Rating Action Commentary
Fitch Affirms Hudbay Minerals Inc.'s IDR at 'BB-'; Outlook Stable
Tue 23 Apr, 2024 - 11:11 AM ET
Fitch Ratings - New York - 23 Apr 2024: Fitch Ratings has affirmed the Long-Term Issuer Default Ratings (IDRs) of Hudbay Minerals Inc. and Hudbay Peru S.A.C. at 'BB-'. The Rating Outlook is Stable.
The ratings and Outlook reflect Hudbay Minerals Inc.'s mid-tier size, concentration in three mines and extensive track record of operating copper mines from exploration to production. The ratings also consider Hudbay's low-cost position at Snow Lake in Manitoba, Canada, and Constancia in Peru; current mine lives through 2038; and Fitch's expectation that EBITDA leverage will be sustained below 3.5x.
Key Rating Drivers
Favorable Low-Cost Position: Fitch expects average annual payable metal sold to be approximately 141,000 tonnes for copper and 268,000 ounces for gold over 2024-2025 and for the company to retain its relative cost position. According to CRU Group, Snow Lake has a first-quartile cost position and Constancia has a second-quartile cost position of the global cost curve.
The mine plan for Constancia (Peru) supports an 18-year mine life, Snow Lake (Canada) supports a 15-year mine life, Pampacancha (Peru) supports a two-year mine life and Copper Mountain (Canada) supports a 21-year mine life. Hudbay has an extensive track record of operating copper mines from exploration to production, and has a number of projects in the exploration and development phases.
Copper Mountain Incrementally Positive: Fitch believes the Copper Mountain stabilization plan to improve mining and mill throughput adds production and EBITDA but is unlikely to generate meaningful FCF through 2025 given plans for discretionary stripping. Fitch views the discretionary spending as fairly flexible and beneficial in the medium-term. We believe there is limited execution risk in stabilizing operations given Hudbay's capital resources and operational expertise.
Copper Exposure: Fitch believes Hudbay has meaningful commodity diversification through its gold production, and to a lesser extent its zinc production. However, the company has a longer-term focus on copper, which accounted for 62% of consolidated revenues in 2023. Hudbay estimates that a 10% change in the price of copper from the company's 2024 base case of $3.75/lb would change operating cash flow before working capital by $107 million in 2024.
Hudbay's average realized copper price was $3.82/lb in 2023, compared with $3.94/lb in 2022. Spot prices are approximately $4.26/lb, which compares with Fitch's assumptions of $8,400/tonne ($3.81/lb) and $8,000/tonne (about $3.63/lb) in 2024 and 2025, respectively.
Conservative Financial Policies: Fitch views Hudbay's conservative capital-allocation policy as favorable to its credit profile. Hudbay's stated financing strategy for sanctioning Copper World includes a committed minority joint venture partner, a renegotiated optimal streaming transaction, net debt/EBITDA of less than 1.2x, minimum cash of $600 million, and limited (up to $500 million) nonrecourse project debt. Hudbay prioritizes operational improvements, low-risk and low capital requirement brownfield expansions in advance of moving forward on large-scale greenfield projects.
Hudbay's EBITDA leverage was 1.9x at Dec. 31, 2023, and Fitch projects EBITDA net leverage will be sustained below 2.0x and FCF to be positive through 2027 assuming copper prices of $8,000/tonne and gold prices at $1,800/ounces after 2024. Under our ratings case assumptions, which have copper prices moderating to $7,500/tonne and gold prices moderating to $1,500/ounce, the capital budget can be funded with no incremental debt and EBITDA leverage is less than 3.5x through 2027.
Copper World Potential: We view the $1.3 billion phase 1 project favorably, given the 2023 pre-feasibility study indications of 85,000 tonnes of annual copper production at sustaining cash costs of USD1.81/lb over a 20-year mine life. Our rating case does not include production or capital spending, except relatively minimal capex to advance studies and permits, since the project is not expected to be approved before 2025. Hudbay stated the project would only move forward if the definitive feasibility study results in an IRR of greater than 15% upon receipt of all state permits and achievement of financial targets.
Derivation Summary
Hudbay, with 2023 copper production at 131,691 tonnes, is significantly smaller than copper producer First Quantum Minerals Ltd. (B/Rating Watch Negative), with 2023 copper production of 707,678 tonnes. However, Hudbay is more than twice the size of Ero Copper Corp. (B/Stable), with 2023 copper production at 43,857 tonnes, and Taseko Mines Limited's (B-/Stable) Gibraltar mine, with 2023 copper production at roughly 55,611 tonnes.
Hudbay's average second-quartile cost position of CRU's 2023 global copper all-in sustaining cost curve is lower than First Quantum's average cost position in the third quartile, Ero Copper's average cost position in the fourth quartile and Taseko's average position in the fourth quartile.
Hudbay's EBITDA leverage of 1.9x at YE 2023 is low for the rating category and compares favorably with First Quantum's EBITDA leverage of 3.8x, Ero Copper's EBITDA leverage of approximately 2.3x, and Taseko's EBITDA leverage at 3.5x.
Key Assumptions
--Average annual payable copper sold at about 135,000 tonnes and average annual payable gold sold at about 235,000 oz.;
--Copper prices of $8,400/tonne in 2024, $8,000/tonne in 2025, and USD7,500/tonne thereafter;
--Gold prices of $1,900/oz in 2024, $1,800/oz in 2025, $1,600/oz in 2026, and $1,500/oz thereafter;
--Zinc prices of $2,500/tonne in 2024, $2,400/tonne in 2025, $2,300/tonne in 2026 and USD2,400/tonne in 2027;
--Average annual capex through 2027 of approximately $355 million;
--Significant Copper World capital spending is not included.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
--Reduced completion risk and funding strategy which mitigates risk associated with the Copper World project;
--Improved size and scale;
--EBITDA leverage sustained below 2.5x.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
--EBITDA leverage sustained above 3.5x;
--Sustained negative FCF before major development capital;
--A material reduction in average mine life.
Liquidity and Debt Structure
Solid Liquidity: Cash on hand was $250 million as of Dec. 31, 2023, and $324 million was available under the aggregate $450 million revolving credit facilities after $100 million net utilization to repay Copper Mountain Nordic bonds assumed upon acquisition and $26 million for LOC. The Hudbay Minerals revolver and the Hudbay Peru S.A.C. revolver both mature on Oct. 26, 2025. Debt maturities are modest before the $600 million 4.50% notes are due April 2026.
Issuer Profile
Hudbay Minerals Inc. is an Americas based mid-sized mining company producing copper with gold, silver and molybdenum by-products at its Constancia operations (Peru), copper with gold and silver by-products at its Copper Mountain operation (British Columbia, Canada) and gold with copper, zinc and silver by-products at its Snow Lake operations (Manitoba, Canada). Its development project pipeline includes Copper World (AZ) and Mason (NV).