HudBay Minerals takes on Fenix nickel

HudBay Minerals and Skye Resources have entered into a definitive agreement to combine their respective businesses. Skye’s principal asset is the worldclass Fenix nickel project in Guatemala, which includes 41.4 Mt of reserves. The transaction will be structured as a Plan of Arrangement under the Business Corporations Act (British Columbia) between HudBay and Skye. Skye’s Fenix project will strategically expand HudBay’s base metals portfolio to include nickel and add significantly to HudBay’s development pipeline, with a world class project that is capable of near term production, has a 30 year mine life and contains significant opportunity for expansion.

On completion of the transaction, all Skye common shares will be automatically exchanged on the basis of 0.61 HudBay common shares for each Skye common share. Upon completion of the transaction, HudBay will have approximately 160.9 million common shares outstanding, of which current HudBay shareholders will own 79.7% and former Skye shareholders will own 20.3%.

Following completion of the transaction the combined company’s profile will include:

– A large increase in reserves and resources
– A diversified multi-metal resource base
– An attractive mix of producing, development and exploration assets that provides a solid platform for future growth
– A strong balance sheet with a pro-forma cash balance of approximately C$861 million, no debt and solid operating cash flow going forward.

“We believe that this represents excellent value for our shareholders,” said Allen Palmiere, President and CEO of HudBay. “Today’s announcement reflects one of the key elements of our strategy -building scale and scope through opportunistic investments to complement HudBay’s existing operations. This is a tremendous addition to HudBay’s development pipeline and provides important diversification to the company’s existing portfolio. Our balance sheet strength together with the continuing strong cash flows from our current operations place us in excellent position to bring to production the Fenix project and continue our aggressive exploration and development activities in the prolific Flin Flon Greenstone Belt [Canada]. At the same time, we will continue to seek additional opportunities in support of further growth and value creation for shareholders.”

Vice Chairman and CEO of Skye, Colin K. Benner said, “The planned combination is a great opportunity for Skye’s shareholders and for Guatemala. This agreement merges the worldclass ferro-nickel Fenix project with a company with the financial and technical capacity to move it forward rapidly and I encourage Skye shareholders to vote in favour of this transaction. HudBay is a large, exceptionally well-managed and respected Canadian mining company with roots going back over 80 years. We are very pleased to become a significant part of this much larger and stronger enterprise and support their plans for future growth in the pursuit of becoming an international mining house.”

Benner will join HudBay’s board as a director. Allen Palmiere said, “We are extremely pleased that Colin will be joining the HudBay board. His proven operating and management expertise will be of great assistance to the company as we move forward to create the next major Canadian base metal company. On a personal note, I have known Colin for many years and am looking forward to working with him.”

As part of the Transaction, HudBay will acquire approximately 12,679,266 common shares of Skye at a price of C$7.51 per share in a private placement for total gross proceeds to Skye of approximately C$95,221,285, representing approximately 19.9% of Skye’s outstanding common shares on a pro-forma basis. These proceeds will be used to immediately ramp up the full engineering, procurement and construction activities at the Fenix project, including the purchasing of long lead time equipment orders that are presently suspended. The private placement financing is not conditional on the completion of the Plan of Arrangement but is subject to the approval of the TSX.

Pursuant to the terms of a Share Purchase Master Agreement between Skye and Vale Inco, Vale Inco has the right to participate in the financing to maintain its current approximate 11.0% equity interest in Skye. Vale Inco must exercise this right within 24 hours after the announcement of the financing. Should Vale Inco exercise in whole its right to participate in this financing, HudBay’s holding in Skye would represent approximately 19.4% of its outstanding common shares on a pro-forma basis.

HudBay Minerals is investing for the future in one of the most ambitious exploration programs in Canada, targeting its 400,000 ha exploration territory in the Flin Flon Greenstone Belt. As an integrated mining company, HudBay operates mines, concentrators and metal production facilities in northern Manitoba and Saskatchewan, a zinc oxide production facility in Ontario, the White Pine copper refinery in Michigan, and the Balmat zinc mine in New York state.

Skye acquired the rights to the Fenix project in December 2004 and has completed a feasibility study for a ferro-nickel project using proven conventional smelting technology. Environmental and construction permits for the project have been received, basic engineering is complete, detailed engineering is over 50% complete and Skye is preparing to initiate construction. Fenix is located in eastern Guatemala and is 98.2% owned by subsidiaries of Skye and 1.8% by the Government of Guatemala. The project consists of an exploitation license encompassing 248 km2 and an exploration license covering 32 km2, together with a pyrometallurgical nickel processing plant and related facilities. Built at a cost of $238 million in 1977, the plant operated until it was closed in 1980. Since the plant shutdown, no mining activity has taken place on the property, but the plant has been on care and maintenance. Ferro-nickel production is now estimated to commence in the last quarter of 2010.