There are many interesting things about Hudbay’s takeover offer for the 84% of Augusta Resource that it doesn’t already own – an offer that has breathed a bit more life into a moribund mining M&A scene that is slowly reviving. Augusta is developing the advanced-stage Rosemont copper deposit southeast of Tucson, Arizona, which is projected to be the third largest copper mine in the U.S. once it’s operating.
Probably the most interesting thing is this:Vancouver resource entrepreneur Ross Beaty is the second-largest shareholder of Augusta, with more than 9% of outstanding shares. He owns 12,200,500 shares indirectly through his Kestrel Holdings company, and 1,235,000 shares directly, according to our friends at INK Research. That’s a total of 13,435,500 shares, or 9.3% of outstanding shares, as well as 5 million convertible notes. According to SEDI records, Beaty filed opening balances for most of the shares on Oct. 25, when Augusta was trading at about $2.15. He picked up 100,000 more shares on Nov. 21 at $1.26, according to a Nov. 22 filing.
The fascinating thing about Beaty’s shareholding in Augusta is that he also has a “For Sale” sign on a giant copper deposit his Lumina Copper has developed, called Taca Taca. The plan was for Taca Taca to have been sold already, but the copper-gold deposit is located in Argentina, which complicates things.
Beaty has an outstanding record of creating shareholder value, even if a sluggish mining sector and geopolitical risk has delayed the sale of Taca Taca. Beaty’s position in Augusta Resource shows that he also recognizes a good bargain when he sees one. Lumina Copper was one of the first stocks I wrote up on World of Mining; for more, check out related links at the bottom.
Taca Taca remains an impressive deposit that shows a net present value of $2.1 billion according to Lumina’s PEA, which was done using more conservative metal prices ($2.75/lb copper) than its Rosemont counterpart ($3.50/lb). Taca Taca also has significant amounts of gold. It’s not a direct comparable and Taca Taca would be more expensive to build, but with Hudbay’s offer valuing Rosemont at more than $500 million, shares of Lumina Copper look cheap by comparison. Lumina’s market capitalization at the time of writing is about $240 million, and Beaty owns about 22% of outstanding shares. Rosemont is further along the development curve, with much of the permitting already completed, but let’s compare some numbers:
After-tax NPV: $2.5B (at $3.50 Cu)
5.9B lbs Cu, proven and probable
7.5B lbs Cu, measured and indicated
1.1B lbs, inferred
After-tax NPV: $2.1B (at $2.75 Cu)
21B lbs Cu/5.5 oz Au, indicated
7.5B lbs Cu, inferred
There was considerable leakage before the bid: Augusta’s share price shot up from $2 to $2.50 in the two trading sessions BEFORE the all-share deal – at $2.96 – was announced. The two-day bump was so striking that Hudbay actually included the detail in its news release announcing the offer (see below). Augusta shares have traded substantially higher ever since the offer was announced, and are on the move today as well, up 2.5% to $3.28 at the time of writing. That suggests competing bids or a higher offer (and, possibly, a regulatory investigation).
“Under the terms of the Offer, Augusta shareholders will be entitled to receive 0.315 of a Hudbay common share for each Augusta common share held, representing approximately C$2.96 per Augusta common share (based on Hudbay’s closing share price on the TSX on February 7, 2014). The Offer represents a premium of 62% to Augusta’s 20-day volume-weighted average price on the TSX for the period ending February 7, 2014, and a premium of 18% to Augusta’s closing share price on the TSX on February 7, 2014 in addition to Augusta’s 26% share price increase during the two trading days preceding the Offer. The Offer values Augusta at an enterprise value of approximately C$540 million on a fully diluted in-the-money basis.”
Rosemont would be a big bite, and a big bet, for Hudbay, which has been talking acquisition and furiously raising capital in recent weeks. On Jan. 30, Hudbay – which runs the Flin Flon polymetallic mine in northern Manitoba and is developing the Constancia copper porphyry project in southern Peru – closed a $173-million share offering, and it also recently increased its line of credit. Hudbay’s market capitalization at the time of writing is about $1.7 billion. It’ll cost almost that much to buy and develop Rosemont.
Disclosure: I own some Lumina shares in an RRSP account. This is not investment advice, and all investors should do their own due diligence. Please read my disclaimer.