Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Hudbay Minerals Quarter 2 2017 Conference Call. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session and instructions will be provide at that time for you to queue up for questions. [Operator Instructions] I would like to remind everyone that this conference is being recorded today, Friday, August 4, 2017, 10 a.m. I will now turn the conference over to Ms. Candace Brule. Please go ahead, Ms. Brule.

Thank you, operator. Good morning, and welcome to HudBay's 2017 Second Quarter Results Conference Call. HudBay's financial results were issued yesterday and are available on our website at 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; Javier del Rio, our Vice President of the South America Business Unit; Andre Lauzon, 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 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. We generated strong free cash flow during the second quarter of 2017 due to our improved production and cost performance compared to the first quarter. We also continued to deliver on our operating targets. Consolidated copper and zinc production both increased from the first quarter, and our consolidated cash cost per pound of copper decreased to $0.85 per pound, down $0.03 from first quarter. As a result, operating cash flow in the quarter increased by 54% from the first quarter of 2017, and we are allocating some of our positive free cash flow generation to expand our exploration budget and build our long-term growth pipeline. We have been active in identifying and acquiring grassroots exploration properties in Peru, Chile and British Columbia during the downturn in metals' prices. The increased exploration budget is due to anticipated drilling on these properties as well as testing targets in Manitoba and drilling down plants at Lalor. We also continued to allocate cash flow to debt reduction with a total of $67 million of long-term debt repaid during the quarter. We recently amended our revolving credit facilities to modify the financial covenants, extend the maturity dates to July 2021, and reduce the interest rate by 1.5% to LIBOR plus 3%. Further, in early June, the U.S. Forest Service issued the final Record of Decision related to our Rosemont project in Arizona. Since receiving that permit, we have begun the administrative process of completing the mine plan of operations and submitted our draft to the Forest Service in late June. We remain on track to meet all of our production and cost guidance for the year. Taking a closer look at the second quarter results, consolidated copper and zinc production increased by 18% and 14% respectively from the first quarter…

[Operator Instructions] And we will take our first question from Orest Wowkodaw [Scotiabank] Please go ahead.

Hi. Good morning. I wanted to get a bit more detail on Constancia. I was being surprised by how strong the grades have been there. They've been pretty flat in the first half of the year. Are you expecting a significant decline to begin here in the second half? Or it is possible we could see grade stay above the 0.5% rate? And then secondary on the recovery side, they've been lower than planned. And I'm just wondering if you've got some better idea in terms of what's driving the lower recoveries and whether you think this could be some kind of permanent issue that we have to think about relative to kind of long-term expected recoveries? Thanks.

Hi, Orest, Cashel here. I'll attempt to answer the question. We are seeing a consistent grade bias as has been mentioned in previous quarters. We're putting forward some efforts towards understanding exactly what the -- what that bias is and what the magnitude of it is. So we're undergoing a drill program twinning holes from the original resource this quarter now. And actually that drilling starts next week, and it will take the balance of the quarter into the next quarter to be able to get there. So to address the grade, if the bias continues, yes, we're probably going to see higher grades than we forecasted as per the technical report for this year's production. So what we believe is happening helps to answer towards the recovery issues you've identified. Originally, the diamond drill coring -- this is our theory, anyway, and so we need this twinning of holes to be able to -- with 100% core recovery to test it, and you'll understand why in a second. So what we think has happened is, with the pre-fracturing of the material at Constancia, in fact, we've shown in the past that we can free dig the material. We blast to increase the efficiency and productivity there. That - when we were covering the original core from the original diamond drilling that, there was a preferential sort of almost gravity circuit and it was washing the fines to the bottom of the whole. So actually -- the core bell wasn't recovering the fine-grained chalcopyrite. As such, that core was what was utilized originally in the metallurgical testing. So the plant was set up to recover a coarser fraction of the chalcopyrite available. And as you can imagine, the fines make its way through it. So we're actually getting the recovery of the coarser fraction of the chalcopyrite as designed, and there's a number of initiatives in the mill underway to be able to test new reagents and new processes and new fragmentation from the mine to be able to recover those fines. So we think, number one, we're going to recover more of those fines in the mill; and number two, that we're going to test this theory and prove it out with this 100% core recovery program that we have underway twinning the old holes to understand statistically what the magnitude of the bias is.

And is your expectation that this is only an issue for kind of a top level of the ore body for the next few years and then both of these things reverse as we get into the hypogene?

Originally, that was my theory, but no. I - we're thinking now that there is a great bias within the hypogene itself. Because we've mined a considerable amount of hypogene to-date and we're seeing that persistence. So what -- so we need to do the science to prove it out but that's the theory we're trying to prove out. And until we sort of come up with it, as people have pointed out, the grade bias has been offsetting the recovery, but we think it's one of the same. And so what we want to do is figure out exactly what it is so we can provide the proper guidance.

Excellent. Thank you very much.\

Yeah.

And we will take our next question from Matt Murphy [Macquarie Capital Markets Canada Ltd.] Please go ahead.

Hi. Just on the cost guidance at Constancia relative to your costs in the first half. Just wondering how much movement you expect in the numerator versus denominator. This sounds like throughput could be a bit better, but I'm wondering how much of the cost in the first half is expected to go away?

Hi, Matt, Cashel here. So we expect an improvement in the denominator and the numerator. And there was the sum of sort of between $5 million and $10 million of extra costs we believe in the first half that won't persist through the second half. So our unit costs are trending down for the past month and we're still aligned with what the January disclosed guidance was throughout the year.

Okay. And the element of community spend, just wondering if that's related to Pampacancha. And what the status is on the land rates there, its still – are you still expecting to get it by the end of the year? Or how is that coming along?

The accounting treatment of the community spend in the second quarter wasn't the community of Chilloroya or what concerning Pampacancha. It was an ongoing for a couple of years' negotiation with some of the regional communities and that sort of hit the books and we finalized what those agreements were. With respect to Pampacancha itself, we're - basically, we're on track with our negotiating strategy with the local community. They remain receptive. I think the way we could couch it is, is we're sort of - they expect one thing, we want to pay another, and we're working down to the details. So it's a - we are on track for meeting the guidance of production out of Pampacancha as laid out in the technical report.

Okay. Thank you.

And we will take our next question from Matthew Fields. Please go ahead.

Hello, everyone. I know mining is a difficult business to sort of predict quarter-to-quarter here. But in 1Q, you produced a lot more, I think 10,000 tonnes or so than you sold. You didn't really make up that gap in 2Q. You, in fact, you're pretty flat, and you just talk about working down stockpiles. But is this sort of 10,000-tonne gap going to be worked out over the course of the year? Is it going to persist? Can you give us a sense of the cadence between production and sales over the back half and maybe just sort of overall cadence, front half versus back half?

Hey, Matt, It's David Bryson. Let - the reality is that we're shipping 10,000 and often 20,000 tonnes parcels out of Matarani in Peru. And so we did have some adverse weather across the whole sort of Pacific seaboard of South America. I think we saw some other copper producers sort of talking about the impact of that on their sales as well in late June. So it's difficult to sort of put opinion on exactly what our sales are going to be every quarter because the shipments are lumpy to the customers in order to keep the freight down and sort of take maximum advantage of the logistics. So I’d say that over the course of the year, we would expect sales to be in line with production. Quarter-to-quarter, there is going to be variances, and I can't really give you specifics on exactly how that's going to play out every quarter.

Okay. Can I just ask, as of August 4th, have you recovered that in balance?

As the swells have continued to Matarani into July, I think we did get a couple of boats out to last month. So right now, we're at levels that are sort of, I think, at or a little bit below where we ended the quarter.

Okay. I think that’s if from me. Thank you.

And we will take our next question from Greg Barnes [TD Securities] Go ahead.

Thank you, operator. Cashel, if I understand your response to Orest's question, you're expecting the best of both worlds. So higher grade on the bias and higher recoveries once you figure out how to get it through your plant?

Yes. So what I'm expecting is that, as per the -- I guess, disclosed quarter-over-quarter recovery would go up with recovery of more the fraction of what we call the ultrafines. And so, yes, and we expect versus current levels -- so more in line with what the technical report says. So what that's going to be? Is it going to be for the hypogene as per the technical report, 89% copper recovery, don't know yet? But we're going to trend in the upper half of the 80s versus now, we've been always trending in the lower half of the 80s. So we expect to be able to do that. There are technologies, there is reagents available to do that and so we're working through that process. And so that's the target to get that up. When is it going to happen? We'll see. And then the grade bias, yes, a little higher. So in the end, we should benefit from the grade bias, although we may not get to the highest recoveries as reported or the mean recoveries as reported in the technical report for the overall copper total. But in the end, provided we continue the improvements on throughput that we've been achieving and maintain that, we should end up day-over-day producing more copper.

Got you. And these changes that you're making in the process plant, what are they specifically? So you obviously, there are different reagents and other things that you're doing.

Yes. It's a reagent-focus now. We don't believe we're in a position where we need to change floatation capacity or -- and there is a focus on grinding utilization and optimization. And so a combination thereof, we believe, will improve recovery. So it's not a requirement for new infrastructure and capital.

Got you. If I can just another question. I thought Pat Merrin was on the phone. I just wanted to ask about the Rosemont permitting. Is the 404 water permit in anyway impacted by the mine plan of operations that you're working with the U.S. Forestry Service on?

Greg, it's actually Alan Hair. I'll answer that question. No, there is no connection. The Forest Service Records of Decision as the outputs of the whole full-blown environmental and social impact assessment process involved 18 different cooperating agencies and that's by far the most significant permit required. But once you get that, that final Records of Decision, you need to operationalize it and that's what the mine plan of operations process is. The 404 water permit is specifically a requirement under the Clean Water Act and is a completely separate thing.

So the Army Corps of Engineers is not waiting to see what the mine plan of operations looks like before they hopefully issue the water permit.

Correct.

Okay. Thank you.

And we will take our next question from Stefan Ioannou [Cormark] Please go ahead.

Okay. Thanks, guys. Most of my questions have been answered, but just wondering on the in Manitoba, just can you give us a bit of an update as where you're at with looking at New Britannia and factoring that into the overall expansion with Lalor and stuff?

Yes, Stefan, Cashel here. Yes, we continue evaluating options. We're sort of in a unique position having 3 processing plants and 3 tailing stands [ph] and evaluating the best return on the capital that we'll employ to develop the gold zone and also to treat the gold zone. So I think with these trade-off studies underway, we'll be in a position close to the end of the year to provide good guidance on what we'll be doing.

Okay. Thanks very much guys.

And we will take our next question from George Topping. Please go ahead.

Hello, everyone. Could you give us an update on community relations at Constancia itself? Is it all quiet at U.S. in the last quarter?

Yes, George, Cashel here. Yes, the community relations are good. No issues, yes.

No issues, perfect. And just going to the Lalor. Is there any revision coming for the second half of the year given the strong build-up?

Basically, we remain on as a release for Manitoba guidance. We believe costs, production levels will meet the expectations as per the guidance. So there is no revision. They've done a lot of work to ramp up Lalor. So Lalor is producing at 4,500 tonnes a day. And that excess material, we will be milling much of it in the second half at the Flin Flon mill where we have excess capacity.

Right. Just to be clear on there. So your rate for [indiscernible] is probably closer to the 4,500 tonnes, did you say?

We're moving our way up to 4,500 tonnes. We believe we'll be at 4,500 tonnes by the end of the year. So we've ramped up from 3,200 tonnes, and we're moving through sort of a linear ramp-up through the process. The resulting metal is on target for guidance as per January.

Right. And then just lastly, Cashel, on the upgrade to the Stall mill. Is there any way to advance that to reduce the trucking that you're doing?

Well, again, it's sort of a -- it's part of the whole discussion and review in trade-off with respect to the gold zone also. But what we're finding is, is and what we're thinking is right now, is with the excess capacity while 777 is still producing, that the value proposition might actually be to utilize the available capacity in Flin Flon and the incremental cost thereof covers off the trucking cost and might be more of a value proposition than putting in a lot of capital to expand Stall.

Right. I see. Great, thank you.

And we will take our next question from Dalton Baretto. Please go ahead.

Thank you. And hey, good morning, guys. Maybe speaking with Manitoba for a bit. Just wondering, including the trucking cost at Flin Flon, where do you see the Lalor mining cost trending over H2?

So basically, as per the guidance for Manitoba, we believe we're going to be at the unit cost per tonne. So we're still seeing ourselves as we've guided before. We don't see a major change over the time. We have in this past quarter and the previous quarter, increased some activities in Lalor to prepare ourselves moving to 4,500 tonnes a day by putting in some raises for ore transport and logistics and movement and also increasing our drill inventory such that we're more prepared for changes in stope sequencing if they do occur. So it's just best practices. So we did incur some higher costs. So those costs, we believe, are going to level off now in the second half of the year.

But I guess, just in terms of the total impact as we look at Lalor's own mine unit costs. The efficiencies we get at mining at those higher rates, the additional trucking cost, the blend of all of that will probably have Lalor running at a pretty similar total unit costs for the second half of the year compared to the first, maybe a little bit better. But that will be offset in part by the fact that we're milling in Flin Flon, which is a lower cost concentrator than Stall, and obviously, actually generating the production that we can convert into revenue.

Okay. Thanks, David. And then maybe just in terms of the plant. How much incremental zinc and concentrate you expect to produce above and beyond what the plant can process?

We'll certainly have some additional zinc concentrate sales that we'll be putting through in the second half. I think it depends in part on sort of the timing of when the ore gets there. And I think we're sort of given that there's also discussions underway in terms of placing that concentrate, we probably don't want to get too specific at this point in time in terms of our exact plans, Dalton. But we would expect to be selling zinc concentrate to third parties over the second half of this year as well as through 2018, just based on Lalor's strong ramp-up and the bias in 777's grades in the favor of zinc and away from copper in the second half of this year.

Perfect. Thanks, guys. That’s all from me.

[Operator Instructions] And we will take our next question from Brian Lalli. Please go ahead.

Hey. Good morning, guys. How are you?

Great.

David, if I could, you've made a pretty great progress on the revolver pay down. I guess the first question is, is the intention to still fully pay that down over the next couple of quarters, particularly with where commodity prices are now?

Yes, certainly, Brian, copper prices are a bit of a tailwind. We are going to have a higher sustaining CapEx as we -- I mean we're on target for full year but our 6-month sustaining CapEx was less than 50% of the full year guidance. That's mainly just around the timing in Peru where we get most of the work done during Q2 to Q3 in the dry season. We're also going to have additional CapEx on the paste plant in Manitoba. And -- so I think the rate of free cash flow generation between all of that, maybe a little bit of extra exploration spending, the rate of free cash flow generation might not be quite as high in the second half. But it obviously depends on the trajectory of metal prices. I still think that we've got a good shot at fully repaying the revolver by the end of the year and maybe having a little bit left over.

Great. And it's actually a perfect segue to my second question I was going to ask on the CapEx. But I guess on the interest expense side, it's -- the third quarter is going to have the semi annual coupon payments, right? Again, I just want to make sure we're modeling cash flow correctly on our side.

Yes, it's January and July are the semi annual bond payments.

That’s great. I appreciate time. Good luck, guys.

Thanks.

And we will take a follow-up from Greg Barnes [TD Securities] Go ahead.

Thank you. Cashel, I want to understand what you're saying about the Stall Lake Concentrator potentially not doing the expansion there but using Flin Flon. Is that possibly a permanent solution?

It certainly a solution until the ore runs out at 777. And so we will evaluate -- it's part of the overall optimization of the Manitoba operations as evaluating in the future what the production profile from Lalor will give to us and how we'll understand to go. So certainly, I would say in the present future, that's the most likely solution. And then we will evaluate what the mine could sustain as production after 777 goes down -- before 777 goes down and we'll come with a plan. But as per the current technical report, and if we weren't to get to be successful in expanding the base metal resource at Lalor, I think naturally after 4 or 5 years, the amount of available bases at Lalor reduces and there is a natural decline in the tonnes per day produced from the base metal. So we're balancing that with the life of 777 and taking the opportunity of the incremental costs of the triple -- that the Flin Flon mill would incur to mill the Lalor ore.

Could you avoid the expansion of Stall completely?

There are some modifications we have to do to Stall. We've had -- it's an old plant. It was built in the '50s. And there is things we need to do to upgrade it, and so we're evaluating those upgrades. And so there are some modifications we need to do there. So there is going to be, in the next year to 1.5 years, some capital into Stall to improve its maintenance reliability.

Okay. Got you. Thank you.

And we will take a follow-up from our Orest Wowkodaw [Scotiabank] Please go ahead.

Hi, guys. Thanks for taking my follow up. Just on Greg's question there. When do you think you'll be ready to make a decision on whether you're expanding Stall or not? Is that going to come at the end of the year with this new updated optimization study or is that kind of - could that be later? And then just secondly, at Constancia, when do you need access to the ore at Pampacancha to stick to the current mine plan that's in, I guess the 43-101? And is there a chance if that gets pushed back if that's actually positive to production in 2018 because of the initial lower grade at Pampacancha?

Yes. I think to answer to your first question, I think with Stall, we'll have a better idea by the end of the year when we're giving guidance on what we're going to do as far as the gold zone goes of what the future looks like. So like I said, they're all integrated and working off those trade-off studies. With respect to Pampacancha, the 43-101 and our guidance contemplates that we will be processing ores in the fourth quarter of 2018. We're still on target for that. That mine plan is the optimized mine plan where there's actually some ongoing stockpiling of some of the ore at Pampacancha. I think you are correct that it could be offset by some - we could, if we were to delay Pampacancha, we might end up with some early higher grades from Constancia continuing on and then pushing into 2019 where you're just robbing Peter to pay Paul. So we're still focused on producing in the latter half of 2018 and that's what shows returns the best NPV to the resource we have available to us.

And when do you need to be actually in the deposit to make this timeline in terms of Pampacancha?

So there's a much -- actually, getting to the ore is not a big issue. It's some of the ancillary work around it to manage the non-contact water, the haul road over there, et cetera, et cetera. So if we -- this time next year, are starting to pioneer at the pit itself, we'll be in time to be able to produce in the fourth quarter.

Thank you very much.

And we will take our next question from Anita Soni. Please go ahead.

Hi. Could you give me an idea of your trucking costs in your Manitoba operations per tonne per kilometer?

Yes, Anita, they're between Stall or between Lalor and Flin Flon, they're in the order of $20 a tonne.

Canadian.

Thank you very much.

And we will take our next question from Alex Terentiew [BMO Capital Markets]

Good morning, guys. I just wanted one follow-up question here on the Stall expansion. I just want to make sure I'm clear. So the potential change to plan or -- that you're talking about, this expansion. Is this from - from the current 3,200 tonnes up to 4,500 or are you talking about the 4,500 and upwards of 6,000 with the New Britannia mill? I just want to make sure I'm understanding correctly there.

So what was contemplated originally, was as the base metal processing plant, Stall was going to be expanded from 3200 to 4500. What we're saying is, in the immediate future, we're seeing the benefit of utilizing the capacity in the Flin Flon mill instead of putting in the capital to increase the capacity of Stall to 4500. The 6,000 tonne a day was the contemplation of reviving the New Britannia mill. What we're doing is evaluating all the options available to us, and by the end of the year, we'll sort of give some guidance on what we're going to do with that excess production opportunity out of Lalor with respect to the gold zones.

Okay, that helps. And then one more on Pampacancha. The grade bias you're seeing at Constancia now, is this something you expect that you could see at that deposit as well?

We're not certain about that. We need to get in there. I think if there is a grade bias there, it wouldn't be for the same reason as Constancia. From the diamond drill core that we used to outline the resource and reserve available to us, it doesn't appear there is the pre-fracturing that exists at Constancia and the core recovery itself was better. So we don't see the same reason for a grade bias at Pampacancha.

Okay. Thank you.

There are no more questions at this time. I'd like to turn the conference back over to Candace for any additional or closing remarks.

Thank you, operator, and thank you everyone for participating. If you have any further questions, feel free to reach out to our Investor Relations team.

And this concludes today's conference. Thank you for your participation and you may now disconnect.