Hudbay Minerals Inc. (HBM) Q4 2013 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen. Welcome to the Hudbay's fourth quarter 2013 conference call. (Operator Instructions) I will now turn the conference over to Candace Brûlé, Director of Investor Relations. Please go ahead. Candace Brûlé: Thank you, Operator. Good morning and welcome to Hudbay's 2013 fourth quarter results conference call. Hudbay's financial results were issued yesterday and are available on our website, at www.hudbayminerals.com. A corresponding PowerPoint presentation is also available and we encourage you to refer to it during this call. Our presenter today is David Garofalo, Hudbay's President and Chief Executive Officer. Accompanying David for the Q&A portion of the call will be David Bryson, our Senior Vice President and Chief Financial Officer; Alan Hair, our Senior Vice President and Chief Operating Officer; Cashel Meagher, our Vice President of the South American Business Unit; and Brad Lantz, our Vice President of the Manitoba Business Unit. Please note that comments made on today's call may contain forward-looking information, and this information by its nature is subject to risks and uncertainties and as such actual results may differ materially from the views expressed today. For further information on these risks and uncertainties, please consult the company's relevant filings on SEDAR and EDGAR. These documents are also available on our website. We will also be referencing the company's offer to acquire Augusta Resource Corporation and we suggest that you read the offer documents that were filed on February 10 and 11, 2014, which include the offer and circular on SEDAR and its scheduled PO and Form F-10 on EDGAR. All of the company's SEDAR and EDGAR filings are also available on our website. For the purposes of this presentation, we have assumed a U.S. to Canadian dollar conversion ratio of 1:1. And now, I'll pass the call over to David Garofalo. Dave?

Thanks, Candace. Good morning, everyone. 2013 represented the year of significant transition for Hudbay, as we made substantial progress on our Sector-Leading Production Growth program, all while managing our existing operations and the closure of two older mines. While the transformation of this scope and scale inevitably leads to challenges, we believe we manage those well. While our shaft sinking was completed during the fourth quarter of 2013 on schedule and on budget, and we also commenced initial production at Reed in September 2013 on time and on budget. At Constancia, we substantially completed all detailed engineering and procurement during 2013 and advanced construction on schedule with over 56% project completion by yearend. We achieved our zinc and precious metals production targets in 2013. We also raised over $500 million in non-dilutive financing through the Constancia gold stream transaction with Silver Wheaton to follow on issuances of our senior unsecured notes and a mobile equipment financing facility. We also built upon our well-established safety track record. In 2013, we reported our lost time accident frequency of 0.4 per 200,000 hours, a rate that is well below the average for the mining sector. This is even as our man-hours increased company-wide by 74% over 17 million. However, the progress we made in 2013 did not come without its challenges. As announced last November, results from the completion of revised capital cost estimate at Constancia indicated an increase in construction cost of approximately $160 million. As you may recall, the most significant contributor to this well-documented cost escalation related to heavy civil works. We have since made excellent progress in this critical area and other key construction milestones, and are on track to achieve project completion on the revised budget and are on schedule to commence production in the fourth quarter of…

(Operator Instructions) Our first question comes from Brett Levy from Jefferies.

With respect to Augusta, I mean is it going to be 100% equity financed or is it going to be some aspect of it that may have some flexibility around it from a capital standpoint?

We believe we have the flexibility to fund this entirely from cash on hand and cash flow from operations. Of course, we're always looking for opportunities that optimize our capital structure. We do have debt outstanding. The only debt we have outstanding is our 2020 notes, $750 million, but they are callable in 2016. And if we see opportunities as the company gets related to lower our cost of capital, than we'll take those opportunities.

And then you guys have said on the previous call that the amount of capital commitments associated with the transaction before Constancia gets going is like in the 10s of millions and not the 100s of millions. Can you like better define that? I mean is it $30 million, $70 million, I mean can you put a more narrow band around that.

Again, it wouldn't be a $100 million, so it's in the tens of millions to complete the detailed engineering, do some limited procurement in the early parts of the projects design in engineering. And of course, Augusta has about $100 million-odd of debt outstanding with the metals trader that would have to be dealt with shortly after the acquisition.

And then in terms of Constancia, I mean you mentioned something about the reserves. Can you talk more specifically about kind of where the reserves are and maybe going forward?

Alan, do you want to talk to that a little bit?

Okay. Well, the current number is sort of 250 million tons. And we anticipate that if we can complete the engineering work successfully, we'll increase that reserve by around another 120 million tons.

Our next question comes from David Charles from Dundee Capital Markets.

Could you maybe, David, talk or Alan please talk a little bit about productivity at Constancia and how the rainy season went this year. I mean it sounds to me based on your comments in the MD&A that productivity is up and that the rainy season had less of an impact than you may have previously expected?

That's a fair comment, David. I think we characterized it before, on the heavy civil works, we're up and grounding that, and obviously a lot more experienced with dealing with the conditions. So in general terms, the heavy civil works productivity has been very good. And then we get no schedule concerns at all, and that we've been completing all the key items on track. The main sediment pond was actually commissioned slightly ahead of schedule, as the first stage in the water harvest is suspected and we anticipate everything else, all the other key milestones been met on time.

And when you say there is no concerns obviously on the heavy civil works, is there any areas of the project where you might still have concerns?

I think the critical path very much lies now with the process plant and just the simple issue of constructing. Lots of construction activity in the same time, in the same space. There's no specific issues, it's just to try to erect steel, string pipe and pull cable all in the same place just requires a lot of management of work fronts and making sure that we optimize peak loading of manpower and counter availability and things. So it's all relatively mundane project execution stuff that we're dealing with now, all the big risk items that reallocation, the power line, everything is behind us.

And is it safe to say that there was maybe less rain this year or you just handled it better?

A combination of both, I don't know the January numbers, but I know Cashel told me that December was slightly wetter than normal, but not as wet as last year. And you're right, I think we're just in the position that at the stage of the project that we're just being told, just there's less impact in productivity.

If I could ask another question, please. I'm just wondering you've gave a good update on Lalor as well, when do you expect to start to underground development at Lalor? I mean it sounds like you're doing a lot of work closely into the shaft, I'm just wondering when you will start to work on other areas of the mine?

Well, we've been obviously doing the underground development at Lalor for quite some time now since we've accessed it some time ago. So really the underground component of the Lalor project is very well advanced. It's really ahead of schedule. So what is dictating the timeline is simply sitting over the shaft and doing the switchover to the main hoist.

And is the underground development sufficient to increase the throughput later in the year when the shaft is ready?

It's all based around being able to optimize the capacity of the expanded Snow Lake concentrate which should also be ready by the middle of the year.

Our next question comes from Alex Terentiew from Raymond James.

Just a couple of questions. I'll start with Constancia. Pampacancha, I know you won't be mining there first, so you have some time before you get into that deposit, but can you give us an idea of when you expect or need the negotiations with locals to be completed? And also tell us an idea of how many families you're dealing with there?

In terms of timelines, we obviously want to wrap up the negotiations that are currently underway. All the key negotiations are done, but I think there is about another four families that we want to deal with in the next few months and then start negotiations with the community on the Pampacancha later in the year. We do want to begin in there some time likely, gain an access in 2016 to allow mining in 2017. So we really need to get it wrapped up by some time next year.

And in terms of number of families, is it similar? I imagine and believe it's less than what you had to deal with so far?

I don't know the exact number, but it's a lot less. It's a less productive sort of area. So there is fewer families and there is also a significantly smaller area than we required for the main Constancia project.

Second question. On Snow Lake, the concentrator unit cost there came in at $35 a ton for the year. And your original guidance for the year was $25 to $30. I know you noted higher reagent and grinding media utilization and stocking challenges. Now should we expect costs to come down there? Or should we assume your cost to stay high? And if they're not going to stay high, what do you expect the cost for that concentrator to be in the long-term? I know not long-term, I mean eventually, you'll build the Lalor concentrator to replace that, but I guess over the next couple of year, where should we expect the cost to be?

Obviously, when we commissioned the Lalor shaft in the middle of this year that the tonnage is going to increase significantly, which will obviously positively impact unit cost, just from a throughput basis. Maybe Brad could add some color on some of the other aspects?

I think as Alan mentioned, we are refurbishing stalls, so we are going to be commissioning in July, which times out pretty close to the Lalor production shaft. So as we increase throughput, you're actually going to see those unit costs come down. And again, we have that issues with contract labors. We replaced our contract labor with our own employees. We also expect that to come down.

So I mean, is the lower-end $25 a ton something reasonable to assume going forward?

It's David Bryson. In our 2014 guidance we talked about combined guidance for the Lalor mine and the Snow Lake concentrator. And we realized combined unit cost of that $137 in 2013, and our guidance for 2014 is in the range of $102 to $124, and that drop reflects some of the efficiencies that Alan and Brad have been talking about.

Our next question comes from Alec Kodatsky from CIBC.

Just a couple of quick questions. It seems like Q4 of this year looked remarkably like Q4 last year, with the grades 777 dropping and seasonal cost coming up. Should we expect basically the same profile as what we saw in 2013, where things stabilized, slightly improve in Q1 and then you start to see more meaningful pickups in grades 777 towards Q2 or Q3?

So I think that would fair. We are anticipating that that production is going to be down slightly in Q1 at 777, as we complete the rehab work that we've had underway. But then after that it will pickup and take us back on track to meet the guidance numbers that we published last month.

And I guess just the last question would be is there any sort of estimated time on when the first drill hole might be put into the copper-gold zone at Lalor?

Well, we'll start the exploration drift once we have completed these, shaft bottom work on Lalor main shaft. So that's going to take a few months to complete that exploration drift and we should be drilling by Q4 of this year, as I think David indicated in his earlier script.

And our next question comes from John Tumazos from John Tumazos Very Independent Research.

Congratulations as Constancia, Lalor, Reed Lake draw to close. And I noticed that dividend is a little lower than it was, around $0.01 every half year as opposed to $0.10. Could you talk about the timetable to restore or increase the prior dividend as the CapEx diminishes?

Actually, we cut that dividend back in the pre-semi-annual declaration back in September. And it was done as we were going to the most intense part of our capital spend at the three new mines that you mentioned. Our intention, and I actually had this discussion with a number of our board members yesterday, is to look at increasing the dividend in 2015, as our cash flow ramps up. And we're discussing possibilities of actually making it formulate based on free cash flow from the existing business. And it's probably a bit premature and a bit academic to talk about what that formula look like, but it's something we're actively considering. And we put it on our agenda to discuss with the board more fully when we have our annual strategy session this summer.

Our next question comes from Stefan Ioannou from Haywood Securities.

Most of my questions have been answered, but just wondering what the planned $150 million Constancia copper-related off-take. Can you just maybe provide a bit of guidance, what's anticipated timing on getting that formally locked away?

Sure. We've been working that for a while and was originally focused on having the right off-take partner to work with us on that transaction. We selected that partner few months ago. We've recently mandated to large banks that's specialized in this type of financing and are now working with them on definitive documentation and finalizing the detailed due diligence on the projects. So our expectation at this point is that we should have final credit approvals in place towards the end of this quarter and look to closing the transaction early in the second quarter.

And just with regard to Constancia, I mean you -- production startup late this year. So you're kind of coming in terms of time, you're coming down to the cruncher. Do you think you'd actually go through and do another formal sort of review of where the CapEx is at, at some point during this year or do you think you're just going to run out until its in production and then sort of add up all the numbers then?

We don't anticipate needing to do another review of the CapEx. A good line of sight now on cost between now and commissioning, so we think we're on track, as previously disclosed.

Our next question comes from Shane Nagle from National Bank Financial.

Most of my questions have been answered as well, guys. But David Bryson maybe just with the off-take financing coming in, the $750 million that you have in the CAD facility. You had gone through with me before just kind of at a different I guess levels or tranches that you had available to you in terms of debt financing. I mean if you acquire -- and if acquiring Augusta you'd have to bring on another $100 million of revolving debt. Could you just maybe walk through kind of the additional financing you would have available to you, should you acquire Augusta? And what funds you'd available to help build that project over that time, in addition to operating cash flow?

When we announce the Augusta bid we indicated that we had arranged an incremental $100 million in credit lines, specifically tied to any requirement that might arise to refinance the existing indebtedness at Augusta. We have arranged the CAD facility and have started to draw down in that facility and expect to have most of that drawn down in the first quarter. The off-take linked facility is something that we see as a standby funding and we don't see a need in our current financing plans to have to draw down on it. But I want to ensure that we've got ample liquidity available in the event of any surprises. But from the perspective of our covenants and incurrence limitations, particularly into the high yield indenture, we have ample capacity to accommodate all of that indebtedness. So I'd say we wouldn't plan to incur all of that except there was something unanticipated that rose. But even if we did incur all of that based on our existing baskets in high yield indenture, we'd still likely have another $100 million or $200 million in incremental incurrence capacity. So we think we've got plenty of room from a strict limitation perspective.

Our next question comes from Gary Lampard from Canaccord Genuity.

A couple of questions, first up on your sources of liquidity. The $250 million from Silver Wheaton, when do you expect to receive that? And the $100 million of income tax refunds, can we assume that that's a number, because clearly you're continuing to higher the VAT as you go this year as well as you're being reimbursed for previous payments?

On VAT, yes, the balance in current statutory receivables at December 31 was $116 million, and so that $100 million it's a bit of an estimate and we also have some Canadian tax refunds coming. So I think it's a conservative estimate. As Dave mentioned during the script, we've already received $56 million of that since December 31 and two VAT refunds that came in January and actually just yesterday. So that's tracking well with respect to the Silver Wheaton payments. We're anticipating that the first $125 million will probably be late Q1, maybe early Q2, just depending on the sequencing of spending at Constancia and how the accounts payable flows. And then the second tranche, the final tranche of $135 million should be mid-to-late Q2.

But that $100 million that is a fair estimate of the net?

Yes. I'll just say that it takes into account the cycling of working capital once we've drawn down the backlog of IGV.

The $120 million reserve or potential reserve increase from Constancia, would you be able to maintain the current reserve copper grade with that higher reserve?

We anticipate the similar reserve grade, don't we?

Obviously, it's an increase in metal price, you'd be lowering the overall reserve grade for the life of mine. Adding in reserve life to the end of the mine, the sequencing then changes and what would happen is, there in the beginning it wouldn't effect the first few years of production through the supergene phase and the high grade phase, but post the Pampacancha phase you would see slightly lower head grades going out in the future.

And on Lalor Lake I think you'll recall that you were doing work on a new mine plant, but I'm not certainly up-to-date on this, is there a new mine plant coming for Lalor Lake any time this year that will be published?

Yes, we have done some work on the new mine plant and it's still going to be part in partial of how we're going to process the ore. But I guess really in summary, we do have a good luck at the five-year plant. It looked like we could increase overall capacity at the mine by one year, where we were up the capacity tonnage in 2018. We moved it forward a year, but again it really ties in with the overall processing plant. So that possibly can come out later this year.

And just a last question. Can you discuss briefly what the nature of the agreements you have with the three families that without an agreement would be impacting your initial operations at Constancia?

I think you must have not picked up. All the critical families are now signed up. So 32 of the total of 36 families have actually got agreements in place. And the terms of agreements didn't really change from agreement one to agreement 32. And the four remaining agreements are in non-critical areas. So we're just really haven't been focusing on them. So now the community relations people just start to get them tied up as well. So all the agreements are in place and of the three physical ones that we indicated to you, I think one is already moved.

Our next question comes from Matt Murphy from UBS.

I just had one on 777. I thought the backfill availability issue have been remedied. Just wondering if you can shed some light on, is it that you're needing more material than you thought or there are there still issues in supply there?

The pastel issues we reference was a problem that we had in the middle of the year, which obviously has caused a bit of a backlog. It also should be noted that overall mill tonnage was the lowest in 2013, because it wasn't been augmented by satellite monitored territories, as the case now is with Reed. So paste was a bit hand-to-mouth in 2013 and combined with the problem of losing both pastels for a period that just led to bit of a backlog of pace. But not that we've got Reed tonnage gone into the mill and the paste system is fully up and running, we're in good shape going forward.

And I guess with some of the stability issues faced last year, do those seem to be isolated incidents or is this something that you think you'll be dealing with more frequently as the mine continues to mature?

This has really basically led to a recasting the approach in terms of the mining plan. Maybe Brad can add some color.

Sure. Really what we have looked at really the extraction method as mentioned to some of the guys. We're going to remove some of the silt pillars by a Chevron method, which is really a retreat paste backfill method. So I think it has made us a little cognizant of moving forward. Some of the higher grade sections obviously weren't as easy to mine. We do have a good handle on the rehab. We had put it in our 2014 plan that we would be rehabbing for the first three months in the first quarter here. That is actually coming to a close here very shortly, so I think ground conditions at the operations, again as we know the mines now over 10 years old, it's something that again we certainly have to be cognizant of and there will be pockets of minor rehab all throughout 2014, but I think again, our large push will be over here, shortly in a couple of weeks actually

And then maybe just a quick follow-up on Augusta. I had noted on the call you had mentioned you're using $3 a pound long-term copper price. Did you say what your long-term assumption is?

We are struggling to remember here.

I think the number is $12 on that.

Our next question comes from Sachin Shah from Albert Fried.

So on Augusta, I just wanted to clarify, I did see the circular filing, what I want to specifically ask you about is there was some discussions that they wanted to have back in December about a possible deal and talking to management further. And there was essential radio silence since then, I guess early December until you made your unsolicited offer. So I was just kind of curious, based on the circulars, description of what happened, why that was the case rather than pursuing to offer as you have not talking to them, because it seemed like they wanted to talk to you guys.

I really have no other color to add there, I think the background is self-explanatory.

As far as going forward, is there any additional comment on what you plan on doing aside from what was already filed in the circular?

The circular is a self-contained document. I think it has everything you need in there.

Any comments on some of the regulatory approvals, if you're plotting on making those filings et cetera.

It will be done in the normal course.

There are no further questions at this time, please continue.

Thank you, operator, and thank you everybody for attending. If you have any other questions, please feel free to contact us directly.

Ladies and gentlemen, this concludes the conference call for today. Thank you for participating. Please disconnect your lines.