Hudbay Minerals Inc. (HBM) Q4 2015 Earnings Report, Transcript and Summary

Good morning. My name is Juana, and I will be your conference operator today. At this time, I would like to welcome everyone to the Copper Mountain Mining Corporation 2015 Year-end Results Conference Call. All lines have been placed on mute to avoid any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. Rod Shier, Chief Financial Officer of Copper Mountain Mining Corporation. You may begin your conference.

Thank you, Juana. After opening remarks by management, in which we will review the business and operational results for the fiscal year-end 2015, we'll open the lines to participants for questions as noted by Juana. Please note that comments made today that are not of a historical factual nature may contain forward-looking statements. This information by its nature is subject to risks and uncertainties that may cause the stated outcome to differ material from actual outcomes. Please refer to the bottom of our latest news release for more information. I'll now turn the call over to our CEO, Jim O'Rourke for his remarks.

Thank you, Rod. Good morning, everyone, and thank you for joining us. Today, we'll discuss the 2015 year-end results of the operation at the Copper Mountain Mine and our corporate financials. I'll briefly summarize the financial results and provide an update on the various operational activities, after which Rod will provide financial details for the 2015 fiscal year. I think everyone is aware as a dramatic slide in the commodity prices over the past year is creating an urgency for our team and stakeholders to adjust to the new reality. Our 2015 achievements with the benefit of our new $40 million crusher investment have greatly strengthened the company's ability to meet the challenges as we move through the year. During 2015, the company completed a total of 14 shipments of copper concentrate, containing 79.8 million pounds of copper plus precious metals, generating a revenue of $291 million growth. I will now refer you to slide three or page three for those who have them. Production for the year was 92.3 million pounds of copper equivalent, which included 77. 6 million pounds of cooper, 29,200 ounces of gold and 276,300 ounces of silver. Gold production was 29.2% greater than that produced in 2014 as a result of mining more ore from the Pit 2 area. Overall, the mine met our production targets and our guidance. Now refer to page four for those who have it. During the 2015 year, mining activities continued from mainly the Pit 2 area and with a lesser tonnage coming from the north end of Pit 3. The mining rate averaged approximately 158,000 tonnes per day, a total of 57.7 million tonnes of material was mined, which included 22.5 million tonnes of ore and 35.2 million tonnes of waste, resulting in a strip ratio of 1 to 1.56. Head grade for the year average 0.335% copper or approximately 0.41% copper equivalent when adding the precious metal credits. Mining in the Virginia pit was initiated, during the latter part of 2015 and a small amount of ore is being delivered to the mill. It is planned that Virginia pit will be completed in the latter part of 2016. Now, I'll refer to the 10-year plan on page five. Last year, we filed our recent 10-year mine plan on SEDAR based on the March 2015 technical report. This plan is based on a point of time. The mine plan is optimized annually and adjusted for the mining and milling rates being achieved and taking into account the current metal prices. The 2012 drilling program in the Pit 2 area was successful in adding ore to the reserves to replace ore mines and start up. Our mine life continues at approximately 17 years. Our mining fleet continues to enjoy favorable mechanical ability. In 2015, all of the mobile production equipment averaged over 84% mechanical availability. Total pit mining costs were 10% below budget, but the unit operating costs for 2015 fiscal year averaged $1.93 per tonne moved, 8% higher than in 2014. A higher unit cost resulted from greater haulage cycle time, as a result of longer waste haulage distance. Modifications to improve haulage options are being investigated currently. Now, refer to page six, during the year the mill process 12.8 million tonnes of ore had a grade of 0.335% copper. This grade was slightly above guidance despite the company being delayed in receiving our permit amendment to mine higher great ore from the Virginia pit. Mill operating time averaged 91.8% as compared to 89.4% average during 2014. Copper recovery for 2015 fiscal year was on plan and averaged 82.1%. Now refer to the mill throughput graph on page seven. Mill throughput averaged 35,100 tonne per day in 2015. The new secondary crusher expense in this program to be very beneficial by providing an increase in mill capacity of about 30% from the 2013 period with no pre-crushing. During the year, the mill operated consistently in the 35,000 tonne per day to 40,000 tonne per day range and achieved an average record quarterly throughput of 37,400 tonne per day in Q3. I just like to point out that month-to-date this year, we're running about 39,000 tonne a day. The total – I'll now refer to page eight. The total cash costs for the year ended December 31, 2015 was $1.74 per pound copper sold, net of precious metal credit. While the site costs were US$1.25 per pound of copper produced, net of precious metal credit. This refers them to reduction of 12% from the 2014 total unit cash cost of US$1.98 per pound and a reduction of 16% below the 2014 site cost of US$1.49 per pound copper net of precious metal. I'll now refer you to page nine. For those of you following the slide, the notes in red identify the cost reduction we've initiated to-date. Early in 2015, Copper Mountain embarked on a rigorous and disciplined program for sustainable cost reduction and across the company's operation. Numerous cost reduction opportunities been achieved in a short timeframe without compromising the safety, environment or production. Nine major cost centers account for approximately 82% of the site operating cost. 2015 total site operating cost savings were about 8% low budget and with capital of about CAD 25 million. The three major site costs were labor 24%, electricity 14% and diesel 12%. Support from our employees has provided a 5% decrease in employee cost, while following the oil prices have resulted in a 24% decrease in diesel fuel cost. Copper Mountain's bottom line continues to benefit from the weak Canadian dollar, approximately 88% of the company's operating costs are now in Canadian dollar base. And keeping with our cost reduction trend, no major capital expenditures are planned for the balance of 2016. Now, I'll refer you to page 10. The drop in copper prices to the CAD 2 per pound range was a wakeup call, and it grasps the attention of all of our stakeholders. Our four main cost reduction initiatives are; firstly, the site costs of course which are being achieved with the support of our employees and our suppliers. Secondly, the support from our senior lenders to adjust our repayment schedule. And thirdly, electrical power, which is our second highest operating cost totaling about CAD 30 million per year. The recent agreement with the B.C. government to differ out to 75% of power cost in a five-year program is very significant to us. And fourth, site operating costs include CAD 1 per ton milled tolling fee paid to the partners. Partners have agreed to defer the tolling payments, which total about CAD 14 million per year. Excuse me. The mine operation has continued its excellent safety record, operating for 875 days without a single loss time incident, as of December 31, 2015. And we surpassed two million man hours of working loss time incident free. Recently, the B.C. government announced that Copper Mountain Mine is the winner of the 2015 Edward Prior Award, for the safest mid-sized mine in B.C. This has been an excellent achievement by our employees for the second year running. I'll now refer to page 11, the company is on track to meet our 2016 guidance level of 80 million pounds of copper. The mill feed grade is forecast to average 0.33% copper, and mill throughput is planned at an increased rate of 37,500 tonne per day. Planned mining rate is 174,000 tonne per day with improved waste cycle time. As we enter 2016, we believe the company is well positioned to weather the current commodity price environment during the year and beyond. To this end, management has identified additional cost reduction opportunities in the areas of energy, maintenance and consumables with potential to positively impact immediate and near-term operating performance. Copper Mountain is focused on cost control combined with ongoing commitment to increase operational efficiencies are key drivers for the company in 2016. I'll answer any specific questions in the question-and-answer period for those wishing more details. I'd now like to turn this over to Rod, to cover our financials.

Thank you, Jim. As noted on slide 12, the company recognized revenue of CAD 242 million for the year-ended December 2015, after pricing adjustments and smelter charges and this was based on sales of 79.8 million pounds of copper, 29,500 ounces of gold and 287,100 ounces of silver. The average realized copper price for the year was US$249 per pound, this compares to net revenues after pricing adjustments and smelter charges of US$266 million based on an average provisional copper price of US$3.11 per pound for the year-ended December 31, 2014. Well, average realized copper prices declined by 20%, year-over-year net revenues declined by only 9% for the 2015 year as compared to the same period last year. This is attributive to the increased gold production achieved during the year and the strengthening of the U.S. dollar as all sales are settled in U.S. dollars. As noted on slide 13, cost of for sales for the year-ended December 31, 2015, were CAD 239 million, which resulted in a gross profit of CAD 2.4 million as compared to cost of sales of CAD 234 million, which resulted in a gross profit of CAD 31.8 million for the year-ended December 31, 2014. This increase in cost of sales is a direct result of major scheduled maintenance being completed during the year in the Mill and Mine department as compared to 2014. General and administrative expenses for the year-ended December 31, 2015 were CAD 6.1 million compared to the CAD 5.5 million for the year-ended December 31, 2014. Non-cash share based compensation reflected an expense of CAD 1.1 million for the year-ended December 31, 2015 compared to an expense of CAD 2.7 million for the year-ended December 31, 2014. In addition, the company has recorded a breakdown of CAD 25 million to the low-grade stockpile as a result of lower copper prices as required under IFRS. For the year-ended December 31, 2015, the company reported finance income of CAD 0.25 million and finance expense of CAD 10.6 million, as compared with the finance income of CAD 0.2 million and finance expanse of CAD 9 million for the year-ended December 31, 2014. Finance expense primarily consist of interest on loans and the amortization of financing fees. For the year-ended December 31, 2015, the company recognized a non-cash unrealized foreign exchange loss of CAD 65.5 million, compared with a non-cash unrealized foreign exchange loss off CAD 28.6 million for the year-ended December 31, 2014, which primarily, relates to the company's debt that is denominated in U.S. dollars. During the 2015 fiscal year-end, the company recognized a non-cash unrealized loss on the interest rate swap of CAD 2.3 million as compared with the non-cash unrealized gain on the interest rate swap of CAD 4.8 million for the year ended December 31, 2014, which is related to the revaluation of the interest rate swap liability required under the company's loan agreements. It should be noted that these adjustments to income are required under IFRS and our non-cash in nature as outlined in the company's MD&A and statement of cash flows. For the year ended December 31, 2015, the company recorded a current and deferred income tax resource tax expense of CAD 6.6 million as compared with a current and deferred income and resource tax expense of CAD 3.4 million for the year ended December 31, 2014. These all resulted in a net loss attributable to shareholders of the company for the year ended December 31, 2015, of CAD 102 million or CAD 0.66 per share as compared to a net loss of CAD 22.5 million or CAD 0.15 per share for the year ended December 31, 2014. If we take out all of the accounting non-cash items, the company reported adjusted EBITDA of CAD 59.3 million and adjusted earnings of CAD 11.4 million or about CAD 0.10 per share for the year ended December 31, 2015, this compares with an adjusted EBITDA of CAD 78 million or adjusted earnings of CAD 28.7 million or CAD 0.24 per share for the year ended December 31, 2014. As noted on slide 14, the company produced cash flow from operations of CAD 21.6 million during the year as compared to CAD 47.2 million for the year ended December 31, 2014. As of December 31, 2015, the company had cash on hand of about US$12.2 million. In conclusion, we delivered a very good year despite the prevailing commodity price environment. As noted on slide 15, our prior R&Ds are focused on continuing to maximize cash flow and minimize costs. We have a number of financial levers that give us some financial flexibility that could be called upon if required. We look forward to a successful 2016 year and are confident our production targets will be met. I would now like to open the lines up for any questions that people may have.

Thank you. Your first question comes from Mark Turner from Scotiabank. Please go ahead.

Hey, good morning guys. Just maybe the first question, I want to make sure that I understand Jim correctly, because I believe you said month-to-date, but so where – where – what has the throughout then I guess so far, you mentioned 39,000 tonnes per day, I wasn't sure if that was operating and if that was month-to-date in February or if that was so quarter-to-date?

No, month-to-date in February was 39,136 as of the 20th, which is 44,000 operating.

Okay. And then in the first quarter, I – presuming, but not mentioning if that – that it might have been lower – sort of scheduled or unscheduled downtime?

That's right. In January, we were only about 35,000 and that was due to the failure of our discharge screen on the SAG mill and we do have a standby screen, that's been put in place and we're working very well now.

Okay. As majority of my questions were more focused towards the balance sheet, wondering if you could provide any more color on the discussions that you've had around terming out or amending the amortization scheduled the senior secured credit facility, just I guess magnitude of what you're looking for and also timing of when the discussion started, how far long you believe they are?

Yeah. I think that's the broad discussion, he and I visited Tokyo early this year and had the discussions with the banks, I'll let Rod to address that.

Hi, Mark. Good question. So, as Jim noted, we met with the bank late in December and put our proposal forward, let's say, rescheduling the amortization schedule, as for an example. We have a payment that starts to go up December that was CAD 8.1 million scheduled for this coming December, and we've asked that to be reduced down to CAD 1.6 million, and just to better match the balance of the loan life with our reserve life, which has an extra two years and better match the current commodity prices. That process will take about three months to four months to complete. We've got the next step is the independent engineers doing a site visit, they've been there before and everything has been well before and we don't expect anything to be different here. So, I would hope to have some to say early in Q2 on this. We've also asked for couple of other more modest modifications to this somehow on some reporting requirements were just to better match the site work. So, for example, we have an environmental certificate, we gave in February, we like to push that to April, just to better match when that work gets done at the site. And then we also have the debt service reserve account that we presently fund via corporate guarantees between Mitsubishi and ourselves and we like to extend that out to another year as well. So that's sort of yaks' and the work is in progress and as I mentioned, it takes about three months to four months to get that completed.

Okay. So, probably another three months to four months to – clarity on whether they will accept extending out the corporate guarantee on the...

Yeah, I would expect somewhere early in Q2.

Okay. And then, just maybe clarification and...

Yeah, that's a good point. I mean, Jim just mentioned, also Mark, the recently announced hydro plant, I mean that means about CAD 22.5 million to us.

Yeah, absolutely.

So, we have other things going on as well at the same time. We have also got as Jim mentioned, the tolling fee, that's worth another CAD 14 million, so – and of course, fuel is a lot cheaper than what we budgeted. Right now, we're running significantly below. I think we used a budget about CAD 0.82 and we're currently around CAD 0.61, CAD 0.62. So, quite a savings there right now.

My other two questions were going to be, one, around the electricity deferral, been able to see what's out there, I guess being publicly written up in different media sources, but is there an expectation of timing of when you'd be signing that and when that savings would actually be kicking in? And then, my second question was going be on the toll milling, that $1 per tonne, is that – it sounds like that's already in place?

Yes. I can answer that, number one, we've been talking back and forth with government recently and the 75% deferral kicks in at about 225, up or below 225 U.S. copper. And that probably will start in March.

Okay.

We're just in the process of – or there in the process of putting the agreements together. Now, with regard to the tolling that's all we've been there. When we financed the secondary crusher, we were allowed with the banks to charge tolling fee of CAD 1 a tonne. So, that's about CAD 14 million a year, and what ourselves and Mitsubishi have agreed is to defer the payments of that. That CAD 14 million cost is in our operating cost and we've agreed we could defer that, the payment of it.

So, you've agreed that you could defer it, but it's not necessarily being deferred yet or is that...

No, no, we're deferring it now.

Okay. Perfect. I will jump to the back of the queue if I have any more questions. Thank you.

Thanks, Mark.

Thank you. Your next question comes from Stefan Ioannou from Haywood Securities. Please go ahead.

Great. Thanks very much. Mark actually got most of my questions. But just – maybe just a couple of follow-ups. Actually one thing, just on the liquidity discussion in the MD&A, there is this mention of a CAD 4.8 million remaining payable I guess related to the secondary crusher. Just is that going to – does that mean it's going to come out in Q1 or is it later in the year or what's the timing on that?

No, that's going to be throughout the year here...

Okay. So, if we just sort of model it, just break it up, look divided by four basically, okay on a quarter basis. Okay. Just so I'm clear on the – just on this toll milling fee attached to the secondary crusher, so the crusher cost CAD 40 million and then you also agreed to pay an additional CAD 1 per tonne on top of that to finance it or how does that work exactly?

No, what happened is – prior to putting in the secondary crusher, we were operating with some contract crusher operator.

That's right. Yeah.

And that was costing us about CAD 3 a tonne to prices of rock. What we did as we finance the crusher with equity, also and our partner. And then we had the senior lenders agree that we could charge the mine a CAD 1 a tonne to recover our investment.

Okay.

Ahead of the bank payment.

Oh, I see, I see.

So, what we do is, we charge the mine CAD 1 a tonne, but that's paid to the partners and we both agreed that we can defer those payments until the copper prices improve.

Okay. Now, fair enough. Got it. Just wanted to make sure I was clear on that. Thanks very much guys.

But that CAD 1 a tonne is in our operating cost and it shows up there is a cost.

Okay, yeah, exactly. Thanks.

Your next question comes from Marco Rodriguez from Stonegate Capital Markets. Please go ahead.

Hi, guys. Thank you for taking my call, my questions. Most of my questions have been answered, just one real quick follow-up, I'm not sure if I quite heard it. On the deferrals that you have their for the power as well as for the tolling fees, is there a cost associated with that, that will be accruing?

Yeah. So, for example, the electricity, we would be billed our electricity – normal electricity rates, but as from a cash flow point of view, you would be only paying 25% of that bill, and the balance then essentially gets pushed out as a payable. So, there is a cost there and they'll be charging interest on that, what we know is about 8%. Publicly we don't have all the details yet about what we believe will be charged. And so, you will see the accounts pay, it will be a non-current accounts payable that will, that accrue on the balance sheet and then be repaid in stronger copper prices.

Got you. And on the tolling fee payments?

With respect to the tolling fee, we've agreed to defer those and there is no – no interest or anything that we're charging the mine on that, and again will be repaid in a stronger commodity price environment.

Got you. Thanks a lot. Appreciate it guys.

Your next question comes from Alex Terentiew from Raymond James. Please go ahead. Pardon me Alex, your line is open, you may ask your question.

Yeah, sorry about that. Just one additional follow-up question on liquidity, you mentioned mining this year at about 174,000 tonnes a day, which is obviously quite a bit above your 37.5 mill rate and even still quite a bit above two to one strip. So, can you just give me a bit of color on to where that additional mining is – where those additional tonnes are coming or going to rather? And if you have any ability to slowdown or defer some of those fees or some of those tonnes?

Good – good question. Thanks for the question Alex. With respect to the increased rate this year, we've – don't forget we've -- the low grade stockpile. And so that accounts for some of that moving per day. Our increased mining rate also, as Jim pointed in his talk, is depended on your haul and where you're hauling to. And with Virginia, it's a little bit shorter haul, so our rates do go up – on a daily basis due to the shorter haul.

Okay. And just a related question I guess, with the CAD 25 million write-down in the low-grade inventory. How are you thinking about some of this materially, you're talking about this low-grade stockpile. Is it – I mean, do you think there is a chance of this, does – could be reclassified or is it effectively waste material, I'm just trying to get a sense of accounting for it cash flows?

Sure. With respect to the write-down that we took, the CAD 25 million, if you look that on a constant dollar basis, actually we wouldn't had a write-down, but we discounted that profit back about nine years, because low-grade stockpile won't be processed until that time and under the IFRS rule, it's little gray, but some companies are discounting back and some are not. We chose to be conservative and discount back and that created a potential write-down there, the CAD 25 million that we decided to take. And we used a – I believe it was about a 9% discount rate there and discounting that back. And now under IFRS rule, if it – when commodity prices come back, you can write that back up if you so choose to, and I don't – I don't know what we'll do at that point in time, we'll cross that bridge when we get there. With respect to how we differ, we differ based on copper content and we each quarter were doing that net realizable value on the entire low-grade stockpile. So, we certainly monitor that from the cash flow point of view, we're typically moving about 8 million tonnes to 12 million tonnes per year to the low-grade stockpile and it does vary each year depending on where we are in the mine plan.

Okay. Great. Thanks. And if I may just one additional question that, you've given some guidance on production, but I can't recall, I can't remember seeing anything, but give any guidance you can give us on what your expectations are for the cash cost this year?

Well, I would expect our cost to be similar to -- this past year where we were sort of all in at CAD 1.75 and cited that CAD 1.25 range.

Okay. Great. Thank you.

Thank you. [Operator Instructions] Thank you. Your next question is from Craig Hutchinson from TD Securities. Please go ahead.

Good morning. Just had a follow-up question on the power agreement here, the deferral. You said it kicks in March and it applies when the copper price is below US$2.25 a pound. How does it work if it goes above it, is it some sort of trailing quarterly basis, is there a time period if it's below US$2.25 for say a quarter or you just sort of -- can you differ those costs or once it creep above US$2.25 automatically you have to start paying the power at full cost?

No. You're right, it is progressive in the sense that it is based on the prior month's average LME price. And at US$2.25 and below, it's 75% deferral, and the US$2.41 and below, it's both 50% deferral. And then as it goes up to US$2.58 approximately it's both 25% deferral. So it's progressive as the price of copper goes up. And I mentioned, the U.S. price is unfortunate, it's based in Canadian prices, so we've just assumed the exchange rate to get some idea of what it is in the U.S terms.

Okay. That's very helpful. Thanks.

Thank you. There are no further questions at this time.

Well, I'd like to thank everyone for tuning into the 2015 year-end earnings call. And as usual, Jim and I are always available if you have any other questions you want to phone us direct on. Thank you very much. Good bye.

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and we ask that you please disconnect your lines.