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Introduction: HudBay Minerals

HudBay Minerals Inc. was a Canadian diversified mining company that produced copper
concentrate, which included copper, gold and silver, as well as zinc metal and zinc oxide.
Established in 1992, the company had grown to become a large senior producer in the industry.
HudBay has assets spanned across North America, Central America and South America. Through
its subsidiaries, HudBay owned copper, zinc and gold mines; ore concentrators and facilities for
zinc production in Manitoba and Saskatchewan; a zinc oxide production facility in Ontario and a
nickel project in Guatemala. 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. 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.
HudBay Minerals held four types of key assets: operating mines, processing facilities,
development projects and exploration properties. 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. Processing facilities allowed the company to manufacture
zinc and other metal products from the ore it produced.
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. When evaluating potential
acquisition opportunities for mineral properties, HudBay Minerals sought to acquire a diversified
set of projects, while maintaining its core competencies. The core requirements were: 1. same
geographic flat, 2. Country with less political and economical risk and good background of
exercising human rights issues, 3. projects with good technical review and value up to its 20%
market capital.

Introduction: Norsemont Mining

Inc.
Norsemont Mining Inc. (1977) 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. Prior to 2004,
none of the companys exploration projects had proved to be viable. 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.
From February 2005 to the present 2011, Norsemonts mineral exploration had been focused in
Peru, on its Constancia project and the exploration had been ongoing. The activities included
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geophysical surveying and geologic mapping. Geologists also performed rock sampling, drilling
and surveying.

PESTEL Analysis: Canada

On July 1, 1867, the British North America Act declared Canada a country. Canada is the second
largest country in the world with 10 million square kilometers of land mass. The country has a
population of approximately 30 million people. The capital of Canada is Ottawa.
Political: The Government Canada is a democracy with a parliamentary Government. Its non
conservative and encourage environmental mining activities. Laws passed by the federal
government are initially announced in the Canada Gazette, a regularly published newspaper for
new statutes and regulations. Only the Supreme Court of Canada has authority to bind all courts
in the country with a single ruling.
Economy: Canada had a GDP Growth of 2.4% (2011) and GDP Per Capita PPP: $51,147 (2011)
People spent good amount of money.
Socio- cultural: Canadians sense of belonging to their community and their country, their
participation in civic, community and volunteer activities, the social and family relationships
they have with one another and the presence of a social safety are equally available to all
citizens. All are important components associated with well-being as citizens. About 85% of
Canadians reported their sense of belonging to Canada as being very strong or somewhat
strong.
Technological: Mining is one of the important industries. In mining it is most technological
since the first coal mine advanced industry which was opened on Nova Scotias Cape Breton
Island some 350 years ago. The mining industry in Canada has changed over time and been as a
most technological adaptable industry.
Environmental: Canadas climate is dominated by extreme long and cold winters. It impact the
mining industry a lot.

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PESTEL Analysis: Peru

Peru is a multi-party republic with a population estimated at 30 million. The country spans
1,285,216 square kilometers in South America and borders Bolivia, Brazil, Chile, Colombia and
Ecuador. The country also has 2,414 kilometers of coastline.
Political: Republic Peru government is liberal with its acts. But because of long civil was the
political situation is not stable at all.
Economical: 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 Perus total exports. 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. Gross domestic product (GDP) in 2010 totaled $287
billion, with a real growth rate of 8.8 per cent. GDP per capita in 2010 was $9,700, ranking Peru
as number 110 in the world in terms of GDP per capita.
Socio- cultural: People living mostly under poverty line reduced over past decade. Malnutrition
has also reduced.
Technological: Technological changes have impact on the mining industry.
Environmental: The country is subject to many natural hazards, including earthquakes,
tsunamis, flooding, landslides and mild volcanic activity. 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.
Legal: Law has impact on the mining business. It imposed the owner rule to run any business
on the land. But Peru was also the second largest producer of cocaine. Illicit drugs were being
moved from Peru into Brazil, Chile, Argentina and Bolivia. As well, organized illegal narcotics
operations in Colombia had penetrated Perus shared boarder.

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Industry Analysis: Porters Five

Forces
For both small and big businesses, managing business effectively is difficult. One of the most
essentials skills needed is the ability to assess the competitive environment. Entrepreneur and
managers must comprehend the competitive environment of the business. There are several ways
to analyze the market and business environment, Porters Five Forces analysis is a great way.
The Porters Five Forces tool is a very powerful tool. It is simple but excellent for judging
exactly where power lies. As it helps to understand not only the strength of current competitive
position but also the strength of an expected position, it is very useful. The tool is generally used
to identify whether new products or services will be profitable. It also helps to understand the
balance of power. The analysis peeks at the strength of 5 vital forces which affect business
competition. The five different forces are:
The metals and mining sector consists of companies involved in the mining and production of
copper, silver, gold, coal, bauxite, iron, lead, and nickel. This sector also includes companies that
mine and produce diamonds and other precious stones. Companies that are involved in metal
processing and metal distribution, such as steel and aluminum, are also included in this sector.
The Metals & Mining Gold, Silver & Other Precious Metals industry consists of companies
involved in the process of extracting precious ores from the earth. This process involves the
exploration of land, the mining of that land leading to the processing and smelting of the
precious ores. The precious metals industry demands extensive amounts of capital to construct
mines and build production facilities. For companies to survive in the long-term, they require
immense expenditures to finance exploration and production. Companies must control costs to
be effective in this industry.
The metals industry is not a vertically integrated industry such as oil and energy. Companies that
conduct exploration seldom refine the metal and the companies that refine metal seldom sell the
metal to the public. Each different type of company has its own strengths and weaknesses along
the supply chain. Some companies do well at the extraction of the metals while others specialize
in the refining and the smelting to create the final product.
Companies in the mining industry come in all shapes and sizes. The majority of production
comes from large blue chip companies, but there are junior companies who specialize in
exploration in hopes of discovering a large gold deposit. There is also room for speculators and
income investors in the mining industry.

The following section will analyze the mining industry applied to the Porters Five Forces Model

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Threat of New Entrants: The threat of new entrants is low in this industry because of the
following reasons.

High cost of financing a barrier to new entrants

Exploration and building of mines requires large amounts of capital
Capital required to set mine into production

Power of Suppliers: Bargaining power of the suppliers is high due to the rules and regulations.
As cost determine the price of every supply lot, different permission granting fee add the cost
and power of the suppliers.

Government regulations and rules

Gaining permits to mine can be difficult

Power of Buyers: Buyers look for the low priced metal and the making the quality ensured is
not an easy task for the suppliers. For the following reasons the bargaining power of the buyers
are moderate.

A companies quality of metal is hard to measure

Commodity based business
Buyers seek lower prices and better contract terms

Availability of Substitutes: Substitution of metal is not possible at all. For several situation and
need, metal is the only answer to the problems. But economic situation and technological
innovation can always reduce the demand of the naturally extracted metals.
Competitive Rivalry: Competitiveness is a feature of the mining industry. The reasons for high
competitive rivalries are given below.

Companies do not compete on price because it is set by the market

Companies do compete for land
Discovery is on a first-come-first server basis
The more reserves the company has the more power they hold

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SWOT Analysis
Strengths
1. HudBay Minerals held four types of key assets: operating mines, processing facilities,
development projects and exploration properties
2. HudBay Minerals has 3 operating mine.
3. As a key asset, processing facilities allowed HudBay Minerals to manufacture zinc and other
metal products from the ore it produced.
4. HudBay Minerals has 2 development projects underway. In order to build an access to the deposit
ore underneath the surface, they build a ramp. This deposit would help them to earn more revenue
in future.
5. Primary exploration property included 408,308 hectares of land. Besides, they have also major
exploration operation in Guatemala, New York, Yukon, Chile and Ontario.
Weakness
1. Convincing the shareholders regarding new mining business acquisitions was proven to be
difficult and a major weakness.
Opportunity
1. HudBay Minerals has access to greater liquidity as it is listed in both the New York Stock
Exchange (NYSE) and the Toronto Stock Exchange.
2. Level of political and jurisdictional risk involve in mining business is relatively lower in America.
As their geographical focus is America therefore they face lower risks in doing business.
3. HudBay Minerals management has the skills necessary to acquire new mining businesses.
Threats
1. Financial crisis in 2008 caused their revenue to fall. As a result their share price was also
dropped.
2. Significant number of mining business opportunities are left untouched as their geographical
focus for business is in America.
3. The mining industry was characterized as risky and uncertain; therefore, large, transformational
mergers or acquisitions were viewed as potentially value-destructive

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Business & Product Life Cycle

Analysis
Mining business is a unique industry. It has unique characteristics of growth and expansion.
Normally exploration is done for several years and then if the mineral is found then extracted
from the mine over the lifetime of the mine. Life duration of a mine is determined by the amount
of metal can be found in that specific mine. The product of the mining industry has stable
demand in the market. Several precious metals has high price due to scarcity. Though the thing
metal is one of the must for our today life; due to economical fall several times the price of the
metals in market fluctuated a lot.

Consolidated Income Statement

& Balance Sheet (Pro-forma)
As the company acquired a new farm already by 91%, we assume to calculate all our value after
reconsidering the merger balance sheet and income statement of the two companies. As there
were different ways to acquire the firm, different balance sheet impact took place. We use the
scenario given for the acquisition terms.

Ratio Analysis
HudBay Minerals acquired 91% of the Norsemont Mining Inc. but as the Norsemont Mining Inc
has zero revenue over the financial years, the ratio for their farm was inconvenient to measure.
On the other hand, Hudbay Mineral had no long term liabilities that make it hard to calculate
some ratios. But, some common ratios were calculated to observe the situation at the HudBay
Minerals. They are demonstrated below.
From 2009 to 2010, HudBay got a revenue boost of 8%, where there gross profit increased a lot.
But due to high operational expenses for exploration the real revenue growth slowdown.
Return on equity ad return on assets both seems normal for the HudBay Minerals. Total assets
turnover and fixed assets turnover indicates the high amount of assets which actually is a part of
exploration machines and equipments.

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HudBay
2009
315%
8% 0.06 0.35
0.07
4%

2010
0.88
3%

36%

86%

Graph: Ratio Analysis

In the following graph, we see the liquidity ratio for the HudBay Minerals. The current ratio is
alarmingly high as well as the quick ratio. For mining companies, these ratios can indicate the
high time to acquire another firm. As the expansion actually determine the growth of the
company, ability to maintain high current ratio can help to do merging. Receivable turnover and
inventory turnover are shows the operating efficiency of the firm.

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HudBay
2009

6.9 5.0

6.1 4.4

2010

17.9
10.0

5.5 3.9

66.4
57.0
36.6
20.4

5.5 6.4

Graph: Ratio Analysis

DuPont Analysis
1.4
1.2
1
0.8
0.6
0.4
0.2
0

0.23
0.06

0.350.36

1.21.25
0.8
0.44
ROE: .019942
ROE: .04504

Graph: DuPont Analysis

Here we see the decomposition of the ROE for HudBay Minerals. With no interest expense the
total asset turnover is consistent. Operating profit margin has the most sensitivity with the ROE
calculation. As huge change in operating profit margin boost up the ROE in 2010.

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Business Risk Analysis

Mine industry is very unique. Simple expansion cannot make the business grow. Mining is an
industry known to be fraught with risks. As we see in the calculation, HudBay Mineral has
average 8%-10% sales growth rate but their operation cost ration is 77%. While the Norsemont
Mining Inc has zero revenue because of expenses for exploring projects, it can be said that their
business risk is also high. Low success in projects and scarcity of the mines make the industry
characterized as a risky one. For both firms it can be said that the business risk is high.

Financial Risk Analysis

From the financial risk calculation, we see; HudBay Mineral has zero financial leverage as they
have no long term debt. But their degree of operating leverage is very high, as much as 39.1. For
Norsemont Mining Inc, we found nil operating leverage as they currently have no sales. But their
financial leverage is .96183 for 2009 and .96463 for 2010; this ratio denotes the level of below
average financial leverage risk.

Country Risk analysis

For conducting the country risk analysis, we selected factors mentioned in the case. And those
factors are listed below.
For demographics we observed the age group, life expectancy, health and other factors. Peru has
satisfactory level of young workable people but also the dependent group below 14 year is high.
With a better life expectancy most people live in the urban area where improved life standard
with drinking water and sanitization facility is available.
For calculating the environmental risks we take the consideration of different Natural Hazards
like earthquakes, tsunamis, flooding, landslides, mild volcanic activity and Man Made Hazards
like deforestation, illegal logging, soil erosion, air pollution, pollution of mining wastes.
Economic situation of Peru was average with GDP growth rate of 6% while the real GDP growth
was8.8%. Low inflation and appreciating exchange value directs the future prospects.
The political situation of Peru was not stable yet. Due to civil war (1980-2000), cocaine
production, illegal narcotics operation and drug smuggling, the country posses high level of
political risk.
After giving weight to different components, we totaled the value and got 67 out of 100 as
country risk.

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Distress Risk Analysis: Altman Z

score Test
Altman Z score test denotes the probability of going bankrupt. As HudBay is a all equity firm is
has no default risk. Norsemont Mining has z score valued 1.6, which means it has a risk of going
bankrupt if their revenue do not go up in future years. If their only project Constancia stands
well, then the risk will be reduced. Otherwise it may face a disastrous situation in future.
Risk Distribution
Z > 2.9
1.81 < Z < 2.99
Z < 1.81

Risk 1.6
Safe Zone
Grey Zone
Distress Zone

Synergy Calculation (Quantitative

& Qualitative)
Synergy is the interaction or cooperation of two or more organizations, substances, or other
agents to produce a combined effect greater than the sum of their separate effects. For valuing
the synergy in this case, first we calculated the separate value of the individual firms.
The assumptions which we used to calculate synergy were:
1. For bidding firm:
Operating Expenses as % of Revenues =
Tax Rate on income =

77.00%
35.00%

Interest Expenses =

$0.00

Current Depreciation =

$103,399.00

Current Capital Spending =

$88,272.00

Working Capital as % of Revenue =

115.00%

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(Operating expenses include)

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Expected growth rate - next 5 years =

3.00%

Expected growth rate - after 5 years =

4.00%

Beta of the stock =

1.20

2. For the target firm:

Operating Expenses as % of Revenues =
depreciation
Tax Rate on income =

100.00%

Interest Expenses =

$395.22

Current Depreciation =

$43.52

Current Capital Spending =

$245.30

Working Capital as % of Revenue =

100.00%

Expected growth rate - next 5 years =

1.00%

Expected growth rate - after 5 years =

6.00%

Beta of the stock =

1.20

(Operating expenses include)

35.00%

We also assume that the growth rate of the firms after synergy will be 2% for first five year and
5% after five years. And the cost will be 60%. After combining other information, we got value
$1,469,697.94 as synergy from the revenue growth and tax savings effect. But as there was
transaction cost and other factors like availability of skilled worker, distance of the plant from
residential area, other fees; we deduct total value of $1188284.793 from the synergy value and
finally got the actual value of synergy which was $281413.14

Quantitative
Norsemont

NAV

Analysis:

NAV Multiples Unique to the mining industry, NAV multiples are commonly observed or applied
in valuations. A NAV multiple is the multiple of the price of a mineral property as implied by the
companys market capitalization or transaction amount to its net asset value (NAV). The NAV
represents the net present value of the expected future cash flows of the mineral property based
on certain inputs. A company with a NAV multiple that is greater than 1.0x is said to be trading
or priced at a premium to its NAV and, conversely, one that is less than 1.0x is said to be trading
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or priced at a discount to its NAV. It is said that the premium relates to optionality and other
more intangible factors including, for example, a strong management team. Also, many would
say that a multiple less than 1.0x implied by the companys market capitalization is not
reasonable and thus that the mineral property is unfairly priced by the market. Accordingly, many
sellers of assets are very reluctant to proceed with any offers below NAV. The primary purpose of
a NAV calculation in a preliminary feasibility study or feasibility study is to demonstrate the
(positive) economics of the propertys reserves. The reserves represent that portion of the
measured and indicated resources that is economically mineable as demonstrated by at least a
preliminary feasibility study.
Here the NAV of the Norsemont Mining Inc is calculation. The market price of the share is $4.40
for 82838891outstanding share. After calculation we get the multiplier value of 82.56. It means
the share of Norsemont is trading with the premium in the market.

Assessment
Decision

of

the

Acquisition

When evaluating potential acquisition opportunities for mineral properties, HudBay Minerals
sought to acquire a diversified set of projects, while maintaining its core competencies.
According to the management those were:
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1.

Any acquisition opportunity should remain within HudBays current scale and
geographic footprint(Americas)
2. Acceptable level of political risk for the company to take on
3. Jurisdictional support for mining activity
4. Human rights issues, including child labour and wages, were a concern to firms
5. HudBays management did not believe that abuses of human rights or attempts at bribery
were acceptable
6. The company was committed to ensuring its operations did not exploit the rights of any
worker or any third parties
7. Company did not target any one specific metal; future metal prices were another
consideration when evaluating the types of mining projects to pursue
8. Any properties HudBay considered needed to exhibit excellent exploration potential
9. Technical reports were a critical part of any analysis for a potential merger and
acquisition opportunity
10. HudBay focused on transactions with a value of up to 20 per cent of its market
capitalization
These 10 conditions were prerequisites for any kind of merger consideration. Though almost full
acquisition were completed, if we see we will discover that important issue like child labour,
bribery, high political risk were ignored in time of acquisition. Peru is a political unstable
country where child labour is a common phenomenon. Also the jurisdictional supports were hard
to get and the ownership of the mining company were linked with it. We assume that an excellent
technical overview report may lead the boards to agree to go for this acquisition.

Timeline Prediction of the Price

of Share
When Muir was asked to estimate the merger operation, it was on March 9, 2011. By that time
91% acquisition was completed. The rest were about to completed within March 15, 2011. There
were three layer of offer and shareholders were independent to choose anyone among them. For
calculating future aspects of the merging operation, we access the 100% acquisition completed
value.

Statement of Problem
It was March 9, 2011, and HudBay Minerals Inc. (HudBay) had just released its 2010 year-end
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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. 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 HudBays acquisition of Norsemont Mining Inc.
(Norsemont), and the release of a favorable feasibility report for Norsemonts Constancia project
in Peru, the decision had become a priority. 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.
Now the main problem focus point was that Muir has to recommend about the investment
decision as the institutional investor. But she also have to solve the below stated problems.

Would Constancia be another failed project? What about the country Peru?
Is it right time for Jamil Investment to enter the South American market?
If Muir suggest to invest then when the investment should take place?
Would the company be able to manage so many projects and stay on track?

Though the investment decision is the main problem here but to get the right answer Muir need
to get a lot of other information too.

Alternatives
Problem

for

Solving

the

For getting solution for the prime problem of investment decision, it is necessary to examine the
acquisition procedure and its aspects. As there was positive technical report about the Constancia
project, it may be a good a project with future profitability. Jamil Investment can expand their
investment further as large market player like HudBay is interested in both Americas. Norsemont
Mining Inc has a negative enterprise value right now, so we assume that among the all deals of
the three structure deal plan, Cash and Stock exchange plan will be mutually better for both
parties.
For the other problems we will first analyze the different deal structure effect on the enterprise
value, then add the synergy value and lastly find out the NPV of the Constancia project.
After getting information from above analysis, we will be leading to the main problem about the
investment decision. The alternatives available are investment or do not investment. And for
calculation we will use the end value of the acquisition action and decide the timing of the
investment.

Assumptions
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We use some realistic assumption for doing the analysis and calculation. For valuing the firm
before the merger, the risk free rate we used is 5% with market premium of 10%. We assume the
beta 1.2 additional risk premium of 2%. The firm was all equity firms and cost of equity was
11%.
For calculating the after merger value with all cash acquisition, we change the beta 1.3 and cost
of debt to be 8%, which is 5.20% after tax. As there was a cash bracket to use for acquisition
purpose, we assume the rest will be taken as debt.
For Cash and Stock exchange acquisition structure, we assume same data as cash acquisition. For
all cases we adjusted 5% country risk.

Base Case Analysis

Before merger HudBay was a big player in the market. For calculating the enterprise value of the
HudBay Minerals we assumed the following information. The revenue growth to be 10%,
operating cost 65%, tax rate 35% and WACC 13%. The calculation of the WACC is given
below.
WACC Calculation
Risk free rate
Market premium
Beta
Cost of Equity
Cost of debt
After tax cost of debt
Weight of equity
Weight of debt
Debt
Equity
Total debt & equity
WACC
Risk Premium
Adjusted WACC

5%
10%
1.2
11%
8%
5.20%
1
0
0
1739279
1739279
0.11
2%
13%

After calculation we got the enterprise value without merger is $2185064.107 and per share price
was $20.3967. Here is the simulation and sensitivity analysis of the base valuation. Simulation
analysis shows that the coefficient of Variation of per share price is 0.0334. And from the
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sensitivity chart we can see the revenue growth is the most sensitive and after that WACC has
sensitivity to the share price.

Cash Acquisition Analysis

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For the combined firm the first acquisition alternative was total cash acquisition. For this
alternative we assume the WACC of 16% with 10% revenue growth. As we assume the
additional cash fund will be collected through debt financing the cost of debt was 8% with the
weight of .11 and after tax cost was 5.2%.
WACC Calculation
Risk free rate
Market premium
Beta
Cost of Equity
Cost of debt
After tax cost of debt
Weight of equity
Weight of debt
Debt
Equity
Total debt & equity
WACC
Risk Premium
Adjusted WACC

5%
10%
1.30032
12%
8%
5.20%
0.88604
0.11396
246021
1912773
2158794
0.10783
5%
16%

Hudbay Share Number

Norsement Share number
Cash per share
Total Cash required
Share price Hudbay
Equity of Hudbay
Debt Finance
Debt
Equity
D/E
Levered Beta

151336
82838.851
4.5
372774.8295
16.67
2522771.12
242774.8295
246021.0025
1912772.9
0.12862008
1.300323662

For cash acquisition, after adding the synergy value, we get per share price $24.796. And the
detail of cash acquisition is tabled here.

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From the simulation we get the Standard deviation of 0.92 and coefficient of variation was .037.
the sensitivity analysis chart shows that the share price in this situation is mostly sensitive to the
revenue growth which is 87.1%, then it is sensitive to WACC by 9.2%.
This deal structure was to exchange $4.50 cash for each Norsemont share. We get that this
acquisition enhance the share price from the base value. And it is likely to success in future
because cash acquisition tends to be successful more.

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Stock-Cash Acquisition Analysis

The stock-cash acquisition deal structure was to receive 0.2617 HudBay shares and $0.001 in
cash. The revenue growth was 10%, operating expense 60%, general cost 5%, terminal growth
rate was 2% and WACC was calculated 16%. The detailed WACC calculation is given below.
WACC Caculation
Risk free rate
Market premium
Beta
Cost of Equity
Cost of debt
After tax cost of debt
Weight of equity
Weight of debt
Debt
Equity
Total debt & equity
WACC
Risk Premium
Adjusted WACC

5%
10%
1.20132
11%
8%
5.20%
0.99831
0.00169
3246.17
1914153
1917399
0.10997
5%
16%

In this situation the share price was calculated $21.6047 with the synergy value of $281413.14.
Additional information regarding this situation is given below. Here, we calculated the share
price after considering the cash payment of $.001 which was totaled $82.83 thousand and the
new number of share was 190941 with levered beta of 1.2013.
Hudbay Share Number
Norsement Share number
Cash per share
Total Cash required
Norsement Share number offer
Total share
D/E
Levered beta

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151336
82838.85
0.001
82.83885
39604.63
190940.6
0.001696
1.201323

P a g e | 21

.
Here we see the simulation and sensitivity analysis of the share price of cash-stock acquisition
deal. The coefficient of variation was .0332 while the share price being most sensitive to revenue
growth 90.8% and then to WACC which is 8.9%.

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Real Option Value

We assume there will be an option of expanding the Constancia project with Zinc exploration.
And the real value option of expanding was calculated as below.

REAL OPTION
Option to Expand
ASSUMPTIONS
Initial Investment (K)
PV of Cash Flows (S)

100000.0
7834.766201

Risk Free Rate (Rf)

t
2

5%
16
4%

d1
d2

-1.783248939
-2.583248939

N(d1)
N(d2)
Cont comp. Discount
factor

0.037272895
0.004893734
0.449329206

Option Value

72.13466907

2.22554

For accessing the net present value of the Constancia project we added the real option value.
Three different scenarios for the Constancia project was given in the case. We calculated NPV
for each scenario and after giving weight we got the weighted average NPV of the Constancia
project.

Value of Constancia: case 1

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Case 1 valuation of the Constancia project, Norsemont has elected to use long-term commodity
price assumptions: $2.50 per pound copper, $14.5/lb molybdenum, $14.00 per ounce silver, and
$1,000.00 per ounce gold. In this scenario, the WACC was 10.58% for the stand along project.
The detailed WACC calculation is given below.
WACC Calculation
Risk free rate
Market premium
Beta
Cost of Equity
Cost of debt
After tax cost of debt
Weight of equity
Weight of debt
Debt
Equity
Total debt & equity
WACC
Risk Premium
Adjusted WACC- Nominal
Inflation
Adjusted WACC- real

5%
10%
1.2
11%
8%
5.20%
0.9823
0.0177
3246.2
180649
183895
0.109
3%
14%
3%
0.105802

In the base case scenario of the Constancia project, after calculation, we get the IRR of 10%
which is less than our WACC. Also the calculated NPZ was negative which is valued US $-73.6
million. After adjusting the real option value we get the adjusted NPV of $-1.4942 million.
The simulation analysis shows that this case has the coefficient of variation of -.73. Which
indicates the riskiness of the project is very high.

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The sensitivity chart shows the NPV is most sensitive to the price of copper by 73.8%. then it is
sensitive to the price of the other metal.
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Value of Constancia: case 2

Case 2: $2.75/lb Cu, $14.50/lb Mo, $14.00/oz Ag and $1,000.00/oz Au were considered. Here
the WACC was also 10.58%. The calculation was same as the case 1. But due to the change in
the price of the metal, we get the NPV value of $152.3 with the IRR 12% which is higher than
the WACC. After adjusting the real option value we get the NPV totaled $224.42.

The simulation analysis shows that the NPV has a coefficient of variance of .46. In the sensitivity
analysis chart we see the copper price has most affect on the NPV about 73.8%.

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Value of Constancia: case 3

Case 3 represents $4.00/lb Cu represents the 27 month Cu forward price and other metals price
based on recent metal prices of $16.00/lb Mo, $18.00/oz Ag and $1,200/oz Au. Here the WACC
was 10.58% and after calculation the NPV was $538.9 with IRR of 17% which is higher than the
WACC. After adjusting the real option value, the NPV was $ 611.025.

Coefficient of variation was .35 for the case 3 scenario in the simulation analysis. The sensitivity
of the NPV was mostly to the copper price which is 73.8%.
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Net Present Value of Constancia

Case 1
Case 2
Case 3
Weighted Average
NPV

NPV
Weight
Weighted NPV
-1.494
0.2
-0.298842442
224.42
0.6
134.6516059
611.03
0.2
122.2050383
256.5578018

There were three different scenarios for the different commodity price of the metals. For analysis
we average the NPV from different scenarios after giving weight 0.2, 0.6 and 0.2. Not being over
optimistic, we get the average synergy value of $256.55.

Comparison
Throughout the case analysis our main problem was regarding the investment decision of Jamil
Investment. We analyze different deal structure situation and different deal scenarios for the
project evaluation.
For the cash acquisition the share price was $24.79 and for cash-stock acquisition the share price
was 21.60; which were both higher than the base case share price $20.4. Though the cash
acquisition mostly tends to be successful but in this case the mixture of cash-stock acquisition is
not a failed one.
The NPV was negative in one scenario but positive in other two scenarios. The coefficients of
variance were -.73, .46 and .35 for those scenarios. So the average risk of the project is moderate.
But any fluctuation can easily make the project very high.
The synergy from the revenue and cost reduction was still positive after subtracting the
transactional costs and other qualitative costs.

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Recommendation
As the Constancia technical analysis report shows positive future results, we assume the
Constancia project will not be a failed project and problems in Peru will not hinder significantly.
For Jamil Investment it will high time to focus on South American market by investing in
HudBay shares as institutional investor. And with the reference to the past history HudBay will
be able to manage its all projects.
So, Muir, should suggest Jamil Investment to invest as an institution for HudBay Minerals
indifferently on the acquisition deal structure.

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