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October 19, 2011 Dear Friend,
Mickey
Foley on our team visited the Back Forty joint venture of HudBay
Minerals and Aquila Resources on October 17th. HudBay has the right
to earn up to 75% and also owns 14.9% of Aquila Resources. Project
operation is expected in 2015 or later with over 50% of the revenues
from gold. Currently 80% of the resources are open pit, and the mine
plan permit will be solely as an open pit. Later underground mining
is plausible as deep drill results to date have been outstanding.
The geological setting resembles Manitoba in a manner very familiar
to HudBay.
We lowered our 2011 to 2013
gold, silver and copper price estimates, which cut our price
target to $16 from $17 per share for Overweight rated HudBay
Minerals. We maintained the same long-term price estimates of
$1,500 for gold, $25 for silver, $4 for copper and $0.80 per lb
for zinc. Our cautious long-term zinc forecast has proven
appropriate in recent weeks, where our concern is that high
silver prices encourage excess lead and zinc outputs in
polymetallic deposits where historically high exchange
inventories appear to confirm such excesses.
HudBay Minerals has not used
any cash to buy back common stock at prices near or below $10
per share recently, which is a disappointment. We do not
understand any haste to build mines given high billing rates
among suppliers, even ignoring macro economic uncertainties, as
we believe escalations in capital costs are greater risks to
mining shares rather than a downturn. In its enthusiasm to build
mines the company's actions are more loyal to the arrogant mine
contractors that overbill it. Examples of companies with
multi-million share recent repurchases include Packaging
Corporation of America, Plum Creek Timber, Century Aluminum,
Worthington Industries, BHP Billiton, Vale, Rio Tinto, FCX and
others. Many companies have record capital outlays, and we
estimate the "Big Six" diversified mines will have total cap ex
in 2011 of $66 billion up from $32 billion in 2007.
Faithfully,
John C. Tumazos, CFA
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Copyright © 2008 John Tumazos Very Independent Research,
LLC
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