Hudbay Minerals Inc. (HBM) Q1 2015 Earnings Report, Transcript and Summary

Good day and welcome to Hudbay’s Q1 2015 Conference Call. Today’s conference is being recorded. [Operator Instructions] At this time I would like to turn the conference over to Ms. Jacquie Allison, Director, Investor Relations. Please go ahead, Ms. Allison.

Thank you, Operator. Good morning and welcome to Hudbay’s 2015 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; Alan Hair, our Senior Vice President and Chief Operating Officer; Brad Lantz, our Vice President, Business Development and Technical Services; Cashel Meagher, our Vice President of the South America Business Unit; Rob Winton, our Vice President of the Manitoba Business Unit; and Pat Merrin, our Vice President of the Arizona 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. And now I’ll pass the call over to David Garofalo. Dave?

Thanks, Jacquie. Good morning everyone. Following achievement of our key milestones last year, we completed our transition into a low-cost, high-quality copper and zinc producer. We carried last year’s momentum into this year achieving commercial production on April 30th at our Constancia mine in Peru. This achievement together with the payment of mine and mill capacity and the first Ocean shipments of copper concentrate from Constancia are important catalysts for Hudbay’s business. The second half of 2015 will represent the beginning of phase of free cash flow generation for the first time after five years of capital investments in our three new mines. Our Manitoba operations were add steady state and overall small portion of the workforce begin strike on May 2nd, we do not anticipate a significant impact on our corporate production and costs guidance for 2015. Cash flow from operations and net earnings were positively impacted by increased revenue as a result of significant increases and production of all metals as Reed and Lalor mines achieved commercial production in 2014. While substantially improved when compared to the prior year, these metrics would have been stronger if we have sold off the copper and gold we produced during this and the prior quarter. We ended the first quarter with 6,000 tonnes of copper and concentrate and 9,000 ounces of unstreamed gold produced that remain to unsold. At March 31st, our total available and committed liquidity was approximately $464 million including $122 million in cash and cash equivalents and $342 million available under our credit facilities. This incorporates the increased demand committed by the lenders under our corporate revolving credit facility which was expanded to 300 million U.S. dollars in March. While we expect this to be sufficient to meet our liquidity needs for 2015, we also have substantial flexibility both into our discretionary spending plans. After beginning concentrate production in December 2014, our Constancia mine achieved commercial production in April 30th. Constancia ramp up as matter expectations with regards throughput, recovery and product quality. The plant is performing as design and throughout is occasionally exceeded nameplate due to favorable ore characteristics with peaks of over 90,000 tonnes per day. Copper recovery in April averaged just over 65%, which is in line with ramp up design and expectations. Concentrate grade is averaged 27%, copper year-to-date with no penalties for deleterious elements. As of April 30th, 42,575 tonnes of copper concentrate have been produced of which 20,500 tonnes have been shipped. As you can see from the monthly data on slide number 9, January and February were impacted by normal processing plant commissioning issues, which were resolved by the middle of March. Both the mine and the concentrator are operating add or above designed capacity. The focus in the initial stages of ramp up was on ore through put with the aim of meeting salable concentrate specifications. The focus is now on increasing copper recovery while maintaining throughput in concentrate quality. A key component of improving copper recovery is expected to be the concentrate regrind circuit, which started recently. We expect the operation to achieve feasible level recoveries of copper in the fourth quarter of 2015. In addition assuming the copper ramp up continues as planned, we intend in the second quarter of 2015 to begin to commission the molly concrete separation circuit, which is already achieved mechanical completion. The performance of the mining fleet at Constancia is approaching design expectations with peak ore production from the pit exceeding 100,000 tonnes per day. A mine dispatch system has been installed and is providing the data needed to further optimize the fleet. Today, mine reconciliations have indicated that the long term model is supported by field measurements. All of it is too early to fully evaluate the reconciliation, we are confident that grade and geology are well represented in the long term plan. The tailings management facility in the water harvesting and management are on scope and on schedule. We have received approval of the second modification to the ESIA, which recognizes the current infrastructure and incorporates the mining of the Pampacancha deposit. We expect to begin negotiations for the purchase of surface rise to Pampacancha later this year. Turning now to Manitoba operations or process in the first quarter of 2015 was 14% higher a year-over-year as a result of the increased production at a Reed and Lalor mines. Compared to the first quarter of 2014 copper grades were 18% higher due to increased production at Reed, which has higher copper head grades as well as normal mine sequencing at our other mines. Processed zinc and gold head grades in the first quarter of 2015 were relatively stable compared to the first quarter of 2014. Recoveries of copper, zinc and gold in the first quarter of 2015 were marginally higher year-over-year as a result of achieving steady operations at our two new mines. Combined Manitoba mine and mill unit operating costs were essentially unchanged from last year. The collective agreements with each of the seven labor unions representing employees at our Manitoba business unit expired on December 31st, 2014. Members of one of the Manitoba unions representing 12% of our employees rejected our formal offer and went on strike on May 2nd. We expect the operation to continue under our comprehensive contingency plan during the strike. Negotiations with the other six unions continue. Subsequent to the quarter, we closed the transaction to acquire a 100% interest in the new Britannia mine and mill located in the Snow Lake Manitoba for approximately 11 million U.S. dollars in net cash consideration plus the contingent payment of 5 million U.S. dollars. The new Britannia mill or the NBM mill if refurbished has the potential to process approximately 2,000 tonnes per day of gold zone ore from the Lalor mine and includes an existing carbon and pop circuit that has historically produced gold dore on site. We expect at a paced [indiscernible] plant for Lalor will be required in addition to the refurbishment of the NBM mill, ore from Lalor will continue to be processed the Snow Lake concentrator while engineering work is carried out on a potential restart of the NBM mill. The results of the technical study on the NBM mill including the estimated cost and timing of a potential restart are expected to be available in 2016. As a result of this acquisition, we no longer expect to construct a new concentrator at Lalor and will not need to spend most of the expected $350 million to $400 million in capital associated with it. The Lalor mine continues to perform well and the next potential major catalyst is an underground exploration program. We have drilled 14 holes totaling over 4,500 meters from the underground exploration drift at the 10 meter to 25 meter level. Preliminary results indicate that the high grade copper gold mineralization has drilled from underground is of similar quantity and quality as indicated by surface drilling. Based on these results we will proceed with the 400 meter pace to exploration ramp extension to the North. Dual platforms to this ramp will allow testing of the copper-gold zone down plunge and step out drilling to the east and west. Further exploration drilling is expected to start when the exploration ramp extension is completed in the second half of 2015. To view this complete drill results, please refer to our first quarter 2015 news release, the news release also has a link of lot of our plan view in vertical composite section. One of our key goals for 2015 was to achieve commercial production at Constancia in the second quarter, having reached that goal we now expect to generate free cash flow from of our business in the second half of this year and to harvest strong returns from the $2.2 billion that we invested in our four mines all of which are now in production. We plan to continue to optimizing production and cost performance at our Manitoba operations which are already generating free cash flow. By proceeding with the phase 2 exploration program of the copper-gold zone at Lalor, we will be able to generate additional information that may have a positive impact on both mine life and optimization of production in the medium term. As our Rosemont project, we planned to continue to our permitting efforts and advance to technical work required to take the project forward, we believe that Rosemont will provide an attractive opportunity to compound the returns from our four mines. On a final note, in 2015 we are celebrating 100 years since the discovery of the Flin Flon deposit. The fact that we were still active in mining exploration of Flin Flon Greenstone Belts speaks to the overall prospectively of the region and as attribute to the people who over generations have built Flin Flon and developed Northern Manitoba, who have also helped to built the strong foundation for a company. With that operator, we’re pleased to take questions.

Thank you. [Operator Instructions] And our first question comes from the line of Matt Murphy. Please go ahead.

Good morning and congratulations on commercial production at Constancia. Just question on the, I mean you have comment that you have some favorable or characteristics on throughput, I’m just wondering how sustainable the April type of throughput is and whether there might be upside to it on a kind of two to three year type of outlook.

I think, well obviously we’ve achieved the first milestone in terms of commence production but we’re still part of way to ramp up process where we have to settle the plant down. The focus is going to be switching to recoveries and so I think its bit premature to be talking about potential throughput gains at this stage.

Okay. Just on staffing, have you transitioned to the full operational work force unit now or do you still have more hiring to do?

Yes, we have. Obviously we’re using Strakon as contract miner but the rest of the positions, all the positions in the plants and the other staffs and technical positions are all filled.

Okay. And then just lastly on the Pampacancha throughput rate negotiation, is that with the local community?

That’s with the community of [indiscernible], we obviously had to negotiate with that same community to get the parts of the Constancies site.

Right, okay. So, same party you’ve had discussion within the past?

That’s correct.

Your next question will come from the line of Orest Wowkodaw. Please go ahead.

Hi, good morning and again congratulations on the early commercial productions. Couple of questions, first of all, in terms of Constancia and the great profile, obviously it’s come up a lot in April from the first quarter. Where do you see that trending for the rest of the year?

I think Orest and in terms of any of the technical aspects around the project, I just refer you to the technical report numbers for the time being.

Which add us about 30% of our preserve grade in the first five year on average, Orest. So, I think that’s expected to be sustainable.

Okay. I’ll leave that there. What about -- in your discloser on CapEx there is $92.4 million number there for Peru project and pre-commercial production cost. Could you break that out for us in terms of what was CapEx versus what was kind of pre-commercial cost?

Yes. There was about 60 odd million there or stated priced and that related to what you could call sort of capitalized OpEx during the first quarter as Constancia was pre-commercial production. So we’d expect most of that to be reversed in Q2 as we sell the pre-commercial production concentrate inventory which should be cleared away by the end of May.

Okay about 60 million. And then just finally on Manitoba, anyway we could get some more detailed disclosure on similar to your previous disclosure on the Manitoba operations going forward? I realized with Constancia, Manitoba is probably less of a focus, but anyway we can or you’re planning to release the mine by mine sort of detailed disclosure that you’ve done before?

Orest, the reason we’ve stopped doing that is because the three mines and the industrial facilities are so integrated, it’s become very difficult for us to do internal allocations across the mines that were meaningful. So we’re sharing facilities across the three mines and so we thought it made more sense to integrate the operating results going forward.

Okay, I guess from our perspective it makes it difficult to try to breakout values by the assets now within Manitoba?

Yes, and we appreciate that.

Your next question comes from the line of David Charles. Please go ahead.

When did you started the achieved commercial production earlier than expected David, so do you expect now to realize free-cash-flow earlier than expected as well at Constancia?

Yes, during Q2 while we’re still getting the recoveries up David, I think sort of Q2 probably looks like it will be sort of neutral to maybe slightly negative. We could end up sort of a little bit softer during the second quarter, but I wouldn’t expect aggregate liquidity to bottom-out sort of much lower than kind of mid to high 300 million range relative to the numbers that we were at March 31st and then I expect that we’ll sort of bounce off of that as we get into the second half of the year, just sort of getting working capital movements and everything else is going on. But I think we’re pretty close to that bottom right about now.

But that means that your cash or the total liquidity you’re saying it’ll go down maybe 120 million to 150 million over the next quarter or so and at that point you’ll be basically at the bottom in terms of your liquidity requirements?

Yes, not necessarily sort of end of quarter to end of quarter sort of more to the trough position. I mean I don’t want to sort of give specific guidance as to exactly where we’re going to end up on June 30th because there’s a lot of moving parts there, but I wouldn’t expect if there is sort of negative total cash flow in Q2 that would be much more than we have talked about.

And maybe just one question, a very-very small one. But David Garofalo you did say that you’re starting up the moly circuit, clearly moly prices have fallen out bad in the last year or so I mean do you see this as just as basically some cream that you can or some extra revenue that you can pick up or do you have a specific view on the moly market at this point that would want you to start that up sooner rather than later?

I’d say David we have no specific view in the moly market other than we don’t think it’s going to be very good, but the – I mean we’ve studied that actually during the construction phase and running than that the moly circuit still makes -- still does represent a valuable contribution even at these low oil moly prices.

Your next question comes from Stefan Ioannou. Please go ahead.

Most of my questions have been answered, but just wondering what the sales versus the production for the quarter the logistical issues, was it anything specific other just normal timing issues with getting con on a bone and stuff or other things going on in Peru with figuring how they con out or in Manitoba likewise?

It was more referenced to Manitoba Stefan and we have talked about a bit of a build-up that we had in the fourth quarter as a result of rail service issues and we continue to struggle with that in the first quarter and we see this typically in the winter we have been making arrangements to secure additional gondolas over and above the fleet that we already had hopefully with the -- I don’t want to sort of say that lower oil prices is a good thing but it may actually improve rail service if there’s fewer oil tankers on the rails and we get velocity improved. But the other dynamic is that we are – there is a lower copper concentrate, there is very high end gold and we’re also just working through some arrangements to make sure that we maximize the value of that concentrate because it’s a bit of different animal than the Flin Flon concentrate. So we’d expect to get that excess inventory drawdown but probably more in the second half of the year as oppose to Q2.

And so just when you talk about the 6,000 tonnes of unsold copper and concentrate. Is that stuff, is that Manitoba or is that kind of the company?

That’s mostly Lalor copper concentrate. And as I say we just want to sort add, A: it’s an issue, just having the ability to get it to market but we given a choice ended up choosing to stockpile, the Lalor material over, some of the other material just that we can make sure that we maximize value from that.

Your next question comes from the line of Greg Barnes. Please go ahead.

Just couple of questions, one: the New Britannia mill, I think Dave or someone said in the call the focused that would be putting the gold only off through the mill there?

That’s correct Greg.

So none of the zinc or from Lalor would go through that with just do you separate that all to the existing mill and then?

We’ve got the stock that, still concentrated which is, we increased up to 2,700 tonnes and perhaps set this maybe a little bit more capacity. So we continue to put the sulfite all through that and the higher go bearing all through the New Britannia mill, that’s concept but obviously quite a bit work to do to optimize this but it seem look a very good opportunity for us to pickup that assets, it’s a relatively low priced.

And what’s the conceptual nature of the timing and I know you’re doing the studies and cost of things like that on this?

Well, we have to get the study done, but this permitting implication as well. So with this, there is a few factors that we have to go ahead around so it is likely take us a couple of years.

And then secondly on Manitoba, you said you are in negotiations with the six of the unions at since one. Where does that stand and what was the timing on any potential strike both for them?

I think Greg, in the situation like this, I mean we take to view that it is best to leave these discussions to the bargaining table and rather than discuss in the public forum like this. We’ve had good industrial relation generally match over all over the years. So we hope that we can reconcile all the issues and get back to normal business.

Are you in mediation with them or is it just normal negotiations right now?

There are seven unions all together and then characterize and some of which bargaining definitely, some of which bargaining together and where slightly different stages with them all and you already knows but as far as we are actually in conciliation with two of the unions right now.

Okay and finally I just want to echo Orest comments about the breakdown of the information from Manitoba now. They makes it awfully difficult for us to attribute values to each of the operations so that we could at least get tonnes and grades from each of the mines that would give us something to work with?

There are 43-101 reports for all the mines Greg and I think we’re largely tracking those. Again the difficulty is on the inter-company or the inter-mine costs and doing the allocation with three active mines, and now sharing infrastructure, it just became a bit of an accounting fiction and not very worthwhile. But I think you’ll find that were more or less tracking what 43-101 grades and tonnages are from each of the mines.

So you have no intention of giving is that mine-by-mine grade and tonnage going forward?

I’m sure, if you talk to our IR departments they can provide you some more inside on a one-off basis.

[Operator Instructions] And your next question will come from the line of Gary Lampard. Please go ahead.

First on Constancia and its expect to a question that Orest staffed earlier on the great profile and specifically referring back to that technical report, the great profile at the time was 0.59% for this year then dropping to 0.43% in 2016 and 0.37% in 2017. So my question here is with perhaps the 306 months lag to that, should we still be assuming that is the that will be milled and as a part of that question, do you have a program in mind in order to ensure that you can actually maintain throughput and recoveries when you do get into that lower grade ore?

There’s a couple of things there. You’re right, I mean the technical report obviously envisages an earlier startup in 2014. The other thing that that will be different is that we anticipate bringing Pampacancha a year later than it envisages in the technical report, so I think you can use the technical report for – the technical numbers this year, but there’s going to be some changes as it moves out. In terms of your question about recoveries, I mean the methods for test work that we’ve done and repeated relatively recently suggest that we should be okay in achieving the designed recoveries.

My second question then is on Rosemont and I want to ask about that air quality control permit that was rescinded a few months ago [audio-gap] and I understand that you’re not wanting to highlight permitting issues at the moment for very good reasons, but can you give a bit of color on that? Was it rescinded because of some sort of a point of procedure or was there actually some design issue that was exposed? And then further to that, what’s the process for actually having that permit restored?

Well as you correctly pointed out, we don’t really look to discuss these issues in great detail. I think it’d be fair to characterize that the state was very surprised that the permit was – the appeal was upheld. I think we’re confident that our continued approach is to respect the overall permitting process and trust the good signs will put at the end and we’re still confident if that’s the case.

And finally just on Manitoba, just a simple question. Do you already have a CapEx estimate for the paced backfill plant? And also I’d like to echo it, sorry resurrect the comments of Orest and Greg as well and then I would like to see some more granularity even if that is just at the level of mine throughput and grade, it certainly makes it easier for us to understand those operations?

In regards with the CapEx, we might have an approximate number, but the only thing they guarantee you that is wrong so it’s likely best not to see the light today.

Your next question comes from the line of Cliff Hale-Sanders. Please go ahead.

Most of my questions have been answered Gary you certainly on the Rosemont -- but I do have one question on the Flin Flon District. You’ve talked about exploration at Lalor, can you just talk about the more regional exploration to offset the mine life exhaustion that we will have at 777 I believe you have about six years of reserves there. What other targets are we looking at? Or, what are the prospects in that area to extend the mine life outside of Lalor?

I think I’ll pass over to Brad to give a better perspective.

Hi, Cliff, yes we are conducting regional exploration with the surface exploration team there and really focusing around 777 again. The plan is to really keep it in the shadow of head frame to increase some resources. We have been drilling targets, we are doing some geophysical work and in conjunction with that there’s been quite underground program with respect to drilling out targets also.

Is there any success or details that you can provide.

We’ve had some minable intersections from some of the surface and underground drilling from the 777 North area, but it’s really early days at this point but would certainly need some follow up.

And your next question will come from the line of John Tumazos. Please go ahead.

Is it too early to conclude that costs at Constancia are going to beat the technical studies based on lower crude oil, the stronger U.S. dollar and your initial indications of some daily throughput exceeding design?

We actually provided some guidance on unit cost John in January and I believe they were sort of somewhere in $8 million to $9 million …

$9 million to $10.9 million per tonne.

$9 million to $10.9 million per tonne all in. So, we’re quite confident that we will be able comfortably achieve those this year but you’re right. There has been some input cost wins what we did not bake into those estimates including local currency weakness, lower oil prices which and lower other input cost generally which should benefit those unit cost assuming we achieve our production objectives.

Alright, we look forward to getting the dividend restored and seeing some of the upside after all the capital. How much of a low do you anticipate until you resume capital program such as Rosemont and if Rosemont were to move long slowly on a permitting standpoint would you look for another project in the interim?

On that John, there really aren’t a lot of projects around. We’ve looked around and Rosemont, though it’s not shoveled already yet, we’re certainly the most shovel ready available in the market, at least in narrow geographic and geological universe. We don’t feel any urgency to go out and buy something else. In fact, I think what we’ll probably end up doing is restoring some of the firm system investments as we did early on in the last five years when we were looking to populate our pipeline. So, putting a few million dollars to work here and there, probably makes the most sense because there is nothing out there that we need doing today, these projects are relatively long dated and we rater see them go down the risk curve within the vehicles they are already in before we look at doing something more meaningful.

And your next question will come from the line of Oscar Cabrera please go ahead.

Just wonder if you could remind me what’s your past position that you’re expecting towards the end of the year and reason I’m asking this is I can understand that there is sensitivities around the negotiations in Manitoba, but should the strike happen, do you have at your disposal ways of bridging the gap well because Constancia is ramping up?

Thanks Oscar, its David. We’ve done quite of bit of analysis with respect our liquidity position vis-a-vie any potential strike scenarios and I think with Constancia ramping up the way it is I think it is sort of any reasonable copper price we feel very good about our liquidity position given the upsized corporate revolver that we have and the free cash flow that we expect from Peru later this year that we do not expect any possible strike scenario to cause this concerns on the liquidity front.

That’s super helpful. Thank you. And then I also wonder if you could comment along the same lines, the trade off are the close benefit of acquiring new Britannia versus building the new concentrator at Lalor. Can you give us ballpark idea of do you expect to have like of 50% of the expenditure there or is it like a 20% would you be able to comment on that?

Oscar, it’s Steve. We expected to be substantially less capital in terms of the building new concentrator or estimate on concentrator construction would have been incrementally about $350 million to $400 million, the refurbished the new Britannia mill, we’re looking at something in the very tens of millions of dollars to refurbish and we’d still have to build the peaceful plan at the lower mine belt which is probably somewhere in the $80 million to $100 million range. So, maybe all in it’s a $100 million or $120 million investment versus 350 million to 400 million but provides us, as Alan said, in additional 2000 tonnes of daily capacity for gold ore and any gold recovery circuit which substantially increases our gold recovery life of mine, if you recall in our technical report it’s in the 60s and gold recovery circuits which substantially increase that.

And those are engineered estimates so Dave can hold me to them.

Thank you very much. And then last but not least at job well done in Constancia. Thanks guys.

And there are no further questions at this time. I would now like to hand it back over to David Garofalo for closing remarks.

Thanks everybody for your time and consideration and of course if you have any other questions and more specifically on operating data of some of our Manitoba projects, feel free to call our IR department and I’m available to take calls as well. Thanks a lot.

Ladies and gentlemen, this concludes the conference call for today. We thank you for your participation. You may now disconnect your line and have a great day.