Fitch Affirms Hudbay's IDR at 'B+'; Outlook Revised to Positive

(The following statement was released by the rating agency) Fitch Ratings-New York-19 March 2021: Fitch has affirmed the IDRs of Hudbay Minerals Inc. and Hudbay Peru S.A.C. at 'B+' and revised the Outlook to Positive from Stable. The Positive Outlook reflects the significant increase in gold production beginning in 2021 and expectations for lower capex, following a period of growth capex associated with improving the production profile, in addition to the improved copper price environment, which results in Fitch's expectation for significantly improved FCF generation. The Outlook could be revised to Stable if total debt/EBITDA is expected to be sustained between 3.0x and 4.0x. Fitch also has affirmed the first-lien senior secured revolving credit facilities at 'BB+'/'RR1' and affirmed the unsecured notes at 'B+'/'RR4'. Key Rating Drivers Low-Cost Position: Hudbay's key mines have a first- or second-quartile cost position and are located in low-risk mining-friendly jurisdictions in Canada and Peru. The mine plan for Constancia (Peru) supports a 17-year mine life including a four-year contribution from higher grade Pampacancha, Lalor (Canada) supports an initial 10-year mine life and the 777 mine (Canada) is expected to be depleted in 2022. Hudbay has since conducted exploration drilling and advanced engineering studies on regional deposits in the Snow Lake region, which resulted in the mine life of Snow Lake operations now expecting to support operations at the New Britania mill until 2037.. Hudbay has an extensive track record of operating copper mines from exploration to production and has a number of projects in the exploration and development phases. Fitch expects annual copper production to generally average between 100,000 tonnes and 120,000 tonnes in the next few years. Exposure to Copper: Fitch believes Hudbay has meaningful commodity diversification through its gold and zinc production. However, the company has a longer-term focus on copper, which accounted for 53% of consolidated revenues in 2020. Hudbay estimated, as of YE 2020, a $0.30/lb change in the price of copper from the company's 2021 base case of $3.00/lb would change operating cash flow before working capital changes by $63 million in 2021. Hudbay's average realized copper price was $2.86/lb in 2020, compared with $2.73/lb in 2019. Current spot prices are around $4.10/lb, which compares with Fitch's assumptions of $3.27/lb in 2021 and $3.04/lb thereafter. Improving FCF Generation: The combination of lower copper production and elevated growth capital spending results in Fitch's expectation for relatively neutral FCF in 2021. The New Britannia mill refurbishment costs are expected to total approximately $128 million in 2020 and 2021. In 2Q20, Hudbay announced it entered into a gold forward sale and pre-pay, in which it received $115 million for delivery of approximately 80,000 ounces of gold in 2022 and 2023. This transaction bolstered liquidity and pre-funded the entire capital budget for the New Britannia mill refurbishment. Fitch expects significantly higher FCF generation, averaging around $290 million in 2022 and 2023, following a period of elevated capital spend, driven by higher copper and gold production and reduced growth capital spending. High-Grade Pampacancha Deposit: Production of copper in Peru declined by approximately 36% in 2020 compared with 2019, primarily due to planned lower copper grades at Constancia and coronavirus-related suspension of mining activities. Hudbay received approval in February 2020 of a surface rights agreement for the Pampacancha deposit and expects to begin mining ore in early 2021. The addition of Pampacancha, a higher grade deposit, helps offset lower grade Constancia production and results in total expected copper production in Peru increasing by roughly 18% from 2020 to 2022 in addition to a substantial increase in gold production. Significant Gold Production: The New Britannia mill restart is expected to be completed in mid-2021, in concert with higher grade gold production at Lalor beginning in 2022. The combination results in significantly higher gold production, which Fitch expects to account for roughly 20% of sales in 2022 and 2023, given Fitch's price assumptions. Once the New Britannia mill is commissioned, annual gold production from Snow Lake, Manitoba, is expected to be over 150,000 ounces during the first eight years at a sustaining cash cost, net of by-product credits, of approximately $655/ounce of gold. Hudbay expects 2021 gold production to increase roughly 62% compared with 2020, and for a further increase in 2022. Fitch believes the higher gold production will diversify Hudbay's commodity exposure and benefit FCF generation. Rosemont Development Delayed: Rosemont is a $1.9 billion project in Arizona expected to average 112,000 tonnes of copper over the 19-year life-of-mine plan at cash costs of $1.29/lb. The USFS approved the Mine Plan of Operations for Rosemont in March 2019. The U.S. District Court issued a ruling on July 31, 2019, where it vacated the USFS's issuance of the FROD, suspending construction work at Rosemont. Hudbay appealed the decision to the U.S. 9th District Court of Appeals, and the company is expecting a decision by YE 2021. Fitch has not included Rosemont production or spending over the rating horizon in its rating case, given the uncertainty in timing of completion of the court process. Fitch views Hudbay's exploration success, organic growth pipeline and its ability to offer operational expertise in a potential partnership, as providing optionality if the Rosemont project is delayed beyond expectations. Declining Leverage Profile: Given Fitch's commodity price assumptions, Fitch expects total debt/EBITDA to have peaked in 2020 and to trend lower beginning in 2021, driven by higher copper and gold production. Rosemont spending, not included in Fitch's forecast, will require substantial capital. Fitch believes Hudbay will likely pursue a partnership for Rosemont and any other considerably large capital spending projects in order to de-risk projects and protect its balance sheet. Derivation Summary Hudbay compares favorably in size, in terms of EBITDA, and in commodity diversification with Eldorado Gold (B/Stable). Hudbay is smaller than copper producer First Quantum Minerals Ltd. (B-/Stable). However, First Quantum has significant exposure to higher risk jurisdictions and less favorable leverage metrics. Hudbay is larger, more diversified, more profitable and has favorable leverage metrics compared with copper producer Taseko Mines Ltd. (B-/Stable). Hudbay is larger and more diversified by commodity, has less-concentrated operations and a favorable reserve life compared with Gran Columbia Gold Corp. (B+/Stable). However, Gran Columbia has favorable leverage metrics. Key Assumptions Fitch's Key Assumptions Within the Agency's Rating Case for the Issuer Include: Production generally in line with the life of mine plan; Copper prices of $7,200/tonne in 2021 and $6,700/tonne in 2022, 2023 and 2024; Zinc prices of $2,500/tonne in 2021, $2,200/tonne in 2022 and $2,100/tonne in 2023 and 2024; Gold prices of $1,600/ounce in 2021, $1,400/ounce in 2022 and $1,200/ounce in 2023 and 2024; New Britannia mill refurbishment is completed in 2021; Dividends remain at current levels; Significant Rosemont capital spending is delayed beyond the ratings horizon. RATING SENSITIVITIES Factors that could, individually or collectively, lead to positive rating action/upgrade: --Improved copper price environment and/or higher metal recoveries leading to total debt/EBITDA sustained below 3.0x; --FFO net leverage sustained below 3.0x; --Reduced completion risks and funding strategy which mitigates risk associated with the Rosemont project. --Improved size and scale. The Outlook could be Stabilized if total debt/EBITDA is expected to remain between 3.0x-4.0x. Factors that could, individually or collectively, lead to negative rating action/downgrade: --Total debt/EBITDA sustained above 4.0x; --FFO net leverage sustained above 4.0x; --Sustained negative FCF beyond 2021 excluding Rosemont development capital; --Material delays in completion of the New Britannia mill refurbishment beyond 2021 which drives a material shift in expected production and commodity mix; --Shift in financial policy resulting in shareholder returns being prioritized in combination with the average mine life depleting materially. Best/Worst Case Rating Scenario International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579. Liquidity and Debt Structure Solid Liquidity: Cash and cash equivalents were $439 million as of Dec. 31, 2020, and $285 million was available under the $400 million, in aggregate, revolving credit facilities after utilization for LOC. The Hudbay Minerals Inc. revolver and the Hudbay Peru S.A.C. revolver both mature on July 14, 2022. Debt maturities are modest before the new notes due April 2026. Fitch believes Hudbay will be able to successfully extend its credit facility maturities. REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING The principal sources of information used in the analysis are described in the Applicable Criteria. ESG Considerations Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg Hudbay Peru S.A.C.; Long Term Issuer Default Rating; Affirmed; B+; Rating Outlook Positive ----senior secured; Long Term Rating; Affirmed; BB+ Hudbay Minerals Inc.; Long Term Issuer Default Rating; Affirmed; B+; Rating Outlook Positive ----senior unsecured; Long Term Rating; Affirmed; B+ ----senior secured; Long Term Rating; Affirmed; BB+ Contacts: Primary Rating Analyst William Van Meerbeke, CFA Associate Director +1 646 582 4737 Fitch Ratings, Inc. 33 Whitehall Street New York, NY 10004 Secondary Rating Analyst Monica Bonar, Senior Director +1 212 908 0579 Committee Chairperson Dino Kritikos, Senior Director +1 312 368 3150 Media Relations: Elizabeth Fogerty, New York, Tel: +1 212 908 0526, Email: elizabeth.fogerty@thefitchgroup.com Additional information is available on www.fitchratings.com Applicable Model Numbers in parentheses accompanying applicable model(s) contain hyperlinks to criteria providing description of model(s). 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