Hudbay Minerals Inc T.HBM

Dundee Capital Markets comments on Teck Resources and HudBay

[shakerman640]

According to Dundee Capital Markets:

https://personal.crocodoc.com/LS1tdD5

Teck Resources Ltd.

(TCK/B-T: C$17.47)

March 30, 2015

NEUTRAL, High Risk

Dundee target: C$21.00

Teck could make a run at HBM but buying Zaldivar is better

Teck could make a run at HBM but buying Zaldivar is better

Stock market speculation has recently centred around Teck Resources possibly looking to acquire HudBay Minerals in an effort to grow its copper/zinc business while lowering Teck’s exposure to metallurgical coal (increased commodity diversification) all the while maintaining Teck’s investment grade status for its debt. We analyze the HBM acquisition option and while it is attractive and is accretive to earnings and cashflow it is less attractive in our view compared to Teck acquiring the Zaldivar mine from Barrick. This Zaldivar acquisition option is neutral on earnings accretion, offers a little less commodity diversification but has significant free cash flow potential while reducing debt/debt+equity metrics. Buying Zaldivar would also fit into a Buy>Build approach to growth. This we view is key in maintaining Teck’s investment grade status on its debt, which would be the dominant criteria in a transaction. The other main difference between the two options would be that an acquisition of Zaldivar would avoid a takeover premium of a least 35% that would be required for Teck to acquire HBM which is not for sale. A transaction for Zaldivar we believe could be completed for $2B, an amount that would also allow Barrick to achieve its goal of reducing net debt by $3B in 2015 (current proposed asset sales are expected to generate only $1B).

If Teck was successful in acquiring Zaldivar (and possibly even if it is not) then it would likely cut its dividend by at least 50%. Freeport McMoRan recently cut its dividend by 80% and the stock traded down in-line with the sector, suggesting that a dividend cut was expected or at least not viewed as a big negative. Cutting the dividend and generating FCF in 2016, would allow Teck to maintain its planned spending on Fort Hills.

Reiterating NEUTRAL rating and maintaining target of C$21.00/share

With met coal prices remaining at depressed levels, an acquisition that allows copper growth, diversifies away for met coal, maintains investment grade rating on debt and provides CF for Fort Hills (oil sands) we believe would be viewed as positive. In the current situation we believe TCK's cash position will continue to slowly decline until Fort Hills is completed. The recent move in the C$ definitely helped profits in Q4 and should definitely contribute to cash flow further in 2015, in our opinion. We highlight that TCK can withstand a full “one-notch” downgrade and still be investment grade at Low-BBB. Lastly, the next dividend ($259 mm or $0.45/sh.) will be reviewed in May by the board and will likely be cut. We remain comfortable with our NEUTRAL rating and target of C$21.00/sh based on a 6.5x 2015 EV/EBITDA multiple to our 2015E EBITDA of $2.9B.