Hudbay Minerals Inc.

Hudbay Minerals Inc. (TSX: HBM) is a Canadian mining company with its operations, property developments, and exploration activities across the United States. The major mines that Hudbay operates are located in Manitoba, Canada, Arizona, United States and Peru.

Key Highlights:

• Strong demand from Gold and Copper: The company’ operations was supported by improved demand dynamics in the recent past. Notably, total copper sales and gold sales stood at 46,105 tonnes and 63,588 oz, respectively in H1FY21, as compared to 40,023 tonnes and 57,165 oz, respectively in pcp. Moreover, elevated metal prices also supported the company’s topline.
  

• Commencement of first gold production at the New Britannia mill: The company reported its first gold production from the New Britannia mill located in Snow Lake, Manitoba. On August 11, 2021, it reported its first gold production, after completing its refurbishment activities in June 2021. Additionally, the company is focusing to complete its construction activities in the new copper flotation facility at New Britannia and is expected to start the production process during the fourth quarter of FY21. This is expected to boost the company’s production in the coming years.
  

• Surge in Cash flow amidst turbulent times: The company reported a surge in its cash flows in the recent past, despite a net loss recorded in both Q2FY21 and H1FY21. Cash from operations stood at USD 96.378 million and USD 148.172 million, respectively, in Q2FY21 and H1FY21, higher than USD 31.368 million and USD 40.455 million in Q2FY20 and H1FY20, respectively. The increase in operating cash flow was primarily the result of higher realized metal prices and higher copper and precious metals sales volumes.

Q2FY21 Financial Highlights:

• HBM impresses with its quarterly result, wherein the company posted revenue of USD 404.242 million, surged from USD 208.913 million in the previous corresponding period (pcp). The increase was mainly attributed to higher realized metal prices as well as higher sales volumes of copper and precious metals partly offset by lower sales volumes of zinc.
• The company reported a gross profit of USD 82.182 million, as compared to a gross loss of USD 12.654 million in pcp.
• The quarter was marked by lower selling & administrative expenses, coupled with a decline in other expense, partially offset by a significant surge in exploration & evaluation expenses (USD 12.571 million v/s USD 2.192 million in pcp).
• Loss for the period declined to USD 3.395 million, from USD 51.901 million in pcp.

Source: Company Report

Risks: The group’s operations are dependent on the prices of commodity in which it deals in. Hence, volatility in underlying commodity prices would affect the company’s revenue, cash flow and other financial metrics.

Valuation Methodology (Illustrative): Price to Cash Flow

Stock Recommendation:

In the recent past, commodity prices have rallied supported by strong demand dynamics, which has supported the company’s realization prices. The group has been able to minimize its net loss in Q2FY21, and the addition of new mills are expected to support future operations. At the end of June 2021, the company has ample liquidity of USD 294.3 million in cash and cash equivalents and USD 295.2 million under its credit facilities. This seems to be sufficient to support its short term and long-term capital needs. We have valued the stock using the Price to CF-based relative valuation method and have arrived at a low double -digit upside (in percentage terms). For the said purposes, we have considered peers like Copper Mountain Mining Corp, Teck Resources Ltd etc. Considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock at the closing price of CAD 7.66 on August 24, 2021.

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached.

Technical Analysis Summary

One-Year Technical Price Chart (as on August 24, 2021). Source: REFINITIV, Analysis by Kalkine Group

*The reference data in this report has been partly sourced from REFINITIV.

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