When it comes to Canadian miners, investors think of Teck Resources Ltd. and First Quantum Minerals Ltd. and pay little attention to diversified metals miner HudBay Minerals Inc. (TSX: HBM)(NYSE: HBM). It hasn’t enjoyed the run-up in its stock price over the last year which caused Teck’s stock price to grow more than three-fold due to a rally in coal and base metals.
But there are clear signs that HudBay is poised to perform strongly in coming months, making it attractively valued.
Let me explain.
Now what?
Firstly, HudBay will benefit from the upbeat outlook for copper and zinc.
Both metals performed quite strongly in the second half of 2016. Zinc soared in value by 55% over the last year, and copper, despite weakening in recent months, is still up by 21% for the same period.
More importantly, the outlook for zinc and copper remains quite upbeat. Even the normally bearish investment bank Goldman Sachs has turned bullish on copper, and Morgan Stanley believes copper and zinc will shine in 2017.
Copper and zinc prices are expected to perform well because of a sharp uptick in demand from China along with supply constraints triggered by a lack of investment in exploration and mine development over the last two years.
Combined, these metals are responsible for generating 86% of HudBay’s gross earnings, which means that firmer prices and rising demand are a boon for the company.
The surge in precious metals since the end of 2016 will also benefit HudBay. You see, gold and silver are by-products of base metals mining and consequently are responsible for generating 14% of HudBay’s earnings.
Secondly, metals production is growing.
For 2016, HudBay’s copper production grew by an impressive 18% compared to a year earlier, whereas zinc output rose 7%, and gold rose by 14%. This trend is forecast to continue over the course of 2017. Both copper and precious metals output at the upper end of company guidance will grow moderately during the year, while zinc output is expected to expand by up to an impressive 36%.
This ability to significantly boost production means that HudBay is well positioned to take advantage of higher base and precious metals prices, thereby giving earnings a healthy lift.
Finally, significant inroads have been made in cutting costs.
All-in sustaining costs for 2016 were a remarkable 26% lower year over year, and they are expected to fall further during 2017. In combination with higher metals prices, this will enhance HudBay’s margins, leading to increased profitability.
So what?
This year is shaping up as a solid year for HudBay. The miner will experience a lift in earnings and profitability, allowing it to finance further exploration and development activities that, over time, should unlock additional value for investors.
