Hudbay holds firm on Peru, even as focus turns to North America

SOUTH AMERICA | CEO says country is stabilizing after violent protests earlier this year

BY HENRY LAZENBY

Hudbay Minerals (TSX: HBM; NYSE: HBM) says it wants to maintain its longterm exposure to politically volatile Peru as its short-term focus turns to completing an acquisition in Canada.

On Apr. 3, the Toronto-based company announced a friendly, US$439-million offer for Copper Mountain Mining (TSX: CMMC; ASX: C6C). The merger would reduce its exposure (based on net asset value) to Peru to about 45%, with 55% attributable to North America. In Canada it has the Lalor gold, silver, copper, zinc mine in Manitoba, and the new Copper Mountain asset in British Columbia following the deal’s expected June closure. The company is also buzzing as it prepares to develop its 86,000-tonne-per-year Copper World project in Arizona.

“The quick answer is yes; we are readjusting our distribution geographically in the short term. But over the long-term, together with (Peru exploration projects) Maria Reyna, Caballito, and then Copper World, we maintain roughly the same distribution,” Hudbay president and CEO Peter Kukielski said in response to an analyst question during a May 9 first-quarter results call.

It could appear as if the company is moving to reduce its strategic exposure to Peru, especially after January, when protesters entered mines in the southern region of Cusco, where Hudbay has its cornerstone Constancia mine. They also damaged and burned machinery and vehicles at Glencore’s (LSE: GLEN) Antapaccay operations, according to local media.

At least 66 have died in violent protests in the country, posing risks for other large mines such as MMG’s Las Bambas and Freeport-McMoRan’s (NYSE: FCX) Cerro Verde.

Kukielski says the Constancia mine had to resort to emergency measures during the first quarter to keep production going from lowgrade stockpiles.

Since December 2022, supporters of ousted president Pedro Castillo have engaged in a series of political protests against President Dina Boluarte’s government and Congress. Castillo had attempted to dissolve Congress citing its efforts to block his attempted policies, resulting in the legislative body impeaching and removing him from office the same day.

For the most part, Kukielski said the situation has stabilized, although the company’s March-quarter production figures were down. During the first quarter, Constancia produced 20,500 tonnes of copper against the prior quarter’s 27,000 tonnes, but gold output folded in half at 11,000 oz., while silver managed to hold up relatively well at 552,000 ounces.

“We’ve been really happy with the turn of events in Peru. It looks like President Boluarte is doing a really good job of stabilizing the environment,” Kukielski said.

So far, Kukielski said the company is not experiencing any problems dealing with the new bureaucracy in obtaining exploration permits.

“I believed in Peru over the last two and a half decades. Peru tends to go through these ups and downs and cycles in social unrest, but I am convinced that Peru is a good place to be,” Kukielski said.

In a May 9 note to clients, BMO Capital Markets analyst Jackie Przybylowski said the Copper Mountain acquisition made sense for Hudbay to diversify its production sources.

The analyst, who maintains an ‘outperform’ rating on Hudbay shares, says the production and shipping disruptions, including a challenged operating quarter at the Lalor mine, served to confirm the company’s rationale for acquiring Copper Mountain.

“It rebalances geographic exposure, somewhat diluting the Peru risk that has depressed Hudbay‘s valuation,” the analyst said in April.

At the time, Przybylowski said that adding Copper Mountain’s cash flows to its balance sheet would help Hudbay fund and build its Copper World project.

A prefeasibility study for Copper World is expected by mid-year. Clearing and grading work to prepare for the future development continues at site, including building roads and other facilities.

At Constancia, transportation logistics have returned to normal since mid-February, and the company has significantly reduced concentrate inventory buildup at the mine.

Mining activities resumed in the nearby Pampacancha satellite pit in the same month.

“The teams continue to operate safely and with support from local communities,” he said.

The company says it’s on track to achieve full-year Peru production guidance of 91,000 to 116,000 tonnes copper and 83,000 to 108,000 oz. gold, weighted towards the second half of the year.

Peru exploration upside

Hudbay has also restarted exploration activities focusing on drill permitting the prospective satellite assets, and evaluating reserve expansions at Constancia and Pampacancha.

During the conference call, Kukielski noted that Hudbay was particularly excited about Peru’s brownfield expansion opportunities close to the Constancia processing facility.

The first, Maria Reyna, sits on the line that joins the Las Bambas and Tintaya mines. It has a similar radiometric footprint to these mines in scale. Vale (NYSE: VALE) drilled 11 holes in the property over a decade ago, all intersecting copper at surface, including 160 metres of over 1% copper equivalent.

The second, the Caballito mine, previously operated by Mitsui until the early 1990s, produced high-grade copper. The company believes a waste rock pile has economic mineralization, given that the historical mine’s cut-off grade was more than 1.5% copper.

There’s more resource upside at its two producing mines, too. Hudbay is finalizing a limited drill program and technical evaluations at the Constancia deposit to confirm the economics of adding another phase to the current mine plan, converting a portion of the existing resource base to reserves.

“Enhancing our brownfield expansions will position the core business for future transformational initiatives such as our Copper World project and better positions us for the next wave of value-creating consolidation in the copper space,” Kukielski said.

At press time in Toronto, Hudbay shares traded at $6.36, down more than 12% over the past 12 months, having tested $4.07 on the low end and $8.47 over the period. It has a market capitalization of $1.6 billion. TNM