What a difference a day makes!

The BarkerLetter | February 19, 2010 | 8:56 am

Will the ghost of last year’s hastily aborted Hudbay/Lundin Mining deal walk again after Lundin releases its fourth quarter earnings February 23rd?

In fact it was a year ago this week that Hudbay Minerals Corp. (HBM.TSX) and Lundin (LUN.TSX) signed a 12-month standstill agreement that effectively canceling their proposed merger. Lundin shareholders and at least one independent research firm (RiskMetrics Group) had approved the all stock deal, but most analysts hated it, and one – Gary Lampard of Canaccord – even got inspired to discount the Lundin shares to its cash, quoting a target of $4.50 per share, which is remarkably close to its present trading range. Others cautioned Hudbay shareholders against diluting their stock to get what they called ‘marginal zinc mines’ and debt.

I have to admit that I was part of that choir of negative Nellies; only now I’m not so sure. It wasn’t long after the friendly merger was cancelled – in fact only three months later – that Lundin raised $188 million from a bought deal that priced the shares at $2.05 each. Hudbay was offering a stock swap that comprised a 32% premium to Lundin’s then stock price of under a buck, a deal which today would only represent an approximate 18% premium, based on the market for their respective shares.

But caution ruled in January of ’09. Hudbay shareholders were undoubtedly obsessed with cash preservation rather than growth. Just about everyone was, and few if any could have predicted the whipsaw market that occurred after last January, and especially in copper and zinc prices.Lundin in the third quarter of ’09 posted net income of $3.7 million versus a whopping $199 million loss in the same period a year earlier, and also paid down $63.9 million in debt. Their guidance for 2010 calls for a similar kind of year with respect to production and sales volumes, with the possibility of even higher metals prices.

So now the question in my mind is merely whether someone – presumably but not necessarily Hudbay – will come in with another offer for Lundin Minerals in the months to come. And if so, would it match or exceed the 32% premium offered a year ago? I think at the very least Lundin shares are not fully priced – but Lundin is an edgy company with projects in edgy places, notably the Democratic Republic of the Congo where it owns 24.75% of the Tenke Fungurume copper cobalt open pit mine.

Tenke will initially produce 115,000 tonnes copper cathode and 8,000 tonnes cobalt per year and has a 40 year mine life. Some nice diggings there in elephant country! But the caveat can be summed up with the simple letters TIA – ‘this is Africa’.

Be careful out there.