Hudbay Minerals Inc (HBM) 2020 Q3 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Hudbay Minerals Inc. Third Quarter 2020 Results Conference Call. (Operator Instructions)

I would like to remind everyone that this conference call is being recorded today, November 4, 2020, at 8:30a.m. Eastern time.

I will now turn the conference over to Candace Brûlé, Director of Investor Relations. Please go ahead.

Thank you, operator. Good morning, and welcome to Hudbay's 2020 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 available, and we encourage you to refer to it during this call.

Our presenter today is Peter Kukielski, Hudbay's President and Chief Executive Officer. Accompanying Peter for the Q&A portion of the call will be Steve Douglas, 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. Good morning, everyone, and thank you for joining us. I hope everyone is staying safe and healthy as the COVID-19 pandemic continues. As you've heard me say many times now, our focus always has been and remains on the health and safety of our workforce and families and the communities in which we operate. We have continued to closely monitor the rapidly changing environment while executing on our business response plans to minimize the overall impact of the pandemic on our operations and to ensure we develop effective site-specific measures to identify and limit COVID-19 exposure and transmission.

With that said, we recognize that we are operating in increasingly difficult times. Arequipa and Cusco, where 80% of Constancia's workforce resides, continue to see a high COVID-19 case count, and Northern Manitoba is also facing increasing cases. While the company has had members of its workforce contract COVID-19, to date, there have been no identified cases of transmission within our workplaces nor transmission between rotational employees and local communities. We believe that our diligence in screening, testing and workplace protocols has been effective in achieving our objective of being a safe employer and neighbor, and we will continue to adapt our site-specific measures to conform to the regional health authorities' latest guidelines.

Today, I'll touch on the highlights of our third quarter financial and operating results, along with an update on 777 and Pampacancha, the progress we're making at New Britannia mill and the Snow Lake gold, and lastly, I'll touch on regional exploration in Peru.

Starting on Slide 3. Hudbay had a solid operating quarter in Manitoba and Peru with steady production and cost performance. Copper production increased over the first 2 quarters of 2020 and increasing gold grades at Lalor resulted in continued strong gold production.

Consolidated copper equivalent production increased by 12% over the second quarter. returning to first quarter levels after the ramp-up to full production at Constancia. Consolidated cash cost, net of by-product credits, was $0.65 per pound of copper, higher than the second quarter of 2020, which was more heavily impacted by the lower cash costs in Manitoba due to the temporary Peru suspension.

However, Consolidated cash costs improved by 34% when compared to first quarter levels. Consolidated gold production decreased by 10% compared to the second quarter due to lower production from Manitoba as the second quarter was a record quarter for Manitoba gold production. Consolidated zinc production in the third quarter was relatively in line with the second quarter.

Operating cash flow before change in noncash working capital was $84 million, reflecting an increase of $55 million compared to the second quarter. The increase is primarily the result of increased sales volumes at Constancia due to the ramp-up to full production after the temporary suspension, lower operating costs in Manitoba and improved commodity prices. This also led to significantly improved adjusted net loss and adjusted EBITDA results in the third quarter when compared to the first and second quarters of 2020.

Adjusted net loss was $0.10 per share and adjusted EBITDA was $96 million. We exited the quarter with approximately $450 million in cash and equivalents and further demonstrated our prudent steps to manage our balance sheet through a successful bond refinancing during the quarter. In late September, we completed the offering of $600 million of 6.125% senior notes due April 2029. The proceeds from this offering were used to redeem all of our outstanding 7.25% notes due in 2023 and paid the accrued and unpaid interest, core premium of $7 million and transaction fees associated with the offering.

As a result of the outstanding performance from the Manitoba operations during the first quarter of 2020 and the steady operations at Constancia since the 8-week temporary suspension, we expect to meet all production, sustaining capital expenditures and unit cost guidance for 2020 despite ongoing COVID-19 operating challenges.

Turning to our Peru operations on Slide 4. We successfully achieved the efficient restart of operations at Constancia in mid-May with the full ramp-up of mining activities to normal levels in early July. During the quarter, Constancia produced approximately 21,000 tonnes of copper, 8,000 ounces of precious metals and 392 tonnes of molybdenum. Production results were higher than the second quarter of 2020 due to the mine ramp-up.

The ramp-up also resulted in a significant increase in ore milled during the quarter compared to the prior quarter. Milled copper grades in the third quarter were slightly lower than second quarter, but in line with the mine plan. Copper recoveries in the third quarter were higher than the second quarter due to the processing of stockpile ore after the mill ramp-up in the second quarter. Combined unit operating costs were higher than the second quarter due to abnormally low operating costs in the second quarter as a result of the processing of stockpile ore during the mill ramp-up. Unit operating costs in the quarter were within the guidance range for 2020.

Production of all metals and unit operating costs at Constancia are expected to be in line with the revised full year guidance for 2020 that was released with the second quarter results. We also continue to make significant progress at Pampacancha since completing the surface rights agreement with the local community of Chilloroya in February of 2020.

The individual land user agreements have been significantly advanced and approximately 79% of the land has been vacated and turned over to Hudbay compared to approximately 33% last quarter. As of September 30, we accrued a total of approximately $96 million in growth spending in Peru relating to obligations under the local community surface rights agreement and the individual land user agreements. As previously disclosed, our initial growth capital guidance for Peru of $70 million did not include the cost of the individual land user agreements due to the ongoing nature of the agreements. And as indicated by our accrued expenditures to date, full year growth capital spending for Peru will exceed that initial guidance once all land user agreements are concluded.

As discussed with our second quarter results, the Consulta Previa consultation process has been impacted by the Peruvian government declared state of emergency. And as a result, we expect the Pampacancha production start date of early 2021.

Now turning to Slide 5. The Manitoba business unit had solid operating performance across the mines, mills and zinc plant during the third quarter and continues to be largely unaffected by the COVID-19 pandemic. Full year production of all metals and costs are expected to be within annual guidance ranges despite the 777 operational disruption, which I'll discuss shortly.

During the quarter, operational performance at both Lalor and 777 was strong with ore production and grades in line with mine plan expectations. At Lalor, 2 weeks of planned maintenance was completed on schedule and the mine achieved a third quarter production rate averaging 4,600 tonnes per day outside of the maintenance period. The 777 mine maintained consistent and stable performance during the third quarter as it approaches its planned closure in 2022.

Operational readiness activities in support of the early start of New Britannia are on track, including ensuring that a sufficient and consistent volume of gold ore will be available. Underground development at Lalor in gold-rich Lenses 25 and 27 is advancing ahead of schedule in preparation for the mid-2021 start-up of new Britannia which is 3 months earlier than previously planned, and I will provide more details on our early gold plans shortly. Mining of the first stope in Lens 27 was completed in September, and the trend of increased precious metals production from Lalor is expected to continue.

At Stall, all processed during the third quarter was in line with the second quarter as both periods had planned outages for capital upgrades. Gold and silver recoveries were slightly lower than the prior quarter, but the trend of improved cold recoveries has continued compared to the same periods in 2019 due to improved ore characteristics and numerous operational improvement projects implemented at the Stall mill. At Flin Flon, the amount of ore processed was generally in line with last quarter.

Combined mine, mill and G&A unit operating costs in Manitoba decreased by 7% compared to last quarter, primarily due to lower operating costs. Third quarter unit costs were at the lowest quarterly level in the last 2 years. Manitoba's combined unit costs are expected to be within the guidance range for the full year 2020.

On October 9, production at the 777 mine was temporarily suspended due to an incident that occurred during routine maintenance of the hoist rope and skip. The hoist rope detached from the skip, causing the skip to fall to the bottom of the shaft. All underground personnel were safely evacuated from the mine using the secondary ramp access. The preliminary video inspection of the mine shaft indicates that damage is limited to the head frame and the bottom of the shaft in the skip compartment. It does not appear that the cage compartment or the ore loading area were damaged and the structural integrity of the shaft does not appear to have been compromised by the incident. The full inspection of the shaft and skip compartment will require an in-person inspection, which is underway.

Underground mining activity has resumed that 777 with limited production from the mine's ramp access. If it is confirmed there is no further damage beyond what has been identified to date, it is expected that the 777 shaft could resume full production in December at a repair cost that is not expected to exceed $5 million.

While fourth quarter production and sales volumes will be impacted, the company is implementing production mitigation plans. Based on the preliminary video inspection and mitigation plans, the company continues to expect the Manitoba business unit to achieve its full year production and unit cost guidance for 2020.

Turning to Slide 6. The new Britannia refurbishment project is ahead of schedule and on budget. Overall, the project is approximately 64% complete, including the completion of 99% of detailed engineering, 98% of project procurement and 45% of construction. We were pleased to move up commissioning of the gold plant to mid-2021. Construction of the new copper flotation building continues to advance as planned and is on track to have the external structure fully enclosed before winter. And construction of the pipeline between the new Britannia and Stall mills also continues as planned.

Last quarter, we identified the potential to produce gold from the New Britannia mill earlier than expected in 2021. The refurbishment activities of the gold plant are ahead of schedule and commissioning of the gold plant is now expected mid-2021, followed by ramp-up and first production in the third quarter of 2021.

Copper flotation building construction activities continue to be on track for completion in August 2021, with commissioning and ramp-up expected during the second half of 2021. While the copper flotation building is being constructed, we plan to install modular flotation cells at the gold plant to optimize copper recoveries as we start the early processing of gold and copper gold ores.

As I mentioned earlier, we continue with the early mining of the gold zone as part of stope sequencing in preparation for the startup of New Britannia gold mill. Once the new Britannia mill is ramped up, average annual gold production from Lalor is expected to increase to over 150,000 ounces commencing in 2022 at first quartile cash costs and sustaining cash costs net of by-product credits of approximately $480 and $655 per ounce, respectively, during the first 8 years of the gold plant's operation.

Slide 7 demonstrates that 2020 has been a year of executing on our Snow Lake gold strategy. With the release of the enhanced second phase of our Snow Lake gold strategy in March of this year, We increased gold reserves by 35% to 2.2 million ounces, increased Lalor's life-of-mine gold production by 41% and extended the mine of life of the Snow Lake operations to 18 years. We were able to fully fund the refurbishment of New Britannia through the gold prepay transaction in May, which positioned us well for executing on our plan. And last quarter, we announced a new mineral resource estimate for the 1901 Deposit which significantly increased the total gold resources, including the addition of a new gold zone.

This quarter, as I mentioned, we announced that we have successfully moved the first gold production forward by 3 months into the third quarter of 2021. We have also been advancing many of the other upside opportunities summarized on this slide. We continue to look at the potential to further optimize both the Stall and New Britannia mills. At the Stall mill, we have initiated studies to examine the potential to increase gold and copper recoveries. And we have also been advancing studies to potentially expand the New Britannia mill capacity beyond the currently planned 1,500 tonnes per day. The engineering activities on the 1901 Deposit continue as planned and we expect to complete a pre-feasibility study in the first half of 2021. We look forward to delivering on these many catalysts in the next 6 to 12 months.

On Slide 8, we show our recently completed follow-up drill program at Constancia North where we continued to test a possible extension of copper porphyry and high-grade skarn mineralization occurring within 300 meters of the northern edge of the current Constancia pit. The image on this slide shows the location of these drill holes in close proximity to the pit. The drill program was a follow-up to the drill intersections announced in March and continued to intersect both skarn and porphyry mineralization, as summarized in the table. Most of the drill holes intersected mineralization located along a southeast-northwest trending regional fault, one hole intersected 78.6 meters of 1.39% copper, 305 grams per tonne molybdenum, 0.43 grams per tonne of gold and 16 grams per tonne of silver. The results will be evaluated and integrated into our annual mineral reserve and resource estimate update for Constancia at the end of the first quarter of 2021.

Further north, we have commenced site preparation work and expect to start the planned drill program on the Quehuincha North high-grade skarn target this month. Early in 2019, we reached an exploration agreement with the Quehuincha community and subsequently completed the Consulta Previa process. This is another example of our consistent approach to community negotiations and how we have been successful in maintaining strong relationships with the neighboring communities near Constancia. This has positioned us well to gain access to other regional growth targets in Peru.

I will conclude today's presentation with an overview of the low-risk, high-return strategic priorities we expect to deliver in the next 6 to 12 months summarized on Slide 9. We've already touched on a few of our growth initiatives and catalysts today, such as the New Britannia mill refurbishment progress and the various near-term Snow Lake gold milestones. As we continue to complete infill drilling at Lalor, we expect to continue to convert additional resources to reserve to potentially further extend the mine life of our Snow Lake operations.

We mentioned the continued progress at Pampacancha, which is expected to significantly increase cash flows from Constancia due to the higher copper and gold grades, and we talked about the results from our drilling at Constancia North.

In Peru, we continue to advance the longer-term growth catalysts with plans for regional exploration at the Maria Reyna and Caballito properties. We are also planning the work to look at possible future mill expansion at Constancia in addition to the use of ore-sorting technology to potentially further enhance the mine's economics.

On Rosemont, The appeal process continues to advance with the plaintiffs having filed their briefs in September to the Ninth Circuit Court of Appeals. We, along with the U.S. government, expect to file our final briefs in November. We still anticipate a final decision in the appeal process late in 2021. In the interim, we commenced the drilling program on our wholly owned private land located in the historic mining district called Helvetia, which is near our Rosemont project. The focus of the program is twofold: to complete condemnation drilling in the areas planned for power and water lines for Rosemont; and to test the Helvetia copper district for further exploration potential.

And finally, we are advancing our greenfield exploration projects with work continuing on the Mason project. The planning of 2021 drill programs at the Llaguen project in Peru and ongoing optimization of our extensive base metal and gold exploration portfolio in Manitoba.

We believe we are well positioned to deliver on a number of near-term and longer-term catalysts. We are focused on delivering value through these catalysts with our near-term high-return investments beginning to pay off next year as we increase cash flows and create value for all of our shareholders.

And with that, I'm now happy to take your questions.

(Operator Instructions) Our first question comes from Orest Wowkodaw of Scotiabank.

Peter, I was hoping you can give us some more color on the Pampacancha development in Peru. I don't really have a good feel on where the Consulta Previa process is. Like, has it actually begun from a government perspective? Or is it about to begin? And when you say kind of first production early '21, are you talking about development or actually ore to the mill in early '21?

Orest, thanks for a good question. Look, I think overall, I think -- my overall comment has been that given the pandemic, the environment in Peru has been very complex, especially as I mentioned, previously, the Consulta Previa process is one that, in the past, has required extensive and intensive human contact as people are interviewed. So clearly, this has not been possible during the pandemic, especially during the state of emergency. And the government has worked hard with us to try to adjust the process so that it can be conducted in a remote manner but still accomplishing the goals at Consulta Previa.

So we've worked hard with the government in order to help them establish means of doing so. The government has demonstrated commitment, especially since the change of the ministries to doing so. And we are still -- we believe that we will complete this process this year, which will enable us to get access to Pampacancha early next year for predevelopment activities, and we remain confident that we will be producing in the second half so that we are able to meet our obligations under the Wheaton agreement by the end of the -- the first half of next year.

Okay. So basically, you're targeting ore to the mill starting around midyear?

A little bit before that potentially, but around about that, yes.

Our next question comes from Jackie Przybylowski of BMO Capital Markets.

Congratulations on the quarter. I wanted to ask about New Britannia, and maybe if you guys could give a little bit more color. This is the second quarter in a row that you guys have provided what's a surprisingly good update, I think, for a project that's not a long project to begin with for you guys to be so far ahead of schedule. Can you give us a bit of color as to how that's been accomplished and sort of what may be precedent we can read into that, if there's any, for how your future projects might be managed? Or is this something that's sort of unique to the situation at New Britannia?

Jackie, thank you. Look, I would say, as a hardcore project guy in my earlier career, same with Cashel, we are reluctant to guide towards earlier completion in almost any situation. But we have a strong level of confidence in the progress that the team has achieved on New Britannia. But I would say that the more fundamental reason, apart from just pure raw project progress by [John Zita] and his team, we have a technical team. That has been absolutely extraordinary. So the team under Peter Amelunxen has actually designed workarounds that enable us to produce gold a little bit earlier than anticipated because I think you're aware that the copper flotation circuit is, in fact, on the critical path. But through some skillful engineering work or technical work, what we've done is we've actually found a way to skirt that critical part to produce gold a little bit earlier.

So I would say that It is a unique combination of project delivery expertise and technical expertise that has allowed us to do this under guidance of Cashel and the technical and project execution team.

Okay. No, that's great. That's interesting. And maybe just a follow-up on Orest's question on Pampacancha. I know you mentioned and it was in the MD&A that you reached land user agreements with 79% by the end of the quarter. Can you give us an update on how that's gone subsequent to that? I mean we're -- scary enough, but we're into November at this point already. Has that been continued to make progress on? Or are you closer to that 100% goal already? Or can we expect that maybe by the end of this year?

Yes. So Jackie, what we meant by 79% is, in fact, that land clearing is 79% complete. So we have significantly more than 79% of the possessor agreement signed. We're sort of in the last [throes] of reaching agreement with families there, and we have a strong level of confidence that, that will be completed this year.

Our next question comes from Dalton Baretto of Canaccord.

I want to start by following up on what Jackie just asked about there. When Constancia was being prepared, the main holdouts were just the last couple of families. Are you seeing any significant resistance on the last few families that need to turn over their land?

Dalton, good question. In essence, I would say, no. The last negotiations are always the most complicated, and that's just the nature of negotiation. If it wasn't going to be the most complicated, they wouldn't be the last people. I would say this is nothing that we have not anticipated. I would say that we have -- our approach has been absolutely consistent. There are no surprises here other than the fact that it's taken a little bit longer than anticipated, but that is largely the consequence of the pandemic because there's been a reluctance of people to meet in person from both sides. And there's also been various incidences of COVID-19 cases amongst communities, which has sort of exacerbated ability to engage. So it's just a complicated environment in which to negotiate. But Javier and the team are doing an extraordinary job of drawing this to a close. And I would say, we remain confident that, that will be done this year.

Okay. And then just on the Consulta previous Previa side, COVID-19 situation aside, we've got fresh impeachment charges now against Vizcarra. We got an election on the horizon in April. How confident are you that this will get done by year-end?

Dalton, I'm an optimist, but I'm a practical optimist. Look, we think that the Consulta Previa process is a process that the Minister of Mines has committed to supporting in an expedited manner. And I acknowledge that, as you have said, that the minister is new in his seat. I acknowledge that we are in a fairly politicized environment, given the fact that we have elections scheduled for April next year and a change of government will to occur in July of next year. So of course, that makes the environment a little bit more political. But Javier and the team have had extensive discussions with the various ministries, especially with the Ministry of Energy and Mines and the Ministry of Economy and Finance. And both of those ministers have reinforced their commitment to advancing the Consulta Previa process as expeditiously as possible. So based on those discussions, we have a level of optimism as well as confidence that we will get it done by year-end. But of course, it's not in our control.

Okay. Makes sense. And then maybe one last one for me. Speaking of politics and elections. I'm sure you saw last night that Arizona flipped Democrat. Does this have any implications at all in terms of your legal challenge at Rosemont?

The case of the Ninth Circuit Court of Appeals is going to be heard by a panel of 3 judges. And so the process is not going to be a political one. The Department of Justice is appealing the decision together with Hudbay at the Ninth Circuit. We've received lots of permits in the past at Rosemont through several administrations, and we don't believe a change in the administration this November or a potential change will have any impact on the Rosemont process.

Our next question comes from Stefan Ioannou of Cormark Securities.

Great to see you're going to be starting some more regional drilling in Peru. Can you just give us a little bit of maybe color on sort of the size of the program you anticipate coming, I guess, starting this month?

Yes. Certainly, Stefan. In fact, Cashel, why don't I turn that to you.

Sure. I think -- Stefan, what we're going to do is we're just going to drill a few thousand meters and test some of these targets we have. I think our permit allows us to drill and follow up with them. It is a geophysical target that's been followed up with geological mapping and compilation and there are some areas of previous informal mining in the area. So we're quite confident in the presence of copper. So this is a greenfield exploration thing. So we'll be drilling between now and the balance at the end of the year. So we're talking less than $1 million to start with and then provided that there is a reason to continue the program, we'll put it into the budget next year and provide that guidance early next year.

Okay. And in terms of an update, we should just probably anticipate just to see it in your next quarter then maybe as to where that -- I mean that's where...

Yes. That's it. Yes. Exactly.

(Operator Instructions) Our next question comes from Greg Barnes of TD Securities.

Just a question around the drilling at Constancia at the northwest side of the pit. How significant do you think this could be? Are you thinking now about a potential layback? Or is it still too early to be going down that road?

Greg, I think it's a little bit early to go down that road. We need to do the resource modeling still? I mean, we've had some fabulous intersections, but the resource modeling needs to be completed really before we can state anything definitively. Cashel, would you add anything to that?

Yes. Well, I mean, you look at those drill intersections and the mine engineer will be looking at the trade-off between, is this a future underground sweetener or will it carry the strip? I would say there needs to be more drilling and the modeling will give us a good guide. And I think with our update, our reserve in March, we'll be in a better position to answer that question specifically.

But one way or the other, it's pretty compelling that it will enter, at some point, the Constancia mine plan. It's just when and where in the sequence and the phases that we mine in it will. And so I think we have a little more drilling to do, but this modeling that we do between now and March will give us good guidance of where it will appear.

Are there any ground control issues, structural issues related to the fault, anything that could give you a problem in that area?

Yes, we mined through that fault now, Greg. It's the [ag] fault, and we mined through that fault now. It is one of the places we have a bit of a layback because of the orientation. But if you're mining parallel to the fault, it will be less of an issue than if you're mining adjacent to the fault. So I don't see that being a big issue. The current geotechnical parameters we mine under will be used there, and it will be similar pit slopes if it indeed requires the pre-strip versus any other methodology of mining. So no, I don't think the fault itself will play a big deal.

This concludes the question-and-answer session. I would like to turn the conference back over to Candace Brûlé for closing remarks.

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