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Summary

  • Hudbay Minerals is projecting a massive 570% increase in copper production from 2013 to 2015 as the Constancia project comes online.
  • The recently acquired Rosemont project is expected to be one of the largest copper mines in the U.S. and account for approximately 10% of total U.S. copper production.
  • If Hudbay can execute these projects on time and budget and achieve anticipated performance, it will become an important copper producer with one of the lowest costs in the industry.

Hudbay Minerals (NYSE:HBM) is a primary copper and zinc producer which operates their flagship 777 mine as well as the Reed and Lalor mines in Manitoba. Hudbay's 777 mine averages production of 25k tons of copper and 51k tons of zinc per year. However, the 777 mine only has an expected seven year life remaining. Over the last couple of years, Hudbay has developed other mines and ramp up is nearly complete at its Lalor mine. Once it reaches full capacity it will produce 59k tons of zinc annually as well as 43,000 gold equivalent ounces and 5k tons of copper over 15 years. Commercial production at Hudbay's Reed mine was achieved on April 1, 2014. The Reed mine is a smaller mine that will produce 15k tons of copper annually over 5 years.

While Hudbay's increased production is a good sign, even more important for investors is their two massive projects, the Constancia project and the Rosemont project. Production at these projects will dwarf current production and will see Hudbay Minerals increase copper production by an estimated 570% from the Constancia project alone. Hudbay Minerals recently acquired Augusta Resources (NYSEMKT:AZC) which gave Hudbay Minerals the huge Rosemont Copper project in Arizona, further adding to their portfolio.

Constancia

Hudbay Minerals is currently constructing the $1.7 billion Constancia mine in Peru with first production expected in the fourth quarter of 2014 and commercial production expected in the second quarter of 2015. On a cost spent basis, the project is roughly 85% complete as of the end of June 2014. The Constancia project is expected to produce 82k tons of copper annually over the 22 year life of the mine. Cash costs per pound are expected to be $1.25 including by-product credits.

Hudbay is projecting a massive 570% increase in copper production from 2013 to 2015 as the Constancia project comes online. They are also projecting a 19% increase in zinc production and a 137% increase in gold equivalent production, though much of that production is subject to streaming agreements with Silver Wheaton (NYSE:SLW) who paid $750 million in exchange for 100% of payable silver from the Constancia project as well as 100% of payable gold and silver from the 777 mine until the end of 2016 and 50% of payable gold and 100% of payable silver thereafter for the remainder of life of mine.

Rosemont

The recently acquired Rosemont project is expected to be one of the largest copper mines in the United States and is expected to account for approximately 10% of total U.S. copper production. Rosemont has proven and probable reserves of 5.9 billion pounds and the mine is expected to produce 243 million pounds of copper over its 21 year life.

The project is currently in the feasibility and permitting stage and is expecting a record of decision later in 2014. Capital expenditures for Rosemont are estimated at $1.2 billion with production slated for 2017. Hudbay Minerals has stated that they expect to fund capital expenditures for Rosemont from financial partners such as Silver Wheaton and from internal cash flow.

Recent Quarter Results

Hudbay Mineral's recent quarter was pretty good with revenues increasing to $139.3 million in the second quarter of 2013 from $130.7 million in the second quarter of 2014 primarily as a result of higher copper sales volumes and higher metal prices offset by lower zinc, gold and silver sales volumes. Hudbay Minerals reported a second quarter gain of $0.3 million compared to a loss of $52.7 million in the prior year period primarily due to foreign exchange gains in the second quarter compared to foreign exchange losses in the same period in 2013.

Hudbay's results would have been better except for the fact that 14% of the copper produced in the second quarter and 8% of zinc were unsold due to poor rail service availability, as a result of an unusually harsh winter and recent spring flooding. Hudbay Minerals has struggled to generate cash recently, but reported operating cash flow of $11.8 million in the second quarter as a result of higher copper sales volumes and higher prices. This is compared to negative cash flows from operations of $10.7 million in the second quarter of 2013.

Cash Position

Hudbay Minerals currently has $547 million in cash and cash equivalents and $900 million in total liquidity, which includes monies owed from streaming payments and credit facilities. The Constancia project is estimated to require an additional $254 million in spending in 2014 and ramp up at their Lalor mine is estimated to require an additional $37 million in 2014. With their cash on hand, Hudbay Minerals should have no problem funding their capital requirements for 2014. Looking forward, it seems likely that Hudbay will be able to fund Rosemont through a combination of streaming agreements and cash flow as they have stated. If cash flow is not as strong as they expect then they may have to issue debt or equity.

If Hudbay Minerals can execute these projects on time and budget and achieve anticipated performance, Hudbay Minerals will become an important copper producer with one of the lowest costs in the industry. Hudbay Minerals is estimating that by 2018 they will achieve cash costs that would rank them fourth in the world based on current 2014 net cash costs which would place them well ahead of major copper producers like Rio Tinto (NYSE:RIO), Freeport McMoran (NYSE:FCX) and Vale (NYSE:VALE).

Risks to Hudbay Minerals

While things are looking up for Hudbay Minerals, the usual project risks remain as they develop their massive Constancia and Rosemont projects. Project delays and cost overruns will remain a risk to investors. With Constancia nearly complete there is far less risk with this project than with Rosemont as Rosemont has not yet received the project's final record of decision. In May, the U.S. Fish and Wildlife Service announced it would restart a review examining the project's effects on endangered species after it discovered an ocelot living in the area. The project faces tough opposition from concerned area residents and environmentalists and has faced many delays in the past.

If the project does not receive approval, this would be a major loss to Hudbay. With an estimated price tag of $1.2 billion for Rosemont, there is the possibility as with any project that large that costs could end up substantially higher. With copper prices lower than they were at this time last year, commodity prices are also a risk. However, once Hudbay completes its projects, it is projecting to be in the bottom quartile in regards to costs, which means that unless copper prices collapse, Hudbay should be profitable even if prices drift somewhat lower.

Source: Hudbay Minerals Transforming Itself Through Growth