How the Grinch Stole Lundin

You're a mean one, Mr. Market. After picking up enough copper and zinc resources to build a thousand Whovilles, one Canadian miner has been swiftly punished by investors with all the empathy of the Dr. Seuss antagonist.

As the full value of this acquisition by Canada's HudBay Minerals comes to light in time, however, I believe that investors' hearts may yet grow larger. Announced at a value of C$800 million ($630 million), HudBay's acquisition of Lundin Mining (NYSE: LMC  ) -- which creates Canada's second-largest base metal miner after Teck Cominco (NYSE: TCK  ) -- was reduced to an effective purchase price of just around C$500 million ($400 million) after investors tore into HudBay's shares on Friday.

One HudBay stakeholder called the move "an embarrassing value destructive transaction," vowing to oppose the deal. By contrast, the move was quickly embraced by Lundin's board, which no doubt cheered a timely cash infusion through a C$135.8 million ($110 million) loan. Upon completion of the deal, HudBay expects to hold C$900 million ($731 million) in cash. Considering the resources thus acquired, I believe this deal is a steal for HudBay.

HudBay gains five new operating mines, including the Zinkgruvan zinc mine in Sweden. Zinkgruvan boasts silver reserves of around 35 million ounces, which will be sold to Silver Wheaton (NYSE: SLW  ) by prior arrangement. Lundin recently suspended zinc production at the Neves-Corvo mine in Portugal, citing market conditions that make mining for zinc uneconomical. With a 4.4% copper content in its ore reserves, however, Neves-Corvo represents the type of high-quality ore reserves that HudBay CEO Allen Palmiere suggests were missing from the company's asset base.

As for development projects, HudBay picks up a 25% stake in the world-class Tenke-Fungurume project in the Democratic Republic of the Congo. Operated by majority owner Freeport-McMoRan (NYSE: FCX  ) , this mine is scheduled to begin production next year with average production of 250 million pounds of copper annually.

Despite the remarkable rally among metal miners in recent days, investors appear acutely uncomfortable with mergers and acquisitions in this climate. The visible strength in shares of Cliffs Natural Resources (NYSE: CLF  ) and Alpha Natural Resources (NYSE: ANR  ) following the termination of their proposed merger last week provides further confirmation of that cautious mood. I'm not surprised by the degree of risk aversion out there, but I hope Fools and Grinches alike will recognize a good deal when they see one.

Further Foolishness:

Over at CAPS, 995 members have rated five-star pick Lundin Mining an outperform. Whether you think this merger is Foolish or folly, please come share your thoughts and counsel with our community of investors. CAPS is free and fun!

Fool contributor Christopher Barker is the commodore of copper, and the Colonel Klink of zinc. He can be found blogging actively and acting Foolishly within the CAPS community under the username TMFSinchiruna. He owns shares of Clifs Natural Resources, Freeport-McMoRan, Silver Wheaton, and Teck Cominco. The Motley Fool has a disclosure policy.


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  • Report this Comment On November 26, 2008, at 3:16 PM, Fundamentalisten wrote:

    Sure thing! I fully agree. I've been an owner of tenke - > lumi a long time. now, it's at it's lowest rate all over. Igratulate HudBay share holders for this bargain deal. Lumi hasn't a cash problem for some years as is. But its main owner - the Lundin Group -look further than that, I think, as well as I do. That's the only reason why I will vote for the deal. To take up, in a market situation like this, good assets in waiting for better times is simply the best use of money now. Not to dig upp minerals from the ground. That has an ever preserved value, to be sold when due....... myself I'm rather considering buying HudBay shares right now....

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