Hudbay’s purchase of Augusta expected to close by end of July

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Toronto-based Hudbay Mineral Resources is expected to complete the US$516 million  purchase of Augusta Resource Corporation and take control of Augusta’s Rosemont Copper Company subsidiary by the end of July, according to regulatory filings.

After months of bitter exchanges between the two companies following Hudbay’s hostile takeover bid launched last February, the two companies announced on June 23 that they had reached a “friendly” agreement for Hudbay to acquire all of Augusta’s outstanding shares Hudbay doesn’t already control.

Hudbay owns 23 million shares of Augusta’s 145 million shares outstanding and is Augusta’s largest single shareholder with a 15.9% stake.

Augusta’s board of directors and several major shareholders controlling about 33 percent of Augusta’s outstanding shares support the sale of the company to Hudbay and are now encouraging shareholders to accept Hudbay’s proposal.

Hudbay has extended an initial deadline  for Augusta shareholders to tender their shares to Hudbay to 5 p.m. on July 16. Upon acceptance of Augusta shares, Hudbay will provide a minimum of 10 additional days for remaining Augusta shareholders to accept the offer, pushing the closing date to no sooner than July 27.

The buyout agreement calls for Hudbay to provide .315 shares of Hudbay stock for each share of Augusta stock and to issue .17 of a Hudbay warrant for each share of Augusta stock. One warrant will allow the shareholder to purchase one share of Hudbay stock on June 20, 2018 at a strike price of $15.

Augusta states the revised Hudbay offer is worth approximately C$3.56 per share, consisting of $3.24 of Hudbay share consideration and $0.32 of Hudbay warrant consideration. The revised offer represents a premium of 10% to the original Hudbay offer and a 42% premium over the closing price of Augusta’s common shares on the Toronto Stock Exchange on Feb. 7, 2014, the last trading day prior to the announcement of the original Hudbay offer.

The terms are not much different than what Hudbay originally offered in February. Hudbay sweetened its bid by including the warrants. But whether the warrants will ever be worth anything remains to be seen. Hudbay is currently trading at $10.78 on the Toronto Stock Exchange. Hudbay will have to issue approximately 38 million shares to complete the acquisition of Augusta. Hudbay has 193 million shares outstanding.

Augusta Resource Executive Chairman Richard Warke

Augusta Resource Executive Chairman Richard Warke

Augusta Chairman Richard Warke told the Financial Post that permitting delays caused Augusta to reevaluate its options and negotiate a friendly deal with Hudbay.

“Obviously not the best upside we wanted today, but you can only control what you can control,” Warke told the Financial Post in a June 23 interview. “Going forward, the combined company offers a really nice exposure to the copper market for our shareholders.

Augusta had repeatedly stated in regulatory filings that it would receive the Final Record of Decision (ROD) approving the mine from the Forest Service and the required Section 404 Clean Water Act permit from the U.S. Army Corps of Engineers by June 30.

But the permitting timetable was severely disrupted  in April after an endangered ocelot was photographed by a remote camera operated by the University of Arizona near the Rosemont mine site in the Santa Rita Mountains on the Coronado National Forest southeast of Tucson.

Recent image of the ocelot taken in the vicinity of the proposed Rosemont mine.

Recent image of the ocelot taken in the vicinity of the proposed Rosemont mine.

The U.S. Fish & Wildlife Service (FWS) formally notified the U.S. Forest Service on May 15 that additional discussions over the Rosemont mine’s potential biological impact on the ocelot and seven other endangered species is required. The Forest Service announced a week later, on May 23, that it agreed with the FWS assessment and that a new endangered species review would be initiated.

Hudbay repeatedly issued a series of 10-day extensions to its buyout offer in the months following the ocelot discovery while it conducted its own review of the permitting issues facing the Rosemont project. Hudbay stated in its original offer in February that it expected Rosemont will receive all the necessary permits to begin construction on the $1.2 billion open pit mine that is projected to produce 240 million pounds of copper concentrate a year. The mine, if built, would be the third largest copper mine in the United States.

While Hudbay is confident that it will obtain its permits, a Canadian mining watchdog group is warning that Hudbay has “a profound disrespect for the environments and communities where it operates.”

MiningWatch Canada program coordinator Ramsey Hart says that U.S. regulatory agencies, local Arizona governments and the general public should not be “lulled into a false sense of security” by Hudbay’s corporate communications that emphasize the company’s environmental stewardship  and commitment to human rights.

Augusta attempted to find a white knight to thwart Hudbay’s offer, which the company repeatedly derided as “opportunistic”. Augusta’s “Notice of Change to Directors Circular” dated July 2 describes the key events leading up to the Hudbay deal.

According to the circular, Augusta held formal acquisition discussions with an unidentified third party from May 2 through May 10, but negotiations regarding transaction terms did not occur. The third party was one of 11 entities that had signed confidentiality agreements with Augusta and one of the five parties that toured the proposed Rosemont mine site.

On May 7, Hudbay offered to provide financing to Augusta under certain undisclosed conditions. A week later, on May 14, Augusta contacted Hudbay to discuss the possibility of entering into a confidentiality agreement to hold discussions about Hudbay’s possible acquisition of Augusta and/or Hudbay providing financing to Augusta.

On June 6,  Warke met with Hudbay’s CEO David Garofalo  to discuss whether Hudbay would be prepared to increase its original offer of .315 shares of Hudbay stock for each Augusta share.

Hudbay CEO David Garofalo

Hudbay CEO David Garolfalo

On the same day, Augusta states it received a “non-binding” proposal from the unidentified party with whom negotiations broke down in May, to discuss the possible acquisition of Augusta for $3.24 per share. Following discussions between the party and Augusta, the party on June 11 increased its “non-binding” offer to negotiate an agreement to purchase all of Augusta’s shares for $3.40 per share.

Augusta and the unidentified party also agreed that Augusta would not enter into discussions to sell the company with any other company who had not signed a confidentiality agreement until June 20. Negotiations regarding transaction terms to complete the purchase of Augusta, however, did not occur.

On June 18, Augusta received a non-binding proposal from Hudbay where Hudbay revised its bid to include not only .315 shares of  Hudbay stock for each share of Augusta, but also to include .15 of a Hudbay warrant for each share of Augusta. One warrant would entitle an Augusta shareholder to purchase Hudbay stock for $15.00 a share within three years.

On the evening of June 20, Warke and Garofalo met to discuss Augusta’s request for an increase in Hudbay’s offer by increasing the exchange ratio for Hudbay stock and warrants and other terms. Garofalo, however, indicated Hudbay was unwilling to increase the amount of Hudbay stock it would offer for each share of Augusta stock, but stated that Hudbay may adjust the warrant ratio.

The next day, June 21, Hudbay and Augusta executives hammered out the final agreement calling for .315 shares of Hudbay stock for each Augusta share, increasing the ratio for the warrants to .17 and extending the execution date of the warrants to four years. The conversion price of the warrants for a Hudbay share remained at $15.00.

The companies reached final agreements early in the morning on June 23 and the deal was announced prior to the markets opening the same day.

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2 Responses to Hudbay’s purchase of Augusta expected to close by end of July

  1. Thomas Moore says:

    Okay we get it! Agusta is being bought out by Hubday. At this point I believe the majority of us could care less what the shares are being bought out for. We want to know how we can prevent Hubday from having a mine in the Santa Rita Mountains, which would be devastating to our enviroment.

  2. ALAN JOHNSON says:

    WOW , WOW , WOW AND YOU WANT TO BELIEVE ALL OF THIS ?
    WHAT POOF IS THERE THAT AUGUSTA WAS NEGOTIATING WITH A THIRD PARTY OVER THE ROSEMONT PROPERTY ? AUGUSTA INVITED/COERCED/SOLICITED A NUMBER OF COMPANIES TO TAKE A LOOK AT THE ROSEMONT PROJECT . THIS LED TO A NUMBER OF VISITS TO THE PROPERTY FOLLOWED BY WHATEVER DISCUSSIONS . AT NO TIME WERE ANY OF THE COMPANIES SUPPOSEDLY INVOLVED IDENTIFIED BY AUGUSTA AND/OR ANYONE ELSE . EVEN AT THIS LATE DATE IN THE PROCESS , THE MYSTERY COMPANY HAS NOT BEEN IDENTIFIED . WAS THIS PERHAPS A PLOY CREATED BY AUGUSTA TO PUT PRESSURE ON HUDBAY FOR A BETTER DEAL ?

    HAVING FOLLOWED THE STRATEGY OF AUGUSTA WITH ITS SPECULATION AND SPIN IT APPEARS THAT THAT THEY CREATED THE MYSTERY THIRD PARTY INTEREST IN ORDER TO GET A BETTER DEAL WITH HUDBAY . HUDBAY DID RESPOND WITH THE WARRANTS OFFER WHICH , IN REALITY , OFFERS VERY LITTLE ADDITIONAL BENEFIT TO THE DEAL .

    AUGUSTA HAS TRAPPED ITSELF IN A WEB OF ITS OWN MAKING . THEY HAVE FAILED TO GO IT ON THEIR OWN WHICH THEY NEVER INTENDED TO DO IN ANY CASE . THEY FAILED TO COME UP WITH THE FINANCING FROM A SYNDICATE OF BANKS AND INVESTMENT FACILITIES THAT THEY CLAIMED HAD EXPRESSED AN INTEREST. AUGUSTA IS ESSENTIALLY BROKE WITH OUTSTANDING DEBTS SOON TO COME DUE .

    AUGUSTA’S BLUFF IN THIS HIGH STAKES POKER GAME OF WINNER TAKES ALL HAS BEEN CALLED BY HUDBAY . THE NEXT FEW DAYS WILL TELL THE TALE . THE AUGUSTA OFFICIALS MAY HAVE PULLED THE WOOL OVER THE EYES OF A BRAZILIAN ON A COLUMBIAN DEAL BUT WILL THIS SUCCESS CARRY OVER TO ROSEMONT AND ITS PROPOSED DEAL WITH HUBBAY ? WHAT IF HUDBAY SHOULD WALK AWAY FROM THE CURRENT DEAL WITH AUGUSTA . HUDBAY COULD SIMPLY SELL ITS SHARES AND MOVE ON . WHERE WOULD THAT LEAVE AUGUSTA ?