HudBay Minerals Inc upgraded at RBC

, Financial News

Hudbay Minerals' flagship 777 mine in Flin Flon, Manitoba

HudBay Minerals Inc. was upgraded to outperform from sector perform by RBC Capital Markets analyst Fraser Phillips, as zinc remains his favoured commodity.

He told clients that the zinc market appears to be in deficit and will remain that way. This is expected to lead to inventory drawdowns below critical levels, resulting in “very strong pricing.”

Phillips noted that 23 per cent of HudBay’s 2016 revenues are forecast to come from zinc, giving the company the highest leverage to the commodity among names the analyst covers.

“In addition, our sensitivity analysis suggests that at spot commodity prices and currencies, HudBay would be free cash flow positive through 2018,” he said in a research note.

Phillips pointed out that the refined zinc market is well-supplied based on inventories in the near term. However, declining mine production coupled with 500,000 tonnes of curtailments coming from Glencore, have driven the concentrate market into a meaningful deficit.

The analyst also highlighted HudBay’s attractive valuation, as its share price has lagged its peers so far in 2016.

Phillips noted that the stock is trading at a 54 per cent discount to HudBay’s net asset value, 2.7x 2016 estimated cash flow per share, and 4.8x 2016 forecasted EV/EBITDA. That compares to the copper group average of 20 per cent, 5.4x, and 7.8x, respectively.

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