Download - Stock Report:
Stock Report:
SECTOR: MaterialsSECTOR HEAD: Larry IpSR. ANALYST: Luiza SantosJR. ANALYSTS: Rafael Grados, Kelly Kaminski,
Reeve Porter, Pooja Sahani
EM Demand
Chile Supply Slowing
Copper Mines
Expansion
Plans
Investment Recommendation
Key Drivers:
© Dyrect Investing, Ltd. - 2
HudBay Minerals, Inc.Recommendation BUYCurrent Price $16.721yr Target Price $19.36% Upside 15.8%
Company Overview
Market Capitalization (MM) $2,500
Revenue (ttm) (MM) $762EBITDA (ttm) $251EPS (ttm) $0.37Forward P/E 16.77Debt/Equity 0.19Dividend Yield (Estimated) 1.20%
Beta 1.83© Dyrect Investing, Ltd. - 3
HudBay Minerals, Inc.• Integrated mining company with assets in North, Central, & South America, focused on the discovery, production and marketing of base metals.
•Growth plan to optimize and expand principal operating platform in Manitoba, and seek growth opportunities farther afield, esp. Peru.
-100%
0%
100%
200% HBM vs. S&P 600
HBM S&P600
Big Competitors &
Market Cap
$284.6B
$144.0 B
$44.8 B
Industry OverviewThe Small Cap Copper Industry
Companies that engage in the exploration and extraction of copper deposits in the United States and Canada, processing the
copper into commoditized cathode sheets.
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$2.50 B
$1.83B
$391.86M$879.75
M
Small Cap Copper Companies Market
Cap
Find feasible deposits and
properties that could yield resources
Build mining infrastructure
Lock future revenues via
supply contracts
Extract & Concentrate
Minerals
Refine into cathode sheets at
Metallurgical Plants
Sell refined copper to customers
Revenue Generation
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4. Operations 6. Sales
2. Development1. Exploration
3. Supply Contracts
5. Refining
TRENDS AND OPPORTUNITIES
Trend #1: World Copper Usage
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10
12
14
16
18
20
22
1999 2001 2003 2005 2007 2009 2011
Refi
ned
Usa
ge (m
m to
nnes
)
World Copper Usage
CAGR = 2.21%
Trend #2: Copper Output
CAGR = 1.43%
Production
RoC Y/YF F F
0
2000
4000
6000
MM
tonn
es2009 Cu Production by Country
-6%-4%-2%0%2%4%6%8%
5.0
5.5
6.0
6.5
7.0
7.5
8.0
2007 2008 2009 2010 2011 2012 2013 2014
Rate of Change (%
)
Prod
uctio
n(M
M to
nnes
)
Chilean Copper Output (2007-2014)
000 tonnes Series2
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HBM vs. CompetitorsNumber of
MinesExpansion
PlansEV / value of in-situ reserves
Current Ratio
8Norsemont Mining in
Peru.0291 6.13
4 Hold on to Prosperity .0332 3.24
9Mt.
Milligan in Canada
.0827 9.79
2Mt. Hope & Liberty
molybdenum
.0347 3.76
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HBM vs. Competitors
HBM: 8 TCP: 9 TKO: 4 GMO: 2
Mine Locations Expansion into Peru
Background:• World’s 2nd largest copper
producer• Stable mining regulatory
environment
Competition: • Big players: BHP Billiton
& Teck Resources hold stake in copper operations
• Small Players: Not there
Outlook:• Joy Global anticipate
growing investment in Peruvian mine development
• Southern Copper and Buenaventura continue to operate profitably
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Norsemont Acquisition
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350% increase in copper reserves190% increase in copper equivalent
reserves
Copper Equivalent Reserves
+350%
Au Eq., 24%
Zn, 33%
Cu, 43%
CurrentAu Eq., 15%
Mo, 7%
Zn, 11%
Cu, 67%
Pro Forma
0
1,000
2,000
3,000
4,000
5,000
6,000
HudBay Pro Forma HudBay
Cu Au Eq Zn Mo
HBM Financial Projections
Revenue CAGR= 20.6%
0%2%4%6%8%10%12%14%16%18%20%
$0
$500
$1,000
$1,500
$2,000
$2,500
$3,000
2009 2010 2011e 2012 e 2013e 2014e 2015e
Net
Inco
me
Mar
gin
Rev
enue
(MM
)Revenue and Net Income Margin
(2009-2015)
Revenue Net Income Margin
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HBM Financial Projections
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2011e
2012e
2013e 2014e2015e
Revenue $952 $1,225
$1,530 $1,995 $2,586
Revenue Growth
24.9% 28.7% 24.8% 30.4% 29.6%
Gross Margin
26.2% 28.8% 30.6% 32.3% 33.5%
EBITDA Margin
23.6% 26.8% 28.9% 31.0% 32.6%
EPS $0.28 $0.64 $1.04 $1.69 $2.52
Valuation
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Year 2011(e) 2012(e) 2013(e) 2014(e) 2015(e)
FCF ($MM) $75 $164 $239 $349 $494
DCF: 40%WACC 15.94%Growth Rate 3.00% DCF Value $2,6471yr Target Price
$15.58
Comps: 30%/30%Price/Earnings
16.8x
1yr Target Price
$22.39
TEV/EBITDA 5.3x1yr Target Price
$21.361yr Target
Price $19.36 + 15.8%
Risks & Sensitivities
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45%
25%
15%
15%
Weight
$16.47
$18.49
$18.88
$15.34
$17.17
Current Forecasted
$15.00 $17.00 $19.00 $21.00
Price of Copper Changes by 50%
Price of Zinc Changes by 50%
Price of Gold/Silver Changes by 50%
Canadian Dollar Exchange Rate Changes by 50%
Weighted Risks
Price per Share
Q&A
Appendices
Index•Breakdown of Operations
•Cross-Sectional Analysis
•Financial Comps
•Index Performance
•Industry Revenues
•Initial Investment Recommendation
•Investment Thesis
•Materials Prices Simulator
•Risks
•Trends: Increase in Copper Prices
•US Copper Output
Investment ThesisDemand in Asia on the Rise• Chinese and Indian copper demand are set to rise 7% and 9%, respectively, in 2011
• China’s copper demand to rise from 6.1 million tons in 2009 to 8.5 million tons in 2015
Chilean Copper Mines Slowing Output • Chilean copper output growth (top global copper mining country) to slow by 12% in 2011 and by 5% in the three following years
• Power and transportation infrastructure concerns damaged by natural disasters
Peruvian Labor Problems• Labor strikes have been disturbing operations in Peruvian Copper mines for the last 5 years
• Peru is the 3rd largest copper producer
© Dyrect Investing, Ltd. - 19Index
Breakdown of Operations1. Mines
– 777, Trout Lake, Chisel North, Basmalt– Goal: increase mineral grades and
production
2. Concentrators– Flin Flon, Snowlake, Balmat– Goal: process minerals by separating
them from gravel
3. Metallurgical Plants– Gets minerals from own concentrators or buys
concentrates from third parties– Refines minerals – Sells to customers who make wires, tubes, and
brass– Goal: increase sales
© Dyrect Investing, Ltd. - 20Index
Trends: Increase in Copper Prices
Source: Mintel/U.S. Census Bureau, Service Annual Survey
© Dyrect Investing, Ltd. - 21Index
$0
$2
$4
$6
$8
$10
Oct-07 Apr-08 Oct-08 Apr-09 Oct-09 Apr-10 Oct-10
Thou
sand
sLME 3-Month Copper Contract ($/tonne)
U.S. Copper OutputPr
oduc
tion
(th
ousa
nd t
onne
s)
2005 2006 2007 2008 2009 2010 E 2011 F
CAGR = 3.18%
Source: Business Monitor © Dyrect Investing, Ltd. - 22Index
0
5,000
10,000
15,000
20,000
25,000
Financial Comps
Stock Price
Market Cap Revenue Profit
Margin EBITDA LT Debt EPS P/E EV/
EBITDA
TGB $4.67 $872M $188.9M 5.6% $47.7M $14.9M $0.06 5.66 14.28
TC $13.12 $1.8B $373.4M (14.9%) $177M $10.5M ($0.44) – 6.70
HBM $17.15 $2.5B $720.7M 15.6% $263M – $0.73 15.58 7.05
GMO $5.40 $392M – – ($8.9M) $10.4M ($0.14) - (43.04)
Yahoo.com/finance© Dyrect Investing, Ltd. - 23Index
Risks• Tariffs and Exchange Rate Fluctuations
– U.S. and Canada copper mining is an export-heavy industry
– Revenues are sensitive to macro environment– Chinese tariffs are 5% on refined copper exports and
10% on blister and scrap copper• Labor
– Union strikes may set back copper mining productions• Collahuasi copper miners 2010
• Environmental Regulations– Expenditure for pollution and abatement and
control© Dyrect Investing, Ltd. - 24Index
Industry Revenue
© Dyrect Investing, Ltd. - 25Index
$0
$500
$1,000
$1,500
$2,000
$2,500
$3,000
2005 2006 2007 2008 2009
Mill
ions
Index Performance
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2010
Index
-100%
-50%
0%
50%
100%
150%
200%
2005 2006 2007 2008 2009
Peer Index Performance
Peer Index:TC, TGB, GMO, HBM S&P600
Cross Sectional Analysis
PEG
EPS Growth
© Dyrect Investing, Ltd. - 27Index
0.0
0.5
1.0
1.5
2.0
0% 20% 40% 60%
PEG Ratio vs. EPS Growth
Initial Recommendation• Due to the increasing global demand for
copper, and slowdown of output of the top copper producer in the world, we believe the small cap US copper industry is an attractive investment opportunity
• Suggested company for further research and analysis: Hudbay Minerals
© Dyrect Investing, Ltd. - 28Index
Material Prices Simulator 1
© Dyrect Investing, Ltd. - 29Index
Material Prices Simulator 2
© Dyrect Investing, Ltd. - 30Index
Material Prices Simulator 3
© Dyrect Investing, Ltd. - 31Index