US court rules against Hudbay's Rosemont project

Shares of HudBay Minerals (TSX: HBM; NYSE: HBM) plunged 21.4% 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 (FROD) on the project and ruled to vacate and remand the FROD. The U.S. Forest Service issued the FROD in June 2017 after a process that took ten years, involving 17 co-operating 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 travelling and 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 following the news from $10 per share to $8 per share and states 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 1-2 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 NGO groups challenging the use of the federal land on the basis of the environmental harm that could be caused by the project."

The analyst notes that the ensuing delay and uncertainty caused by the ruling "will not only affect progress at Rosemont (finalizing of minority sale, 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 says 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.

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

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 final administrative step in the permitting process, the company said. Rosemont received its Section 404 water permit from the US Army Corps of Engineers on March 8.

Rosemont's final environmental impact statement (EIS) exceeded 2,600 pages, and its Mine Plan of Operations weighed in at 4,000 pages. The project will use dry-stack tailings, where about 85% of the water will be mechanically filtered out of the tailings, leaving 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, the company says 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 notes 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 (around 45,000 acre-feet) 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 (CAP) water." Hudbay is supporting a $28 million project with Community Water Company of Green Valley to build an eight-mile pipeline and water recharge facility that will bring CAP water to the region.

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 copper price of $3 per pound.

The project is situated in the Helvetia-Rosemont district, where mining activity 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 envisions a final pit measuring 1,828 metres (6,000 feet) east to west and 1,828 metres north to south, with a total depth of about 884 metres down to 945 metres.

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

The mine production plan outlines a 19-year mine life.

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 to terminate UCM's remaining earn-in and off-take rights for US$45 million in cash, plus three annual instalments 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) has a precious metals purchase agreement on Rosemont. Under the streaming arrangement, Wheaton will pay Hudbay $230 million in upfront cash payments in two instalments. 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., respectively, 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 in Toronto, Hudbay is trading at $4.85 per share in a 52-week trading range of $4.51 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 following 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 US Mining Code that materially differs from the interpretation the US Forest Service has applied consistently for many years," she states in a client note. "If the ruling were to be upheld, this precedent-setting decision could impact any future mining project on US federal land."

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

CIBC's Oscar Cabrera trimmed his price target on Hudbay from C$9.00 per share to C$7.00 per share.