Hudbay Minerals Inc. (HBM) Q2 2016 Earnings Report, Transcript and Summary

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.

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?

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 million in new commitments for our credit facilities bringing total commitments under the facilities to $530 million. Including this additional credit availability and cash and cash equivalents of $142 million, total liquidity at June 30 was $294 million compared to $190 million at the end of March, which was expected to be the low point in our liquidity for the year. We are pleased with our operating cash flow generation in the second quarter which grew to $138 million from $102 million in the first quarter. In addition to strong operating cash flow, we received significant Peru value-added tax free funds during the quarter, some of which was catch up from the first quarter. At current spot prices we expect to continue to be cash flow positive through the balance of the year. However, cash flow in the third quarter will likely be softer and potentially negative due to peak levels of sustaining capital in Peru and a bond interest payment in late September. In the fourth quarter of this year, we expect our liquidity position to improve at current metal prices as we continue to generate free cash flow from our operations and realize the benefits from our cost reduction initiatives. Constancia mining operations and cost optimization continued as planned during the second quarter. Ore milled increased to 6.7 million tons from 6.2 million tons in the first quarter of this year, while the average milled copper grade increased to 0.62% from 0.57% in the first quarter. Mill throughput in May and June was affected by higher than expected liner wear in the SAG mills. The liners were successfully replaced in early July. Optimization of plant performance remains the primary focus for Constancia. Total copper recovery in the second quarter increased to 82.7% from 81.8% last quarter as the metallurgy associated with the varying ore types is better understood. During the second quarter, production of copper and precious metals increased by 19% and 52% respectively compared to the first quarter, due to higher mill throughputs, head grades and recoveries. Combined unit operating cost for the second quarter was $7.88 per ton and were within guidance expectations for 2016. Cash cost net of by-product credits in the second quarter was $0.97 per pound of copper produced. Sustaining cash cost net of by-product credits in the second quarter was $1.39, our best results since reaching commercial production at Constancia last year. Peru sustaining cash cost in third quarter is expected to be affected by higher sustaining CapEx as we ramp up heavy civil earthwork to [indiscernible] activity on the Constancia tailings dam during the dry season. Concentrate inventory at the Constancia mining sites and the Matarani port are currently at normal working levels despite a temporary increase in the inventories at the port due to the ocean swells in late June. Metal production, sustaining costs and combined unit operating costs in Peru are expected to be within guidance ranges for 2016. Ore produced at our Manitoba mines during the second quarter of 2016 was fairly consistent with the first quarter. Copper grades were higher at Reed as a result of the stopes mined. While zinc grades at Lalor improved over the first quarter as expected. We expect the zinc grades at both 777 and Lalor to increase throughout the balance of the year. Ore processed in the Flin Flon concentrator during the second quarter was marginally higher than the first quarter. Copper and gold recoveries were higher in the second quarter compared to the first quarter as a result of higher head grades, while zinc and silver recoveries were slightly lower due to lower head grades. Ore processed in the Snow Lake concentrator in the second quarter was 11% higher than the first quarter as a result of higher production at the Lalor mine. The second quarter represented the highest throughput rate experienced at the Snow Lake concentrators since the refurbished mill was commissioned in 2014. Manitoba cash costs and sustaining cast cost, net of by-product credits, in the second quarter was $0.37 and $1.10 per pound of copper produced, a decrease of 68% and 53% respectively, compared to the first quarter. The decrease is largely the effect of cost reduction initiatives, increased copper production and higher sales of precious metals. Metal production, sustaining cost and combined unit operating cost in Manitoba are expected to be within guidance ranges for 2016. Our priority for the remainder of the year is to optimize the business and generate cash flow from our operations in this current metals price environment. We believe our performance in the second quarter demonstrates our ability to achieve our 2016 objectives. We also remain committed to realizing the full potential of our growth opportunities pipeline. We are on track to publish an updated 43-101 technical report on Constancia by the end of the year, which will contain further insights on the opportunity from developing the Pampacancha satellite deposit and incorporating it back into the Constancia mine plan. At Lalor we completed our 11,000 meter drill program in the gold zone at the end of June, which will form the basis of an updated plan for mining and processing in the Snow Lake area. We are continuing to work in completing an updated technical report on Lalor, incorporating a new mining plan with the integration of the New Britannia gold mill, which we expect to finalize in late 2016 or early 2017. We believe New Britannia has the potential to significantly increase the gold recoveries, which together with the results from the gold zone drill program will provide an opportunity to realize value through a potential precious metals streaming transaction if the copper prices don’t improve in the near-term. The proceed of the streaming transaction could be used to fund the Lalor optimization work and potentially the development of Pampacancha if the time is right. We believe that the streaming transaction can be structured in a way to preserve substantial gold exploration upright from Lalor for Hudbay's shareholders. At Rosemont, we continue to advance permitting activities and engineering studies. In summary, we continue to believe that Hudbay is uniquely positioned amongst our peers with attractive low cost, producing assets in low risk jurisdiction providing near-term downside protection, leverage to an eventual recovery in copper prices and meaningful exposure to zinc. Hudbay also offers a strong pipeline of internal growth opportunities with attractive potential returns in Lalor, Pampacancha and Rosemont. With that, we are pleased to take your questions.

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

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?

Cashel, maybe you can provide some extra color?

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.

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.

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.

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?

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

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

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.

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.

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?

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.

Okay. And this is all from the underground drills?

Yes. This has all been underground drilling.

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?

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

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

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.

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.

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

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.

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.

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.

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