Metals miners HudBay and Lundin announce $814-million merger plan

By Kristine Owram, The Canadian Press

TORONTO - Zinc miner HudBay Minerals Inc. (TSX: HBM.TO) is buying Lundin Mining Corp. (TSX: LUN.TO) in a friendly deal that creates one of Canada's biggest publicly traded base-metals companies.

Under the deal, Vancouver-based Lundin will become a wholly owned subsidiary of HudBay, which is offering stock valued at $814 million when the transaction was announced early Friday.

Late Friday, the transaction was rejected by a HudBay institutional shareholder, Toronto merchant bank Jaguar Financial Corp. (TSX: JFC.TO), which said it planned its own conditional offer to take over HudBay.

In a side deal, HudBay is lending C$135.8 million to Lundin, which will use the cash for its operations. The debt will later be repaid in Lundin shares representing about 19.9 per cent of the total.

HudBay CEO Allen Palmiere, who will remain CEO of the newly merged company, said the combination makes HudBay larger, stronger and more diversified with an "outstanding project pipeline."

"This is truly a growth company at its inception," Palmiere said.

"We have a world class suite of assets to develop and to expand our production profiles, we are prepared to pursue additional accretive transactions ... and we've got extremely good exposure to a variety of commodities when we do experience a recovery in commodity prices."

The deal reflects an expected wave of further consolidation in the mining sector as weaker companies or those with strong cash flows get swallowed up by bigger players hoping to shore up their balance sheets and diversify their metals output while they await for a recovery in the global mineral industry.

Cormark Securities analyst Justin Reid, who follows Lundin, said Friday's takeover is a good deal for that company.

He said the two companies combined will have a larger market capitalization, which will benefit them when credit markets recover since the money will likely flow first to the larger miners.

"They are trying to bolster scales of economy," Reid said.

Reid also said now is a good time to buy and that while HudBay had many assets to choose from, Lundin's Tenke Mining unit acquired last year was the main attraction.

Tenke owns a nearly one-quarter stake in a major copper-cobalt project in the Democratic Republic of Congo.

"Assets are cheap right now and HudBay was in a great position with lots of cash to go shopping," Reid said.

Phil Wright, Lundin's president and chief executive, said he believes the new merged company is extremely well positioned going forward to take advantage of a market recovery.

Metals prices, along with most other commodities, have slumped in recent months on fears of a global recession and declining demand from emerging markets like China and India. Many companies have responded by cutting production and closing mines, which will likely result in a supply shortage and a jump in prices once markets recover.

"What we see is a company now that has the size and strength to survive in these markets," Wright said.

"I think there is a lot of opportunity in this market, that opportunity is being created by distress in a number of other companies, and I think this company is in an excellent position once normal growth resumes ... to generate future cash flow and value."

Wright predicted the metals market won't fully return to normal until 2011, but "2011, '12 and '13 are going to be years where shareholders are going to be very, very adequately rewarded for their confidence and for staying the course," he said.

Under Friday's deal, Lundin's board has agreed to pay HudBay C$24.25 million in certain circumstances, if the deal doesn't go through, and has granted HudBay the right to match competing offers.

The agreement will require the approval of two-thirds of Lundin's shareholders. HudBay has commitments from shareholders representing 21.1 per cent of the outstanding Lundin shares.

After markets closed Friday, shareholder Jaguar Financial offered to acquired HudBay for $5.40 per share or $826 million in a complex swap of securities for shares. The offer. however, is conditional on the cancellation of the HudBay-Lundin deal.

"The proposed HudBay-Lundin combination is an embarrassing value-destructive transaction," said Vic Alboini, chairman and CEO of Jaguar.

"The Jaguar offer will return cash to the HudBay shareholders as well as monetize the value of its assets to return more cash to the HudBay shareholders."

He added that HudBay is a "cash-rich company with extremely low operating costs," while Lundin "appears to have a serious solvency problem."

HudBay's operations are primarily in Canada while Lundin's are mainly in Europe. Together, their predominant focus will be on copper mining, with smaller amounts of zinc, silver, lead, nickel and gold output.

Had they been merged at Sept. 30, the combined company would have had about C$900 million cash and total debt of US$240 million - an enviable balance sheet in the current tight-money environment.

Vancouver-based Teck Cominco Ltd. (TSX: TCK-B.TO), a more diversified mining company that produces zinc, copper, gold and coal, is currently being crushed by debt obligations and low commodity prices.

HudBay, long thought to be a takeover target, is a Toronto-based integrated mining company with its main operations in northern Manitoba and Saskatchewan, plus other operations in Central America.

Lundin, an active buyer in recent years, has been active primarily in Portugal, Spain, Sweden and Ireland as well as the Congo.

HudBay is offering 0.3919 of a common share for each Lundin share. Based on HudBay's stock price before the announcement, the offer is worth about $2.08 per Lundin share.

HudBay shares dropped $2.07 or 40 per cent to $3.16 Friday, reducing the value of the offer to about $483 million at the close of Friday trading. Lundin shares rose four cents to $1.05.