Hudbay Minerals Inc (HBM) 2019 Q3 法說會逐字稿

Good morning, ladies and gentlemen.

Thank you for standing by.

Welcome to the Hudbay Third Quarter 2019 Results Conference Call.

(Operator Instructions) I would like to remind everyone that this conference call is being recorded today, November 12, at 10:00 a.m.

Eastern Time.

I will now turn the conference over to Candace Brûlé, Director, Investor Relations.

Please go ahead.

Thank you, operator.

Good morning and welcome to Hudbay's 2019 Third 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 Peter Kukielski, Hudbay's Interim President and Chief Executive Officer.

Accompanying Peter 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 Eugene Lei, our Senior Vice President, Corporate Development and Strategy.

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 Peter Kukielski.

Peter?

Thank you, Candace, and good morning, everyone.

Thank you for joining us.

Before we get into the quarterly results, I thought I'd start today's call with an update on 2 current items that have been the focus for investors: Our permanent CEO search and the status of the Rosemont litigation.

In October, the board appointed Stephen Lang as the Chair of our Board of Directors.

Steve has over 40 years of experience in the mining industry, including engineering, development and operating experience.

Steve's current focus is on identifying a permanent CEO.

The Board has advanced a comprehensive search process, which I expect will be concluded in the next few months.

In the meantime, we are making all the necessary decisions to advance the business and ensure we are delivering on our strategic objectives.

This brings us to the second item I'd like to address, which is the current status of the Rosemont litigation.

In late August, we made the tactical decision to file a motion for reconsideration of certain issues in the District Court's July 31 decision.

Among other things, we believe the District Court went beyond its authority by assessing the validity of Rosemont's mining claims, and we asked the court to reconsider its judgment in this respect.

The motion for reconsideration was the first step in our appeals process as we seek to correct the court's misinterpretation of current mining laws and regulations that govern mining activities on public lands in the United States.

Although the District Court denied our motion, it was important to put these issues on the record prior to filing an appeal to the U.S. Ninth Circuit Court of Appeals, which we anticipate could take approximately 2 years to conclude.

We remain fully committed to Rosemont, as we believe it is a high-quality, high-return copper development project that both benefits stakeholders and complies with applicable laws.

We believe Rosemont's permits will ultimately be upheld on appeal as the District Court's unprecedented decision contradicts several decades of mining regulations in the U.S. and has the potential to seriously disrupt the United States mining industry.

I will now move on to a review of our consolidated results for the quarter, together with an operational review and highlights of various optimization and growth initiatives in both Peru and Manitoba.

In the third quarter, Hudbay continued to deliver solid operating results with record quarterly mill throughput at Constancia and strong cost performance in both Peru and Manitoba.

We produced over 36,000 tonnes of copper in the quarter, a 20% increase compared to last quarter due to higher grades and recoveries at Constancia, along with record quarterly throughput at the Constancia mills.

Consolidated cash cost net of by-product credits was $0.98 per pound of copper, a 23% improvement compared to the second quarter of 2019.

This cost improvement was a result of lower unit operating costs in both Peru and Manitoba.

Peru achieved its lowest unit cost in 8 quarters and Manitoba unit cost stabilized at a lower level following the ramp-up of Lalor during the first half of the year.

Similarly, all-in sustaining cash cost net of by-product credits decreased to $1.90 per pound of copper in the quarter, a 16% improvement over the last quarter, driven mainly by the strong unit cost performance in the operations.

Earnings and earnings per share in the third quarter were affected by several onetime or noncash factors.

The first was a noncash impairment of Rosemont's carrying value which reduced earnings per share by $0.93.

Following the court's judgment on Rosemont, an impairment test resulted in an after-tax impairment loss of $242 million.

The second factor related to a dividend withholding tax incurred with the repatriation of funds by way of a onetime intercompany dividend.

This withholding tax reduced earnings per share by approximately $0.03 per share.

The third notable factor was noncash deferred tax adjustments, which reduced earnings per share by $0.01.

Despite these onetime adjustments, we are in line with expectations.

During the quarter, the copper mining corridor in Peru continued to see heightened political activity around other companies mining projects and operations.

This included large protests against the granting of a permit for another company's mining project, the Tia Maria project, which caused blocked access to the port in July and August.

Constancia continued to operate at full capacity despite these restrictions and the team actively managed concentrate logistics to overcome these challenges.

However, sales volumes were slightly lower this quarter, reflecting the temporary buildup of copper concentrate inventory as a result of the restricted access to the port.

This caused lower revenues and lower operating cash flow during the quarter, but we expect that to improve once inventory levels normalize.

Since the end of October, these protests have resumed, but haven't affected access to the port of Matarani.

We will continue to monitor the situation and actively manage logistics around any potential impacts.

I think it's important to note our Peruvian team's impressive ability to navigate through these recent external logistical challenges in Peru.

By maintaining strong relationships with our communities and partners in the region, we've been able to continue to operate at full capacity without any significant interruption to our business.

I'm extremely proud of the performance of our Peruvian team.

Cash and cash equivalents decreased to approximately $400 million at September 30, 2019.

This reflected a number of unusual movements in cash, including seasonally elevated sustaining capital expenditures, the semiannual cash interest payment on our long-term debt and lower sales in Peru.

Taking a closer look at the results from our South America business unit, Constancia continued to perform well and is on track to achieve 2019 production and cost guidance.

During the quarter, Constancia produced 31,000 tonnes of copper, over 15,000 ounces of precious metals and 262 tonnes of molybdenum.

Copper and precious metals production was significantly higher than the second quarter due to higher grades and recoveries in addition to the record mill throughput levels achieved this quarter.

Moly production during the quarter was slightly lower than last quarter due to reduced availability of key reagents required for the moly circuit that are transported by ship through the port of Matarani.

Since access to the port was restored in August, the moly plant has returned to normal operating levels, and we are on track to achieve annual production guidance of all our metals improved.

Milled copper grades in the third quarter were higher than the second quarter.

Milled throughput was 7% higher than last quarter, a quarterly throughput record averaging just under 90,000 tonnes per day, reflecting higher plant availability through the continued successful implementation of optimization initiatives.

Recoveries in the third quarter improved for all metals compared to the second quarter.

The increased recoveries were a result of continued metallurgical improvements.

And while recoveries vary from quarter-to-quarter depending on the complexity and grade of the ore feed, we are pleased with the sustained improvements we are seeing as a result of these initiatives.

One of these initiatives is a continued integration of an automated advanced process control system in the grinding and bulk flotation circuits, which allows us to automate many factors in the circuits to optimize the output.

This system was installed at the end of last year and initial tuning was completed in the first quarter of 2019, with a second round of refined tuning in the third quarter, which corresponds to the 2 quarters of the highest copper recoveries since Constancia has been operating, as shown in the graph on Slide 5.

We have also implemented flotation improvements such as optimizing the water recovery in the tailings thickener and the installation of enhanced equipment in the rougher circuit.

We are pleased with the results from these initiatives and the performance of the mill year-to-date achieving targeted throughput copper grades and copper recoveries for 2019.

Constancia combined mine mill and G&A unit operating costs in the third quarter were $8.63, the lowest quarterly unit cost reported in the past 8 quarters, reflecting our focus on cost control and throughput optimization initiatives.

During the fourth quarter, a 4-day semiannual maintenance shutdown of the Constancia mill is planned, and product and combined unit costs are expected to reflect correspondingly lower ore throughput.

In addition to regular semiannual maintenance work, we plan to install new op equipment relating to the ongoing throughput and recovery optimization initiatives at Constancia.

The maintenance shutdown is consistent with the full year plan for Constancia.

And as mentioned earlier, we continue to expect production and cost guidance to be met for the full year 2019.

Cash cost, net of by-product credits for the third quarter was $1.26, representing a 23% decrease from the second quarter.

Sustaining cash cost, net of by-product credits in the quarter was $1.73, a decrease of 17% from the second quarter.

The decline in these cash costs reflects lower operating costs and stronger production in the quarter, partially offset by higher sustaining capital expenditures in the case of the sustaining cash costs.

We continue to advance discussions with the community of Chilloroya on a land access agreement for the Pampacancha satellite deposit.

These discussions are progressing, and we continue to expect to be mining ore at Pampacancha in 2020.

We are continuing to advance permitting, community relations and technical activities required to access and drill the satellite targets northwest of Constancia on the land we acquired last year.

On one of those properties, we are nearing the final stages of obtaining drilling permits, and we expect to be drilling that target in the coming months.

Switching to Manitoba.

We saw a similar trend with lower operating costs during the quarter.

Ore mined in Manitoba was lower than the second quarter as a result of Lalor 5-year maintenance requirements.

We are pleased with the performance we've seen from Lalor since the maintenance was completed, and the mine output has been returned to the 4,500-tonne-per-day level.

We continue to maximize production from the 777 mine as we saw high tonnage out of the mine as a result of the implementation of management systems designed to improve mobile equipment availability and key performance indicators for drilling, blasting and backfilling processes.

These improvement initiatives continued to keep 777 mining costs at or below the CAD 80 a tonne level since the beginning of 2019, as seen on Slide 7.

Manitoba operations produced approximately 29,000 tonnes of zinc, 5,000 tonnes of copper and 26,000 ounces of precious metals.

Full year production of all metals is expected to be within the annual guidance ranges for 2019.

As seen on Slide 7, Manitoba combined unit operating costs continued to trend lower in the third quarter, reflecting the stabilization of unit costs at a lower level, following the ramp-up of Lalor during the first half of the year.

While third quarter unit costs are well below the levels reported in the first half of the year and are within the guidance range for 2019, we expect full year combined unit costs to be at or slightly above the upper range of guidance for Manitoba.

Manitoba cash costs net of byproduct credits in the third quarter was negative $0.68 per pound of copper.

These costs were lower compared to the second quarter, primarily as a result of lower treatment, refining and freight costs, and higher byproduct credits on a per pound of copper basis.

Sustaining cash cost net of by-product credits in the second quarter was $2.40 per pound of copper, which is higher than the second quarter due to increased capital development expenditures at Lalor and lower copper production.

New Britannia mill refurbishment activities are progressing in line with the development schedule laid out in the February 2019 mine plan.

Detailed engineering is on track to be completed in the first quarter of 2020 and environmental permits are expected before construction begins in mid-2020.

Construction activities will continue until the third quarter of 2021, with plant commissioning and ramp up during the fourth quarter of 2021.

Once the New Britannia mill is commissioned, average annual gold production from Snow Lake is expected to be approximately 140,000 ounces during the first 5 years as a sustaining cash cost net of by-products of approximately $450 per ounce of gold.

Exploration activities on the regional deposits in Snow Lake continued to progress with the potential to add additional future feed to both the store base metal concentrator and the New Britannia gold mill.

Slide 9 highlights the regional deposits that currently contain a defined resource estimate.

The white bars represent base metal material and the red bars represent potential gold material.

February 2019 mine plan is based on current Lalor reserves only, which totals approximately 14 million tonnes.

The regional deposits add another 4 million tonnes in the indicated category and an additional 13 million tonnes in the inferred category, all within trucking distance of the 2 mills.

We continue to advance feasibility studies on the recently discovered 1901 Deposit, which contains an initial inferred resource estimate of 2.1 million tonnes at 9.67% zinc, as announced in August 2019.

Drilling on the 1901 Deposit continues to test the size of the deposit, confirm the presence of gold and copper-gold mineralization and upgrade the mineral resource estimate to a higher category.

Recent underground drilling on Lens 17 at Lalor has confirmed the information in the past surface drill holes and an inferred estimate on Lens 17 is expected with the Annual Mineral Reserve and Resource Estimate Update in March 2020.

I'd like to conclude with a highlight of our strong project pipeline and summary of our near-term catalysts, many of which have already been discussed.

Since 2010, we have continued to execute on our consistent long-term growth strategy, leveraging our core competencies of exploration, project development and efficient operations, allowing us to create the world-class pipeline we have today.

Our exploration team discovered 3 new deposits in the recent past: Lalor in 2007, Pampacancha in 2012 and the 1901 Deposit in 2019.

We have demonstrated our project development expertise through the successful construction and commissioning of the Constancia and Lalor mines in 2014 and are committed to replicating the success at the Rosemont project.

We have a proven track record of efficient operations with Constancia being one of the lowest-cost open-pit copper mines in South America and Lalor on track to becoming one of the lowest-cost gold mines in Canada.

We have been opportunistic in pursuing low-acquisition cost, potentially high-return opportunities, such as the land consolidation to the northwest of Constancia and the Ann Mason property in 2018.

We are proud of our portfolio of assets and our strategic core competencies, which position us well for delivering on our robust pipeline of near-term catalysts.

Of course, we are always looking to improve, which is why we will continue to seek operating and cost efficiencies in all of our operations regardless of commodity price.

While we have already achieved many significant catalysts year-to-date, we believe we still have a number of meaningful near-term catalysts.

In Manitoba, we will have an updated reserve and resource statement for Snow Lake later in the first quarter, which will incorporate the results from the infill drilling to upgrade Lalor inferred resources and the exploration drilling at the Lalor in-mine targets, such as Lens 17.

The updated reserve and resource statement will also include results from the ongoing work to upgrade WIM, Pen II and New Britannia zones to a reserve classification.

Throughout 2020, we will advance drilling and feasibility work on the 1901 Deposit, and we will continue to explore our large land package to provide potential additional feed to our store and New Britannia mills.

In Peru, as mentioned earlier, we expect to be drilling at one of the satellite targets to the northwest early next year.

We continue to make progress on discussions to reach a community agreement on Pampacancha, which will allow us to bring the Pampacancha pits into production in 2020.

Pampacancha brings an additional 40 million tonnes into the mine plan over approximately 4 years at an average grade of 0.6% copper and significant precious metals content.

We continue to believe that Rosemont is one of the world's best undeveloped copper projects delivering strong returns.

We intend to appeal the court's decision to the U.S. Ninth Circuit Court of Appeals as we evaluate next steps for the project.

We have plans to drill high-grade targets at Ann Mason with a focus on enhancing project economics, along with advancing exploration activities on our other prospective grassroot exploration properties.

Overall, the third quarter has been a solid quarter.

Our operations in Peru and Manitoba continued to deliver, and we advanced our Pampacancha discussions with the Chilloroya community.

We also set the stage for our appeal of the Rosemont decision, where we are confident permits will ultimately be upheld.

That concludes my presentation portion of the call, and we are pleased to take your questions.

(Operator Instructions) Our first question comes from Greg Barnes with TD Securities.

Peter or Cashel, the recoveries at Constancia.

Obviously, they've bounced back up again.

And I understand it will change with the ore type.

But are you going to get to a point where you have more consistent recoveries in this mid-80% range?

Greg, Cashel here.

Yes, I think so.

I think we're looking at being in the mid-80s, and we do have some improvement initiatives that we believe that there might be a few points left over the next couple of years of improvement.

So you get into the mid- to high 80s, you think?

Yes, I think so, especially when we get into a higher proportion of hypogene later on, I think our -- we'll have more consistency in the ore feed and thus a lot of our optimization processes bear more fruit.

And just on the list of catalysts, Peter, on the 1901 zone.

It looks like you could make a development decision on that next year.

And how -- at a high level, how quickly could you be into the zone and actually mining it?

And then where would the ore go, Snow Lake or Flin Flon?

Greg, we're still progressing the feasibility work on 1901.

But the current thinking is that the zinc-rich material could be processed at Stall and the gold-rich material processed at New Britannia mill, which would result in incremental production to Lalor and ultimately, lower overall cost per tonne due to the economies of scale.

Does that address your question?

Do you have enough capacity at Stall to take 1901 plus Lalor and not go to Flin Flon?

Cashel?

There's an opportunity with some low capital intensity to increase throughput at Stall to be able to accommodate 1901 conceptually.

We're still looking at what's best for the business to understand when 1901 and the associated gold zone we've discovered there might be incorporated into the life of mine.

And I think probably we're doing a round of drilling anyway this winter.

And so probably mid-next year, we'll be in a better position to know when and where and how it fits in.

Our next question comes from Dalton Baretto with Canaccord Genuity.

I just want to touch on this Rosemont impairment a little here.

I think your disclosure says that the impairment was driven by a 3-year delay.

And I think a 2% increase in the discount rate.

Just wondering kind of how you guys came up with those 2 metrics and whether you've changed anything else in your project valuation estimates?

Dalton, it's David Bryson.

So we sort of ran with the mine plan that was in the last technical report for Rosemont.

So no changes to production, assumed capital costs, operating costs.

We have no reason to believe that there are any substantive changes at this point in time.

So as you pointed out, it was really driven by the assumed delay and the change in the discount rate assumption.

So we're sort of assuming a restart of construction in 2023.

We think that that provides a reasonable allowance for the conclusion of litigation as well as a remobilization in order to sort of get back to a point where we could start construction.

Obviously, that's an assumption that we had to choose for the purposes of the analysis.

As it relates to the discount rate, we used 7.5% at the end of 2018 when we had what we thought was very clear visibility into the permits and sort of expectations as to how the court process is going to play out.

Obviously, the decision that we've received over the summer was a surprise to us, and we think many others who are observers of the process.

And so just given that decision, we felt it appropriate to add some additional risk discounting and embed that into discount rate.

And we think that's pretty consistent with what many of the sell-side analysts have done with respect to the discount rates that they're using to value Rosemont.

Sure, go ahead.

Dalton, it's Peter.

I was going to say that just in addition to what David has said, we are very confident that the court's decision will be overturned by the Circuit Court, but we do anticipate that that process will take up to a couple of years.

Right.

Okay.

And then maybe I can ask a follow-up to Greg's question there on Constancia on the throughput side.

By my estimates, if I take out the maintenance downtime, you're running at around 89,000 tonnes a day pretty consistently.

Do you expect that to continue going forward as the ore types change and actually bring Pampacancha in?

Yes, we still -- we expect to continue at the same run rate.

There's no reason why we should assume.

Obviously, there will be a little bit of variability in ore types, but throughput should remain constant.

Got it.

And maybe if I can ask one last question.

With the new chair in place now, are you anticipating any change in strategy at all going forward?

So in fact, that's a good question, Dalton.

I would say, in general, not.

We have been taking a hard look at our strategic plan, especially in the context of the Rosemont decision.

It's a healthy thing to do.

We do it periodically in any case.

And I think it's fair to say that the range of choices ahead of us remain very consistent with the strategic plan that we've espoused in the past.

(Operator Instructions) Our next question comes from John Tumazos with John Tumazos' Independent Research (sic) [John Tumazos Very Independent Research].

Excuse me that I haven't read the U.S. court decision.

Could you just summarize the judge's reasoning, probably criticizing the regulatory agencies concerning the project?

And could you update us on your relationships with the royalty streaming companies?

I don't think that you or Augusta had taken cash yet, but they would have advanced cash at a later stage closer to construction.

John, basically, what the judge made -- based his decision on was a validity of mining claims.

Now typically, it's the agencies that rule on validity of mining claims and this judge ruled that we did -- we're not entitled to place waste rock and tailings on some mining claims that the forestry service felt that we were.

So it's just a question of -- we made an application to the court for reconsidering based on our sense that that was in great judgment.

And on the question of royalty, we have not drawn anything against our royalty from Wheaton Precious Metals.

Our next question comes from Pierre Vaillancourt with Haywood Securities.

Peter or Cashel, I was wondering if you could elaborate a little bit on the nature of discussions with Chilloroya just because it's been consistently pushed back and maybe just identify the issues and whether we can really count on a start-up in 2020.

Or is this going to be dragging on potentially longer?

Pierre, thanks for the question.

Look, I think that there is no change in the tone of the conversations.

I think I mentioned in our last earnings conference call that we had sort of -- we were now in a stage of negotiation with the community of Chilloroya.

That remains correct.

So this is a negotiation now, which really has -- is on the path towards closure.

We previously talked about how in the past, there were some items that were censored to which the community was sensitive that had been addressed prior to the end of the last quarter.

Now we are in advanced negotiation with the community, and we expect those negotiations to be concluded in the near term so that we can, in fact, start production at Pampacancha in late 2020.

So really, no change, but we are making very, very good progress.

This concludes the question-and-answer session.

I would like to turn the conference back over to Candace Brûlé for any closing remarks.

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

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

This concludes our call.

You can disconnect your lines at this time.