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:

• Surge in Cash from operations: In Q1FY21, the company reported a cash from operations of USD 51.797 million, jumped from USD 9.086 million in pcp. The positive impact from higher amortization coupled with a change in fair value of financial instruments and other net finance costs has resulted in the growth.
• Encouraging Long-term production outlook: The company expects its annual production (of both gold and copper) to remain elevated in the coming years, which looks encouraging. Copper production is expected to grow by ~46% from FY20 to 139,000 tons in FY24, while gold is expected to grow by 154% to 318,000 oz in FY24.              

Source: Company Presentation

• Positive Preliminary Economic Assessment for Mason Copper Project: Mason has the potential to more than double Hudbay’s current copper production levels, and if brought into production, Mason is expected to become the third largest copper mine in the United States. It has 27-year mine life with average annual copper production of approximately 140,000 tonnes over the first ten years of full production.

Q1FY21 Financial Highlights:

• HBM announces its quarterly result, wherein the company posted revenue of USD 313.624 million, climbed from USD 245.105 million in the previous corresponding period (pcp). The increase was driven by elevated sales from copper and zinc.
• The group reported a gross profit of USD 52.512 million, as compared to a gross loss of USD 21.911 million in pcp. The improvement was primarily attributed to lower cost of sales.
• The quarter was marked by an increase in selling and administrative expenses and a surge in exploration and evaluation expenses. Results from operating activities stood at USD 38.861 million, as compared to a loss of USD 38.359 million in pcp.
• The corporation posted a net loss of USD 60.102 million, as compared to a loss of USD 76.134 million in pcp. The quarter was marked by a surge in other net finance costs and higher loss from change in fair value of financial instruments.

Q1FY21 Income Statement Highlights (Source: Company Report)

Risks: The company’s performance is co-related to underlying commodity prices, and price volatility would affect the company’s overall performance.

Valuation Methodology (Illustrative): Price to Cash Flow

Stock Recommendation:

Mason is a viable long-term option for potential future development and a strong component of Hudbay’s pipeline of long-term growth opportunities in mining friendly jurisdictions. Mason’s 2.2 billion tonne measured and indicated resource estimate is one of the largest greenfield copper projects in the Americas. Going forward, we expect the company to deliver decent financial result as copper prices are likely to remain elevated. We have valued the stock using the Price to CF-based relative valuation approach and arrived at a target price offering double-digit upside potential (in % terms). We have considered peers like Lundin Mining Corp, Capstone Mining Corp etc. Hence considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock at the closing price of CAD 8.42 on July 23, 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 July 23, 2021). Source: REFINITIV, Analysis by Kalkine Group

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

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