Hudbay Minerals (TSX:HBM)(NYSE:HBM) stock had been on a tear. From November to April, shares doubled in value.
After reporting earnings on May 6, however, the stock plunged around 30%.
What happened to the market’s optimism for Hudbay stock? Did the dip lead to a great buying opportunity? Let’s find out.
Understand the rise
Before we pivot to the latest quarterly results that tanked the stock, it’s important to know why Hudbay stock rose 100% in the first place.
The first catalyst was the confirmation of a Section 404 water permit for its $2 billion Rosemont project, which is set to produce low-cost copper in Arizona via an open-pit mine. The next catalyst came a few days later, when the company revealed that it was buying out its minority partner.
Following these two revelations, investors scrambled to re-rate the stock given that it now controlled 100% of valuable mine with few hurdles remaining.
After the meteoric rise, I suggested that readers sell the news. “Time and time again, mining companies have proven terrible stewards of capital,” I wrote. “Hudbay is a perfect example of this value destruction.”
And now … the fall
Since that post, shares have fallen by more than 30%. Is now the time to jump back in?
In the first quarter, Hudbay recorded a net loss of $13 million. In the same quarter of last year, it booked a $41 million profit.
Meanwhile, operating cash flows fell to $90 million, a near 50% reduction from last year. Lower selling prices and sales volumes were to blame.
Take a look around the mining sector and you’ll realize every company has been hit hard by lower metals prices. Lundin Mining Corporation, First Quantum Minerals Limited, and Teck Resources Ltd are all down 20% or more over the last 30 days.
Hudbay, however, has fallen by more over the same period — a drop compounded by its inability to grow production. Last quarter, copper output fell 6% year over year.
It seems that despite the great news about the Rosemont project, Hudbay’s multi-decade struggle of profitably allocating shareholder capital continues.
Following the drop stemming from Hudbay’s first-quarter results, the stock looks like a bargain again. Today, it looks like investors are pricing in too much short-term headwinds, thereby discounting the value of the Rosemont mine.
Discounting at 8%, the value of the Rosemont mine is around US$770 million. At a 10% discount rate, the value is closer to US$500 million.
Given that the project could double Hudbay’s EBITDA once it enters production, the current market cap of US$1.3 billion doesn’t seem to be properly pricing Rosemont’s upside.
For example, if copper prices grow from US$3.00 per pound to US$3.50 per pound, the after-tax value of Rosemont would be more than Hudbay’s entire market cap!
If you’re looking for under-priced mining stocks, Hudbay certainly qualifies following its recent drop.
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Fool contributor Ryan Vanzo has no position in any stocks mentioned.