Hudbay on schedule at Constancia despite rain

VANCOUVER — Operating in the Peruvian Andes can offer a range of challenges, not the least of which is a rainy season that usually runs from September through April. And heavy rains proved to be an issue for Canadian base metal producer Hudbay Minerals (HBM-T, HBM-N) at its wholly owned, US$1.5-billion Constancia copper-molybdenum-silver asset in the Chamaca and Livitaca districts of southeastern Peru.

In late February Hudbay reported that bad weather had delayed aspects of Constancia’s development, with above-average rainfall forcing the company to tarp over portions of its site.

Hudbay said that rainfall increased 50% compared to the previous five years. But Cashel Meagher, Hudbay’s vice-president of South American operations, points out that despite the challenges, “what we do not know is exactly what our productivity increase will be during the dry season . . . we believe we’ll be in a better position to trend recovery on schedule in June or July, but what can be said right now is that we forecast probably to be behind by a couple of months.”

He adds that “we also believe that there is capacity in the dry season to recover with more efficient use of the night shift, and also from the protracted periods we’ve had of little rain, we’ve experienced higher-than-average forecasted recovery of productivity numbers.”

Hudbay is six months into an estimated 27-month development period at Constancia, and has invested US$351 million on the project through the first quarter of 2013. According to first-quarter numbers released by president and CEO David Garofalo, the company has entered into more commitments for US$631 million at Constancia, and used around 50% of its US$157-million contingency.

“We believe the impact on the project schedule is recoverable, and our targets for initial production and full production remain unchanged. The project’s forecasted final costs remain on budget,” Garofalo says.

So far Hudbay has completed 25% of Constancia’s build-out, with tailings facilities, haul roads and water-diversion infrastructure under construction. The company estimates that heavy-haulage access roads should be complete by October, while plant construction is expected by late June. Delivery of long-lead items — including flotation cells, pumps, regrind mills, semi-autogenous grinding mills and crushers — has been underway since mid-March.

On the socio-political side, Hudbay is looking to relocate families that will be affected by Constancia’s development. To date the company has relocated 13 families to newly built homes, with another 12 homes under construction and scheduled for occupancy, which leaves Hudbay with 10 ongoing negotiations to complete by year-end. According to Meagher there has been no sign of non-governmental organization activity around the development.

“It is sort of a fluid situation,” Garofalo says. “I would like it to happen sooner rather than later. It’s one of the more difficult and riskier items when building mines in Peru, as you would see from the disclosure of many of the other projects being built here. So we continue to work at it. Certainly our goal is sooner rather than later, but as I’ve said, we believe there’s some capacity within the schedule to extend that timeline, if required.”

Exploration will continue at Constancia throughout the year, with three diamond rigs on-site and 3,000 metres planned during the first quarter. One rig will focus on infill and feasibility work at Hudbay’s Pampacancha deposit, which holds 47 million proven and probable tonnes grading 0.48% copper, 149 grams moly per tonne, 4.49 grams silver per tonne and 0.285 gram gold per tonne.

The remaining two rigs will be running at Pampacancha West, which includes a group of geophysical anomalies located 500 metres west of Pampacancha. Recent drilling has indicated that the target has magnetite-skarn mineralization, with highlights including hole 12-142, which cut 14 metres at 0.85% copper equivalent starting at 11 metres, and almost 28 metres at 0.51% copper equivalent starting at 91 metres.

Hudbay reported US$1.3 billion in cash to end the first quarter, and it has another US$250 million it could draw down from a gold-silver streaming agreement with Silver Wheaton (SLW-T, SLW-N) on its 777 mine in Manitoba.

“Right now there is no urgency,” Garofalo says. “We are well-capitalized — it’s really all about driving down our cost of capital, and we’ll do so opportunistically. There is a [gold-stream] component at Constancia that we could consider at some point — that’s a lever we could pull.”

Constancia’s current mine plan envisions a 16-year life beginning in 2015, with annual production clocking in at 90,000 tonnes contained copper in concentrate with moly, silver and gold by-products.

Hudbay has traded within a 52-week range of $7.36 and $12.10, and closed at $8.72 at press time, with 172 million shares outstanding for a $1.5-billion market cap.