TD updateEvent HBM reported Q1/22 adjusted EPS of $0.02, below TD at $0.05 and consensus of $0.09. Adjusted EBITDA of ~$110mm was ~21% below TD's forecast of ~ $140mm. Lower sales volumes due to freight issues in Northern Manitoba appears to be the principal reason for the weaker-than-expected results.
Impact: SLIGHTLY NEGATIVE
Q1/22 consolidated contained copper production of 24,702t was in line with our 24,365t forecast. Consolidated C1 costs were $1.11/lb copper (TD: $1.01/lb) and AISC were $2.29/lb. Consolidated gold production was 53,956ozs, ~14% below TD's forecast of ~62,670ozs.
Sales volumes from Northern Manitoba were affected by the availability of railcars in Q1/22, with excess inventory of approximately 7,000t of copper concentrate containing high gold content and 6Mlbs of refined zinc at the end of the quarter, collectively valued at approximately $45mm.
Management expects to largely catch-up sales volumes in Q2/22. HBM has maintained both production and cost guidance for 2022 — Management noted that the cadence of production in Q1/22 was in line with expectations. Although HBM has experienced inflationary cost pressure similar to the rest of the mining industry and costs in Peru were at the higher end of the guidance range on a per-tonne basis (partly due to COVID-19-related absenteeism and high rainfall), management expects that cost efficiencies and higher grades at Constancia/Pampacancha over the rest of the year will keep costs within the guidance ranges.
Copper World PEA expected before the end of Q2/22.
HBM is planning a twophased approach — initially on private lands (requiring only state and local permits) over a 15-year period.
Phase 2 would then extend onto federal lands and mine-out the Rosemont and Copper World deposits. Phase 2 would require federal permitting. Environmental groups continue to oppose the Rosemont project;
HBM has started early works on Copper World, partly to determine how much opposition the project will face. We are maintaining ~US$428mm in our consolidated NAV (based on our estimated NPV for the Rosemont project) as a placeholder for Copper World, pending more complete technical details becoming available.
TD Investment Conclusion We are maintaining our BUY recommendation and C$14.00 target price.
Profile Hudbay Minerals owns and operates zinc and copper mines in Canada and Peru, concentrator facilities, and a zinc refinery. The company also owns the Rosemont copper project in Arizona. Metals & Minerals Hudbay Minerals Inc. (HBM-T) C$7.16 Q1/22 Misses on Manitoba Sales; Copper World Early Work Starts
Greg Barnes Derick Ma, CFA, CPA, CA
Recommendation: BUY Risk: HIGH 12-Month Target Price: C$14.00
12-Month Dividend (Est.): C$0.02 12-Month Total Return: 95.8% Market Data (C$) Current Price C$7.16
TD Securities Inc. estimates The Copper World PEA is expected to incorporate a two-phase mine plan, with the first phase reflecting a standalone operation utilizing Hudbay’s private land for processing infrastructure and contemplating mining portions of Copper World and Rosemont located on patented mining claims. The first phase is designed as an economically viable standalone plan, requiring only state and local permits and is expected to reflect an approximately 15-year mine life.
The second phase of the mine plan is expected to extend the mine life and incorporate an expansion onto federal lands to mine the entire Rosemont and Copper World deposits. The second phase of the mine plan would be subject to the federal NEPA permitting process. Using the Copper World initial resource and management commentary, we have roughly calculated an NPV-10% estimate of $281mm for the Copper World project (NPV-8%: ~$520mm). Our conceptual NPV calculation is based on the following assumptions: initial capex of $1.5bln, first production in 2027, mill throughput of 54,000tpd, and 85% recovery rates.
We believe that our initial conceptual NPV-10% of $281mm and NPV-8% of $521mm support our current valuation for Copper World/Rosemont ($428mm). In fact, we believe that there is upside to our NPV estimate once it better reflects the oxide and sulphide components of the Copper World resource and the integration of Rosemont. Outlook
We have adjusted our forecasts to reflect the Q1/22 results. Our revised NAV8% is C$13.08/share (previously C$12.93/share) — the slight increase in our NAV-8% is largely the result of minor balance-sheet adjustments. Hudbay Net Asset Value Source: Company, TD Securities Inc. estimates Valuation Based on Capital IQ consensus estimates, Hudbay is currently trading at an EV/Forward EBITDA multiple of 2.97x, which compares with its three-year multiple of 4.22x.
In comparison, First Quantum, Teck, Lundin, and Capstone are trading at an average EV/Forward EBITDA multiple of 3.68x. Over the past three years, First Quantum, Teck, Lundin, and Capstone have traded at an average EV/EBITDA multiple of 5.1x.
Justification of Target Price Our target price is based on an EV/2023E EBITDA multiple of 4.0x (60% weighting) and a 1.0x multiple to our NAV-8% (40% weighting). Key Risks to Target Price The main risks facing the company include forecast, financial, technical, and political risks. Among other things, these include risks related to copper, zinc, and nickel prices; input costs, labour costs, and fuel prices; the governing fiscal and legislative regimes; the timing of key developments; market conditions; capital and operating costs; foreign exchange rates; resources and reserves; operating parameters; permitting; environmental issues; and staffing and key personnel retention. Hudbay’s operations could be negatively affected by COVID-19-related travel, social-distancing, and other restrictions.