TORONTO HudBay Minerals Inc (HBM.TO) said on Friday it will buy fellow Canadian base miner Lundin Mining Corp (LUN.TO) for about C$500 million, triggering a 40 percent drop in its stock as shareholders worried about taking on Lundin's large, but riskier, metals portfolio.
Under the friendly transaction, HudBay will pay 0.3919 of a share for each Lundin share to create Canada's No. 2 base metals miner, trailing only Teck Cominco TCKb.TO.
The deal, which will combine HudBay's solid balance sheet with Lundin's larger production profile and growth prospects, comes as tight credit conditions and the sharp drop of metals prices have hammered mining shares and prompted mine closures.
The deal valued Lundin at around C$800 million ($630 million) as of Thursday's close. But with the drop in HudBay's shares on Friday, the value shrank to just less than C$500 million.
Not long after the deal was announced HudBay itself became the target of a takeover bid. Jaguar Financial Corp JFC.TO said it had made an offer contingent on the HudBay dropping its acquisition of Lundin.
Jaguar, a penny stock that has a market cap of about C$8.6 million and is already engaged in other hostile takeover attempts, said it owns a stake in HudBay and called the plan for Lundin "an embarrassing value destructive transaction."
In an interview, HudBay Chief Executive Allen Palmiere said he was not too surprised by the market's reaction to the deal, but said the takeover was necessary to expand and diversify HudBay's assets beyond the company's operational center in Manitoba's Flin Flon greenstone belt.
"Mining companies can only be made so efficient. What really dictates the economics are the quality of the ore reserves. We've got good reserves up in northern Manitoba. We don't have great ones," said Palmiere, who will remain CEO of the combined company.
ADDS MINES, PLUS TENKE
With Lundin, HudBay will acquire five operating mines, including the lucrative Neves-Corvo copper and zinc operation in Portugal and the Zinkgruvan mine in Sweden, as well as a 25 percent stake in the massive Tenke-Fungurume copper deposit being developed in the Democratic Republic of Congo.
HudBay has been seen as a beacon of stability in the mid-tier base metals space, due to a cash position that totaled C$844 million at the end of the third-quarter.
The company ended the Friday session down C$2.07 at C$3.16 on the Toronto Stock Exchange, as some worried about how much of that cash will be used to shore up Lundin's operations. Lundin stock rose 4 Canadian cents to C$1.05, trading about 15 percent below the per-share offer.
Palmiere, however, said the combined company should be cash flow positive if metal prices stay at current levels.
Lundin, which grew rapidly through three acquisitions in 2006 and 2007, has dropped 93 percent since July 2007, as falling nickel and zinc prices have made some assets uneconomical.
The cheap price paid for Lundin illustrates just how dramatic the selloff in mining stocks has been of late. Lundin paid three times that amount last year for Tenke Mining, whose sole asset was the 25 percent stake in Tenke-Fungurume.
"There's a lot of work associated with the far-flung Lundin empire, said David Davidson, an analyst at Paradigm Capital.
"(The takeover) is a call on a quick turnaround in commodity prices, and very few people are willing to take that side of the coin today."
On a conference call, Lundin CEO Phil Wright admitted the company was in need of a quick cash injection, saying a C$135.8 million loan from HudBay to Lundin also announced on Friday was a condition of the deal.
"As we stand today, the injection that we have gained as part of this deal has been in integral part of us actually agreeing to move forward on this basis," he said.
Following the deal, HudBay's cash on hand will be about C$900 million, with total debt of about $240 million.
Lundin's board has approved the transaction, which includes a break fee of C$24.25 million.
HudBay's main development project is the Fenix nickel property in Guatemala, which the company has said will be delayed until market conditions improve.
(Editing by Rob Wilson)