HudBay Minerals Inc. and Lundin Mining Corp. have formally severed their controversial merger agreement, officially ending the miners' plans to create a new Canadian base metals powerhouse.

The accord to end the ill-fated deal will give cash-strapped Lundin the freedom to seek other sources of financing or potential partners.

Even with a $136-million cash injection from HudBay in exchange for a 20-per-cent stake in the Vancouver company, some analysts are predicting that Lundin could run out of cash or breach its debt covenants later this year.

Toronto-based HudBay won't have to pay a $2.5-million break fee to Lundin for cancelling the takeover.

HudBay will acquire a seat on Lundin's board of directors, be granted a right of first refusal on any asset sales and be given the right to maintain its ownership level if Vancouver-based Lundin sells stock.

With the merger officially cancelled, HudBay avoids a potentially embarrassing shareholder vote on the contentious deal at a meeting slated for March 25. The company conceded that its shareholders would have voted down the transaction.

However, stockholders will still cast ballots at the meeting to decide whether to oust HudBay's board of directors with a new slate proposed by Monaco-based hedge fund SRM Global Master Fund Ltd.

Worth about $800-million when it was announced on Nov. 21, HudBay and Lundin executives presented the merger as a bold attempt to create a new Canadian mining champion amid the carnage of the commodities collapse.

The deal would have combined HudBay's well-established zinc and copper operations in Manitoba with Lundin's mines in Portugal and Sweden as well as its 24-per-cent stake in the Tenke Fungurume copper project in the Democratic Republic of the Congo.

However, the merger provoked fierce opposition from several HudBay shareholders, who called the offer dilutive and ill-conceived.

An appeal by one HudBay shareholder to the Ontario Securities Commission resulted in a surprise decision by the regulator last month to overturn the Toronto Stock Exchange's approval of the transaction.

The proposed deal would have seen HudBay double its share count and the OSC ruled that the company needed to get shareholder approval before the merger could proceed.

“The decision to terminate the transaction was not an easy one for the board,” Allen Palmiere, HudBay's chief executive officer, said in a statement.

“However, after hearing from many of our shareholders over the last three months, and considering the market reaction to the OSC decision, we believe this is in the best interests of the company and its stakeholders,” Mr. Palmiere said.

The failed Lundin bid marks the second disappointing move in less than a year for HudBay.

Last June, Mr. Palmiere launched a bid for Skye Resources Inc., valued at $436-million at the time, acquiring the firm's Fenix nickel project in Guatemala.

Four months later, HudBay halted all major work on the project, blaming the crash in nickel prices.