TORONTO • Augusta Resource Corp. is “essentially insolvent” and facing severe financial risks in the coming months, according to the company that wants to take it over.
David Garofalo, the chief executive of HudBay Minerals Inc., tore into Augusta’s management in an interview on Thursday as the $428-million hostile takeover battle continues to heat up. His key message was that Augusta shareholders could be in deep trouble if the company does not wrap up permitting for its Arizona-based Rosemont copper project in short order.
The permitting question is at the heart of this takeover battle. This week, Augusta said it expects to receive its final required permit in the first half of this year. After that, it is set to begin construction.
HudBay claims the permitting process is likely to be much more prolonged than that. If it is, that means Augusta could face serious liquidity concerns.
HudBay’s $428-million hostile bid for Augusta provides jolt to Canadian mining sector
Augusta had just US$749,000 in cash at the end of September, leaving it with negative working capital of US$87-million. That is not a problem if the company locks up its permitting soon, because that event would trigger US$336-million of payments to the company from Silver Wheaton Corp. and a joint venture partner.
But if a clean water permit does not arrive promptly, Mr. Garofalo said shareholders could be in trouble because Augusta has a US$109-million loan from Red Kite Mine Finance Fund coming due in July. While Augusta will likely be able to extend that loan, that could have consequences for shareholders.
“They really have no money, they have significant debt and that debt is coming due very soon,” Mr. Garofalo said. “We’re concerned about what they might do to extend that debt and what it might do to destroy value for shareholders.”
Another source of concern is that two of the permits Augusta has obtained are facing legal challenges, which could delay the funding from Silver Wheaton. “That money isn’t coming in the door soon,” Mr. Garofalo said.
The announcement by HudBay raises the hostilities in a takeover battle that was already nasty. This week, Augusta CEO Gil Clausen ripped HudBay for its poor stock performance relative to peers and argued that a merger is too risky for Augusta shareholders given HudBay’s exposure to Peru and questions about how it would finance Rosemont.
Augusta also said the HudBay bid has “virtually no chance of success” because investors holding more than a third of its shares said they would not tender. But Mr. Garofalo said that is meaningless because there are no legally binding arrangements.
“With the shareholders of Augusta, the feedback I’ve been getting conceded that they never thought this management team would actually build the project or finance it,” he said. “It was seen as a trade for them and they were looking forward to being put into a safe pair of hands.”
HudBay believes it is the right company to build the US$1.2-billion project because of its strong technical and financial capabilities. But it has to win the battle first. Augusta shares are trading above its bid and numerous analysts stated that rival offers are a strong possibility.
Richard Warke’s Augusta Resource Corp. (AZC) fell six cents to $3.52 on 1.35 million shares, after the company told its shareholders to reject Hudbay Minerals Inc.‘s (HBM: $8.70) “low-ball” $540-million bid ($2.96 a share). Hudbay, which already owns 23 million Augusta shares, or 16 per cent of the company, has offered 0.315 of a share for each Augusta share it does not own. Hudbay is after the company’s Rosemont copper-silver-moly project in Arizona, where Augusta awaits a final permit, expected shortly. Then, the company can begin building its $1.2-billion mine. Mr. Warke says 12 banks are interested in lending the company a total of $890-million, but the financing has yet to close. Hudbay has more than enough money to start building with $6.7-billion in working capital. President Warke, however, will not tender his 10.8 million Augusta shares, for 3.4 million shares of Hudbay, about $32-million. He made a similar decision when his gold company, Ventana Gold Corp., received a $1.5-billion takeover offer from Eike Batista in 2011. Then, Mr. Warke refused to tender his four million Ventana shares, until Mr. Batista upped his bid, to $13.06 a share from $12.80. Mr. Warke ended up receiving $54.4-million.
Life has not always been this good for Augusta’s president. Before Ventana, he was just like every other junior promoter, toiling away in hopes of making a big hit. He started in the business working for Murray Pezim as an apprentice promoter. Like many others he leaves behind him a series of failed juniors, many of which ended in bankruptcy. Mr. Warke himself had to file for personal bankruptcy in 1998. He was 38 years old, coming out of his first marriage and facing lawsuits from TD Bank, HSBC and Firstline Trust Co. He has since managed to more than repair his net worth, thanks in part to Ventana, although his assets took another hit in 2010 after wife No. 2 filed for divorce. Many promoters would say that one can never be seen as truly successful in their business until one has experienced at least one bankruptcy and one divorce. Elizabeth Taylor once said, “There is no deodorant like success.”