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HudBay says to buy Lundin Mining, shares plunge

21/11/08

By Cameron French

TORONTO (Reuters) - HudBay Minerals Inc said on Friday it will buy fellow Canadian base miner Lundin Mining Corp , triggering a 46 percent drop in its stock as shareholders worried about taking on Lundin's large, but riskier, metals portfolio.

Under the friendly transaction, HudBay will pay 0.3919 of one of its shares for each Lundin share to create Canada's No. 2 base metals miner, trailing only Teck Cominco .

The deal, which will combine HudBay's solid balance sheet with Lundin's larger production profile and growth prospects, comes as tight credit conditions and the sharp drop of metals prices have hammered mining shares and prompted mine closures.

The deal values Lundin at around C$800 million ($625 million) as of Thursday's close. But with the drop in HudBay's shares, the value had shrunk to less than C$450 million.

"There's a lot of work associated with the far-flung Lundin empire, said David Davidson, an analyst at Paradigm Capital. He said some of Lundin's operations have become uneconomical.

"It's a call on a quick turnaround in commodity prices, and very few people are willing to take that sign of the coin today."

HudBay's shares were down C$2.43 at C$2.80, while Lundin was up 2 Canadian cents at C$1.03, just below the value of the offer.

HudBay will immediately loan Lundin about C$135.8 million and will acquire 19.9 percent of the company in a private placement at C$1.40 a share, to pay back the loan.

"Lundin benefits immediately from getting a cash injection. That's huge," said Catherine Gignac, an analyst at Wellington West.

She said the combination will give resource fund managers a mid-cap Canadian alternative to Teck Cominco , which is Canada's largest base metals miner, but has fallen out of favor with investors due to debt taken on to buy Fording Canadian Coal Trust.

Following the deal, HudBay's cash on hand will be about C$900 million, with total debt of about $240 million.

Lundin's board has approved the transaction, which includes a break fee of C$24.25 million.

Lundin's operations are largely in Europe, while HudBay's are in Canada and the United States. HudBay also owns the Fenix nickel project in Guatemala.

($1=$1.28 Canadian)

(Editing by Jeffrey Jones)