Hudbay boosts gold reserves, production forecast in Manitoba

In its recent annual mineral reserve and resource update, mid-tier copper producer Hudbay Minerals (TSX: HBM; NYSE: HBM) provided some market optimism in the form of a major boost in gold at its Lalor mine within the Snow Lake Mining complex in northern Manitoba.

Last year, the company announced initial results from its Snow Lake gold strategy, which sees its Lalor copper-zinc-gold mine transition to a predominantly gold operation with precious metals constituting a majority of life-of-mine revenues.

Several years of work, including drilling, test mining and trade-off studies on processing solutions for the gold ore, fed into the Phase One strategy that resulted in a 65% increase in Lalor’s gold reserves in 2019, the company says. The operations plan also includes processing of the higher-grade gold ore at the company’s New Britannia mill that is marked for a refurbishment program.

Hudbay’s decision to shift processing of Lalor’s gold-zone ore from its current Stall mill to its New Britannia mill is driven by the substantial modelled increase in gold recoveries from approximately 53% at Stall to a 93% recovery forecast at New Britannia. The Phase One plan at Lalor envisions annual gold output more than doubling from 2018 levels to 140,000 oz. over the first five years after its New Britannia mill is overhauled in 2022.

The Lalor mine currently operates at 4,500 tonnes per day, with ore processed at the 3,500 tonne-per-day Stall mill and the remaining 1,000 tonnes per day processed at the company’s 777 mine and mill complex. Its 777 mill operates at 4,000 tonnes per day, below its 6,000 tonne-per-day capacity, as the mine is winding down towards scheduled closure in mid-2022.

Phase Two of the Snow Lake gold strategy was recently tabled, following extensive infill and exploration drill programs at Lalor as well advancing engineering studies on the company’s other regional deposits in the Snow Lake region. The program delivered a major boost in gold reserves and resources with an overall 35% increase in total Snow Lake gold reserves to 2.2 million contained ounces.

“We are extremely pleased with our exploration success over the past 12 months in Manitoba, where we’ve doubled the mine life in Snow Lake and more than doubled Lalor’s annual gold production from current levels,” Peter Kukielski, Hudbay’s president and CEO, stated in a March 30 news release.

The headframe at Hudbay Minerals’ Lalor zinc-gold-copper mine, near Snow Lake, Manitoba. Credit: Hudbay Minerals.

Updated proven and probable reserves at Lalor came in at 15 million tonnes grading 0.74% copper, 3.8% zinc, 4.2 grams gold per tonne and 28 grams silver per tonne. Additional inferred resources of 4.4 million tonnes averaging 1.2% copper, 1.0% zinc, 4.4 grams gold and 26 grams silver were also tabled for the deposit. Hudbay says Lalor’s latest reserve estimate adds more than a year of mine life, and it now sees 18 years of operational life for its overall Snow Lake operation, inclusive of nearby satellite deposits.

Lalor’s life-of-mine gold production now sees an increase of 41% versus the previous mine plan, and annual gold production is anticipated to more than double from current levels to average over 150,000 oz. over the first eight years following the New Britannia mill upgrade. Hudbay also forecasts low operating costs of about US$655 per oz. gold at Lalor on a sustaining cash cost per oz. gold produced basis and net of by-product credits.

The company’s revised 18-year mine plan for its Snow Lake operations sees ongoing operations at Lalor processing 4,500 tonnes per day, for the initial 10 years then transitioning to mining of the gold-rich WIM and 3 Zone deposits over the final eight years of the plan.

Under the revised mine plan, the New Britannia gold mill will operate at its maximum capacity of 1,500 tonnes per day from 2022 to 2030 by processing Lalor’s current gold-zone reserves at average grades of 6.4 grams gold and 1% copper. From 2030 to 2037, New Britannia is expected to operate at a processing rate of between 1,200 to 1,500 tonnes per day at average grades of 2.2 grams gold and 1.3% copper as the Lalor feed is replaced by WIM and 3 Zone ore.

The WIM copper-gold deposit was acquired by Hudbay in 2018 for $500,000 and hosts probable reserves of 2.45 million tonnes grading 1.63% copper and 1.6 grams gold plus some minor zinc and silver values. The deposit, located 15 km by road from the New Britannia mill, starts from surface and Hudbay expects to develop it through an underground ramp.

The 3 Zone deposit, which hosts 662,000 tonnes of probable reserves grading 4.2 grams gold, was acquired as part of Hudbay’s 2015 New Britannia mine and mill acquisition from QMX Gold (TSXV: QMX) for US$12.3 million. It is a ramp-access deposit located within the existing mining infrastructure at the past producing New Britannia operation.

The company has budgeted $153 million for its New Britannia mill upgrade program, and says it anticipates a two-year payback on the investment. Construction is expected to run from mid-2020 through mid-2021 followed by commissioning and ramp-up programs in late 2021. All key environmental permits for the project are in hand.

Hudbay also highlighted a Phase Three program in its Snow Lake gold strategy that will look at further extending the life of its Snow Lake complex. The company says it will examine the potential of its Lalor inferred resource to extend that mine’s life beyond the current estimate of ten years.

The newly discovered Lens 17, a copper-gold rich lens included in the Lalor inferred resource, contains 0.8 million tonnes at 3.0% copper, 3.7 grams gold and 18 grams silver and remains open down plunge. Additionally, there are mineral resources at Hudbay’s other satellite gold deposits in the Snow Lake region, such as the Birch and New Britannia deposits, that could potentially feed the New Britannia mill and further extend the operational life. New Britannia and Birch are mineralized zones at the past-producing New Britannia gold mine that the company says would be accessible with some investment in the existing mining infrastructure.

Among Hudbay’s analyst research coverage, consensus was positive on the boost in gold reserves and increasing forecast mine output in Manitoba. In his research note, Haywood Securities analyst Pierre Vaillancourt noted that the increase in gold production over the next few years “will improve Hudbay’s overall production profile, while reducing vulnerability to base metals.” Vaillancourt has a hold rating on the stock and a $3.00 target price.

The headframe at Hudbay Minerals’ Lalor gold-zinc-copper mine in Manitoba. Credit: Hudbay Minerals.

BMO Capital Markets mining analyst Jackie Przybylowski maintains a market perform rating on the company and has a $4.00 target price, describing Hudbay’s longer-term guidance as positive.

CIBC mining analyst Oscar Cabrera was more bearish on the company, recently downgrading his rating from outperformer to neutral and his target price from $6.50 to $3.00 per share citing the negative effect of the COVID-19 pandemic on commodity prices, specifically on copper, which is Hudbay’s main product.

Hudbay has taken some lumps in the market recently due to the global COVID-19 pandemic and lower base metal prices. On March 20, the company announced it was commencing a temporary shutdown of its flagship Constancia copper mine in Peru, due to the country’s declaration of a state of emergency in mid-March.

Following the mine closure announcement, Scotia Capital mining analyst Orest Wowkodaw downgraded his rating on the company to sector perform from sector outperform, and dropped his target price to $3.50 per share, from $5.00 per share. “Overall, we view this update as negative for the shares, particularly if the suspension is extended beyond the initial two-week quarantine period in the country,” Wowkodaw stated in his research note.

At press time, the company closed at $2.45 per share on the TSX, giving it a market capitalization of $640 million based on 261 million common shares issued and outstanding. The stock has a 52-week trading range of $1.66 and $10.42.