Augusta blasts Hudbay’s ‘lowball’ hostile bid

Augusta Resource’s (TSX: AZC; NYSE-MKT: AZC) board calls the unsolicited takeover offer by Hudbay Minerals (TSX: HBM; NYSE: HBM) “grossly opportunistic” and “lowballed,” and urges shareholders to reject the bid, arguing it undervalues Augusta’s flagship Rosemont copper project in Arizona.

“Hudbay is asking you to accept an offer that does not come close to offering full and fair value for Rosemont,” Augusta’s CEO Gil Clausen told shareholders and analysts on a Feb. 24 conference call. He says that “it is quite frankly a grossly opportunistic bid,” as the Rosemont project is nearing construction.

The company’s directors, officers and four shareholders holding over 33% of Augusta’s shares have said that they would not tender their shares to the offer. The all-share proposal has “virtually no chance of success,” Clausen says. The transaction, among other conditions, requires approval from two-thirds of Augusta’s shareholders.  

Hudbay, which owns 16% of Augusta, launched its hostile bid on Feb. 9, where it proposed to exchange 0.315 of its shares for each Augusta share it didn’t already own. That works out to $2.96 per Augusta share, or $540 million based on Hudbay’s Feb. 7 closing price.

Since then, Augusta shares have soared above the offer price to close Feb. 25 at $3.43. The offer price has a noticeable discount to the company’s current trading price.

The board’s financial advisors, Scotia Capital and TD Securities, have both concluded the proposal is “financially inadequate.” Analysts are also calling for a higher offer.

Hudbay — a base-metal producer with assets in Canada and Peru — is after the Rosemont project, some 50 km southeast of Tucson. Rosemont is set to become the third-largest copper mine in the U.S. and has a $1.2-billion price tag. Once up and running, the mine should churn out 243 million lb. copper and 5.4 million lb. molybdenum each year over its 21-year life, based on reserves. Production should start in early 2017.

Augusta is wrapping up the permitting process that it started in 2007. It expects to receive the final Record of Decision and the Clean Water Act 404 permit — its last major permit — by the end of June.

The company’s board is “confident” that Rosemont will be fully financed by mid-2014. It’s lining up a US$890-million debt financing with a syndicate of 12 banks. Augusta has a Korean consortium earning a 20% interest in the project for US$176 million, as well as a US$230-million streaming agreement with Silver Wheaton (TSX: SLW; NYSE: SLW). 

“We are right now just on the cusp of unlocking significant value for our shareholders. With the receipt of our permit, we expect a significant [share price] re-rating. Our project financing is nearly complete. These are transformational milestones. Hudbay recognizes this,” Clausen cautions.

He points out Hudbay’s offer fails to compensate Augusta shareholders for geopolitical, project execution and financing risks related to Hudbay’s shares and assets.

Hudbay’s main development project is the Constancia copper project in Peru, which has seen its capital costs increase by 85% to $1.7 billion since 2011, Clausen notes. “Hudbay’s inability to manage costs isn’t just specific to Constancia. This was an issue at Lalor too. The cost of completing the concentrator at Lalor increased significantly since the initial estimate.”

Hudbay is developing Constancia as well as ramping up its underground Lalor and Reed mines in Manitoba. Any delays or capital increases at these projects could affect Rosemont’s timeline, Clausen says.

Augusta argues that Hudbay’s shares have underperformed its peer group since 2010, noting it is “pursuing value-maximizing alternatives” to the offer. The company has signed confidentiality agreements with several third parties.

“Rosemont is a high-quality world-class asset. We will not let Hudbay steal this asset with this lowball bid,” Clausen says.  

Hudbay’s offer expires on March 19.