Is Augusta Resource Ready for the Gallows?

Rosemont copper/molybdenum/silver project site in Pima County, Ariz., about 31 miles southeast of Tucson. Source: Augusta Resource

The noose is tightening around the neck of Augusta Resource (NYSEMKT: AZC  ) , and it may be that now only HudBay Minerals (NYSE: HBM  )  can save investors in the development stage miner from the hangman.

On Friday HudBay extended the deadline for its tender offer of Augusta shares, part of its hostile bid to gain access to the potentially lucrative Rosemont copper mine near Tucson, Ariz. Originally due to expire this past Friday, HudBay extended the timetable for its C$540 million offer to May 27 after Augusta adopted a "poison pill" defense to protect against HudBay's acquiring too much of its stock and seriously diluting its ownership stake. Hudbay owns about 16% of Augusta and has offered shareholders 0.315 of Hudbay stock for each share of Augusta they own.

While securities regulators in British Columbia denied HudBay's attempt to overturn the shareholders' rights plan, they only gave Augusta until July 15 to find a white knight suitor, and then only if Hudbay extended its offer to July 16 and then for another ten days if any shares were taken up. Augusta accused its rival of making an opportunistic, lowball offer, and says it's signed confidentiality agreements with 11 parties and even has bidders that can potentially top Hudbay's offer.

Shareholders recently approved of Augusta's poison pill defense, which, excluding Hudbay's own votes against it, won 94% approval. Augusta says HudBay's offer is "grossly inadequate."

In concurrence with its offer extension, however, HudBay now alleges that the U.S. Army Corp of Engineers issued a letter last week telling Augusta its "proposed compensatory mitigation is inadequate", and the agency was moving toward making a final determination on its permit application, suggesting it won't be good news. The purported letter Augusta allegedly received hasn't been made public, however, and Augusta hasn't commented on it yet either. That wouldn't be the first time the miner withheld such information from investors, as it received a letter from ACE back in February raising concerns about its mitigation plans at Rosemont, which weren't revealed until last month.

When developed, the Rosemont mine would be the third largest copper operation in the U.S. behind Freeport-McMoRan's Morenci project in Arizona and Rio Tinto's Bingham Canyon in Utah. Rosemont would be capable of producing 243 million pounds of copper annually, or about 10% of all U.S. copper output.

But it's coming up against increasingly severe environmental concerns that place its ability to achieve those goals in grave doubt. In addition to the Army Corps of Engineers, both the U.S. Forest Service and the EPA have a say in the matter, and where the former has delayed its ruling on Rosemont till at least the end of the month so that it has a chance to address comments it's received about the project, the latter has previously said it believes the project is "out of balance with the impacts" it will cause to the environment, and ultimately has veto power over the ACE decision.

Rosemont hosts an estimated 5.9 billion pounds of copper and 194 million pounds of molybdenum. Should its permitting go according to plan, which at this moment isn't at all assured, it plans to commence production in the first quarter of 2017.

Following the offer extension and revelation that the Army Corps of Engineers may be poised to vote against Augusta's mitigation plan, shares in the miner fell by nearly 9% over the past two days of trading. The existence of this letter, though, could sway more investors to tender their shares to HudBay Minerals, and Augusta Resource may be left swinging with no other avenue to thwart the takeover attempt.

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