Hudbay states it ‘remains committed’ to Rosemont Mine while major miners slash production

The Arizona Daily Star is reporting that Toronto-based Hudbay Minerals Inc. “remains committed” to constructing the Rosemont Copper Mine in the Santa Rita Mountains on the Coronado National Forest 35 miles southeast of Tucson.

“Hudbay remains committed to developing the Rosemont project and contributing to the community by creating jobs, providing a much needed economic boost, and operating in a safe and sustainable way,” Patrick Merrin, Hudbay vice president of the Arizona business unit, said in a written statement to the Daily Star.

Merrin’s statement comes as copper prices are hovering near six-year lows and major copper producers have announced sharp cutbacks in production and layoffs at Arizona copper mines.

It also comes as Hudbay’s stock has been beaten down by more than half since May 1 and increasing concern among analysts that the company will be unable to service $1.1 billion in debt, let alone finance construction of the Rosemont Mine.

In addition, Hudbay’s Arizona-subsidiary Rosemont Copper Company has not obtained critical permits needed to construct the mine including a state air quality control permit that was revoked by a state Superior Court judge and the Section 404 Clean Water Act permit that is yet to be issued by the U.S. Army Corps of Engineers.

Merrin’s comments also contrast with statements made by Hudbay’s president and CEO David Garofalo at the company’s May 22 annual meeting in Toronto. Garofalo stated that Hudbay’s board of directors has not made a decision on whether to proceed with constructing the $1.5 billion Rosemont mine and that the company would not bring on additional production until copper prices rebounded to $3.50 a pound.

Spot market copper prices have fallen each of the last fours years from a May 2011 peak of more the $4.50 per pound to $2.34 per pound on Monday.

Depressed copper prices are also having an unknown impact on Hudbay’s financing plans for Rosemont. Garofalo has repeatedly stated Hudbay intends to use cash generated from its recently opened Constancia Mine in Peru to help finance Rosemont construction.

How much cash will be available in the lower price environment and after Hudbay services its $1.1 billion in debt is uncertain. Hudbay’s debt is costing the company approximately $100 million a year in interest expense and there is concern that Hudbay will be unable to repay $920 million in US debt due in 2020 if low copper prices persist.

“If copper continues to trade at the current levels, Hudbay might be toast,” an investment analyst stated in an Aug. 24 breakdown of Hudbay’s finances in the online investment guide Seeking Alpha.

Hudbay has $336 million in commitments from a minority partner and a metal streaming company to help finance construction of Rosemont once all material permits are in place and a construction decision to move forward has been made, according to Hudbay’s 2014 Annual Information Form (Page 5-6).

The $336 million, however, leaves Hudbay approximately $1.2 billion short in financing the construction of Rosemont.

Hudbay’s high debt load, slackening worldwide demand for copper and projected low copper prices cast doubt that Hudbay has the ability to internally finance Rosemont construction.

And given the recent round of production cutbacks by several of the world’s largest copper producers, it appears that obtaining debt financing for construction of a new copper mine projected to add 240 million pounds of copper annually to the world market will be challenging to obtain at a reasonable price.

Hudbay’s stock price has also declined to its lowest level in six years, making it difficult for the company to issue additional stock to raise money for construction at Rosemont. Hudbay closed at $4.44 share Friday on the New York Stock Exchange, down from $10.28 in May.

Phoenix-based Freeport MacMoRan announced late last month major cutbacks across its worldwide holdings that will result in a 150 million pound annual reduction in copper production. Freeport operates seven open-pit copper mines in North America – Morenci, Bagdad, Safford, Sierrita and Miami in Arizona, and Chino and Tyrone in New Mexico.

Freeport stated its “revised plans in North America incorporate reductions in mining rates to reduce operating and capital costs, including the suspension of mining operations at its Miami mine (which produced 57 million pounds in 2014), a 50% reduction in mining rates at the Tyrone mine (which produced 94 million pounds in 2014) and adjustments to mining rates at other U.S. mines.”

The cutbacks have already resulted in Freeport laying off 170 workers at its Miami mine, 60 miles east of Phoenix, the Phoenix Business Journal reports.

Meanwhile, Grupo Mexico subsidiary Asarco LLC has laid off 78 workers at the Ray Mine north of Tucson in the beginning of a wave of layoffs expected over the next two months, the trade journal Platts is reporting. Asarco plans to shut down its copper concentrator in Hayden by the end of October for an indefinite period.

Asarco states in an Aug. 28 press release that the concentrator shutdown would reduce its copper production by about 67 million pounds of copper annually. The company said 211 hourly workers could be affected by the job cuts. The projected layoffs would result in a 20 percent reduction in Asarco’s hourly workforce to 1,637 workers.

The job cuts come three months after Asarco laid off fewer than 100 employees at its Southwest U.S. operations, Platts reports.