We are upgrading HudBay to Outperform following the financing and

commencement of construction at Constancia.

Investment Opinion

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.