Near-term funding concerns overhang long-term growth
We provide Q4/12 conference call highlights and have updated our forecasts
for the company.
Impact – NEGATIVE
In our view several issues contributed to yesterday’s sell-off in HudBay
shares: 1) investors were disappointed and surprised by the announcement
that the company’s dividend would likely be cut (albeit temporarily) in H2/13,
2) due to weather issues, the Constancia project is two months behind
schedule (management believes that it can make-up the lost time over the next
six months), 3) 50% of the contingency included in the Constancia capex
estimate has already been utilized (although with 75% of the project capex
committed, arguably utilization of the contingency could be higher), and 4)
while HudBay has sufficient funding to meet its expected capital requirements
over the next three years, a capital cost overrun of ~20% on the Constancia
project (or ~$300 million) would, in our view, likely necessitate the sourcing
of additional funding.
Taken together, these issues have crystallized concerns that HudBay may
require additional funding at some point within the next 18 months to
complete its development pipeline. Management noted that it has several
levers to pull to meet any funding shortfall including: 1) equipment financing
on the Constancia project (possibly $100 million-$150 million in funding) and
2) the sale of a gold stream on the Constancia mine (~$300 million). In
addition, based on our forecasts, we expect HudBay to generate ~$300 million
in operating cash flow over the next two years.
We believe that HudBay has sufficient financial flexibility to fund its project
pipeline, but we also note that operating cash flow is likely to look very
skinny for the next 2-3 quarters, while at the same time, the company is
pushing to catch-up lost time at Constancia. Until investors are more
comfortable with HudBay’s funding for its development pipeline and that the
Constancia project remains on track (timing and capex), we believe that
HudBay’s share price is likely to trade in line with its peers.
We have adjusted our model to reflect the expansion of the Lalor mill by 20%
(requiring $90 million additional capex) and we have increased costs at Lalor
over the next few years to reflect recent cost performance and a 12-month delay in the commissioning of the new Lalor mill. Our NAV-10% has increased slightly to $13.14/share (from $13.02); however, our 2013 and 2014 EBITDA estimates have declined slightly (see sidebar on previous page). We are maintaining our HOLD
recommendation and we have lowered our target price to $11.00 (reflecting our lower estimates).
Conference Call Highlights:
? Management remains committed to paying a dividend – A cut in the dividend is expected in H2/13
and we expect a resumption of the $0.20/share annual dividend to occur by H2/14. The dividend cut
expected in H2/13 is the result of covenants in the company’s 9.5% Unsecured Notes indenture that
require it to maintain a consolidated debt/EBITDA ratio of 2.5:1 or less. We estimate that the current
debt/EBITDA ratio is ~3.2:1. Management is considering a number of avenues to maintain the
? Delays experienced at the Constancia project were due to heavier-than-expected rainfall (15%
higher than normal) in December, which negatively affected productivity and pushed the project
two months behind. Management maintains that it can regain lost time over the dry season when
productivity is expected to improve and has maintained its production targets (full production Q2/15)
and capex guidance (US$1.55 billion).
? The company also indicated that 50% of the Constancia project’s contingency of $157 million
has been used – but this is not out of line with expectations and with 75% of the project capex
committed, contingency spending is slightly below what would be expected.
? Relocation at Constancia slower than expected – Due to protracted negotiations, the relocation of
some families from the Constancia site is taking longer than planned. However, management also
noted that it may not be necessary to construct a water impoundment at this point because the water
balance on the project has been found to be positive. This would allow extra time to move the
remaining families. Thirteen of twenty three families have been relocated.
? Lalor capex has increased by $90 million (to $794 million) due to scope changes for the new
concentrator, it also emerged that the 12-month delay in moving ahead with building the concentrator
is to allow the company to better manage cash flows. Operating costs for the Lalor project should be
higher than previously expected for 2015, while ore is processed at Snow Lake and Flin Flon ahead of
the start-up of the new concentrator.
? New mine plan being developed for Lalor – Management would not provide an estimate at this time
for the potential mining rate at Lalor, but suggested that it would be higher than the currently planned
4,500 tpd. With the shaft capable of hoisting 6,000 tpd and the mill is expanded to 5,400 tpd, we
suspect that a 5,000 tpd mining rate would be reasonable. Management expects to have a new mine
plan available during H2/13.
Also Cannacord lowers traget to $10.00