HudBay to build Reed copper mine

The board at HudBay Minerals (HBM-T, HBM-N) has agreed to develop the high-grade, near-surface Reed copper deposit in Manitoba into a mine. Production of copper in concentrate is expected to average 17,000 tonnes per year over the five-year mine life and initial production is slated for late 2013.

Daily ore production is forecast at 1,300 tonnes and the ore will be trucked 120 km to HudBay’s concentrator in Flin Flon. Production grades are expected to average 3.78% copper, 0.45 gram gold per tonne and 5.77 grams silver per tonne, and assumed metal recoveries at the concentrator are anticipated to be 94% copper, 58% gold and 62% silver.

Total operating costs average $91 per tonne milled, with $67 per tonne mining, $16 per tonne milling and $8 per tonne administration. According to the preliminary economic assessment, pre-tax net present value at an 8% discount rate works out to $64.9 million, assuming weighted-average metal prices of US$2.78 per lb. copper, US$1,059 per oz. gold and US$24.14 per oz. silver. Pre-tax cash flow is estimated at $112.3 million.

The Reed project is a joint venture between HudBay, with 70%, and VMS Ventures (VMS-V), with 30%.

“We are very pleased that HudBay has elected to move forward with construction . . . while only having completed a preliminary economic analyst on the project,” Rick Mark, VMS Ventures’ chief executive, said in a statement. “This demonstrates the robust nature of the Reed deposit.”

Exploration work there has also generated highly prospective targets that make Mark “optimistic that the deposit will grow over time.”

“The potential for additional deposits within the joint-venture ground remains strong,” Mark continues. “For those bullish on the copper price in 2014 and beyond, the cash flow projections are most encouraging.”

Not everyone greeted the news with such enthusiasm, however.

“Development at Reed adds production, but not a great deal of value,” Matt Murphy, an analyst at UBS Investment Research, concluded in a research note, adding that total capital expenditure of $71 million is above UBS estimates of $60 million, and operating costs of $91 per tonne are above UBS estimates of $45 per tonne.

“While the mine will add 17,000 tonnes per year of copper production over its five-year mine life . . . we expect thin margins, and our NAV for HudBay’s 70% stake in Reed fell from $0.48 per share to $0.18 per share.” Murphy lowered his 12-month target price on the stock from $15 per share to $14.50 per share. At presstime HudBay traded at $9.83 per share within
a 52-week range of $9.14-18.70. The company has 171.9 million shares outstanding.

On the same day HudBay announced that it was moving ahead with construction of the Reed mine, the mid-tier copper-zinc-gold-silver producer outlined in 2012’s production guidance and capital and exploration budgets.

HudBay has a capital investment budget this year of $391 million, including $296 million in growth initiatives that include the Reed project. Exploration spending is anticipated at $54 million, which includes $31 million in grassroots efforts in the Flin Flon greenstone belt, $13 million in South America and $10 million on other efforts in North America.

David Garofalo, HudBay’s president and chief executive, said plans for next year include ongoing construction at the Lalor copper-gold-zinc project near Flin Flon and continued procurement and engineering activities at the Constancia copper project in Peru, where management expects to make a formal production decision before March.

Capital expenditures next year at Lalor are anticipated to total $147 million. The company will work on completing the ventilation shaft to allow first ore production up the temporary hoisting facilities by mid-year. The company will also start sinking the production shaft early in the new year, deliver underground equipment and complete the engineering and procurement for the new concentrator.

Contained copper metal production in concentrate is expected to be lower than in 2011 because of the pending closures of the Trout Lake and Chisel North mines in 2012, while production of precious metals and zinc are expected to remain unchanged from 2011 levels, the company says.

Tom Meyer, an analyst at Scotia Capital, has a one-year target price on the stock of $12 per share. “We are lowering our financial estimates across the board,” he wrote in a research note. “We had anticipated Lalor having some commercial production in 2012, so we have removed these volumes from our estimates. The decline in forecast metal from Lalor volumes was more than offset by higher-than-expected guidance on the Trout Lake and Chisel North mines up for closure. It should be noted that remaining ore from these mines are higher cost and subject to additional challenges.”