Augusta says yes to sweetened Hudbay takeover

VANCOUVER — After a drawn-out takeover battle that tested proposed new regulations on the tenure of shareholder rights plans in B.C., Augusta Resource (TSX: AZC; NYSE-MKT: AZC) has agreed to a sweetened takeover bid from Hudbay Minerals (TSX: HBM; NYSE: HBM).

Hudbay launched its bid for Augusta in early February, offering 0.315 shares for each Augusta share in a deal that valued the junior and its large, development-stage Rosemont copper project in Arizona at $540 million.

Located southeast of Tucson, the deposit at Rosemont hosts 605.3 million proven and probable tonnes grading 0.44% copper and 0.015% molybdenum. Augusta has planned a conventional open-pit mine and sulphide processing plant for Rosemont, a project expected to cost US$1.1 billion.

Based on Augusta’s current timeline the mine would start operating in 2017, producing 243 million lb. copper and 5.4 million lb. molybdenum annually. As planned the mine will be the third largest copper mine in the U.S. and would account for 10% of U.S. production.

It’s a big project and Hudbay wants it, but Augusta’s board thought Hudbay was being too stingy with its early bidding, undervaluing the asset along with the rest of the market. As such Augusta rejected Hudbay’s offer and solicited other bids.

At one point Augusta said 10 companies were interested. However, no competing bids ever surfaced.

In the meantime, Augusta adopted a shareholder-rights plan. Also known as a “poison pill,” rights plans temporarily block hostile bids to give boards time to find alternatives. By blocking the bid, they make takeovers near impossible unless the seller agrees.

However, the practice in Canada has been for regulators to only let poison pills stand for six to nine weeks after launching a hostile bid. It was about balance: pills held long enough to give boards some time to drum up alternative interest but did not let targets say no to bids indefinitely.

The practice was not set in stone, however, and in recent years different provincial securities regulators have issued seemingly contradictory rulings in response to poison pill conflicts. As such, last year regulators from across the country came together to craft a new poison pill concept.

The new rules validate the old structure, but poison pills could stand indefinitely in the face of a hostile offer, if recently approved by a shareholder vote.

This is what happened with Augusta. On May 5 at a special meeting Augusta shareholders voted to continue the rights plan. That afternoon the B.C. Securities Commission confirmed that Augusta’s rights plan could stay in effect.

Hudbay was disappointed at the delay, but the company did not shy away from its position: that no other bidders would emerge for Augusta, and so the company and its shareholders would eventually come back to the negotiating table.

Now, it seems Hudbay was indeed right.

Four months after its initial bid and six weeks after Augusta shareholders extended its rights plan to keep Hudbay at bay, the Canadian miner has its prize within reach. The company sweetened the deal slightly to make it all happen, but by adding $15-million worth of warrants on the table Hudbay is getting one of the largest new copper projects in the U.S.

The new bid has the miner offering 0.315 shares and 0.17 of a warrant for each Augusta share, with the warrants exercisable at $15 for four years. The warrant component lifts the value of the bid to $555 million. Augusta’s board of directors is unanimously recommending that Augusta shareholders tender to the bid and has agreed to terminate the rights plan. All of Augusta’s directors and officers have agreed to the bid, representing 30% of the company’s outstanding count. Hudbay already owns 16% of Augusta, and another 4% of shares had already been tendered.

“After a thorough process to consider all of our alternatives, we are pleased to have agreed on a mutually beneficial transaction representing a successful conclusion to our value maximizing process,” Augusta chairman Richard Warke said.

On news of the sweetened deal, Augusta’s share price gained 25¢ to reach $3.45, near the upper end of its 52-week share price range of 48¢ to $3.64. Augusta has 145.5 million shares outstanding. Hudbay shares slid on the news, losing 24¢ to close at $10.05.

Augusta aims to start construction at Rosemont before year-end, but permitting problems keep cropping up. The latest is due to a single wildcat: an ocelot spotted near the project triggered calls for more consultation with U.S. environmental authorities before the project earns a record of decision (ROD), one of two major outstanding permits.

Augusta started working to permit Rosemont in 2007. Until the ocelot sighting, Augusta believed it would receive the ROD in the second quarter of this year. Now it is eyeing the third quarter, but analysts are divided on whether the project will get a full go-ahead before year-end.

The imminent takeover of Augusta is the third big copper deal in recent months. A week earlier First Quantum Minerals (TSX: FM; LSE: FQM) signed a deal to buy Lumina Copper (TSXV: LCC; US-OTC: LCPRF) for $456 million to get its large Taca Taca copper project in Argentina. In April, after lengthy negotiations, a Chinese consortium bought the Las Bambas copper mine in Peru from Glencore Xstrata (LSE: GLEN) for US$6 billion.

Two catalysts are pushing deals forward. The first is that the resource sector as a whole is at a bottom right now, which means share prices are depressed and deals are available. The second is specific to copper: the global copper market is expected to return to surplus this year and remain so for three or four years, as mine supply outstrips demand.

Beyond that, however, the market is expected to return to deficit, with lower copper prices and a focus on austerity discouraging  project development. This bodes well for copper in the medium- to long-term, which is why companies are interested in acquiring assets now.