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Hudbay Minerals Inc. (HBM)

Q2 2016 Earnings Call· Thu, Jul 28, 2016

$22.46

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Transcript

Operator

Operator

Good morning ladies and gentlemen and thank you for standing by. Welcome to the HudBay Minerals Q2 2016 conference call. [Operator Instructions] I would like to remind everyone that this conference call is being recorded today July 28, at 10 AM Eastern time. I will now turn the conference over to Ms. Candace Brule, Investor Relations. Please go ahead Ms. Brule.

Candace Brule

Analyst

Thank you, operator. Good morning everyone and welcome to HudBay's 2016 second quarter results conference call. HudBay's financial results were issued yesterday and are available our Web site www.hudbay.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; 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 Web site. As a reminder, all amounts discussed on today's call are in U.S. dollars unless otherwise noted. And now I'll pass the call over to Alan Hair. Alan?

Alan Hair

Analyst

Thanks, Candace. Good morning, everyone. In the second quarter of 2016, the results from our ongoing initiatives to optimize our operations and reduce cost were evident. We saw increased production volumes across all metros compared to the first quarter of 2016, mainly due to the strong operating performance at our Constancia operation in Peru. Costs at all of our operations were reduced resulting in consolidated cash cost, net of byproduct credits, of $0.83 per pound of copper produced, 28% lower than the first quarter. Consolidated all-in sustaining cash cost net of by-product credits declined by 21% to $1.42 per pound of copper produced from $1.80 per pound last quarter. Our production and cost performance at our operations enabled us to improve our financial performance during this quarter despite the low commodity price environment. The net loss and loss per share in the second quarter 2016 were $5.7 million and $0.02 respectively, an improvement compared to the first quarter. Net loss and loss per share in the second quarter was affected by deferred tax adjustments of negative $0.04 per share and the delay in loading a 20,000 ton parcel of copper concentrate at the port in Peru. The port delays were due to the same weather factors that closed a number of Chilean ports in late June. Operating cash flow increased in the second quarter compared to the first quarter and the company generated positive free cash flow even after capital expenditures and debt principal repayments during the quarter. Based on our operating and cost performance to date, we are well-positioned to achieve the cost reduction targets of over $100 million we announced earlier this year, as well as a reduction in operating and capital cost guidance for 2016. During the second quarter, we were able to secure an additional $30…

Operator

Operator

[Operator Instructions] And our first question will come from the line of Stefan Ioannou. Please go ahead.

Stefan Ioannou

Analyst

Maybe just a little bit of a housekeeping question. Just on the liner change that happened, I guess, in early July. Was that sort of, would that fall under sort of scheduled maintenance or is that notable sort of additional cost item that we were going to see come out in Q3?

Alan Hair

Analyst

Cashel, maybe you can provide some extra color?

Cashel Meagher

Analyst

It would be scheduled maintenance. However, one of our providers ended up delaying longer than what was expected for the delivery and we needed make up liners in old liners in there. So as such, we ended up replacing liners more than expected until the actual ordered replacement liners showed up. So it's a new mill. We are still working on life of liners and who is the best provider for it. And so we have now built that into our future preventative maintenance programs.

Stefan Ioannou

Analyst

Okay. Got it. Got it. And just now that you are getting into the Constancia pit there, just looking sort of at the head grade profile over the next year or so. Is it still pretty much in line with what is in the feasibility study mine plan? I am just trying to think of where the grade is going to go in lieu of having in Pampacancha higher grade come into the mine plan and in time. But just in the near-term, are we going to see grades at that sort of upper 0.5% to even 0.6% level over the next six to 12 months or are they going to start to fall off really quickly here.

Cashel Meagher

Analyst

I think what we have explained in the past is, with the previous technical report, the older one, we expect one closer to the end of this year to replace it and put in some of the information now of what we understand with the performance of the different ore types. With that being said, what we noticed is when we do have this higher proportion of oxide mineral, we do get reduced recovery. But that reduced recovery is more than offset by the increased throughput and also the increased total copper grade. So I think on a balance you are going to see, as you have seen, more or less expected, still following the same profile as did the original technical report, but maybe a lower recovery and a higher throughput and a little higher head grade. We are getting back into some more of that oxide material late this year for a short period of time, for about two or three months. That will bump up the head grade again, maybe lower the recovery a little. However, the output of metal, you can expect more or less the same.

Stefan Ioannou

Analyst

Okay. And then I guess, I mean just looking forward in terms of timing, when the mill feed is going to be dominated by "sulphide mineralogy", is that still sort of mid-2017 onwards or, is that fair?

Cashel Meagher

Analyst

Yes. More or less. That’s what we believe.

Operator

Operator

[Operator Instructions] And our next question will come from the line of [Alex Cancivio] [ph]. Please go ahead.

Unidentified Analyst

Analyst

Alan, I just missed some of your comments you made there on Lalor. Can you just repeat them for me, what sort of exploration drilling you guys are doing there and timing of this gold zone? And then also your plan for the updated technical report on incorporating the gold zone in the New Britannia mill.

Alan Hair

Analyst

Okay, Alex. Yes, we just completed an 11,000 meter drill program at the end of June. So obviously we are still processing that material and a number of technical studies ongoing. So we are looking now to provide a technical report that will incorporate the gold zone and the New Britannia mill, either late this year or early 2017.

Unidentified Analyst

Analyst

Okay. And that gold zone, I know a year or two ago you guys kind of changed how you classify some of those zones there and the lower depths at Lalor. You used to have a copper, gold and -- I can't recall exactly but this is a predominantly gold zone then? Very little base metals?

Alan Hair

Analyst

We haven't actually changed, Alex. We have always described three main zones. The upper base metal zone, the intermediate gold zone, the lower copper, gold zone. But you are correct, this is a higher gold, lower base metal zone that we are talking about, that we have been doing the drilling on zone 25.

Unidentified Analyst

Analyst

Okay. And this is all from the underground drills?

Alan Hair

Analyst

Yes. This has all been underground drilling.

Unidentified Analyst

Analyst

Okay. And the plan, just conceptually at the moment, I know your study is not out yet, but the plan is to start production from an expanded operation including some more from that gold zone in 2018?

Alan Hair

Analyst

Tentatively, that’s what we are currently looking at, yes.

Operator

Operator

Your next question will come from the line of [Oris Wacodoc] [ph]. Please go ahead.

Unidentified Analyst

Analyst

Just curious on your thinking around the maturity of your bonds. We have seen a number of your peers start to early term-out some of these maturities. Just wondering if that’s something you are considering. Thank you.

David Bryson

Analyst

Hey, [Oris] [ph], it's David. We are continuing to monitor that. We are encouraged by the improvement in conditions we are seeing in the high yield market. Obviously, the secondary trading price of our bonds has come up although right now they seem to be yielding in the 11% to 11.5%. So I don’t think that we are at a point given the call premium that we would be paying if we were to do the first call in October that it would really make economic sense for us to be doing a refinancing or term-out right now. But as the business continues to generate cash flow, we reduce net debt levels. We think that we will be well-positioned in also providing a little bit more insight on our plans for Lalor and Pampacancha that we don’t see any issues with that refinancing over the next year or two.

Unidentified Analyst

Analyst

And do you think that refinancing is tied to Rosemont or is it independent of Rosemont funding?

David Bryson

Analyst

It really depends on circumstances but I don’t think that we would necessarily wait to be in a position to proceed with Rosemont if we saw an attractive opportunity to refinance the bonds prior to that.

Operator

Operator

And we have no questions left at the moment. Ms. Brule, at this time I will turn the conference back to you for any additional or closing remarks.

Candace Brule

Analyst

Thank you, operator and thank you, everyone for participating. Please feel free to reach out to our investor relations group if you have any further questions.

Operator

Operator

This concludes today's call. Thank you for your participation. You may now disconnect your lines.