Hudbay builds on its Manitoba legacy

VANCOUVER — Canadian base metal producer Hudbay Minerals (HBM-T, HBM-N) laid a foundation for success on the Flin Flon greenstone belt in northern Manitoba roughly 85 years ago. During that time the company has developed 26 mines in the region and moved around 145 million tonnes of ore. And with one major development project nearly complete and a strong resource base, Hudbay looks poised to tap the mineral wealth of Flin Flon’s volcanogenic massive sulphide (VMS) deposits for a long time to come.

The heart of Hudbay’s current production is its flagship 777 underground mine in Flin Flon, which has been producing copper, zinc, gold and silver in concentrate since around 2004. The 777 operation was especially important for the company in 2012, when it was going through a transition period due to the permanent closure of its Trout Lake and North Chisel mines.

In 2013, 777 will again be Hudbay’s main profit driver, with production expected to total 1.6 million tonnes of ore grading 2.18% copper, 4.41% zinc, 1.94 grams gold per tonne and 30.89 grams silver per tonne.

“The life of mine at 777 is around eight years, but we still see good potential to extend that life,” commented president and CEO David Garofalo during a first quarter presentation. “For the last several years our replacement ratio on production has been roughly one third, and we’re optimistic we can continue to do that and extend the mine life beyond that 2021 timeline through additional exploration.”

And Hudbay succeeded in maintaining that ratio during a reserve and resource update in late March, with 777 now holding 5 million proven tonnes grading 2.37% copper, 4.05% zinc, 1.95 grams gold and 27.31 grams silver; along with 6.45 million probable tonnes grading 1.48% copper, 4.4% zinc, 1.79 grams gold and 28.49 grams silver. Overall that equates to around a 36,000 tonne drop in 777’s copper equivalent reserves, which now total roughly 563,000 proven and probable tonnes.

“We think we have a very good track record of generating consistent growth in our reserves and resources on a per share basis, and we believe that it is a critical element of the value proposition that mining equities have to deliver to investors,” Garofalo continued, discussing how the negative impact gold producers have encountered with exchange-traded funds (ETFs) could also translate into the base metal sector.

“So why take the risk of investing in mining equities? The reason has to be, we present a value proposition over and above just investing in the base metal, and for those who have a positive view on the metals we produce, we can provide greater leverage on a per-share basis to those metals as the values of those metals go up as central banks continue to debase currencies,” he said.

Regardless of Hudbay’s success at extending 777’s mine life, the company will have a long-standing presence in the region in the form of its wholly owned Lalor mine in the Chisel Basin, 210 km east of Flin Flon. Hudbay has spent roughly $800 million on Lalor to date, and declared commercial production at the site in late March.

Lalor is expected to process around 418,000 tonnes of ore in 2013 at average grades of 0.54% copper, 9.89% zinc, 1.23 grams gold and 17.7 grams silver. But the most impressive aspect at Lalor — the second-largest deposit Hudbay has ever discovered on the Flin Flon greenstone belt — is its life of mine, which clocks in at roughly 20 years.

Copper-equivalent reserves at Lalor jumped by around 76,000 tonnes during 2012, as overall numbers improved during the reclassification of resources into the proven and probable categories. Lalor now holds 13 million probable tonnes grading 0.67% copper, 8.15% zinc, 1.59 grams gold and 15.52 grams silver in its defined base metal zone, complemented by global inferred resources totalling 12.8 million tonnes grading 0.93% copper, 2.7% zinc, 3.86 grams gold and 27.99 grams silver.

“We see at Lalor, much like we have with many of the other VMS deposits we have mined in Manitoba, a significant exploration potential from underground. What we’ve found to date is very high-grade copper-gold mineralization in addition to the well-defined zinc and gold mineralization we have closer to surface,” Garofalo explained, citing a zone Hudbay has identified at depth that averages roughly 4% copper and 7 grams gold. “As we get that drill access we’ll be better able to delineate the higher-grade zones we believe are underground and continue to extend Lalor down-plunge.”

The final element of Hudbay’s near-term growth strategy in Flin Flon is the $72-million Reed high-grade copper deposit, which the company owns a 70% interest in alongside joint-venture partner VMS Ventures (VMS-V). Reed is a smaller underground operation that will run at roughly 1,300 tonnes per day over a five-year mine life and is expected to process roughly 51,000 tonnes of ore in 2013 at average grades of 3.43% copper, 1.18% zinc, 0.72 gram gold and 8.8 grams silver.

Reed lies near a provincial highway and will provide feed to Hudbay’s Flin Flon concentrator. Reed’s reserves are well defined and total 2.2 million probable tonnes grading 3.83% copper, 0.59% zinc, 0.48 gram gold and 6.02 grams silver.

Hudbay will continue to focus on brownfield opportunities near its existing deposits during 2013. The company has budgeted around $20 million in exploration expenditures on its Manitoba portfolio during the year, with roughly 55,000 metres of drilling planned.

Hudbay reported cash and equivalents totalling $1.3 billion at the end of 2012, and expects capital expenditures in 2013 to reach approximately $1.24 billion. The company’s shares have dropped roughly 22% — or $2.15 since early April, on the back of falling base metal prices — and closed at $7.62 at press time. Hudbay has 172 million shares outstanding for a $1.3-billion press-time market capitalization.