P a g e | 1

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 company’s 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, Norsemont’s mineral exploration had been focused in Peru, on its Constancia project and the exploration had been ongoing. The activities included geophysical surveying and geologic mapping. Geologists also performed rock sampling, drilling and surveying.

1 | P a g e

P a g e | 2

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 Scotia’s 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: Canada’s climate is dominated by extreme long and cold winters. It impact the mining industry a lot.

2 | P a g e

P a g e | 3

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 Peru’s 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 Peru’s shared boarder.

3 | P a g e

P a g e | 4

Industry Analysis: Porter’s 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, Porter’s Five Forces analysis is a great way.

The Porter’s 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 Porter’s Five Forces Model

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

4 | P a g e

P a g e | 5

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

5 | P a g e

P a g e | 6

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

6 | P a g e

P a g e | 7

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.

7 | P a g e

P a g e | 8

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.

6.9 6.1 5.5

17.9 20.4

5.5

66.4

5.0 4.4 3.910.0

36.6

6.4

57.0

HudBay

2009 2010

Graph: Ratio Analysis

8 | P a g e

Sales growth Gross Profit Growth

Return on common

equity

ROA Total Asset Tunrover

Fixed Asset Turnover

8%

315%

4% 3%36%

86%0.0662118721

0418710.0553356494

805395

0.354566322589913

0.880395878988657

HudBay

2009 2010

P a g e | 9

DuPont Analysis

00.20.40.60.8

11.21.4

0.0591184950646713

0.354566322589913

1 0.795091469448922

1.19655001297983

0.227063319029606

0.358392626890975

1

0.442984092849689

1.2494177184914

ROE: .019942ROE: .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.

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.

9 | P a g e

P a g e | 10

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.

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 Risk 1.6

Z > 2.9 Safe Zone

1.81 < Z < 2.99 Grey Zone

Z < 1.81 Distress Zone

10 | P a g e

P a g e | 11

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 = 77.00% (Operating expenses include) Tax Rate on income = 35.00%Interest Expenses = $0.00 Current Depreciation = $103,399.00 Current Capital Spending = $88,272.00 Working Capital as % of Revenue = 115.00%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 = 100.00% (Operating expenses include) depreciationTax Rate on income = 35.00%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

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

11 | P a g e

P a g e | 12

Quantitative NAV Analysis: Norsemont

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 company’s 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 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 company’s 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 property’s 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.

12 | P a g e

P a g e | 13

Assessment of the Acquisition Decision

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:

1. Any acquisition opportunity should remain within HudBay’s current scale and geographic footprint(Americas)

2. Acceptable level of political risk for the company to take on3. Jurisdictional support for mining activity4. Human rights issues, including child labour and wages, were a concern to firms5. HudBay’s management did not believe that abuses of human rights or attempts at bribery

were acceptable6. The company was committed to ensuring its operations did not exploit the rights of any

worker or any third parties7. Company did not target any one specific metal; future metal prices were another

consideration when evaluating the types of mining projects to pursue8. Any properties HudBay considered needed to exhibit excellent exploration potential9. Technical reports were a critical part of any analysis for a potential merger and

acquisition opportunity10. 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.

13 | P a g e

P a g e | 14

Statement of Problem

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. 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 favorable feasibility report for Norsemont’s 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 for Solving the Problem

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.

14 | P a g e

P a g e | 15

Assumptions

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 5%Market premium 10%Beta 1.2Cost of Equity 11%Cost of debt 8%After tax cost of debt 5.20%Weight of equity 1Weight of debt 0Debt 0Equity 1739279Total debt & equity 1739279WACC 0.11Risk Premium 2%Adjusted WACC 13%

15 | P a g e

P a g e | 16

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 sensitivity chart we can see the revenue growth is the most sensitive and after that WACC has sensitivity to the share price.

16 | P a g e

P a g e | 17

Cash Acquisition Analysis

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   Hudbay Share Number 151336Risk free rate 5% Norsement Share number 82838.851Market premium 10% Cash per share 4.5Beta 1.30032 Total Cash required 372774.8295Cost of Equity 12% Share price Hudbay 16.67Cost of debt 8% Equity of Hudbay 2522771.12After tax cost of debt 5.20% Debt Finance 242774.8295Weight of equity 0.88604 Debt 246021.0025Weight of debt 0.11396 Equity 1912772.9Debt 246021 D/E 0.12862008Equity 1912773 Levered Beta 1.300323662Total debt & equity 2158794WACC 0.10783Risk Premium 5%Adjusted WACC 16%

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

17 | P a g e

P a g e | 18

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.

18 | P a g e

P a g e | 19

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 5%Market premium 10%Beta 1.20132Cost of Equity 11%Cost of debt 8%After tax cost of debt 5.20%Weight of equity 0.99831Weight of debt 0.00169Debt 3246.17Equity 1914153Total debt & equity 1917399WACC 0.10997Risk Premium 5%Adjusted WACC 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 151336

Norsement Share number 82838.85Cash per share 0.001

Total Cash required 82.83885

Norsement Share number offer 39604.63

Total share 190940.6

D/E 0.001696

Levered beta 1.201323

19 | P a g e

P a g e | 20

.

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%.

20 | P a g e

P a g e | 21

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) 100000.0  

PV of Cash Flows (S) 7834.766201       Risk Free Rate (Rf) 5%  t 16   σ2 4%       d1 -1.783248939  d2 -2.583248939       N(d1) 0.037272895  N(d2) 0.004893734  Cont comp. Discount factor

0.449329206 2.22554

     Option Value 72.13466907  

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 121 | P a g e

P a g e | 22

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 5%Market premium 10%Beta 1.2Cost of Equity 11%Cost of debt 8%After tax cost of debt 5.20%Weight of equity 0.9823Weight of debt 0.0177Debt 3246.2Equity 180649Total debt & equity 183895WACC 0.109Risk Premium 3%Adjusted WACC- Nominal 14%Inflation 3%Adjusted WACC- real 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.

22 | P a g e

P a g e | 23

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.

23 | P a g e

P a g e | 24

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%.

24 | P a g e

P a g e | 25

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%.

25 | P a g e

P a g e | 26

Net Present Value of Constancia

  NPV Weight Weighted NPVCase 1 -1.494 0.2 -0.298842442Case 2 224.42 0.6 134.6516059Case 3 611.03 0.2 122.2050383Weighted Average NPV     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.

26 | P a g e

P a g e | 27

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.

27 | P a g e