HudBay Minerals Inc. Outlook To Negative From Stable On Operations and Economic Uncertainty; 'B' Rating Affirmed

  • We believe Toronto-based base metals producer HudBay Minerals Inc.'s cash flows are highly exposed because of measures taken in response to the COVID-19 pandemic, which led to the suspension of mining activities at the company's Constancia (Peru) mine, and currently depressed base metals prices.
  • We believe the company has sufficient cash to cover its fixed cost obligations for at least the next 12 months, but are closely evaluating the potential impact of the current situation on its liquidity and prospective credit measures.
  • As a result, on March 24, 2020, S&P Global Ratings revised its outlook on HudBay to negative from stable.
  • At the same time, S&P Global Ratings affirmed its 'B' issuer credit rating on HudBay and its 'B' rating on the company's unsecured notes. The '3' recovery rating on the unsecured notes is unchanged.
  • The negative outlook primarily reflects the risk that a protracted suspension of HudBay's mining operations at Constancia and sustained base metals price weakness will lead to higher-than-expected cash outflows that materially weaken the company's cash position and debt leverage.
TORONTO (S&P Global Ratings) March 24, 2020--S&P Global Ratings today took the rating actions listed above. The outlook revision reflects operational and economic uncertainty associated with the COVID-19 pandemic. HudBay recently announced the temporary closure of its Constancia mining operations, following the state of emergency announced by the Peruvian government in response to the COVID-19 pandemic. The timing of restart and extent of the impact of the closure on Hudbay is uncertain. However, we believe an extended period of lost production would meaningfully affect the company's cash flows because Constancia accounts for more than half of HudBay's revenues and operating cash flows. Separately, the company's Manitoba (Canada) operations continue to operate in line with expectations at present, but as with many other mining operations globally, a temporary closure related to COVID-19 remains possible.
The negative outlook primarily reflects the risk that a protracted suspension of HudBay's mining operations at Constancia, along with sustained base metals price weakness, will lead to higher-than-expected cash outflows that materially weaken the company's cash position and debt leverage.
We could lower the ratings within the next 12 months in case of an extended period of operations disruption or continued weaker base metal prices below our assumptions. In this scenario, we would expect HudBay's cash position to meaningfully deteriorate, likely approaching US$100 million, with uncertain prospects for a rebound. In such a scenario, we would expect the company's prospective leverage to increase to levels not viewed as commensurate with the rating, likely well above 6x.
We could revise the outlook to stable if, over the next 12 months, business and economic disruption associated with the COVID-19 outbreak is not meaningful and base metals prices remain at least in line with our assumptions. In this scenario, we would also expect the company to improve its adjusted debt-to-EBITDA below 5x in 2021 while generating positive free cash flows.
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