Friendly Manitoba remains HudBay’s happy home (May 09, 2011)

With three operating underground mines, another under construction and more than 4,000 sq. km of prospective land to explore all in northern Manitoba, HudBay Minerals (HBM-T, HBM-N) has no plans to leave the province anytime soon, even with two large acquisitions in recent years in Central and South America.

And despite two of its older Manitoban mines being scheduled to shut down by the second quarter of 2012, the company remains a stalwart believer in the area’s geology. For 2011, HudBay has planned one of the largest exploration campaigns there in its 83-year history.

As the company’s chief exploration geologist, Kelly Gilmore, explains, “VMS (volcanogenic massive sulphide) deposits are one of the key targets for our 2011 exploration program and account for 83% of the total proposed expenditures, including 56% in (Manitoba’s) Flin Flon greenstone belt. VMS deposits occur in various greenstone belts throughout Canada, but we believe the Flin Flon belt is one of the most prospective, if not the most prospective, belt to explore in.” 

HudBay’s geologists backed up those words with the 2007 discovery of the sizable Lalor nickel-copper-gold-silver deposit, 2.4 km from the company’s Chisel North zinc mine and 15 km from its Snow Lake concentrator. As of January 2011, Lalor had reserves of 10.5 million tonnes grading 8.31% zinc, 0.64% copper, 1.55 grams gold per tonne and 21 grams silver per tonne, as well as a further 12.75 million tonnes at mostly similar grades in the indicated and inferred resource categories.

Gilmore notes a huge “positive characteristic of Flin Flon deposits has been the growth of the deposit while mining has been going on,” due to successful exploration within the mine. Historically, this has averaged about 2.5 times the initial size of the deposit when mining started. HudBay is encouraged that Lalor has an indicated resource that is similar to both its flagship 777 mine and the historic Flin Flon mine prior to the start of mining.

The company plans to spend $70 million on exploration throughout the Americas this year and $163 million advancing the Lalor project toward production, which is scheduled to begin in the second quarter of 2012. As of February, HudBay had driven an underground production ramp 1,700 metres from the Chisel North mine toward a zinc-rich ore zone at Lalor, simultaneously giving it access to nearby gold zones which HudBay needs to drill. The total length of the ramp is expected to be 2,750 metres.

Chisel North’s mine life is expected to end just as initial ore production begins from Lalor, allowing for a smooth transition of mining personnel and continued activity at the Snow Lake concentrator. 

About 215 km away from Chisel, near the small town of Flin Flon on the Saskatchewan and Manitoba border, HudBay’s Trout Lake copper-gold-silver-zinc mine is finally expected to wind down in the fourth quarter, after 29 years of production. The company’s current cornerstone VMS mine, 777, also near Flin Flon, started commercial operations in 2004 and is expected to run until at least 2020.

Last year HudBay produced a combined total of 52,000 tonnes of copper (up from 48,000 tonnes in 2009), 77,000 tonnes of zinc (down slightly from 78,000 tonnes in 2009), 87,000 gold oz. (down from 92,000 oz. in 2009) and 843,000 silver oz. (down from 1 million oz. in 2009) from all its mines.

Facing a flat or even downward production profile in the near term, however, HudBay has launched itself into expansion mode. Earlier this year, it picked up Toronto-based Norsemont Mining in a friendly $520-million cash-and-share deal for the low-grade but high-tonnage Constancia copper project in southern Peru. 

The project boasts reserves totaling 372 million tonnes at 0.39% copper, 0.01% molybdenum, 3.57 grams silver per tonne and 0.05 gram gold per tonne. Based on the results of an updated feasibility study completed previously by Norsemont, HudBay expects to produce around 172 million lbs. copper (or about 78,000 tonnes) and 2 million lbs. molybdenum (about 900 tonnes) in concentrate at attractive cash costs over a 15-year mine life.

It has allocated $116 million for a preconstruction program at Constancia this year, which will include: early equipment procurement for long lead items, a resource model update, a metallurgy review and pit optimization study, geotechnical and condemnation drilling, and a US$9-million exploration program. Management expects a definite construction decision will be made by year-end.

HudBay’s expansion into South America marks a time of transition for a company which, in one corporate form or another, has largely stayed in Manitoba since the 1930s. It has developed 26 mines in the region over the years. 

The company says major advancements in geophysical survey technologies have allowed it to find deposits at deeper depths than previously possible. Having already developed major infrastructure in the area including two concentrators and a zinc plant also allows the company to mine discoveries that might be uneconomical for another operator to develop.

Further upside exists in HudBay’s several advanced-stage joint ventures for nearby VMS projects. Within trucking distance of its Flin Flon concentrator, HudBay controls a 70% interest in the Reed Lake high-grade, near-surface copper project, with joint-venture partner VMS Ventures (VMS-V) holding the remaining 30% carried interest. In April, HudBay reported Reed Lake’s indicated resources stand at 2.55 million tonnes of 4.52% copper, 0.91% zinc and 0.64 gram gold per tonne. 

A joint venture with Halo Resources (HLO-V) also allows HudBay to earn a 67.5% interest in the smaller Cold and Lost properties in the Sherridon VMS district 115 km away from Flin Flon. The partners expect to prepare a prefeasibility study for the projects during 2011 to determine how they fit with HudBay’s long-term production plans.

Outside of Manitoba, HudBay is earning up to a 75% interest in the advanced-stage Back Forty zinc-gold project, a JV with Aquila Resources (AQA-T) in Michigan’s Upper Peninsula. In addition, HudBay holds minority equity positions in 14 junior exploration companies with an aim to have a pipeline of projects ready for development following the construction of Lalor and Constancia.

Little mentioned by the company these days is its 98.2% interest in the Fenix brownfield nickel laterite project in Guatemala, which hosts reserves of 36.2 million tonnes grading 1.86% nickel. 

One of its less successful acquisitions, HudBay obtained Fenix in an all-share takeover of Skye Resources in mid-2008. Relatively little advancement of the project has been made since problems with locals reached a tipping point in late 2009, when a protester was shot and killed under unclear circumstances. A group of Guatemalan women later alleged that they were assaulted and raped in 2007 by security and police forces near the mine site. HudBay denies any wrongdoing in both cases, and says it did not have interests in the region in 2007.

It is now seeking a partner for the project. 

HudBay’s origins date back to the Whitney family of New York, which formed the Hudson Bay Mining & Smelting Co. Ltd. in 1927 to develop the original Flin Flon mine. It operated as such until 1975, when it became an operating subsidiary of a company related to Anglo American (AAL-L). 

Hudson Bay Mining & Smelting would eventually turn into HudBay after Allen Palmiere and Peter Jones’s small struggling zinc producer, OntZinc, bought it in 2004 from Anglo American for $325 million (financed through a mix of equity and debt). 

In the midst of rising commodity prices and stock markets, the new HudBay shares rose from $3 in 2004 to a high of $29.63 in late 2007, before being badly hit by the 2008 financial crisis, which pushed the stock down as
low as $2.70. In a remarkable turn of events, Palmiere and other directors of HudBay were forced out in early 2009 after a failed takeover bid for Lundin Mining (LUN-T), which angered shareholders because they were not allowed to vote on the deal and what seemed like a hefty premium at the time.

Then, HudBay had close to $1 billion on its pristine balance sheet, a time when cash was king and credit seemingly could not be found at any price. A cash-strapped Lundin agreed to a $597-million all-stock takeover deal, with Palmiere arguing the crisis environment would not last, and investors should understand the value of building a company through acquisitions while targets are cheap.

A shareholder group led by hedge fund SRM Advisers, which still controls 14.5 million HudBay shares, disagreed and ousted the former directors, nominating most of the current set. They are now led by chairman Wesley Voorheis, a Toronto lawyer, and president Garofalo, a Toronto accountant and the former chief financial officer of Agnico-Eagle Mines (AEM-T, AEM-N). 

With its shares trading around $15.19 on April 28, HudBay’s current market capitalization stands at $2.6 billion. Like many other resource companies, Lundin shares have more than quadrupled in value since early 2009, with the company now boasting a market cap of nearly $5 billion, leaving HudBay investors to ponder over what might have been.