HUDBAY MINERALS INC.
Off Restriction After $400M Equity Offering
Our Conclusion
We resume coverage of Hudbay Minerals as we come off restriction
following its recent $402M bought-deal financing. Use of proceeds are listed
as accelerating Copper Mountain optimizations, debt repayments under the
company’s 3P plan, potential sanctioning of Copper World, evaluation of mill
expansions at Constancia and New Britannia, and general corporate
purposes.
Overall, we did not see an immediate need for the financing, but at the same
time we were unsurprised by the update as several of Hudbay’s copper
peers have raised equity in recent periods and been well supported. We view
Hudbay as a deleveraging story and this deal accelerates the company’s net
debt reductions, as do strong FCF from the high-grade Pampacancha pit in
Peru and commodity strength.
The equity offering at $9.50/share is accretive to our NAV estimate but on a
per share basis is dilutive to our near-term earnings and FCF estimates. In
our price target calculation we ascribe an 80% weighting to near-term
metrics and 20% to our NAV per share estimate. After model updates, we
reduce our price target to C$14.50 (from C$15.50). Our NAV per share is
now C$5.32 (prior C$5.05).
Key Points
Bought Deal Financing: Originally, the deal was announced at $300M but
was then upsized to $350M with a further 15% overallotment, which was
ultimately filled and the deal closed at $402M. At closing, Hudbay issued
42.4M shares at $9.50 each. We calculate 9.7% share dilution to
shareholders before the equity offering.
Net Debt Improves: In our view, Hudbay is a deleveraging story, a process
being undertaken organically through FCF from operations, especially as the
company processes the high-grade Pampacancha deposit in Peru, and
financial results have been supported by strong copper and gold prices. As
at Q1/24, the company reported net debt of $994M. Prior to this offering, we
forecast 2024 year-end net debt of $882M; with the offering now closed, we
update our model and forecast year-end net debt of $499M.
2024 Outlook: We expected Q1/24 results to offer a strong start to the year,
and anticipate that Q2/Q3 will be periods of lower production with slightly
higher costs before production increases in Q4/24. Q1 results were better
than we expected (see our note), mostly on gold production and sales, and
were a stronger-than-expected start to 2024. We continue to expect results
to moderate in Q2/Q3 but foresee some potential for the operational strength
in Q1 to persist into Q2 results