Augusta’s Clausen on Hudbay bid, other suitors

Nine interested parties — including a number of “significant industry players” — have signed confidentiality agreements to review the Rosemont copper project in Arizona, Augusta Resource (TSX: AZC; NYSE-MKT: AZC) says.

President and CEO Gil Clausen says Augusta’s ongoing strategic review is generating a lot of interest in the wake of Hudbay Minerals’ (TSX: HBM; NYSE: HBM) hostile takeover bid for the company.

Hudbay’s proposal in February — to exchange 0.315 of its shares for each Augusta share it didn’t already own — worked out to $2.96 per Augusta share, or $540 million, based on Hudbay’s closing price on Feb. 7. At press time Augusta’s shares closed at $3.44 apiece.

Augusta has set its annual and special meeting of shareholders for May 9, and shareholders will be asked to determine whether to continue the shareholder-rights plan or terminate it. The company says it is also going to be hosting site visits to the project over the next few weeks. 

On March 31, Hudbay announced that it is extending its offer until May 5. It also said Augusta’s strategic review process “has failed” and called the scheduling of site visits “a stalling tactic.” 

“It is unclear why site visits to a greenfield development project 30 miles from Tucson, Ariz., would require three to four weeks and, more importantly, why site visits have not already occurred if interested bidders truly exist,” Hudbay said in a statement. 

Clausen spoke to The Northern Miner on March 28 about Rosemont, Augusta’s strategic review and the shareholder-rights plan.

The Northern Miner: Could you elaborate on the nine interested parties mentioned in the press release?

Gil Clausen: Indeed. We are pleased with the quality of the participants — it’s not surprising given the quality of this asset and its rarity. It really does have high scarcity value. How many projects do you know of that you could say are world-class and of size in our copper industry? This is clearly one of them. It is going to produce on average 243 million lb. copper a year, and we’re expected to fall within the first quartile in respect to cash costs worldwide.

We have one of the lowest capital intensity projects in the world. There is existing infrastructure in place, and we’re in the U.S., which is a very, very low political-risk jurisdiction. If you throw on top of that unbelievable interest from counterparties who love our clean-quality copper concentrate, Rosemont is a rare opportunity that really doesn’t come along often.

It’s undoubtedly opportunistic on the part of Hudbay right now, they see Rosemont’s value and they need this project. They know that we’re in the last stage of permitting. We expect all permits will be wrapped up in the second quarter of this year. We’ve finished the full environmental impact statement process and now we’re in a regulatory time frame that is statutory. Rosemont is an unbelievable opportunity for anybody who is interested in creating, developing and growing in our sector.

Hudbay knew their bid was going nowhere — it was a low-ball bid. They tried scare tactics with our shareholders and the market and our shareholders have spoken. Our shares have been trading between a 25–30% premium over their implied offer price, and a lot of long-term shareholders that have been with us through this permitting phase recognize that the value is at hand. Less than one quarter of 1% of this stock has been tendered, according to a recent Reuters article. I think shareholders recognize this bid won’t succeed, and are disappointed that Hudbay would have launched this type of action to try to expropriate this value just before a value-creating event, with permitting to be complete in the next few months.

We are developing this asset in a professional, systematic pattern. We’ll have project financing completed early in the third quarter of this year. We have project partners in place to develop this asset. We’ll have detailed engineering at least 75% complete on this project before we break ground, and we will be ready for construction before the fourth quarter. Our execution plan is second to none. We have already paid for mills, drives, crushers and e-houses, which are already on the property, and we have fixed price contracts in place for our equipment. We will be construction-ready [before September]. This is real and this is an execution plan that I would stack up against any major company. We know what we’re doing. Our team has a huge amount of construction experience and a tremendous amount of operating experience. So when people look at us and the asset — be it the execution plan or the quality of the asset — the execution that has gone on to date and the quality of the asset are both unique. This asset is a jewel.

TNM: What would be your ideal scenario at this point?

GC: What we always do as a board is to make sure that we look at all options and assess what’s going to create value for our shareholders. We’re going to run this process, and if we have options at the end of the day that we feel are meaningful we’ll bring that discussion to our shareholders. Our view as a company is to maximize value for our shareholders. We’re also of the view that we have a wide range of shareholder interest and that’s why we like to take decisions to our shareholders, so that they can make up their minds. We put that shareholder-rights plan in place at the beginning of last year to protect shareholders and keep optionality in place for our shareholders because Hudbay was creeping their position. They were buying stock and creeping up their ownership position with the hope of creating a blocking position. We took that shareholder-rights plan to our shareholders in the fourth quarter of last year, and they resoundingly supported it with an 88% majority approval. Our view in terms of our governance is consistent. What we’re doing now is asking our shareholders directly: Do you still want to retain that rights plan? We believe this approach allows our shareholders to have the power to make up their minds on these types of issues.

TNM: What is the best way to develop this asset?

GC: We already have joint-venture partners with LG International Corp. and Korea Resources Corp., and we see no reason to make any changes from the project perspective. LG and Kores bring tremendous value as shareholders, and they’re significant players in our project-financing plans. We have Silver Wheaton as a partner on a streaming deal. We have great partners and we have developed a first-class execution plan both in financing and construction, so from that perspective we know that that has created an enormous amount of value for shareholders. This is a cornerstone asset and we’ve never taken our eye off the prize. We’ve been advancing permitting and developed this project in a professional and systematic manner. We’re experienced in the U.S. and have an outstanding team in place, people who know about large-scale, open-pit mining in the U.S. Rosemont is a cornerstone asset that you can aggregate around in our sector and create an entity that would be the darling for investors who are looking for high-quality copper assets in North America that are low cost and low risk.

TNM: Could you comment on HudBay’s dropping its minimum tender condition?

GC: We have been clear that Hudbay’s bid is a lowball, coercive and opportunistic bid that has virtually no support from our shareholders. Their tactic of dropping the minimum tender partway through their bid period is in essence an acknowledgement by Hudbay that their bid is doomed to fail. Augusta’s shareholder-rights plan was put in place to prevent this sort of predatory tactic. By dropping its minimum tender, Hudbay is trying to secure a minority blocking position and thwart strategic alternatives that could benefit other Augusta shareholders.