Hudbay Minerals Inc (HBM) 2018 Q2 法說會逐字稿

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

Welcome to the Hudbay Minerals Inc.

Q2 2018 Conference Call.

(Operator Instructions) I'd like to remind everyone that this conference call is being recorded today, August 1, 2018, at 10:00 a.m.

Eastern Time.

I'll now turn the conference over to Ms. Carla Nawrocki.

Please go ahead, ma'am.

Thank you, operator.

Good morning, and welcome to Hudbay's 2018 Second 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; and Rob Assabgui, 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.

Thanks, Carla.

Good morning, everyone.

We delivered solid production results and growing free cash flow in the second quarter.

We are continuing to allocate that cash flow to strengthening our financial capacity, with a $49 million reduction in net debt during the quarter, as well as towards funding the development of our exploration pipeline.

Our Constancia mine continues to perform well, and we're on track to meet 2018 production, capital cost and unit cost guidance in Peru.

In Manitoba, we are on track to meet our 2018 production guidance.

However, as result of a number of factors, we expect combined mine and mill unit operating costs to be between CAD 125 and CAD 135 per tonne, an increase of approximately 12% from our initial guidance.

At Rosemont, we are continuing to progress through the final stages of the permitting process.

We recently amended our revolving credit facilities to extend the maturity date by 1 year to July 2022 and to incorporate various amendments to the terms and conditions of the facilities to provide us with greater flexibility.

Our total liquidity, including cash and available credit facilities, was $859 million at the end of the second quarter, up from $810 million at the end of the first quarter.

Taking a closer look at the second quarter results.

Production of copper-equivalent contained metal in concentrate of 61,000 tonnes was essentially unchanged from the first quarter.

Consolidated cash cost and an all-in sustaining cash cost, net of by-products, at $0.96 and $1.48 per pound of copper, respectively, were in line with the results from the first quarter 2018 as lower copper production due to lower Constancia grades was offset by higher by-product credits.

Net profit and earnings per share in the second quarter of 2018 were $24.7 million and $0.09, respectively, compared to a net profit and earnings per share of $19.1 million and $0.08, respectively, in the second quarter of 2017.

Operating cash flow before change in noncash working capital was $132 million, consistent with the first quarter of 2018.

The Constancia mine produced approximately 27,000 tonnes of copper during the second quarter, which was lower than the first quarter primarily due to lower grades, in line with the mine plan.

Total copper recovery was 79.7% in the second quarter, down slightly from 80.7% in the first quarter of 2018.

We're in the process of implementing several metallurgical initiatives, with the intention of increasing copper recoveries, as anticipated in the recently filed technical report for Constancia.

We successfully completed Constancia's semiannual scheduled maintenance shutdown in May, resulting in slightly lower metal throughput than the first quarter of 2018 and substantially higher maintenance costs than usual.

As a result, combined mine, mill and G&A unit operating costs were $10.33 per tonne in the second quarter compared to $8.92 per tonne in the first quarter.

Year-to-date combined unit costs are above our full year guidance range due to the second quarter factors I mentioned, as well as the payment of signing bonuses in the first quarter under a 3-year collective bargaining agreement in Peru.

We expect costs to be significantly lower in the second half of the year, leading to full year unit cost that we expect will be within our guidance range.

Negotiations with the local community to acquire the Pampacancha surface rights are ongoing, with recent exchanges of proposals.

With community elections scheduled for October, we are continuing to allow time for the process to run its course.

The Manitoba operations produced approximately 33,000 tonnes of zinc, 10,800 tonnes of copper and 32,400 ounces of gold-equivalent precious metals during the second quarter, all of which increased over the first quarter of 2018.

Ore mined during the second quarter of 2018 slightly decreased compared to the first quarter as increased production at our Reed mine was offset by decreased production at our 777 mine.

Ore processed in Manitoba during the second quarter increased over the first quarter as the transfer of excess Lalor ore to the Flin Flon concentrator and higher-than-expected ore output from the Reed mine, together with the drawdown of ore stockpiles, sustained solid mill throughput.

While the mines also produced a higher-than-usual copper and zinc grades in the second quarter, we expect grades to come back down close to reserve levels in the second half of 2018.

Manitoba combined mine, mill and G&A unit operating costs in the second quarter were lower than the first quarter, benefiting from significantly higher throughput as the Flin Flon mill recovered from some of the challenges experienced in the first quarter.

Manitoba cash costs and sustaining cash costs, both net of by-product credits, decreased in the first quarter of 2018 as a result of significantly higher zinc by-product credits.

A failure of 1 of 2 main exhaust fans at Lalor in June created operating restrictions underground that are impacting daily production and delaying the mine's ramp-up to 4,500 tonnes per day.

We expect repairs to the fan to be completed in August.

While critical development required for future production is continuing, the mine is producing ore at a rate of approximately 3,000 tonnes per day due to the ventilation restrictions.

As a result of this, we expect Lalor unit cost to be higher than normal in the third quarter.

Production of all metals from the Manitoba business unit is expected to be within full year guidance.

As we look towards the balance of 2018, our priorities include completing the ramp-up of production at Lalor, enhancing Constancia production through higher recoveries and throughput optimization, completing the Pampacancha surface rights negotiations, advancing our exploration pipeline and seeing the Rosemont permitting process through to completion.

We remain very positive about the long-term supply-and-demand fundamentals of copper and believe that our business is well positioned to create value as those fundamentals materialize.

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

(Operator Instructions) We'll go first to Orest Wowkodaw with Scotiabank.

Alan, I was hoping we could get a little bit more color about what's going on operationally in Manitoba.

I mean, this asset seems to be continuing to disappoint, well, certainly your guidance but also expectations.

The latest issue at Lalor I find particularly troublesome just because this is a new mine rather than 777.

What -- can you give us a sense of what's going on there and whether you think this is going to impact performance beyond 2018?

Orest, I might actually pass that over to Cashel to answer.

Sure.

Okay, yes, so there was a particular one-off issue that was a legacy commissioning issue from when we ramped up Lalor.

The particular OEM recommendations for the fan weren't followed to the letter, and there was some checks on asset integrity that fell through the cracks.

So I don't know what to say.

It's an unfortunate event that's costing us some -- obviously some repair costs and then also costing us some time to get us to the ramp-up.

So it's a bit of an unfortunate event.

So with that behind us and with us double-checking our commissioning on all of our project as we constructed Lalor and moving forward, we're at the midst of commissioning our Lalor paste plant, and we're pouring as of June and also this month, and we'll be up to, we believe, full capacity of that in August.

So we have a positive outlook as far as looking forward.

We continue being pleasantly surprised with what we're finding in the gold zone.

We're doing advanced engineering on our copper-gold zone.

So all of these things as well as we're doing down-plunge, up-plunge extensions on our base metal zones as far as the in-mine exploration goes.

So we view Lalor on a long-term basis as being very solid and being able to achieve our 4,500 tonnes.

It's -- like I said, it's very unfortunate this one sort of event happened.

But otherwise, up until that event, Lalor was performing very well and moving forward and certainly will benefit tremendously from the paste fill taking place of the cemented rock fill that we are having to rehandle.

So we still believe in Lalor and the ramp-up capacity and the capability and the availability of the LHDs underground, no longer hauling rock and being able to place paste.

So I guess that...

And in terms of unit costs, I mean, you increased your guidance there.

Is that -- I mean, with 777, I assume unit costs per tonne are going to continue to move higher as that mine sort of winds down even though Lalor costs should come down.

But on an overall basis, like should we anticipate that costs per tonne in Manitoba are going to stay, I don't know, in the $120 to $130 level pretty much for the next couple of years?

I think what it is, is over time we're seeing a trend upwards.

Manitoba historically produced more tonnes than what we're producing now.

We've just -- recently, we're closing -- we've closed the Reed mine and the volume going through the Flin Flon mill.

The asset in Flin Flon is getting older, the mill and also, as you point out, the mine.

Reconditioning costs in 777 are going up.

As we see the volume increase in Lalor, we'll see also volume decrease probably in 777.

And so the overall effect is what we're seeing as a trend upwards in those costs.

But we're working hard to be able to try and extend the life of 777, identifying remnants to try and increase the volume.

And we also have a fulsome exploration program because now we have capacity within our surface plants to be able to bring on other ore.

Okay.

But Cashel, it sounds like you're sort of saying that costs are going to remain elevated for the next couple of years.

Is that fair?

I'd say with Lalor, we're going -- the costs will come down with our unit volume the way it is.

But when we had -- when we were filling all the plants, yes, the costs were lower.

It's just they're trending upwards now.

Yes.

Orest, it's David.

Like we've got sort of clearly some one-off issues that are affecting 2018 unit costs that we do not expect to recur.

But as Cashel is saying, there's also an underlying trend, with sort of reduced mine production without Reed, as 777 moves to the end of its mine life, that sort of is going to have a trend over time on costs.

But sort of we're going through the budget process for 2019.

We'll give guidance once we've done that.

But I think sort of the levels that we're seeing for 2018, I don't think that's a new baseline against which to expect further cost escalation.

There's a combination of trend as well as one-offs that's affecting our revised guidance.

(Operator Instructions) We'll go next to Stefan Ioannou with Cormark Securities.

Just -- I guess just staying on the Manitoba subject, I'm just kind of curious, obviously, you're still trucking ore from Lalor all the way over to the Flin Flon concentrator.

Just kind of curious, given where metal prices have sort of dipped to more recently, is there sort of a tipping point on zinc and/or copper pricing where you start to maybe think about not trucking ore that distance?

Or is that decision really more based on sort of a need to just keep tonnes going through the Flin Flon concentrator as long as you can?

Stefan, it's Cashel here.

I think it's very simple.

It's -- as long as the fixed costs, the base costs are being covered by 777 and the Flin Flon concentrator, every tonne we put through that concentrator is a benefit to the business.

So it's as simple as that.

Yes.

I think -- and Stefan, we're a long ways away from being at a point where it makes sense to actually reduce throughput on account of metal prices.

We'll take the next question from John Tumazos with John Tumazos Very Independent Research.

Could you just refresh us as to which month there'll be no more Reed mine ore left to mill and when the scheduled end of mining and milling is for 777?

John, the Reed mine is basically -- we'll be done this month as per the original plan.

And 777, as Cashel alluded to, we're still looking at possible options there to potentially extend the mine life, but currently, we're sort of saying 2021.

And with no other questions in queue at this time, I'd like to turn the call back to Ms. Carla Nawrocki 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 team if you have any further questions.

Ladies and gentlemen, this does conclude today's conference.

We thank you for your participation.

You may now disconnect.