"... willing to spend about C$400 million .."
By Liezel Hill - Feb 6, 2013
HudBay Minerals Inc., the third-best- performing Canadian mining stock this year, is willing to spend about C$400 million ($402 million) on deals to replenish its development pipeline.
The copper and zinc producer, which expects to more than quadruple copper output by 2015, will capitalize on a “buyers’ market” for mining assets as small companies struggle to raise funds and larger competitors consider sales, Chief Executive Officer David Garofalo said yesterday. HudBay would be comfortable spending about 20 percent of its C$1.94 billion market value, he said.
“We’re looking at a lot of things and I’m hoping that we can tuck something in this year,” Garofalo, 47, said in an interview at Bloomberg’s office in Toronto, where HudBay is based. “We’ve never been busier looking at opportunities.”
Exploration and development companies face funding shortfalls after mining-industry equity sales dropped for a third straight year as valuations declined and bank lending fell. At the same time, mining companies including BHP Billiton Ltd. and Rio Tinto Group, the two largest, have been looking to sell less-profitable assets.
The majors are very interested in simplifying their balance sheets, said John Hughes, an analyst at Desjardins Securities Inc. in Toronto.
“Any asset that is not deemed material could be available to a smaller company where it could be material,” Hughes, who rates HudBay a buy, said yesterday in a phone interview. “The process is really just getting under way.”
There are opportunities across the mining industry, from new projects to fully developed assets, Garofalo said.
HudBay, which declined 0.4 percent to C$11.27 at 11:14 a.m. in Toronto, is the best-performing mining stock in the Standard & Poor’s/TSX Composite Index this year after Aurizon Mines Ltd. and Uranium One Inc., which both received takeover offers last month. Thirteen analysts have a buy rating on HudBay and four recommend holding the shares, according to data compiled by Bloomberg.
Lundin Mining Corp., another Canadian metals producer, also is studying copper acquisitions and can fund a deal of as much as $700 million, Chief Executive Officer Paul Conibear said yesterday in an interview in Cape Town. Lundin has looked at assets in Eastern Europe, he said.
HudBay acquired the Constancia project in Peru when it bought Norsemont Mining Inc. in 2011 for C$305 million. The mine, which is expected to cost $1.5 billion, is scheduled to start production next year.
The Norsemont acquisition was “just under 20 percent of our market cap and that’s a level that I’m pretty comfortable with, give or take,” Garofalo said. “We prefer to focus on smaller deals, we don’t want to bet the farm on any one acquisition.”
HudBay will consider assets in “investment-grade” countries in the Americas, including Peru, Mexico, Colombia and Brazil, Garofalo said. There must be potential at a project to increase the estimated size of the deposit through exploration, he said, and it’s “unlikely” that the company will buy a producing mine.
HudBay, which owns the 777 zinc and copper mine and processing operations in Manitoba, is developing the Lalor mine and a second, smaller project called Reed in the Canadian province, in addition to Constancia. Reed will begin output this year and Lalor’s production shaft and new concentrator is scheduled to be completed in late 2014.
“We’re looking for that next generation of growth opportunities at HudBay beyond Lalor and Constancia,” Garofalo said. “We have to start looking at beyond 2015, 2016.”
Global supply of copper, used in pipes and wires, will probably remain in deficit this year and then move into surplus during 2014 and 2015 as new projects start up, Garofalo said. The market will probably return to deficit by 2016, as demand is supported by consumption from China and other developing countries and declining mine grades curtail output.
Copper for March delivery rose less than 0.1 percent in New York yesterday to close at $3.77 a pound on the Comex. Copper futures gained 6.3 percent last year.
HudBay expects to conclude agreements this year with smelter owners to buy the metal concentrates to be produced at Constancia, Garofalo said. Some of the groups are also interested in becoming minority partners in the project, he said.
“There’s a couple of them that are doing due diligence on the project and we’ll see where that goes,” Garofalo said. “We’re not going to sell ourselves short and there’s no pressing need to do a deal like that.”
Garofalo, the former chief financial officer at Agnico- Eagle Mines Ltd. who joined HudBay in July 2010, said he’s wary of large deals.
While big mergers and acquisitions create critical mass, which can be attractive to investors, “I think it’s been demonstrated that it tends to be value destructive over the long term,” Garofalo said.
There have been three takeovers of copper companies bigger than $1 billion in the past three years, for a total of $11.34 billion, according to data compiled by Bloomberg. The total jumps to $22.5 billion if First Quantum Minerals Ltd.’s hostile bid for Inmet Mining Corp. that expires Feb. 14 and Sesa Goa Ltd.’s pending offer for Sterlite Industries India Ltd. are included.
HudBay abandoned a C$780.7 million agreement to buy Toronto-based Lundin in 2009 after HudBay investors said the proposed deal undervalued their company.
‘Us and Lundin’
Inmet, Lundin and HudBay are the only three independent Canadian copper miners valued at $1 billion to $5 billion after producers including Equinox Minerals Ltd. and Quadra FNX Mining Ltd. were acquired in 2011.
“When I started in the job in July 2010 there were about six mid-tier companies in the North American space, and if Inmet disappears four of them will be gone,” Garofalo said. “It will be ironically just us and Lundin.”
He expects smaller companies, or so-called juniors, may merge to create new midsized producers.
“I wouldn’t be surprised if you look down at the junior producer level to see some of those junior producers trying to consolidate to create a bit of critical mass and try to fill that void,” Garofalo said. “I think that will happen.”