HudBay bids for Norsemont (January 17, 2011)

HudBay Minerals (hbm-t, hbm-n) is looking to venture farther south than it ever has before to acquire its next project.
The company has made a friendly $520-million pitch to Norsemont Mining’s (nom-t) shareholders in the hope of nabbing Norsemont’s copper-rich Constancia project in southern Peru.
Currently, HudBay’s only advanced project outside of Canada or the U.S. is the Fenix nickel project in Guatemala.
HudBay is offering for each Norsemont share 0.2617 HudBay share and .1¢ in cash, or $4.50 in cash with the cash consideration capped at $130 million. If all shareholders chose the cash option it would work out to each receiving $1.10 in cash per share.
Those numbers represent a 33% premium on the 20-day volume-weighted average trading prices of HudBay and Norsemont of $17.76 and $3.49, respectively – a price that HudBay’s president and chief executive David Garofalo says represents fair value.
“You can’t steal assets,” Garofalo said on a conference call. “You have to pay full price for what’s been outlined. So the upside for shareholders is in the exploration – that’s where significant accretion comes from. It’s through the drill bit, and this project offers that kind of potential in spades.”
To tap into that potential, HudBay would launch an extensive
exploration program in conjunction with an optimization study if its takeover is successful.
The optimization study would aim to consider a larger mine than the one outlined in Norsemont’s feasibility study which considered mining 44.9 million tonnes of ore per year for the first 12 years of operation. The concentrator would have had a capacity of 50,000 tonnes per day.
And while it is too early for HudBay to say what changes may be in store for the project, greater upside can already be gleaned from copper’s current price compared to the price used in Norsemont’s study.
Norsemont used a copper price of US$1.80 per lb., so a higher price would likely expand the outlined open pit.
Upside could also come out of the results from five drills the company had turning at the site in December 2010.
HudBay’s vice-president of exploration Cashel Meagher said HudBay already has more targets in mind beyond the San Jose and Constancia deposits outlined by Norsemont.
“Within the area there are some untested geophysical and geochemical anomalies,” Meagher said on the conference call. “Norsemont did a good job on the San Jose and Constancia pits and we can now evaluate those at a higher copper price and there are several targets within a 5-km radius that we would pursue in 2011.”
Constancia currently has reserves of 277.4 million tonnes grading 0.43% copper, 0.012% molybdenum, 3.69 grams silver per tonne, and 0.05 gram gold per tonne for 2.6 billion lbs. copper, 71 million lbs. moly, 32 million oz. silver and 446,000 oz. gold.
Those kinds of numbers would make the acquisition of Constancia a boon to HudBay’s production numbers looking out five years.
The company says bringing Constancia into full production by 2016 would grow its copper production by 145%, while gold equivalent production would increase 130% over the same period.
HudBay added that the acquisition is consistent with its strategy of acquiring porphyry or volcanogenic massive sulphide deposits with exploration upside in mining-friendly jurisdictions in the Americas.
The company has $1.2 billion of available cash and credit lines, along with strong cash flow from its existing mines, and says it is in a good position to finance construction of the Constancia project.
Norsemont’s most recent estimate put capex for a mine at Constancia at $950 million. Garofalo said he expected that capex would be in the $1 billion range.
In Toronto on Jan. 10 – the day the acquisition news was released – HudBay shares were off 3.4% to $16.20 while Norsemont shares climbed 5.4% to $4.50.
While Norsemont’s chief executive Patrick Evans called the offer fair and gave his recommendation, he did add that of Norsemont’s nine directors, six voted in favour of the deal while two abstained and one voted against.
Garofalo said HudBay currently has lock-up agreements with parties representing 35.6% of all of Norsemont’s shareholders.