Q3 2020 Hudbay Minerals Inc Earnings Call

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Good morning, ladies and gentlemen, thank you for standing by welcome to the Hudbay minerals Inc. third quarter 2020 results conference call.

At this time all participants are in listen only mode. Following the presentation, we will conduct a question and answer session.

During the question queue you May Press Star then one on your telephone keypad.

Should you need assistance during the conference call you may signal, an operator by pressing star and zero.

I'd like to remind everyone that this conference call is being recorded today November four 2020 at 830 am Eastern time.

I'll now turn the conference over to Candice Burley director of Investor Relations. Please go ahead.

Thank you operator, good morning, and welcome to Hudbays, 2023rd quarter results Conference call.

These financial results reissued yesterday and are available on our website at www Dot Hudbay dotcom.

A corresponding Powerpoint presentation is available and we encourage you to refer to it. During this call are present or presenter today is Peter could kill ski hobbies, President and Chief Executive Officer accompanying Peter for the Q and a portion of the call will be Steve Douglas, Our senior Vice President and Chief Financial Officer, Cashel Meagher, our senior Vice President.

In a chief operating officer, and you're generally our senior Vice President corporate development and strategy.

Please note that comments made on today's call may contain long for.

Permission and this information by its nature is subject to risks and uncertainties and <unk> actual results may differ materially from the views expressed today.

For further information on these risks and uncertainties. Please consult the companys relevant filings on SEDAR and Edgar. These documents are also available on our website as a reminder, that all amounts discussed on today's call are in us dollars unless otherwise noted and now I'll pass the call over to Peter for guilty Peter.

Thank you Candice 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 I'll 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 well executing on our business responds plans to minimize the overall impact will depend they make on our operations and to ensure we develop effective site specific measures to identify and limits COVID-19 exposure and transmission.

With that said, we recognize that we are operating in an increasingly difficult times are a key part and quiz Coke, where 80% of Constancio. The workforce resides continue to see a hike 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 more transmission between rotational employees and local communities.

We believe that our diligence in screening testing and workplace protocols have 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 triple seven and public control. The progress, we're making at new Brittania mill address, though like gold and lastly, I will touch on regional exploration in Peru.

Okay.

I think on slide three.

Hudbay had a solid operating quarter in Manitoba, and Peru, with steady production and cost performance copper production increased over the first two quarters of Twentytwenty 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 off to the ramp up to full production at Constancio.

Consolidated cash cost net of byproduct credits was 65 cents per pound of copper higher than the second quarter up 2020, which was more heavily impacted by the lower cash cost in Manitoba due to the temporary produce suspension. However, consolidated cash cost 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 changes 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 Constancio due to the ramp up to full production after the temporary suspension lower.

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 Twentytwenty. Adjusted net loss was 10 cents per share and adjusted EBITDA was $96 million.

We exited the quarter with approximately $450 million in cash and equivalents and further demonstrates that 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% that was due in 2023 and pay the accrued and unpaid interest quote 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 quarters of 2020, and the steady operations that constancio since the eight week temporary suspension, we expect to meet or production sustaining capital expenditures and unit cost guidance, what 2020. Despite ongoing COVID-19 operating challenges.

Turning to our Peru operations on slide four 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 Constancio produced approximately 21000 tons of copper.

<unk> thousand ounces of precious metals, and 392 tons of molybdenum.

Production results were higher than the second quarter of Twentytwenty due to the mine ramp up.

The ramp up also resulted in a significant increase in all mills during the quarter compared to the prior quarter.

Milled copper grades in the third quarter was slightly lower than the second quarter, but in line with the mine plan copper.

Copper recoveries in the third quarter were higher than the second quarter due to the processing of stockpiles or after the mill ramp up in the second quarter.

Combined unit operating costs were higher than the second quarter due to that normally low operating cost in the second quarter as a result of the processing of stockpiled ore during the middle ramp up.

Unit operating cost in the quarter were within the guidance range for 2020.

Production of all metals and unit operating costs at Constancio are expected to be in line with a revised full year guidance. What traded 20 that was released with the second quarter results.

We also continued to make significant progress in pump a contra since completing the surface rights agreement with the local community of Troy up in February of 2020.

The individual end 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 Thirtyth, we accrued a total of approximately $96 million in growth spending in Peru relating to obligations under the local communities surface rights agreement and the individual end user agreements.

As previously disclosed our initial gross capital guidance, what Peru of $70 million did not include the cost of the individual end user agreements due to the ongoing nature of the agreement and as indicated by our accrued expenses to date full year growth capital spending for crew will exceed that initial guidance. Once all end use agreements agreed.

Thats all concluded.

As discussed with our second quarter results. The consultant Pravia consultation process has been impacted by the Peruvian government declared a state of emergency and as a result, we expect the pump concept production start dates of early 2021.

Now turning to slide five 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.

Well, yeah production of all metals and costs are expected to be within the annual guidance ranges. Despite the triple seven operational disruption, which I'll discuss shortly.

During the quarter operational performance at both law and Triple seven was strong with oil production in grades in line with mine plan and expectations.

At Lalor two weeks of plant maintenance was completed on schedule and the mine achieved third quarter production rates, averaging 4600 tonnes per day outside of the maintenance period.

The Triple seven mine maintained consistent and stable performance during the third quarter as it approaches its plant closure in 2022.

Operational readiness activities in support of the early start of new brittania or on track, including ensuring that a sufficient and consistent volume of gold or will be available.

Underground development at Lalor in gold Rich lenses 25, and 27 is advancing ahead of schedule in preparation for the mid Twentytwenty, one start up of new Brittania, which is three months earlier than previously planned and I will provide more details on our early gold plans shortly.

Finding of the first stope in latest 27 was completed in September and the trend of increased precious metals production from Lalor is expected to continue.

[noise] at store all process 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 all characteristics and numerous operational improvement project implemented at the store mill.

At Flin Flon the amount of oil process was generally in line with last quarter.

[noise] combined mine mill and DNA unit operating cost 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 two years.

The Topas combined unit costs are expected to be within the guidance range for the full year Twentytwenty.

On October 9th production at this triples, you have in mind was temporarily suspended due to an incident that occurred during routine maintenance of the hoist drop and skip.

Oh boy struck detached from the skip, causing the skip to fall to the bottom of the shot.

All underground personnel were safely evacuated from the mine using the secondary ramp access.

The preliminary video inspection of the mine shaft indicates the damage is limited to the head frame at the bottom of the shaft in the skip compartment. It does not appear that the cage compartments or the or loading area were damaged and the structural integrity of the shopped does not appear to have been compromised by the incident.

The full inspection of the Sharpton skip compartment will require an in person inspection, which is underway.

Underground mining activity has resumed a triple seven with limited production from the mines ramp access if it is confirmed there is no further damage beyond what has been identified to date. It is expected that the triple seven shop 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 were 2020.

Turning to slide six the new Brittania 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're pleased to move up commissioning of the gold plan to mid 2021 concern.

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 Batavia installed Mills also continues as planned.

Last quarter, we identified the potential to produce gold from the new Brittania mill earlier than expected in 2021.

Refurbishment activities are the gold project ahead of schedule and commissioning of the gold parties dial expected mid Twentytwenty, one 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 Twentytwenty one.

While the copper flotation building is being constructed we plan to install modular flotation cells at the gold plans to optimize copper recoveries as we start the early processing of gold and copper gold goals.

As I mentioned earlier, we continue with the early mining of the gold zone as part of stope sequencing in preparation for the start up of new Brittania Gold mill once.

Once the new potential is ramped up average annual gold production from Lord is expected to increase to over 150000 ounces commencing in Twentytwenty two at first quartile cash costs and sustaining cash cost net of byproduct credits of approximately 480 and $655 per ounce respectively.

During the first eight years of the gold plant operation.

Slide seven 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 lalors life of mine gold production by 41% and extended the mine of life of the Snow Lake operations to 18 years we.

We were able to fully fund the refurbishment of new brittania through the gold prepaid transaction in may which positioned us well for executing on our plan and last quarter, we announced a new mineral resource estimate for the 91 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 followed by three months into the third quarter of 2021.

We have also been advancing many of the other upside opportunity summarized on this slide.

We continue to look at the potential to further optimize both the stores and new Brittania most.

At the store no 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 Brittania mill capacity beyond the currently planned 1500 tonnes per day.

The engineering activities and the 90 to one deposits continue as planned and we expect to complete a prefeasibility study in the first half of Twentytwenty one.

We look forward to delivering on these many catalysts in the next six to 12 months.

On slide eight we show our recently completed follow up drill program at Constancio, North where we continue to test a possible extension of copper porphyry and high grade Skarn mineralization occurring within 300 meters of the northern edge of the current Constancio pit.

The image on the slide shows the location of these drill holes in close proximity to the pit to.

The drill program was a follow up to the drill intersections announced in March and continued to intersect both Scott and porphyry mineralization as summarized in the table.

Most of the drill holes intersected mineralization located along as South East North West trending regional fault, one hole intersected 78.6 meters of 1.39% copper 305 grams per tonne molybdenum 0.43 grams per ton of gold and 16 grams per ton.

Non of silver.

The results will be evaluated and integrated into our annual mineral reserve and resource estimate update within stance here 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 cold Winter North high grade scan target this month.

Early in 2019, we reached an exploration agreement with a good winter community and subsequently completed the consultant Brady a process. This.

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 Constancio.

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 six to 12 months summarized on slide nine we.

We've already touched on a few of our growth initiatives and catalyst today, such as the new Brittania mill refurbishment progress and the various near term snow Lake gold milestones.

As we continue to compete infill drilling at Lalor, we expect a continued good.

Additional resources to reserves.

Further extend the mine life of us know like operations.

We mentioned the continued progress of pump a contract which is expected to significantly increase cash flows from from Constancio due to the higher copper and gold grades and we talked about the results from our drilling at Constancio North.

In Peru, we continue to advance the longer term growth catalysts with plans for regional exploration that the Maria Rayna and cover Utah properties. We are also planning the work to look at possible future expansion that Constancio. In addition to the use of all sorting technology to potentially further enhance the mines 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 drilling program on our wholly owned private land located in historic Mining District Court held Vitia, which is near our Rosemont project. The focus of the program is twofold to complete condemnation drilling in the area is planned for power and water lines for Rosemont and to test the Hell Bisha carpet district for further exploration potential.

Central.

And finally, we are advancing our greenfield exploration projects with weapon turning on the Mason project. The planning of 2021 drill programs at the Oregon 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 increased cash flows and create value for all of our shareholders and with that I am not happy to take your questions.

Okay.

Thank you ladies and gentlemen, we will now begin the question and answer session to join the question queue. You May Press Star then one on your telephone keypad.

You will hear a tone acknowledging your request if you are using a speakerphone. Please pick up your handset before pressing any keys to withdraw your question. Please press Star then two to join the question queue. Please press Star then one now.

Our first question comes from Orest Wowkodaw of Scotia Bank. Please go ahead.

Hi, Good morning, Peter I was hoping you could give us some more color on the pecan shop development in Peru, I don't really have a good feel on where the consult a probably a process is like has it actually be gotten from a government perspective or or is about to begin and when you say.

They've kind of first production early 21 are you talking about development or or actually ordered them Bill in early 21. Thank you.

One more thing no. Thanks very good question.

I think overall I think my what my overall comment is being that given the pandemic the environment in Peru, as being very complex, especially as I mentioned previously be consulted Brady a process is one that in the past as required extensive and intensive a human contact at people into.

Viewed 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 I'm in a remote manner, but still accomplishing the goals of consult pravia.

So we worked hard with the government in order to to help them established means of doing so the government has demonstrated commitment, especially since the change in the ministries to doing so and we are still part we believe that we will complete this process.

This year, which will enable us to get access to pump a concha 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 say the first half of next year.

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

That's a little bit before that potentially but around about that yes.

Thank you so much.

Our next question comes from Jackie pretty Blocky of BMO capital markets. Please go ahead.

Yes, thanks, very much and congratulations on the quarter I wanted to ask about new Brittania, 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 Oh no I'm not alone project should begin with for you guys to be so far ahead of schedule can you give us a bit of color as to how.

How that's been accomplished and.

Sure what what.

Maybe precedent, we can read into that if there's any.

Or how your future projects might be managed or is this something that sort of unique to this situation that new brittania. Thanks.

Mourning Jackie and thank you look I would say you know as a hardcore project Guy in my earlier career as saying with cash flow. 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 the road.

Tanya, but I would say that the more fundamental reason apart from just pure roll project progress by John Zito and his team we have a technical team that has been actually absolutely extraordinary so the team on the Peter I'm, a long said that actually designed workarounds that enabled 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 with 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.

And the guidance of cash flow and the technical and project execution team.

Okay. No that's great. That's it that's interesting and maybe just a follow up on or it's just a question on PAMA Sanjay I know you mentioned it was in the Mdna that you reach land use your agreements with 79%.

By the end of the quarter can you give us an update on how that's done subsequent to that anywhere.

Scary enough, but we're into November at this point already has.

That.

We continue to make progress on are you closer to the 100% goal already or can we expect that maybe by the end of this year.

Yeah. So Jack you want what you meant by 79% is in fact that land clearing Act.

79% from fleet, so we have significantly more than 79% of the possessor agreement signed we sort of in the last last throes of reaching agreement for final physician.

And we have a strong level of confidence that that will be completed this year.

Great. Thanks, very much I'll I'll, Oh, what's real top on thank you very much.

Our next question comes from Dalton Barreto of Canaccord. Please go ahead.

Thanks, operator, good morning, Peter and team I want to start by following up on my Jackie just asked about there.

When constancio is being prepared the main holdouts with just the last couple of families are you seeing any significant resistance on the last few families that need to turn over their land.

Morning gotten yeah. Good question, you know I in essence, I would say no.

The last the last negotiations are always the most complicated so 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 off a COVID-19 cases amongst communities, which is I sort of exacerbated a ability to engage so.

It's just a complicated environment in which to negotiate but heavier and the team are doing an extraordinary job of growing this to a close.

And I would say we remain confident that that will be done this year.

Okay. Thanks, and then just on the consoles that previous side COVID-19 situation aside.

Got fresh impeachment charges now against Sky, We got an election on the horizon and April how.

How confident are you that that will get done by year end.

Dolphin.

Adult and I'm, an optimist I'm part of a practical optimist.

But we think that the consultant pravia process is a process that the the minister of mines has committed to supporting in an expedited manner and I acknowledge that as you've said that the minister is new in his seat I acknowledge that we are.

Our in a fairly politicized environment, giving the fact that we have elections scheduled for April next year and a change of government.

To occur in July of next year, So of course that make the <unk> the environment, a little bit more political.

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 a reinforce their commitment to advancing the consulta privia 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 from me speaking.

Politics and elections.

Sure you saw last night that Arizona flip Democrat does this have any implications at all in terms of your legal challenge at Rosemont.

You know.

Okay. So the case, though of the ninth Circuit Court of Appeals is going to be heard by a panel of three judges and so the process is not going to be a political one.

The department of Justice is appealing the decision together with high Beta nine circuit, we've received lots of permits in the past at Rosemont through several administrations and we don't believe it change in the administration. This november or a potential change will have any impact on the rosemont process.

Perfect. Thanks, guys. That's all from me.

Thank you.

Our next question comes from Stephan Your model of Cormark Securities. Please go ahead.

Great. Thanks, very much guys had great to see you are going to be starting tomorrow regional drilling up in Korea can you just give us a little bit of maybe color on sort of the size of the program. We anticipate I guess starting this month.

Yes, certainly Stephan in fact White Castle, why don't I turn it to you sure I think.

Hi, So that's what.

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 a geophysical target thats been followed up with.

Geological mapping and compilation and there are.

Some areas of previous in form of mining in the area. So we're quite confident in the presence of copper. So this is a greenfields exploration things. So we'll be drilling between now and the balance of the ended the year. So you know, we're we're talking less than a million dollars to start with and then provided that there is.

A reason to continue the program will put it into the budget next year and provide that guidance early next year okay.

Okay, and then in terms of that day, we should probably anticipate just to see it in your next quarter, then maybe as to where that.

And is that fair that we got that that that's it yes exactly.

Okay. Okay, great. Good luck, thanks very much.

Thank you.

Once again, if you have a question. Please press Star then one.

Our next question comes from Greg Barnes of TD Securities. Please go ahead.

It's like it's just a question around the drilling at Constancio, the northwest edge at the pit.

How significant do you think this could be are you thinking now about a potential lay back or is it still too early to be going down that road.

Craig I think it's a little bit early to go down that road do we need to do the resource modeling still I mean, we've had some fabulous intersections, but there is those modeling needs to be completed really before we can state anything definitively cash.

Actual would you add anything to that yeah, well I mean, you know you look at those drill intersections and.

The mine engineer, we'll be looking at the.

The trade off between is this a future underground sweetener or will it carry the strip.

I wouldn't 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 will 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 Constancio mine plan, its just when and where in the sequence in the phases that we mine.

And it will and so I think we have a little more drilling to do but is 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.

And in that area, we mined through that fault now Greg Yeah.

The attic fault and we mine through that fall now.

Okay.

He is one of the places we have a beta volley back because of the orientation, but if you're mining parallel to default it'll be less of an issue then if you're mining adjacent to default. So I don't see that being a big issue you know the current geotechnical parameters, we mine under will be use there and it will be similar.

Pit slopes if it indeed requires the pre strip versus.

Any other solid methodology of mining so no I don't think the ball to itself will play a big deal.

Okay. Good thank you.

This concludes the question and answer session I would like to turn the conference back over to Candice relay 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 color.

This concludes our call you can disconnect your line.

Okay.

Okay.

Okay.

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