GOOD PROGRESS AT COPPER MOUNTAIN; POTENTIAL THROUGHPUT UPSIDE AT CONSTANCIA
THE TD COWEN INSIGHT
HBM had a solid first quarter operationally, generated strong free cash flow, and is making progress turning around the Copper Mountain mine. Management is also focusing on increasing gold production at its Manitoba operations with the New Britannia mill achieving record throughput.
Impact: POSITIVE
Potential upside at Constancia. In March 2024, the Peruvian Ministry of Energy and Mines indicated an intention to make regulatory changes to allow mining companies to increase their permitted mill throughput levels by up to 10%. HBM is monitoring the status of this proposed regulation and evaluating the potential to increase future production at Constancia and noted that it would have the ability to increase production with pebble crushers that are at site but have not been implemented. On a very preliminary basis, assuming a 10% increase in mill throughput and no additional capex, we estimate that our NPV-8% for Constancia would increase by ~8.5% to ~C$7.12/sh (from C$6.56/sh).
Copper and gold hedges. At the end of the quarter, HBM had 15.9 million pounds of copper forwards and 19.8 million pounds of copper collars outstanding, representing approximately 44% of 2024 Copper Mountain production guidance levels at prices between $3.97/lb and $4.36/lb. HBM also entered into zero-cost collars for 36,000 ounces of gold from April to December 2024 at an average floor price of $2,088/oz and an average cap price of $2,458/oz. We estimate that the gold hedges are equivalent to ~15% of the company's gold production over the balance of the year. At current commodity prices, management is not considering adding to its hedge positions.
HBM is making progress towards meeting its 3-P conditions (permit, prudent financing, and feasibility plan) to proceed with the development of the Copper World project. Management continues to expect that state permits will be received this year. That being said, we do not expect a formal decision to proceed with the project until late 2025 or H1 2026.
We have raised our HBM target price to C$16.00 (from C$14.00) and maintained our
BUY recommendation. We have increased our target EV/2025E EBITDA multiple to 5.25x (from 4.5x) reflecting the strong copper price environment and HBM's solid operation performance. We have also increased our target P/NAV multiple to 1.0x (from 0.9x), which is in line with the company's peer group target multiple.