Hudbay Minerals Inc. (HBM) Q1 2017 Earnings Report, Transcript and Summary

Good morning. My name is Kelly, and I will be your conference operator today. At this time, I would like to welcome everyone to the Copper Mountain Mining Corporation First Quarter 2017 Earnings 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, Kelly. After opening remarks by management in which we will review the business and operational results for the 2017 first quarter, we will open the lines to participants for questions, as noted by Kelly. 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. For those of you following on the webcast we will be referencing to page number of the supporting slides. I’ll now turn the call over to our CEO, Jim O’Rourke for his remarks. Jim O’Rourke: Thank you, Rod. Good morning everyone and thank you for joining us. Today we’ll discuss the 2017 first quarter results of our operation at the Copper Mountain Mine and our corporate financials. I’ll briefly summarize the financial results and provide an update of the various operational activities, after which Rod will provide the financial details for 2017 first quarter. For the third months ended March 31, 2017 Copper Mountain continued to focus on maintaining record production levels achieved last year. The company has enjoyed improved metal prices and continued focusing on cost containment and production efficiencies. I’ll refer to slide two for those who have the book and the first quarter highlights. During the quarter the company completed the total of four shipments of copper concentrate containing approximately 19 million pounds of copper plus precious metals. These sales generated $74.1 million in revenue net of treatment and refining charges and price adjustments. The average realized copper price was US265 per pound. This is compared to revenues of $58.7 million net of pricing adjustments and with an average copper price of US$2.10 per pound for the same period last year. Increase in revenues compared to the same period last year is due to the increase in sales price of copper and gold along with timing of one additional concentrated shipment during the quarter. The company’s cash position at the end of the first quarter was $30.1 million. Production for 2017 first quarter was 21.2 million pounds of copper equivalent which includes 18.1 million pounds of copper plus 5900 ounces of gold and 64,300 ounces of silver. Copper production during the period was slightly lower as compared to the 19 million pounds of copper produced in the first quarter of 2016. Copper production remains on track to our annual guidance, but is forecast to remain slightly lower during the first half of the year. I’ll now refer you to page three which provides an overview of the Pit areas. Mining activities continued in Pit #2 in the saddle areas during the quarter, a total of 18 million tons of material was mined including 5.7 million tons of ore, and 12.3 million tons of waste resulting in a strip ratio of 2.16:1. Pit #2 has been extended to the West with the incorporation of additional resources discovered with the 2016 drill program continuation of a larger drill program is scheduled in the Pit areas for this summer. Half the program is allocated to drilling the area west of Pit #2 to further extend the mining in that direction. During the quarter the mine average 199,600 tons per day, about 11% greater than our guidance of 180,000 ton per day. Favorable haulage profile contributed to the average mining rate in the fleet. Mining in the Oriole Pit was initiated during the latter part of 2016 following the completion of the Virginia Pit. Small amounts of ore are being delivered to the mill from the starter pit area. The Oriole deposits contains higher grade ore than the other pit areas and is plan to supply a larger portion of the mill feed during the second half of the year. Our mining fleet continues to enjoy favorable mechanical availabilities. In 2017 haulage trucks have averaged 88% mechanical availability which is little above industrial standard. Total unit open pit mining costs at $1.68 per ton were slightly higher than $1.53 mining costs during the same quarter last year. These higher unit costs have resulted from an increase in the in-pit broken rock inventory, higher fuel prices and more difficult wet winter conditions causing higher explosive costs. Mine pit operations are expected to be maintained with cost reductions being a priority. A program to increase drill productivity has been implemented and includes increased utilization plus GPS instrumentation to improve drill positioning and improve monitoring of drills performances. Moving on to page four which is a summary of the quarterly throughput of the mill, during the quarter the mill processed a total of 33.4 million tons of ore grading .309% copper. The mill achieved an average throughput rate of 37,350 ton per day during the quarter, about the same as was 37,100 ton per day recorded in the first -- reported in the first quarter of 2016. The slight lower throughput rate as compared to our guidance was adversely affected by increased maintenance on ball mills in the period. Copper recovery averaged 78.9% while gold recovery averaged 61.3% for the quarter, mill operating time during the quarter average 91.8% which is virtually out of plan. Moving on in to page five which provides the quarterly costs, total unit costs for the three months ended March 31, 2017 were US$1.86 per pound the copper sold which is net of precious metal credit, while site cash cost for US$1.36 per pound produced net of precious metal credits. This represents an increase from the first quarter of 2016 of unit costs with total unit cost of US$1.61 per pound and an increase of 17% above the first quarter of 2016, site cash costs of US$1.16 per pound copper produced net of precious metal credits. Most of the increase site unit cash cost is attributable to 4.7% lower copper production, 4% increase in the electricity rate and an increase in diesel fuel prices plus some increase in the explosive costs. I’ll now refer you to page six. For the third consecutive year, Copper Mountain Mine was awarded the Edward Prior Safety Award. Edward Prior Award is presented annually by the Province – Provincial Government of British Columbia to the midsized mining operation having the lowest in injury frequency rate. This slide provides a picture of our representative accepting the award on behalf of our team members at the mine site. Once again, this award acknowledges the dedication and strength of our operating team and reinforces our ongoing commitment to safety, while continuing to achieve operational efficiencies and production records. I will now move on to page seven and this provides an overview of the first quarter results and a review of the 2017 guidance. Copper production during the first half of 2017 is forecast to be slightly below the average for the year, but the company is on track to meet our 2017 guidance level on a 75 to 85 million pounds of copper. Copper grade forecast to average 0.3%. The mill throughput is planned to average 38,000 ton per day during the year, which is lower than the 39,800 ton per day, up 2016. This slower mill throughput rate is attributable to lower scheduled mill operating time in the second quarter. During our [annual grade] in mill gear inspection, cracks were discovered on [a few teeth] of the SAG mill girth gear. The new gear shown in the picture was installed last week. Our team and contractors did an excellent job in completing the installation few days ahead of schedule. This installation was factored into our 2017 production plan for the first half of the year. This downtime is behind us now, but will affect the total mill operating time and mill throughput in the second quarter. As mentioned earlier, the mine continues to produce above plan and the mining rate is forecast to average above our 180,000 ton per day rate with [Indiscernible] waste following the cycle time. We believe the company has positioned well going forward. An increase copper price and continuing weak Canadian dollar provide a favorable outlook for the company. The global economic environment has many uncertainties which are most difficult to predict. We are confident that the mine will meet our guidance which recognized the need to continue to improve efficiencies and to continue with the mine’s aggressive cost saving initiatives. I will answer specific questions in the question-and-answer period for those wishing more detail and now I would like to ask Rod to review the first quarter financials.

Thank you, Jim. As noted on slide eight, the company recognized revenues of $74.1 million for the first quarter ended March 31, 2017 after pricing adjustments and treatment charges. And this was based on sales of 19 million tons of copper, 6,000 ounces of gold and 64,000 ounces of silver. The average realized copper price for the first quarter of 2017 was 265 per pound, as compared to 210 per pound for the quarter ended March 31, 2016. Comparative revenues for Q1 2016 were $58.7 million after pricing adjustments and smelter charges. Realized average copper prices increased by 26% quarter over quarter, this combined with the increase copper sales as compared to Q1, 2016 accounted for the increase in Q1, 2017 revenues as noted by Jim. As noted on slide nine, cost of sales for the first quarter ended March 31, 2017 were $69 million which resulted in a gross profit of $11.2 million as compared to cost of sales of $57.2 million which resulted in a gross profit of $1.6 million for the first quarter ended March 31 2016. The increase in cost of sales as a direct result of selling more copper during the quarter and getting back some of the cost savings realized on diesel and electricity as well as higher than normal drilling and blasting cost during the quarter as noted by Jim. General and administrative expenses which include some mines site administrative expenses were $2.7 million for the first quarter ended March 31, 2017 compared to the $1.8 million for the first quarter ended March 31, 2016. Non-cash share-based compensation reflected in an expense that $0.5 million for the first quarter ended March 31, 2017 compared to an expense of $0.2 million for the first quarter ended March 31, 2016. For the quarter ended March 31, 2017 the company recorded finance income of $0.1 million and finance expense of $3.4 million. This compares with finance income of $.1 million and finance expenses of $3.1 million for the first quarter ended March 31, 2016. Finance expense primarily consists of interest on loans and the amortization of financing fees. For the first quarter ended March 31, 2017 the company recognize the non-cash unrealized foreign exchange gain of $3.2 million compared with non-cash unrealized foreign exchange gain of $25.2 million for the first quarter ended March 31, 2016, which primarily relates to the company's debt as denominated in U.S. dollars. During the first quarter of 2017 the company recognize the non-cash unrealized loss on the interest rate swap of $0.4 million as compared to the non-cash unrealized loss on the interest rate swap of $2.6 million for the first quarter ended March 31, 2016, which is related to the revaluation of the interest rate swap liability required under the company's loan agreement. 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 first quarter ended March 31, 2017 the company recorded a current resource tax expense of $0.4 million as compared with the current resource tax expense of $0.2 million for the first quarter ended March 31, 2016. This all resulted in a net gain attributable to shareholders of the company for the first quarter ended March 31, 2017 as $7.2 million or $0.04 per share as compared to a net income of $18.9 million or $0.11 per share for the first quarter ended March 31, 2016. As you can see on our income statement foreign-exchange gains and losses can swing quarterly and yearly and can vary significantly. After we remove all the accounting non-cash items the company reported adjusted EBIT of $16 million and adjusted earnings of $0.3 million for the first quarter ended March 31, 2017 compared with an adjusted EBIT of $7.2 million and adjusted loss of $7.9 million for the first quarter ended March 31, 2016. As noted on slide 10 the company had a cash flow from operations before working capital changes of $20.8 million during the first quarter of 2017, this compares to $15.2 million for the first quarter ended March 31, 2016. At the end of the quarter the company had cash on hand of $30 million and an additional $26 million in receivables. In conclusion, we enjoyed a positive first quarter. Our priorities remain focused on continuing to maximize cash flow and minimize costs. We remain confident our 2017 production targets will be met. I’d now like to open the lines up for any questions that people may have.

[Operator Instructions] Your first question comes from Craig Hutchison from TD Securities. Your line is open.

Good morning, guys. A question on your working capital changes, it was negative $18 million in a quarter and there was some changes to inventory and accounts payable, but can you give more context around that number, it seems fairly large? And do you that will reverse itself for the course of the year?

Yes. I think, I think as -- good question Craig. As outlined in our MD&A and in the liquidity section, I think you really need to look at that amount due to related party, because I don't think that should really be part of our working capital. Its funds that have been advanced by Mitsubishi that are on rolling one year notes, we've been doing it for five years, but unfortunately because there just one year notes that roll we have to report that as a current liabilities. So, if you took about 30 million out then take a look at the change in working capital.

Okay. So, how much in the quarter I guess it’s related to Mitsubishi?

We saw an increase in the amount due to them of about $8 million.

Okay. And just in terms of the operations, if you sort of hit the target, so you’re talking about 30,000 tons per day for the year in a greater point three, are you not going to trend below the low end of your guidance of 75 million. Do you think throughput will get up to $40,000 to sort of compensate for the shortfall you’re looking for Q2?

The mill throughput on the first half of the year will below as Jim noted because of that plant maintenance that we have and that was incorporated into our yearly plan. So you still will see an increase in throughput on the second half of this year, now that this gear changes behind this.

In terms of recoveries, can you give us sort of sense of where you guys would be with that sort of in the low 80s? Jim O’Rourke: Yes. Our forecast is 82% recovery. We did have hit in the first quarter. We did find small patch in the pit area that was very fine-grained in between Pit #2 and 3 and we mine through it, so we’re not expecting more. But we are starting a program of geomet testing of the various areas of the pit to get a better handle on the overall metallurgy. The metallurgy or the mineralization changes substantially throughout the pit area and we have areas where we have recovery up closed to 90% and then as you saw areas where they are down in the high 70s. So, we just want to get a better handle on that and possibly incorporate some of that into our block model.

Okay, guys. Thanks for taking my questions.

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

Good morning, guys. Thank you for taking my question. Just a couple real quick ones. Just coming back here to the increase in the power rates you guys saw in the quarter, does that have anything – any driver there from the electricity deferral plan from last year or is that going through some place else?

No, Marco. That’s everybody got that in the province. It was – you saw 4% increased come through. We did from a cash flow point of view. You did see a repayment of the Hydro. Our electrical deferral went down from 15 million at year end to about 11 million at the end of the quarter. But you'll -- you're just subject to the BC increase in electricity rates.

Got you. And so, when that given the fact that you’re not based on where the current copper prices are right now, you don’t – you can’t use that program anymore as of right now. Is there – remind me, is there any impact when you start to make those payments back through the income statement or is it all just cash flow item?

It’s all just a cash flow item and this remind you that, if this is based on a monthly basis. Each month BC Hydro informs us of the average copper price and the average bank account exchange rate and that determines your deferral or premium or repayment if you will of the electricity. But you're correct that the rates were out right now, we are paying back that deferred program.

Got you. And just another real quick kind of housekeeping item here, I kind of noticed here in your notes and on your filings for revenues, the presentation of the numbers somewhat changed with the pricing adjustments, it seems like they are now kind of embedded inside the concentrate sales. Was this an accounting rule change or something internally that drove this decision?

It was more of an internal disclosure on it. No accounting rule changes. All the rules have stayed the same. We just got some feedback from people that sound a little confusing. So we just made a little simpler.

Got you. Thanks a lot guys. Appreciate your time.

Thank you.

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

Great. Thanks guys. Just couple of quick questions. Just on the G&A should we expect to see them at $2.6 million a quarter level going forward or should they come back to something we sort of saw in prior previous years?

No. You should see that come back down.

Okay. Okay. And then just on the guidance side of things obviously expect the copper production to come up, should we assume the same for the gold and silver byproducts increasing through the second half of this year as well?

Yes. You would expect that.

Okay. Okay. And then just on – last question, just a back on some power deferral stuff, but just when I looking at the cash flow statement, where do I actually see that sort of repayment of the deferral going through?

It’s going to be in the working capital.

Okay. It’s embedded in there, okay. Got it. Okay. Okay. And then just you mentioned sort of based on your budgeting you sort of see $3 million of it through repayable this year, another 11 million next year. What sort of copper price and FX rate you think they come up with that sort of schedule?

Sorry, can you repeat that question?

Well, just sort of in terms of like repaying back everything, you sort of mentioned somewhere in the MD&A that $3 million would get paid back this year and the balance in 2018 based on your forecast of copper and FX rate going?

You're referring to the power?

The power, yes.

Okay. Okay. That is based on where the copper and FX rate is. About 340 Canadian makes it about a breakeven.

Yes.

And based on the latest sort of forecast going forward sort of averaging 250 this year, hope you’re going to -- you can calculate where that repayment would be.

Yes. And obviously they’re using sort of [consensus] to come up with those numbers, okay.

Yes, US$250 we’re talking.

US, of course, yes, and then FX rate somewhere around current spot against there, yes, okay.

Yes. Where we are now like 1.33.

Yes.

Yes.

Yes. Okay, great. That helps. Thanks very much guys.

Okay.

And there are no further questions at this time. I’ll turn the call back over to the presenters.

Well, thank you very much for dialing into our Q1 conference calls. And as usual if you have any additional questions please call Jim or myself directly and we’ll be more than happy to answer them. Thank you very much. Good bye.

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