Hudbay/Augusta

Overview

Following the acquisition by Hudbay of most of the common shares of Augusta (the "Augusta Shares") in consideration for common shares of Hudbay ("Hudbay Shares") and for warrants to acquire common shares of Hudbay ("Hudbay Warrants"), there will be an amalgamation squeeze-out of the minority Augusta shareholders under which, on an amalgamation of Augusta with Newco, they will receive Hudbay Shares and redeemable preference shares of Amalco (having full stated capital). These preference shares will be redeemed immediately by the delivery of Hudbay Warrants. The Canadian and U.S. tax consequences to a holder of Hudbay electing, following receipt of an exercise notice by the warrantholder, to settle Hudbay Warrants by issuing Hudbay Shares equal to the warrants' in-the-money value, are unclear.

Previous bid and take-up

Pursuant to an offer which had been endorsed by the Augusta board after being "sweetened" with the Hudbay Warrants, Hudbay in July 2014 took up Augusta Shares so that it now owns 96% of the outstanding Augusta Shares. The consideration paid for each Augusta Share was 0.315 of a Hudbay Share and 0.17 of a Hudbay Warrant.

Hudbay Warrants

Hudbay may give a written "In-the-Money Settlement Notice" that it will satisfy its obligations in respect of Hudbay Warrants that are exercised by paying their "in-the-money" value in Hudbay Shares, cash or any combination thereof.

Preliminary squeeze-out transactions

Prior to the "Effective Time" of the amalgamation, Hudbay will transfer all of the Augusta Shares held by it, together with any Hudbay Warrants to be distributed on the redemption described below, to Canco (a direct wholly-owned subsidiary) in exchange for common shares of Canco. In turn, Canco will transfer such Augusta Shares and Hudbay Warrants to Newco (a direct wholly-owned subsidiary of Canco) in exchange for Newco Shares.

Amalgamation

At the Effective Time, Augusta and Newco will amalgamate and continue as one corporation (Amalco) and:

1. each outstanding Augusta Share of a minority shareholder will be exchanged for (i) one Amalco Redeemable Preferred Share to be issued by Amalco to the shareholder, and (ii) 0.315 of a Hudbay Share to be issued by Hudbay directly to the shareholder;
2. each outstanding Newco Share will be exchanged for one Amalco Common Share;
3. each outstanding Augusta Share beneficially owned by Newco will be cancelled;
4. validly dissenting Augusta shareholders will be entitled to receive the fair value of their shares; and
5. in consideration for the issuance of each Hudbay Shares in (a) above, Canco will issue one common share to Hudbay.

Redemption

Each Amalco Redeemable Preferred Share will immediately be redeemed by Amalco in consideration for 0.17 of a Hudbay Warrant (the "Redemption"). No fractional Hudbay Shares, or following the Redemption, Hudbay Warrants, will be issued or delivered in connection with the Amalgamation or the Redemption..

Canadian tax consequences.

Basis allocation. A resident shareholder will be deemed to have disposed of its August Shares for proceeds equal to the aggregate adjusted cost base thereof and to have acquired the Amalco Redeemable Preferred Shares and Hudbay Shares at an aggregate cost equal to such proceeds. The cost to a resident shareholder of the Amalco Redeemable Preferred Shares will equal the proceeds of disposition for the Augusta Shares multiplied by a fraction whose numerator will be the fair market value immediately after the Amalgamation of the Amalco Redeemable Preferred Shares and the denominator will be the fair market value immediately after the Amalgamation of all of the shares received upon the Amalgamation. The proceeds of disposition not allocated to the Amalco Redeemable Preferred Shares will be allocated to the cast of Hudbay Shares.

Redemption

The Amalgamation Agreement provides that the aggregate stated capital of the Amalco Redeemable Preferred Shares will be an amount equal to the aggregate fair market value of the Hudbay Warrants received on the Redemption, with the result that resident shareholder should not realize a dividend on the Redemption. The Amalco Redeemable Preferred Shares on Redemption will be considered to have disposed of for proceeds of disposition equal to the aggregate fair market value of the Hudbay Warrants received on the Redemption.

Warrant settlement

The consequences of settlement in Hudbay Shares, or a combination of Hudbay Shares and cash, following receipt of an "In-the-Money Settlement Notice," are unclear. The holder might realize a capital gain to the extent that the fair market value of the Hudbay Shares (or combination of Hudbay Shares and cash) received upon exercise exceeds the adjusted cost base of its Hudbay Warrants.

U.S. tax consequences

Taxable exchange. The exchange will be a fully taxable transaction for a holder of Augusta Shares.

Warrant settlement

The U.S. federal income tax consequences are not clear in a situation where a U.S. Holder does not pay the cash Exercise Price because an In-the-Money Settlement Notice is issued, and instead receives a net number of Hudbay Shares having a value equal to the value of the Hudbay Warrant at the expiry time. In that case, if the Hudbay Warrant is treated as a "a right to acquire stock" within the meaning of the U.S. federal income tax reorganization rules, the receipt of Hudbay Shares in satisfaction of the Hudbay Warrant could be treated as a "recapitalization" for U.S. federal income tax purposes. If the exchange is treated as a recapitalization, no gain or loss would be recognized on the receipt of Hudbay Shares, the U.S. Holder would have a tax basis in the Hudbay Shares received equal to the holder's tax basis in its Hudbay Warrant, and the U.S. Holder's holding period in the Hudbay Shares received in satisfaction of the Hudbay Warrant would include its holding period in the Hudbay Warrant. Alternatively, the U.S. Holder may be deemed to have exercised its Hudbay Warrants in exchange for the relevant number of Hudbay Shares with the tax consequences described in the preceding paragraph, and then as having sold a number of Hudbay Shares having a value equal to the aggregate Exercise Price, with a portion of such sale proceeds then deemed paid to Hudbay in satisfaction of the cash Exercise Price. In that case, a U.S. Holder will have gain or loss on the shares deemed acquired and sold based upon the difference between the fair market value of those shares and the holder's tax basis in those shares as determined under the preceding paragraph. The U.S. Holder would have a tax basis in the retained shares equal to the sum of the fair market value of the Hudbay Warrant that is attributable to such number of shares and the Exercise Price for those shares.