Hudbay Minerals Inc. (HBM) Q1 2016 Earnings Report, Transcript and Summary

Good morning ladies and gentlemen. Thank you for standing by. Welcome to the HudBay Minerals Inc, Q1 2016 conference call. [Operator Instructions] I would like remind everyone that this conference call is being recorded today April 29 at 10 AM Eastern time. I will now turn the conference over to Ms. Candace Brule, Investor Relations. Please go ahead.

Thank you, operator. Good morning and welcome to HudBay's 2016 first-quarter results conference call. HudBay's financial results were issued yesterday and are available our website 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 Alan Hair, HudBay's President and Chief Executive Officer. Accompanying Alan for the Q&A portion of the call will be David Bryson, our Senior Vice President and Chief Financial Officer; Cashel Meagher, our Senior Vice President and Chief Operating Officer; Eric Caba, 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. As many are aware effective July 1, 2015 we converted reporting to US dollars and therefore all amounts are in US dollars unless otherwise noted. And now I'll pass the call over to Alan Hair. Alan?

Thanks Candace. Good morning everyone. The achievement of commercial production at Constancia last year, solidified HudBay's transition into a low-cost high-quality copper producer. In the first quarter of 2016, we saw increased copper production volumes and lower cash cost per pound of copper produced resulting in increased operating cash flow versus the same quarter last year. Copper production increased more than 150% to approximately 39,000 tons despite having reduced throughput to Constancia while the trunnions on one of the grinding circuits were being replaced March. As a result, we nearly doubled our revenues to $254 million compared to the same period in 2015 notwithstanding lower realized copper and zinc prices. Earlier this year in response to lower commodity prices we took specific actions to reduce capital and operating costs. The initial results of those assets were evident during the first quarter. As a result of the ramp-up of production at Constancia and ongoing cost-reduction initiatives consolidated cash costs net of byproduct credits decreased to $1.15 per pound from $1.44 per pound in the first quarter last year. Similarly, incorporating saving cost royalties and copper G&A consolidated all in sustained cash cost net of byproduct credits was $1.80 per pound a decline from $2.67 per pound in the first quarter last year, reflecting significantly higher copper reduction from the ramp up of Constancia. Operating cash flow grew to approximate $72 million or $0.31 per share from approximately $70 million or $0.07 per share in the same period last year. Net loss and loss per share in the first quarter 2016 were $15.8 million and $0.07 respectively. Net loss reflects $23 million in interest expense that’s no longer been capitalized following the achievement of commercial production in Constancia on April 30, 2015. Based on our operating and cost performance to date we're well on track to achieve the cost reduction targets of over $100 million we announced last quarter and meet our production operating and capital cost guidance for 2016. As of March 31, 2016 Hudbay had liquidity of approximately $190 million, including $86 million in cash and cash equivalents, as well as availability under the company’s secured credit facilities, which we amended at the end of March. Liquidity at March 31, 2016 is net of the semiannual interest payment of $44 million on Hudbay’s senior unsecured notes. Peruvian sales tax refunds during the first quarter were also about $20 million lower than expected due to changes in the refund process, but we expect to catch up during the second quarter. Liquidity at the end of the first quarter is expected to be a low point for 2016. We expect our liquidity position to improve at current metal prices as we generate free cash flow from our operations, continue to benefit from ongoing cost-reduction initiatives and collect Peruvian sales tax refunds. During the first quarter, Constancia mining operations continued as planned and cost optimization progressed. Ore Mill decreased 2.6 million tons from 20.4 million tons in the fourth quarter of 2015, due to lower mill capacity during the replacement of the trunnions on both the both the SAG and ball mills on one of the two grinding circuits. The average milled copper grade was 0.57% in the first quarter of 2016, slightly lower than the fourth quarter of 2015. The plan replacement of the damage trunnions at Constancia was completed without incident and ahead of schedule in late March 2016. The downtime was approximately 5 weeks, compared to the 6 to 8 weeks originally anticipated during which time the other grinding circuit continued to operate at full capacity with good throughput and recoveries. Both circuits have since ramped up to full capacity. Optimization of plant performance remains a primary focus for Constancia. Recoveries have improved as the metallurgy associated with the varying ore types as better understood. Total copper recovery including both sulfides and oxides in the first quarter 2016 was 81.8%, compared to 79.8% in the fourth quarter of 2015. Combined unit operating costs of $7.76 per ton were within guidance expectations for 2016 notwithstanding the reduced throughput associated with replacement of the trunnions. Cash cost and sustaining cash costs net of byproduct credits was $1.15 per pound and $1.49 per pound, respectively in the first quarter 2016. Sustained capital is expected to be high on the second and third quarters after the rainy season, but the impact on sustaining cash cost should be partially offset by higher production levels at desired throughput rates during those quarters with both grinding circuits now at full production. Concentrate inventory levels improve maintained at normal working levels during the first quarter of 2016 as result of the improved trucking capacity implementing 2015 and reduced port congestion. The ongoing PRS expansion at the Matarani port is expected to be completed by June 2016, which will improve access to Hudbay’s designated pier – Pier C. Metal production and combined unit operating costs in Peru are expected to be within guidance ranges for 2016. In Manitoba, for the first quarter 2016 total ore mine grew by 22% compared to the same period in 2015 as a result of increased production at our Lalor and 777 mining’s. The grades were lower in the first quarter 2016, compared to the same quarter last year in line with mine plant expectations with exception of Lalor zinc grades which were lower due to stop sequencing and are expected to improve throughout the balance of the year. Ore process in Manitoba was higher than the same period in 2015 as a result of increased production at Lalor offset by unscheduled maintenance at the Flin Flon mill during the quarter. Overall production of zinc, gold and silver Manitoba remained fairly consistent compared to the same period last year as higher ore throughput was offset by lower mine grades. Copper production decreased due to lower production from the Flin Flon mill and lower copperhead grades at 777 and Lalor. In Manitoba, cash costs, net of byproduct credits in the first quarter 2016 was $1.14 per pound, a decrease of $0.30 per pound compared to the same period of 2015. Manitoba cash costs are expected to continue to decline over the balance of 2016 as copper and zinc production increases in line with our guidance ranges and cost-reduction initiatives to take effect. The Manitoba sustaining cash costs net of byproduct credits of $2.32 per pound was also affected by higher sustaining capital cost in the first quarter 2016, due to exploration drilling and development at Lalor and mining equipment rebuilds and purchases. Manitoba sustained capital is expected to be lower in future quarters in 2016, in line with guidance. Metal production and combined unit operation cost in Manitoba are expected to be within guidance ranges for 2016. We began the year by identifying cost savings across our business and restructuring our credit facilities to defer debt repayments, arrange more flexible financial covenants and strengthen our liquidity position. Now that we have implemented these cost-saving initiatives and successfully completed the mill repairs at Constancia, we believe we're well-positioned to generate increasing free cash flows from our four producing mines for the remainder of the year. While our priority for the year ahead is to manage our business and generate cash flow from operations in this current metals price environment, we have not lost sight of the potential of our growth opportunities pipeline. We expect to publish an updated 43-101 technical report in Constancia by the end of the year, which will contain further information on the Pampacancha development opportunity. At Lalor, we're continuing our 11,000 meter drill program in the gold zone, which will form the basis of an updated mining plan and processing in the Snow Lake area. We expect to finalize this by the end of 2016. At Rosemont, we will continue to advance permitting activities and engineering studies throughout the year. We believe the HudBay is uniquely positioned amongst our peers with attractive low-cost producing assets and low risk jurisdictions providing near-term downside protection and leverage to an eventual recovery in copper prices together with a strong pipeline of growth opportunities with attractive potential returns in Lalor, Pampacancha, and Rosemont. With that, we're pleased to take your questions.

I didn't think I would be first. David Bryson, you talk about maximizing free cash flow now that you’ve got everything settled down. What do you think your cash balance will look like by the end of the year in terms of some kind of quantum from where we are now or how do you think free cash flow evolves over the course of the year?

Hi, Greg. Obviously, it's going to be partly a function of copper prices, but given that we had set the business with the cost reduction initiatives in the debt to rescheduling earlier this year to be no worse than breakeven at two dollar copper prices, assuming that we sustain in and around the $2.25 range, we should definitely do better than that. Q1 was expected to be a bit of a lower point in the total liquidity, which is how we tend to think about it just given that you can drawdown on and repay revolving credit facilities based on working capital requirements. So going forward, I think, we certainly expect improving cash flow both from the Peruvian sales tax refunds, but also outside of those working capital dynamics seeing good cash flow from Peru as well as Manitoba with Peru running with both lines for the balance of the year and as we've talked about getting the Manitoba production backup with the higher grades and full mill throughput.

So spot copper dated at, say, $2.25? Where do you think you are going to be?

Well, I think in terms of sort of bottom line free cash flow I think that you probably be in $50 million to $100 million range up from where you were at the end of December 2015 adjusted for an – sort of revolver drawdown and some repayments.

Does that include the Peru sales tax refund?

Yeah.

Yes, it does, okay. And that's about $40 million to $50 million, if I remember correctly?

For the year, yeah.

Yeah, for the year. Okay. Great, thank you.

Your next question will come the line of Stefan Ioannou with Haywood Securities. Please go ahead.

Great. Thanks very much guys. It's great to see the – they are trying to replace some quickly. Just wondering in Manitoba, can you just comment maybe a bit more on the unscheduled downtime at Flin Flon, like what actually happened there?

Hi, Stefan, Cashel here. Basically what we did is we had a breakdown on two pieces of equipment associated the mill, one was the crusher in Flin Flon and the other was a belt tear and both of those took us down for about eight days. So they are one offs and we do have capacity in the mill and we have stockpiles in front of it now and we will work through that throughout the balance of the year.

Okay, great. And then just looking at the Canadian facility $39 million was drawn, was that just working capital that you wanted to sort of take advantage of? Or anything else there?

Yeah, I would say that was mainly related to just the interest payment at the end of March and just wanting to ensure that there was ample liquidity. I think assuming that cash flow moves where we expect it to over the balance of the year, we look to pay that back down.

Okay. And maybe just one sort of housekeeping question, juts on the senior unsecured notes, I know in the note it says that it’s – the semiannual stuff, that’s been payable on April 1, but from accounting point of view, it actually goes out on March 31, does that – just so I’m clear on that.

From an actual cash management perspective, you have to actually send the cash to the trustee a couple of days prior to the scheduled payment date.

Yeah.

So what happens is, it leaves our bank accounts on about March 30 and then at that point, we reclass it from cash and cash equivalents over to a prepaid obligation. And so, at that point, it comes out of our liquidity calculations.

Yeah, okay, so, the bottom line that your cash position and everything versus – and your liquidity that you stated here includes that payment obviously at March 31, if you will.

It reflects that payment having gone out the door, yeah.

Yeah, okay, great. Thanks very much guys.

[Operator Instructions] We’ll now take our next question from the line of John Tumazos with John Tumazos Very Independent Research. Please go ahead.

Thank you. In terms of the information flow over the balance of the year, you expect a new technical report incorporating Pampacancha, you expect the new technical report at Lalor by year end. You didn’t say a new technical report at Rosemont if I heard you correctly. Are there any new projects or new capital needs likely to advance either from successful drilling at Lalor, at Constancia or new external opportunities that might change priorities in your project queue? Could Rosemont be a candidate for JV partner?

Okay. John, I think we prefer to characterize, we’ve set the sales up when we made our spending reductions that we announced last quarter to try and minimize discretionary capital expenditure through the course of 2016, but obviously in this current environment, we are looking forward to turn-off cash. So we do with the opportunity to be maybe potentially advancing, but those aren’t in our plans right now. We are looking to, as a say, still to be recently cautious, but as the year progress, we may take a different view in that.

As we look at the different projects in the pipeline, John, as Allen mentioned, we’re going to evaluate things like Lalor, like Pampacancha, and Rosemont as they develop depending on the returns and payback periods associated with that. We already have a joint venture partner at Rosemont and so we think a lot of – there is still work to be done in terms of developing an eventual financing plan with Rosemont, but that’s a bit hypothetical until we have permits in hand and a corporate price that would support Rosemont’s development. In the meantime, we don’t expect to make significant capital commitments to Rosemont other than just steadily moving it forward and meeting the objectives that we’ve set for the project. And Lalor and Pampacancha as we have more information we’ll have more insight to share in terms of what the path forward for those initiatives will be.

Should we optimistic that the new technical study at Lalor brings new reserves and resources?

Hi, John, Cashel here. I think the normal process goes as you convert resource to reserve and that’s what we’re doing in the corporate gold zone and the gold zone and we intend to bring that forward at the conclusion of the drilling. And so far to-date, the drilling is very encouraging, proving out sort of what the resource has already indicated.

Thank you.

It appears there are no further questions at this time. I’d like to turn the conference back to Mr. Alan Hair for any additional or closing remarks.

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

Ladies and gentlemen, thank you very much for participating. You may now disconnect your lines.