Hudbay Minerals Inc (HBM) 2016 Q4 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Hudbay Minerals, Incorporated Fourth Quarter 2016 Conference Call. (Operator instructions). I would like to remind everyone that this conference call is being recorded today, Thursday, February 23, 2017 at 10:00 AM Eastern Time. I will now turn the conference over to Ms. Candace Brule.

Thank you. Good morning, and welcome to Hudbay's 2016 Fourth Quarter Results Conference Call. Hudbay's financial results were issued yesterday, and are available on our website at www.Hudbay.com. The corresponding PowerPoint presentation is also available, and we encourage you to refer to it during this call.

Our presenter today is Alan Hair, Hudbay's President and Chief Executive Officer. Accompanying Alan for the Q&A portion of the call will be David Bryson, our Senior Vice President and Chief Financial Officer, Cashel Meagher, our Senior Vice President and Chief Operating Officer, Eric Saba, our Vice President of the South America business unit, Andre Lauzon, our Vice President of the Manitoba business unit, and Pat Merrin, our Vice President of the Arizona business unit.

Please note that comments made on today's call may contain forward-looking information, and this information, by its nature, is subject to risks and uncertainties and as such, actual results may differ materially from the views expressed today. For further information on these risks and uncertainties, please consult the Company's relevant filings on SEDAR and EDGAR. These documents are also available on our website.

As a reminder, all amounts discussed on today's call are in US dollars, unless otherwise noted. And now, I'll pass the call over to Alan Hair. Alan?

Thanks, Candace. Good morning, everyone. This time last year, having started my role as CEO in a period of cyclical low commodity prices, I laid out a clear plan for the Company to adapt to the volatile metal price environment while sustaining our pipeline of growth opportunities. We proudly achieved our objectives, but the year was not without its challenges.

In early 2016, we were focused on strengthening our liquidity position through cost reduction initiatives and credit facility renegotiations. Based on a detailed review of our operations, we identified over $100 million of operating and capital cost savings, and we achieved this target as seen through our lower unit operating costs in both Peru and Manitoba, with an early one-third reduction in total sustaining capital expenditures year-over-year.

In March, we amended our credit facilities, extending maturities to 2019, deferred principal amortization payments and introduced more flexible financial covenants. In December, we refinanced the 9.5% senior unsecured notes through the issuance of two separate, longer-dated tranches, as a blended interest rate of just under 7.5%.

As a result of our efficiency and cost reduction efforts, we delivered low-cost production growth in copper, zinc and precious metals, maximizing the free cash flow generation of the business in 2016. We successfully maintained our pipeline of organic growth opportunities and positioned Hudbay to advance high-return in-house brown field projects such as Pampacancha and the Lalor expansion. We also used excess free cash flow to reduce our debt position, including a $64 million repayment to our credit facilities in the fourth quarter.

We achieved all of our annual guidance levels provided on February 24, 2016. Production of copper and precious metals in Peru have exceeded the higher end of guidance ranges, while unit operating costs were within guidance expectations. In Manitoba, production of all metals and unit operating costs were within guidance ranges.

Sustaining capital expenditures for the year were lower in both Peru and Manitoba, resulting in approximately a 20% reduction in total sustained capital compared to guidance. This was mainly as a result of cost savings at both business units and lower deferred stripping in Peru reflecting the updated mine plan for Constancia released in November. There was also a small amount of capital deferred into 2017, primarily related to the construction of the [Las Bambas] road interconnect which is expected to be constructed by the end of 2017.

In summary, 2016 was a year of volatile metal prices, but our efforts to adapt the business to a responsive environment paid off as we achieved our guidance levels, generated positive free cash flow to reduce debt, while positioning in the business to be ready to refocus on growth when market conditions improved.

Taking a closer look at the fourth quarter results, our operations continue to achieve strong quarterly consolidated copper equivalent production and low cash costs in both of our Peru and Manitoba business units, resulting in positive free cash flow generation. Consolidated cash costs net of byproduct credits was $0.85 per pound of copper produced, a 7% decrease from $0.91 in the third quarter of 2016 reflecting higher byproduct credits and ongoing cost reduction initiatives.

Consolidated, all-in sustaining cash costs net of byproducts was $1.46 per pound of copper produced, unchanged quarter-over-quarter. Net loss and loss per share in the fourth quarter were $47 million and $0.20, respectively. Gross profit increased compared to the third quarter 2016, but net earnings were impacted by approximately $50 million in costs relating to fees and the coal premium paid in connection with the bond refinancing in December, along with deferred tax adjustments and mark-to-market losses on various items.

Operating cash flow before change in non-cash working capital was $122 million, or $0.52 per share, relatively unchanged quarter-over-quarter. While copper sales volumes were lower, this was offset by lower operating costs, higher zinc sales volumes, and higher realized prices.

Cash and cash equivalents increased by $29 million during the quarter. This increase was mainly a result of operating cash flow of $140 million, partly offset by $44 million of capital investments and $64 million in principal repayments under the revolving credit facilities in the fourth quarter. Net debt declined by $20 million, as the $80 million increase in the outstanding senior unsecured notes was more than offset by a higher cash balance and credit facility repayments in the quarter.

Our total available liquidity of $391 million increased by $114 million during the quarter, due to the increase in cash and cash equivalents, an additional $20 million in commitments under the credit facility, and the repayments under the credit facility I mentioned earlier.

During the fourth quarter, the Peru operations produced approximately 34,000 tonnes of copper, a slight decrease in the third quarter, resulting in full-year 2016 production above the top end of the guidance range.

Ore mined during the fourth quarter of 2016 decreased quarter-over-quarter, as ore production rates were aligned to mill throughput rates. Mined and milled copper grades were lower than the third quarter as the mine [plan] continues to advance to the lower levels in the pits.

Total copper recovery was 81.6% in the fourth quarter, compared to 83.6% in the third quarter, as mining began on phase 2 of the Constancia open pit where the initial near-surface ore contains a greater amount of altered and oxidized mineralization.

Combined mine, mill and G&A unit operating costs were $7.98 per tonne in the fourth quarter, compared to $8.71 per tonne in the previous quarter. Unit operating costs benefitted from lower mining costs due to ongoing improvement initiatives. Combined unit operating costs were within guidance expectations.

Cash cost net of byproduct credits was $1.11 per pound of copper produced, a slight decrease in the third quarter as a result of continued cost optimization and maintenance timing. Sustaining cash costs net of byproduct credits was $1.54 per pound of copper produced, lower than the third quarter result of lower capital costs from tailings impoundment construction.

During the fourth quarter, Manitoba operations produced approximately 10,000 tonnes of copper, 29,000 tonnes of zinc and 26,000 ounces of precious metals. While copper and precious metal production was in line with the third quarter, zinc production and concentrate was 8% lower, due to lower zinc grades at 777. Ore production at our Manitoba mines during the fourth quarter was in line with the previous quarter. Overall, copper and zinc grades were lower due to lower grades at 777 and Reed. However, in 2017, higher zinc grades are expected at 777 as a result of the resequencing of the mine plan to prioritize stops containing higher zinc grades, which is expected to result in improved overall economics per tonne at 777.

Combined mine, mill and G&A unit operating costs in the fourth quarter at CAD96.38 per tonne, were 4% higher than the third quarter as a result of unplanned maintenance expenditures. Combined unit operating costs were within guidance expectations.

Cash cost net of byproduct credits in the fourth quarter was negative $0.06 per pound of copper produced, lower than the previous quarter due to higher realized zinc prices and the decrease in general support costs as a result of cost reduction initiatives. Similarly, sustaining cash costs net of byproduct credits in the fourth quarter was $0.58 per pound of copper produced, lower than the previous quarter, affected by the same factors impacting cash costs described above as well as reduced capital expenditures.

Looking ahead in 2017, we will continue to focus on operating efficiency improvements in order to sustain the cost reductions we achieved last year, and to generate incremental free cash flow from the business. From a growth perspective, we remain committed to advancing the high return opportunities in our pipeline, such as the Lalor throughput expansion and the Pampacancha deposits.

At Lalor, technical work is underway on a new mine plan to increase throughput from the mine and the associated milling facilities while incrementally adding zinc and gold production in the near and medium-term, respectively. We expect to release the results in an updated technical report on Lalor before the end of the first quarter. Construction of the Lalor paste backfill plant is under way and we expect to complete the majority of the work before the end of this year.

Having paste backfill is intended to reduce operating costs, increase mining rates, and maximize ore recovery.

At Constancia, we recently published an updated 43-101 technical report, which incorporates a Pampacancha satellite deposit into the mine plan with first production expected in late 2018. We have allocated $25 million of capital to spend on Pampacancha in 2017 to advance the development of the deposit.

At Rosemont, we continue to advance permitting activities. We expect to publish a new technical report on Rosemont by the end of March, outlining the feasibility work we've completed since we required the asset as well as new mineral reserve and resource estimates. We're also continuing to advance early-stage exploration opportunities in the countries where we operate, providing long-term organic growth potential in our pipeline. Given the improved metal price environment, and Hudbay's increasing free cash flow generation, we are re-evaluating our expiration plans for 2017 with a focus on high-priority exploration targets in Canada, Peru and Chile, which may result in an increase in funds allocated to exploration.

Lastly, we also expect to allocate free cash flow generation from the business to further reduce debt and lower our cost of capital. We are pleased with the position Hudbay is in today as we enter 2017, but we will remain focused and sustain positive free cash flow generation while continuing to advance the high return growth opportunities in our pipeline.

With that, we're pleased to take your questions.

(Operator instructions) We have Matt Murphy with our first question. Please go ahead.

Good morning. Just wondering if you can provide some thoughts on how you look at Rosemont with the copper price maybe looking a little bit better than some people had expected, and maybe the market asking more about growth projects than capital conservation. Has your thinking on Rosemont changed at all? Are you -- what thought are you giving as to how you would finance it? Has that changed, at all?

Well, the first thing to point out, obviously, with Rosemont, is we're still waiting for the permits. But, we've also indicated that we believe for us to have a coherent financing plan, we'd need to see copper prices with a 3 in front of them, and that remains our view.

And any update in terms of permitting?

I think it's fair to say that we've always viewed permitting as a scientific and technical process, and we believe that good science will prevail and we've got no reason to believe that we won't achieve our permits in due course.

Has there been any dialogue since the transition of the political regime since New Year, or is it just still awaiting a decision from the Army Corps?

We're waiting both -- we're waiting on two Federal permits, one from the Army Corps and one from the Forest Service. As we say, we view this as a scientific and technical process, not a political process, and we believe that good science should prevail shortly.

Okay, thanks.

We have our next question from Orest Wowkodaw, please go ahead, sir.

Hi, good morning. I was wondering if we could get a little bit more detail on plans in Manitoba moving forward? In 2017, you upped the zinc guidance a fair amount in terms of resequencing 777, in terms of zinc production relative to 2016. How should we think about kind of 2018 and 2019, with the paste backfill plant I guess on track to be finished this year? Is the 2017 number kind of a good run rate before you think about doing any mill expansions, say for 2018 and 2019, or any color you could provide would be helpful. Thank you.

Hi Orest, Cashel, here. As you pointed out, yes, we intend on producing more zinc. The motivation there is to take advantage of these higher zinc prices, and so what we did is, we re-looked at optimizing the mine and the [life of mine]. So, that work is still under way. So, we've done the 2017 work as per our guidance. We're still working out 2018 and 2019.

As an overall view of what we will produce going forward, we're going to provide some more detail on Lalor. We believe there's some more opportunity at Lalor to produce more zinc from there, also. So, we'll give better guidance on that closer to the end of the quarter.

Okay, so at this point, how long -- with 777, how long can you kind of focus on the zinc before you have to normalize the mine plan again? Given there's not much life left to it?

If you look at the previous technical report, I think the previous technical report has us running out of reserves some time in 2020, so the question is, is what is the sustained zinc price, what are we finding as we're heading towards the margins of the deposit. As you know, any mine that gets along in age, sometimes the stopes themselves are more difficult to recover. So, what we're doing is, we're taking a detailed look at what's available to us within the 777 mine, to really understand going forward. But, we're quite confident what we're going to deliver in 2017. As you know in the past we've been unsuccessful at expanding those ore zones underground with underground exploration, so we have a limited resource there and we're trying to optimize that to get the best value for the community and for the shareholders.

Okay, and in terms of just the Lalor kind of study that will be coming out in March, will that include -- will that only look at expanding the Snow Lake mill potentially, or will it also include a review of refurbishing and restarting the New Brit mill?

I think what we'll be able to do, is with respect to the New Brit and the gold zone, is provide our plan going forward, what we intend on doing there, what we're working on. As far as the detail goes, that will have to come sometime after. As you can imagine, reopening an older asset has many components to it, of which are tailings impoundment, condition of equipment, etc. So, I think shortly after getting out some guidance on the base metal zone with this 43-101 at the end of the quarter, we'll be able to produce and provide more detail on the gold zone soon thereafter.

Okay, thanks very much for the color, Cashel.

We'll take our next question from Alex Terentiew. Please go ahead.

Hey guys, good morning. I just want to circle back to Manitoba, here. So, 777 you guys have been mentioning lately, the mine is getting older, obviously. It's kind of approaching the end of its life and it's getting a little bit more challenging. So, just on this throughput number, should the current rate be -- I know we talked about Manitoba in general, but should the current throughput rate for 777 -- is that the kind of rate we should look at for the mine going forward? And on the cost side, the costs that we've seen over the past quarter or two, are those the same sort of costs we should expect? Cost per tonne?

Yes, Alex, hi, Cashel again. I think like I sort of explained with Orest, I believe that we have 2017 well understood. I would be surprised to expect any higher throughput. As we move along the margins of the ore and the areas of the mine become more distal to our hoisting facility. So, I think what we will try and do, is maintain the current throughput with respect to having a certain base load requirement to optimize our milling cost. So, as a per-tonne basis mined or milled, you could probably expect similar sort of costs you've seen in the past few quarters.

Okay great, thanks, and I just wanted to clarify one of your last comments, as well. So, this update on Lalor next month, it will be primarily just the base metal zone and the gold zone, and really incorporating the New Britannia mill? That will come later on this year? Did I hear that right?

Yes, I wouldn't say later this year, but shortly thereafter, maybe in the following quarter we would be able to give reserve detail around the gold zone. At the end of this quarter, it would still be conceptual in nature because we're still working out some detail to support the reserve. It's not so much the underground mine-ability and dilution that we're concerned about. It's about the detail around the costing of the capital, or refurbishing New Brit, and the tailings facility we may use which is Birch Lake. So, it's just about getting some more detail around those areas, however, the gold zone itself and the recovery of the gold zone remains robust.

Okay, sorry, and just one quick question here on Constancia. You noted, Alan, that a $25 million allocated in 2017 for public contrast -- so can I just read from that, that you are still on-target to get your service rights by year-end ad begin pre-stripping at the deposit?

Yes, that's still our plan, is to have the negotiations require surface rights associated with a view to advancing the pre-strip next year.

Okay great, thank you.

We will take our next call from Stefan Ioannou, please go ahead.

Great. Thanks, guys. Just like in Manitoba, obviously 777 is, as you mentioned, it's sort of starting to get fairly old, here. Just wondering at Reed, is there any plans there specifically to do exploration this year, or is most of that exploration in Manitoba going to be focused in Lalor?

Hi, Stefan, Cashel again. So, Reed itself, we believe we've sort of evaluated the extents of the deposit proper. We're drilling off the bottom of the zone, the copper areas. They're turning out more or less as expected. So, we believe we found the extent of the ore zones at Reed, and basically what's going on is infill drilling. The exploration currently, yes, we will be concentrated on some infill at Lalor. However, much of our exploration we're going -- we're seeing a rebirth with it, and we'll start looking for other opportunities within the camp itself. And in due course, we'll talk about those as they become more material to the discussion.

Okay. Would it be fair to say that these are sort of very grass-roots stage targets, or ones you've done work on in the past that have some drilling with or without JV partners?

It's a combination of both. There will be some brown fields, and there will be some green fields within the camp.

Okay, great. Thanks very much, guys.

(Operator instructions) We will take our next question from Ralph Profiti. Please go ahead.

Thanks, operator. I'm just looking at the old technical report, and I understand it's dated for Lalor, but it showed that wasted development tonnes fall off pretty significantly. And I was wondering, is it possible that we'll see Lalor move into sort of a waste-neutral or a waste-deficit position in the next couple of years? Is that still in the plan?

Yes. So Ralph, Cashel here again. Basically, the balance of this year will see the construction of our paste backfill plant, and what has happened up until its commissioning and continuing this year is, we've had a need for rock underground to backfill various voids such that we're able to continue mining. So with that, we have in front of us quite a bit of pre-development for a majority of ore zones. So, other than the gold zone itself, which requires -- and the copper-gold zone which require future and more development, the base metal zone is by and large developed. And so, we could see a drop-off certainly in the base metal component in our required capital development.

Got it, okay. And let me switch gears a little bit and talk a little bit about Rosemont, and maybe a question for Alan. Do you still consider KORES in the minority partner, a long-term invested shareholder there, or could we see a change in the ownership structure going forward? Or is it kind of too early to tell?

Well obviously, it's KORES and LG that are joint venture partners, and we've got no reason to believe that they will not -- well, we believe that they remain committed to the project. So.

Okay, thanks, Alan.

We have a follow-up question from Alex Terentiew, please go ahead.

Hi guys, just a quick question on Constancia. I haven't seen the moly numbers, moly production numbers disclosed there. Is the mine producing any moly at the moment? And then also, their low recoveries that you noted, I recall that back in 2015 and 2016 when you were ramping up Constancia you had some of this transition oxidized material, and when you went through that you saw your recoveries go up. So, is this kind of a Q4 and maybe a Q1 issue, and you expect to see recoveries improve back into Q2?

Alex, I think you're right on with the latter. Basically yes, we're going through what we call our Phase 2 pushback and it's from surface-down, and so we have been going through a mix transition. And so, we have seen elevated oxide and as you know, the plant itself recovers sulfide copper minerals. And so, the copper total, against copper total our recovery has gone down, although the ratio remains solid that the percentage of sulfide material recovered still remains in the high 80s. So, it's just we report against copper total, which includes some of the copper oxide or copper-soluble component.

And as for the moly, we do. We are getting more confidence in the moly plant. We've made some sales in moly. We expect this year with the variability and throughput as the like of mix transition, some skarn material, and some supergene material, that we find the moly plant becomes more stable and more predictable when we're milling less variable throughput. So, we believe it's still material impactful for the majority of the reserve, the hypogene, and as we go further into the year we expect to be able to improve our recovery and production of moly, and then in further years even better as we get more stable and more stable, a more singular feed.

Okay, that's great. Thank you.

It appears there are no further questions at this time. Ms. Candace Brule, I'd like to turn the conference back to you for an additional or closing remarks.

Thank you, operator, and thank you, everyone for participating. Please feel free to reach out to our investor relations department if you have any additional questions.

And this concludes today's call. Thank you for your participation. You may now disconnect.