Some of the loudest buzz that I heard circulating in Toronto this week -- while attending the annual mining-industry conference hosted by the Prospectors and Developers Association of Canada -- surrounded the outlook for supply constraints in the zinc market to fuel a positive long-term price environment for this often-overlooked base metal. Not only does is zinc used to galvanize steel to prevent corrosion, it also galvanizes the bullish investment outlooks for some diversified miners.
Combined with widespread bullish outlooks for copper and precious metals, anticipated strength from zinc could render HudBay Minerals (NYS: HBM) a seriously underestimated triple threat for powerful leverage to strength in prices for these metals in its stable. Specifically, that leverage takes shape both through the company's proven record of delivering low-cost production in the face of industrywide cost pressures, as well as through the meaningful production growth standing in HudBay's development pipeline.
Speaking of triples, HudBay revealed this week that it tripled its fourth-quarter earnings for 2011 to $0.21 per share. Operating cash flow surged 42%, to $52.2 million, as the company achieved its full-year production targets for the fifth consecutive year. HudBay's average cash cost for copper production came in at a very respectable $1.44 per pound for 2011. That's a co-product cost, meaning it does not count zinc and precious-metal revenue as an offset. As such, it is not directly comparable to the $1.01-per-pound cost that has my colleague Jim Mueller vocally pumped about major miner Freeport-McMoRan Copper & Gold (NYS: FCX) . HudBay's producing and pending mines indeed offer cost structures that are competitive with the world's largest producers. Southern Copper (NYS: SCCO) benefits from a copper production scale more than 10 times that of HudBay, yet its comparable 2011 copper cost of $1.66 per pound places HudBay's achievement cozily into context.
Meanwhile, even as the company positions itself for a meaningful growth spurt, shareholders continue to enjoy a semi-annual dividend that currently yields 1.8%. With its massive treasure of $900 million in cash and equivalents, HudBay's total available liquidity of $1.1 billion (and zero debt!) has the company beautifully positioned to absorb looming capital expenditures to complete mine construction at the Lalor project in Manitoba, Canada, and the Constancia mine in Peru. Still, the company will pursue some debt financing to build these mines. With the addition of these new mines, HudBay anticipates production expansion over the next 4 years of 255% for copper, 135% for precious metals, and 65% for zinc.
Though HudBay is far from a pure play on zinc, its low-cost zinc production nonetheless played a positive role in developing my own rationale for investing in the 85-year-old mining company. Similarly, although my staunchly bullish long-term outlooks for copper and metallurgical coal formed the core of my investment thesis for Teck Resources (NYS: TCK) , Teck's world-class zinc production certainly has galvanized my interest. Whether Fools are drawn to HudBay Minerals for copper, precious metals, zinc, or all three, I believe it's the time-tested miner's precious balance sheet, low cost structure, attractive dividend, and growth profile that will have them waiting patiently for the stock's long-term outperformance. Accordingly, I have initiated a bullish CAPScall for HudBay Minerals within my Motley Fool CAPS portfolio, and I invite my readers to follow suit.
Add HudBay Minerals to MyWatchlist.
Add Southern Copper to MyWatchlist.
Add Freeport-McMoRan Copper & Gold to MyWatchlist.
Add Teck Resources to MyWatchlist.
At the time thisarticle was published Fool contributorChristopher Barkercan be foundblogging activelyand acting Foolishly within the CAPS community under the usernameTMFSinchiruna. HeTweets. He owns shares of HudBay Minerals and Teck Resources. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has adisclosure policy.
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