Anglo to sell HBM&S to Ontzinc for $325m

The Manitoba-based operations of Hudson Bay Mining & Smelting could be sold to tiny Venture-listed Ontzinc (OTZ-V) if a new deal with Hudson Bay’s parent goes through.

South African mining house Anglo American (AAUK-Q) has agreed to a deal to sell the assets to Ontzinc for $325 million, following a quiet auction for the assets.

Neither company released details of the transaction, but in a conference call with investors and press, Ontzinc’s chief financial officer, Douglas Scharf, put the net value of Hudson Bay’s assets at $349 million. The close correspondence of the purchase price suggests Ontzinc would be assuming all the operation’s existing liabilities.

The purchase remains conditional on Ontzinc’s raising the money to do the deal. The company has a market capitalization of around $14 million and had $3.1 million in cash at the end of June; it said it planned to raise some of the funds for the purchase through an equity offering, and the rest from debt financing.

Both parties are trying to sew up the sale by the end of December.

Hudson Bay had been rumoured to be on the block for several months, Anglo having decided the zinc and copper producer was no longer a “core asset.” Anglo spokeswoman Kate Aindow told the Bloomberg wire service that with zinc and copper prices recovering in the past year, “it’s a good time for us to sell it.”

Anglo had taken a US$208 million charge against earnings in 2003 in writing down the carrying value of Hudson Bay. The writedown brought operating profit for Anglo’s worldwide zinc operations down to a loss of US$62 million for the year. The remaining value of the asset reflects mainly the US$276 million capital cost of the 777 Project, the Flin Flon area’s newest mine.

Hudson Bay consists of the Flin Flon smelting and refining complex, mills at Flin Flon and Snow Lake, Man., and five mines in Manitoba and Saskatchewan: Callinan, Trout Lake, 777, Chisel North, and Konuto. Another mine and mill complex, at Ruttan Lake in northern Manitoba, was closed in 2002.

Hudson Bay produced 117,900 tonnes zinc and 83,100 tonnes copper from 2.2 million tonnes of ore in 2003. It also produced 57,500 oz. gold and 1 million oz. silver as byproducts. Anglo’s interim report for the first half of 2004 showed production of 52,700 tonnes zinc from Hudson Bay and 43,200 tonnes copper from its zinc operations, mainly from Hudson Bay.

Ontzinc said in its announcement of the deal that Hudson Bay had made $25 million on revenues of $265 million in the first six months of 2004.

The whole operation’s published reserves at the end of 2003 were 16.4 million tonnes grading 4.94% zinc and 2.07% copper. Anglo did not report other resources beyond reserves, but in a conference call held Oct. 8, Ontzinc Chairman Gregory Peebles said the operation had about 13 years in reserves and resources. That would suggest that about 10 million more tonnes could be reported. Chief Financial Officer Scharf said more information would come out in a prospectus for the equity offering.

Scharf said “we are unable to discuss specifics of our financing plans” in the conference call, but the equity financing would be accompanied by a consolidation of Ontzinc shares. He gave no specific information on the proposed ratio of consolidation, but Ontzinc has about 238 million shares outstanding and last traded at 8 before being halted for the announcement. The company also said it would change its name to Hudson Bay International Minerals after the financing and consolidation.

Saying “there is significant value not only in the assets but in the people of Hudson Bay Mining,” Peebles indicated the operations would be largely led by current Hudson Bay management. Hudson Bay had reduced its workforce by about 10% by the end of 2003, and Peebles told a Hudson Bay employee during the conference call that existing jobs at the operation would be safe. About 1,400 people work for Hudson Bay.

Ontzinc has been seeking to join the zinc industry’s big time for about a year. In November 2003, it made an unsolicited, US$1.7-billion bid to buy Australian zinc producer Pasminco out of administration. Instead, the administrators floated a new company, Zinifex, in April of this year, to hold the producing assets of Pasminco.

Ontzinc also owns the dormant Balmat zinc property in upstate New York and the closed Gays River zinc mine in Nova Scotia.