HUDBAY’s 777 mine on Flin Flon’s greenstone belt in northern Manitoba, the company’s heartland since 1927. “HudBay’s always built its own projects,” says chief executive David Garofalo. “It’s never bought cash flowing assets."

HUDBAY’s 777 mine on Flin Flon’s greenstone belt in northern Manitoba, the company’s heartland since 1927. “HudBay’s always built its own projects,” says chief executive David Garofalo. “It’s never bought cash flowing assets."

David Garofalo: We're Not Trying to Play Hardball

Issue 78, March 2014

Continued from Page 1

...or realise its investment and avoid the risk of dilution on any fumbled Augusta response to its Red Kite loan.

HudBay’s muscle in its bid for Augusta owes much to Garofalo’s toehold strategy, taking equity stakes in juniors at an early stage rather than investing heavily in greenfield exploration. The strategy feeds projects into HudBay’s project pipeline, allowing it to concentrate on construction, building new mines throughout the cycle.

HudBay has bought shares in eight juniors since Garofalo joined in 2010, including Augusta and VMS Ventures, whilst building three new mines, including its $1.7bn Constancia mine in Peru, due for production later this year.

“The investment thesis is get involved early,” Garofalo says, “put seed capital to work in good projects and get a seat at the table.” He sees it as an “opportune time” to mop up assets and is looking to build a portfolio of shares in “at least ten companies, probably a bit more in this environment.”

Last week, HudBay bumped up its share in explorer Panoro Minerals to 11 per cent. “Whether we acquire Augusta or not, there’s a number of other projects that we would probably still add into the pipeline, all greenfield.”

HudBay has cash of $804m and debt of $779m. The company doubled its credit line to $200m last month and cash flow is due to balloon with output from Constancia, as capital expenditure drops and new production comes onstream.

Criticism of its current bid has focused on the cost of acquiring Augusta, plus the cost of building Rosemont, being equal to HudBay’s own C$1.7bn ($1.5bn) market cap. Garofalo however is “very confident” he can finance construction from internal cash flow, doubling forward annual production to 400,000 tonnes in exchange for a fifth of its market cap.

“We’re well capitalised,” Garofalo says, describing recent copper price weakness as noise. “We don’t need to worry about the short term machinations of the market. You’d love to be able to time projects to have the new production hit the peak of the cycle. But the reality is, it takes 5 to 10 years to build projects, to get them permitted, financed and operating, so you can’t hope to hit the peak of the cycle.”

“It’s a mugs game to try to time things. What you hope to do is build long life deposits and over a 20-year period, you’re going to hit several peaks in the cycle. That’s what generates superior rates of return.”

“We’re well capitalised. We don’t need to worry about the short term machinations of the market.”

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