Hudbay Minerals Inc. (HBM) Q4 2016 Earnings Report, Transcript and Summary

Good morning. My name is Jody and I will be your conference operator today. At this time, I would like to welcome everyone to the Copper Mountain Mining Corporation 2016 and Year End Earnings Conference Call. [Operator Instructions] Rod Shier, Chief Financial Officer of Copper Mountain Mining Corporation, you may begin your conference.

Thank you, Jody. After opening remarks by management which will review the business and operational results for the fiscal year end 2016, we will open the lines to participants for questions, as noted by Jody. 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 and on Slide 1, if you are following along on the slides. And I will now turn the call over to Jim O’Rourke, our CEO for his remarks. Jim O’Rourke: Thank you, Rod. As Rod mentioned, the slide on Page 1 gives you a pretty good view of what the copper price has been doing in the last year, so I may just refer to that. So good morning, everyone and thank you for joining us. Today as Rod said, we will discuss the 2016 year end results and the operation in the Copper Mountain Mine and our corporate financials. I will briefly summarize the financial results and provide an update on various operational activities, after which Rod will provide financial details for the 2016 fiscal year. 2016 started as a very challenging year for the company, following the perceptive drop in copper price near the end of 2015. Copper price fluctuations in the $2 per pound range during the first 3 months of the quarter have been a challenge. Our team continued to aggressively pursue the cost reduction program initiated at the end of 2015 and achieved strong performance in 2016, with a decreased operating costs, while increasing mill throughput well above the design capacity. These achievements positioned the company favorably to take advantage of the increased copper prices at year end. As a result, we increased our cash position quarterly and end of the year with cash of $31.4 million, after the December payment of $14.4 million made toward our senior debt. During the fiscal year, the company completed a total of 13 shipments of copper concentrate, generating growth revenue of $278 million. Now, I am going to move on to for those with the slides take a look at your Page 2 – provides the highlights for the year. 2016 mine performance continue to show quarterly improvements throughout the year in mill throughput, while holding the average year’s operating site cost at $12 per pound of copper net of precious metal credits. Total production for the 2016 year was 103 million pounds of copper equivalent using current prices. This included 82.9 million pounds of copper, 30,800 ounces of gold and 291,900 ounces of silver. Copper production was slightly above guidance by 3.6% and 6.8% above the 2015 production level. For those with slides, again, guide you to Page 3, which is a Plan B with the pits. During the 2016 year, mining activities continued to focus in the Pit #2 area, as well as the Virginia Pit and the Saddle area. Mining in the Virginia Pit was completed at the end of September. A total of 68.8 million tons of material was mined during the year, including 23.4 tons of ore and 45.4 million tons of waste. The average mining rate was 187,900 ton per day, 8% above our 2016 guidance. Open pit mining cost averaged $1.69 per ton, or US$1.28 per ton and this is a reduction of 12.4% from the average 2015 mining cost. The lower unit costs were achieved with improved utilization of our dispatch system, plus the reduced diesel fuel prices, and most importantly, the reduced haulage cycle times as a result of shorter waste haul distances. Improvements in the haulage options are key and alternatives to minimize the cycle times are continuously being evaluated. Our mining fleet continues to enjoy favorable mechanical availabilities. The mobile production equipment averaged plus 85% mechanical availability during the year. A modest 5,200 meter diamond drill program was completed in the west end of Pit #2 during the year. This program confirmed the continuity of mineralization beyond the western end to Pit #2 and added additional 10.8 million tons of ore grade mineralization to the resource. Additional modest drill program is planned for 2017 to further test the western extension. Copper grade for the year averaged 0.324% copper, slightly below our guidance of 0.33% copper, partially resulting from the company being delayed in receiving the permit amendment to mine the Virginia Pit. Mining in the smaller high-grade Oriole Pit was initiated near the end of the year and ore from this pit is planned for delivery to the mill in the latter half of 2017. The Oriole Pit, you can see is at the bottom of the Super Pit on the slide on Page 3. Moving on then to Page 4 for those who have the slides. Mill throughput improved quarterly throughout the year and averaged 38,900 tons per day, 11% increase as compared to the 35,100 ton per day average in 2015. During the fourth quarter of 2016, the mill achieved an average record throughput rate of 41,200 ton per day, an increase of 12.6% over the comparative period in 2015 and 20.3% above the design capacity. Mill operating time improved during the year and by year end, the mill had averaged 92.1% operating time compared to the 91.8% operating time during 2015. Copper recovery for 2016 fiscal year was on target and averaged 81.6%. I could now refer you to Slide 5, which provides the quarterly cost. The total cash cost for the year ending December 31, 2016 was $1.54 per pound copper sold, net of precious metal credits, while the site cost – cash cost averaged $1.12 per pound copper produced net of precious metal credits. This represents a reduction of 11.5% compared to 2015 total cash cost and a reduction of 10.4% compared to 2015 site cash costs net of precious metals. We continue to strive for the improvements at the mine site and the gains made in the past 2 years have positioned the company well to take advantage of the higher copper prices. In addition, Copper Mountain’s bottom line continues to benefit from the weaker Canadian dollar relative to the U.S. dollar. In keeping with our cost-reduction trend, no capital expenditures – major capital expenditures are planned for the balance of this year. Mill cost cutting or production gains have compromised the company’s environmental or safety targets. The mine continued its excellent safety record throughout the year and for the third consecutive year was the recipient of the Edward Prior Safety Award from the B.C. government, as the safest open pit mine in our class. I would now like to move on to the Slide 16, where we are providing the 2016 guidance table, 2016 production and the 2017 guidance. The dedication and cooperation of our employees and suppliers were key to the success of the mine during the past year. Because the mine site team exceeded their bonus criteria targets of mining cost reductions and mill throughput targets, a 5% bonus was earned and paid to all employees at year end. The mine operation is matured and we are confident we will continue to meet our ongoing targets to add shareholder value. Mine management will continue to evaluate all options to improve the operation, but we believe much of the low-hanging fruit has already been harvested. The operation is on track to meet our 2017 guidance level of 75 million to 85 million pounds of copper for the year with mill throughput scheduled to average 38,000 tons per day. The average mill operating time for 2017 is projected to be 89% to allow for a major scheduled maintenance shutdown during the first half of the year. Production in the first half of the year is planned to be lower than that during the second half due to this maintenance shutdown. The mill feed grade is forecast to average 0.3% copper with ore from the Pit #2 area, Battle zone and the newly developed Oriole pit in the latter part of the year. The mining rate continues to be in the plus 180,000 ton per day range. I will answer any specific questions during the answer period and for those wishing more detail. Thank you. Rod?

Thanks, Jim. As noted on Slide 7 for this year ended December 31, 2016, the company recognized net revenues of $278 million after pricing adjustments and smelter charges based on sales of 82.7 million pounds of copper, 29,900 ounces of gold and 283,900 ounces of silver with an average realized copper price of US$2.19 per pound. This compares to net revenues after pricing adjustments in smelter charges of $242 million based on an average provisional copper price of US$2.49 per pound for the year ended December 31, 2015. While average realized copper prices declined 12% year-over-year, net revenues increased 15% for the 2016 year as compared to the same period last year. This is attributed to the increased pounds of copper being produced and sold during 2015 as compared to the 2015 year. And as noted by Jim, this relates directly to the addition of the secondary crusher and plant optimization efforts by the mine site team. On Slide 8, you can see that cost of sales for the year ended December 31, 2016, were $250 million, which resulted in a gross profit of $27.6 million as compared to the cost of sales of $240 million, which resulted in a gross profit of $2.4 million for the year ended December 31, 2015. This increase in total cost is a result of moving more material than last year and as a result of the unit – and the costs are lower in the 2016 year than the previous year. General and administrative expenses for the year ended December 31, 2016 were $5.6 million compared to $6.1 million for the year ended December 31, 2015. It should be noted that this amount includes an allocation of mine site administration cost as well. Non-cash share-based compensation reflected in an expense of $800,000 for the year ended December 31, 2016 compared to expense of $1.1 million for the year ended December 31, 2015. For the year ended December 31, 2016, the company recorded finance income of $0.2 million and finance expense of $12.6 million as compared with finance income of $0.25 million and finance expense of $10.6 million for the year ended December 31, 2015. Finance expense primarily consists of the interest on loans and amortization of financing fees. For the year ended December 31, 2016, the company recognized a non-cash unrealized foreign exchange gain of $13 million. This compares with a non-cash unrealized foreign exchange loss of $65.5 million for the year ended December 31, 2015, which primarily relates to the company’s debt that is denominated in U.S. dollars. During the 2016 fiscal year end, the company recognized a non-cash unrealized loss on the interest rate swap of about $0.1 million as compared with a non-cash unrealized gain on the interest rate swap of about $2.3 million for the year ended December 31, 2015, 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 are non-cash in nature as outlined in the company’s MD&A and statement of cash flows. For the year ended December 31, 2016, the company recorded a current resource tax expense of $1.1 million and a nil deferred income and resource tax expense. This compares with the current resource tax expense of $200,000 and a deferred income and resource tax expense of $6.8 million for the year ended December 31, 2015. This all resulted in net income attributable to shareholders of the company of $7.7 million or about $0.06 per share for the year ended December 31, 2016 as compared to a net loss of $78.5 million or $0.66 per share for the year ended December 31, 2015. If we take out all the accounting non-cash items, the company reported adjusted EBITDA of $62.1 million and adjusted loss of $3.8 million or about $0.03 per share for the year ended December 31, 2016. This compares with an adjusted EBITDA of $59.3 million and an adjusted earnings of $11.4 million or about $0.10 per share for the year ended December 31, 2015. During the year, the company produced cash flow from operations of $75.2 million before working capital changes as compared to $38.8 million for the year ended December 31, 2015. During the year, the company repaid a total of $34.7 million in principal and interest on loans and ended the year with cash on hand of about $31.4 million. In conclusion, we delivered a very strong performance both operationally and financially during 2016 despite the corporate commodity price being depressed during most of the year. The rally towards year end was welcomed. We look forward to the 2017 year and are confident our production targets will be met. I would now like to open up the lines for any questions that people may have.

[Operator Instructions] Your first question comes from the line of Orest Wowkodaw, Scotia Bank. Your line is open.

Hi, good morning. I was just curious what you are anticipating with respect to gold production this year and also in regards to just sustaining capital including capitalized stripping? Jim O’Rourke: Well, with regard to gold production, it should be very similar in the 30,000 ounce range.

Okay.

Sustaining capital. Jim O’Rourke: Sustaining capital. It was pretty modest of $5 million.

Sorry, did you say $5 million? Is there a deferred stripping on top of that or would that include that?

The only deferred stripping that we ever incurred is a function of IFRS unfortunately, because we – any time our strip ratio dips above the LIFO mine average to the one we have to put a little bit on to the balance sheet to normalize that out and you will notice – you will note that in 2016, there was about $2 million that was deferred as a result of that very early in the year. We are not anticipating having to defer under our current plan, but that does get dictated unfortunately, if we dip above that 2:1 strip ratio.

Okay, appreciate that.

As Jim noted our – right now for the next little while we have a short haul and so the guys are really moving a lot of material.

Okay.

Yes. In terms of our mining activity, our mining cost, it’s the same fleet, same number of trucks and everything. So with the same fleet, if we get a short haul, our mining rates go up substantially. And as you can see last year, we were quite a bit over our plan and or our guidance and we are continuing at the higher rate right now.

Okay, so that $5 million is a good number to use for ‘17?

For capital, yes.

Yes, for sustaining capital, okay. And then just finally for me, in your disclosure talks about Mitsubishi, I guess funding US$4.8 million debt repayment in February. Can you just explain how the mechanics of this will work and in terms of your relationship now with them? Does this just increase or setup some kind of loan payable to them or can you please walk us through that?

Yes, sure I can walk you through that. That’s no problem. As you know, Mitsubishi guaranteed the term facility and part of our senior facility, there is a requirement in there to have about 45 days working capital at the mine and if management team and Mitsubishi is part of the team there – management team there is not that 45 days at the mine site. Mitsubishi has contributed the funds to make that term loan payment and you saw that in 2016 and you saw that in February of this year as well. And so what happens to that loan, it then becomes a loan due to Mitsubishi to be paid back down the road.

What’s the maturity of that?

The maturity is the short-term maturity and you will see it under our current liabilities, but it actually is not the intended as long-term they get rolled over every year. And so it gets pushed out, the intent would be that, that gets paid back after the senior credit facility and that’s an unsecured loan. So, it’s really just moving some loan payments a little bit further down the road as the net effect.

Okay, thank you very much.

Your next question comes from the line of Marco Rodriguez with Stonegate Capital. Your line is open.

Good morning. Thank you for taking my questions. Just a couple of real quick ones. First here, just on the electricity deferral aspect, your anticipation for fiscal ‘17 just to utilize the program?

Hi, Marco. Good to hear from you today. We certainly in our budgeting, we used 222 copper in our budgeting. So at that time, we were planning on deferral, but with – you have seen the increase in copper price to where we are at in the 270ish range now and there would be no deferral. We actually paid back about $300,000 last month, so you start to repay some of that deferred electricity. So based on where copper pricing is today, I would not use any electricity deferral.

Got it. And I am not sure if I caught this or missed this on the call, but do you have a CapEx spend for fiscal ‘17?

Yes. Orest was just asking that and it’s about $5 million for sustaining capital is a good number to use.

Got it. Thanks a lot, guys. Appreciate your time.

Thanks.

[Operator Instructions] Your next question comes from the line of Stefan Ioannou of Coremark Securities. Your line is open.

Great. Thanks, guys. I was just wondering – I mean, roughly speaking, how much longer do you expect to benefit from what you would consider a short haul at the mine? Jim O’Rourke: Well, we will throughout this year and – but we are continuing evaluating options and looking at how we are going to do that, maintain that, but definitely through this year.

Okay, okay. And then you mentioned some of the exploration you did in and around the pit last year, it’s going to result at an updated resource and increased grades. Did you have any idea of how soon we may see the impact of higher grades in the mine planning? And is it going to be something we might see in 2018, 2019 or how will that sort of fit into the overall mine plan? Jim O’Rourke: Well, I think that our existing mine plan does show that this year is a lower year for us. But with regard to the drilling, that west end of Pit #2 is developing quite nicely and we do want to get some more drilling out that way, because as you are aware, every ton we convert from waste ore is advantageous.

Sure, okay, And then maybe just one last question just on the debt itself, I know going into late last year there was some thoughts of talking to Mitsubishi about sort of just realigning some of the debt repayments. And I guess that never sort of really came to full fruition with copper being at $75 a pound now, is that sort of still on hold or do you think there maybe some discussions with Mitsubishi at some point this year to sort of talk about debt repayments in later this year end and thereafter? Jim O’Rourke: Yes, any rescheduling would have just been with the senior lenders and that was a discussion last year, when the price was down in the $2, $2.10 range. And now with the prices where they are now, I don’t think there is much appetite for that either from us or from them. So I don’t think that’s necessary.

Okay, so we shouldn’t expect any of that. Okay, great. Thanks very much guys.

There are no further questions at this time.

Okay. I would like to thank everybody for dialing in to our 2016 conference call. And as usual, if you have any other questions, feel free to call Jim or myself directly. Thank you very much. Goodbye. Jim O’Rourke: Thank you.

This concludes today’s conference call. You may now disconnect.