HudBay Aquisition
HudBay Minerals, amid high metal prices and low costs, looks at acquisitions
Canadian Press - Thursday June 1, 2006
By Gary Norris
TORONTO (CP) - HudBay Minerals Inc. (TSX:HBM), feasting on high base-metal prices and low production costs, is on the watch for takeovers - but could become an acquisition target instead.
While production at existing and new operations has been expanding rapidly, CEO Peter Jones told the company's annual meeting Thursday that "merger and acquisition plans continue to be a focus" for HudBay. The firm transformed itself at a stroke from a development-stage company into Canada's third-largest producer of zinc and copper with its December 2004 takeover of Hudson Bay Mining and Smelting Co. from Anglo American PLC (Nasdaq:AAUK) for $316 million.
It has since been using the flood of cash flow from unprecedented zinc and copper prices to pay down debt and in just over a year has eliminated $107 million US of the $175-million-US note issue used to fund the HBMS purchase.
"They could be an acquirer or an acquiree," analyst Catherine Gignac of Wellington West said after the meeting.
"Building up of cash, being able to pay down their debt . . . they're looking pretty attractive," said Gignac, who rates HudBay a "buy" with a share-price target of $18.
The stock traded at $13.70 Thursday afternoon, off 12 cents on the day but up from $2.50 a year ago.
With a stock-market value of $1.2 billion, HudBay would be readily digestible by a Canadian company like Teck Cominco Ltd. (TSX:TEK.B), with a market capitalization approaching $15 billion, Falconbridge Ltd. (TSX:FAL.LV), worth over $20 billion, or Inco Ltd. (TSX:N), valued at $14 billion - all currently involved in bigger takeover dramas.
On a wider scale, global giants like BHP Billiton Ltd. (NYSE:BHP) have been striding the world in search of new metal supplies.
HudBay's flagship asset is the 777 mine, opened in 2004 at Flin Flon in western Manitoba; it has other mines in Manitoba and recently reopened the Balmat zinc mine in upstate New York, and it processes zinc and copper in Manitoba, Michigan and Ontario.
Its vertical integration - active in everything from exploration to refined metal sales - distinguishes it from other intermediate-sized miners, Jones told shareholders.
HudBay also enjoys low costs, with year-over-year increases on a per-unit basis ranging from five per cent in copper smelting down to three per cent in mining and 1.4 per cent in concentrator operations.
"We've had excellent production . . . but we've also had first-class cost control," Jones said in an interview.
The 1,500-employee company's labour costs have been moderate under its union agreement, Jones said, while HudBay has suffered less than many competitors from rising costs for inputs ranging from explosives to steel, "in part because we're an efficient producer and in part because we are more focused in underground mining than we are in surface mining," thus avoiding moving masses of overburden.
"Also we benefit from having the lowest electrical power costs in North America, as we're supplied principally by Manitoba Hydro."
HudBay is spending $10 million this year on exploration, mainly in the Flin Flon region but also in the Yukon and South America.
In terms of acquisitions, "we tend to be a very conservative company," Jones said.
A takeover would likely be in the Americas and preferably in zinc - "but any base or even precious metal would be of interest," he added.
"But above all, whatever we acquire must be relatively low on the production cost curve, as it has to survive through a relatively low metal price cycle."
That said, HudBay doesn't expect prices to turn down soon.
"Even though there may be some short-term fluctuations, we believe the medium to longer-term underpinning for zinc is very strong indeed," Jones said.
"It's driven by a supply-side situation. There are few new zinc sources available worldwide, and that's going to be with us for at least two years and possibly longer."
