Hudbay Minerals: Copper and Zinz

02/28/2017 7:00 am EST

Focus: STOCKS

Peter Mantas

CIO, Logos LP

Hudbay Minerals (Toronto: HBM) is a global metals producer in Canada focused on copper and zinc in addition to gold and silver with operations mostly focused in South America.

The company has risen significantly recently (up over 50% YTD and over 200% in the past year) but I believe there is more room to run under current macroeconomic conditions.

Out of all the mining operators in Canada, Hudbay has one of the healthiest balance sheets around with very manageable debt levels, sustained positive retained earnings and ample cash.

Further, the company is a very efficient operator in mining as it has a 14% FCF to sales conversion rate and is  attractively valued with a forward PE of 11x.

The company recently exceeded production guidance at its Constancia mine in Peru and its zinc operations are on an upswing given higher than expected ramp-up in its Lalor mine, which contained higher than anticipated zinc grades.

Zinc prices have been higher in 2017 and copper prices are expected to swell from $2.18/lb to $2.81/lb over the next 6-8 months.

This price increase in copper stems from higher than usual demand from China, reduction in copper stocks within global warehouses, weaker global currencies vs. the USD and a current labor shortage due to strikes at BHP’s largest mine in Chile.

We believe that Hudbay is poised to continue to ramp up production in its Peruvian copper mine to take advantage of these prices (cap ex for that mine are expected to grow by $25 million over the coming year) and that prices will hit close to forecast by mid-May.

Our price target on the name is $16.77 as we expect these catalysts to take shape at a faster rate under this maturing bull market.

However, I believe that this is not a long term investment (given our long range copper forecast) and investors should consider taking all profits above $18.10 regardless of a change in copper price forecasts. Logos LP is long shares of HBM.

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