HudBay, Lundin Combo Under Fire – by Marilyn Scales

Marilyn Scales is a field editor for the Canadian Mining Journal, Canada’s first mining publication. She is one of Canada’s most senior mining commentators.

I wonder who first said, “No good deed goes unpunished.” Wherever that bit of wisdom came from it would seem to apply perfectly to the proposed friendly business combination of Toronto’s HudBay Minerals and Vancouver’s Lundin Mining. Major backers are weighing in with their opposition, and shareholders have voted with their wallets.

On Nov. 21, HudBay and Lundin announced their intention to create “a new Canadian leader” in the mining sector. Lundin would become a wholly owned subsidiary of HudBay with each Lundin shareholder receiving 0.3919 of a HudBay common share. The offer represents a 32% premium over Lundin’s 30-day average trading price. HudBay CEO Allen J. Palmiere will be CEO of the combined company. Other members of the HudBay board will be Philip J. Wright, Lukas Lundin, M. Norman Anderson, Colin K. Benner, Donald K. Charter, Ronald P. Gagel, R. Peter Gillin and William A. Rand.

The combined company will be Canada’s second-largest base metals producer as measured by market capitalization. It will have a portfolio of mining assets in Canada, Portugal, Sweden, Spain and Ireland. It will have development projects in the Democratic Republic of Congo and Guatemala.

If all goes according to plan, HudBay will have cash-on-hand of $900 million and a total debt of US$240 million (as of Sept. 30, 2008), it says. HudBay will then loan Lundin $135.8 million for capital investments and general corporate purchases. Lundin will issue 97.0 million common shares to HudBay in return.

The deal looks to be beneficial. HudBay could diversify its production base beyond zinc, and its management is capable. In 2007 HudBay and Lundin had combined production of 187,116 tonnes of copper, 278,289 tonnes of zinc, 44,450 tonnes of lead, 3,270 tonnes of nickel, 102,587 oz of gold, and 4.18 million oz of silver.

HudBay brings its Manitoba properties (the 777, Trout Lake and Chisel North mines, two concentrators and the Flin Flon smelter) to the table. Lundin has operating mines in Spain (Aquablanca), Portugal (Aljustrel and Neves-Corvo), Ireland (Galmoy) and Sweden (Storliden and Zinkgruvan). In the immediate pipeline are HudBay’s Fenix development (recently acquired in a merger with Skye Resources) in Guatemala. Also in development by Freeport-McMoRan is the Tenke Fungurume project, in which Lundin acquired a 25% interest acquired from Tenke Mining in 2007.

The HudBay-Lundin combination is running into stiff opposition. As soon as the proposed deal was announced, HudBay shares fell 40%, closing at $3.16 on Nov. 21. Most analysts dislike the proposal, pointing out that Lundin’s mines are marginal at best and the company lost $200 million in Q3 2008 due to the write down many of its recently acquired projects. Jaguar Financial, which holds 5% of HudBay’s common shares, immediately launched its own takeover bid for HudBay in hopes of putting a halt to the combination. Correinte Master Fund of Fort Worth, Texas, wants the deal re-examined, saying HudBay management committed “an act of gross mismanagement”.

For my part, I favour the deal. Yes, management will have some rough times ahead as metal prices languish and global financial markets continue their downward spiral. But with the next uptick in prices, the new, larger HudBay will be in a good position to profit from them. This deal may eventually rate as the steal of the century.

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