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HudBay CEO defends Lundin deal

ANDY HOFFMAN

00:00 EST Thursday, November 27, 2008

Under fire from shareholders for offering a premium of more than 100 per cent for the battered shares of Lundin Mining Corp., Allen Palmiere, the rookie chief executive officer of HudBay Minerals Inc. concedes that on its surface, the takeover offer doesn't look good.

"The headline number was terrible," Mr. Palmiere said in an interview discussing the rough ride that his shareholders have given the all-stock bid since it was announced on Friday.

When he cemented the transaction with chairman Lukas Lundin, 17 days before it was unveiled, the premium appeared more reasonable.

In the interim, however, Lundin shares skidded below $1 on concerns over the Vancouver company's debt. The offer, valued yesterday at about $570-million, was not open for renegotiation, Mr. Palmiere said. Lundin would have walked.

"We're in an incredibly volatile environment. The premium on the day we shook hands was 20 per cent," he said.

The drubbing that HudBay's stock suffered Friday (it plummeted nearly 40 per cent) hasn't dissuaded Mr. Palmiere that this will prove a "transformational" transaction for his company, which mines and processes zinc and copper at operations centred in Manitoba.

Lundin's Neves-Corvo copper mine in Portugal and its Zinkgruvan zinc mine in Sweden both boast costs among the lowest in the industry. The company also has a 25-per-cent interest in what Mr. Palmiere says is "potentially the best mine in the world," the Tenke Fungurume copper project in the Democratic Republic of Congo. If the deal succeeds, HudBay's reserves and resources will increase by 300 per cent and cash flow will rise by more than 100 per cent.

"I've looked at a large number of companies, I do it on a full-time basis. This was by far the most attractive opportunity I've seen for a long time. Being quite honest, we are upgrading our asset base significantly," he said.

Many HudBay shareholders and the majority of analysts don't see it that way. HudBay will nearly double its outstanding shares and give Lundin a $136-million loan that will eventually be converted into a 20-per-cent equity stake. While its healthy cash balance of over $800-million will be maintained, on a per-share basis it will be cut in half. HudBay is also taking on $242-million of Lundin debt.

"I think they grossly overpaid," said David Taylor, an investment manager at Goodman & Co. in Toronto who holds nine million HudBay shares in his funds.

Mr. Taylor is among shareholders who have tabled a requisition for a special shareholder meeting aimed at ousting HudBay's board and senior management including Mr. Palmiere. Under a so-called "plan of arrangement" HudBay is permitted to issue the shares without giving its shareholders a vote.

The Lundin offer marks the second transaction for the former HudBay chairman who took over the president and CEO job in January.

In June, he launched a bid for Skye Resources Inc., valued at $436-million at the time, acquiring the company's Fenix nickel project in Guatemala. Just four months later, HudBay halted all major work on the project, blaming the crash in nickel prices.

"They did Skye Resources and they destroyed shareholder value and now they're doing it again," Mr. Taylor said.

Mr. Palmiere has been marketing the deal to shareholders this week, including Mr. Taylor, and admits he's been somewhat taken aback by the negative reaction.

"Everybody is a little bit surprised. It's an emotional market right now so it's somewhat difficult to anticipate market response. At the end of the day what we've put together is an extremely attractive proposition," he said.

HUDBAY (HBM)

$3.70, up 45 cents

LUNDIN (LUN)

$1.01, up 20 cents