Vancouver – In a move that took investors and analysts by surprise, HudBay Minerals (HBM-T) and Lundin Mining (LUN-T, LMC-N) are merging into what they hope will be the next major global diversified mining company.
The proposed deal would see Lundin holders receive 0.39 HudBay shares for each Lundin share held, turning Lundin into a wholly-owned HudBay subsidiary. The share ratio values Lundin shares at $2.08, representing a 32% premium over Lundin’s 30-day, volume-weighted average trading price.
In addition, HudBay is loaning Lundin $135.8 million for immediate use towards financing capital investments. HudBay will recoup the funds in the form of 97 million Lundin shares at $1.40 a piece, representing 19.9% of Lundin’s outstanding shares. The resulting HudBay would have 306 million shares outstanding.
Lundin investors moved 18 million shares on the news but left the company’s share price almost unchanged, up 4¢ to $1.05. HudBay shareholders, however, were less impressed – the major lost $2.07 or almost 40% to close at $3.16, on 20 million shares traded.
HudBay’s share price has not dropped below $4 since 2005.
The merger news comes only a week after Lundin announced a $200-million third quarter loss, related primarily to writedowns for recently-acquired assets with deteriorating worth. It marked a dramatic change for the ambitious mining company, which a year ago traded near $10 and boasted double-digit profits. And while president and CEO Phil Wright had put on optimistic light on future revenues, he modified that today.
“The injection of cash we get through this deal is a welcome injection,” he said. “It doesn’t take a rocket scientist to see that some of the provisional pricing settlements coming through now are considerably lower than we had anticipated even last week and that will take a toll on revenues.”
HudBay’s situation is quite different. At the end of September the company had $844 million in the bank; with metal prices tanking and immense uncertainty surrounding the global credit system, cash in the bank has become a key asset of late. But analyst Greg Barnes with TD securities points out HudBay’s production profile was set to shrink over the next two years, particularly with the company’s recent decision to delay development at the Fenix nickel laterite project in Guatemala. The merger would certainly reverse that decline. And the major was focused on zinc; the merger would diversify its production profile.
Both companies would also see better geographical diversity. Most of HudBay’s operations are in the Flin Flon greenstone belt of northern Manitoba, where it operates the 777 zinc-copper mine, the Trout Lake zinc-copper mine, the Chisel North zinc mine, and a concentrator-zinc plant-copper smelter complex. HudBay also owns a zinc oxide facility in Ontario and a copper refinery in Michigan.
Lundin, on the other hand, has no North American operations. Its producing operatiosn include the Neves-Corvo copper-zinc and Aguablanca nickel mines in Portugal, the Zinkgruvan zinc-lead mine in Sweden, the Galmoy zinc-lead mine in Ireland, and the Aguablanca nickel mine in Portugal. The company also owns a 26% interest in the massive Tenke copper project in the Democratic Republic of Congo, being built by partner Freeport MacMoran (FCX-N).
Combined, the companies produced 187,115 tonnes of copper, 278,289 tonnes of zinc, 44,560 tonnes of lead, 3,270 tonnes of nickel, 102,587 oz. gold, and 4.18 million oz. silver in 2007. While 2008 numbers will be similar, 2009 production rates will be lower as Lundin recently put its Aljustrel zinc mine in Portugal on care and maintenance while HudBay was forced to mothball its Balmat zinc mine smelter in the summer.
Barnes calculates that the combined company would have a market capitalization of $1.6 billion, making it the third-largest Canadian mining company behind Teck Cominco (TCK.B-T, TCK-N) and Cameco (CCO-T) and pushing First Quantum Minerals (FM-T) to fourth place.
If the merger goes ahead the new entity would have roughly $900 million on hand, compared to US$240 million in debt. Most of the debt comes from Lundin; most of the cash from HudBay. The heads of each company stressed the importance of cash in the current market.
“On the financial side this new company is extremely powerful and very flexible,” says Allen Palmiere, CEO of HudBay. “We are going to build the next diversified major and we will continue to evaluate opportunities very stringently – we certainly expect that the current environment will continue to create opportunities.”
Though HudBay’s main lifeblood has until now been zinc, the new entity shifts the focus to copper. Copper production would account for almost 60% of the revenue in the combined company, with zinc bringing 27% of revenues to the table and the rest divided between nickel, lead, gold, and silver in that order.
In a conference call to discuss the announcement one analyst questioned the deal from HudBay’s perspective, pointing out that HudBay only just closed its takeover of Skye Resources. In the deal HudBay acquired the Fenix project, which is home to a huge nickel deposit but also carries a $1-billion development price tag. When HudBay closed the Skye deal nickel prices were hovering above US$10 per lb. The metal is now going for more like US$4.50 per lb and the major has delayed development until prices recover.
Other analysts voiced serious concern that HudBay was paying such a premium in the deal, given the current market and given Lundin’s debt load and need for cash. Wright went so far as to clarify that his company was in need of cash in the near term and said that without the cash component “the deal wouldn’t have been done.” Lundin has a US$575-million revolving line of credit but Wright said that, since banks don’t even want to lend to banks these days, the company didn’t want to go there.
Against all attacks Palmiere defended the deal by saying that even under the most bearish outlook the Lundin acquisition adds value to HudBay.
“We looked at the downside scenario: we took current metal prices and ran forward to ensure that even with this scenario for five years the deal is still accretive,” he said. “Even under that very bleak outlook our cash position grows.”
And Palmiere says that statement stands even if zero value is attributed to Tenke, which is in a country ravaged by civil war and where mining contracts with the government are being re-negotiated. Lundin just made its final payment on phase one of development at Tenke, which should take it to production within a year. Over 2008 Lundin contributed US$264 million to the project.
“I feel extremely comfortable in terms of the values given to Lundin’s assets and feel their assets support the premium we’ve provided,” said Palmiere. “The reality is today’s market is volatile at best so really we have to look at asset value rather than equity value. Equity values today don’t represent the underlying health of companies – there’s no relationship whatsoever.”
The boards of both companies have approved the plan. HudBay shareholders will not have a say in the matter, as acquisitions do not require shareholder approval. Lundin shareholder will have to approve the merger, by a margin of at least two-thirds, and have been advised by its board to vote in favour. A 40% vote in favour is already assured, as 21.1% of Lundin’s shareholders have already agreed to support the deal while HudBay will vote in favour via its new 19.9% holding.
Be the first to comment on "HudBay and Lundin to merge"