Lundin’s Rebound Buoys HudBay

VANCOUVER–HudBay Minerals’ (HBM-T, HBMFF-O) failed bid to acquire Lundin Mining (LUN-T, LUNMF-O) in the spring led to a nasty boardroom battle and then new leadership for the mid-tier Canadian miner.

Now the failed acquisition has shown its silver lining — HudBay sold its 16.7% interest in Lundin during the second quarter and realized a gain of $99.9 million, which lifted the company’s quarterly net earnings to $89.4 million.

Significantly lower realized prices for copper and zinc in 2009, compared to the same quarter last year, partially offset the gain from the Lundin sale. Lower metal prices reduced copper revenues by $76.7 million and zinc revenues by $23.1 million. The weaker Canadian dollar, however, increased U. S. dollar revenues by $41.8 million.

The company reports that strong production from its 777 mine in Flin Flon, Man., and solid overall cost performance offset challenging mining conditions at its Trout Lake mine, also in Flin Flon.

The second-quarter earnings brought HudBay’s cash position to a significant $846 million. The company has no debt.

HudBay says production is “on track to meet overall 2009 targets” but warns that zinc production is expected to be at the lower end of its 75,000-to 90,000-tonne guidance. Over the second quarter, the company removed 576,780 tonnes of ore from its mines, with grades averaging 3.46% zinc and 2.08% copper.

In mid-June, HudBay announced its intention to close its Flin Flon copper smelter before the middle of 2010 and shutter its White Pine copper refinery in Michigan shortly thereafter. The copper smelter processes copper concentrates into anodes, which are sent by rail to the White Pine refinery. At White Pine, the anodes are refined into market standard copper cathodes.

The smelter has an annual capacity of 90,000 tonnes of copper anode. In 2008, HudBay produced nearly 82,460 tonnes of copper from the facility, but roughly 32% of the concentrates treated at the smelter was purchased. Some 225 employees will be out of work in Flin Flon while roughly 65 will lose their jobs at White Pine. The company has set aside more than $6 million for severance payouts.

Instead of those two facilities, HudBay will use its Flin Flon metallurgical complex, which includes a concentrator, a copper smelter, and a zinc plant, for all of its production. The Flin Flon complex, which is newer, emits significantly lower levels of particulate matter and sulphur dioxide; emissions from the old facilities were set to exceed allowed levels soon, as those levels are dropping.

The closures are part of Hud- Bay’s larger plan, which the company also unveiled in mid-June. On a conference call, CEO Peter Jones described a strategy “defined by two broad themes,” which are to optimize operations in HudBay’s traditional home base of Manitoba and to grow beyond Manitoba.

In the Prairie province, Hud- Bay’s optimization plans include “aggressively pursuing” development of the deep, high-grade Lalor zinc deposit, continuing to explore the Flin Flon greenstone belt, and considering reopening the Chisel North mine, which the company put on care and maintenance earlier this year. Jones says the company will make a decision on the next phase of development at Lalor before the end of the year; earlier in the year, he spoke of driving an exploration adit into the deposit that could be used in a mine-as-you- go fashion.

Farther afield, HudBay wants to develop its Fenix nickel laterite property in Guatemala, which it acquired through its takeover of Skye Resources in 2008. The company expects to produce a revised project plan for Fenix in early 2010. At present, Fenix is HudBay’s only significant property outside of Canada. But the company has more than $800 million in its treasury and Jones has spoken repeatedly of using that cash for a series of acquisitions, both large and small.

And now, after almost five fairly quiet months, the new board has announced its first acquisition: a $12- million deal to earn into Aquila Resources’ (AQA-T, AQARF-O) Back Forty volcanogenic massive sulphide project in Michigan.

The deal will see HudBay spend $2.2 million to buy 12.1 million Aquila shares at 18.3¢ apiece. The acquisition will give HudBay 14.9% ownership in Aquila, along with a board seat and the right to maintain its interest, as well as the right to earn a 51% stake in Back Forty.

To earn that interest, the major will have to spend US$10 million on exploration at Back Forty within three years. Once it has earned 51%, the companies will form a joint venture, with HudBay as operator. HudBay can increase its interest to 65% by completing a feasibility study and it retains the marketing rights to any metal production from the project.

Calling the partnership a “close fit with our strategic plan,” Jones said the deal is a win for both companies. He added that zinc concentrate from a mine at Back Forty could potentially supply HudBay’s Flin Flon metallurgical complex.

The Back Forty project is an advanced exploration-stage project. The deposit comprises discrete zones of massive sulphide, stringer, and gold-only mineralization, each with high-grade components. Massive sulphide has been traced along strike for almost 1 km and to a vertical depth of 500 metres. The resource, which Aquila updated in January, is divided into open-pit and underground zones.

The measured and indicated open-pit resource stands at 5.9 million tonnes grading 2.46 grams gold per tonne, 4.06% zinc, 33.1 grams silver, 0.61% copper and 0.13% lead. Inferred resources add 620,000 tonnes grading 3.68 grams gold, 2.46% zinc, 46.5 grams silver, 0.15% copper and 0.44% lead.

Underground measured and indicated resources currently total 2.6 million tonnes grading 1.39 grams gold, 9.16% zinc, 25 grams silver, 0.28% copper and 0.63% lead. Inferred resources add 550,000 tonnes averaging 2.03 grams gold, 6.62% zinc, 36.4 grams silver, 0.28% copper and 0.67% lead to the underground count.

The current resource is not closed off at Back Forty. The Main zone massive sulphides remain open at depth and to the west and deep drilling indicates that zinc mineralization continues. For example, one of the last stepout holes on the Main zone intersected 7.7 metres of 10% zinc at 400 metres depth. And there are at least three other zones nearby that have seen limited exploration, as well as an exploration land package of roughly 9,600 acres (39 sq. km).

HudBay’s share price has spent the summer between $7 and $9, after briefly falling below $3 in December from a 52-week high of $11.62 last August. The company has 153 million shares outstanding.

On news of its deal with HudBay, Aquila’s share price gained 6¢ to reach 24.5¢. Aquila has a 52-week trading range of 4.5-45¢ and 70 million shares outstanding.