TORONTO (miningweekly.com) – Tahoe Resources and Rio Alto Mining have entered into a definitive agreement to combine their businesses in a C$1.3-billion cash-and-scrip deal that will see Tahoe gain a footing in Peru while creating a new intermediate precious metals producer, the companies announced on Monday.

The combined company was expected to offer shareholders significant low-cost production from Tahoe’s Escobal silver mine, in Guatemala, and Rio Alto’s established La Arena gold mine, in Peru, as well as long-term sustainable growth fuelled by the development of Rio Alto’s Shahuindo gold project, from which first output was expected in early 2016.

With strong operating margins and low capital risk, the combined company was expected to have industry-leading free cash flow generation, strong financial returns and a robust balance sheet with zero net debt.

The combined company would benefit from extreme low-cost production, as its 2015 outlook of 18-million ounces to 21-million ounces of silver was estimated at a total cash cost of $6.35/oz to $8.25/oz and all-in sustaining costs (AISC) of $9.75/oz to $11.50/oz. It was also expected to produce 210 000 oz to 220 000 oz of gold at net cash costs of $570/oz to $600/oz and AISC of $730/oz to $765/oz. Operating margins of more than 50% were foreseen based on consensus commodity price forecasts.

The companies’ combined $3.25-billion market capitalisation was expected to appeal to a broader institutional shareholder base, increase analyst coverage and improve share-trading liquidity.

Based on Friday's closing price of Tahoe’s common shares of C$17.64 on the TSX, the offer implied payment of C$4 a Rio Alto share, which represented a premium of 22.1% to the closing price of Rio Alto shares of C$3.28 on the TSX at the end of last week.

Tahoe vice chairperson and CEO Kevin McArthur would act as the executive chairperson of the combined company's board and Rio Alto president and CEO Alex Black would become the new CEO of the combined company. Ron Clayton would act as president and COO of the combined company.

The deal was expected to close in April and would see Tahoe shareholders owning 65% of the new combined company and Rio Alto shareholders owning the balance.

BMO Capital Markets acted as lead financial adviser to Tahoe, while GMP Securities acted as financial adviser to Rio Alto.

On Monday morning, Tahoe’s TSX-listed stock fell about 10% to C$15.73 apiece, while Rio Alto's stock surged about 16% to C$3.80 apiece.