Hudbay Minerals’ (TSX: HBM; NYSE: HBM) CEO David Garofalo says the company is more focused on the bigger growth picture than what will happen in the next quarter.
Since joining the Toronto-based company in 2010, Garofalo has put into place a five-year growth plan and overseen the development of three new mines — Constancia in Peru, and Lalor and Reed in Manitoba — which will substantially grow the company’s copper, precious metals and zinc output in the coming years.
“We are not focused on the next quarter, we are focused on investment raising well beyond those five years,” Garofalo said at the recent Scotiabank Mining Conference in Toronto.
Hudbay has been mining volcanogenic massive-sulphide deposits in Manitoba for over 85 years. Its flagship asset is the 777 zinc–copper–gold–silver mine in Flin Flon, Man. The underground mine started commercial production in 2004, and has another eight years in its mine life.
Garofalo notes Hudbay has been gradually increasing production at 777 through brownfield exploration, which has kept operating costs per tonne relatively consistent over the past six years at US$39 per tonne. “We have labour advantages — low turnover — and we have low energy prices in Manitoba, but there has been inflation and other input costs . . . by expanding production a little bit every year, has delivered the mitigant to cost inflations and other key input costs,” he said.
Over the past few years, the company has been shifting its focus away from Flin Flon towards Snow Lake, 180 km east, with the discovery of its Lalor gold–zinc–copper deposit in 2007. The new mine, Garofalo points out, represents “the largest discovery we’ve ever made in this camp in the 86 years we have been here.”
As the dominant player in the region, Hudbay used its existing infrastructure and staff to start up Lalor in 2012. The mine reached its first-phase of commercial production on April 1, 2013, and is running at a quarter of its capacity. Output should ramp up once the main production shaft is fully operational in July 2014, Garofalo says.
Meanwhile, Hudbay intends to invest $9 million to double capacity at the Snow Lake concentrator to 2,700 tonnes day by mid-2014 to accommodate increased production from Lalor until late 2016. Around this time, it plans to finish building a new concentrator for the mine.
By the end of October 2013, Hudbay had invested $405 million in the project and committed another $46 million. Lalor has a projected production rate of 4,500 tonnes per day and a 20-year mine life.
Sitting halfway between the Lalor and 777 mines in the Flin Flon greenstone belt is the company’s Reed copper deposit. The high-grade underground mine came online this September and should reach full production of 1,300 tonnes per day by the first half of next year. By the end of October 2013, Hudbay had spent $59 million of Reed’s estimated $72-million capital budget, and committed another $7 million. Reed has a five-year projected mine life based on 2.2 million tonnes in reserves grading 3.8% copper.
Hudbay has been feeding Reed’s ore through a concentrator in Flin Flon that had spare capacity. This boosted the mine’s economics because Hudbay didn’t have to build another concentrator. Reed is expected to generate a 30% pre-tax internal rate of return. “As important as Lalor and 777 are, which are big, world-class deposits, these Reeds are important as well, and we’ve built a couple dozen of these in our history to feed the existing industrial complex, and on a capital-efficient return basis,” Garofalo said. Reed is 70% owned by Hudbay and the rest is held by VMS Ventures (TSXV: VMS; US-OTC: VMSTF).
The producer is applying its Manitoba business model to its open-pit Constancia copper porphyry project in southern Peru, which is a new jurisdiction for Hudbay.
By the end of October the company had spent US$900 million on Constancia and committed another US$300 million. The project could cost US$1.7 billion to build after the 15% cost escalation reported earlier this year.
Garofalo says the project is 50% built, with production anticipated in late 2014, followed by commercial production by mid-2015. Constancia is envisioned to churn out 90,000 tonnes contained copper in concentrate each year for 16 years, along with molybdenum, silver and gold by-products.
Garofalo says that the company gained the confidence to venture into Peru because the project was in an established copper camp and near existing infrastructure, including a highway, railhead and power grid. Glencore Xstrata’s (LSE: GLEN) Las Bambas project and Antapaccay mine are nearby.
Hudbay has a 10-year power agreement and a 10-year port contract in place for the project, with construction underway for a 70 km long power line from Tintaya to Constancia. The miner is exploring the property for other near-surface anomalies to boost Constancia’s ore grade and mine life.
To help develop these three mines, Hudbay recently issued another US$100 million in 9.50% senior unsecured notes due Oct. 1, 2020. The notes come along with US$650 million of 9.50% unsecured notes issued in September 2012 and June 2013. The offering was completed Dec. 9 shortly, and bumped Hudbay’s available liquidity to $1.3 billion, notes BMO analyst Aleksandra Bukacheva.
“BMO Research views this as positive, as it alleviates potential shortage of funds around Constancia commissioning, especially in the event of delays,” she wrote in a note. Bukacheva has a “market perform” rating and $8 target on Hudbay.
Raymond James analyst Alex Terentiew pointed out once the US$100-million offering was concluded, Hudbay’s debt-to-capital ratio would reach 43%, which he said is “quite high.”
Hudbay is working on securing roughly a $150-million, off-take-linked financing for Constancia in early 2014, he added. If both financings close, Hudbay should have over $100 million in cash-on-hand. Terentiew has a $9 target and “market perform 3” rating on the stock.
“With Constancia, Lalor and Reed now in the pipeline — Lalor and Reed are essentially complete — we’ll look forward three years from now, and we’ll have more than a tripling in our copper-equivalent production,” Garofalo said.
This year the company is guiding production of 33,000 to 38,000 tonnes copper, 85,000 to 100,000 tonnes zinc and 85,000 to 105,000 oz. precious metals. It estimates growth of 390% for copper, 115% for precious metals and 30% for zinc in 2015, over 2012 levels.
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