Is Hudbay’s Takeover Offer Fair?

Or is it just opportunistic?

| More on:
The Motley Fool
You’re reading a free article with opinions that may differ from The Motley Fool’s premium investing services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn more

“The unsolicited offer is grossly inadequate and does not come close to recognizing the full and fair value of Augusta and the world-class Rosemont project,” said CEO Richard Warke of copper miner Augusta Resources (TSX:AZC). Warke wants the company’s shareholders to reject a takeover offer from Hudbay Minerals (TSX:HBM)(NYSE:HBM), calling the offer “highly opportunistic”. He may have a point.

Like many junior miners, Augusta has fallen on hard times. The stock traded close to $6 about three years ago, which is also the time at which copper prices hit their peak. But a soft market for both commodities and mining companies pushed Augusta’s stock price to $1.51 by the end of 2013.

Meanwhile the consensus analyst net asset value of Augusta is closer to $6 per share, which has provided Hudbay with an excellent opportunity. The offer on the table is 0.315 Hudbay shares for every Augusta share, at the time equal to $2.96 per Augusta share (a 62% premium to Augusta’s 20-day average price). If the bid is successful, then Augusta’s shareholders will hold an 18% interest in the combined company. But they will contribute 26% of the combined company’s net asset value, and 41% of the reserves.

The tables have since turned. Hudbay’s share price has declined, so the offer is now only worth $2.74 per Augusta share. And Augusta shares currently trade at $3.52. Augusta’s management has also claimed that it has secured “no” votes from at least 33% of the shareholders, which would kill the bid. On the surface, it looks like Hudbay will have to increase its offer if it wants the takeover to be successful.

Foolish bottom line

This scenario is not unlike Goldcorp’s bid for Osisko Mining. It involves a large company with lots of options and a small company that doesn’t want to be taken out. But given the state of the markets, both Augusta and Osisko will have trouble finding other suitors. Meanwhile Goldcorp and Hudbay could surely find other cheap targets if their offers are unsuccessful.

Both Osisko and Augusta trade at a premium to their takeover offers, reflecting shareholders’ beliefs that higher offers are on the way. In fact, both offers are likely inadequate. But these are still buyers’ markets. So holding these companies’ shares, and betting on higher offers, is a very dangerous game to play.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Benjamin Sinclair holds no positions in any of the stocks mentioned in this article.

More on Investing

Workers use a microscope to do medical research in a modern laboratory.

Is Now the Time to Buy Health Care Stocks?

Health care stocks are on the up, but does that mean you should go ahead and buy anything? In short:…

Read more »

Volatile market, stock volatility

2 Volatile Stocks to Hold for a Decade

The market is full of opportunities for investors. But does that opportunity include some volatile stocks to hold?

Read more »

Arrowings ascending on a chalkboard

1 Under-the-Radar U.S. Stock to Buy in August

Canadians on the hunt for an undervalued and under-the-radar U.S. stock should consider Match Group Inc.

Read more »

Woman has an idea
Dividend Stocks

2 Low-Risk Growth Stocks Paying Great Dividends

These top TSX dividend stocks give investors exposure to interesting growth opportunities.

Read more »

A person builds a rock tower on a beach.
Dividend Stocks

Got $300? 2 Simple TSX Stocks to Buy Right Now

These two simple TSX stocks have everything a long-term investor looking to dollar cost average into a position wants right…

Read more »

A golden egg in a nest
Dividend Stocks

Millennials: No Excuses! Start Saving for Retirement Right Now.

Millennials, we need to stop complaining and start bragging. We're great savers, so it's time to start investing in TSX…

Read more »

Value for money
Dividend Stocks

3 UNDERVALUED TSX Stocks to Buy in August

Here are some attractively valued TSX stocks for the long term.

Read more »

A young man throwing and catching his daughter above his head
Dividend Stocks

Parents: Double Your CCB Payments This Month!

Parents can use those CCB payments to their benefit and double them this year month after month -- no waiting,…

Read more »