Hudbay Minerals Inc (HBM) 2017 Q1 法說會逐字稿

Good morning, ladies and gentlemen.

Thank you for standing by.

Welcome to Hudbay Minerals Inc.

First Quarter 2017 Results Conference Call.

(Operator Instructions) I would like to remind everyone that this conference is being recorded today, Thursday, May 4, 2017 at 10 a.m.

Eastern time.

I will now turn the conference over to Ms. Candace Brûlé Please go ahead, Ms. Brûlé.

Thank you, operator.

Good morning, and welcome to HudBay's 2017 First Quarter Results Conference Call.

HudBay's financial results were issued yesterday and are available on our website at www.hudbay.com.

A 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; Javier del Rio, our Vice President of the South American 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 U.S. dollars, unless otherwise noted.

And now, I'll pass the call over to Alan Hair.

Alan?

Thanks, Candace.

Good morning, everyone.

After focusing on strengthening our liquidity position and lowering costs last year, our focus this year is to continue to deliver on our operating targets in order to generate positive free cash flow and pay down debt.

We're also on track to advance the high-return, in-house brownfield opportunities at Lalor and Pampacancha in 2017.

While we generated positive free cash flow during the first quarter 2017, there were a few items that impacted financial results this quarter.

There were a number of onetime mill maintenance costs and delays that impacted production and unit costs.

Also, low opening concentrate increase and late quarter sales, where revenue will be booked later in the year upon delivery, affected the financial results in the first quarter.

Despite these challenges, we are on track to meet our production and cost guidance for 2017.

We were also pleased to release the updated mine plan for Lalor and the feasibility study results for Rosemont on March 30.

The new Lalor mine plan incorporates 4,500 tonnes per day through the Stall base metal mill beginning in 2018, a ramp-up from the current 3,000 tonnes per day.

With the addition of paste backfill in early 2018, mining efficiencies at Lalor are expected to improve along with lower sustaining capital expenditures.

Technical work is ongoing in the New Britannia Mill, which has the potential to process up to 1,500 tonnes per day of Lalor gold and copper gold material.

The Rosemont project is expected to have a 19-year mine life and demonstrates robust economics with a projected 15.5% after-tax project IRR at the copper price of $3 per pound.

These technical reports were key milestones for our company and we believe will add significant values for our shareholders as we continue to advance Lalor and Rosemont.

Taking a closer look at the first quarter results.

Consolidated cash costs net of byproducts was $0.88 per pound of copper produced, a slight increase from $0.85 in the fourth quarter of 2016.

Consolidated all-in sustaining cash costs net of byproducts was $1.46 per pound of copper produced, which was unchanged quarter-over-quarter.

Net loss and loss per share in the first quarter were $2 million and $0.01 respectively, compared to a net loss and loss per share of $47 million and $0.20 respectively in the fourth quarter of 2016.

Higher copper and zinc prices during the first quarter of 2017 allowed us to increase our gross profit compared to the fourth quarter of 2016, notwithstanding lower revenues as a result of the timing of sales and lower production due to planned and unplanned maintenance activities at our operations.

The increased margins allowed us to continue to pay down debt, thereby lowering our finance expenses and outstanding debt compared to previous quarters.

Operating cash flow before change in noncash working capital was $80.6 million or $0.34 per share, down from a $122 million or $0.52 per share in the fourth quarter 2016, due to lower copper sales volumes for the reasons I mentioned earlier.

Cash and cash equivalents decreased by $14 million in the first quarter to $133 million.

This decrease was mainly a result of principal repayments of $64 million on our credit and equipment facilities, $41 million of capital investments primarily at our Peru and Manitoba operations and interest payments of $11 million, which were partially offset by operating cash flows of $110 million.

As a result, our total available liquidity was $433 million, up from $391 million at the end of 2016.

The Constancia mine produced 27,211 tonnes of copper and 11.6 thousand ounces of precious metals during the first quarter, which was lower than prior quarters due to lower grades in throughput.

Ore mined at Constancia during the first quarter 2017 increased by 16% compared to the fourth quarter in 2016 as we start to increase stockpiles to improve our ability to blend ore at the processing plant.

Mined and milled copper grades in the fourth -- in the first quarter were approximately 45% lower than the fourth quarter, as we enter lower grade phases of the mine, although we continue to see positive grade reconciliation in the mined ore.

Mill throughput during the first quarter of 2017 was affected by scheduled and unscheduled maintenance.

Recoveries of copper and gold were lower in the first quarter 2017 compared to the fourth quarter in 2016 as a result of increased mix in high zinc ore.

Combined mine, mill and G&A unit operating costs in the first quarter of 2017 were 15% higher than the fourth quarter of 2016 as a result of increased plant maintenance, cost of operating the moly plant at significantly higher rates and community investments.

Cash costs net of byproduct credits was $1.30 per pound, an increase of 17% from the fourth quarter of 2016 as a result of decreased copper production and increased cost as mentioned earlier along with lower gold byproduct credits.

Sustaining cash costs, net of byproduct credits, was $1.61 per pound of copper produced, an increase of 5% from the fourth quarter 2016 as a result of the facts as noted above, partially offset by lower deferred stripping costs and royalties.

Despite the increase in cash costs and sustaining cash costs during the first quarter, we are still tracking in line with the expected costs as outlined in the November 2016 technical report for Constancia.

Recall that 2017 is expected to be a peak year for cash costs and sustaining cash costs before significantly declining in 2018 to 2021 due to the inclusion of the high-grade Pampacancha deposit into the mine plan and the significant decline in sustaining capital expenditures beginning in 2018.

We also successfully negotiated the first collective agreement with the union that was formed at Constancia.

In accordance with the (inaudible), the agreement expires in November 2017, being 1 year from the start of those initial negotiations.

The new agreement had no impact on our cost guidance.

Accordingly, we continue to expect to meet 2017 production and cost guidance at Constancia.

In Manitoba -- the Manitoba operations produced approximately 7.5 thousand tonnes of copper, 30,600 tonnes of zinc and 19,600 ounces of precious metals during the first quarter.

Production of gold -- of copper, gold and silver was lower than fourth quarter 2016, mainly as a result of lower mill throughput as well as lower grades in the Lalor and Reed mines.

Zinc production was higher in the first quarter of 2017 compared to the fourth quarter 2016 as a result of higher zinc grades at 777 and Lalor as well as higher zinc recoveries.

Production is expected to be within guidance ranges as Lalor ore production increases and mill throughput improves.

Ore production at the Manitoba mines for the first quarter of 2017 increased slightly compared to the fourth quarter of 2016 as a result of higher production at the Lalor and Reed mines.

Zinc grades at Lalor and 777 was sequentially higher, offset by lower copper grade, reflecting the areas being mined.

As part of the updated mine plan to grow Lalor's ore production rates to 4,500 tonnes per day, we undertook substantial operating and capital development work during the first quarter of 2017, and this work is expected to continue throughout the remainder of the year.

With the production ramp-up underway, waste development was accelerated to match stock backfill requirements and will continue at higher rates until the commissioning of the paste backfill plant.

This change is expected to increase cash flow for the year over the base plan but will also result in higher reported unit costs compared to the recent past, until the paste plans are commissioned.

These changes were outlined in the recently filed 43-101 technical report for Lalor.

Ore processed in Flin Flon in the first quarter 2017 was approximately 20% lower than the fourth quarter in 2016 due to unscheduled maintenance, resulting in higher unit operating costs at the Flin Flon mill.

Zinc recovery was slightly higher compared to the fourth quarter in 2016 as a result of higher head grades.

The Flin Flon mill's combination of aging infrastructure and excess capacity means that we can expect quarter-to-quarter variation in throughput, but we continue to expect to meet full year guidance -- full year production guidance for Manitoba.

Ore processed and recoveries at the Stall Concentrator in the first quarter of 2017 were fairly consistent compared to the fourth quarter in 2016.

Unit operating costs at the Stall Concentrator were 31% higher this quarter compared to the fourth quarter of 2016 as a result of damage to the crusher in December 2016, which necessitated the use of higher-cost temporary crushing facilities during the first quarter.

Repairs have been completed and the mill resumed the use of its permanent crushing circuit in April 2017 and has been operating at planned levels.

Manitoba combined mine, mill and G&A unit operating costs in the first quarter of 2017 were 24% higher quarter-over-quarter as a result of lower overall ore milled and higher costs at the mines and mills for the reason I just mentioned.

We continue to expect combined unit cost to be within the guidance range for 2017.

Manitoba cash costs net of byproduct credits in the first quarter of 2017 was negative $0.66 per pound of copper produced compared to negative $0.06 in the first quarter of 2016.

The decrease is primarily a result of increased byproduct credits.

Sustaining cash costs net of byproduct credits in the first quarter of 2017 was $0.28 per pound of copper produced compared to $0.58 per pound in the fourth quarter of 2016.

The decrease resulted from the same factor described above as well as reduced capital expenditures.

Looking ahead for the remainder of the year, we will continue to focus on generating positive free cash flow and debt reduction, which we were able to accomplish despite the challenges we faced this quarter.

From a growth perspective, we remain committed to advancing the high-return opportunities in the pipeline.

That's just the inclusion of the Pampacancha deposit into the Constancia mine plan, the Lalor throughput expansion and the advancement of permitting at Rosemont.

We'll also continue to advance early-stage exploration opportunities in the countries where we operate, providing a long-term organic growth potential in our pipeline.

Given the improved metal price environment and HudBay's increasing free cash flow generation, we are focused on high-priority exploration targets in Canada, Peru and Chile.

With that, we are pleased to take your questions.

(Operator Instructions) And we'll go first to Matt Murphy.

Could you take us through the unplanned maintenance, a little bit more detail at Constancia and the, I guess, the crusher issue at Stall?

Matt, Cashel here.

Yes, at Constantia, actually, we have 8 motors that are identical that run the 4 mills we have, the 2 segs, the 2 balls.

One of those motors, it was found to have faulty carbon brushes on the electric motor.

The other ones we checked out, they don't.

So that's truly a one-off part of the issue -- was that replacement to that motor took a little longer than we had hoped.

So that was the one-off at Constancia.

But that happened.

With Stall itself, actually, there was a -- there were some hot works and some rubber ignited, and it damaged an area.

And also, we had some problems with the crusher then, too.

So we've repaired that now, and now this month, we're up and running normal.

So that was a one-off also.

Okay.

And then the other operational question is Constancia recoveries.

What are you seeing ahead of you in terms of transfer, the mixed or the high zinc ore?

And do you have a recovery target this year?

Yes, we do, we have a planned recovery target.

We're now trending about 3 or 4 points below it.

As always, we'll continue to do some improvements in the mill itself to be able to address recovery.

Our primary focus, though, right now is on throughput.

And this month, we've managed to increase the throughput to be able to compensate for some of that recovery.

We also have some processes in place to be able to improve the recoveries.

So I think a lot of this we could consider more or less behind us versus what we see coming with Constancia.

And, yes, that's it.

We'll go next to Orest Wowkodaw with Scotiabank.

It's Orest here.

More questions for me on Constancia.

Just following up on that there.

Specifically, I was surprised, how high the grade was in the quarter at 0.55.

If I'm not mistaken, I thought the grade was supposed to average something closer to 0.4 this year, copper.

Is that -- do you think grades are going to stay around that 0.5 level or are we going to see the grade fall off a cliff in the next quarter or 2?

Yes, Orest, as we -- Cashel here again.

As we mine more and more the volume of the hypogene, we're finding a sort of a persistence in a little bit of higher grades that we thought was isolated to the mix transition of the supergene zones.

So we're working through that on a reconciliation basis.

Certainly at the input level, the blast holes and the ball mill discharge seem to be lining up with those higher grades.

So we're working towards understanding with certainty what that reconciliation means and certainly what the magnitude of that is.

So as I've said to Alan before, it's a terrific problem to have at the moment.

Right, but it does sound like you expect now to do kind of much better than that 0.40 that you were guiding to before.

Is that fair?

So far, this year, yes, we have been reconciling higher.

So like with anything, we want some more certainty.

We want a little more of the volume of the hypogene to go through before we would be in a position to sort of solidify what that grade forward might be.

What has been the positive grade reconciliation to date at Constancia?

It's been pretty high, actually.

It's been in the double-digits, so we're hoping that persists.

And as I said, we're hoping to take advantage of some of our improvements on throughput to take advantage of these higher grades so that the full capability of the mill is utilized.

Now we'll go next to Stephen Walker with RBC Capital Markets.

Alan, just a question on Constancia with respect to one of the contractors there.

There was an incident this past weekend, and one of the trucking contractors had a couple of vehicles set on fire.

And again, I understand that this is obviously not your vehicles, but could you give us background on what's happening between the contractors in that part of Peru?

And whether there's any potential implications on production or movement of concentrate?

There was actually 3 trucks that were impacted of 5, 2 of which were owned by 1 contracting company, 1 by, actually, one of the local communities.

We don't know whether that fire was deliberately set.

You see from the pictures in the newspaper that the -- it looks as if the middle truck caught fire and then set the other 2 off, similar to what you can see if a car catches fire in a parking lot.

So at this stage, it's just speculation of whether the fire was set deliberately or whether it was an accident.

There is speculation like given that Las Bambas has got caught up with their concentrate backlog and are now fully bimodal, there are certainly lots of trucks in the area that are looking to hold concentrate.

So we don't see this as being a particular issue, to be honest.

And really, I mean, as we've said before, logistics even with Las Bambas up and running now, have had no material impact on our business.

In fact, one of the issues with Q1 is we ended up with literally no concentrate on site or at the port at the end of Q4 in 2016, which shows that the logistics are actually working really well.

We'll go next to Greg Barnes with TD Securities.

Cashel, going back to Orest's question on the higher grade and the good grade reconciliation, it does seem you're getting more of the mix in high zinc ore than you expected and that's negatively impacting recoveries.

How is this going to balance out?

Well, that's exactly what working on, Greg, is we're recalibrating our methodology for resource delineations that we can give more certainty into the long-term plan.

And it's all about having enough volume of the distinct mineral types to be able to evaluate this and forecast forward of what it might be.

So as you're sort of indicating, yes, it seems as though we underestimated the volume of skarn, which has some of the high zinc mineralization in it, which does impact our recovery as to those iron and the quantity of iron in it.

At the same time, the copper total and certainly the copper total sulfide component seems to be trending higher and offsetting that depression of recovery caused by the zinc and/or the iron.

So what we're doing is we're going back through the process.

We're using different interpolation methods.

We're reviewing our geological models and the constraints therein and addressing areas and zones.

So this is an ongoing project now.

It's got a lot of attention and we do want to be able to provide better guidance on what the grades should be going forward.

And recoveries.

And therefore -- recoveries, yes.

So the first thing is quantify the volume and grade of the mineral types and the recoveries will fall out from those.

Do you have a target when you expect to have this done, this modeling redone?

So it's an ongoing process.

We are finding new things.

So I would say in the next couple of quarters, we should have some certainty on it.

We're coming into our higher volume on hypogene ahead, and so that will give us a lot of support for what we feel is going on.

Okay.

And just switching to Lalor, in the MD&A, you talked about changing the mining sequence, and going forward 250,000 tonnes of high-grade ore.

I understand this is all to enable you to get to the 4,500 tonnes a day.

When do you expect to get to that level of mine output and mill throughput?

Yes, probably, Greg, the best guess we have now, where we'll get to 4,500 tonnes with an incremental increase, is this time next year, sort of coinciding with the commissioning of the paste fill plant.

But the mine will be able to do 4,500 tonnes a day ahead of that?

Yes.

There's a few modifications for logistics down on -- down in the grizzly area, but otherwise, we're pretty developed, as you know, because we've been using -- we've had to generate rock for backfill.

So we see no issue and we've also ramped up our drill inventory already and we're well on target to be able to sustain that type of production.

We'll go next to Stefan Ioannou with Cormark.

Just maybe back to kind of Matt's original question, just again at Constancia.

Not to belabor this, but getting the throughput higher to sort of offset some of the grade and recovery issues right now, like do you foresee getting throughput like up above nameplate, above 80,000 tonnes a day or just getting it back to 80,000 tonnes a day given -- compared to what we thought in Q1?

Yes, I think what's fair to say is we believe that the overall capability of the asset is more than 80,000 tonnes a day, so that's what we're targeting.

And let me just say that -- and the grade's been a bias higher, as have been pointed out, and slightly lower with the recovery, but the grade has been outstripping the decline in recovery.

Okay, okay.

And then I'm just wondering, with the union labor negotiation sort of set up at least for a year contract.

That union that's been set up now, does it cover essentially all of the workforce at Constancia or just a small part of it?

What kind of breakdown is behind that new union?

Of the eligible employees, the hourly employees that work directly for Constancia, 1/4 of them have elected to be part of the union.

So it's only 1/4 of our workforce.

And what is typical in the Peruvian workforce is to sign 1-year contracts.

It's abnormal to go to 3-year contracts.

And most typically, the consequence of extended negotiating periods are non-impactful to the operation.

(Operator Instructions) We'll go next to Matthew Fields with Bank of America Merrill Lynch.

This is actually Nathan Hickey filling in for Matt.

I see that you guys kind of noted that during the first quarter some of the lower sales was attributed, in part, to (inaudible) those, kind of pushed into the next quarter.

I was wondering if you guys could just give us a little more detail around how much that was and sort of what the impact of that item was on the first quarter specifically?

Sure.

It's David Bryson.

Most of our sales from Peru go to either traders or to Asian smelters, where we book revenue recognition upon or within a few days of loading.

We do have sales with 1 non-Asian customer, where we book revenue recognition upon arrival in Europe.

And so, we had one of those 10,000 tonne parcels in late Q1, where the vessel arrived in Q2, and so that shifted over.

But certainly, an element of the difference between production and sales was, as Alan mentioned, we ended Q4 with virtually no inventory in Peru.

And so it was sort of expected that there would be some build back up to normal working inventory levels, which we saw in the quarter.

And we'll take a follow-up from Greg Barnes with TD Securities.

It's for David Bryson.

David, do you think you'll be able to fully repay the revolving facility this year from free cash flow?

At spot metal prices, I think it'll be close, Greg.

But I think that certainly -- assuming that we deliver on our production targets, convert that material to sales and our costs are in line with guidance, I think that's definitely achievable.

And maintain a cash balance of how much?

Between a $100 million and $150 million, which is typically where we like to keep it.

And with no further questions in the queue, I'd like to turn the conference back over to Candace Brûlé for any additional or closing remarks.

Thank you, operator, and thank you, everyone, for participating.

Please feel free to reach out to our Investor Relations group if you have any further questions.

Again, that does conclude today's presentation.

We thank you for your participation.