Hudbay selling $34.5 million in Rosemont equipment; unsold copper stockpiles jump; debt mounts; 3rd Quarter loss

Hudbay Mineral’s is liquidating $34.5 million in previously purchased equipment and deposits on future equipment that was slated to be used at its proposed Rosemont copper mine but is no longer useful based on recent engineering studies.

Toronto-based Hudbay reports in its 3Q Management Discussion and Analysis that the equipment purchased and deposits made by Rosemont’s previous owner, Augusta Resource Corporation, are no longer needed. Hudbay, which mines copper and zinc at three Manitoba mines and recently opened the massive Constancia open-pit copper mine in Peru, acquired Augusta in 2014 in a $500 million stock deal.

The decision to unload unneeded equipment comes at the same time as Hudbay struggles with declining copper prices, mounting debt and steadily increasing stockpiles of unsold copper, gold and silver concentrate that has swelled from 6,000 tonnes at the end of the 1st Quarter to more than 100,000 tonnes at the end of the 3rd Quarter on Sept. 30. (A tonne is equal to 2,240 pounds.)

Hudbay states it decided to sell the Rosemont mine equipment following “the completion of a value engineering process in the second and third quarters of 2015.”

The studies determined “that certain equipment previously purchased or ordered by prior Augusta management is unsuitable to achieve the design objectives for Rosemont and different equipment will better meet Rosemont’s objectives while observing permitting commitments,” the company reports.

Hudbay did not disclose any details on what type of equipment is being sold and whether this signals a significant redesign in mining operations at the proposed $1.5 billion, mile-wide, half-mile deep open pit copper mine in the Santa Rita Mountains on the Coronado National Forest southeast of Tucson.

The write-down of the Rosemont equipment was a major factor in Hudbay’s 3rd Quarter loss of $11.8 million.

Hudbay closed down 8 cents on the New York Stock Exchange Monday at $5.18 a share. The stock as recovered from a low of $3.61 a share on Sept. 29.

Total revenue for the third quarter of 2015 was $269.8 million, $99.6 million higher than the same period in 2014, primarily as a result of higher sales volumes with the completion of the Constancia mine in Peru, partially offset by lower realized prices and higher treatment and refining charges.

Year-to-date revenue was $549.4 million, $154.6 million higher than the same period in 2014, primarily due to the same factors that affected third quarter results.

During the third quarter of 2015, copper and zinc prices declined as market concerns about Chinese economic growth precipitated broad-based declines in commodity prices, the company states. Copper prices ranged between $2.61/lb and $2.22/lb, and zinc prices ranged between $0.95/lb and $0.72/lb.

In September and October, a variety of production curtailments were announced by major copper and zinc producers in response to the decline in prices.

“Although copper and zinc demand will remain highly dependent on the path of Chinese economic growth, the prompt response to lower prices by higher-cost producers is expected to provide support to copper and zinc prices at current levels,” Hudbay states.

Copper was trading at $2.24/pound on Monday. Garofalo stated at the company’s annual meeting last May that copper prices would need to hit $3.50 before the company would bring on additional production.

The depressed copper prices appear to be squeezing Hudbay’s cash flow as the company increased its credit line by $100 million for the second time this year and now has a $400 million facility. The company reported drawing down $214 million of the credit facility as of Sept. 30.

In addition, Hudbay has tapped $146 million of a $150 million “standby credit facility” extended in June 2014 to provide financing for expenditures at Constancia. The company must begin quarterly repayments on the loan beginning Dec. 31 and continuing through the third quarter of 2018.

Hudbay also has $68.4 million outstanding on an equipment financing loan from Caterpillar Financial Services for its fleet of mining trucks at Constancia payable over six years.

The short-term credit lines are in addition to $917 million in 9.5% unsecured, long-term debt due in 2020.

Hudbay continues to be burdened by high stockpiles of unsold copper, gold and silver concentrate at its three mines in northern Manitoba and at Constancia.

“At the end of the third quarter, we had approximately 100,000 tonnes of copper concentrate and inventory between Manitoba and Peru, containing 25,000 tonnes of copper, 20,000 ounces of gold, and 490,000 ounces of silver,” Hudbay CEO David Garofalo said during a Nov. 6 conference call with investment analysts.

Unsold copper concentrate at Constancia mine increased to approximately 65,000 tonnes as of Sept. 30. Hudbay is increasing the number of trucks on the narrow, 475-kilometer road that twists through the Andes from the Constancia mine site to a seaport in Matarani to reduce the stockpile.

“The majority of the excess inventory is expected to be sold during the fourth quarter,” Hudbay states. “Since Sept. 30, 2015, inventory levels at the Constancia mine site have declined by approximately 30%.”

The Constancia mine reached commercial production in April and unsold stockpiles began to swell.

Hudbay reported in its 2nd Quarter MD&A more than 73,000 tonnes of unsold copper concentrate containing 19,200 tons of copper, 30,300 ounces of gold and 579,300 ounces of silver. At that time, Garofalo said that approximately two-thirds to three-quarters of the unsold concentrate was in Peru.

Garofalo said the company had 6,000 tonnes of unsold copper concentrate and 9,000 ounces of gold at the end of the first quarter, according to a transcript of the company’s May 8 conference call with analysts.

Hudbay states it expects to make an investment decision on whether to proceed with construction of the Rosemont mine in 2016.

Garofalo told analysts in the Nov. 6 conference call that the company “continued our permitting efforts and the technical work required to advance the (Rosemont) project.” Hudbay has hired the Australian engineering firm Ausenco as the primary engineering contractor for Rosemont. Ausenco led the construction of Constancia.

Hudbay must still obtain an Air Quality Control Permit from the state of Arizona, a Clean Water Act Section 404 permit from the U.S. Army Corps of Engineers, which can be vetoed by the U.S. Environmental Protection Agency, and the final Record of Decision from the U.S. Forest Service before the Rosemont project could proceed.

The EPA has recommended that the Army Corps reject the 404 permit based on a 2013 plan submitted by Augusta Resource.

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3 Responses to Hudbay selling $34.5 million in Rosemont equipment; unsold copper stockpiles jump; debt mounts; 3rd Quarter loss

  1. thomas stewart says:

    Good Golly Hudbay And Rosemont Getting Ready For “George Soros” To Take The “Copper Stockpile” Like He Did With The “Coal Stockpile” Pennies On The Dollars!! Because Of The Unknown “Air Pollution Control Permit” Get Real This Is Playing Into The Obama Muslim Brotherhood Of “Make Believe Permits” Just Wait Till The USA Runs Out Of “Coal Or Copper”!! God Bless America.

  2. ALAN JOHNSON says:

    CALL IT THE CHINA SYNDROME OR WHATEVER , BUT THE RESULTS ARE THE SAME THROUGHOUT THE WORLD IN THE CASE OF EVERY MINERAL RESOURCE AND EVERY COMPANY INVOLVED IN EXPLOITING MINERAL RESOURCES BY WHATEVER MEANS . THE INDUSTRY HAS ENTERED A PERIOD OF DOOM AND GLOOM .

    HUDBAY IS NO EXCEPTION AND THEIR TIMING TO MOVE INTO LARGE COPPER PROJECTS HAS COME BACK TO HAUNT THEM FINANCIALLY . OPERATING IN SOUTH AMERICA IS NOT FOR THE FAINT OF HEART . THIS IS THEIR FIRST TIME AND IT IS A NEW EXPERIENCE .

    WHAT DOES THIS MEAN RELATIVE TO THEIR ROSEMONT COPPER PROJECT ? OBVIOUSLY , THERE IS NO RUSH TO GO INTO PRODUCTION WITH THE COPPER PRICE AS DEPRESSED AS IT IS . THE FACT THAT THEY ARE SELLING OFF THE NEW EQUIPMENT AND SUPPLY CONTRACTS THAT AUGUSTA HAD PUT IN PLACE RAISES SERIOUS CONCERN OVER THEIR INTENTIONS TO PROCEED AS PER THE PERMIT APPLICATION THAT AUGUSTA HAD PRESENTED TO THE FOREST SERVICE . HUDBAY HAS UNDERTAKEN TWO SIGNIFICANT DRILLING PROJECTS SINCE TAKING OVER FROM AUGUSTA IN ORDER TO BETTER UNDERSTAND THE NATURE OF THE MINERALIZATION THAT EXISTS . THEY HAVE BROUGHT IN AN AUSTRALIAN CONSULTING FIRM TO REVIEW ALL OF THE RESULTS AND TO ADVISE ON A WAY FORWARD . IT APPEARS THAT HUDBAY IS NOT SATISFIED WITH THE DUE DILIGENCE THAT THEY CARRIED OUT ON AUGUSTA AND MAY BE SUBMITTING MAJOR REVISIONS OF THE PERMIT APPLICATION TO THE FOREST SERVICE . THIS COULD RESULT IN THE PERMITTING PROCEDURE BEING PUT ON HOLD .

    HUDBAY HAS VERY FEW OPTIONS WHEN IT COMES TO THEIR FINANCIAL SITUATION . THEY APPEAR TO BE FAR OVER EXTENDED IN WHAT IS DEFINITELY A DEPRESSED METALS MARKET . PERHAPS THEY MAY HAVE TO CONSIDER DISPOSING OF RESOURCE ASSETS , ASSUMING THAT THEY CAN FIND BUYERS . BASED ON A RELATIVELY SOUND TRACK RECORD , THEIR INVESTORS WILL BE PATIENT BUT , AT THE END OF THE DAY , THE BILLS MUST BE PAID .

    TO DATE , HUDBAY HAS NOT SPENT MUCH HARD CASH ON THE ROSEMONT COPPER PROJECT . THEY MAY SIMPLY BE WILLING TO SIT ON THE PROJECT AND DO RELATIVELY NOTHING UNTIL CONDITIONS IMPROVE AND THE COPPER PRICE INCREASES . A PROJECT LIKE ROSEMONT COPPER COULD TAKE 10-12 YEARS TO BRING INTO PRODUCTION .

    THE ONLY REAL WINNERS IN THE ROSEMONT COPPER PROJECT , TO DATE , ARE THE FORMER OFFICERS OF AUGUSTA WHO WERE HANDSOMELY REWARDED FOR THEIR EFFORTS . BEWARE THAT THEY ARE CURRENTLY LURKING IN PATAGONIA IN A NEW PROJECT WHERE PROMOTION AND SPECULATION ARE THE NAME OF THE GAME .

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