What happened
Shares of base metal miner Hudbay Minerals (HBM 0.53%) dropped nearly 13% today after the company announced the sale of 24 million shares of common stock that will provide about $200 million in funding. Should the overallotment option be fully exercised, the total funding would reach $230 million.
The market is simply reacting to the large amount of dilution the deal will bring to shareholders. There are approximately 240 million shares outstanding today, which means the financing will result in dilution of at least 10%. That roughly matches the loss as of 1:24 pm EDT, or a loss of 11.3%.
Image source: Getty Images.
So what
Hudbay Minerals is primarily focused on copper mining, although deposits of the metal are often accompanied by gold, silver, zinc, and lead as well. While it ended the second quarter of 2017 with $125 million in cash, the company has three brownfield expansion projects -- Lalor zinc, Lalor gold, and Pampacancha -- and the high-potential Rosemont project in Arizona that are quickly advancing and require investment.
The company has steadily improved its performance and balance sheet in the last four quarters, so announcing a rather large share offering now is smart from management's perspective. It allows the company to take advantage of a rising stock price, and therefore raise more funding from selling fewer shares. Of course, it still results in dilution for shareholders. But if the extra cash enables increased production output and operating performance for the foreseeable future, then it could be a trade worth making.
Now what
Hudbay Minerals has seen significant improvements in the production levels of all base metals in 2017. More importantly, the increased output has been achieved with lower per-unit costs, which has boosted operating cash flow and earnings compared to last year. While the dilution today certainly hurts, the company can use the extra cash raised from the share offering to invest in various expansion projects. If you liked the stock before today's announcement, then there's no reason to change your mind now.