Mining Stocks to Watch in 2013 – Part 2

Mergers and acquisitions are expected to pick-up in 2013 as mining companies look to leverage in a "buyers market".

2. Hudbay Minerals, Inc. (Stock Profile – TSX:HBM & NYSE:HBM)

Hudbay Minerals is a Canadian integrated mining company with operations, development projects and exploration activities across the Americas. The company is principally focused on base and precious metals – primarily copper, zinc and gold.

The company has a number of projects in development but none bigger than the Constancia copper-molybdenum-silver mine located in Peru. Hudbay acquired the asset from Norsemont Mining in 2011 in a transaction valued at $520 million.

In August 2012, Hudbay’s board of directors approved a US$1.5 billion investment to fund the development and construction of the Constancia mine. The Constancia development schedule contemplates nine quarters of construction, with initial production in late 2014 and full production commencing in the second quarter of 2015.

With $1.5 billion in cash and cash equivalents offset against $500 million in long term debt, Hudbay has approximately $1 billion in available working capital; and, the company plans to put that money to work developing its various projects. In addition, management is also looking outside the company for growth opportunities.

“We’re looking at a lot of things and I’m hoping that we can tuck something in this year,” said Chief Executive Officer David Garofalo during an interview with Bloomberg in early February. “We’ve never been busier looking at opportunities.” Hudbay’s CEO looks to take advantage of a “buyers market” as small companies struggle to raise funds and larger competitors consider sales.

Garofalo notes the Norsemont acquisition was “just under 20 percent of our market cap and that’s a level that I’m pretty comfortable with, give or take. We prefer to focus on smaller deals, we don’t want to bet the farm on any one acquisition.” An acquisition would likely be facilitated by issuing stock or a combination of equity and cash.

Last week, HudBay stock had its “outperform” rating reiterated by analysts at RBC Capital in a research note issued on February 11, 2013. They currently have a $13.00 price target on Hudbay’s shares.

A number of other firms have also recently commented on Hudbay. Analysts at Canaccord Genuity raised their price target on HudBay Minerals from $10.50 to $11.50 in a note to clients on Thursday, January 10, 2013. On the same day, analysts at TD Securities raised their price target on shares of HudBay Minerals from $10.50 to $12.00.

Hudbay Minerals is currently trading at $10.64 per share which values the company at $1.8 billion and yields a cash to market cap ratio of 55%. It’s a “buyers market” and perhaps time for the company to leverage its healthy balance sheet.

3. Trevali Mining Corporation (Stock Profile – TSX:TV & OTCPK:TREVF)

One company that Hudbay might consider looking at is Trevail Mining. With development projects in Peru and Canada that are nearing production, Trevali is set to become the next TSX-listed zinc producer.

In Peru, the company is close to production at its Santander zinc-lead-silver mine where commissioning is scheduled to commence in a few weeks.

In Canada, Trevali owns the Caribou mine and mill, the Halfmile mine and the Stratmat polymetallic deposit – all located in the Bathurst Mining Camp of northern New Brunswick. Trial production from the Halfmile mine was successfully undertaken in 2012 and the Company anticipates commencing operations at its Caribou Mill Complex in late 2013.

Trevali is not only on our radar but is also on the radar of Aleksandra Bukacheva, a mining research analyst with Fraser Mackenzie in Toronto. When asked which of the companies she covers are possible takeover candidates, Ms. Bukacheva said, “The first and perhaps most likely would be Trevali Mining. It is the only emerging junior zinc producer listed on the Toronto Stock Exchange. History shows that every single junior zinc company that’s made it into production, like Farallon Mining and Breakwater Resources, has been taken out within a few years of operation.”

Bukacheva adds, “We as a firm are bullish on zinc. We believe that there is likely to be a zinc supply shortage in the next three years, which could be a tailwind for the price of zinc.”

Trevali Mining is part of the Cardero Group of companies. Based in Vancouver, the Cardero Group has been on the sell side of a few takeovers including the sale of Corriente Resources to CRCC-Tongguan Investment Co. for $680 million in 2010 and the Pampa de Pongo iron project in Peru, which sold for $100 million to the Nanjinzhao Group in 2009.

Shares of Trevali Mining are currently trading at $1 even valuing the company at $200 million – a valuation which may garner some attention from larger companies looking to expand their base metals portfolio.

For 3 Mining Stocks to Watch in 2013 – Part 1 – CLICK HERE.

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