Hudbay Minerals Inc. (HBM) Q1 2014 Earnings Report, Transcript and Summary

Ladies and gentlemen thank you for standing by. Welcome to the Hudbay’s First Quarter 2014 Conference Call. At this time all lines are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session with instructions provided. (Operator Instructions) I would like to remind everyone that this conference is being recorded today. And I will now turn the conference over to Candace Brûlé, Director, Investor Relations. Please go ahead. Candace Brûlé: Thank you, Operator. Good morning, and welcome to Hudbay’s 2014 first 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; (Technical Difficulty)

Ladies and gentlemen, I apologize for the interruption. We just lost the line of one of our speakers, and they will be reconnected momentarily. Please stand by. And ladies and gentlemen, please stand by. The conference will resume momentarily. Ladies and gentlemen, I would now like to reintroduce our speakers.

Apologize for the technical difficulties. Hopefully, it won’t happen again, our line dropped. This is David Garofalo speaking. So I’ll just go right into an overview of our results. Our financial results in the first quarter of 2014 were affected by lower sales relative to metal production. As a result of rehabilitation work at the 777 mine was successfully completed in February 2014, production of copper concentrate rebounded as expected late in the first quarter and was in line with overall expectations. Despite better copper production volumes late in the quarter, the availability of concentrate for shipping prior to quarter end, was limited and extreme cold weather in the quarter affected railway service from our Manitoba operations. As a result, cash flow from operations, net earnings, and cash cost per pound of copper sold were all negatively affected by a significant accumulation of unsold copper and precious metals. Specifically, 29% of copper and 44% of precious metals produced in the quarter was not sold. Operating costs at our Manitoba business unit improved in the first quarter relative to comparable periods. At 777, operating costs per tonne of ore were 12% lower compared to the same period in 2013, primarily due to reduced contractor costs offset partly by higher propane costs due to unusually harsh winter conditions. Operating costs per tonne of ore at Lalor improved by 12% when compared to the fourth quarter of 2013, as progress was made in replacing contractors with permanent employees. Further economies of scale are projected in the second half of 2014, when Lalor is expected to double its production capacity to 2,700 tonnes of ore per day and increase its production rate. Full year 2014 production and operating cost guidance remains unchanged. During the quarter, we received a third deposit under the precious metals…

Thank you. Ladies and gentlemen, we will now conduct a question-and-answer session. (Operator Instructions) Your first question today will come from the line of David Charles with Dundee Capital Markets. Please go ahead. David Charles – Dundee Securities Corp.: Yes, good morning, David. Thanks very much for the update. I suppose I have two questions. So I’ll give you them both at the same time. Given that they’ve adjourned the BC Securities Commission decision, how will that – I just wondered if you could maybe give us some color as to how that might impact the date that you’ve extended your offer to i.e., the 5th of May? And I suppose I’ll give you the other one at the same time. I’m just wondering at the Lalor project, you will obviously do a changeover from hoisting ore through the ventilation shaft, up through the main shaft. And I’m wondering when would – how that might impact a commercial production decision, let’s say, on phase two and how that might flow through into the income statement? Thank you very much.

Yes, sure. On the first question David, thank you for both your questions. On the bid for Augusta, the terms of that bid are not going to change. The bid expires on May 5, unless the remaining conditions of the offer have been satisfied or waived, including, critically, the shareholders’ rights plan being waived and validly ceased traded. So, it will expire in the absence of that, on Monday. And I’ll let Alan handle the question on Lalor.

Hi, David. With Lalor, we’ll be doing the change-on commissioning of the new shaft in July. And with Lalor, we will be applying a slightly different commercial production test. Maybe David Bryson would be better placed to explain that.

What we’ll be doing, David, is there will be a one-month period for determining commercial production. Lalor will essentially revert back to the pre-commercial production stage once the new production shaft is commissioned. And for that one or two-month period while we’re getting it ramped up to commercial production, Lalor will not be contributing to the P&L. I mean, we would expect that to be during the third quarter. And so, we don’t expect it to have a major financial impact, but it could impact the Q3 results to an extent. David Charles – Dundee Securities Corp.: So does that mean then that in Q3 what you’ll see is potentially a little bit of a drop-down until commercial production is declared at Lalor? And then, we see the full impact of Lalor in Q4?

So let’s suppose that we start production with the main shaft on, say, July 1, and it ends up as sort of we ramp up taking two months, so that we declare commercial production at August 31. For two of the three months during the second quarter, Lalor’s attributable revenues and costs will be capitalized. And so, the earnings and EBITDA contribution from Lalor during those two months would not hit the P&L; they would be a credit to capitalized Lalor costs. David Charles – Dundee Securities Corp.: Excellent. Thank you very much.

Your next question today will come from the line of Alex Terentiew of Raymond James. Please go ahead. Alex Terentiew – Raymond James Ltd.: Good morning, guys. Development at Constancia seems to be going fairly well. Is there any particular component of the remaining work that puts your schedule and CapEx targets at risk, or, maybe another way of asking it, where are you focusing your efforts right now to make sure you stay on target?

Alex, I’ll answer that. The – I think we’ve characterized the project at the stage now that all this headline, big-ticket risk items are actually behind us. The relocation is done. The main Socabaya-to-Tintaya line is now energized. So really, the ball is very much in our court just to deliver on the final build-outs of the project. I mean, the majority of the procurement is in hand. Most of the final pieces will be on site this month. So really it’s very much focusing on maintaining the necessary productivities and the various different construction activities. Alex Terentiew – Raymond James Ltd.: Okay, that’s great. And just a related Constancia question here, when you guys talk about commercial production in Q2 2015, how are you defining that, as you know 60% of design over a 30-day period?

We actually define it as 60% over three months. Alex Terentiew – Raymond James Ltd.: Over three months, okay.

For a new operation, that’s distinct from the Lalor definition, because it’s already producing up the vent shaft. Alex Terentiew – Raymond James Ltd.: Okay. One last question, nice to see that you’ve signed a copper concentrator offtake at Constancia as well. Are you interested in seeing more of an offtake, or is 20% a comfortable level that you guys want to stay at?

Alex, it’s David Bryson. We do intend to enter into additional offtake contracts, but we do not expect that that additional offtake will be tied to financing. And we’re in discussions with a number of interested parties, and don’t anticipate any issues in placing that offtake. Really, we’re awaiting to confirm the details on the transaction with Dreyfus and the Constancia credit facility before moving into any commitments on the remainder of Constancia’s production. But I think ultimately, we would like to have 70% to 80% of Constancia’s production under contracts. Alex Terentiew – Raymond James Ltd.: Okay, perfect. That’s it for me. Thank you.

Your next question will come from the line of Stefan Ioannou of Haywood Securities. Please go ahead. Stefan Ioannou – Haywood Securities, Inc.: Great. Thanks, guys. Great to see Constancia coming along nicely. Just wondering with the inventory buildup through Q1 in terms of metal production, is it fair to assume that most of that has subsequently been sold, and you’re sort of back on track, or is there still big inventory sitting around right now?

Yes, Stefan, it’s David Bryson again. We do still have some inventory up at Flin Flon right now, and although we’re starting to see spring in Toronto and New York, it is still pretty cold up north. And so, we’re certainly hoping to start to bring that down over Q2, but I think over the course of the year, we would expect sales to be in line with production. But we – I think it’s questionable whether we’ll fully draw that down during the second quarter. Stefan Ioannou – Haywood Securities, Inc.: Okay. So, yes, modest inventory. We shouldn’t be surprised with a modest sort of surplus at the end of this quarter, anyways?

Yes. Stefan Ioannou – Haywood Securities, Inc.: Okay, great. Thanks very much guys.

(Operator Instructions) Your next question will come from the line of Orest Wowkodaw of Scotiabank. Please go ahead. Orest Wowkodaw – Scotia Capital Markets: Hi, good morning. I had a question about Lalor and the Snow Lake mill. I just was curious, why are the copper grades that you are reporting in terms of mill grades so much below the mine grades from Lalor? I’m just wondering, when I look back, it looks like it’s been that way for the past sort of four or five quarters. Are you working through some lower-grade inventories at the mill, or just a little color would be great.

I’m not sure if I can provide any color there Brad, do you have an answer to that to hand?

Good morning, Orest. Really, when I looked, the grades are relatively close like, It’s around 0.9 at the mine, and I think the milled head grade was 0.82 copper. But really, the copper in the Lalor ore body is in the footwall side of the lens that we’re mining. And if we’re mining in the hanging wall side of that lens, that’s when we get the zinc grades in excess of 10% zinc. So really it’s just where we are. And we do have a certain amount of stockpiled rock between the mine and the mill. So that will account for variances from month-to-month between mine grades and mill grades. Orest Wowkodaw – Scotia Capital Markets: Okay, because there was quite a bit of difference when I look at the whole of 2013, as well, between 0.83 and sort of 0.6, but thank you.

And Mr. Garofalo, I’m showing no further questions at this time. Please continue.

Thank you. Just to follow up Orest’s question, if you don’t mind. And, Orest, hopefully this helps, but you can circle back with us. But last year, for example, the mine copper grade was 0.57 at Lalor, and we milled 0.54 it’s almost de minimis difference. And when I look at the copper grade this year, it’s 0.92 – and this is Q1 numbers – against copper grade of 0.81 over the three-month period, so a little bit more of a difference this year. The difference last year is insignificant. But I think over the balance of the year, the mine grade and the process grade should more or less line up.

But, Orest, we’ll follow up with that offline. Orest Wowkodaw – Scotia Capital Markets: Yes.

Is there one more question, Operator, I see?

There actually is. Your next question will come from the line of Gary Lampard of Canaccord Genuity. Please go ahead. Gary Lampard – Canaccord Genuity Corp.: Thank you, and good morning, everyone. Just a quick question, are you still purchasing third-party zinc concentrate? And if you are, how much do you think that you’ll be purchasing for Q2, Q3, and Q4 of this year?

Hi, Gary. We don’t expect to be purchasing much additional third-party concentrate. I think we’re still working through some stockpiles of previously purchased third-party con, so you’ll probably see that in the production over the next quarter, or so. But we think as we get closer to commissioning the Lalor main production shaft, we should see a step up in domestic zinc con production that should allows us to build the zinc plan without meeting any further third-party con. Gary Lampard – Canaccord Genuity Corp.: Okay. So just really, really broad-brush, something like 5,000 tonnes for this quarter and then nothing for Q3 and Q4 would be reasonable estimates?

Let us get back you on that. Gary Lampard – Canaccord Genuity Corp.: Okay, sure. Thanks very much

And ladies and gentlemen, that does conclude the Q&A session for today, and as well that will conclude the conference call for today. Again, we do thank you for your participation. And you may now disconnect your lines.