After beginning the year by formally appointing Peter Kukielski as its CEO, and this month settling a long-drawn-out boardroom battle with its second-largest investor, Canadian copper producer Hudbay Minerals (TSX, NYSE: HBM) is setting its sights on gold.
Despite strong performance at its Canadian operations, Hudbay swung to a loss in the first three months of the year, mainly due to weak base metal prices and lower grades at its Constancia copper mine in Peru.
Then the pandemic hit, and Peru operations were halted, but it had no material impact on the business as a whole, Kukielski told MINING.COM in an interview on May 22. Hudbay expects a delay of up to four months before it can start mining an extension at Constancia.
Expected output at its operations in Canada's Manitoba province, where it mines for zinc and copper, were maintained, and the Lalor mine in Snow Lake is fast becoming a meaningful low-cost gold producer that will benefit from the refurbishment of the New Britannia mill, expected to be complete in 2022.
"I think increasing our exposure to gold is a logical step for the company, and the reason is, first of all, we have the assets and the expertise to transform our Lalor mine and the other regional properties around it into a gold business," Kukielski said.
Kukielski said it turns out the base metals deposit, discovered in 2007, has a massive gold component.
"These are all discoveries on our own lands using our own expertise, and we've been in the area for 90 years. As we go deeper into the ore body, it is turning into a gold mine. Chasing this right now I think is both strategic and smart."
Hudbay is funding the development through the refurbishment of the new Old Britannia mill and mine, which it bought for $15 million.
"We are spending $115 million to refurbish the mill and fix up some of the infrastructure, [and] add a flotation circuit," Kukielski said. "That takes the recovery of gold at 53% from the current mill to 93%. It adds a lot of value to the ore."
Once the refurbishment complete, the mill is expected to process about 1,500 tonnes of ore a day.
The refurbishment was funded by a gold futures transaction - Hudbay presold Lalor gold production in 2022-23, on the base of the gold forward curve, Kukielski said.
In 2022-23, Hudbay is set to deliver 40,000 oz. each year to a consortium of banks that funded the transaction. The gold production is not tied to any asset like a stream, but can come from any mine, Kukielski added.
"The cash is in the bank, the flexibility there," Kukielski said. "Very few companies have the ability to invest at the bottom of a cycle, but we are one of those fortunate few."
This year's guidance is set at 90,000 oz. gold at Lalor, and, Kukielski said, by 2022 it will be producing over 150,000 oz. at an average all-in sustaining costs (AISCs) of $650 per ounce.
Lalor contains 1.3 million inferred ounces and is expected to provide 150,000 oz. per year for eight years, then production will drop slightly as it is mined for its expected 18-year life.
But Kukielski is looking at the gold business as part of the base metals cycle, and said Hudbay remains copper-focused.
"Copper is our primary metal," he said "The fundamentals for copper are fantastic, and in the future it is the primary metal - the green metal of the future. Everything that needs to be done to decarbonize our world requires copper, the green metal of the future. It is the responsible metal to mine."
At press time in Toronto, Hudbay was trading at $3.77 per share within a 52-week range of $1.66 and $7.56.
The company has about 261 million common shares outstanding for a $985-million market capitalization.
Jackie Przybylowski, a mining analyst at BMO Capital Markets, upgraded the company's rating from market perform to outperform and raised her target price to $5.00 per share from $4.00 per share as a result of changes to her target multiples and gold and silver commodity prices.
"We have consistently commented on the potential for Hudbay to deliver value through its portfolio of exploration assets in Manitoba and Peru," she wrote in a research report on May 29. "While this potential was previously too far out to have a meaningful impact on our target in the past (our target is based 50% on P/NAV (10%) and 50% on EV/EBITDA (NTM)), the mining of higher-grade Pampacancha in Peru in early 2021 and the commissioning and ramp-up of the New Britannia mill in Manitoba in H2/21 are now closer on the horizon. Additional exploration potential - both at Snow Lake and especially in Peru - could contribute further upside beyond our current estimates."