Hudbay on schedule at Constancia despite rain delays
VANCOUVER — Operating in the high-altitude Peruvian Andes can offer a range of challenges, not the least of which is a rainy season that can run from September through April. And heavy rains proved to be an issue for Canadian base metal producer Hudbay Minerals (HBM-T, HBM-N) at its wholly-owned US$1.5 billion Constancia copper-molybdenum-silver asset in the Chamaca and Livitaca districts of southeastern Peru.
In late February Hudbay reported that weather conditions had delayed aspects of Constancia's development as a number of productive work days were lost due to above-average rainfall that forced the company to tarp over portions of its site.
Hudbay said that there was roughly a 50% increase in the amount of rain compared to the past five years. Despite challenging conditions, however, the company believes it has the capacity to play catch up on a variety of earthworks at the site during Peru’s dry season.
"What we do not know is exactly what our productivity increase will be during the dry season," commented Cashel Meagher, Hudbay’s vice-president South American Business Unit. "We believe we’ll be in a better position to trend recovery on schedule in June or July, but what can be said is right now is that we forecast probably to be behind by a couple of months.
"We also believe that there is capacity in the dry season to recover that with more efficient use of the night shift, and also from the protracted periods we’ve had of little rain, we’ve experienced higher than the average forecasted recovery of productivity numbers of late," he concluded.
Hudbay is roughly six months into an estimated 27-month development period at Constancia, and has invested roughly US$351 million on the project through the first quarter of 2013. According to first-quarter numbers released by president and CEO David Garofalo, the company has entered into additional commitments for roughly US$631 million at Constancia and utilized around 50% of its US$157 million contingency.
“We believe the impact on the project schedule is recoverable, and our targets for initial production and full production remain unchanged. The project’s forecasted final costs remain on budget,” Garofalo added.
Thus far Hudbay has completed approximately 25% of Constancia’s build out, with tailings facilities, haul roads and water diversion infrastructure under construction. The company estimates that heavy-haulage access roads should be complete in the third quarter, while plant construction is pegged to start up by late June. Delivery of long-lead items including flotation cells, pumps, regrind mills, SAG mills and crushers has been underway since mid-March.
On the socio-political side Hudbay continues to negotiate the relocation of families that will be affected by Constancia's development. To date the company has relocated 13 families to newly-constructed homes, with another 12 homes under construction and scheduled for occupancy, which leaves Hudbay with roughly 10 on-going negotiations to complete by the end of the year. According to Meagher there has been no sign of non-governmental organizational activity around the development.
"It is sort of a fluid situation," Garofalo added. "I would like it to happen sooner rather than later. It’s one of the more difficult and one of the riskier items when constructing mines in Peru, as you would see from the disclosure of many of the other projects being constructed here. So we continue to work at it. Certainly our goal is sooner than later but as I’ve said, we believe there’s some capacity within the schedule to extend that timeline if required."
Exploration initiatives will continue at Constancia throughout the year, with three diamond rigs on-site and 3,000 metres planned during the first quarter. One rig will focus on in-fill and feasibility work at Hudbay's Pampacancha deposit, which holds 47 million proven-and-probable tonnes grading 0.48% copper, 149 grams moly per tonne, 4.49 grams silver per tonne, and 0.285 grams gold per tonne.
The remaining two rigs will be collared at Pampacancha West, which includes a group of geophysical anomalies located roughly 500 meters west of Pampacancha. Recent drilling has indicated that magnetite-skarn mineralization exists at the target, with highlights including hole PO-12-142, which cut 14 meters at 0.85% copper equivalent starting at 11 meters and almost 28 meters at 0.51% copper equivalent starting at 91 meters.
Hudbay reported US$1.3 billion in cash to end the first quarter, and has another US$250 million it could draw down from a gold-silver streaming agreement with Silver Wheaton (SLW-T, SLW-N) on its 777 mine in Manitoba.
"Right now, there is no urgency," Garofalo added. "We are well capitalized. It’s really all about driving down our cost of capital and we’ll do so opportunistically. There is a [gold-stream] component at Constancia that we could consider at some point, that’s a lever we could pull."
Constancia's current mine plan envisions a 16-year life beginning in 2015 with annual production clocking in at 90,000 tonnes of contained copper in concentrate with molybdenum, silver and gold by-products. Hudbay has traded within a 52-week range of $7.36 and $12.10, and closed at $8.72 at the time of writing with 172 million shares outstanding for a $1.5 billion market capitalization.