Hudbay’s debt, low copper prices puts Rosemont on back burner

Hudbay Minerals’ decision to delay construction of the $1.5 billion Rosemont copper project underscores the increasingly perilous financial outlook for the Toronto-based company that is mired in debt during a period of low copper prices that are expected to continue for several years, if not much longer.

Under the direction of former CEO David Garofalo, Hudbay embarked on a five-year plan to open two new mines in Manitoba and the Constancia mine in Peru, by far its largest operation. (Garofalo resigned in December and is expected to become CEO of Goldcorp in April.)

Hudbay borrowed more than $1.2 billion to finance construction of the three mines. The company was banking on the demand for copper to remain strong and prices to remain high.

But instead, demand dropped and copper prices declined from $4.50 a pound in early 2011 to about $2.10 per pound today. The collapse in copper prices forced Hudbay to repeatedly borrow more money.

Hudbay ‘s former CEO David Garofalo

Hudbay increased its credit lines by $200 million just in 2015 and is now seeking a $550 million credit line. Hudbay paid $109 million in interest last year, according to its 2015 Financial statement.

Moody’s Investors Service downgraded Hudbay’s long-term debt on Monday and issued a “negative” rating outlook.

“This rating action reflects Moody’s view that there has been a fundamental downward shift in the mining sector with the downturn being deeper and prospects for a recovery extended, resulting in increased credit risk and weaker metrics for Hudbay as well as the global mining sector,” Moody’s stated in a press release.

The combination of sharply increased debt and plummeting  copper prices is putting heavy pressure on Hudbay’s balance sheet and is forcing the company to slash expenditures for at least the next several years, Hudbay CEO Alan Hair told investment analysts during a Feb. 25 conference call.

Hudbay CEO Alan Hair

Hudbay is forecasting $105 million in reduced spending in 2016 and is deferring $150 million due on credit lines until 2019, Hair told analysts.

“Our priority in this environment is to manage our business to generate sufficient cash flow from our operations to more than cover capital spending and interest expense,” Hair said.

Like other copper mining companies, Hudbay’s stock has been hit hard. The stock has fallen from $10.28 on the New York Stock Exchange on May 1 to $2.93 a share on Feb. 29.

Hudbay’s future is hinged on the price of copper.

“Should we see $3.25 copper, then HudBay will be a $10 stock again,” writes the Investment Doctor, a regular contributor to the Seeking Alpha investment website. “But if copper remains trading at just $2/lbs for the remainder of this decade, then I’m unsure HudBay will still exist in 2021. Yes, that’s harsh, but it is what it is!”

Hudbay’s financial problems have forced the company to curtail the rate of spending on the Rosemont prospect. Hudbay states it intends to spend $30 million this year on permitting and engineering on Rosemont. Last fall, Hudbay stated it would spend $30 million on Rosemont in the first six months of 2016.

“We want to try and maintain a certain amount of momentum to keep the project moving along,” Hair told investment analysts. “We think we’d lose value if we just stop dead in these tracks.”

One investment analyst is questioning why Hudbay would continue to spend any money on Rosemont given the company’s financial condition and low price copper for years to come.

“I’m a little surprised that you’re spending the money (on Rosemont),” said Oscar Cabrera, an analyst with Bank of America Merrill Lynch, during the conference call with Hair. “…if push comes to shove (with) the $30 million, are you going to spend (it) in the project?”

“I mean if there was a severe change in the market environment, we might reconsider,” Hair said.

Hudbay hopes to gain permitting approval from federal and state agencies this year and then set Rosemont aside for future development.

“(Rosemont) will be a really good shovel ready project that is just sitting there waiting for the market conditions to improve,” Hair said.

Rosemont opponents want to preempt Hudbay’s permitting/mothball strategy by calling for federal regulators to deny a key water permit that is necessary to build the mine.

“Now is the time for federal regulators to stop this speculative and damaging project,” said Gayle Hartmann, president of Save the Scenic Santa Ritas, in a press release issued Monday. “Regulators have the law and the science on their side to deny the permits needed to build this mine.”

The U.S. Army Corps of Engineers is reviewing Hudbay’s application for a Section 404 Clean Water Act permit that is needed to build the mine. Both the Corps and the U.S. Environmental Protection Agency, which has veto authority over the 404 permit, have roundly criticized Rosemont’s plans as insufficient to mitigate the project’s damage to the region’s watershed.

At the same time, the U.S. Fish and Wildlife Service is nearing completion of a biological opinion on Rosemont’s impact on a dozen threatened and endangered species, including the only known wild jaguar in the U.S. The service, could stop the mine by determining that the mine would jeopardize the existence of an endangered plant or animal.

The U.S. Forest Service will issue its final decision on whether to allow the mine to proceed after it receives the biological opinion.

Rosemont also needs a state air pollution permit. A Maricopa County Superior Court overturned the state’s Air Quality Control Permit for the project in early 2015. Hudbay is appealing the decision.

Hudbay’s weakening financial situation and uncertainty on permitting cast a long shadow over Rosemont’s future.

“The truth is that this project should never be built,” said Randy Serraglio, a conservation advocate with the Center for Biological Diversity. “The tremendous damage that the Rosemont Mine threatens to our air, water, wildlife and beautiful landscapes is simply too great, no matter how hard the company tries to obscure it.”