Hudbay Minerals Inc (HBM) 2017 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for standing by.

Welcome to the Hudbay Minerals Inc.

Q4 2017 Conference.

(Operator Instructions) I would like to remind everyone that this call is being recorded today, February 22, 2018 at 10:00 a.m.

Eastern Time.

And now it's my pleasure to turn the conference over to Carla Nawrocki.

Thank you, operator.

Good morning, and welcome to Hudbay's 2017 fourth 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; and Andre Lauzon, our Vice President of the Manitoba 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, Carla.

Good morning, everyone.

I'm pleased to report that our operations in Peru and Manitoba delivered solid operating results in 2017.

On a consolidated basis, our full year copper production exceeded 2017 guidance and production of zinc and precious metals were within 2017 guidance ranges.

We proudly achieved these results with the strong safety performance across all of our operations, including zero lost time accidents at our Constancia mine in Peru.

With these operating results and improved metal prices, we were able to utilize strong cash flow generation to reduce debt and enhance our balance sheet.

We generated operating cash flow before change in noncash working capital of $172 million in the fourth quarter, a 41% increase from the fourth quarter of 2016.

We've reduced our net debt position by $462 million over the course of the year and ended 2017 with $623 million of net debt.

Our total liquidity, including cash and available credit facilities, increased to $778 million, up from $391 million at the end of 2016.

In June, we've received the Final Record of Decision for the Rosemont project from the U.S. Forest Service, which leaves us with one key federal permit outstanding, the Section 404 Water Permit from the U.S. Army Corps of Engineers.

Progress continues to be made in the 404 Permit and on the mine plan of operations.

During the downturn in metal prices over the past few years, we have more than doubled our owned and optioned mineral properties from approximately 380,000 hectares to approximately 860,000 hectares across Canada, Peru, the U.S. and Chile.

Last year's strong cash flow generation, coupled with the higher metals price environment have positioned us well to pursue a more aggressive exploration program in 2018.

Our 2018 exploration budget of $50 million, more than twice that of 2017 spending, will be focused on exploration near existing processing infrastructure in Manitoba and Peru and on grassroots exploration properties in Peru, Chile and British Columbia.

Taking a closer look at the fourth quarter results, consolidated copper and precious metals production increased by approximately 7% and 12%, respectively from the third quarter of 2017, while consolidated zinc production decreased by approximately 10%.

Consolidated cash cost, net of byproducts, increased by 10% from the third quarter of 2017 to $0.77 per pound of copper as a result of higher zinc byproduct credits.

Consolidated all-in sustaining cash cost, net of byproducts, was $1.49 per pound of copper, which was lower than the third quarter, mainly due to higher sustaining capital expenditures in Peru during the third quarter.

Net profits and earnings per share in the fourth quarter were $100 million and $0.38, respectively compared to $41 million and $0.17, respectively in the third quarter of 2017.

Profit in the fourth quarter benefited from a noncash deferred tax gain arising from the changes to U.S. tax rates in December.

Operating cash flow before change in noncash working capital increased by approximately 12% to $172 million or $154 million in the third quarter, mainly due to higher realized copper and zinc prices.

Based on our results to date, we are on track to meet our production, capital expenditures, exploration and unit cost guidance for 2018 that we disclosed in January.

The Constancia mine produced approximately 34,000 tonnes of copper during the fourth quarter, which was higher than the third quarter, primarily due to improved copper head grade and copper recoveries.

Mill copper grades in the fourth quarter were higher than the third quarter, approximately 7% lower than the fourth quarter of 2016 as expected, as Constancia entered lower grade phases of the mine plan.

Twin hole drilling that we conducted in the Constancia pits has indicated that positive grade bias that has been experienced since the start of Constancia's production is expected to persist through the life of the deposit, although the extent of the bias is expected to be less than what has been experienced to date.

We are working on our revised Constancia mine plan and updated reserves, which we expect to release by April of this year.

Total copper recovery was 82.1% in the fourth quarter compared to 81.2% in the third quarter.

Improvements in processed recoveries continued to be implemented and evaluated in conjunction with the grade reconciliation.

In 2017, copper production at Constancia are exceeding the guidance range, while precious metals production was slightly below the lower end of guidance.

Combining mine, mill and G&A, unit operating costs were $9.75 per tonne in the fourth quarter compared to $7.49 per tonne in the previous quarter.

The higher combined unit costs are mostly related to decreased capitalized stripping, higher utility prices and higher overall operating costs due to increased molybdenum production during the period as well as increased planned maintenance costs that will occur in conjunction with the major scheduled plant shutdown.

Due to these factors as well as lower-than-expected mill throughput earlier in 2017, full year 2017 unit operating costs at Constancia were higher than guidance expectations.

We believe that some of the factors of that cost elevated unit cost in the fourth quarter are nonrecurring, and accordingly, we remain confident that we will meet our unit cost guidance for 2018.

Cash cost, net of byproduct credits, was $1.38 per pound of copper produced compared to $1.19 per pound of copper produced in the third quarter 2017, mainly as a result of lower deferred stripping, increased planned cash costs and profit sharing.

Sustaining cash cost, net of byproduct credits, was $1.81 per pound of copper produced, essentially unchanged from the third quarter of 2017.

Negotiations to secure surface rights over the Pampacancha deposits are progressing.

The community is providing Hudbay with access to the land to carry out early-works activities and we expect to begin ore production later this year.

The Manitoba operations produced approximately 33,100 tonnes of zinc, 9,300 tonnes of copper and 32,200 ounces of gold equivalent precious metals during the fourth quarter.

Production of all metals in Manitoba for full year 2017 was within the guidance range.

Ore mine during the fourth quarter of 2017 decreased by 8% compared to the third quarter as a result of lower production at 777, while lower process during the fourth quarter was in line with the previous quarter as we drew ore from the stockpiles.

Manitoba combined mine, mill and G&A unit operating costs in the fourth quarter were higher than the third quarter, mainly due to lower production at 777, the cessation of the capitalization of Reed’s development costs and the higher costs at Lalor incurred increased production to 4,500 tonnes per day in accordance with the revised mine plan.

Combined unit operating costs in Manitoba exceeded the guidance range for these reasons, while zinc plant production and unit operating costs well within the 2017 guidance range.

Manitoba cash cost, net of byproduct credits, in the fourth quarter 2017 was negative $1.42 per pound of copper as a result of significantly increased byproduct credit for all metals, which were partially offset by higher cost at 777 and Reed’s mines during this part of the mine life.

Similarly, sustaining cash costs, net of byproduct credits in the fourth quarter was negative $0.35 per pound of copper produced, lower than the previous quarter, affected with the same factors impacting cash costs that I noted, partially offset by higher sustaining capital spending.

Manitoba sustaining CapEx was higher than usual in the fourth quarter, but was within guidance expectations for the full year 2017.

We continue to sell excess zinc concentrate during the fourth quarter and expect to continue to do so through the first half of 2018.

As I noted, our 2018 production and unit cost guidance for Manitoba remains unchanged.

We are on track to increase Lalor's production to 4,500 tonnes per day for the third quarter of 2018.

In 2018, precious metals contained in ore production from Lalor, which is no royalty stream -- no royalty or stream obligations, is expected to account for 67% of Manitoba's precious metals production.

The mine plan at Lalor for 2018 includes some mining of the gold zone for processing at Flin Flon, which will enable a better understanding of the gold zone characteristics and better inform the evaluation of options for processing Lalor gold.

As we look towards the balance of 2018, we will continue to focus on driving efficiencies in our operations to generate free cash flow and increased net asset value.

From a growth perspective, we remain committed to advancing existing opportunities in the pipeline, such as the inclusion of the Pampacancha deposits into the Constancia mine plan, the completion of the Pace plan to continue ramp-up production at Lalor and moving Rosemont through the permitting process and its development.

We are also looking forward to funding exploration work in the properties that are required over the past several years, including properties in the vicinity of Constancia that we believe have the potential to provide additional higher-grade feeds for Constancia mill.

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

(Operator Instructions) And we'll go first to Matthew Fields at Bank of America.

I just wanted to really ask about, I know you sort of mentioned this in the past, but when it eventually comes time to decide how to fund Rosemont project, remind us, is it $1.1 billion that sort of attributable to Hudbay?

And is it sort of your intention to use secured debt, like a term loan, add-on to bonds, do some more equity, like, can you sort of give us some color on your options and your sort of thinking about how you'd like to align your capital structure to fund that next portion of your growth?

Matt, it's David Bryson.

Thanks for the question.

So you're correct.

When we think about Rosemont's financing requirements, net of the joint venture partner contributions, equipment financing and the existing stream with weakened precious metals, there is about $1.1 billion in funding to come sort of via equity from Hudbay.

When we look at the business over Rosemont's likely construction period at spot metal prices, we think that the existing business between Manitoba and Peru can comfortably generate that amount of free cash flow.

So it really comes down to a conversation around risk management and what to do about the risk of spot metal prices falling during Rosemont's construction.

So we did raise equity last September that provides some risk mitigation.

We would certainly consider an add-on to the unsecured high-yield bonds that we have outstanding around the time of Rosemont sanctioning.

And we would also consider a modest amount of metal price hedging during and only during Rosemont's construction period as additional risk mitigation tools.

There is no need for us to utilize secured debt and we would not plan to utilize secured debt.

We would plan to put in place a cost overrun credit facility at the Rosemont project level, secured by Rosemont's own assets.

But that would, again, just be a contingency capital that would be part of our risk mitigation plans.

But certainly, no plans to put any additional secured debt on our existing operating assets.

All right.

That's good color.

And then just to remind us about what's the construction period for Rosemont?

How many years do you anticipate the construction to go if it's sort of according to plan?

Based on the 43-101 that we issued in March of last year, the construction period is 3 years from sanctioning.

So you have a year or 2 till sanctioning and then 3 years of cash flows while you're building in addition to any financing you choose to undertake?

Well, look, the timing around sanctioning is primarily a function of permitting.

As Alan mentioned, that's progressing.

We haven't issued public guidances to the exact timing of permitting, but we think it's well on track.

We have 1 of the 2 remaining federal permits that we need, and we think that the 404 Water Permit is progressing well.

So depending on the receipt of that, we think we could move quite rapidly into sanctioning the project, given the work that we've already done on the project itself, and given the financial capacity that we have.

So I don't want to sort of speculate on exactly when we'd sanction the project, but I think, once we do that, then you'd be looking at initial production about 3 years from there.

And we'll go next to Matt Murphy at Macquarie.

Another question on Rosemont here.

Just wondering what kind of dialogue you've been having with the Army Corps?

And what gives you the confidence that you'll be ultimately getting a go-forward on the Water Permit?

And any comment on this EPA document that came out on the water mitigation?

It's Alan, Matt.

I think I can start off by saying that our view remains that all the scientific and technical concerns relating to the 404 Permit have never been appropriately dealt with, including any concerns raised by the EPA.

So we think that from a technical perspective, we're in good shape.

Okay.

And ultimately, this decision rests with the Army Corps, is that right?

Like the -- is the EPA involved at this point other than having veto power over the Army Corps?

You're correct.

If the Army (inaudible) and any veto power that from the EPA would be at the Washington level, not the (inaudible), that's specific to the comment.

And we'll go next to Greg Barnes at TD Securities.

Could you just highlight or give us some more details around the molybdenum production at Constancia.

I know you've been working on the molybdenum moly recovery plant, but I'm not quite sure what's going on and what it means?

Greg, Cashel here.

Basically, it's on and off now with the varied geology in the current mine plan as of last year and this year, when we're still working through various phases of the Constancia mine plan.

So when we get into mixed transitions, skarn or supergene and the proportion of mix to the feed of that, as those lithologies or those mineralization types are increased.

What we find is the moly within the copper bulk concentrate isn't of sufficient grade to merit running the copper bulk through the moly plant.

Now when we find ourselves in times of feed, and this thing varies sort of on a daily basis based on the dispatching within the mine of higher percentage hypogene ores, we find ourselves in a position where the moly bulk or the copper bulk corn has sufficient moly to merit running through and more than cover the cost of production of moly.

So we're not -- we're -- it's part and parcel of this revamping of the resource that we've now sort of completed, and we hope to be able to give more guidance when we've completed the mine plan that we've talked about putting out in April that addresses the reconciliation issues where we'll be more predictive of when we're producing moly concentrate and when we might not be.

But as the mine matures, we will produce more molycon more consistently.

From a high-level perspective though, Greg, it's David.

What we're trying to do, as Cashel says, is when there is an opportunity to make some incremental cash flow from running the moly plants, we will.

That sort of makes a modest contribution to cash cost at Constancia.

The way that we report unit cost means that it increases unit cost because there's no byproduct credit to that number.

So -- but it's not really a material contributor to Constancia's economics at the moment.

We'd expect it to be a more significant contributor once we have that more consistent head grade of moly to run the plan.

Not to jump the gun, but when do you think that will be?

Yes.

I think in light of us now relooking at the resource and doing the reconciliation on the different types of mineralization we have, we have a much better control on the mineralization, the geology and et cetera.

And so they're working through the mine plan and they're evaluating that the current phases, et cetera, et cetera, are all still beneficial to an NPB optimization.

So I still believe we have a year or 2 to work through some of the upper portions of the mine with a couple of pushbacks.

And until we get out of those or into, predominantly, hypogene feed that it won't -- it would be -- be able to give better guidance.

And so that's -- when we put out -- we intend on sort of putting out fulsome guidance on the life of mine with the reconciliation and the future mine plan at the end of March, early April.

And we'll go next to Alex Terentiew at BMO Capital Markets.

Just want to go to Lalor and the gold zone.

Are you still expecting to provide some sort of update mine plan later this year?

And related to that, any further thoughts on refurbishing the New Britannia mill and/or expanding the sawmill before -- beyond like 32 or beyond the current rate or so?

I guess and -- should we expect the current milling capacity that we're seeing there today to be what we should expect for Lalor going forward?

Okay.

Hi, Cashel here.

And what we'll do is we'll do it in reverse order.

Stall mill, we sort of see the current capacities between 3,000, 3,500 tonnes a day at sort of its length...

(technical difficulty)

But right now our view is, while the Flin Flon mill is under capacity, we'll utilize that excess capacity.

So we're not going to -- we don't have plans and we're not going to expand the Stall mill is our current view because the way the current Lalor life of mine is, it's that when the baseload coming from the 777 mine comes off and the reserve is depleted that the Lalor mine itself goes down in production as per the current 43-101.

So they sort of mesh well together and we don’t see the merit of adding capital.

And right now, albeit, unless we have some exploration success within the Snow Lake area, we don't have plans to expand the Stall mill.

With respect to the New Britannia mill, what we're doing is we're proceeding with a permitting case and engineering studies to evaluate its restart.

In parallel with that, we're evaluating the product we can expect from our gold zones at Lalor.

So to shorten the potential permitting time, we're doing it in parallel.

So we picked the preferred option for disposal of tails at New Britannia.

We're proceeding with that permitting option.

But at the same time, we're conducting underground drilling, underground test mining and milling of the Lalor gold zone intended this year at the Flin Flon mill.

So I don't anticipate we will have detailed guidance or reserve by the end of this year, but we'll know a lot more about the gold zone and we'll be prepared should it merit the restart of the New Britannia mill as efficiently and a timely fashion because we're proceeding with that permitting option regardless.

Yes, that makes sense.

With 777, given where metal prices are today, I don't know if you guys have done any other incremental drilling, any resources that maybe could have been in the mine plan but weren't when metal prices were lower.

Should we still expect that around the 2020 closure?

Or is that -- is there a potential to extend that a little bit more?

We're working on it.

We believe there is.

And so the quantum thereof we're trying to assess now.

So we believe with the addition now, with the strategy to move the excess Lalor ore that Stall can't produce in the present time, that there is an opportunity to bring in some other resource that's available at 777.

So the engineering studies and evaluation are underway.

I would suspect later this year would be the time when we would have more clear guidance on what that is.

We'll go next to George Topping at Industrial Alliance.

At Pampacancha, could you tell me how much money has been spent on preparing the site to date and on what?

George, Cashel here.

It's in the handful of millions of dollars.

Basically, what we've done to date is we've moved -- we're moving the haul road across what we call the (inaudible) valley and the waste rock dump, and we've just finished our first water well hole.

So it's in the handful.

Yes, the total amount to December 31, George, was $14 million.

$14 million, collateral.

Okay, can you elaborate on what's the remaining sticking points, is that really -- is it done to the -- just the negotiation over money, there's -- no environmental issues have arisen or anything like that?

There's no environmental issues, George.

It's just that our experience with negotiating with the communities in Peru is that you just -- you take a patient approach, you don’t try and rush out at it.

There's always a number of unrelated issues that come up, and we're just continuing to progress those discussions.

I mean, we've been very successful in achieving the final desired outcome in all cases to date.

So there's no expectation that, that won't happen in Pampacancha, but there might be a little bit of slippage, but even that in itself is not the end of the road, I think we've indicated it certainly wouldn't impact 2018 guidance.

Then just secondly, skipping on these, utility charges that have increased at Constancia.

Can you give us some more details on that?

Yes, it relates to the power supply contract at Constancia, George.

We have a long-term contract with one of the local power generators.

The contract is based on an index of few different sources of power generation in Peru, local natural gas prices, diesel prices, et cetera.

And as we've seen a increase in energy cost globally that's flowing through into the cost in our contract.

Can you give us numbers or percent change in the cost of power?

I think in Q4 it sort of had an impact of few million dollars.

The actual power draw in Q4 was a little bit higher than usual, just as we were processing some harder material.

I think sort of the total increases in the 10% range.

But we had that sort of factored into the 2018 guidance that we provided for Peru.

So we don't see that as a issue at this point with respect to cost for 2018.

And we'll go next to Orest Wowkodaw at Scotiabank.

I wanted to follow-up on Greg's question with respect to the molybdenum at Constancia.

Can you give us an idea of how much moly you actually expect to produce in 2018?

And if you've previously been sort of only marginally maybe breakeven, maybe slightly positive on that.

Should we think about the moly right now as kind of having cash costs around $7 a pound to produce?

And then with the increased moly price now that you'd actually been making some profit at current moly levels?

Well, Orest when we decide whether to run the moly plants or not, we're mindful of where current moly prices are.

So the higher the moly price the more likely it is that we're going to run the moly plant.

But it's also going to be a function of the sort of the mine feed that we've got going to the plant.

So I think -- I don't think that it would be reliable to give you an estimate for what we expect to produce or the financial contribution because it's really going to be a function of circumstances, both geologically as well as what the external moly price is over the course of the year.

What I can say is we don't see it having a material financial impact on Constancia's results.

Okay.

But when we think back to say 2017, is -- should we -- is there revenue baked in for the moly that's being offset by cost?

Or you just sort of...

Yes.

Okay.

So they're both being inflated for the moly?

Yes, but when you see our revenue breakdown sort of the moly, it's just showing up in an other line because it's not terribly large.

Our other revenue for the fourth quarter of 2017 was like $2.8 million and that includes sort of a few byproducts that we've produced in Manitoba as well.

Okay.

When you do run the moly plant, what kind of recoveries are you getting?

I think what we've scheduled in the technical report we're sort of getting, it's the -- between 60% and 50%.

Are you achieving that level?

When we run the moly plant, yes.

Otherwise, we are unable to produce the 55% concentrate grade needed for sale.

Okay.

And I realize you'll be putting out your new mine plan at Constancia, I guess, in a month or 2. But can you give us any idea on -- based on some of the analysis you've done to date on the twin drilling, a potential range of what we could expect on the positive grade reconciliation?

The more fulsome disclosure will come with the 43-101, which will break out our future product by year.

Basically, we were able to solidify that there is a great bias.

That the great bias that we had to date was in the order of 20% versus the existing 43-101, but that going forward, it will be reduced relative to the existing 43-101 and we'll give specific guidance on that with the technical report we'll issue early April.

And we'll move next to Stefan Ioannou at Cormark Securities.

Orest actually kind of asked my question, the last one about grade bias, but I guess, you mentioned that it sort of -- you expect it to be sort of pervasive through the life of mine now.

So, I guess, so it is sort of to assume that doesn't really matter what type of mineralization you're in within Constancia.

It is pervasive.

Can you maybe provide a little bit of color as to why or what's that's the function of?

Yes, I think we've said it in the past that the higher grade supergene mineralization seem to have a higher grade bias to the existing 43-101 than the future dominant hypogene.

And so the quantification of the remaining reserve to be mined scheduled out.

We've managed to reconcile that and it will be included in the new 43-101 going forward what that quantum is.

But as I've said before, in the upper part of the mine, that's already been mined, that grade bias was greater than the grade bias we see going forward relative to the currently published 43-101.

Got it.

So, I guess it's -- one of the main drivers is still the supergene versus hypogene discussion?

That's right.

(Operator Instructions) And we'll go back to Matthew Fields at Bank of America.

I've got no other question.

And with no additional questions at this time, I'd like to turn the program back over to Carla Nawrocki.

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

Please feel free to reach out to our investor relations team if you have any further questions.

And ladies and gentlemen, once again, that does conclude today's conference.

Again, I'd like to thank everyone for joining us today.