Hudbay Minerals sees credit rating upgrade at S&P due to improved cash flow

Investing.com -- S&P Global Ratings has raised the issuer credit rating of Toronto-based base metals producer, Hudbay Minerals Inc (NYSE:HBM)., from ’B’ to ’B+’ due to improved cash flow and leverage measures over the past year. This improvement was supported by favorable metal prices and a reduction in debt. The rating agency also raised its issue-level rating on the company’s unsecured debt to ’B+’ from ’B’, while maintaining its ’3’ recovery rating on the unsecured debt.

In 2024, Hudbay’s financial performance outperformed expectations, with EBITDA increasing by 25% over the previous year. This allowed the company to generate a free operating cash flow (FOCF) of US$240 million. This positive performance was largely due to higher copper and gold prices, which rose by 9% and 18% respectively over 2023. Increased gold volumes also contributed to higher earnings and cash flows for the company.

Hudbay utilized this FOCF to reduce its debt by about US$250 million, which included repaying US$100 million of its revolver, buying back US$82 million of unsecured notes, and settling the company’s gold prepay liability. With higher earnings and lower debt, Hudbay’s adjusted debt to EBITDA decreased a full turn to 2.1x in 2024.

S&P Global Ratings expects Hudbay to sustain these improved leverage measures through 2026, with adjusted debt to EBITDA averaging about 3.0x. Despite anticipation of lower consolidated copper production by 5% through 2026, and a meaningful decline in consolidated gold production by 2027, the rating agency believes Hudbay’s prospective cash flow and credit measures align with a ‘B+’ rating.

The company’s recent acquisition of its remaining 25% interest in Copper Mountain, making Hudbay the full owner, is also factored into these estimates. The agency also assumes gradually declining gold prices and relatively steady copper prices through 2027.

Hudbay is expected to commence construction on its Copper World project within the next 12-18 months. The project, estimated to cost US$1.5 billion for phase 1, is expected to be financed through a joint venture partner and with internal cash. A portion of the capital expenditure (capex) may be funded with debt or debt-like financing.

Upon completion, the Copper World project is expected to significantly increase Hudbay’s scale and cash flow generation. The company’s annual copper output is estimated to increase by about 185 million pounds, approximately 60% higher than 2024.

Hudbay is projected to maintain robust liquidity and stable debt levels over the next few years. As of Dec. 31, 2024, Hudbay had US$582 million in cash, largely due to about US$400 million of gross equity offering proceeds in 2024, and US$426 million availability under its revolving credit facility.

The company’s large cash balance allows it the option to fully repay its unsecured notes due April 2026, if it does not refinance before the maturity. S&P Global Ratings assumes the company will refinance a major portion of the notes before its maturity and maintain a robust cash position. This would provide Hudbay financial flexibility to pursue its Copper World development project in Arizona and reduce its need for external debt funding for the project later.

The stable outlook reflects S&P Global Ratings’ expectation that Hudbay will generate steady average credit measures, including adjusted debt to EBITDA of 2.5x-3.5x over the next couple of years, and maintain adequate liquidity as it advances towards a construction decision on Copper World project.

S&P Global Ratings could downgrade Hudbay within the next 12 months if the company’s adjusted debt to EBITDA approaches 4x. This could occur if production volumes or EBITDA margins trend below estimates, potentially from production challenges or lower sustained commodity prices. Conversely, the rating could be raised if the company generates and sustains adjusted debt-to-EBITDA below 2x and builds ample liquidity for development of its Copper World project, thereby reducing the debt financing needs for the project.

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