Why HBM is a better buy than LUN at this levelI've been thinking over this HBM-LUN deal and the more I think about it, the more I feel that HBM has a better upside for its risks. I've thought through several scenarios and their outcomes that I would like to share with you, please feel free to comment:
1) Deal goes through with Lundin (Target: $8-$10): This would create a base metal entity that would have no liquidity problem due to the strong balance sheet that HBM currently has. It will be the second largest base metal producer right below teck cominco and is well positioned to climb higher when base metal prices rebound as we ride out the current economic crisis.
2) Deal does not go through with Lundin (Immediately to cash per share $5 with upside to 10): HBM would likely gets revalued to higher price in the range of $5 almost immediately on news of a failed merger with Lundin because it is currently depressed due to unfavourable sentiment surrounding the deal. HBM was trading at around $5 prior to the deal which is near cash value per share and this attributes no value of any of its mining assets which will not last when the economy does turn around.
3) Another party tries to take over HBM (Target: depending on offer price): Obviously the offer would entail the scraping of the Lundin deal and HBM's upside is determined by the offer.
As you can see, HBM stands to benefit in all three scenarios which cover all possible outcomes of this proposed merger, it's a matter of time horizon but I'm sure that this company will do better in the long run. Also in terms of downside for HBM should the general market continue to trend down (though I believe downside is limited at this level), the share price won't trade much lower that its current levels because it is already at a significant discount to cash.
All in all, the way I look at it is that HBM will be a winner with or without this deal succeed. Feel free to comment your views as I would like to hear them.