HudBay warned not to pursue Mantos Copper

Open pit mining at HudBay’s Constancia polymetallic mine in southern Peru. Source: HudBay Minerals Inc.

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Open pit mining at HudBay’s Constancia polymetallic mine in southern Peru. Source: HudBay Minerals Inc.

HudBay Minerals Inc. [HBM-TSX, NYSE] has issued a press release in which it commented on media speculation regarding a potential business acquisition by the company.

HudBay was referring to a Bloomberg news report, which stated that HudBay “is in talks to buy Mantos Copper SA, a Chilean private miner owned equally by Audley Capital and Orion Mine Finance, that according to sources, is seeking a buyer to fund its expansion plans.”

The same sources noted that Mantos Copper, could fetch as much as $1 billion. “While talks are [apparently] advanced, they could still fall apart and other bidders may emerge,” the sources said.

Following the Bloomberg report, private equity firm Waterton Global Resource Management Inc. revealed that it has a 4.8% stake in HudBay, and indicated that it is opposed to the idea of HudBay buying Mantos Copper.

“Waterton calls on HudBay to immediately terminate any discussions or plans to execute the Mantos transaction and any other material acquisitions in the near future,” the private equity firm said in a statement.

This view is based on the following key factors, Waterton said.

Based on HidBay’s current underperformance and discounted valuation, the company would be forced to transact from a position of weakness.

If the company intends, in line with its guidance to the market, to begin construction of the Rosemont copper project in the first quarter of 2019, then in Waterton’s estimate, the company will face an imminent funding requirement of $1.1 billion. This reinforces, from a capital allocation perspective, the need to terminate any potential negotiations for new acquisitions immediately, and specifically acquisitions like the Mantos transaction, which according to the Bloomberg article, have a material purchase price of $1 billion worth of required follow-on capital.

HudBay should not be pursuing growth for the sake of empire building.

HudBay is an integrated mining company, primarily producing copper concentrate (containing copper, gold and silver), zinc concentrate and zinc metal. The company owns four polymetallic mines, four ore concentrators and a zinc production facility.

The operations are located in northern Manitoba and Saskatchewan, Peru and Arizona.

The Rosemont Project is an open-pit copper-molybdenum-silver porphyry-skarn deposit located in Arizona. It is expected to be one of the largest copper mines in the U.S., accounting for 10% of total U.S. copper production.

On Friday, HudBay issued the following response to the Waterton statement. “While the company’s policy is to avoid comment on speculation and rumours, HudBay emphasizes that it has a consistent strategy of optimizing the value of its current operations and evaluating growth opportunities that are complementary to its current business and that it continues to adhere to this strategy,” HudBay said.

“As described in HudBay’s public disclosure, this may include acquisitions that fit HudBay’s stringent criteria, ranging from early stage exploration to producing mines, provided they are accretive to shareholder value on a per share basis,” the company said.

“Further, any acquisitions would ensure that HudBay retains the financial flexibility and management capacity to maximize the value of its assets and existing growth opportunities.”

On Friday, HudBay shares eased 6.31% or $0.39 to $5.83 on volume of 1.9 million. The 52-week range is $12.65 and $5.44.

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