Our view: In the near term, Hudbay provides strong leverage to both copper and gold prices as they continue to generate strong FCF (we calculate a yield of 8%/15% at spot prices in 2024/2025). In the medium term, obtaining permits and advancing the Copper World project can create value and drive copper production growth with a high quality project in a great location. We reiterate our Outperform rating and $18 price target post Q2 results that were largely inline with our estimates.
Key points:
Pampacancha pause: After 3 strong quarters, Hudbay sourced less ore from the high grade Pampacancha pit at Constancia in Q2 leading to lower production. This was part of the mine plan sequence to set up stronger production in the second half of the year (Q4 in particular) and through Q3/2025 when the pit is exhausted. The recent government decision to allow for 10% more throughput could increase production by 2026 with modest capital investments (<$50M) to help offset the grade decline. Hudbay also continues to advance high priority targets around Constancia (Maria Reyna and Caballito) through permitting and community consultation that could backfill higher grade material in future years.
FCF potential: Despite a weaker quarter, HBM generated $33M in FCF in Q2 after averaging $100M over the past 3 quarters. With production expected to increase in H2, we forecast FCF of ~$230M for 2024 for a yield of ~8% vs. copper peers at 1% at spot prices ($4.01/lb copper and $2,460/oz gold). This would be ~$285M (~10%) at $4.50/lb copper or ~$170M (~6%) at $3.50/lb copper (holding gold and other commodities at spot).
Copper World remains a key value driver: Hudbay continues to expect the receipt of the two remaining state permits for Copper World in H2/2024. We believe there could be litigation of these permits by NGO groups (as they have with prior permits) and the nature of these cases can determine how quickly the project can be advanced. Nevertheless, getting Copper World to a shovel ready state in 2025 would be a positive development for HBM's valuation and could make it a takeout candidate due to the scale, grade, and location of the project.
Possible upside in Manitoba: Hudbay has completed regional exploration work on the recently acquired land in Manitoba which could provide additional high grade zones and catalysts in the coming years. The company also obtained a permit to increase throughput at the New Britannia mill to 2,500tpd (throughput averaged 1,850tpd in Q2) which could provide incremental production growth.
Valuation remains attractive: Hudbay is currently trading at 0.81x P/NAV and 3.8x 2024E EBITDA (0.84x and 5.0x at spot) which compares with large-cap producers at 1.0x and 7.0x (1.0x and 8.0x at spot) and mid- cap producers at 0.8x and 5.8x (0.9x and 7.2x at spot).