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Hedge fund slams HudBay's 'slip-shod' merger process

ANDY HOFFMAN

00:00 EST Thursday, March 05, 2009

MINING REPORTER

HudBay Minerals Inc. chief executive officer Allen Palmiere tried to amend the terms of a controversial merger agreement with Lundin Mining Corp. after shareholders slammed the proposed transaction, according to court documents released by a hedge fund trying to oust Mr. Palmiere and the HudBay board.

Monaco-based SRM Global Master Fund LP, which owns 11 per cent of HudBay's stock, said HudBay's board of directors is "incapable of creating value and serving the best interest of shareholders," in a filing with securities regulators yesterday. The SRM circular calls HudBay's ill-fated attempt to merge with Lundin a "slip-shod process" that included management-dominated negotiations and "neglect" by the HudBay board. It also includes an excerpt from a text message sent by Mr. Palmiere to Lundin's CEO, Phil Wright, on Nov. 26, just five days after the deal to combine HudBay's Manitoba zinc and copper operations with Lundin's mines in Europe and Africa was announced.

"There is a lot of criticism about the price and the current stock reaction only exaggerates the problem," Mr. Palmiere wrote. HudBay's shares plunged 40 per cent after the proposed marriage was unveiled as investors balked at the premium of more than 100 per cent that HudBay was offering for cash-strapped Lundin. HudBay shareholders weren't given a vote on the transaction, despite the fact that the company would have doubled its share count to pay for the takeover.

"The movement for a dissident shareholder meeting is growing and we need to cut it off quickly or else it may turn into something we can't deal with," Mr. Palmiere continued in the text, which was filed in the Ontario Superior Court as part of an oppression application launched by SRM against HudBay. An attempt by HudBay to have the records sealed as confidential was rejected.

"My special committee is becoming more concerned every day and we need to address all of these factors. I think that the best way to address this is to make a significant revision to the exchange ratio. Please let me know your thoughts as soon as possible," he wrote.

Mr. Wright's response to Mr. Palmiere's note was brusque.

"Allen, we have totally exposed ourselves on this and have binding agreements. I can't even believe this is being raised. ... I am at a total loss. This deal is here for the doing. If you guys lose your nerve, I don't want to think of the consequences," Mr. Wright said.

The deal terms were never changed and Mr. Palmiere continued to promote the merits of the combination until the deal was officially severed last month after the Ontario Securities Commission issued a surprise order forcing HudBay to give its shareholders a vote.

SRM has proposed its own slate of directors to replace the HudBay board. They include Peter Jones, the company's former CEO, and Wes Voorheis, a Toronto lawyer and former CEO of Hollinger Inc.

"The process that the HudBay board followed to do this deal was atrocious," Mr. Voorheis said yesterday.

Mr. Palmiere did not respond to requests for comment yesterday.

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