UPDATE 1-HudBay mulls gold spin-off; seeks deals in Peru

Tue Apr 5, 2011 4:35pm EDT

* Sees possible annual gold production of 400,000 ounces

* Says could spin off gold assets into new company

* Looking to Peru for more M&A

* Focused on small, single-asset development companies (Updates with quotes, background)

By Julie Gordon

SANTIAGO, April 5 (Reuters) - HudBay Minerals (HBM.TO) will consider spinning off its gold assets into a separate company once it completes a drilling program at the Lalor deposit in central Canada, the company's chief executive said on Tuesday.

Hot off the heels of its successful takeover of Norsemont Mining, the company is also looking to buy more projects in Peru, Chief Executive David Garofalo told Reuters on the sidelines of the CRU copper conference in Santiago.

The base metal miner plans to boost annual production to 250,000 ounces of gold within five years, but that could go higher.

"We could have 400,000 ounces of gold production from what is now a 7 million ounce reserve space, which I think has the potential to grow to 10 million ounces," Garofalo said.

"That's (the equivalent of) a meaningful mid-tier gold company," he added.

Garofalo said a spin-off would be an ideal way to gain value for those gold ounces and added the company has no plans to hedge or sell off gold.

"Splitting the company in two is something we will consider once we get an opportunity to really drill Lalor out from underground," said Garofalo. "We want to know what we own before we try to put a value on it."

DEAL HUNTER

Last week, HudBay announced that it had more than tripled its copper resources, largely driven by its takeover of Norsemont. HudBay's total proven and probable copper equivalent reserves rose to 3.1 million tonnes as of March 31, from 791,000 tonnes as of Jan. 1, 2010.

HudBay bought junior Norsemont for roughly $400 million in order to gain access to its Constancia project, located some 100 km (62 miles) south of Cusco, Peru.

"We are looking at further acquisitions in the area," Garofalo said, adding he is only interested in deals that "move the needle".

Garofalo said he likes single asset, developmental stage companies and added that HudBay hopes to build in Peru a similar style of mining district to what it has in Northern Manitoba, where the company owns three mines, two concentrators and a zinc plant.

"It is always most economic to try to leverage off the infrastructure you've built by acquiring more deposits to leverage off those initial fixed costs," he said.

Garofalo said that he had been approached numerous times for a so-called "merger of equals", like the now-defunct $9 billion deal between Inmet Mining IMN.TO and Lundin Mining (LUN.TO), but that he isn't interested.

"We're not looking to large scale M&A. We're not looking to merge with like-sized companies," he said. "Juniors are exactly our snack bracket in terms of acquisitions."

(Editing by Simon Gardner and Lisa Shumaker)

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