Credit Suisse has an Outperform rating and $23 target price on HudBay Minerals Inc (HBM.TO) after it moved to buy Norsemont Mining Inc. (NOM.TO, not rated).
Event: HBM has agreed to acquire Norsemont Mining by way of a formal take-over bid. The transaction is valued at $520Mln (cash and/or shares). Each NOM shares can be exchanged for 0.2617 HBM shares, or C$4.50/share cash. The anticipated completion of offer is expected before end-1Q11.
View: In-line with Management M&A strategy. The transaction is consistent with HBM's strategy of acquiring early-stage porphyry deposits with exploration upside in mining-friendly jurisdictions. The transaction is also within management's target of acquisition between 10-20% of HBM's market capitalization (NOM at 20%). Using a long-term copper price of $2.50/lb and a discount rate of 10%, our preliminary asset valuation for the Constancia project is $519Mln. Mgmt + Directors and other shareholders of NOM holding approx. 34.4% of fully-diluted basis have entered into lock-up agreements with HBM. HBM currently holds a 1.1% interest in NOM.
Catalysts: NOM's Constancia copper project has good infrastructure in an established mining district in Peru. Based on the preliminary optimization study released in December 2010, Constancia is expected to produce 172Mln lbs of copper and 2Mln lbs molybdenum annually over 15 years. HBM intends to pursue further optimization studies through 2011 aimed at increasing resources and economies of scale. We estimate an additional one year of production adds 6% to project NAV.
Valuation: Our TP of C$23/share is based on a 70/30 weighting of 1x our NAVPS estimate of C$22.28/share and 6x FY11/12 EV/EBITDA. We remain positive on the growth prospects for HBM (both organic and M&A), and the low jurisdictional risks associated with its asset base and the defensive qualities of its balance sheet (end-3Q10 cash of $852Mln and no debt ($5.69/share). We currently assign no value to Back Forty or Fenix in our valuation model."