The Ontario Securities Commission ordered HudBay Minerals (HBM.TO) on Friday to allow shareholders to vote on its C$550 million ($440 million) takeover of Lundin Mining (LUN.TO), raising both hopes and fears that the deal will not go through.

Shares of HudBay jumped more than 25 percent on the news, recapturing a chunk of the ground lost since the unpopular deal was announced last November. Lundin plunged 19 percent, as the potential loss of HudBay's deep pockets reignited fears of insolvency.

Both Canadian companies mine mainly copper and zinc, prices of which have plunged amid a global economic slowdown.

I think the probability is that it is (dead), Blackmont Securities analyst George Topping said of the deal. He upgraded shares of HudBay to buy from hold on expectations the deal will get voted down.

The three-member Ontario Securities Commission panel ruled HudBay must get approval to issue the 153 million shares it planned to use to pay for Lundin, an amount that will double HudBay's publicly traded float in the process.

While such a large issue would require shareholder approval on other major exchanges, current Toronto Stock Exchange rules allow companies to do it without a vote.

The two-day OSC hearing follows a challenge to the Toronto Stock Exchange's preliminary approval of the deal by merchant bank Jaguar Financial. Jaguar has been the loudest of a group of institutional shareholders that have opposed the takeover.

In its decision, the OSC said that while the rules do not require approval by HudBay shareholders, the extreme dilution involved in the transaction would leave former Lundin shareholders holding about 50 percent of the company, making it more a merger of equals than an acquisition of Lundin.

The commission, Canada's main securities regulator, also criticized the uncommon haste in the attempts to close the deal by Jan. 28, ahead of a March shareholder meeting that has been called to consider removing HudBay's board.

We have concluded... that the quality of the marketplace would be significantly undermined by permitting the transaction to proceed without the approval of the shareholders of HudBay, the OSC said.

Following the ruling by the OSC, HudBay said it is reviewing the decision with its lawyers.


HudBay's offer values each Lundin share at 0.3919 of a HudBay share, or C$1.74 based on Friday's prices.

Shares of Lundin were down 25 Canadian cents at 94 Canadian cents, as investors bet the deal would not go through. HudBay was up 89 Canadian cents at C$4.41.

Opponents of the deal have said acquiring Lundin would add unneeded risk to HudBay's strong balance sheet and profitable asset base.

HudBay has countered that Lundin's sprawling base metals properties -- including a stake in the massive Tenke-Fungurume copper-cobalt deposit in the Democratic Republic of Congo -- are needed for the company's growth.

Topping said acquiring Lundin's assets could be good for HudBay in the long run, but questioned the high price offered.

He said the key risk for HudBay now will be dealing with a potential lawsuit from Lundin if the deal falls apart.

In addition to Jaguar, other key HudBay shareholders, including 11 percent owner SRM Global Master Fund, have also come out against the deal.

SRM, along with Corriente Master Fund have put forward an alternative board, and have launched an Ontario Superior Court challenge to force HudBay to move up the date for a separate shareholder meeting to consider replacing its board.

That hearing is expected to begin on Monday, the same day Lundin shareholders are expected to vote to approve the deal.

As part of its plan to disrupt the deal, Jaguar launched a separate bid for HudBay. Given the OSC decision, it withdrew the offer on Friday.

($1=$1.25 Canadian) (Additional reporting by Susan Taylor in Ottawa and Scott Anderson in Toronto; editing by Peter Galloway)

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