Bloomberg News

HudBay Seeks ‘Toeholds’ in Mineral Explorers Over Larger Deals

January 31, 2012

Jan. 30 (Bloomberg) -- HudBay Minerals Inc., a Canadian copper and zinc producer, said it plans to expand by buying “toeholds” in exploration companies rather than acquiring or merging with rivals.

“It’s what we like to euphemistically call our farm system,” Chief Executive Officer David Garofalo said in a Jan. 26 interview at Bloomberg’s Toronto bureau. “We’re trying to fund promising drill programs, and if they find something meaningful we have a seat at the table.”

HudBay, which has mines and processing operations in Manitoba, is expanding production as base-metals demand rises. The Toronto-based company is building two new mines in Canada and plans to start construction this year at its Constancia project in Peru. HudBay forecasts copper production will more than triple by 2016 while zinc output will increase by about 65 percent.

HudBay acquired the Constancia project when it bought Norsemont Mining Inc. in July for C$305 million ($303 million). HudBay abandoned a C$780.7 million agreement to buy Canada’s Lundin Mining Corp. in 2009, after HudBay investors said the proposed deal undervalued their company. Garofalo, who joined HudBay as CEO in July 2010 from Agnico-Eagle Mines Ltd., said he’s cautious about big transactions.

“We’ve seen some large-scale M&A happen on the gold side and the base-metals side in the last couple of years and we think that’s largely been disastrous in terms of per-share value creation,” Garofalo said. “I think what the market is saying is, ‘Do smaller deals and try to use cash.’”

Mining Transactions

There were $43.7 billion of mining acquisitions larger than $1 billion completed in the last two years, according to data compiled by Bloomberg. The biggest by a copper miner was Quadra Mining Ltd.’s March 2010 purchase of FNX Mining Co. for C$1 billion. The combined company, Quadra FNX Mining Ltd., fell 33 percent before Quadra said it agreed to a takeover offer last month from KGHM Polska Miedz SA, while the S&P/TSX Materials Index rose 14 percent.

Garofalo expects copper prices will rebound in 2012, supported by Chinese demand for the metal and constraints on supply. Copper futures declined 23 percent last year on the Comex in New York. The industrial metal used in pipes and wires climbed 3.8 percent last week and was up 13 percent in January.

“I think demand from China is much more robust than people had assumed,” Garofalo said. “Europe is a bit of a cloud, but Europe is really not the catalyst for copper prices right now.”

Zinc Mining

Zinc prices, which fell 25 percent last year in London, are probably near a floor, as investors anticipate the metal moving from a supply surplus to deficit in the next couple of years, Garofalo said. There are some large primary zinc mines scheduled to close starting 2013, he said.

“I don’t see a lot of downside in zinc,” Garofalo said. “It’s going to be like flicking a switch, it will go from surplus to deficit very quickly when those closures happen.”

HudBay will announce updated cost estimates for Constancia after completing a feasibility study in the next few months, Garofalo said. The company is also in “advanced” negotiations with export-credit agencies for debt financing to help fund development at Constancia.

--Editors: Steven Frank, Simon Casey

To contact the reporter on this story: Liezel Hill in Toronto at lhill30@bloomberg.net

To contact the editor responsible for this story: Simon Casey at scasey4@bloomberg.net -0- Jan/27/2012 20:06 GMT


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