Hudbay extends hostile bid for Augusta, mulls Rosemont delay

Hudbay Minerals (TSX: HBM; NYSE: HBM) is extending its hostile takeover offer for Augusta Resource (TSX: AZC; NYSE-MKT: AZC) to May 16 from May 5, and says it’s digesting news  of permitting delays at Augusta’s flagship Rosemont copper–molybdenum project in Tucson, Ariz. 

Augusta notified shareholders on May 1 that the U.S. Forest Service (USFS) has said that it needs more time to review 100 comments from the objection-review process that the agency completed on April 30. Augusta noted that the USFS says an update on the schedule for the record of decision (ROD) is expected by the end of May.

The U.S. Army Corps of Engineers (ACOE) has said there is a shortfall between the mitigation plan proposed in April and the mitigation required to offset impacts to U.S. waters associated with the project.

Augusta stated in a press release that the ACOE says that it’s on schedule to deliver the permit decision on Rosemont by the end of June, assuming the USFS delivers its ROD before that date.

A number of analysts who cover the junior seemed divided on the significance of the news.

Tom Meyer of CIBC said in a note to clients that while the delay is “unfortunate,” it doesn’t change his view there will be a “positive permitting outcome and a likely higher bid for the company.” (In February Hudbay offered 0.315 of a share for each Augusta share, valuing the company at $443 million, or $3.05 per share.)

By contrast, Joseph Gallucci and Iain Farmer, mining analysts at Dundee Capital Markets, said they do not have confidence in Augusta’s permitting guidance and that the delay “could be costly.”

The analysts calculate that Augusta has $10 million in cash and a $2 million monthly burn rate, so it “could run out of funds” by the end of the third quarter.

“Augusta has $96.5 million in drawn debt owed to Red Kite and would be in default if additional funds are not secured [another $7.5 million contingent on the final ROD and $5 million contingent on a 404 Clean Water Act permit would bring total Red Kite debt to $109 million]. This would force Augusta to refinance the debt from a position of weakness . . . we believe that Augusta cannot meet its financial obligations if this process is delayed beyond third-quarter 2014.”

The analysts note that the USFS must produce written responses to all the objections it has received before the agency can issue a ROD, reasoning that “due to the complexity of the submissions . . . this response could take quite some time.”

“We are reluctant to accept AZC’s timeline given the reality of this permitting process, and the company’s repeated failures to meet timelines set in the past,” they said.

Letitia Cornacchia, Augusta’s vice-president of investor relations and corporate communications, dismissed Dundee’s comments, saying that there no need to change the company’s permitting guidance at this time, and that it has many financing options available.

“We do have cash-on-hand, and the Red Kite debt expiry can be extended to October,” she told The Northern Miner. “We’ve always had a full suite of financing options available to us in the event that we need it.”

She also said that “in the past we’ve consistently guided along the lines of the U.S. Forest Service, and they have not changed their guidance. They have said they’ll come out with a definitive schedule for the final ROD in May, and until then we still expect to receive the ROD in the second quarter. And the Army Corps of Engineers has not changed its expectation that it will issue a permit decision by the end of June.”

Cornacchia noted that the comments period ended on Feb. 14, and since then the USFS has been responding to these submissions.

“They just need a little more time to wrap up their conclusions,” she said. 

Cornacchia confirmed that the Rosemont project is expected to start production in the first quarter of 2017, and that it could produce 243 million lb. copper and 5.4 million lb. molybdenum a year. Once in production, Rosemont would account for 10% of copper output in the U.S., Augusta says. 

At press time Augusta’s shares traded at $3.09 apiece within a 52-week range of 48¢ and $3.65 per share.

CIBC’s Meyer has a 12- to 18-month target price of $4.75 per share. “Based primarily on scarcity value for Augusta’s project, we foresee good upside in the shares,” he commented.

Augusta has 145 million shares outstanding.