Hudbay looks forward to big returns on investment in 2015

VANCOUVER — According to Hudbay Minerals (TSX: HBM; NYSE: HBM) president and CEO David Garofalo the past year marked a “turning point” for the company that will see roughly five years of expansion and capital investment pay off. Hudbay is about to emerge from an extended period of acquisition and development with three new mines, and it looks poised to deliver a 300% boost in its annual copper production.

Back in 2010 Hudbay laid out a strategy to geographically diversify its production centres with a focus on low-cost copper and zinc operations. The company has an 85-year operating history in the Flin-Flon greenstone belt that stretches across central Manitoba and east-central Saskatchewan. The belt is one of the largest Paleoproterozoic volcanogenic massive sulphide (VMS) districts in the world, and still hosts three of Hudbay’s cornerstone mines.

A couple of base metals acquisitions over the past four years, however, have seen Hubday  expand its international presence. The company is finally closing in on first commercial production at its newly built Constancia copper  mine in southern Peru, after having acquired the porphyry deposit in 2011 via a $520-million, cash-and-shares deal for Norsemont Mining.

Hudbay followed up in June 2014 when it grabbed Augusta Resources in an occasionally prickly $555-million deal that added the advance-stage Rosemont copper project in Arizona to the production pipeline.

The company scored Rosemont’s Clean Water Act Section 401 water quality certification from the Arizona Department of Environmental Quality in early February.

“This past year was pivotal for Hudbay as we completed key milestones in our transition into the low-cost, high-quality copper and zinc producer we envisioned when we laid out our growth strategy nearly five years ago,” Garofalo outlined in a Feb. 20 conference call. “Copper production, in particular, is expected to increase, and the economies of scale of the increased production volumes of all metal is expected to drive down unit operating costs significantly.”

And Hudbay’s operating results in 2014 could definitely be qualified as “transitional” since the company had to lean heavily on its aging 777 operation in Flin Flon as it ramped-up its new operations. In fact, annual production of copper, zinc and precious metals was roughly 25% below guidance, while operating costs were on the rise.

At 777, lower production volumes, higher cement costs and additional stope rehabilitation expenditures contributed to operating costs that were 42% higher in the fourth quarter compared to the same period a year earlier.

The company reported total production for 2014 of 37,644 tonnes  copper, 82,542 tonnes zinc, and 85,703 oz. gold equivalent. Year-to-date by-product cash costs were pegged at US$1.98 per lb. copper, compared to US$1.91 per lb. in 2013.

Hudbay reported that increased costs were primarily due to higher treatment and refining charges and increased purchased zinc concentrate usage last year.

But it’s Hudbay’s 2015 guidance that should give shareholders a reason for optimism. The company expects to crank out between 140,000 tonnes and 175,000 tonnes copper, 95,000 tonnes and 120,000 tonnes zinc, and 135,000 oz. and 170,000 oz. gold equivalent.

“This year represents a milestone for Hudbay as we become a multi-jurisdictional operating company, with four mines in production,” Garofalo elaborated. “Our goals for 2015 reflect our shareholders’ desires to begin harvesting strong returns from the capital invested in our three new mines.”

Though 777 is getting long in the tooth, Hudbay’s presence in the Flin Flon belt should be long-standing as it reaches steady-state production at its new Lalor and Reed mines. The company expects its Manitoba unit to chip in between 40,000 tonnes and 50,000 tonnes copper, 95,000 tonnes and 120,000 tonnes zinc, and 85,000 and 105,000 equivalent oz. gold this year.

Meanwhile, commercial production at Constancia remains on track for the second quarter. There are currently 900,000 tonnes on the run-of-mine pad and another 1.2 million tonnes of broken ore in the Constancia pit.

The operation carries most of Hudbay’s expanding red metal aspirations, with 2015 production estimated at between 100,000 tonnes and 125,000 tonnes copper.

“Initial mining of softer supergene ore from the main Constancia pit is expected to average 30% above reserve grade over the first five years,” Garofalo added. “We should be generating free cash flow by the second half of the year, with first shipment of concentrate expected late in the first quarter.”

On the exploration front, Hudbay will invest US$20 million on what Garofalo labelled “exciting” opportunities at Constancia and Lalor.

Exploration activities in Manitoba will focus on targets in Flin Flon and Snow Lake that include the down-plunge exploration potential of the gold and copper-gold zones at Lalor from the 955- to 1,025-metre level exploration ramp.

The company also intends to re-start exploration drilling at Constancia to test anomalies identified during recent airborne geophysical programs.

At Rosemont Hudbay recently kick-started a metallurgical program, with initial results expected in the second quarter. Permitting efforts will reportedly be ongoing throughout the year.

“We believe we will be in an excellent position to internally fund the development at Rosemont due to our strong balance sheet, coupled with the growing cash flows once Constancia, Lalor, and Reed operate at full capacity,” Garofalo said. “In addition, the expected capital contributions from Rosemont’s strategic financial partners will add to our strong financial capacity.”

BMO Capital Markets labels Hudbay one of its “preferred base metals stocks,” and has a stock “outperform” rating on the the company and a $13-per-share price target. BMO analyst Sasha Bukacheva wrote on Feb. 20 that the investment thesis is “framed by [an outstanding growth profile,] low geopolitical risk and the near-term catalyst of the continued ramp-up at Constancia.”

Hudbay has traded within a 52-week window of $7.50 and $11.85, and closed at $10.19 per share at press time. The company has 234 million shares outstanding for a $2.3-billion press-time market capitalization. Hudbay is well capitalized, with $207 million in cash, $1.1 billion in debt and a 38% net debt to equity ratio.