UPDATE 2-HudBay lenders withdraw credit line, shares drop

TORONTO, Feb 27 (Reuters) - HudBay Minerals (HBM.TO) saidon Friday its lenders have refused to renew an C$80 million($63 million) credit line due to uncertainty over a keyshareholder's attempt to oust the mining company's board.

Shares of HudBay, which earlier this week canceled itsall-stock takeover bid for Lundin Mining (LUN.TO), dropped morethan 7 percent on the news, as well as on a steep drop incopper prices.

HudBay, which mines mostly copper and zinc, said theundrawn credit facility was due to expire Feb. 28.

It said the lenders' reluctance stems from a move by SRMGlobal Master Fund -- HudBay's top shareholder, with an 11percent holding -- to call a meeting for March 25 to toss outHudBay's board of directors and replace them with its ownslate.

SRM launched the challenge after HudBay announced its bidfor Lundin -- initially valued at around C$800 million -- inNovember.

The offer was aggressively resisted by SRM, as well as byother HudBay shareholders, and eventually collapsed following aregulatory ruling that HudBay must seek shareholder approval toissue the shares it was using to buy Lundin.

"The lenders noted the uncertainty regarding the futuredirection of HudBay, and expressed concerns that a new boardmay distribute much of HudBay's cash balances to shareholdersrather than maintain them for ongoing development," HudBayChief Executive Allen Palmiere said in a statement.

The company has a cash position of $686 million, it said.It said SRM has made repeated requests that HudBay use the cashto conduct a major share buyback.

HudBay's shares were down 42 Canadian cents at C$5.53 onthe Toronto Stock Exchange shortly after the market's open.

In a separate statement on Friday, HudBay urged itsshareholders to vote against ousting the board.

HudBay said such a move would allow SRM to gain controlover the company without paying a premium to shareholders.

"We believe SRM is motivated by a desire to cause asshort-term increase in HudBay's share price for their ownbenefit, is disregarding the best interests of HudBay, and ispotentially destroying long-term shareholder value," Palmieresaid.

($1=$1.27 Canadian)(Reporting by Cameron French; Editing by Peter Galloway