Editorial: HudBay’s baffling Lundin bid

While metal prices seem to have bottomed out in November, the week ended Nov. 22, the 47th trading week of 2008, saw several miners’ share prices get their feet knocked out from under them.

• The biggest shocker was HudBay Minerals’ friendly offer to buy fellow base metals miner Lundin Mining, with each Lundin share to be exchanged for 0.3919 of a HudBay share, plus a side loan and a private placement to assuage Lundin’s liquidity problems. For a few moments, at least, the offer was a 32% premium over Lundin’s 30- day average trading price, but the immediate 40% collapse in HudBay’s shares once trading resumed wiped out the premium.

Said HudBay CEO Allan Palmiere during a testy conference call with analysts: “In this environment you’re better off buying a mine than building one.” Unstated was the obvious third option: sit on your huge wad of cash for a year or two while rivals go under, and then go shopping, when cash has ascended in status from king to emperor. It’s worse than that, though: at presstime HudBay’s market capitalization had shrunk to just $516 million, or $328 million below the cash and equivalents the company was hoarding at the end of the third quarter.

Well that’s enough to rouse the corporate raider in any of us, though so far, only Jaguar Financial has heeded the call. Within hours, Jaguar announced its intention to launch a hostile bid for HudBay with the only selling point being a promise to break the company into pieces ASAP.

The HudBay-Lundin deal gives off the vibe of a bunch of prairie rubes being taken by some smooth operators in Vancouver and London. But perhaps the most disturbing aspect of the deal is HudBay’s refusal to hold a shareholder vote. After all, at its essence, this is a merger that bets the company’s huge cash position and low political risk on a roll of the dice that Lundin’s 24.75%-owned Tenke Fungurume copper-cobalt mine, now under construction in the Democratic Republic of the Congo, gets into operation within a year and actually starts spinning off hefty profits that can be repatriated.

In a way, HudBay management’s bravado in withholding a vote — a strategy most managers in the industry would approve of — follows a line back to Goldcorp’s wildly controversial offer for Glamis Gold in the summer of 2006, which was also pushed through by management without a shareholder vote. That watershed deal dropped the bar so low that it’s now the norm to only allow shareholders to vote on an offer for their entire company, or else a complete change of business. It’s been a step backward for shareholder rights and it shows no signs of being reversed any time soon.

• Teck’ssharemeltdownreacheditsnadironNov. 20,whenitsB shares touched a new low of $3.35 before rebounding and settling above $4 — a tenth of the share price in early September. A week ago, we outlined all the moves Teck could take to start repaying a US$5.8-billion bridge loan, and the crippled giant has clearly embraced an all-of-the-above approach that still leaves it short on cash. In the coming months, shareholders should brace themselves for massive dilution or far more substantial asset sales, or maybe both.

• NovaGold Resources has long had an enthusiastic core of retail supporters who have stuck with the plucky company, even rallying to give the thumb’s down to Barrick Gold’s hostile US$16-per-share takeover offer in late 2006.

However, those hearts may have finally grown cold on Nov. 24, when the stock plummeted in a single day from $2.50 to 48, after the company halted development of its small-scale Rock Creek gold mine in Alaska. Far more worrying was the revelation that the company is facing a cash crunch, with only $10 million in the till and a US$20-million bridge loan due by year’s end.

• It’s not all doom and gloom: Fresh from the official opening of its Kittila mine in Finland, Agnico-Eagle Mines showed that a top-quality mid-tier gold miner can still raise substantial funds, in this case a US$252-million private placement. While the company’s press release states the proceeds would be earmarked for mine development, there’s some speculation Agnico is ready to make another acquisition. Another company with good news was Toronto-based Carpathian Gold, which tabled a 10-million gold-equivalent- oz. resource at its Rovina Valley project in Romania’s Golden Quadrilateral.

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