Q3 2019 Earnings Call
Good morning, ladies and gentlemen, thank you for standing by welcome to the Hudbay third quarter 2019 results conference call. At this time all participants are in listen only mode. Following the presentation, we will conduct a question and answer session to join.
In the question Q you May press Star one on your telephone keypad should you need assistance during the conference call you may signal, an operator by pressing star zero.
I would like to remind everyone that this conference call is being recorded today November 12 at 10 am Eastern time, I will now turn the conference over to Candice Burley Director Investor Relations. Please go ahead.
Thank you operator, good morning, and welcome to Hudbay 29 team third quarter results Conference call.
Its financial results for issued yesterday and are available on our website at www Dot Hudbay dotcom, a corresponding Powerpoint presentation is also available and we encourage you to refer to during this call.
Our presenter today is Peter could kill ski Hudbays interim President and Chief Executive Officer.
Accompanying Peter for the Q and 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 Lee, 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 or in U.S. dollars, unless otherwise noted and now I'll pass the call over to Peter can kill ski Peter.
Thank you Candice and good morning, everyone.
Thank you for joining us.
Well, we get into the quarterly results.
I would start todays call with an update on to current items that have been the focus for investors.
Permanent CEO search and the status of the Rosemont litigation.
In October the board appointed Stephen Yang as a chair of our board of directors.
Steve as over 40 years of experience in the mining industry, including engineering development and operating experience.
Steve current focus ism identifying a permanent CEO .
The board has advanced a comprehensive search process, which I expect we'll be concluded in the next few months. 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 filed a motion for reconsideration of certain issues in the district courts July 31st decision.
Among other things we believe the district court went beyond its authority by assessing the validity of Rosemont 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 courts 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 US ninth Circuit Court of Appeals, which we anticipate could take approximately two years to conclude.
We remain fully committed to Rosemont as we believe it is a high quality high return corporate development project that both benefit stakeholders and compliance with applicable laws.
We believe Rosemont permits will ultimately be upheld on appeal as a district courts unprecedented decision contradict 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 onto a review of our consolidated results for the quarter together with an operational review and highlights of various optimization and growth initiatives in both through and Manitoba.
In the third quarter Hudbay continued to deliver solid operating results with record quarterly mill throughput at Constancio and strong cost performance in both Peru and Manitoba.
We produced over 36000 tons of copper in the quarter at 20% increase compared to last quarter due to higher grades and recoveries at Constancio.
Along with record quarterly Throughputs at the Constancio Mills.
Consolidated cash cost natural byproduct credits was 98 cents per pound of copper, 23% improvement compared to the second quarter of 29 team.
This cost improvement was the result of lower unit operating costs in both Peru in Manitoba.
Through achieved its lowest unit costs eight quarters, and Manitoba unit cost stabilized at a lower level. Following the ramp up of law during the first half of the year.
Similarly, all in sustaining cash cost native byproduct credits decreased to $1.90 cents per pound of copper in the quarter, 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 one time or noncash factors.
The first was a noncash impairment of rosemont carrying value, which reduced earnings per share by 93 cents.
Following the courts judgments on Rosemont and 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 dividends. This withholding tax reduced earnings per share by approximately three cents per share.
The third notable factor was noncash deferred tax adjustments, which reduced earnings per share by one cents. Despite these onetime adjustments we are inline with expectations.
During the quarter the copper mining cargo 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 companies mining project, the Tia Maria project, which caused rock to access to the port in July and August .
Stance there continue 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 build up 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 normalized.
Since the end of October these approaches to presumed but havent affected access to the port of Massarany.
We will continue to monitor the situation and actively manage logistics around any potential impacts.
I think it's important to note our Peruvian teams 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 Thirtyth 2019.
This reflected a number of unusual movements in cash, including seasonally elevated sustaining capital expenditures the semi annual cash interest payments on our long term debt and lower sales in Peru.
Taking a closer look at the results from our South America business units Constancio continued to perform well and is on track to achieve 2019 production and cost guidance.
During the quarter Constancio produced 31000 tons of copper.
Over 15000 ounces of precious metals and 262 tons 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.
BOLI production during the quarter was slightly lower than last quarter due to reduced availability of key reagents required for the Molly circuit that are transported by shift through the port of Massarany.
Since access to the Port was restored in August the Maliphant has returned to normal operating levels and we are on track to achieve annual production guidance of all our metals in Peru.
Build copper grades in the third quarter were higher than the second quarter.
Mill throughput was 7% higher than last quarter, a quarterly throughput record, averaging just under 90000 tons 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 increase recoveries were results of continued metallurgical improvements and while recoveries vary from quarter to quarter, depending on the complexity in grade of the ore feed we're 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 the second round of refined tuning in the third quarter, which corresponds to the two quarters of the highest copper recoveries since constancio has been operating as shown in the graph on slide five.
We have also implemented flotation improvements such as optimizing the water recovery in the tailings thickener and the installation of enhanced equipment in the refer circuit.
We're pleased with the results from these initiatives and the performance of the mill year to date, achieving targeted throughput copper grades and copper recoveries between 19.
Constancio combined men mine mill and Gionee unit operating costs in the third quarter were $8.63. The lowest quarterly unit costs reported in the past eight quarters, reflecting our focus on cost control and throughput optimization initiatives.
During the fourth quarter.
Four days semi annual maintenance shut down to the Constancio mill is planned and production and combined unit costs are expected to reflect correspondingly lower ore throughput.
In addition to regular semi annual maintenance work, we plan to install new up equipment relating to the ongoing throughput and recovery optimization initiatives and constancio.
The maintenance shutdown is consistent with the full year plan for Constancio and as mentioned earlier, we continue to expect production and cost guidance to be met for the full year 29 team.
Cash cost net of byproduct credits for the third quarter was one dollar and 26 cents, representing a 23% decrease from the second quarter.
Sustaining cash cost native byproduct credits in the quarter was one dollar and 73 cents 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 Geoffroy are on a land access agreement for the pump a conscious satellite deposit.
These discussions are progressing and we continue to expect to be mining ore at pump a culture in 2020 .
We are continuing to advance permitting community relations and technical activities required to access in drilled a satellite targets northwest of Constancio on the land we acquired last year.
On one of those properties, we're nearing the final stages of obtaining drilling permits and we expect to be drilling that targets in the coming months.
Switching to Manitoba.
We saw similar trend with low operating costs during the quarter.
Ore mined in Manitoba was lower than the second quarter as a result of lower five year maintenance requirements.
We're pleased with the performance we've seen from Lauro since the maintenance was completed and the mine output has been returns to the 4500 times per day level.
We continue to maximize production from the Triple seven mine as we saw high tonnage out of the mine as the results of the implementation of management system is designed to improve mobile equipment availability in key performance indicators for drilling blasting and backfilling processes.
These improvement initiatives continue to keep triple seven mining costs at or below the Canadian $80, a time level since the beginning of 29 team as seen on slide seven.
Manitoba operations produced approximately 29000 tons of zinc.
5000 tons of copper and 26000 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 seven Manitoba combined unit operating costs continue to trend lower in the third quarter, reflecting the stabilization of unit costs at a lower level. Following the ramp up of law 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 all 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 cost net of byproduct credits in the third quarter was negative 68 cents 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 the higher byproduct credits on a per pound of copper basis.
Sustaining cash cost native byproduct 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 lower and lower copper production.
You Brittania mill refurbishment activities are progressing in line with the development schedule laid out in the February 2019 mine plan.
Tell the 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 Brittania Mill is commissioned average annual gold production from Snow Lake is expected to be approximately 140000 ounces. During the first five years and sustaining cash cost net of byproducts of approximately $450 per ounce of gold.
Exploration activities on the regional deposits in Snow Lake continued to progress with a potential to add additional future fee to both the store base metal concentrator and the new Britannia Gold mill.
Slide nine highlights the regional deposits at currently container defined resource estimate.
The white bars represent base metal material and the red bars represent potential gold material.
Every 2019 mine plan is based on current law reserves, only which totals approximately 14 million tons.
The regional deposits at another 4 million tons in the indicated category and an additional 13 million tons in the inferred category all within trucking distance of the two mills.
We continue to advance feasibility studies on the recently discovered 91 deposit which contains an initial inferred resource estimate of 2.1 million tons at 9.67% zinc as announced in August 2019.
Drilling on the 90 no one deposit continues to test the size of the deposit confirmed 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 lanes 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 three new deposits in the recent past Loring 27.
Concha in 2012, and the 91 deposit in 29 team.
We have demonstrated our project development expertise through the successful construction and commissioning of the Constancio and lore mines in 2014 and are committed to replicating the success at the Rosemont project.
We have a proven track record of efficient operations with Constancio being one of the lowest cost open pit copper mines in South America, and lower on track to becoming one of the lowest cost gold mines in Canada.
We've been opportunistic in pursuing low acquisition cost potentially high return opportunities such as the land consolidation to the northwest of Constancio 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 catalyst 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 late in the first quarter, which will incorporate the results from the infill drilling to upgrade lalor inferred resources and the exploration drilling at the law in mind targets, such as Len 17.
The updated reserve and resource statement will also include results from the ongoing work to upgrade whim tend to and new brittania zones to a reserve classification.
Throughout 2020 , we will advance drilling and feasibility work on the 90 to one deposit and we will continue to explore our large land package to provide potential additional ore feed to our stall and new Brittania 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 pump a conscious pits into production in 2020 .
Potential brings an additional 40 million tons into the mine plan over approximately four 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 targeted and Mason with a focus on enhancing project economics, along with advancing exploration activities on our other prospective grassroots exploration properties.
Overall, the third quarter has been a solid quarter our operations in Peru in Manitoba continued to deliver and we advanced our pampacancha discussions with the Geoffroy a 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 coal and we're pleased to take your questions.
Thank you ladies and gentlemen, we will now begin the question and answer session to join the question Q You May Press Star one on your telephone keypad, you will hear atone acknowledging your request. If you are using a speakerphone. Please pick up your handset before pressing any key.
To withdraw your question. Please press star to once again to ask a question. Please press star one at this time, we will pause for a moment as colors join the queue.
Our first question comes from Greg Burns with TD Securities. Please go ahead.
Yes. Thank you.
Peter a cash all that the recoveries that constancio, obviously that bounce back up again, my understand it'll change with the old type but.
Again, it gets a point, where you have more consistent recoveries in this mid eighties, 80% range.
Hi, Greg Cashel here, Yeah, I think so I think we're looking at being in the mid Eightys and we do have some improvement initiatives that we believe that there maybe a few points left over the next couple of years.
Do you get into the mid to high Eightys you think.
Yes, I think so especially when.
We get into a higher proportion of hygiene later on I think are well have more consistency in the ore feed us a lot of our optimization processes.
Through.
Okay.
Just on the list of catalyst Peter on the Nineteena one 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 all go snow Lake often fun.
Greg will you know, we still progressing the feed of feasibility work on 90, though one.
The current thinking is that the zinc rich material could be process that stall in the gold, which material process that a new brittania mill, which would result in incremental production to Lauren ultimately lower overall cost per ton do economies of scale.
Does that address your question.
We have enough capacity installed to take my Tino, one pleasantly Lauren not go to Flin flon.
Actually there is there's an opportunity with some low capital intensity to increase throughput install.
To be able to accommodate 19 on one conceptually.
We're still looking at what's best for the business to understand when Nineteena, one and the associated gold zone with discovered there might be incorporated into the life of mine.
And I think.
Probably we're doing around the drilling anyway. This winter and so probably mid next year, we'll be in a better positioned to know when and where and how it fits in.
Good thank you.
Our next question comes from del Tin Barretto with Canaccord Genuity. Please go ahead.
Hi, Good morning, guys I, just want to touch on his rosemont impairment a little here I think your disclosure says that got the apparently spending by three years later I think a 2% increasing the discount rate just wondering how you guys came up I don't see metrics and why do you change anything else in no project valuation estimates.
It all 10, it's David Bryson, So we sort of ran with the on mine plan that was in the last technical report for Rosemont. So no changes to production ascend capital costs operating costs and we have no reason to believe that there are any substantive changes.
This point in time, so as you pointed out is really driven by the assumed delay and the change in the discount rate assumption. So we are sort of assuming a restart of construction in 2023, we think that that provides a reasonable allowance for the complete.
One of litigation as well as a remobilization.
In order to wiser to get back to a point, where we could start construction. Obviously, that's an assumption that we had to let shoes for the purposes of the analysis as it relates to the discount rate we used to 7.5% at the end of Phase 2018, when we had Oh, what we call is 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 received over the summer was a surprise to us and we think and many others said were observers of the process and so just given that decision now we haven't felt at appropriate to add to that.
National a risk discounting and and at that and the 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.
Okay.
Sure.
So those are now it's Peter I was going to say that you know just in addition to lot to what David said, we are very confident that.
The 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 the Baltic Gregs question, Darren can scan channels, obviously, but side.
Hi, My my estimates if I take up the maintenance downtime you're running at around 89000 tonnes a day pretty consistently do you expect that to continue going forward as the ore types change actually being population.
Yeah, we still we expect to continue at the same run rate a there's no reason why do you should assume obviously there'll be a little bit of variability in all types that the throughput should remain constant.
Got it and maybe I can ask one last question would you care inflation. How are you anticipating any change in strategy at all going bald.
So in fact that 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.
Its a healthy thing to do we do periodically in any case and I think it's fair to say that the range of choices in ahead of us remain very consistent with the strategic by and that we've disposed in the past.
Perfect that's often get thank you.
[noise] are once again, if you have a question. Please press star one.
Our next question comes from John Tumazos with John Tumazos is independent research. Please go ahead.
Thank you.
Excuse me that I haven't read the U.S. Court decision.
Could you just summarize.
The judges 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 are Augusta taken cash at the day would have advanced cash at a later stage closer to construction.
Thank you.
Good morning, John I'm basically what the a V. A judge made spaces decision on was a validity of mining claims now typically its the agencies that rule on velocity of mining claims and this judge ruled that we did were not entitled to I place waste rock and tailings on.
Some mining claims that the partially service I felt that we work. So it's just a question Melba, we made an application to the quarter reconsidering based on our saying that that was a integrate judgment.
The question of royalty, we have not drawn anything against our royalty from a wheaton precious metals.
Thank you very much.
Our next question comes from Paris, Valin chord with Haywood Securities. Please go ahead.
Hi, Peter Cashel would wonder if you could elaborate a little bit on the of the nature of discussions with Charleroi just because.
It's been.
Consistently pushed back and or maybe just identify the issues and whether we.
Can really count on a on a startup in 2020 or is this going to be dragging on potentially longer.
I don't want it they're not thanks for the question look I think that.
There is no change in the lead the tone of the conversations I think I mentioned in our lost any country earnings conference call that we had sort of we would now in those stage of a negotiation with the community of children.
That remains correct. So this isn't negotiation now.
Which really has is on the part towards closure.
We previously talked about how in the past there was some items that.
That was sense it to which the community with sensitive that had been addressed prior to the end of the last quarter. Now we are in advance negotiation with the community and we expect those community those negotiations to be concluded in the near term. So that we can in fact, a start production at a pump.
Punch in late 2020.
So really no change, but we have making very very good progress.
Okay. Thanks.
Welcome.
This concludes the question and answer session I would like to turn the conference back over to Candice relay 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 colleague internet disconnect. Your lines at this time.
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