By Euan Rocha
TORONTO Feb 10 Canadian base metal miner HudBay
Minerals Inc said it plans to buy exploration company
Augusta Resource Corp in a bid to gain control of its
Rosemont project in Arizona, an asset widely viewed as one of
the most promising copper projects in the United States.
The strategically timed bid, announced late Sunday, comes
just weeks before Augusta is expected to receive final approvals
that would allow it to begin development and construction work
on the asset that could account for as much as 10 percent of
U.S. copper output, making Rosemont the third largest copper
mine in the country.
Rosemont, located some 50 kilometers (31 miles) southeast of
Tucson, is expected to begin operations in 2016 and produce 243
million pounds of copper, along with about 2.9 million ounces of
silver and 5.4 million pounds of molybdenum, annually.
The $1.2 billion project is set to become the No. 3 copper
mine in the United States, behind Freeport-McMoRan Copper & Gold
Inc's Morenci mine in Arizona and Rio Tinto's
Bingham Canyon Mine in Utah.
"We view the Rosemont project as an attractive complement to
our existing portfolio of high quality, long-life assets," said
HudBay's Chief Executive David Garofalo in a statement.
The unsolicited all-stock proposal from Toronto-based HudBay
offers Augusta's shareholders a premium of 18 percent over the
company's closing price of C$2.51 on the Toronto Stock Exchange
Augusta shares surged 25 percent to C$3.14 in early trading
on Monday, well above the value of HudBay's bid, indicating that
investors expect a sweetened bid to emerge. HudBay's shares fell
5.5 percent to C$8.88 on the TSX.
Analysts expect rival bids to emerge, as they argue HudBay's
current offer does not reflect the strategic value and advanced
permitting status of the project.
"Given the scale of Rosemont and favorable geopolitical risk
profile, we see the potential for other bidders to emerge," said
National Bank analyst Steve Parsons, in a note to clients.
Based on Friday's closing price, HudBay is offering to pay
C$2.96 per share for all the shares in Augusta it does not own.
Augusta shareholders will be entitled to receive 0.315 of
one HudBay common share for each Augusta common share held,
valuing the company at about C$455 million ($413 million).
HudBay said the enterprise value of the deal could be about
HudBay currently owns about 23.1 million shares in Augusta,
representing about 16 percent of the company's outstanding
shares. HudBay made its initial investment in Augusta in 2010.
Vancouver-based Augusta said late on Sunday that its board
will meet this week to discuss the HudBay offer and it urged its
shareholders not to take any action until the company decides on
the next course of action.
Jennings Capital analyst Peter Campbell said he believes the
offer "significantly undervalues Augusta" and he views the bid
as being "very opportunistic."
"We believe that shareholders who have been in Augusta for
the long-term, and have held on throughout the lengthy stage of
permitting the project, would be giving up significant value by
accepting this offer," he wrote in a note to clients.
Augusta has already secured some of the financing to fund
the construction of the Rosemont project. In 2010, the company
signed an earn-in agreement with a South Korean consortium that
is comprised of Korea Resources Corp and LG International Corp
The agreement allows the Korean consortium to acquire a 20
percent interest in the project in return for a $176 million
investment. Augusta is also using $230 million that it received
from a separate deal with Silver Wheaton Corp to fund the
HudBay said its offer will be open until March 19, unless
extended or withdrawn. The offer is subject to all customary
conditions, receipt of the necessary regulatory approvals and no
material adverse change in Augusta's status.
Analysts believe the material adverse change clause allows
HudBay to hedge its bets, giving it an exit option in the event
of an unfavorable ruling on Augusta's permits.
HudBay has retained BMO Capital Markets and GMP Securities
as its financial advisers, with Goodmans LLP and Milbank, Tweed,
Hadley & McCloy LLP acting as legal counsel.