HUDBAY MINERALS installing a river diversion pipe at its Constancia mine, Peru.

HUDBAY MINERALS installing a river diversion pipe at its Constancia mine, Peru.

HudBay Gears Up to Capitalise on "Ideal" Buyer's Market

Issue 47, June 2013

HudBay has announced two capital raising initiatives in the last week, offering $150m in debt at 9.5 per cent and agreeing a $130m equipment deal with Caterpillar’s financing arm. The news bolsters HudBay’s balance sheet, shouldered with developing the Constancia mine in southern Peru.

Only last week, analysts at Moody’s downgraded the company’s debt to B3, saying it expected it to require fresh capital. HudBay has operated a cluster of mines in Canada’s Manitoba for 85 years, but in 2011 paid $366m for Constancia, with projected capital costs of $1.5bn and production due in 2014.

In Manitoba, HudBay is also approaching first production from its high grade, short life Reed project and is ramping up production at Lalor. Group copper output is projected to rise fivefold in three years from 40,000 tonnes in 2012 to 200,000 tonnes by 2015.

The capital raisings give headroom to HudBay’s intent to capitalise on “an ideal market” for adding to its pipeline, with weak prices amongst juniors and asset sales by majors. “We have never been busier looking at opportunities,” chief executive David Garofalo has said. “The juniors are capital starved and are aggressively pursuing suitors.”

Since joining HudBay from Agnico Eagle Mines in July 2010, Garofalo has carried over Agnico’s toehold acquisition strategy, taking equity stakes in a raft of pre-production juniors, including Copper Reef, Panoro Minerals and MacDonald Mines Exploration. Only a month after joining HudBay, he paid $30m for up to 14 per cent of Augusta Resource Corp, owner of the gigantic Rosemont copper project in Arizona.

Garofalo has told reporters that he would be “comfortable” spending up to 20 per cent of the company’s C$1.3bn ($1.3bn) market cap on an acquisition, targeting a project at the scoping or feasibility stage. “We don’t want to bet the farm on any one acquisition.”

HudBay is the last remaining midcap in the copper space publicly on the hunt. Late Wednesday, Lundin Mining broke from the field, paying $350m for Rio Tinto’s Eagle mine in Michigan. In April, Capstone likewise knocked itself out, offering $650m for BHP Billiton’s Pinto Valley mine, in a deal that won US regulatory approval on Tuesday.

Doubling losses to the copper price, shares in HudBay are off 22 per cent this year at C$7.80, in line with peers.

“We have never been busier looking at opportunities.”

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