Description

Hudbay Minerals is a Canadian mining company focused on the production of copper and zinc through its Constancia mine in Peru and its 777, Lalor and Reed (70%-owned) mines in Manitoba, Canada. It also owns an 80% interest in the Rosemont copper development project in Arizona (Mar/2017 feasibility study NPV10 of US$499mm for Hudbay), in addition to exploration assets in Canada, Peru and Chile.

Core rationale for the value case and potential upside is as follows:

• Deep Value: Significant discount to peers and its own historical trading value with little changed in the business

• Sentiment Driven: HBM sells off the most and rallies the hardest (in %) in sentiment changes

• Rosemont Price Out: HBM P/NAV at 0.78x excluding Rosemont with peers at 0.82x (excluding IVN)

• Rosemont permit likely to be received within 6-8 months

• Pessimism likely to reverse (similar to 2017 lows):

• Rosemont: Water rights permit would now be an upside surprise

• Concern over Panpacancha: HBM able to get land rights but also has contingency plan if land rights don’t materialize

• Management: Sentiment is at rock bottom, can’t really get worse (and if it did a management change would be received positively)

• Takeout: Discounted valuation with significant copper portfolio could attract a buyer, especially with Rosemont permit

1.       Key Catalysts & Upcoming Dates

Near-term catalysts (next 6 months):

• Rosemont permitting

• The company is now waiting for the U.S. Army Corps of Engineers to issue a Section 404 Water Permit under the Clean Water Act. The Section 404 permit is the final key federal permit required by the project.

• Pampacancha land rights and confirmation of 2019 production volume

• Lack of resolution to the land rights would be a negative read through as 2019 production could be negatively impacted although contingencies at Constancia have already been communicated

• Regional exploration success at Constancia – could offset Pampacancha production loss if land rights not obtained

• Macro sentiment change

Longer-term catalysts:

• Mine plan for the Lalor gold zone (Q1 2019)

• Regional exploration success at Constancia (2019)

• Rosemont production and FCF (2022)

• Takeover candidate potential once Rosemont permits are in hand (undefined time)

• Potential acquirors would be Lundin, First Quantum or potentially a major

• Management change (although unlikely given the “mine building” expertise through Constancia)

• Management change to someone more market savvy would be welcomed by the market given the general dislike for current management

2.      Business Description

Business Description:

• Headquartered in Toronto, Hudbay Minerals is a mining company mainly focused on the production of copper concentrates and zinc through its Constancia mine in Peru and its 777, Lalor and Reed (70%-owned) mines in Manitoba, Canada. It also owns an 80% interest in a copper development project in Arizona (Mar/2017 feasibility study NPV10 of US$499mm for Hudbay), in addition to exploration assets in Canada, Peru and Chile. Finally, the company owns and operates ore concentrators and a zinc production facility in northern Manitoba and Saskatchewan.   

Country Exposure

Metal Exposure

Copper Equivalent Reserves & Resources

Copper Cost Profile

Mine Life

Project Portfolio

10-yr Annual Copper Equivalent Production Forecast

3.      Historical Price Change

Historical Daily Price chart (3 years) USD vs. Copper Price – Hudbay has significantly underperformed copper prices since mid-2017 and specifically 2018 YTD; Hudbay share price is only 25% above the lows 2016 excluding Q1 and at the lows of 2017

Historical Daily Price chart (3 years) USD vs. LUN and FM – Since mid-2017, Hudbay has underperformed FM by ~37% and performed in line with Lundin

Historical Daily Price chart (YTD) USD vs. LUN and FM – Since mid-2017, Hudbay has underperformed FM by ~37% and performed in line with Lundin

4.      Capitalization

• Credit Facility – The company maintains a US$550mm revolving credit facility, secured by all of the group’s assets, costing Libor + 250 bps, and maturing July 2021. By 1Q18, the company had drawn $133mm in letters of credit, leaving it with US$417mm in undrawn availability

• Debt – The company has two bonds, a US$400mm 7.25% bond due 2023 and a US$600mm 7.625% bond due 2025. In addition, it has 82k in capital lease obligations.

• Ratings – Rated B2/B+ (Moody’s/S&P), stable outlook. Upgraded Sep/17 by S&P, and Aug/18 by Moody’s. Ratings upside by Moody’s: “Hudbay's CFR could be upgraded if the company is able to maintain adjusted debt/EBITDA below 3.0x and continue to generate positive free cash flow while reducing its mine concentration risk.”

• Structure – Bonds are subordinated to the Credit Facility; thus, Moody’s assigns a one-notch downgrade to B3.

• Liquidity – As of 3Q18, HBM had US$393mm in cash, and total liquidity of US$810mm, vs US$1.1bn of debt outstanding.

• Leverage – Reasonable leverage at ~1.0x net debt/EBITDA LTM.

• Capex – Guidance of US$245mm in 2018 vs. US$272mm 2017.

• FCF Forecast – Consensus FCF of US$375m in 2018 vs. US$228mm 2017.

• Stock Liquidity – Average daily traded value of US$17.5m over the past 3 months.

5.      Financial Performance & Outlook

Summary of financial metrics (USD)

Evolution of consensus financial estimates (2018 & 2019)

Revenue (USD)

EBITDA (USD)

EPS (USD)

Evolution of consensus mining estimates (2018 & 2019)

Cash Costs Copper

Copper Production

6.      Valuation

6.1              Base Case Valuation

• Based on consensus commodity price deck, HBM trades at ~0.58x P/NAV, below peers at 0.76x (or 0.82x excluding Ivanhoe)

• Rerating to Peer multiple would see ~35% upside to current share price

• On EV/EBITDA basis, ~55% upside to current share price at consensus base case copper price and 4.5x EV/EBITDA (peers at 5.5x)

• For context, ~90% upside to January share price level (little fundamental change in HBM’s business since then)

Share Price Sensitivities (C$/sh) – Cu Prices vs. P/NAV and EV/EBITDA

6.2             Broker Valuation (normalized price deck to consensus LT price)

7        Trading Comps (Consensus)

8       Analyst Recommendations

Price of $7.00 vs. average 12 mth target of $12.76

10    Current & historical shareholder

Top shareholders

Top shareholder history

• Significant decrease in holdings from FMR (Fidelity) since June 30 could be the cause of abnormal share price weakness

11     Dividends

13    Financial Forecasts (consensus commodity prices)

Catalyst

• Rosemont Permits
• Pampacncha land rights
• Exploration success
• Macro sentement change
• Takeover offer