havilah’s control, including, actual or anticipated fluctuations in operating results due to factors related to Havilah’s business, the success or failure of Havilah’s business strategies, Havilah’s ability to obtain third-party financing as needed, the failure of securities analysts to cover Havilah Shares following the spin-off transaction, the operating and share price performance of other comparable companies, changes in laws and regulations affecting Havilah’s business, general economic conditions and other external factors. Additionally, stock markets in general have experienced volatility that has often been unrelated to the operating performance of a particular company. These broad market fluctuations could adversely affect the trading price of Havilah Shares.

The TSXV may not approve Havilah’s listing application.

Havilah has applied to have the Havilah Shares listed on the TSXV. Listing is subject to the approval of the TSXV in accordance with its original listing requirements. TSXV has not conditionally approved Havilah’s listing application and there is no assurance that the TSXV will approve the listing application.

PART 16. PROCEDURE FOR RECEIPT OF ARRANGEMENT CONSIDERATION

Consideration Election and Procedure

For purposes of the following, references to Klondex Shareholders include holders of In-the-Money Options and/or Klondex RSUs who receive Klondex Shares pursuant to the Arrangement.

Under the Arrangement, Klondex Shareholders will be entitled to receive, for each Klondex Share held: (a) the Hecla Consideration, as described in more detail below; and (b) the Havilah Consideration, consisting of 0.125 of a Havilah Share (after giving effect to the Havilah Share Consolidation).

With respect to the Hecla Consideration, Hecla has agreed to pay to each Klondex Shareholder the equivalent of US$2.47 per Klondex Share (based on the relative values of the Klondex Shares and Hecla Shares as at March 16, 2018). The Hecla Consideration to be received by each Klondex Shareholder will consist of either: (a) the Cash Consideration; (b) the Share Consideration; or (c) the Combination Consideration, depending on which form of Hecla Consideration the Klondex Shareholder elects to receive (or is deemed to have elected to receive), all as more particularly described below and in the Plan of Arrangement.

The actual Hecla Consideration received by a Klondex Shareholder will depend upon such Klondex Shareholder’s consideration election (or deemed election) and, in the case of Klondex Shareholders electing to receive the Cash Consideration or Share Consideration, on the effect of proration. Klondex Shareholders who elect to receive the Cash Consideration will, subject to the proration mechanism described below, be entitled to receive US$2.47 in cash for each Klondex Share held by them. Klondex Shareholders who elect to receive the Share Consideration will, subject to the proration mechanism described below, be entitled to receive 0.6272 of a Hecla Share for each Klondex Share held by them. Klondex Shareholders who elect to receive the Combination Consideration will not be subject to proration, and will receive 0.4136 of a Hecla Share and US$0.8411 in cash for each Klondex Share held by them.

In order to elect the form of Hecla Consideration, a Registered Klondex Shareholder or registered holder of Klondex Options and/or Klondex RSUs must deliver to the Depositary the applicable validly completed Election Document(s) (with accompanying Klondex Share certificate(s) or DRS Statement if you are a Registered Klondex Shareholder) prior to the Election Deadline, which is 1:00 p.m. (Pacific Daylight Time) / 4:00 p.m. (Eastern Daylight Time) on [●], 2018. In the case of Registered Klondex Shareholders, the applicable Election Document is the Letter of Transmittal and Election Form. In the case of a registered holder of Klondex Options and/or Klondex RSUs, the applicable Election Document is the Option/RSU Election Form.

 

- 117 -


Table of Contents

Registered Klondex Shareholders (other than Dissenting Shareholders) or registered holders of Klondex Options or Klondex RSUs who do not elect to receive the Cash Consideration or the Share Consideration by the Election Deadline, or who fail to make a valid election as to the form of Hecla Consideration that they wish to receive, will be deemed to have elected to receive the Combination Consideration for each Klondex Share.

If Klondex and Hecla determine that the Effective Date is not reasonably likely to occur by the tenth Business Day after [●], 2018, they may by agreement determine a new Election Deadline (which Klondex and Hecla expect to be not more than ten Business Days before the Effective Date), in which case notice of the new Election Deadline will be published.

The determination of the Depositary as to whether elections have been properly made and when elections were received by it will be binding. REGISTERED KLONDEX SHAREHOLDERS AND HOLDERS OF KLONDEX OPTIONS AND KLONDEX RSUS WHO DO NOT MAKE A SPECIFIC ELECTION PRIOR TO THE ELECTION DEADLINE, OR FOR WHOM THE DEPOSITARY DETERMINES THAT THEIR ELECTION WAS NOT PROPERLY MADE WITH RESPECT TO ANY KLONDEX SHARES, KLONDEX OPTIONS OR KLONDEX RSUS, AS APPLICABLE, WILL BE DEEMED TO HAVE ELECTED TO RECEIVE THE COMBINATION CONSIDERATION IN RESPECT OF SUCH SECURITIES.

Proration

Set forth below is a summary description of the proration calculations arising as a result of the Maximum Cash Consideration and Maximum Shares Consideration that Hecla is required to deliver under the Arrangement. For purposes of the following, references to Klondex Shareholders include holders of In-the-Money Klondex Options and/or Klondex RSUs who receive Klondex Shares pursuant to the Arrangement. As a result of the maximums on both cash and Hecla Shares that Hecla is required to deliver under the Arrangement, along with the proration calculations that ensue from those maximums, it is likely that Klondex Shareholders who elect to receive either the Cash Consideration or the Share Consideration will end up receiving both cash and Hecla Shares, notwithstanding their election. If all Klondex Shareholders were to elect to receive either the Cash Consideration or the Share Consideration, then as a result of proration the Hecla Consideration received by each Klondex Shareholder would consist of 0.4136 of a Hecla Share and US$0.8411 in cash for each Klondex Share.

Cash Consideration Proration

The Maximum Cash Consideration that Hecla is required to deliver under the Arrangement is US$157,410,417. The Maximum Cash Consideration will be allocated, first, to Klondex Shareholders who elect, or who are deemed to have elected, to receive the Combination Consideration, to the extent of US$0.8411 per Klondex Share. Consequently, Klondex Shareholders who elect to receive the Cash Consideration will only be entitled to receive the Cash Consideration in respect of each Klondex Share held by them if other Klondex Shareholders elect to receive the Share Consideration in respect of an equivalent or greater number of Klondex Shares. If the number of Klondex Shares in respect of which Klondex Shareholders elect to receive the Share Consideration is less than the number of Klondex Shares in respect of which Klondex Shareholders elect to receive the Cash Consideration, Klondex Shareholders who elect to receive the Cash Consideration will, instead of receiving US$2.47 in cash for each Klondex Share, receive a lesser amount of cash (which shall be not less than US$0.8411) and a portion of a Hecla Share (not exceeding 0.4136 of a Hecla Share) for each Klondex Share, all as more particularly provided for in the Plan of Arrangement. If all Klondex Shareholders validly elect to receive the Cash Consideration, or if no Klondex Shareholders elect to receive the Share Consideration, a Klondex Shareholder electing to receive the Cash Consideration would receive US$0.8411 in cash and 0.4136 of a Hecla Share for each Klondex Share held by them.

 

- 118 -


Table of Contents

Share Consideration Proration

The Maximum Shares Consideration that Hecla is required to pay under the Arrangement is 77,411,859 Hecla Shares. The Maximum Shares Consideration will be allocated, first, to Klondex Shareholders who elect, or who are deemed to have elected, to receive the Combination Consideration, to the extent of 0.4136 of a Hecla Share per Klondex Share. Consequently, Klondex Shareholders who elect to receive the Share Consideration will only be entitled to receive the Share Consideration in respect of each Klondex Share held by them if other Klondex Shareholders elect to receive the Cash Consideration in respect of an equivalent or greater number of Klondex Shares. If the number of Klondex Shares in respect of which Klondex Shareholders elect to receive the Cash Consideration is less than the number of Klondex Shares in respect of which Klondex Shareholders elect to receive the Share Consideration, Klondex Shareholders who elect to receive the Share Consideration will, instead of receiving 0.6272 of a Hecla Share for each Klondex Share, receive a lesser portion of a Hecla Share (which shall not be less than 0.4136 of a Hecla Share) and cash (not exceeding US$0.8411) for each Klondex Share, all as more particularly provided for in the Plan of Arrangement. If all Klondex Shareholders validly elect to receive the Share Consideration, or if no Klondex Shareholders elect to receive the Cash Consideration, a Klondex Shareholder electing to receive the Share Consideration would receive US$0.8411 in cash and 0.4136 of a Hecla Share for each Klondex Share held by them.

Exchange Procedure

On the Effective Date, each Participating Former Securityholder will, following completion of the transactions described above under the heading “Part 7 – The Arrangement – Arrangement Mechanics” of this Circular, be entitled to receive, and the Depositary will deliver to such Participating Former Securityholder following the Effective Time, certificates and/or cash representing the Arrangement Consideration that such Participating Former Securityholder is entitled to receive in accordance with the terms of the Arrangement.

After the Effective Time and until surrendered for cancellation, each certificate or DRS Statement that immediately prior to the Effective Time represented one or more Klondex Shares following completion of the transactions described above under the heading “Part 7 – The Arrangement – Arrangement Mechanics” of this Circular will be deemed at all times to represent only the right to receive in exchange therefor, certificates and/or cash representing the Share Consideration, Cash Consideration or Combination Consideration that the holder of such certificate or DRS Statement is entitled to receive in accordance with the terms of the Arrangement.

A Klondex Shareholder who holds Klondex Shares registered in the name of a broker, investment dealer, bank, trust company or other Intermediary should contact the Intermediary for instructions and assistance in providing details for registration and delivery of certificates and/or cash representing the Arrangement Consideration which the Registered Klondex Shareholder is entitled to receive on the non-Registered Klondex Shareholder’s behalf.

Klondex Shareholders

A Letter of Transmittal and Election Form (printed on white paper) is being mailed, together with this Circular, to each person who was a Registered Klondex Shareholder on the Record Date.

Each such Registered Klondex Shareholder must forward a properly completed and signed Letter of Transmittal and Election Form (with accompanying Klondex Share certificate(s) or DRS Statement) to the Depositary in order to receive the Arrangement Consideration to which such Registered Klondex Shareholder is entitled under the Arrangement. It is recommended that Registered Klondex Shareholders complete, sign and return the Letter of Transmittal and Election Form (with accompanying Klondex Share certificate(s) or DRS Statement) to the Depositary as soon as possible.

Copies of the Letter of Transmittal and Election Form may be obtained by contacting the Depositary. The Letter of Transmittal and Election Form will also be available under Klondex’s issuer profile on SEDAR at www.sedar.com.

 

- 119 -


Table of Contents

Klondex and Hecla reserve the right to waive or not to waive any and all errors or other deficiencies in any Letter of Transmittal and Election Form or other document and any such waiver or non-waiver will be binding upon the Registered Klondex Shareholder. The granting of a waiver to one or more Registered Klondex Shareholders does not constitute a waiver for any other Registered Klondex Shareholder. Klondex and Hecla reserve the right to demand strict compliance with the terms of the Letter of Transmittal and Election Form. The method used to deliver the Letter of Transmittal and Election Form and any accompanying certificates representing Klondex Shares is at the option and risk of the holder surrendering them, and delivery will be deemed effective only when such documents are actually received by the Depositary. Klondex recommends that the necessary documentation be hand delivered to the Depositary, and a receipt obtained therefor; otherwise the use of registered mail with return receipt requested, and with proper insurance obtained, is recommended.

Non-Registered Klondex Shareholders whose Klondex Shares are registered in the name of a broker, investment dealer, bank, trust company, trustee or other nominee should contact that nominee for assistance in depositing their Klondex Shares and should follow the instructions of such nominee in order to deposit their Klondex Shares.

Lost Certificates

If any Klondex Share certificate, that immediately prior to the Effective Time represented one or more outstanding Klondex Shares, has been lost, stolen or destroyed, then, upon the making of an affidavit of that fact by the person claiming such Klondex Share certificate to be lost, stolen or destroyed, the Depositary will, in exchange for such lost, stolen or destroyed Klondex Share certificate, issue the certificates and/or cash representing the Arrangement Consideration which such Registered Klondex Shareholder is entitled to receive in accordance with the terms of the Arrangement.

When authorizing such payment in exchange for any lost, stolen or destroyed certificate, the person to whom such consideration is to be delivered shall, as a condition precedent to the delivery of such payment: (a) give a bond satisfactory to Hecla, Havilah and the Depositary (acting reasonably) in such sum as Hecla, Havilah and the Depositary may direct; or (b) indemnify Hecla, Havilah, the Depositary and Klondex in a manner satisfactory to each of them (acting reasonably), against any claim that may be made against Hecla, Havilah, the Depositary or Klondex with respect to the certificate alleged to have been lost, stolen or destroyed.

Holders of In-the-Money Klondex Options and Klondex RSUs

Under the Arrangement, holders of In-the-Money Klondex Options and holders of Klondex RSUs will be entitled: (i) to receive Klondex Shares for their In-the-Money Klondex Options and Klondex RSUs; and (ii) to receive the Hecla Consideration and Havilah Consideration for each such Klondex Share to the same extent as a Klondex Shareholder. However, under the Plan of Arrangement, no Klondex Share certificates will be issued in respect of the Klondex Shares to be received by holders of In-the-Money Klondex Options and holders of Klondex RSUs. Accordingly, holders of In-the-Money Klondex Options and/or Klondex RSUs will not be required to deliver a Letter of Transmittal and Election Form to the Depositary in order to receive the Arrangement Consideration to which they are otherwise entitled under the Plan of Arrangement.

Fractional Interests

To the extent the aggregate number of Hecla Shares or Havilah Shares that a Klondex Shareholder would otherwise be entitled to receive under the Arrangement includes a fractional share, the actual number of Hecla Shares or Havilah Shares, as applicable, to be received by the Klondex Shareholder will, without additional compensation, be rounded down to the nearest whole number of shares.

Any cash component of the Arrangement Consideration payable pursuant to the Arrangement that is less than one cent will be rounded down to the next whole cent.

 

- 120 -


Table of Contents

PART 17. CERTAIN CANADIAN FEDERAL INCOME TAX CONSIDERATIONS

The following is, as of the date of this Circular, a summary of the principal Canadian federal income tax considerations generally applicable under the Tax Act to Klondex Shareholders who exchange their Klondex Shares for the Arrangement Consideration pursuant to the Arrangement and who, at all relevant times, for purposes of the Tax Act: (a) deal at arm’s length with each of, and are not “affiliated” (within the meaning of the Tax Act) with any of, Klondex, Hecla or Hecla Acquisition Subco; (b) hold their Klondex Shares as capital property; and (c) will hold the Havilah Shares and any Hecla Shares received by them pursuant to the Arrangement as capital property (a “Holder”). Generally, Klondex Shares, Hecla Shares and Havilah Shares will be considered to be capital property to the holder thereof provided that they are not held in the course of carrying on a business of buying and selling securities and have not been acquired in one or more transactions considered to be an adventure or concern in the nature of trade. Certain Klondex Shareholders who might not otherwise be considered to hold their Klondex Shares, Hecla Shares or Havilah Shares as capital property may, in certain circumstances, be entitled to have their Klondex Shares, Hecla Shares, Havilah Shares and any other “Canadian security” (as defined in the Tax Act) owned by such holders in the taxation year in which the election is made, and in all subsequent taxation years, treated as capital property by making the irrevocable election permitted by subsection 39(4) of the Tax Act. Klondex Shareholders should consult their own tax advisors regarding the potential application and consequences of this election in their particular circumstances.

This summary is not applicable to a Holder: (i) that is a partnership; (ii) that is a member of a partnership that holds Klondex Shares; (iii) that is a “financial institution” (as defined in the Tax Act for the purposes of the mark-to-market rules); (iv) an interest in which is a “tax shelter investment” (as defined in the Tax Act); (v) that is a “specified financial institution” (as defined in the Tax Act); (vi) that has made a “functional currency” election under section 261 of the Tax Act; (vii) that has received, or receives, Klondex Shares upon the exercise or deemed exercise of a Klondex Option, Klondex RSU or Klondex DSU; (viii) that is a corporation resident in Canada and that is (or does not deal at arm’s length within the meaning of the Tax Act with a corporation resident in Canada that is), or that becomes as part of a transaction or event or series of transactions or events that include the Arrangement, controlled by a non – resident corporation for purposes of section 212.3 of the Tax Act; (ix) that has entered into, or enters into, a “derivative forward agreement” or “synthetic disposition arrangement” (each as defined in the Tax Act) with respect to its Klondex Shares, Hecla Shares or Havilah Shares; or (x) that receives dividends on its Hecla Shares or Havilah Shares under or as part of a “dividend rental arrangement” (as defined in the Tax Act). Such holders should consult their own tax advisors.

This summary is based upon the provisions of the Tax Act in force on the date of this Circular and counsel’s understanding of the current published administrative policies and assessing practices of the CRA made publicly available prior to the date of this Circular. Subject to the immediately following paragraph, this summary takes into account all specific proposals to amend the Tax Act which have been publicly announced by or on behalf of the Minister of Finance (Canada) prior to the date of this Circular (the “Proposed Amendments”) and assumes that the Proposed Amendments will be enacted in their current form; however no assurance can be given that any of the Proposed Amendments will be enacted in the form proposed, or at all. Except for the Proposed Amendments, this summary does not take into account or anticipate any changes in law, whether by legislative, governmental or judicial decision or action, or changes in the administrative or assessing practices and policies of the CRA, nor does it take into account other federal or any provincial, territorial or foreign tax legislation or considerations, which may differ significantly from the Canadian federal income tax considerations discussed herein.

This summary does not take into consideration the proposals announced by the Minister of Finance (Canada) as part of the Canadian federal budget tabled on February 27, 2018 pertaining to the taxation of private corporations and their shareholders. Holders that are private corporations (and any shareholders of such corporations) should consult with their own tax advisors for advice with respect to the tax consequences that could arise as a result of such proposals.

 

- 121 -


Table of Contents

This summary is not exhaustive of all possible Canadian federal income tax considerations applicable to a Holder in respect of the transactions described herein. The income or other tax consequences will vary depending on the particular circumstances of the Holder, including the province or provinces in which the Holder resides or carries on business. Accordingly, this summary is of a general nature only and is not intended to be, nor should it be construed to be, legal or tax advice to any particular Holder, and no representations with respect to the income tax consequences to any particular Holder are made. Moreover, no advance income tax ruling has been applied for or obtained from the CRA to confirm the tax consequences of any of the transactions described herein. Holders should consult their own legal and tax advisors for advice with respect to the tax consequences of the transactions described in this Circular based on their particular circumstances.

Holders Resident in Canada

The following portion of this summary is generally applicable to a Holder who at all relevant times, for purposes of the Tax Act, is or is deemed to be resident in Canada (a “Resident Holder”). The following portion of this summary, other than the portion under the heading “Part 17 – Certain Canadian Federal Income Tax Considerations – Holders Resident in Canada – Dissenting Shareholders”, applies to Resident Holders that are not Dissenting Shareholders.

Exchange of Klondex Shares Pursuant to the Arrangement

Under the Arrangement, Resident Holders will first exchange their Klondex Shares for Class A Shares and Havilah Shares, following which they will exchange their Class A Shares for the Hecla Consideration.

The exchange of Klondex Shares for Class A Shares and Havilah Shares is intended to generally qualify as a tax-deferred reorganization pursuant to section 86 of the Tax Act. Provided the fair market value of all of the Havilah Shares distributed to holders of Klondex Shares on the exchange of the Klondex Shares pursuant to the Arrangement does not exceed the aggregate “paid-up capital” (as determined for purposes of the Tax Act) of all of the issued and outstanding Klondex Shares immediately before the exchange, the distribution of the Havilah Shares to Resident Holders should not give rise to any deemed dividend to Resident Holders. Klondex expects that the fair market value of all of the Havilah Shares at the time of such exchange will be substantially less than the aggregate “paid-up capital” (as determined for purposes of the Tax Act) of all of the issued and outstanding Klondex Shares immediately before such exchange.

Assuming that the fair market value of the Havilah Shares distributed to holders of Klondex Shares under the Arrangement does not exceed the aggregate “paid-up capital” (as determined for purposes of the Tax Act) of all of the issued and outstanding Klondex Shares immediately before