HudBay Minerals Inc. (HBM), the 87-year-old company making a C$334 million ($301 million) hostile bid for a smaller Canadian copper-mine developer, is looking for more acquisitions even if it doesn’t pull off that deal.
HudBay made its all-stock offer on Feb. 9 for Augusta Resource Corp. (AZC), the owner of the Rosemont copper project in Arizona. The bid was 16 percent less than Augusta’s closing price yesterday in Toronto, indicating investors are anticipating a higher offer. That’s also the widest discount for any current Canadian takeover, data compiled by Bloomberg show.
While HudBay recently started up two Canadian mines and is close to completing a new Peruvian operation, it’s not yet clear where growth will come from further in the future, according to Chief Executive Officer David Garofalo. Hudbay is still a few years away from developing a sustainable pipeline, he said in a March 4 interview at Bloomberg’s Toronto office.
“We’re ready to move onto other things whether or not we get Rosemont,” he said.
Garofalo, 48, a former chief financial officer at Canadian gold producer Agnico Eagle Mines Ltd., took up his current post in July 2010, more than a year after HudBay abandoned an agreement to buy Canadian competitor Lundin Mining Corp. Garofalo said that when he became CEO, he found the Toronto-based company’s project pipeline was empty, while two of its three mines were nearing the end of their lives.
Since then, HudBay has developed and started output at the Lalor mine in Manitoba, as well as the smaller Reed deposit in the province. The company also acquired the Constancia copper project in Peru by buying Norsemont Mining Inc. in 2011 for C$315 million. It expects to start production at the $1.7 billion mine later this year.
Garofalo “has been successful in really shifting the focus from just the smaller Manitoba business unit to more of a global diversified mining company,” Shane Nagle, a Toronto-based analyst at National Bank Financial Inc., said in a phone interview yesterday.
HudBay fell 2.9 percent yesterday to C$8.67 in Toronto. The shares have declined 14 percent in the past 12 months, while the S&P/TSX Materials Index has declined 11 percent. HudBay reported a fourth-quarter net loss of C$55.5 million and sales of C$136.1 million.
HudBay, which was founded in 1927 as Hudson Bay Mining and Smelting Co., has done “extensive” due diligence on a handful of other projects, Garofalo said. It will only consider buying assets in Canada, the U.S., Mexico, Chile and Peru, he said. It wants projects that already have resource estimates.
“There’s a handful of projects that meet those criteria right now,” Garofalo said. They’re at an earlier stage than Rosemont and would require less capital upfront, he said.
The overall level of mining-industry dealmaking has declined. There were 948 mining acquisitions with a total value of $50.8 billion last year, compared with more than a thousand deals with a combined value of $109.7 billion in 2012, data compiled by Bloomberg show.
BHP Billiton Ltd. (BHP) and Rio Tinto Group, the largest mining companies, are among those curbing spending and selling unwanted projects following a decline in commodity prices. Copper prices fell 7.2 percent in London last year and have declined 9.7 percent so far in 2014.
“We’re being counter-cyclical, and we have to be,” Garofalo said. “If we have to compete for scarce resources against Rio Tinto, our goose is cooked.”
HudBay has also signed confidentiality agreements with state-owned companies in Asia that may be interested in investing in the company or cooperating on projects. HudBay is talking “very broadly about partnerships and things like that,” Garofalo said, without identifying the companies.
“The added benefit is that if somebody ever did get aggressive with us, then we have a potential white knight as well,” he said.
HudBay’s interest in Vancouver-based Augusta predates Garofalo’s time as CEO. The companies entered into a confidentiality agreement four months before Garofalo took over as CEO, HudBay said in a February filing.
In August 2010, HudBay acquired an 11 percent stake in Augusta. The companies held talks in 2010 through 2013, according to the filing. Last month, HudBay took its proposal directly to Augusta shareholders.
On Feb. 9 HudBay, which now owns 16 percent of Augusta, offered 0.315 of a share for each Augusta share it didn’t already own. HudBay says Augusta is being too optimistic about how long it will take to obtain the necessary permits for Rosemont. It said in a Feb. 27 statement that HudBay would be better placed to move the project forward.
Augusta has rejected the bid as too low and opportunistically timed. Augusta is on the cusp of getting its permits to build Rosemont, after which its shares will increase materially, its CEO Gil Clausen said in an e-mail.
“We see no chance of the bid succeeding in its current form,” Clausen said.
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