Is HudBay’s Fenix An Albatross?

MONTERREY, MEXICO — Canadian miner HudBay Minerals (HBM-T, HBMFF-O) picked a challenge when it chose to go international last year, taking on one of Central America’s most testing community conflicts at the Fenix nickel project in Guatemala.

A man was killed in clashes over land rights at the site in September, so developing nickel reserves looks like the easy part. But Torontobased HudBay is upbeat and aims to make a decision on the project on the shores of Lake Izabal by June 2010, eager to make the most of Fenix’s big reserves. The 19,000- acre area hosts 41.4 million tonnes of mineral reserves and the potential to produce 50 million lbs. of nickel per year over 30 years, the company says.

“There’s still quite a bit of resource and exploration potential so Fenix could have a much longer life than the thirty years we’ve expected,” said Michael Winship, HudBay’s president and chief operating officer, recently. (He has since resigned.)

HudBay, which has zinc, copper and gold deposits, mines and refineries at eight sites across Canada and the northern U. S., bought Fenix from Skye Resources in mid-2008 with plans to develop an area that was first mined in the 1970s by a joint-venture between Inco and the Guatemalan government, and still has substantial infrastructure. Shuttered since 1980, the plant lies amid large expanses of nickel laterite deposits but has long had a difficult relationship with the surrounding community. Local Mayan leaders say much of the land was illegally given to mine prospectors in the 1960s, who evicted families that claimed the area because it once belonged to their ancestors. Numerous efforts to relocate Mayan farmers who live in thatched houses on the land have turned violent, particularly during Guatemala’s 1960-96 civil war. A 1998 United Nationsbacked truth commission linked people employed by a subsidiary of a previous mine owner to killings of anti-mining activists.

Most recently, relocation talks broke down in late September and a primary school teacher was killed when security guards from Hud- Bay’s Guatemala unit clashed with residents. Details are unclear. Guatemala’s attorney general’s office said the man died of a bullet wound but security guards claimed members of the local community attacked him with a machete.

“That incident was quite upsetting for us and we certainly regret the outcome,” Winship said. “We have quite a big land position and it is actually just a few small areas where we have some indigenous people occupying land so it wouldn’t prevent us from advancing with the project, but of course we want to resolve the situation,” he added.

The incident has not escalated into large anti-mining protests in Guatemala and HudBay says the local community has put forward a petition of more than 3,000 signatures and 85 businesses asking the authorities for better security

in the area and expressing support for the Fenix project. Hud-Bay also has in its corner the government, which holds 1.8% of HudBay’s Guatemalan subsidiary Compania Guatemalteca de Niquel, or CGN. The Guatemalan government strongly supports the Fenix project and hopes it will create hundreds of jobs. Goldcorp runs the only other major mine in Guatemala, a gold deposit that has also faced some local opposition. Efforts to develop large-scale mining projects in some other non-mining Central American countries, such as Honduras and Panama, are still in their infancy.

But residents on HudBay’s land are poor Mayans, some of whom do not speak Spanish, only their native Q’eqchi tongue. And so the Canadians must rely on consultants and experts in indigenous people, as well as some government representatives to talk to local leaders. Some Mayans are very determined.

“I was born here and in 40 years no one else has worked this area. We need it to survive. They will have to kill me to take my body off this land,” a local farmer, who gave his name as Alfredo, told Guatemalan media through an interpreter.

HudBay is moving ahead with its work at Fenix, with capital investment in hospitals and pharmacies for the local communities, and aims to update its geological studies.

“Reviewing the previous work done by Skye, we found some areas of the work were good, some were questionable and there were a lot of things that we questioned,” says Cashel Meagher, HudBay’s director of technical services and exploration. “We are looking at updating the resource, doing an optimization of mine reserves and including some material that was previously excluded, so that might give us reason to re-evaluate Fenix on that basis,” he added. One way the company might reduce the US$1-billion price tag for development is to change the existing power plant at the site, which was run by oil-fired boilers — prohibitively expensive to run whenever oil prices rose. Winship said the company is considering coal, pet-coal and hydropower, or linking to the Guatemalan electricity grid.

Meanwhile, the company is also considering taking on a joint-venture partner to help finance construction of Fenix, chief executive Peter Jones told a third-quarter results conference call in early November. “As we move forward, we will . . . look at various financing alternatives, including potential joint-venture partners, offtake agreements and other strategic options that could make Fenix more attractive for HudBay,” Jones said.

HudBay still has to convince some investors it made the right decision by buying Fenix.

“The project as it is right now is not going anywhere,” says John Hughes, an analyst at Desjardins Securities. “I would suggest that the asset is actually for sale,” he speculates, adding that a potential partner could pay up to US$500 million for Fenix. “I think the Chinese would be the most likely to look at it,” Hughes says.

HudBay declined to comment. Investors are in fact more excited by HudBay’s new gold and copper discovery at its Lalor project in Manitoba. But many are not overly concerned by the land issue in Guatemala. “Investors see (the violent incident at the end of September) as a delay rather than a major impediment to the project continuing,” says George Topping, senior base metals analyst at Blackmont Capital.

Another issue is that Fenix is HudBay’s first nickel play and there are doubts about the company’s know-how.

“I would say not a lot of people are a big fan of the project,” said a Canadian-based analyst who declined to be named. “I think the main concern is that it is a big nickel project which is something that HudBay has never done before,” he adds.

But HudBay says it is still very committed to the project and believes it can manage both Lalor and Fenix.

“As a matter of fact, we want to manage three projects at the same time: Lalor, Fenix and in northern Michigan,” Winship said. “We believe we have the resources and the expertise and we can find adequate financing.”

Meanwhile in the boardroom, HudBayís Peter Jones has announced he will retire as CEO at the end of the year, but continue as a director, and Warren Holmes has been appointed executive vice-chairman.