HudBay will likely see management shakeup, more conservative approach

February 24, 2009 - 12:59

By: Kristine Owram, THE CANADIAN PRESS

TORONTO - HudBay Minerals (TSX:HBM) will likely see a complete shakeup of its board of directors and management team in favour of a more conservative, low-risk approach after the collapse of a merger deal with Lundin Mining (TSX:LUN), analysts said Tuesday.

If the deal had been approved, it would have created one of Canada's largest publicly traded base-metals companies.

But the friendly merger arranged by the two companies was scrapped Monday night after the proposal provoked fury among some significant HudBay shareholders, who were originally told they couldn't vote on the deal.

Then the Ontario Securities Commission ruled last month that a transaction that would more than double the number of outstanding HudBay shares without a vote by its stockholders would undermine "the quality of the marketplace."

"I think we'll see a much more conservatively managed balance sheet, a focus on building cash going forward, less concern with growth in terms of expanding production, and a refocusing on existing producing and development assets," Desjardins Securities analyst John Hughes said Tuesday.

Lundin shareholders voted overwhelmingly in favour of the merger a few days after the OSC's ruling, but it seemed likely that HudBay shareholders would vote down the deal at a special meeting scheduled for March 31.

Opposition to the deal was spearheaded by a relatively small merchant bank, Jaguar Financial Inc. (TSX:JFI), but the Ontario Teachers' Pension Plan, SRM Global Master Fund and Corriente Master Fund had also called for HudBay to hold a shareholder vote.

Blackmont Capital mining analyst George Topping said Tuesday that its likely this same meeting will now be used by shareholders to replace HudBay's board of directors and management team - unless the current management can orchestrate a takeover of HudBay.

"In terms of looking after themselves, it would be in their best interests to get a third party to come in and make a bid for HudBay, because that way they would at least be able to negotiate golden parachutes," Topping said.

"It's a terrible market to try and attract buyers, but with almost $700 million in cash, HudBay would be very attractive."

If HudBay isn't bought first, Topping said it's a "given" that the current management team will be replaced and the company will turn its focus inward to currently owned assets, such as the Reed Lake deposit, which HudBay owns jointly with VMS Ventures (TSX:VMS), and the Lalor Lake deposit, both in the Flin Flon Greenstone Belt in northern Manitoba.

Both Hughes and Topping predicted HudBay shareholders could see a special dividend as well.

HudBay will keep its 19.9 per cent ownership stake in Lundin that it acquired in December 2008 and will be entitled to have one nominee on the Lundin board so long as HudBay owns 10 per cent or more.

HudBay also will have the right to maintain its current level of ownership and has the right of first offer for six months if Lundin sells or transfers major assets.

Lundin has operations in Spain, Portugal, Sweden and Ireland and about 1,500 employees, while Toronto-based HudBay's main operations are in northern Manitoba and Saskatchewan.

The proposed combination, announced Nov. 20, represented a 32 per cent share-price premium for Lundin shareholders based on the then-prevailing share prices, and it would leave Lundin investors owning about half of the merged entity. HudBay's stock price quickly fell 40 per cent after the announcement.

HudBay shares were up 47 cents or nearly 10 per cent to $5.25 in late morning trading on the Toronto Stock Exchange. Lundin shares fell seven cents or almost nine per cent to 73 cents.

Under a deal between the companies, HudBay will not pay Lundin an agreed-upon $2.5-million break fee for backing away from the merger.