Hudbay’s reduced exposure belies its belief in Peru’s prospectivity

“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,” Kukielski said in response to an analyst query during Hudbay’s May 9 first-quarter results call.

At first gloss, it could appear that the company is moving to reduce its strategic exposure to the jurisdiction. Especially after the most recent bout of demonstrations, which saw protesters enter mines in the southern region of Cusco, where Hudbay’s cornerstone Constancia mine is, in mid-January. They damaged and burned machinery and vehicles on local miner Antapaccay operations, the mine camp area was damaged according to local media.

Violent protests in the country have killed at least 66, posing risks to the activity of 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 low-grade stockpiles.

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

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 oz.

“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.

He expects the country’s current period of relative quiet to last for some time.

So far, the company is not experiencing any problems dealing with the new bureaucracy in obtaining pending 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, bringing another “leg to the stool” to diversify 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 further 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.

The private land-based phase one Copper World project is making planning progress, and a prefeasibility study is expected by midyear. Clearing and grading work to prepare for the future development continues at site, including building roads and other facilities.

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

At Constancia, transportation logistics have normalized 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 mine is working through a planned period of higher stripping from March through June, with the team expected to mine higher-grade ore from late in the second quarter slightly ahead of schedule, Kukielski says.

Peru exploration upside

Following the recent stoppage, Hudbay has also restarted Peru exploration activities focusing on drill permitting the prospective satellite assets and evaluating a reserve expansion at Constancia and Pampacancha feeding into new mining phases.

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 drilled 11 holes in the property over a decade ago, all intersecting copper starting 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 mining 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 C$6.40, Hudbay shares are down more than 12% over the past 12 months, having tested C$4.07 on the low end and C$8.47 over the period. It has a market capitalization of C$1.7 billion ($1.25bn).