Haywood Securities has declared that the proposed merger between HudBay and Lundin Mining will not be completed, and Lundin must now move ahead.

In a note published Tuesday, metals analyst Kerry Smith said he expects that HudBay shareholders will reject the merger if a vote takes place.  The Ontario Securities Commission has decided a simple majority vote is required.

No date for the shareholder vote has been set, and we would expect no vote will be held, as HudBay shareholders have been very opposed to the deal, notwithstanding its longer term merits, bringing long-life assets together with a very solid cash balance to make a bigger and more financially more secure company, he added.

Meanwhile, Smith noted, Lundin Mining has been sideswiped by rapidly declining prices like all the base metals producers.

The company has been hit hard by recent weakness in base metal prices and most now aggressively cut costs, Haywood Securities advised.

Lundin needs to hunker down and cut costs, Smith advised. CEO Phil Wright is well aware of the issues, and we believe is prepared to make the necessary hard choices.

Smith noted the profile of Lundin Mining is drastically different from a year ago. The company has pared its operating base to three producing mines, while the massive Tenke Fungurume copper/cobalt project appears to be ahead of schedule and under budget.  Lundin has sold its Aljustrel operation and its Galmoy mine will close in May.

Smith also noted that Lundin's balance sheet is highly leveraged, and depending on metal prices going forward, may require additional capacity.

The proposed merger with HudBay would have added some needed strength to Lundin's balance sheet, including $800 million in cash and $270 million in long-term debt, according to Haywood Securities.

The deal will not go through and, as a result, Lundin's financial position is substantially different from what it could have been. As of year-end, we estimate Lundin's balance sheet has approximately $110 million in cash and $350 million of debt.'

Bottom line-cash is tight, and we expect Lundin is not keen to draw further on its $500 million credit facility, which we estimate has less than $200 million of credit remaining, Smith observed. Lundin is in a difficult situation, as investors are unsure what the balance sheet looks like, whether it is still onside with the debt covenants and also how successful the company has been at reducing costs at its current operations.

Noting that shutting down Galmoy will improve Lundin's overall cash profile, and that the mining company should realize some benefit from lower fuel and other consumables cost, Smith said Lundin will scrutinize all expenditures, and we expect there are additional capital and operating cost savings that can be realized that we have not modeled.

Haywood Securities still gives Lundin a SECTOR OUTPERFORM rating, and has revised its target price from negative $3.25 per share to $1.25/sh.