The Bell Tolls For HudBay-Lundin Merger

The unravelling of the controversial HudBay-Lundin merger was the biggest mining story in Canada during the week ended Jan. 24, the third trading week of the year, as weeks of relative quiet over the holidays gave way to a flood of corporate news.

• On Jan. 23, the Ontario Securities Commission set aside a decision by the Toronto Stock Exchange to allow HudBay Minerals to acquire Lundin Mining without a shareholder vote. Under the original deal unveiled in late November, HudBay would issue 0.3919 of a share for each Lundin share, with only Lundin shareholders getting to vote on what is essentially a merger of equals. Time was short for the OSC as the merger would have been completed Jan. 28 after a positive vote by Lundin shareholders.

The deal was vociferously opposed by many HudBay shareholders who correctly viewed management as paying too much for Lundin and squandering HudBay’s large cash position on a zinc-heavy company in financial distress. As HudBay shares cratered 40% in response to the deal’s announcement, Jaguar Financial jumped in with its own — now abandoned — hastily thrown-together hostile takeover bid.

In overturning the TSX, the OSC effectively ruled that, to go through, the deal requires a simple majority of votes cast by HudBay shareholders at a special meeting, as required under section 604 of the TSX Company Manual.

The OSC concluded in a biting decision statement that the “economic consequences of the transaction on the shareholders of HudBay are extreme. The considerations. . . raise serious concerns as to the appropriateness of HudBay’s governance practices and the fair treatment of HudBay shareholders.”

The OSC also noted that the TSX “did not provide any affidavit evidence to assist us in establishing the basis for its decision” (to not insist that a vote by HudBay shareholders take place).

Over the years, the OSC has often been subject to knee-jerk criticism that it’s too lax a regulator, but this kind of action shows it’s ready and able to step in with speed and strength — and step on a few toes at the TSX — to protect common shareholders from a reckless management team running a listed company.

So, the deal in anything resembling its current form is dead, as evidenced by HudBay shares soaring 25% after the OSC decision.

The questions now shift to whether there will be an ugly new battle for control of HudBay’s board, and what Lundin will do next operationally and financially now that it has to cope on its own with the severe contraction in base metal prices and the worsening conditions in the Democratic Republic of the Congo, where its best development asset sits.

Still, Lundin walks away from all this with gross proceeds of $136 million from a December private placement by HudBay for 97 million shares, or a 19.9% stake in Lundin.

HudBay paid $1.40 per share for the placement. With Lundin shares trading at 92¢ at presstime, that means HudBay has a paper loss of $47 million, or 34%, on that particular investment in a month and a half.

• The British Columbia Securities Commission is feeling its oats, too, as the provincial regulator issued cease-trade orders against 53 B. C.-connected companies that trade on U. S. over-the-counter markets for failing to file financial statements. Some companies have since complied.

The orders stemmed from the BCSC’s implementation in September of a rule forcing issuers in B. C. to file financial statements with the commission.

“We cease traded these companies because they appear to have a significant connection to B. C.,” said Martin Eady, the BCSC’s director of corporate finance. “We are also reviewing others to determine whether or not we should take regulatory action against them as well.”

The list of companies affected is at the regulator’s website www.bcsc.bc.ca,where people can also tap into the national cease-trade database published by the Canadian Securities Administrators.

With so much corporate dereliction of duty and fraud being exposed in North America this decade, investors would be well served by making the regulators’ websites a regular stopping point as they research companies and business executives.

• On a positive note, gold’s continued strength in this time of economic peril was ably demonstrated by Kinross Gold’s raising of at least US$361 million in a bought deal led by UBS Securities Canada and priced at US$17.25 per share. The financing tops substantial ones unveiled late last year by fellow Canadian gold miners Agnico-Eagle Mines and Yamana Gold.

Send your Letters-to-the-Editor and other op-ed submissions to the Editor at: tnm@northernminer.com,

fax: (416) 510-5137, or 12 Concorde Pl., Suite 800, Toronto, ON M3C 4J2.