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Private Equity Mines for an Activist Solution at Hudbay Minerals

John Jannarone

Waterton Global Resource Management Wants to Replace 80% of Hudbay Directors

By John Jannarone

Hudbay Minerals has suffered a rough stock performance in recent years. Could some new resources help shore the mining company up?

The Toronto-based firm has expanded from a key mining asset in Manitoba several years ago to a sprawling global company with operations in Peru, Arizona, and Nevada. But shareholders have felt some growing pains: The company’s totals shareholder returns lagged the S&P 500 by 95 percentage points over the last five years and by a whopping 308 percentage points over the last decade, according to Bloomberg data. Total shareholder returns also significantly lagged those of a group of proxy peers Hudbay chose itself in recent years- though by a narrower margin.

The 10-year performance is particularly relevant. The current chairman, Alan Hibben, joined the board roughly a decade ago and the company’s string of acquisitions began shortly thereafter, beginning with some Peruvian assets in 2011.

Last year, Waterton Global Resource Management, a private-equity firm focused on mining investments, decided to take a stake in Hudbay. The move mirrors some other recent transactions that blur the line between activism and private-equity, with Starboard value recently investing $200 million in struggling pizza chain Papa John’s through a PIPE, or private investment in public equity.

Waterton has accumulated a chunky 12% position in Hudbay and nominated a slate of eight directors to replace existing members of the 10-person board. Waterton’s goal is to draw on the experience of its nominees, whose resumes include leadership roles at global mining giants such as BHP Billiton, ArcelorMittal, Goldcorp, and many others. Importantly, all of the nominees are business veterans and not employees of Waterton.

Oddly, Hudbay has tried to call out Waterton for being a biased, short-term player. It’s true that the private-equity firm’s stake is recently acquired, but that shouldn’t bother other stockholders too much – Waterton had to buy well over $100 million of shares in the open market to accumulate the position.

And naturally, private-equity firms are patient by definition: They generally have around five years to deploy capital they raise and another five to harvest investments. That hardly suggests Waterton is looking for an opportunity to dump the shares at a small profit.

One area where the company could use some advice is securing permits at new mines. The company acquired assets in Arizona in 2014 and frustratingly still doesn’t have the permits it needs there. Certainly, after almost five years, it would behoove shareholders to take advice from experienced industry executives.

Similarly, the company has since 2016 been struggling to secure surface rights for Pampacancha, a site in Peru. While the company predicts a breakthrough this year, its credibility has eroded as shareholders grew frustrated with other disappointments such as the Arizona permits.

And the company appears to be spending far too freely on deals that yield little result. By Waterton’s estimates, Hudbay has spent $4.8 billion on acquisitions and capital expenditures since 2010. That compares with the company’s market capitalization of $1.7 billion. Even if Waterton’s estimate was half as large, it’s clear the company hasn’t been putting its money to work well.

It’s worth noting that Hudbay’s board of directors and C-suite collectively own well below 1% of the company’s shares, versus Waterton’s 12%. That, perhaps, explains why they appear tolerant of the company’s stock performance.

And the board has consistently rewarded management with top performance scores, even with the company facing operational challenges and the share price struggling. That has allowed management to take home healthy compensation while many shareholders suffered.

Of course, some make the argument that short-term stock underperformance is no reason to overhaul a company’s board . But with so many years of pain for long-term holders, the time has come for change.

Contact:

John Jannarone , Editor-in-Chief

www.CorpGov.com

Editor@CorpGov.com

Twitter: @CorpGovernor