The consensus opinion, or maybe it should be called the conventional wisdom, among mining industry analysts who follow the ins and outs of the ongoing effort by Toronto's Hudbay Minerals Inc. to take over Augusta Resource Corp., owner of the Rosemont Mine private land, is that Hudbay's offer of last Sunday was too low. Their view is that Augusta could get more when (not much mention of if) the mine is permitted and that other bidders are likely to enter the scene and push up the price.
But one Toronto analyst, Dundee Capital Markets, an investment dealer that follows both companies, argued in its research note this week that Hudbay's offer is fair and that Augusta shareholders should accept it. At the heart of Dundee's argument is the firm's view that the mine is farther off, maybe a lot farther off, from winning its last permits than Augusta says, and that continued delays in permitting could put Augusta in a precarious financial position.
The offer is in Hudbay stock that amounts to the equivalent of $2.96 per share, or 18 percent higher than Augusta's stock was priced at last Friday, Jan. 31st. (That price has since risen as a result of Hudbay's offer; it's at $3.08 per share, higher than Hudbay's offer, this morning).
"We believe that HBM's offer represents a good opportunity for AZC shareholders to reduce their exposure to what we see as significant permitting and liquidity risks for the company," Dundee's note to investors said.
(The initials HBM and AZC are stock market acronyms for the two companies).
Continuing, Dundee analysts Joseph Gallucci and Iain Farmer wrote:
"Our thesis that AZC's permitting timeline remains uncertain in the face of significant environmental and social headwinds remains intact. Further supporting our thesis was Hudbay's acknowledgment (in its press release) that:
"'…based on its extensive due diligence independent of Augusta, Hudbay believes Augusta's management continues to be overly optimistic about the permitting timeline and Augusta's ability to complete the required engineering and raise the necessary financing to construct the Rosemont project.'"
"Unless AZC's permitting solution is resolved soon, which we see as unlikely, we continue to believe that with its current cash balance (we estimate ~13.5M) the company can only survive until Q3/14 at which time it may have to pursue financing from a position of weakness," Dundee said.
The report noted that Hudbay's offer was 62 percent above Augusta's 20-day average stock price.
In a separate note, Dundee said the takeover would be good for Hudbay, allowing it to increase its annual copper production by roughly 85 percent assuming Rosemont is permitted.
"As opposed to Augusta, Hudbay can afford to sit on the project if permitting is delayed. In fact it would probably be better from a cashflow standpoint for (Hudbay)," Dundee analysts David Charles and Patrick Raciot wrote.
The analysts wrote that a big Hudbay copper mine known as Constancia, now under construction in Peru, should start generating significant cashflow by 2016 that could be available to finance Rosemont construction starting in 2017.
Charles and Raciot wrote that the timing of Hudbay's offer was a surprise, since Dundee -- as did many analysts -- believed that Rosemont would have to make more progress in getting final approvals to draw takeover action.
"But that said, we believe the acquisition could eventually be good for HBM if Rosemont gets permitted," Dundee wrote.