- Waterton calls on Hudbay Board
to immediately terminate any discussions or plans to execute the
Mantos Transaction and any other material acquisitions in the near
future.
TORONTO, Oct. 5, 2018 /CNW/ - Waterton Precious Metals
Fund II Cayman, LP and Waterton Mining Parallel Fund Offshore
Master, LP (the "Funds"), each of which are managed by Waterton
Global Resource Management, Inc. (the "Investment Adviser", the
Investment Adviser together with the Funds ("Waterton" or "We")),
owning 12,514,886 or approximately 4.8% of the issued and
outstanding shares of Hudbay Minerals Inc. ("Hudbay" or the
"Company") (TSX:HBM) (NYSE:HBM), sent the following letter to the
Company's Board of Directors (the "Board").
The full text of the letter follows:
The Board of Directors of
Hudbay Minerals Inc.
25 York Street, Suite 800
Toronto, ON
M5J 2V5
Members of the Board:
Waterton Precious Metals Fund II Cayman, LP and Waterton Mining
Parallel Fund Offshore Master, LP (the "Funds"), each of which are
managed by Waterton Global Resource Management, Inc. (the
"Investment Adviser", the Investment Adviser together with the
Funds ("Waterton" or "We")), own 12,514,886 or approximately 4.8%
of the issued and outstanding shares of Hudbay Minerals Inc.
("Hudbay" or the "Company") (TSX:HBM) (NYSE:HBM).
Waterton is a private equity
firm that specializes in the metals and mining sector. Waterton's institutional platform uniquely
combines in-house investment management, mining and permitting
personnel that have extensive experience in evaluating, optimizing
and permitting mining assets around the world, and specifically in
the Americas, including in Arizona. Given its breadth of
in-house technical expertise, Waterton has conducted extensive technical due
diligence based on public information on Hudbay's portfolio and
believes Hudbay has world class assets.
We appreciate the opportunity to have engaged with management
over the past several weeks. On August 31,
2018, members of Waterton's
Investment Team met with Alan Hair,
Chief Executive Officer and Eugene
Lei, Vice President Corporate Development of the Company
(the "Initial Meeting"). At the Initial Meeting, amongst other
matters, Hudbay's recent poor market performance and operational
issues were discussed. During that meeting, management advised
Waterton that Hudbay had no plans
to undertake material acquisitions and, specifically in respect of
producing assets, that Hudbay had looked at all copper producing
mines with none of them making sense for the Company. From our
discussions with other shareholders, we understand that management
may have similarly communicated to other shareholders that Hudbay
had no intentions to undertake material acquisitions.
Our informed, unyielding view is that under no circumstances
should Hudbay be engaging in any material acquisitions at this
time, including any transactions that could adversely impact
shareholders, the Company's balance sheet, and/or the Company's
ability to effectively progress its current portfolio of assets.
Waterton has been in contact with
institutional investors holding approximately one-third of Hudbay's
shares. Thus far, unanimously, all of these shareholders are
emphatically opposed to the Company engaging in a material M&A
transaction. Prior to executing on any transaction, the Board
should solicit the opinion of its shareholders. This view is based
on the following key factors:
- Based on the Company's current underperformance and discounted
valuation, the Company would be forced to transact from a position
of weakness.
- If the Company intends, in line with its guidance to the
market, to begin construction of the Rosemont copper project ("Rosemont") in the
first quarter of 2019, then in our estimate the Company will face
an imminent funding requirement of ~$1.1
billion -- this reinforces, from a capital allocation
perspective, the need to terminate any potential negotiations for
new acquisitions immediately, and specifically acquisitions like
the Mantos Transaction which, according to the Bloomberg Article,
have a material purchase price and ~$1
billion worth of required follow-on capital.
- Given the obvious operational issues at the Company's current
assets (summarized below), management's focus should be on
executing on their existing portfolio and meeting their stated
objectives to the market and their shareholders.
- Hudbay should not be pursuing growth for the sake of empire
building. Too many Canadian mining companies justify transactions
by financially engineering per share value accretion and in many
instances, this only sends companies down a familiar path of value
destruction.
As you can therefore imagine, we were extremely disturbed and
troubled by the Bloomberg report yesterday (the "Bloomberg
Article") that Hudbay is in discussions to acquire Mantos Copper
S.A. ("Mantos"), a producing Chilean miner, for as much as
C$1 billion (the "Mantos
Transaction"). The market reaction to the Bloomberg Article was
starkly negative, with the share price falling markedly
intraday.
In light of this report and given that the sales process for
Mantos publicly kicked off in May
2018, Mr. Hair's recent statements to us at the Initial
Meeting were materially misleading, at best, and we are compelled
to give the Board this simple directive: under no circumstances
should Hudbay pursue the Mantos Transaction or any other material
M&A transactions. We have yet to receive any reassurance
from the Board that Hudbay will not be proceeding with any material
M&A transactions. On the contrary, the Company's late afternoon
press release commenting on the Bloomberg Article makes it appear
all the more likely that Hudbay is in the late stages of a material
transaction (the "Hudbay Release").
To be clear, it is not Waterton's practice as a private equity firm
to issue public statements of this nature. However, in light of the
gravity of the circumstances and potential imminent material
erosion of shareholder value, we have been left with no other
choice but to engage on a public basis in an effort to protect
value on behalf of all shareholders. As a top five shareholder of
the Company, we call on the Board of Directors of Hudbay to
immediately terminate any discussions or plans to execute the
Mantos Transaction and any other material acquisitions in the near
term (the "Acquisition Moratorium") and to provide
corresponding comfort to this effect to the Company's
shareholders.
In addition to Waterton's
concerns about an imminent acquisition, we would like to address
the statement in the Hudbay Release to the effect that the Company
"has had a consistent strategy of optimizing the value of its
current operations." We were shocked to read this statement as it
is patently false for the reasons outlined below. At the Initial
Meeting, it became clear to Waterton that Hudbay lacks a credible plan to
advance the development of its core assets. The Company's recent
market performance and operational misses have led Waterton to lose confidence in management and
the Board.
Hudbay Shares Have Underperformed
We believe that as a result of a lack of strategic focus and
inability to execute, the Company's shares are significantly and
persistently undervalued by the market. Hudbay currently trades at
a 55%1 discount to its peer group average on a cash flow
basis. Year to date, Hudbay's share price has declined 44% and the
copper price has declined just 12% over the same
period.2
We believe that if the Company continues on its current course
operationally and/or does an M&A transaction, this will cause
massive value destruction.
Poor Execution
As stated previously, we believe that Hudbay has a high-quality
portfolio of assets; nevertheless, in each of its core assets, we
believe that Hudbay has demonstrated a consistent lack of foresight
and planning resulting in value erosion for its shareholders. The
fact that these issues seem to have impacted Hudbay's three core
assets, illustrates a broader and systematic failure to plan
effectively and to hold management to account.
________________________
|
1 As at
close of business on October 1, 2018.
|
2 As at
close of business on October 4, 2018.
|
Arizona:
Hudbay's stewardship of its Rosemont copper project in Arizona has been a case study in poor
execution. The Company has, by its own admission, surpassed its own
"worst case" permitting timeline scenario even though permitting
for Rosemont has been ongoing for
a decade. Not only has the Company failed to obtain all of the
relevant permits required to construct and operate Rosemont, but the Company seems to have
fundamentally misunderstood the permitting regime in the United States.
In Q3, 2017, shortly following the issuance of the Record of
Decision and underlying Biological Opinion for Rosemont (collectively, the "Permits"), the
Board approved a bought deal financing for C$242 million. While the use of proceeds from the
financing was vague, it was widely understood by the market that
the funds would be utilized to finance the construction of
Rosemont. At the Initial Meeting,
Mr. Hair confirmed this was undeniably the Board's intention.
Accordingly, the Board's rationale for closing the bought deal
financing in late September 2017 must
have been based on the assumption that (i) the Permits would not be
appealed; and (ii) the pending 404 Clean Water Act Permit
from the U.S. Corps of Engineers would be granted very shortly
following the issuance of the Permits, allowing the Company to
proceed with the construction of Rosemont in late 2017. During the Initial
Meeting, Mr. Hair conceded that these assumptions were a "major
miscalculation" and a "sore spot for investors." Indeed, any
reasonable person with permitting and regulatory experience in
the United States would have known
that the likelihood of the foregoing assumptions proving true was
extremely low given the challenges, regulatory uncertainty
and public opposition to Rosemont's permitting process. Note that over
36,000 public comments were submitted during the permitting process
for Rosemont, a material number of
comments by any standard, and that during that same period, two
distinct legal proceedings were brought against the lead state
agency following its approval of certain permits for Rosemont. Against this backdrop, assuming that
the Permits would not be challenged, and that construction of
Rosemont could proceed in late
2017, shows a patent and clear lack of understanding of the key
issues relating to one of the Company's core assets. In fact, as
the Board should have expected, the Permits were challenged by
several well-capitalized and highly sophisticated advocacy groups
in late 2017 and in early 2018 and construction at Rosemont could not proceed on the timeline
that the market had expected.
Thirteen months after the closing of the bought deal financing
(the announcement of which was followed by a 17.9% drop in the
share price), shareholders remain in the dark regarding the details
relating to the delayed issuance of the 404 Clean Water Act
Permit and the various outstanding legal challenges against the
Permits. This is another instance of the Company not providing
shareholders with appropriate visibility on key issues.
Peru:
Regarding the Company's Constancia project in Peru, management has been unable to negotiate
access to mine higher-grade material as outlined in their mine
plan, forcing Hudbay to reduce its 2018 precious metals production
guidance at Constancia by ~20%. This failure has resulted in
penalties for the Company under its streaming agreement with
Wheaton Precious with more penalties
expected to accrue in 2019. In addition, operating costs at
Constancia have been steadily increasing, exceeding the high-end of
guidance provided by management in 2017 and tracking above 2018
guidance through the first half of this year. The guidance misses
are particularly alarming in light of the flexibility built into
the estimates – approximately +/- 10% relative to the midpoint –
further highlighting management's inability to provide shareholders
with reliable guidance and calling into question their ability to
formulate and execute on plans for the Company's assets.
Manitoba:
Despite operating in the region for over 90 years and Mr. Hair's
intimate knowledge with the Company's Manitoba operations having been the COO of the
Company prior to assuming the role of CEO in 2016, Hudbay has
failed to devise and convey a strategic plan to the market for its
Manitoba assets following the
closure of the Reed Mine in 2018 and the expected closure of the
777 Mine in 2021, demonstrating, once again, a lack of planning and
ability to properly guide the market on key operational mining
metrics. For example, in 2017, despite the wide operating
cost range provided to the market, Hudbay exceeded the top end of
that range and its operating costs were 20% higher than the
midpoint of guidance provided by management. As a further example,
in Q1 2018, Hudbay released cost guidance for the year which was
~20% higher than 2017's guidance and subsequently revised their
cost guidance higher by a further ~12% in July 2018 following a disappointing second
quarter.
As illustrated above, in addition to a consistent lack of
foresight and planning, the Company has either serially misguided
or completely failed to provide guidance to the market on material
issues, significantly eroding shareholder trust.
We Urge the Board to Immediately Commit Publicly to an
Acquisition Moratorium
Given the negative reaction to the Bloomberg Article,
shareholders are clearly dissatisfied. In light of the
foregoing concerns, we urge you not to continue down the current,
potentially value destructive path and, instead, commit to an
Acquisition Moratorium in order for the Board to fully understand
the views and deep concerns of its shareholders. We believe
that a failure to do so may violate the Board's fiduciary duties
and would be contrary to the expectations of Hudbay
shareholders.
It is our hope that the Board will appreciate the urgency of the
matters described in this letter and will heed our call to
implement our suggestions on timely basis and avoid the need for
Waterton to exercise the other
remedies available to it and other shareholders. However, we must
reserve our rights to take any and all actions that we may deem
warranted in order to ensure the best interests of shareholders are
paramount in the boardroom.
Sincerely,
Isser Elishis
Chief
Investment Officer
About Waterton
Waterton is a leading
private equity firm dedicated to developing high quality resource
assets in stable jurisdictions. Waterton's founding team has a successful
track record of originating, structuring, managing and exiting
investments through acquisitions, joint ventures and partnerships,
across a range of sectors and asset classes. Waterton's core
strength is its cross-functional, fully-integrated, in-house team
of professionals who possess significant mining, financial and
legal expertise. Waterton's team
employs a proactive approach to asset management, leveraging
significant sector knowledge and extensive industry relationships
to support the firm's investment activities.
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SOURCE Waterton Global Resource Management