Hudbay hits commercial production at Constancia

Hudbay Minerals (TSX: HBM; NYSE: HBM) has stayed on course with its ambitious growth plans over the last five years, bringing online three new mines, with the latest being the large Constancia copper-molybdenum-gold-silver mine in Peru.

Located 600 km southeast of Lima in the province of Chumbivilcas, Constancia reached commercial production on April 30, some four months after initiating production in December 2014.

“We are very proud of the success we have had building and commissioning the project and maintaining the support of local communities around the operation,” Hudbay’s chief financial officer David Bryson says.

Hudbay picked up Constancia through its 2011, $520-million acquisition of Norsemont Mining, and a year later started building the US$1.7-billion mine. It is now Hudbay’s fourth producing asset, following the relatively new Lalor and Reed mines and the aging 777 zinc-copper mine. The latter three are all in the Flin Flon greenstone belt of Manitoba, where Hudbay is celebrating 100 years since discovering the original Flin Flon deposit.

With all three new mines up and running, Hudbay expects copper production this year to increase more than 270% over 2014 levels and anticipates becoming free cash flow positive, after investing US$2.2 billion on Constancia, Lalor and Reed over the past few years.

“The second half of 2015 will represent the beginning of a phase of free cash flow generation for the first time after five years of capital investments in our three new mines,” David Garofalo, the company’s president and CEO, said on a conference call.

While the company doesn’t provide cash flow guidance, Constancia will be the main contributor.

So far, Constancia has been meeting the ramp-up targets for throughput, recovery and product quality. The plant is running as expected and throughput in April averaged 79,000 daily tonnes, including peaks of over 90,000 tonnes per day due to favourable ore composition, Garofalo says.  

Copper recovery in April averaged 65%, while concentrate grade averaged 27% year-to-date, “with average concentrations of deleterious below penalty levels.” As of the end of April, Constancia had produced 42,575 tonnes of copper concentrate, of which it shipped 20,500 tonnes.

During the ramp up, Hudbay notes, it initially focused on ore throughput and meeting saleable concentrate requirements, but will switch its focus to boosting copper recovery. The improvement in recovery should come from the recently started concentrate regrind circuit. The company anticipates Constancia will achieve steady design and feasibility-level copper recoveries of 88% in the fourth quarter.

Annual production at the 80,000-tonne-per-day open-pit operation should average 82,000 tonnes copper at cash costs of US$1.25 per lb. over its 22-year life. But annual output during the first five years should come in higher, averaging 116,000 tonnes copper, at cash costs of US90¢ per lb.

If copper recoveries increase as planned, Hudbay aims to ramp up the molybdenum concentrate separation circuit by July. While Garofalo doesn’t expect moly prices to pick up soon, he says running the circuit still makes sense, as it represents a “valuable contribution.”

Meanwhile, the firm has received approval of a second modification to the environmental and social impact assessment (ESIA) for Constancia. The ESIA revision includes mining the nearby high-grade Pampacancha copper-gold deposit. Hudbay anticipates talks to buy the surface rights to the deposit later this year.

For 2015, Constancia should deliver 100,000 to 125,000 tonnes copper and 50,000 to 65,000 equivalent oz. gold. Silver Wheaton (TSX: SLW; NYSE: SLW) has two streaming agreements on Constancia. It is set to receive half of the gold produced for US$400 per oz. delivered, and all of the silver generated over the mine’s life.

At its Manitoba operations, Hudbay processed 14% more ore, 18% higher copper grades and slightly improved copper, zinc and gold recoveries during the first quarter of 2015 compared to a year ago, as it achieved steady state production at the Lalor gold-zinc-copper mine and the Reed copper mine. (Both assets achieved commercial production in 2014.)

Hudbay’s 2015 consolidated production guidance is 140,000 to 175,000 tonnes copper, 95,000 to 120,000 tonnes zinc and 135,000 to 170,000 equivalent oz. gold.

It does not expect that the 12% of its Manitoba employees on strike will affect the guidance, as it is continuing operations under its comprehensive contingency plan. “We’re hopeful that we will be able to reach a negotiated settlement on a timely basis,” Bryson says, without giving specifics on the machinists’ strike that started on May 2.

Hudbay also recently closed the transaction to acquire the New Britannia mill in Snow Lake, Man. Once refurbished, the 2,000-tonne-per-day mill could increase the Snow Lake concentrator’s processing capacity from 2,700 daily tonnes, eliminating the firm’s need to build a concentrator at Lalor, Desjardins analyst Jackie Przybylowski writes.

Hudbay is studying throughput optimization at both mills, with the New Britannia mill restarting in 2017 for $100 million. Przybylowski has increased her one-year target to $13 from $12 per share, with a “hold-above-average risk” rating.

BMO analyst Aleksandra Bukacheva has a more optimistic view. She notes Hudbay remains one of BMO’s preferred base metals stocks, with an “outperform” rating. She has increased her target to $15 from $13, highlighting the company’s “outstanding growth profile, low geopolitical risk and quick ramp-up to commercial production at Constancia.”