HudBay Minerals Inc.
(HBM-T) C$16.59
Q3/10 dragged lower by weak copper shipments
Event
HudBay reported Q2/10 adjusted EPS of C
.08 compared to TD forecast
EPS of C
.06 and consensus estimate of C
.11. The company will be
holding a conference call today, Thursday, November 4 at 10:00AM EST.
Impact - NEUTRAL
We expected a relatively weak quarter from HudBay and that’s what we got.
Copper concentrate sales were negatively impacted by reduced rail car
availability – at the end of the quarter, the company had excess inventories of
5,000 tonnes of copper and 7,800 tonnes of gold contained in copper
concentrate. If this material had been sold during the period, EPS would have
been approximately 11 cents higher, according to management.
HudBay has leased additional rail cars and expects to ship concentrate
equivalent to production in Q4/10. Excess inventories should be drawn down
during Q1/11.
While Q3/10 was an active quarter for HudBay on various fronts, including
the hiring of a new CEO, an investment in Augusta Resources, and the
acceleration of the Lalor project, financial results for the period contain little
in the way of new information. We are maintaining our HOLD
recommendation and C$16.50 target price.
Details
Zinc production slightly below our forecasts: Zinc production for the
quarter totaled of 18,091 tonnes in concentrate, or 15% below our forecast of
21,177 tonnes. Lower grade mining sequences at both 777 and Trout Lake
negatively zinc impacted production. Copper in concentrate production was
14,913 tonnes, or 31% higher than our forecast of 11,363 tonnes as a result of
higher, planned copper grades.

Cash costs better than expected on higher by-product credits – HudBay reported negative cash cost of
US
.27/lb zinc on a by-product basis versus our forecast of positive cash costs of US
.09/lb zinc. For the
first time, the company also reported co-product cash costs of US
.86/lb zinc, US$1.37/lb copper and
US$336/oz gold. For those who care, HudBay’s cash cost per ounce of gold would place it among the lower
cost gold producers. At current gold prices, HudBay is enjoying a cash margin of approximately US$1,000/oz.
Lalor project on-track; shaft sinking deferred to Q1/11 start – HudBay has reduced its planned 2010
capital expenditures at Lalor to $54 million from $133 million with the commencement of shaft sinking that
was expected during Q3/10 delayed until Q1/11. Management did not provide an explanation for the delay but
noted that no changes have been made to total project costs ($560 million) or project timeline (initial ore
production during 2012). In Exhibit 1, we show HudBay’s revised capex plan for Lalor against its previous
forecast. HudBay also noted that is conducting trade-off studies to determine the viability of constructing a
new (and possibly larger?) concentrator at the mine site as opposed to refurbishment of the Snow Lake
concentrator that would be capable of processing 3,500 tonnes of ore per day.

Zinc production heading lower…. until Lalor kicks-in in 2013 – Part of the reason for lower zinc
production during Q3/10 is the fact that the Trout Lake mine is nearing the end of its life and the mine plan is
adjusted for the closure of the mine. HudBay expects mine production to be relatively constant this year and
next – we are modeling approximately 15,500 tonnes per year, but we expect the operation to be closed at the
end of 2011. HudBay expects to offset some the lost production via an expansion of the 777 mine to access the
777 North zone that contains 550,000 tonnes grading 1.0% copper and 3.6% zinc. The capital cost for the
expansion is estimated at $20 million and production should average approximately 3,300 tonnes of zinc per
year over 6-years.

As well, we expect that Hudbay should approve the development of the Reed Lake project
joint venture during 2011. High grade copper ore is expected to be mined at Reed Lake and trucked to Flin
Flon – we estimate that production could total about 15,000 tonnes over a 5-6 year life. HudBay’s interest in
the JV is 70%, with VMS Ventures controlling the balance.