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Feb 19, 2019

Hudbay's no. 2 investor ratchets up pressure on miner

Nimbleness key for companies as shareholder activism rises: M&A lawyer

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Hudbay Minerals Inc.’s (HBM.TO) second-biggest investor ratcheted up pressure on the Toronto miner ahead of its quarterly earnings, arguing the company’s shares could more than double if it changes its strategy.

Hudbay could be worth about $19 per share if it changes its leadership, reviews its portfolio and improves capital allocation, Waterton Global Resource Management said Tuesday in a 73-page presentation. After rising as much as 6.8 per cent, Hudbay’s shares were up 5.9 per cent to $8.40 at 2:03 p.m. in Toronto, giving the company a market value of $2.2 billion.

Hudbay called Waterton’s plan “long on generalities and very short on specifics.” It said in a statement that the plan appeared to be largely based on a list of actions the miner is already taking and which are advancing well. Hudbay said it would address Waterton’s claims in more detail later.

“Hudbay is disappointed by Waterton’s selective use of performance metrics, revisionist history and confrontational approach, including personal attacks,” spokesman Scott Brubacher said in an emailed statement. “Waterton is a mining private equity firm that competes with Hudbay for mining assets and may not have interests aligned with other shareholders.”

Waterton, which owns 12 per cent of Hudbay, has been pushing for changes at the miner since last year to improve performance. It has nominated eight directors to the company’s board and is seeking to replace the chief executive officer and chairman.

In the new presentation, Waterton details what it thinks is needed to narrow the valuation gap between Hudbay and its nearest competitors. In addition to replacing the CEO, chairman and most of the board, Waterton says more needs to be done to restore investor faith and hold management accountable for implementing the necessary changes.

“With the new leadership team at the helm and by executing on its clearly defined strategy, Hudbay can win back the trust of the capital markets and close the valuation gap to its peer group -- allowing shareholders to benefit from a material increase in the share price,” Waterton said in a statement.

Earnings Misses

Waterton said Hudbay has deployed more than US$4.8 billion since 2010 on capital projects with little to show for it. The private equity firm also argues that Hudbay failed to secure the rights needed to develop some of its mines, while failing to communicate a long-term development plan for other sites.

Shareholders’ trust in the company has been shaken by these issues and several earnings misses, according to Waterton. The Toronto-based investment firm, which has never run a proxy fight, began agitating for changes at Hudbay last year.

Waterton has proposed Peter Kukielski as potential CEO and board member at Hudbay. Kukielski resigned from Nevsun Resources Ltd. in December after that mining company was taken over by Zijin Mining Group Co. Waterton has also suggested Richard Nesbitt, the former head of the Toronto Stock Exchange’s parent company, as a potential chairman.

Greg Barnes, an analyst with TD Securities, said there is little question that the proposed board members Waterton has put forth, as well as Kukielski, have strong global mining and strategy experience. In some cases, he said, they could bring “beneficial know-how to Hudbay.” But he echoed Hudbay’s criticisms of Waterton’s broader plan as being “very high-level.”

‘Aggressive’ Target

The plan, he said, contains few specifics and doesn’t propose to break up the company. Although he had no issue with any of the proposed initiatives, Barnes said the peer group Waterton chose to compare Hudbay with was questionable and its price target expectations were “aggressive.”

Hudbay delivered stronger-than-expected third-quarter results in October, causing its stock to jump the most in nine years. Hudbay is expected to announce its fourth-quarter results after the market closes on Tuesday.