CU ARTICLE HBM “Omicron is peaking in certain areas of the world, however, there’s still a possibility for weaker data in Q1/22 due to supply chain issues, reduced manufacturing activity to curb case counts, etc.,” the analysts said in a research report released Friday. “We’d expect copper to slightly pull back during Q1/22 as this data comes out and some investors worry about how global growth is being impacted. However, the copper market still looks very tight. For example, the labour issues at BC’s Highland Valley mine (just 0.75 per cent of global supply) were enough to propel the copper price last week by more than 10 US cents per pound. This, combined with sustained low inventories on the exchanges, have led us to raise our price deck in the near term.
“Longer term, we continue to point out that the higher tax/royalty rhetoric in LAM could deter investment into new supply, further pushing out its timeline. Larger copper supply gaps could form 2024+ and we believe copper, like other metals benefitting from green investments themes, will remain higher to incentivize new supply. Thus, we have also raised our long-term price deck to compensate.”
With those price deck changes, Mr. Singh made a trio of target price changes to producers in his coverage universe.
Calling it “undervalued but starting to gain traction with investors,” he reaffirmed Hudbay Minerals Inc. (HBM-T, “buy”) as his top pick, raising his target to $15.50 from $14. The average target on the Street is $12.96, according to Refinitiv data.
“With FM trading at a premium and LUN dealing with issues, we find that HBM is gaining traction again with investors as it’s the option with the most attractive valuation (trades at just 0.8 times P/NAV [price to net asset value] and 3.0 times 2022 P/CF [price to cash flow]),” said Mr. Singh. “This year, HBM will benefit from a full year of higher grades getting accessed at Pampacancha (started mining last year) in Peru and we project HBM will increase Cu production by 25 per cent (210Mlbs) year-over-year at the Constancia complex. In Manitoba, HBM will benefit from a full year of the fully refurbished New Britannia gold plant ramping up processing.
We project that HBM will increase Au production by 30 per cent (+170Koz) year-over-year in Manitoba. The discount on HBM ignores these growth areas and misses that given the bulk of capital spent on these projects, HBM is at a free cash flow inflection point at current copper prices. ... The Peru risk doesn’t seem as bad as the market is implying based on HBM’s trading multiple. The key catalyst for HBM this year is that mid-year the Company will table a PEA for Copper World/Rosemont’s private land option in Arizona. This is a free option in HBM’s share price currently and the PEA will allow the market to assign value to the asset.”