Future ownership of Rosemont copper project to be determined as Augusta shareholders meet with HudBay bid set to expire

Two starkly different scenarios over the future ownership of the proposed Rosemont copper project have emerged in the days leading up to Augusta Resource Corporation’s annual meeting this Friday in Vancouver, B.C.

The focus of the meeting will be whether Augusta’s shareholders will take steps that will clear the way to accept HudBay Mineral Resources $500 million hostile takeover bid. Toronto-based HudBay, which already has a 16 percent stake in Augusta with 23 million shares, has stated its bid will expire at 5 p.m., May 5.

Augusta shareholders will be asked whether to continue a shareholders’ rights poison pill strategy adopted by the Augusta board last year in anticipation of possible hostile takeover from HudBay. According to the Arizona Daily Star, the vote may not be necessary, because the British Columbia Security Commission is expected to issue a ruling Thursday on HudBay’s request to void the poison pill.

The poison pill issue aside, the central factor in the takeover debate is likely to be whether shareholders’ believe Augusta’s repeated statements that permitting for the mine will be completed by June 30 with construction to begin soon after; or HudBay’s assertion that Augusta’s management is misleading its shareholders over the permitting timeline and that there is virtually no chance construction will begin this year.

Cash-strapped Augusta needs a quick resolution to the remaining permitting issues to access $336 million in contingent funding the company claims will be available once the U.S. Army Corps of Engineers issues a Section 404 Clean Water Act permit. Augusta has repeatedly stated that it expects the permit will be issued by June 30.

The Army Corps has stated a decision to issue the permit will be made by June 30. The Corp, however, has raised serious questions over whether Augusta has provided sufficient mitigation to compensate for the destruction of wetlands, streams and springs that will occur if the mile-wide, half-mile deep mine is built in the Santa Rita Mountains on the Coronado National Forest southeast of Tucson.

The contingent funds, Augusta claims, will be used in part to repay a $109 million loan that is due not later than Oct. 21, 2014 from RK Mine Finance. The loan is fully collateralized by the assets of Augusta’s Rosemont Copper Company and a default could result in Augusta losing its only material asset.

Augusta also claims completion of the permitting will allow it to move forward with additional long term financing from an international consortium of lenders necessary to build the $1.2 billion mine.

Peter Campbell, an analyst with Jennings Capital Inc., is recommending  that Augusta shareholders reject the HudBay offer, based in part on Augusta’s optimistic outlook on permitting and withstanding expected legal challenges.

Augusta recently told Campbell that it does not believe the U.S. Environmental Protection Agency will exercise its veto authority over the Army Corps’ presumed issuance of the 404 permit.

“Management indicated that, in the entire history of the EPA, this has only happened 11 times, and believes that, in this case, there are just not substantive enough issues for this to occur,” Campbell wrote in an April 15 report.

“Given the intensive scrutiny and painstaking process that Augusta has been through to get the Rosemont Copper project to this stage, we would agree with the Company,” Campbell states.

The EPA Region IX headquarters last November recommended that the Army Corps to deny Rosemont’s Section 404 permit application. Earlier this month, EPA asked the Arizona Department of Environmental Quality not to certify Rosemont’s 404 permit application, a step that must be completed before the Army Corps can make its decision.

Augusta, according to Campbell’s report, also believes there is virtually no chance that expected litigation from mine opponents will be successful in obtaining an injunction to block construction pending the outcome come of the legal process.

“We find it difficult to believe that an egregious oversight could be demonstrated by the regulators,” Campbell states. “The Company therefore believes that there is a near-zero probability that an injunction halting work on the project would ever be granted.”

Joseph Gallucci, an analyst with Dundee Capital Markets, is far less optimistic about Augusta’s near term permitting prospects and is recommending shareholders accept HudBay’s offer.

“(HudBay) makes a strong case for the takeover,” Gallucci writes in an April 17 report. “Our thesis remains that (Augusta’s) permitting timeline is still uncertain in the face of significant environmental and social headwinds.”

HudBay has repeatedly stated in press releases and in filings with Canadian and U.S. regulators that Augusta will not obtain the key permits in the near term and that, even if it does, expected litigation will freeze Augusta’s ability to access the $336 million in contingent funding.

Without a capital infusion, Augusta will be in a weak position to renegotiate the RK loan, HudBay has stated.

Augusta “has liquidity issues and limited financial capacity to build Rosemont,” Gallucci states. “Should HBM’s offer not be accepted, we believe that (Augusta) would be forced to finance from a position of weakness, resulting in substantial shareholder dilution.”

HudBay is operating two copper mines, ramping up production at a third and building a fourth in Peru that will be completed next year. The company had $631 million in cash and readily marketable securities as of Dec. 31, 2013, according to its year-end financial statement.

Gallucci states that expected permitting delays and litigation connected to the Rosemont project is unlikely to cause significant problems for HudBay.

“Accounting for some permitting delays, we believe that Rosemont’s construction could start somewhere in 2016 and with a two-year construction schedule; first production could happen in 2018,” Gallucci states. “This would fit perfectly with HBM’s current copper production growth…”