Hudbay Minerals to buy struggling Copper Mountain Mining for US$439 million
The deal shows how much demand for green metals is heating up
**riel FriedmanPublished Apr 13, 2023
Hudbay Minerals Inc.says it will acquire Copper Mountain Mining Co., whose mine in British Columbia cut its output nearly in half last year after a series of challenges.
Toronto-based Hudbay’sall-stock dealoffers a 23-per-cent premium to Copper Mountain’s 10-day weighted average trading price, and values the company atUS$439 million.
It will require approval from two-thirds of Copper Mountain shareholders and a simple majority of Hudbay shareholders, and is expected to close around the middle of 2023.
The deal shows even struggling single-assetcopperproducers are drawing interest and attracting premiums as demand for green metals heats up during the energy transition.
Hudbay said the combination would create an Americas-focused copper company, with assets in Canada, the United States and Peru. It sees potential to expand Copper Mountain’s production by removing bottlenecks in ore milling and adding other equipment on site.
“This has been going on for about a year,” Peter Kukielski, chief executive of Hudbay, said on a conference call on April 13. “We’ve done very detailed due diligence.”
One analyst on the call, John Tumazos, of Very Independent Research LLC, was sceptical about some of Hudbay’s assumptions, including its projection that Copper Mountain would contribute about US$100 million in earnings before interest, taxes, depreciation and amortization in 2023. He noted that Copper Mountain in 2022 lost about US$25 million in cash flows.
“After the first cup of coffee I can’t think of one that’s lower grade,” Tumazos said. “Is it the lowest-grade operating (copper) mine in the world with a conventional grinding mill?”
Gil Clausen, chief executive of Copper Mountain, denied this. However, he said thereserve grade of the mine’s ore stands at about 0.24 per centcopper, which he said was possible to profitably mine partly because of B.C.’s low-cost power.
In an earnings call on March 27, Clausen characterized 2022 as “especially challenging.” The mill was running at reduced rates due to a series of equipment breakdowns, and a ransomware attack temporarily shut down part of the mill in late December.
“We were completing all of our plant-optimization projects, so there was a large amount of committed project capital being spent, at the same time we were experiencing these operational challenges,” he said on that call.
In 2022, the mine produced 24,000 tonnes of copper at cash costs of US$3.53 per pound, compared with the 41,000 tonnes of copper produced at US$1.49 a pound the year before.
Hudbay’s Constancia copper mine in Peru has produced 110,000 tonnes of copper at cash costs of US$1.18 per pound on average over the past three years.
The combined company, which includes Hudbay’s other mines in Manitoba and Peru, would produce around 150,000 tonnes of copper a year.
By comparison, Teck’s new QB2 copper mine in Chile, one of the world’s largest, is expected to produce 316,000 tonnes per year for the first five years of its mine life.
Kukielski said Constancia and Copper Mountain are similar operations and Hudbay can use its expertise and greater resources to increase production and efficiency at the Copper Mountain mine.
“The combined company has the potential for a valuation re-rating from the benefits of being a larger scale, more diversified and more liquid copper producer,” he said.
Kukielski said he believed combining both companies’ assets would unlock about US$30 million in synergies per year.
“The pro forma company will fill a unique niche of midsized copper companies,” he said. “This size and bracket of mid-tier copper companies have garnered significant interest from investors and has historically been very active in industry consolidation.”
