US court rules against Hudbay’s Rosemont

Shares of Hudbay Minerals (TSX: HBM; NYSE: HBM) plunged 21.4% on Aug. 1 after a ruling by the U.S. District Court for the District of Arizona halted construction at the company’s Rosemont copper-molybdenum project in the state.

The court challenged the U.S. Forest Service’s issuance of a final record of decision on the project, and ruled to vacate and remand the decision. The U.S. Forest Service issued the decision in June 2017 after a process that took 10 years, involving 17 cooperating agencies at various levels of government, 16 hearings, over 1,000 studies and 245 days of public comment resulting in more than 36,000 comments.

Hudbay argues the district court has “misinterpreted federal mining laws and Forest Service regulations” regarding the project, and will appeal the decision to the U.S. Ninth Circuit Court of Appeals.

Peter Kukielski, Hudbay’s interim president and CEO, was unavailable for comment, but in a press release expressed his disappointment, stating “we strongly believe that the project conforms to federal laws and regulations that have been in place for decades.”

Mining analyst Farooq Hamed of Raymond James cut his price target after the news from $10 per share to $8 per share, and said in a research note that the ruling drives uncertainty and delays that could persist for more than a year.

“It is our preliminary understanding that the appeals process can take one to two years, with ancillary legal proceedings taking a further six to nine months,” Hamed said, adding that from what he can tell, the ruling “relates to the use of federal land for mining operations, and is in response to lawsuits issued by various non-governmental organizations challenging the use of the federal land on the basis of the environmental harm that could be caused by the project.”

The analyst noted that the ensuing delay and uncertainty caused by the ruling “will not only affect progress at Rosemont [such as finalizing a minority sale and reaching a sanctioning decision], but also the overall corporate strategy for Hudbay, as it may need to pivot to other opportunities in the interim while this issue at Rosemont comes to resolution.”

In March, Hudbay’s board of directors approved a US$122-million early works program for Rosemont — part of the US$1.9-billion capex estimate for the project. In a press release on March 28, management said it expects to seek board approval to start Rosemont construction by the end of 2019, which would enable first production by the end of 2022.

The early works program was given the green light after Hudbay announced on March 21 that it had received the approved Mine Plan of Operations (MPO) from the U.S. Forest Service. The issuance of the MPO was the last administrative step in the permitting process, the company said. Rosemont received its Section 404 water permit from the U.S. Army Corps of Engineers on March 8.

Rosemont’s environmental impact statement exceeded 2,600 pages, and its MPO weighed in at 4,000 pages. The project will use dry-stack tailings, which mechanically filters out 85% of the water from the tailings and leaves a material that the company describes as resembling “damp sand.” The water extracted will be reclaimed and reused for mining purposes, Hudbay says.

In addition, Rosemont will be a “zero-discharge site” — where the water used in processing will remain on-site to be recycled and reused. In its 2018 annual report, the company noted that it has “voluntarily committed to replace all water used at the operation,” and that, as of the end of last year, it had “already purchased and stored approximately nine years’ worth of water … in the Avra Valley and Lower Santa Cruz storage facilities of the Tucson Active Management Area. This water will be returned to the Rosemont-area aquifer, via recharge of the Central Arizona Project water.” Hudbay is supporting a $28-million project with the Community Water Company of Green Valley to build an eight-mile pipeline and water recharge facility that will bring Central Arizona Project water to the region.

Hudbay Minerals Rosemont copper project in Arizona. Credit: Hudbay Minerals.

Once in full operation, Hudbay estimates Rosemont would be the third-largest copper mine in the U.S., accounting for 10% of the country’s annual copper production.

Over a projected 19-year mine life, Rosemont is expected to produce 127,000 tonnes of copper annually.

A 2017 feasibility study outlined a 15.5% after-tax, unlevered internal rate of return at a $3 per lb. copper price.

The project is situated in the Helvetia–Rosemont district, where mining dates to 1875. Hudbay picked up the project through its acquisition of Augusta Resource in September 2014.

The near-surface deposit consists of copper, molybdenum, silver and gold mineralization. It is a high-tonnage, skarn-hosted and porphyry-intruded deposit that would operate as an open-pit, shovel-and-truck operation.

A technical report completed in 2017 envisioned a final pit measuring 1,828 metres east to west and 1,828 metres north to south, with a total depth of 884 metres, down to 945 metres.

The processing facility is 305 metres east of the pit, and the dry-stack tailings facility, 457 metres southeast of the pit.

Rosemont contains 536.2 million measured and indicated tonnes grading 0.29% copper, 0.011% molybdenum and 2.64 grams silver per tonne, and 62.3 million tonnes grading 0.30% copper, 0.01% molybdenum and 1.58 grams silver per tonne.

Hudbay reached an agreement in March to acquire 100% of Rosemont. It struck a deal with United Copper & Moly LLC to acquire its 7.95% interest in the project and end UCM’s earn-in and offtake rights for US$45 million in cash, plus three annual installments of US$10 million per year, starting on July 1, 2022. UCM is jointly owned by Korea Resources and LG International.

Wheaton Precious Metals (TSX: WPM; NYSE: WPM) has a precious metals purchase agreement on Rosemont. Under the streaming arrangement, Wheaton will pay Hudbay $230 million in upfront cash payments in two installments. Wheaton is then entitled to 100% of Rosemont’s gold and silver at a cost of US$450 per oz. and US$3.90 per oz., subject to inflation.

Last year, across the company, Hudbay produced 154,550 tonnes copper-in-concentrate, 115,588 tonnes zinc-in-concentrate and 176,375 oz. precious metal-in-concentrate.

At press time, Hudbay traded at $4.50 per share in a 52-week trading range of $4.41 to $10.42. The company has 261 million shares outstanding for a $1.3-billion market capitalization.

Jackie Przybylowski of BMO Capital Markets lowered her one-year target price on Hudbay from $10.50 to $10 per share, after news of the court ruling. The “surprise ruling” she wrote, “will delay development of the Rosemont project by about two years in [the] best-case scenario, and will derail the project entirely in [the] worst case.

“The judge’s ruling is based on an interpretation of the U.S. Mining Code that materially differs from the interpretation the U.S. Forest Service has applied consistently for many years,” she stated in a client note. “If the ruling were to be upheld, this precedent-setting decision could impact any future mining project on U.S. federal land.”

While the analyst said she assumes a delay of two years, she also said she believes the permits “will ultimately be upheld.”

CIBC’s Oscar Cabrera trimmed his price target on Hudbay from $9 per share to $7 per share.