And Permits A Potential Catalyst Later In 2024 Our Conclusion
Earlier today, Hudbay reported strong Q1/24 operational and financial
results. See our first look note here. Overall, we expected a positive market
reaction, and coupled with a strong trading session for copper prices,
Hudbay traded up 14% and led most of its peers. With this note, we update
our model for Q1/24 results and fine-tune our forward estimates. After model
updates, we reiterate our Outperformer rating and increase our price target
to C$15.50 from C$13.00.
For the remainder of the year, we expect the market focus to centre on the
company’s continued operational momentum and free cash flow generation
as well as the receipt of state level permits to develop its Copper World
project in Arizona. Receival of the permits is a key 2024 milestone, in our
view, which should enable Hudbay to announce a project partner and jointly
initiate a full feasibility study.
At spot prices, HBM trades at 4.0x EV/2024E EBITDA and 0.9x NAVPS
compared to peers at 6.7x and 0.8x, respectively, on average.
Key Points
Model Updates. Most of our updates are limited to Q1/24 actuals, but we
have also fine-tuned our cost assumptions for Q2/24-Q4/24 at each
producing asset. On a consolidated basis, we model cash costs within
guidance of $1.05/lb-$1.25/lb Cu for the remaining three periods, but with
Q1/24 cash costs of $0.16/lb Cu, our full-year estimate is $0.89/lb which is
better than the guidance ranges. This includes unit costs of $12.33/t in Peru,
and C$225/t in Manitoba.
Potential Peru Regulation Changes. In March, Peru proposed regulation
changes that could allow mining companies to increase throughput levels by
up to 10% above current permitted levels. On the conference call it was
discussed that this is still at the proposal level, but that recent meetings with
Peruvian ministers have indicated the proposal is relatively advanced.
Furthermore, management noted that its operations generally have some
redundancy built in, and that modification to the process plant and other site
infrastructure would be minimal to achieve additional throughput, should the
regulation changes be approved.
Copper Mountain Turnaround Efforts. Hudbay has focused on stabilizing
Copper Mountain operations since its 2023 acquisition. Full benefits are not
expected until 2025. Progress has been made thus far, evidenced by
improved mill availability and recoveries. In April 2024, the plant ran at
40ktpd on average (9% better than Q1/24) and achieved 83% copper
recoveries. April results have benefitted from reprogramming the mill expert
system and removal of magnetite from the pebble stream. We expect further
progress toward 50ktpd to be demonstrated into 2024 year end.