We are upgrading HudBay to Outperform following the financing and
commencement of construction at Constancia.
Production Growth Within View.
With the startup at Lalor (Q3 2012), Reed
(late 2013) and Constancia (late 2014), HudBay should generate group leading
production growth over the next three years. By 2016 we forecast 300% growth
in production vs 2012, and 30% growth between 2012 and 2014. This is ahead of
peers like Capstone and Inmet, whose key projects won't start till 2016 at the
Execution Risk Remains Key, But Manageable.
We think investors are rightly
skeptical that HudBay can execute on the Constancia project, a large-scale,
open-pit project in Peru, unlike anything the company has attempted before. But
the project has relatively
favourable infrastructure, including power, water
and road access
, which reduce the technical challenges associated with
construction. It has
key environmental permits in hand, life-of-mine
cooperation agreements with local communities. HudBay plans to spend nearly
$1B of it's $1.5B budgeted capex during 2013 - a crucial year that will determine
if the project is largely on budget and on schedule. We think the market is
expecting a significant cost overrun and/or a delay. Factoring in capex of $1.8B
(20% over budget), and startup in mid 2015 (about 3 quarters behind schedule),
we still believe the project is viable. We note that
while the average Constancia
reserve grade is only 0.47% copper equivalent, we expect the first five years
of production to average over 0.7% copper equivalent
Balance Sheet Can Withstand Cost Overrun.
We think HudBay could require
additional funding for its projects over 2013-2015, but stress-testing suggests the
balance sheet can handle more than the existing $800M in available debt.
HudBay also has other financing alternatives, including an offtake sale for
Constancia's copper output, and selling a minority stake in the project.