The SANTA RITA Mountains surrounding Augusta’s Rosemont copper project.

The SANTA RITA Mountains surrounding Augusta’s Rosemont copper project.

Garofalo's Takeover Tactics Win Out Over Augusta

Issue 90, June 2014

Augusta Resource Corp. struck a face-saving deal with HudBay Minerals this week, pumping Augusta’s massive Rosemont copper project in the US into HudBay’s project pipeline.

On Monday, Augusta said it had agreed to a friendly takeover by HudBay, ending nearly five months of public hostility between the two companies.

HudBay made an all-stock offer for Augusta in February that valued the company at around C$540m, including net debt and HudBay’s existing 16 per cent stake. This week, it added 4-year warrants to the deal, lifting its face value to C$555m ($518m).

The agreement represents a sharp turnaround for Augusta’s board, which has repeatedly told investors that HudBay’s offer had “no chance of success”, labelling it “coercive” and “grossly inadequate” given the scale of its 5.9bn lb Rosemont project in Arizona. “Going forward, the combined company offers a really nice exposure to the copper market for our shareholders,” chairman Richard Warke added this week.

Subject to final permitting, the agreement is also a resounding victory for HudBay’s chief executive David Garofalo, who has repeatedly said HudBay would tender its shares in Augusta into a higher offer, whilst extending its own bid without improved terms no less than 7 times.

The extensions have backed Augusta into a corner, proving HudBay’s initial claim that permitting was unlikely to be resolved by mid-year, whilst running down the clock on Augusta’s pinched liquidity. The tabled offer effectively blocked Augusta from embarking on a material financing that could have diluted HudBay’s stake, or alleviated pressure on Augusta’s own projected permitting deadline.

The price of copper has also moved against Augusta’s hopes of a bidding battle, plunging in March on Chinese bond default concerns. HudBay’s share price has meanwhile risen 6 per cent since its opening bid to C$9.96.

Before warrants, it is due to issue 38m shares under the deal, equal to 20 per cent of its market cap, or C$390m, substantially below the deal’s headline value. Tellingly, HudBay upscaled its credit facility by $100m on the day of its opening bid, but by using warrants rather than cash to better its final terms, Garofalo has kept HudBay’s powder dry.

“A really nice exposure to the copper market.”

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