Please advise if you can answer all the questions in attached questionnaire as per the attachedcase of IVEY PUBLISHING: 9B14N013. (HUDBAY MINERALS: ACQUISITION OF NORSEMONT MINING.

If answering all questions is not possible then please answer only 3rd question as below:-

• What is an appropriate valuation for Norsemont? Does HudBay appear to be overpaying for this target?

9B14N013 Genevieve Eccleston wrote this case under the supervision of Professor Craig Dunbar solely to provide material for class discussion. The authors do not intend to illustrate either effective or ineffective handling of a managerial situation. The authors may have disguised certain names and other identifying information to protect confidentiality. This publication may not be transmitted, photocopied, digitized or otherwise reproduced in any form or by any means without the permission of the copyright holder. Reproduction of this material is not covered under authorization by any reproduction rights organization. To order copies or request permission to reproduce materials, contact Ivey Publishing, Ivey Business School, Western University, London, Ontario, Canada, N6G 0N1; (t) 519.661.3208; (e) cases@ivey.ca; www.iveycases.com. Copyright 2014, Richard Ivey School of Business Foundation Version: 2014-06-04 It was just past seven in the evening when Joelle Muir's assistant handed her the document she had been waiting for all day. It was March 9, 2011, and HudBay Minerals Inc. (HudBay) had just released its 2010 year-end statements. Muir, a recent hire by Jamil Investments, an asset management firm that focused on Canadian firms in the mining, energy and industrial sectors, pored over the financials well into the night. Muir had been tasked by her managing director, Ava Day, to assess HudBay and determine whether Jamil Investments should become an institutional investor. Given the recent announcement of HudBay's acquisition of Norsemont Mining Inc. (Norsemont), and the release of a favourable feasibility report for Norsemont's Constancia project in Peru, the decision had become a priority. Muir wanted to make a good impression and she knew her recommendation as to whether the firm should invest was critical. In addition to providing an investment recommendation, Muir had some key considerations, including HudBay's acquisition history and Norsemont's history of poor financial results and uneconomic projects. Would Constancia be another failed project? Muir also needed to research Peru itself. Jamil Investments currently didn't hold any interests in South America, but was now the time to enter? Finally, the bid had offered a triple deal structure, whereby shareholders could elect to tender their shares through three different options. Why had HudBay offered this triple deal structure, and which option was most desirable? As Muir surveyed the documents piled on her desk, she knew she had a long night ahead. OVERVIEW OF HUDBAY MINERALS A Canadian firm, HudBay Minerals Inc. was a diversified mining company that produced copper concentrate, which included copper, gold and silver, as well as zinc metal and zinc oxide.2 Established in 1992, the company had grown to become a large senior producer in the industry, competing alongside such mining giants as Inmet Mining and Teck Resources. Senior producers were usually larger mining companies that included both upstream and downstream operations. Growth in the industry was unique. Because significant growth could not be achieved by continuous expansion of a single mine, the companies grew primarily through their acquisitions of junior mining companies and their assets. HudBay's assets spanned across North America, Central America and South America. 3 Through its subsidiaries, HudBay owned copper, zinc and gold mines; ore concentrators and facilities for Authorized for use only by Sharan Singh in Corporate Finance at Laurentian University from Sep 09, 2015 to Dec 02, 2015. Use outside these parameters is a copyright violation. HUDBAY MINERALS: ACQUISITION OF NORSEMONT MINING 1 Page 2 9B14N013 zinc production in Manitoba and Saskatchewan; a zinc oxide production facility in Ontario and a nickel project in Guatemala (see Exhibit 1). 4 In January 1996, Pan American Resources Inc. and Marvas Developments Ltd. consolidated to form Pan American Resources. 5 The company was primarily an exploration company that developed properties in production stages. The properties of the company were located in northern and central Chile. Three properties, Mamina, San Pedro and Sierra Gorda were located within in the major porphyry copper district in the north, while the remaining 10 properties were located in the Domeyko district of central Chile. In 1996, the company reported a net loss of $801,537, 6 or $0.05 per share. 7 The company had not begun actual mining operations, and its only revenues came from interest income on short-term investments. In March 2002, the consolidated company acquired ONTZINC Corporation, a private Ontario company, through a reverse takeover and assumed the name ONTZINC Corporation (ONTZINC). 8 ONTZINC was a private, junior mineral exploration company. Its primary shareholders, the Clifford Frame family, held 60 per cent of the shares outstanding. In connection with the acquisition, the company sold part of its project in Chile, and in return, acquired the Ontario property of ONTZINC. 9 Two years later, on December 21, 2004, ONTZINC Corporation acquired Hudson Bay Mining and Smelting Co., Limited (HBMS) and changed its name to HudBay Minerals Inc. 10 HBMS was a Canadian mining company with a strong ore reserve and resource base, making it an attractive target for ONTZINC. It also had an experienced management team and workforce, which were both intended to remain to lead the company after the acquisition. 11 HBMS brought several assets, including the 777 and Chisel North mines, as well as a zinc plant and concentrator. 12 This acquisition was intended to make ONTZINC a significant player in the zinc and copper production sector. Gregory J. Peebles, the chairman of ONTZINC, stated that, \"Given its copper and zinc reserves and the refurbishment of much of its plant and equipment, we expect that Hudson Bay International will play a significant role in the global base metals industry.\" 13 On October 25, 2010, HudBay Minerals was listed on the New York Stock Exchange (NYSE) under the ticker symbol \"HBM.\" This listing meant the company was listed on both the Toronto Stock Exchange (TSX) and the NYSE. HudBay's recently appointed chief executive officer (CEO) David Garofalo, said, \"Our listing on the NYSE will provide us with greater visibility and increased liquidity on the world's largest stock exchange.\" 14 As of March 9, 2011, the company had closed at a stock price of $16.67 on the TSX and $17.22 on the NYSE (see Exhibit 2). 15 Principal Assets HudBay Minerals held four types of key assets: operating mines, processing facilities, development projects and exploration properties (see Exhibit 3). The company operated three underground mines: the 777 mine in Flin Flon, Manitoba; the Trout Lake mine near Flin Flon and the Chisel North mine at Snow Lake, Manitoba. 16 Processing facilities allowed the company to manufacture zinc and other metal products from the ore it produced. The assets in this class included a zinc plant in Flin Flon and ore concentrators in Flin Flon and Snow Lake. 17 HudBay currently had two development projects underway. In Snow Lake, the Lalor project was a zinc, gold and Authorized for use only by Sharan Singh in Corporate Finance at Laurentian University from Sep 09, 2015 to Dec 02, 2015. Use outside these parameters is a copyright violation. History Page 3 9B14N013 Strategy for 2011/12 HudBay Minerals had several strategic objectives for the remainder of 2011 and early 2012. The company was seeking advance construction on the production of its recent development project, Lalor, to evaluate opportunities and complete an optimization study. 22 This study would ultimately lead the company to decide whether to construct a new concentrator or refurbish the existing one. 23 In addition, HudBay needed to manage the closures of the Trout Lake and Chisel North mines.24 Early stage projects also needed attention from the company. HudBay hoped to complete the economic assessments on three projects, which would enable the expansion of the grassroots program in the Flin Flon greenstone belt and the advancement of the Back Forty and Reed Lake projects. 25 Finally, the company wanted to focus on identifying and executing one or more acquisitions. As a result, HudBay was looking for projects that met its acquisition criteria. Acquisition Criteria When evaluating potential acquisition opportunities for mineral properties, HudBay Minerals sought to acquire a diversified set of projects, while maintaining its core competencies. As the company's current geographic focus was the Americas, company management believed that any acquisition opportunity should remain within HudBay's current scale and geographic footprint. However, a main consideration was the acceptable level of political risk for the company to take on, as well as the jurisdictional support for mining activity. In certain developing countries, political and economic risks always posed an issue when deciding whether to invest in the region. Often, human rights issues, including child labour and wages, were a concern to firms. In addition, governments of these nations often required bribes for foreign companies to operate. HudBay's management did not believe that abuses of human rights or attempts at bribery were acceptable. The company was committed to ensuring its operations did not exploit the rights of any worker or any third parties. Although the company did not target any one specific metal, future metal prices were another consideration when evaluating the types of mining projects to pursue. Commodity prices often fluctuated against market movements, and predicting future trends was, by nature, speculative. Additionally, any properties HudBay considered needed to exhibit excellent exploration potential. Technical reports were a critical part of any analysis for a potential merger and acquisition opportunity. The mining industry was characterized as risky and uncertain; therefore, large, transformational mergers or acquisitions were viewed as potentially value-destructive. As such, HudBay focused on transactions with a value of up to 20 per cent of its market capitalization. 26 Acquisition History On November 21, 2008, HudBay announced its intention to acquire Lundin Mining Corporation (Lundin) in a stock transaction, whereby Lundin shareholders would receive 0.3919 HudBay common shares for Authorized for use only by Sharan Singh in Corporate Finance at Laurentian University from Sep 09, 2015 to Dec 02, 2015. Use outside these parameters is a copyright violation. copper deposit near the facilities in Snow Lake. Recently, the company had begun the construction of an $85 million ramp to provide access to the deposit. 18 The Fenix project, located in Guatemala, was a nickel laterite project and the company's second development program. 19 Primary exploration property included 408,308 hectares of land positions in Manitoba and Saskatchewan.20 Other properties included land in Guatemala, New York, Yukon, Chile and Ontario. Additional properties were under option in Michigan and Manitoba. 21 9B14N013 each Lundin share. 27 This arrangement represented a premium of 32.0 per cent in terms of Lundin's 30day trading average. This transaction would make HudBay Minerals Canada's second largest base metals company by market capitalization. 28 HudBay's portfolio of assets would also broaden to include interests in Portugal, Sweden, Spain and Ireland, as well as a world-class pipeline with two new projects located in the Democratic Republic of Congo and Guatemala. The firm's combined 2007 actual metal production would include 187,115 tonnes of copper, 278,289 tonnes of zinc, 44,560 tonnes of lead, 3,270 tonnes of nickel, 102,587 ounces of gold and 4,184,536 ounces of silver. 29 HudBay's combined cash and debt figures would total approximately Cdn$900 million and US$240 million, respectively. 30 After the takeover was announced in November 2008, HudBay's share price fell sharply. Shareholders, including its major stakeholder, SRM Global Master Fund (SRM), had voiced their opposition to the deal, citing the currently underperforming market conditions. Both HudBay and SRM mined copper and zinc, and both had seen the price of both metals plunge as a result of the global economic crisis. SRM and Corriente Master Fund, another major stakeholder, made an application to the Superior Court of Justice, stating their opinion that the takeover deal disregarded the interests of the shareholders and calling for an order directing HudBay to hold a shareholders' meeting to approve the transaction. HudBay vigorously defended itself against the application and maintained the deal would close on January 28, 2009.31 Meanwhile, another major shareholder, Jaguar Financial Corporation, launched a similar appeal for an Ontario Securities Commission (OSC) hearing and review of the TSX's decision not to require a meeting of the HudBay shareholders regarding the takeover transaction. 32 The OSC reversed the decision made by the TSX to grant conditional approval to the transaction.33 In doing so, the OSC determined that HudBay shareholder approval would be required as a condition to the listing of additional common shares of HudBay that would be produced in the transaction. Three days after the reversal, Lundin shareholders approved the arrangement. 34 However, after receiving strong feedback from many of its shareholders, HudBay determined that HudBay shareholders were unlikely to approve the arrangement based on current market conditions and opposition from the major shareholders (see Exhibit 4). On February 23, 2009, the companies announced the termination of the agreement. 35 In May 2009, HudBay sold its existing 19.9 per cent stake in Lundin for gross proceeds of approximately $236 million, representing a gain of approximately $100 million. 36 FINANCIAL OVERVIEW OF HUDBAY HudBay's 2010 financial results reflected a continued recovery in metal prices following the 2008 financial crisis. Net earnings of $73.0 million, or $0.48 per share, were generated in 2010 (see Exhibit 5), 37 representing an improvement of 475 per cent over 2009. 38 Operating cash flows totalled $199.9 million, after share repurchases, the establishment of a dividend and reinvestments in Lalor and other growth projects. 39 The company undertook a $300 million credit facility and ended the year with cash and cash equivalents of $901.7 million, and no debt (see Exhibit 6). 40 OVERVIEW OF NORSEMONT MINING Established in 1977, Norsemont Mining Inc. (Norsemont) was a natural resource company that acquired, explored and developed natural resource properties. Norsemont was currently focused on the exploration of prospective metals properties and developing such properties to a feasibility phase. Because the Authorized for use only by Sharan Singh in Corporate Finance at Laurentian University from Sep 09, 2015 to Dec 02, 2015. Use outside these parameters is a copyright violation. Page 4 Page 5 9B14N013 company focused on this early stage practice, it was highly dependent on raising capital by way of equity to fund its high expenditures. 41 In December 2002, the Canadian Venture Exchange, the predecessor of the TSX Venture Exchange (TSX-V), declared Norsemont to be inactive. 42 In August 2003, it was transferred to the the TSX's NEX board, which provided a market for TSX-V companies that lacked a current active business to trade until they completed a \"reactivation.\" 43 Reactivations usually included a reorganization of the company's business affairs and sufficient financing to fund the company's business plan. Norsemont was subject to these terms because, prior to 2004, none of the company's exploration projects had proved to be viable. In October 2004, Norsemont completed its reactivation as a Tier 2 issuer on the TSX-V, and its listing was transferred back to the TSX-V to resume trading (see Exhibit 7). 44 In 2004, the company purchased an option to earn up to a 75 per cent interest in the Joss'alun property owned by Copper Ridge Explorations. Norsemont financed this purchase through a private placement of 880,000 units at $0.25 per unit, equalling gross proceeds of $220,000. 45 In 2006, the property was found to be uneconomical, and the company subsequently terminated the agreement. 46 From February 2005 to the present, Norsemont's mineral exploration had been focused in Peru, on its Constancia project. The company was dually listed on both the Toronto Stock Exchange and the Lima Stock Exchange in Peru. On March 9, 2011, Norsemont stock closed on the TSX at $4.40 per share. 47 FINANCIAL OVERVIEW OF NORSEMONT As of December 31, 2010, Norsemont Mining had cash holdings of $9.5 million. 48 The company had no revenue, and, as a result, reported a net loss of $21 million for the previous 12 months. 49 Earnings per share reported a loss of $0.24 on Norsemont's 87,043,333 shares outstanding (see Exhibit 8). 50 THE CONSTANCIA PROJECT As of 2011, Norsemont Mining's primary asset was a 100 per cent interest in the Constancia project in Peru after acquiring 70 per cent of the interest from Rio Tinto Mining and Exploration Ltd. (Rio Tinto) for cash payments of US$13 million, completing work expenditures of US$7.8 million and issuing 1,250,000 common shares to Rio Tinto. The remaining 30 per cent interest was acquired from Mitsui Mining and Smelting Company Ltd. for a total consideration of US$9.8 million. 51 Property Description The Constancia property comprised 22,516 hectares in 36 mineral concessions. It was located in the south-eastern Andes of Peru in the Chamaca and Livitaca districts, approximately 600 kilometres from Lima, the capital of Peru. Authorized for use only by Sharan Singh in Corporate Finance at Laurentian University from Sep 09, 2015 to Dec 02, 2015. Use outside these parameters is a copyright violation. An Uneconomic History Page 6 9B14N013 Accessibility, Climate, Local Resources, Infrastructure and Physiography The climate was typically divided into the wet season, from October and March, which was characterized by slightly higher temperatures reaching approximately 20C, and a dry season, from April and September, when temperatures dipped as low as -10C. 54 The sun was often extremely strong, and high ultraviolet readings were recorded mid-day. The closest electrical power ended in Uchucarcco, 20 kilometres from the project site, and the nearest community was 50 kilometres away, in Espinar. 55 The nearby communities provided the project with unskilled labour; however, to obtain skilled mining talent, the company needed to train the workers or enlist experienced workers from outside the area. Water resources were available year-round in streams near the project site. 56 A large issue revolved around surface rights in Peru. The national system for agricultural land ownership was not always accurate, and Peruvian law did not vest surface rights with mineral rights. Therefore, Norsemont needed to purchase surface rights from the surface right owner to gain access to the property. As such, a portion of the Constancia project's surface rights belonged to the Chilloroya and Uchucarcco communities. In exchange for annual leases for the Constancia project surface rights, Norsemont made cash rental payments; provided educational assistance, medical services and veterinary services; and supplied irrigation systems to both communities. The costs associated with these services was approximately $20,000 per month. 57 Exploration Exploration had been ongoing at the Constancia project since 2005. The activities included geophysical surveying and geologic mapping. Geologists also performed rock sampling, drilling and surveying, which were required for the project's feasibility study. In addition, camp construction had begun in anticipation for operations to commence in Peru. 58 PERU Geography Peru is a multi-party republic with a population estimated at 30 million. The country spans 1,285,216 square kilometres in South America and borders Bolivia, Brazil, Chile, Colombia and Ecuador. 59 The country also has 2,414 kilometres of coastline. 60 The country is subject to many natural hazards, including earthquakes, tsunamis, flooding, landslides and mild volcanic activity. The country's most active volcano erupted in 2009. 61 In addition, Peru was experiencing several environmental issues, including deforestation as a result of illegal logging, soil erosion, air pollution in Lima, and the pollution of rivers and coastal waters from mining wastes. Authorized for use only by Sharan Singh in Corporate Finance at Laurentian University from Sep 09, 2015 to Dec 02, 2015. Use outside these parameters is a copyright violation. The Constancia project was accessible from Lima, Peru, by flying to either Arequipa or Cuzco and then travelling by paved or gravel highway to the project site. Either route took approximately seven hours. 52 The project site was also within 60 kilometres of a railway. 53 Page 7 9B14N013 The official language of Peru is Spanish, with approximately 84.1 per cent (2007 census) of the population using the language. 62 The poverty rate dropped significantly over the past decade but remained high at approximately 30 per cent, with even higher rates in rural areas. 63 Malnutrition started to fall in 2005, when the government instituted a hygiene, sanitation and clean water program. School enrollment had improved, but many children dropped out of school to help support their families. More than 25 per cent of Peruvian children aged 6 to 14 worked (see Exhibit 9). 64 Economy The Peruvian economy had been growing at an average rate of 6 per cent per year since 2002, with recent growth resulting from increasing private investment, especially in the extractive sector, which contributed to more than 60 per cent of Peru's total exports. 65 The exchange rate had been slightly appreciating and inflation remained low. On February 1, 2009, the U.S.-Peru Trade Promotion Agreement entered into force, opening greater trade and investment between the two countries. 66 Gross domestic product (GDP) in 2010 totalled $287 billion, with a real growth rate of 8.8 per cent. 67 GDP per capita in 2010 was $9,700, ranking Peru as number 110 in the world in terms of GDP per capita. 68 Political and Transnational Issues As a result of the civil war in Peru from 1980 to 2000, approximately 150,000 internally displaced persons were living in Peru. 69 Peru was also the second largest producer of cocaine. Illicit drugs were being moved from Peru into Brazil, Chile, Argentina and Bolivia. 70 As well, organized illegal narcotics operations in Colombia had penetrated Peru's shared boarder. THE ACQUISITION The Announcement On January 10, 2011, HudBay Minerals and Norsemont Mining announced that HudBay had agreed to acquire all of Norsemont's outstanding common shares. As a result of bringing the Constancia project into full production, HudBay's copper production was expected to grow by approximately 145 per cent by 2016 (see Exhibit 10). 71 Constancia would also contribute to HudBay's gold production, which was expected to increase 130 per cent over the same period. 72 HudBay's CEO, Garofalo, commented on the announcement: Bringing Constancia into operation will significantly increase HudBay's copper production and contribute to HudBay's precious metals production growth. In addition, this acquisition is expected to increase our mineral exposure on a per share basis, and deliver per share growth in net asset value and long term earnings and cash flow. 73 The acquisition of Norsemont would be HudBay's first major acquisition under its current management. Authorized for use only by Sharan Singh in Corporate Finance at Laurentian University from Sep 09, 2015 to Dec 02, 2015. Use outside these parameters is a copyright violation. People and Society Page 8 9B14N013 Deal Structure Norsemont shareholders could elect to receive their consideration in one of three ways: (1) to receive 0.2617 HudBay shares and $0.001 in cash; (2) $4.50 in cash; or (3) a combination of cash and HudBay shares. 75 However, the choice was subject to a maximum aggregate cash consideration of $130 million. 76 When the Norsemont shareholders were deciding on whether to elect for shares, cash or a combination of the two, they needed to consider the benefits of each option and the potential benefits and downfalls to both HudBay and Norsemont shareholders. The agreement contained the customary \"non-solicitation\" provisions, which permitted the Norsemont board to terminate the support agreement and enter into an agreement with an unsolicited, superior proposal. However, such circumstances had two requirements: matching rights in favour of HudBay and a termination payment of $21.6 million. 77 Assuming all shares were tendered, 17 per cent of the combined company would be represented by former Norsemont shareholders. Norsemont Board Recommendation Both boards of directors approved the acquisition. The Norsemont board of directors recommended that shareholders tender their shares. Norsemont's officers and directors held approximately 34.4 per cent of the company's total shares and entered into lock-up agreements, having agreed to tender their shares to the bid. 78 The boards saw the benefits of this strategic acquisition to both parties, which, subsequently, would lead to the creation of a dominant market player. Norsemont's CEO, Patrick Evans, commented: With its strong balance sheet and exceptional technical expertise HudBay is well placed to accelerate the development of the Constancia project far sooner than Norsemont could have achieved independently. The HudBay offer provides Norsemont shareholders with an attractive opportunity to continue to participate in Constancia's success without the dilution that the independent funding of Constancia's development would have required. 79 In addition to the benefits to both parties were the vast benefits to Peru. Evans commented: Besides presenting Norsemont shareholders with an exciting diversification and growth opportunity, Peru will benefit significantly through HudBay's participation in that country's wellestablished and rapidly growing mining industry. 80 Analysts were unsure whether to expect competing bids. Norsemont executives had stated that 20 other confidentiality agreements had been signed in pursuit of this bid. 81 The company had also had an opendoor policy for the past three years, providing any company to the opportunity to review the project. 82 Therefore, a competing offer could have been presented throughout the bidding process. Authorized for use only by Sharan Singh in Corporate Finance at Laurentian University from Sep 09, 2015 to Dec 02, 2015. Use outside these parameters is a copyright violation. In exchange for the shares, Norsemont shareholders who tendered their shares would receive equity consideration with a value of $4.65 per share, or a total consideration equivalent to $520 million. The value represented a 33 per cent premium, which was based on Norsemont's 20-day trading price average of $3.49 per share. 74 Page 9 9B14N013 FEASIBILITY STUDY Its proposal was to develop an open-pit mining and flotation of sulfide minerals project, in an effort to produce commercial-grade concentrates of copper and molybdenum and small quantities of silver and gold. The project was largely self-contained. Located on site would be the mine, mill, facilities, administration and an accommodation camp. A new transmission line would be installed from Tintaya to the site to provide grid power, and other infrastructure improvements, such as roads, would also be developed. Over the following 12 quarters, construction and other necessary developments and improvements would be made to bring the site into production. Metal price expectations had increased to reflect the current metal price environment, and the project's study had increased in-pit reserves by 34 per cent, 83 which had extended the life of the mine by one year, to a total of 16 years. 84 Capital Costs The total development capital costs were estimated to be $920 million, representing a large increase over the 2009 preliminary feasibility study estimate of $846 million.85 Over the life of the mine, sustaining capital was estimated to be $240 million, an increase of $92 million over the 2009 study (see Exhibit 14). 86 Operating Costs Over the life of the mine, several operating costs would be incurred, including for drilling, blasting, loading, hauling, road and dump maintenance, and general mining support. Also pre-stripping prior to mine operation would need to be accounted for. The total cash cost was estimated at $0.93 per payable pound of copper. 87 Cash costs included a mining royalty, transportation of the ore, marketing fees, treatment and refining charges, government royalty and by-product payments. Sustaining capital would be an additional $0.09 per payable pound. 88 Mining and Production Over the 16-year life of the mine, the feasibility study estimated average annual product at 170 million pounds of recovered copper, 2,960 tonnes of molybdenum, 1.8 million ounces of recovered silver and 10,800 ounces of gold. 89 Production was projected to begin as early as 2015. However, the analysts didn't expect full production of the mine until 2016, at the earliest. 90 Over the first five years of production, the Constancia mine was expected to produce 235 million pounds of recovered copper per year. 91 Authorized for use only by Sharan Singh in Corporate Finance at Laurentian University from Sep 09, 2015 to Dec 02, 2015. Use outside these parameters is a copyright violation. On February 28, 2011, Norsemont released its feasibility study on the Constancia project (see Exhibit 11). Since this project was Norsemont's only asset, Muir had devoted much time to reading and analyzing this document, which would indicate to investors the true measure of this acquisition's value. Page 10 9B14N013 Risks VALUATION Following the announcement of the acquisition, analysts' reactions had been mixed. On one hand, the project would increase HudBay's longer-term development project pipeline and drive the company's revenue stream to concentrate more on copper. 92 In addition, HudBay would have sufficient financial strength to fund the sizeable project, as a result of having a strong cash flow from existing operations and $1.2 billion in available cash and credit lines.93 However, the Constancia project would be the first large-scale, open-pit mine for the company in South America. In addition, analysts had estimated that until the mine was in full production, the project would be dilutive to both earnings and cash flows. 94 The Constancia project was Norsemont's only principle asset; and with no revenues, Muir knew she would need to provide analysis to back up any recommendations. Norsemont had provided three cases of predicted long-term commodity price assumptions (see Exhibit 12). 95 Muir knew that, based on these three scenarios, she would need to look at the net asset value (NAV) per share that the project would provide, which would add to the premium HudBay was offering. In addition, Muir wanted to take a look at the total cost per pound of recoverable copper. Because commodity prices were one of the most uncertain factors surrounding the economics of this project, a major consideration would be the costs that HudBay would incur. If prices dipped too low, the project could become uneconomic. Thus, she needed to determine the level of volatility the company could incur before the project lost its viability. Muir wanted to compare this project to Franco-Nevada Corporation's purchase of Gold Wheaton Corp. (now known as Franco-Nevada GLW Holdings Corp.) at $5.06 per share, and Silver Wheaton Corp.'s purchase of Silverstone Resources Corp. for $2.00 per share. Gold Wheaton Corp. and Silverstone Resources Corp. had been purchased at a total enterprise value (TEV)/Revenue multiple of 7.5 and 6.5, and a TEV/EBITDA (earnings before interest, taxes, depreciation and amortization) multiple of 12.4 and 2.8, respectively. 96 Was HudBay overpaying or underpaying, and why? Muir looked at the recent transactions in the industry and at comparable companies she thought would be considered relative comparisons to Norsemont (see Exhibit 13 and Exhibit 14). THE EXTENDED OFFER/CONCLUSION Just a week earlier, HudBay had announced that it currently owned approximately 91 per cent of Norsemont's outstanding shares, making it successful in its acquisition of Norsemont. 97 The company also announced that it was extending its offer to shareholders until March 15 to allow those Norsemont shareholders who have not yet tendered their shares to accept the offer. 98 Muir knew that time was of the essence for her recommendation to her managing director, Day. She also knew that if she were to recommend that Jamil Investments invest in the combined company, she should recommend an appropriate timing for the investment. Authorized for use only by Sharan Singh in Corporate Finance at Laurentian University from Sep 09, 2015 to Dec 02, 2015. Use outside these parameters is a copyright violation. Several factors surrounding the results of the feasibility study had created uncertainty. Muir wanted to ensure she considered all forecasted financial, technical and political risks surrounding the potential of the Constancia project. 9B14N013 This investment would be a big decision for the firm and an opportunity for Muir to establish herself in her new job. She knew she needed concrete reasons to explain why the mining company was investing in a large-scale, open-pit mine in Peru, a first for HudBay Minerals. The deal structure was also curious, and Muir knew she needed to decide whether it represented a good or bad strategy for both HudBay and Norsemont shareholders and present her rationale to the board. In addition, she would need to explain to Day why a company with no revenues was a good investment. She knew she would need a quantitative NAV analysis to back up her reasoning. Finally, when the acquisition closed, HudBay would have at least five new development projects in its pipeline. Would the company be able to manage so many projects and stay on track? Muir looked up as the clock was about to strike ten o'clock. She got up to make another pot of coffee. She would come up with a recommendation, even if it took her the whole night. Authorized for use only by Sharan Singh in Corporate Finance at Laurentian University from Sep 09, 2015 to Dec 02, 2015. Use outside these parameters is a copyright violation. Page 11 Page 12 9B14N013 EXHIBIT 1: PRINCIPLE SUBSIDIARIES OF HUDBAY MINERALS INC., 2009 HudBay Metal Marketing 100% (Canada) HMI Nickel 100% (British Columbia) Compania Guatemalteca de Niquel - 98.2% (Guatemala) Hudson Bay Exploration and Development 100% (Canada) Hudson Bay Mining and Smelting 100% (Canada) HudBay Marketing and Sales (Canada) HudBay USA 100% (Michigan, USA) Zochem 100% (Canada) Balmat Holding 100% (Delaware) St. Lawrence Zinc 100% (Delaware, USA) Source: HudBay Minerals Annual Information Form 2009. EXHIBIT 2: HUDBAY MINERAL SHARE PRICE PERFORMANCE, 2008 TO 2011 Volume 25.00 Share Price 50.00 15.00 30.00 10.00 20.00 10.00 Volume (mm) 40.00 5.00 Share Price (C$) 20.00 0.00 Apr-012008 Sep-222008 Mar-162009 Sep-042009 Mar-012010 Aug-202010 Source: Bloomberg, LLP (not sure what is the right was to cite our Bloomberg library terminal Feb-112011 0.00 Authorized for use only by Sharan Singh in Corporate Finance at Laurentian University from Sep 09, 2015 to Dec 02, 2015. Use outside these parameters is a copyright violation. HudBay Minerals Inc. (Canada) Page 13 9B14N013 EXHIBIT 3: HUDBAY MINING'S KEY ASSETS AND PROPERTIES, 2009 BRAMPTON Zinc Oxide Plant TORONTO Head Office Marketing Co. FLIN FLON 2 Mines Concentrator Zinc Plant Copper Smelter LALOR Deposit BALMAT Zinc Mine Concentrator WHITE PINE Copper Refinery FENIX Nickel Deposit 777 Mine Historical Production Statistics Units 000's tonnes Ore mined % Zinc grade in ore % Copper grade in ore grams/tonne Gold grade in ore grams/tonne Silver grade in ore 2009 1,540.35 4.35 2.49 2.12 26.39 December 31st 2008 1,470.29 4.36 2.61 2.13 24.82 2007 1,424.12 4.51 2.68 2.44 25.64 Trout Lake Mine Historical Production Statistics Units 000's tonnes Ore mined % Zinc grade in ore % Copper grade in ore grams/tonne Gold grade in ore grams/tonne Silver grade in ore 2009 679.33 3.10 1.96 1.30 15.72 December 31st 2008 776.21 3.70 1.93 1.38 19.21 2007 827.01 4.27 2.36 1.44 14.84 December 31st 2008 325.16 7.42 2007 328.93 8.20 Chisel North Mine Historical Production Statistics Units 000's tonnes Ore mined % Zinc grade in ore Source: HudBay Minerals Annual Information Form 2009. 2009 48.69 9.18 Authorized for use only by Sharan Singh in Corporate Finance at Laurentian University from Sep 09, 2015 to Dec 02, 2015. Use outside these parameters is a copyright violation. SNOW LAKE Zinc Mine Concentrator Page 14 9B14N013 EXHIBIT 4: HUDBAY MINERALS SHARE PRICE PERFORMANCE - THE EFFECTS OF THE ONTARIO SECURITIES COMMISSION DECISION Volume Share Price 40.00 Terminates Agreement 9.00 30.00 6.00 20.00 OSC Reverses Decision 3.00 0.00 Sep-02-2008 10.00 Oct-15-2008 Nov-26-2008 Jan-12-2009 Feb-24-2009 Source: Bloomberg, LLP (not sure what is the right was to cite our Bloomberg library terminal 0.00 Volume (mm) Share Price (C$) Announcement of Merger Authorized for use only by Sharan Singh in Corporate Finance at Laurentian University from Sep 09, 2015 to Dec 02, 2015. Use outside these parameters is a copyright violation. 12.00 Page 15 9B14N013 EXHIBIT 5: HUDBAY MINERALS KEY FINANCIAL AND PRODUCTION RESULTS, 2009 TO 2010 Dec 3 1 2 0 1 0 Dec 3 1 2 0 0 9 901,693 886,814 902,522 945,724 2,173,086 2,032,686 1,739,279 1,698,484 Cash and cash equivalents Working capital Total assets Shareholders' equity F inancial Perform ance ($000's except per share and cash cost per pound amounts) Revenue Earnings before tax and non-controlling interest Net earnings attributable to shareholders Basic and diluted net EPS EBITDA Operating Cash Flow Operating Cash Flow per share Cash cost (on a co-product basis) Copper ($/pound) Zinc ($/pound) Gold ($/troy oz) Cash cost per pound of zinc sold (US) Operating Highlights Production (HBMS contained metal in concentrate) Copper tonnes Zinc tonnes Gold troy oz. Silver troy oz. Metal Sold Copper tonnes Cathode & anodes Payable metal in concentrate Zinc - refined tonnes Gold troy oz. Contained in slimes & anode Payable metal in concentrate Silver troy oz. Contained in slimes & anode Payable metal in concentrate Three M onths Ended Y ear Ended Dec 3 1 2 0 1 0 Dec 3 1 2 0 0 9 Dec 3 1 2 0 1 0 Dec 3 1 2 0 0 9 183,280 166,673 778,818 720,722 41,606 9,620 158,105 141,468 24,493 7,171 72,985 112,440 0.16 0.05 0.48 0.73 71,745 40,571 280,240 143,339 59,927 33,624 199,850 124,512 0.40 0.22 1.33 0.81 1.39 0.87 345 -0.42 0.09 1.46 0.90 386 -0.39 - 13,660 19,120 22,375 209,788 11,215 21,239 22,350 248,195 52,413 77,314 87,176 843,401 48,397 78,722 92,201 1,004,624 50 8,543 27,200 8,864 29,299 31,795 15,407 104,941 59,981 110,070 1,948 13,458 19,342 - 55,868 25,239 94,263 - 21,082 121,270 474,195 - 789,305 217,534 2,185,407 - -0.03 1 Refer to non-GAAP measures. Cash costs (on a co-product basis) have not been presented for 2009 as the smelter was in operation for all of 2009 and a portion of 2010 2 Before changes in non-cash working capital 3 Metal reported in concentrate is prior to refining losses or deductions associated with smelter terms 4 Zinc sales include sales to our Zochem facility of 8,914 tonnes in the fourth quarter of 2010. In the fourth quarter, Zochem had sales of 11,006 tonnes of zinc oxide. 5 Concentrate was not sold in 2009 while the smelter was in operation Note: EPS = earnings per share; EBITDA = earnings before interest, taxes, depreciation and amortization; HBMS = Hudson Bay Mining and Smelting Co., Limited Source: HudBay Minerals MD&A December 31, 2010. Authorized for use only by Sharan Singh in Corporate Finance at Laurentian University from Sep 09, 2015 to Dec 02, 2015. Use outside these parameters is a copyright violation. F inancial C onditions ($ 0 0 0 s) Page 16 9B14N013 EXHIBIT 6: HUDBAY MINERALS FINANCIAL STATEMENTS, 2009 TO 2010 C onsolidated Balance Sheet (Expressed in thousands of Canadian dollars) Assets 2010 2009 C urrent Assets Cash and cash equivalents Accounts receivable Income taxes receivable Inventories Prepaid expenses and other current assets 901,693 886,814 78,168 40,187 99 15,313 121,694 131,128 9,992 7,990 15,431 23,152 3,813 1,106 1,130,890 1,105,690 Property, plant and equipment 906,906 818,634 Available-for-sale investments 104,990 27,249 Future income and mining tax assets Current portion of fair value of derivatives 30,300 81,113 2,173,086 Other assets 2,032,686 139,480 119,738 33,088 0 Liabilities and Equity C urrent liabilities Accounts payable and accrued liabilities Taxes payable Pension obligations 55,800 40,228 228,368 Current portion of other liabilities 159,966 2,604 516 Other employee future benefits and stock-based compensation 90,439 81,287 Asset retirement obligations 58,915 49,133 Future income tax liabilities 42,146 34,927 Fair value of derivatives 1,633 7,068 424,105 332,897 629,861 644,127 Equity Share capital Contributed Surplus Source: HudBay Minerals Annual Audited Statements December 31, 2010. 41,697 6,445 1,698,484 9,702 1,305 1,699,789 2,173,086 Non-controlling interests 26,717 1,021,195 1,748,981 Accumulated other comprehensive income 24,205 1,043,516 1,739,279 Retained Earnings 2,032,686 Authorized for use only by Sharan Singh in Corporate Finance at Laurentian University from Sep 09, 2015 to Dec 02, 2015. Use outside these parameters is a copyright violation. As at December 31 Page 17 9B14N013 EXHIBIT 6 (CONTINUED) C onsolidated Statem ents of Earnings (Expressed in thousands of Canadian dollars, except per share and per share amounts) Years ended December 31 2009 720,722 Operating 451,106 506,275 Depreciation and amortization 103,399 100,731 General and administrative 28,132 44,176 Stock-based compensation 6,511 4,692 Ex penses Accretion of asset retirement obligations 4,352 4,488 Foreign exchange loss 8,477 17,752 601,977 678,114 176,841 42,608 Earnings before the following: Exploration (29,822) Interest and other income 8,323 Gain (loss) on derivative instruments 2,763 Earnings before tax (7,609) 107,386 (917) 158,105 141,468 Tax expense 88,067 28,988 N et earnings 70,038 112,480 72,985 112,440 Net earnings attributable to: Shareholders of the Company Non-controlling interests N et earnings (2,947) 40 70,038 112,480 Basic 0.48 0.73 Diluted 0.48 0.73 Basic 150,636,835 153,460,823 Diluted 151,336,399 154,067,282 Earnings per share: W eighted average num ber of com m on shares outstanding Source: HudBay Minerals Annual Audited Statements December 31, 2010. Authorized for use only by Sharan Singh in Corporate Finance at Laurentian University from Sep 09, 2015 to Dec 02, 2015. Use outside these parameters is a copyright violation. 2010 778,818 Revenue Page 18 9B14N013 EXHIBIT 6 (CONTINUED) C onsolidated Statem ents of C ash F low s (Expressed in thousands of Canadian dollars) C ash provided by (used in): Operating activities Net earnings Reclamation payments 2010 2009 70,038 (2,764) 112,480 (1,685) Items not affecting cash: 103,399 100,731 Stock-based compensation Depreciation 6,336 4,692 Accretion on asset retirement obligations 4,352 4,488 Foreign exchange loss 2,826 9,868 Change in fair value of derivatives Future tax expense Net gains reclassified from OCI Other Change in non-cash working capital (1,421) 21,881 (5,429) 632 55,740 255,590 74 2,218 (107,956) (398) (18,318) 106,194 Investing activities Additions to property, plant and equipment Additions to computer software Sale of short-term investments Proceeds from sale of investment Purchase of other non-current investments Release of cash held in trust Release of (additions to) restricted cash (167,642) (99,948) (4,691) (1,966) 0 478,941 8,051 235,704 (52,619) 0 54,626 (162,275) (3,945) 3,885 (48,462) 564,209 F inancing activities Repayment of loans payable and senior secured notes 0 (3,764) Repayment of obligations under capital leases 0 (511) Repurchase of common shares Prepaid financing costs Dividends paid Proceeds on exercise of stock options (63,294) 0 (14,901) 0 5,253 (75,610) Effect of exchange rate changes on cash and cash equivalents (5,000) (2,668) (2,826) 9,393 118 (9,434) 14,879 886,814 C ash and cash equivalents, end of year Note: OCI = other classified income Source: HudBay Minerals Annual Audited Statements December 31, 2010. 661,087 225,727 901,693 886,814 Authorized for use only by Sharan Singh in Corporate Finance at Laurentian University from Sep 09, 2015 to Dec 02, 2015. 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Years ended December 31 Page 19 9B14N013 EXHIBIT 7: LISTING CRITERIA FOR THE TORONTO STOCK EXCHANGE VENTURE EXCHANGE Property Requirements Recommended Work Program Working Capital and Financial Resources Net Tangible Assets, Earnings or Revenue Other Criteria Management and Board of Directors Distribution, Market Cap and Public Float Sponsorship $500,000 on the Tier1 Property as recommended by geological report Adequate working capital and financial resources to carry out stated work programor execute business plan for 18 months following listing; $200,000 in unallocated funds TSX Venture Tier 2 2 Significant interest in a qualifying property or, at discretion of the Exchange, a right to earn a significant 2 interest in a qualifying property; sufficient evidence of no less than $100,000 of exploration expenditures on the qualifying property in the past three years $200,000 on the qualifying property as 3 recommended by geological report Adequate working capital and financial resources to carry out stated work programor execute business plan for 12 months following listing; $100,000 in unallocated fund $2,000,000 net tangible assets No requirement 1 Material interest in a Tier 1 property 1 3 Geological report recommending completion of work program Management, including board of directors, should have adequate experience and technical expertise relevant to the company's business and industry as well as adequate public company experience. Companies are required to have at least two independent directors. Public float of1,000,000 shares; 250 Public float of 500,000 shares; 200 public shareholders each holding a public shareholders each holding a board lot and having no resale board lot and having no resale restrictions on their shares; 20% of restrictions on their shares; 20% of issued and outstanding shares in the issued and outstanding shares in the hands of public shareholders hands of public shareholders Sponsor report may be required 1 \"Tier1 property\" means a property that has substantial geological merit and is: (a) a property in which the Issuer holds a material interest; and (b) a property on which previous exploration, including detailed surface geological, geophysical and/or geochemical surveying and at least an initial phase of drilling or other detailed sampling (such as trench or underground opening sampling), has been completed; (c) a property on which drilling or other detailed sampling on the property has identified potentially economic or economic materialization; and (d) an independent geological reporter commends a minimum $500,000 Phase 1 drilling (or other form of detailed sampling) program based on the merits of previous exploration results; or an independent, positive, feasibility study demonstrates that the property is capable of generating positive cash flow from ongoing operations. 2 \"significant interest\" means at least 50% interest 3 \"geological report\" or \"technical report\Group Study Instructions: 1. Please type your report in a standard business style (that is, an executive summary, table of contents, introduction, analysis, and conclusion) with a maximum of 12 pages (excluding supporting Exhibits as appendices and Executive Summary), 12 font, double spaced and bound. 3. The report is due on Saturday, December 19, 2015 CASE: HUDBAY MINERALS: ACQUISITION OF NORSEMONT MINING Apply the general case analysis framework to study the case: to identify the problem, review the environment within which the firm was operating, do a company analysis, review its financial performance, project its future financial plan, identify and analyze the possible solutions /alternatives to the problem, and finally make a recommendation. The following represents a set of questions specific to this case. Do not limit your analysis to these questions. You must organize your answers to these questions into a business report rather than simply list your answers. 1. Do an assessment of the mining industry in 2011. Evaluate Norsemont as a potential acquisition target for HudBay. 2. Assess HudBay's acquisition strategy and its capabilities with respect to acquisitions. How well does Norsemont fit as an acquisition target? 3. What is an appropriate valuation for Norsemont? Does HudBay appear to be overpaying for this target? 4. Why would HudBay have used a mixed cash/share offer structure? What does this choice of structure signal about HudBay? 5. What is an appropriate valuation for HudBay? How will the acquisition affect that valuation? As Joelle Muir, would you recommend that Jamil Investment invest in HudBay? Why, or why not