Hudbay Minerals Inc. (HBM) Q2 2018 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Hudbay Minerals Inc. Q2 2018 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 provided at the time for you to queue up for questions. [Operator Instructions] I would like to remind everyone that this conference call is being recorded today, August 1, 2018 at 10 a.am. Eastern Time. I will now turn the conference over to Ms. Carla Nawrocki. Please go ahead, ma'am.

Thank you, operator. Good morning, and welcome to Hudbay's 2018 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 presenters 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; and Robert Assabgui, our Vice President of Manitoba 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.

Thanks, Carla. Good morning, everyone. We delivered solid production results and growing free cash flow in the second quarter. We are continuing to allocate that cash flow to strengthen our financial capacity with $49 million reduction in net debt during the quarter, as well as towards funding the development of our exploration pipeline. Our Constancia mine continues to perform well and we're on track to meet 2018 production, capital cost and unit cost guidance in Peru. In Manitoba, we are on track to meet our 2018 production guidance. However as a result of a number of factors, we expect combined mine/mill of unit operating costs to be between CAD 125 and CAD 135 per tonne, an increase of approximately 12% from our initial guidance. At Rosemont, we're continuing to progress to the final stages of permitting process. We recently amended our revolving credit facilities to extend the maturity date by one year to July 2022 and so incorporate various amendments to the terms and conditions of the facilities to provide us with greater flexibility. Our total liquidity including cash and available credit facilities was $859 million dollars at the end of the second quarter, up from $810 million at the end of the first quarter. Taking a closer look at the second quarter results, production of copper-equivalent contained metal in concentrate of 61,000 tonnes was essentially unchanged from the first quarter. Consolidated cash cost and all in sustaining cash cost nets of byproducts at $0.96 and $1.48 per pound of copper respectively were in line with the results from the first quarter 2018 as lower copper production due to lower Constancia grades was offset by higher byproduct credits. Net profits and earnings per share in the second quarter 2018 were $24.7 million and $0.09 respectfully compared to a net profit and earnings per share of $19.1 million and $0.08 respectively in the second quarter of 2017. Operating cash flow before change in non-cash working capital was $132 million consistent with the first quarter of 2018. The Constancia mine produced approximately 27,000 tonnes of copper during the second quarter, which was lower than the first quarter primarily due to lower grades in line with mine plan. Total copper recovery was 70.7% in the second quarter, down slightly from 80.7% in the first quarter of 2018. We are in the process of implementing several metallurgical initiatives with the intention of increasing copper recoveries as anticipated in the recently filed Technical Report for Constancia. We successfully completed Constancia semi-annual schedule maintenance shutdown in May, resulting in slightly lower metal throughput than the first quarter 2018 and substantially higher maintenance cost than usual. As a result, combined mine mill and G&A unit operating cost were $10.33 per tonne in the second quarter compared to $892 per tonne in the first quarter. Yeah-to-date combined unit costs are above our full year guidance range due to the second quarter facts as I mentioned as well as the payments of signing bonuses in the first quarter under a three year collective bargaining agreements in Peru. We expect cost to be significantly lower in the second half of the year leading to full year unit cost that we expect to be within our guidance range. Negotiations with the local community to acquire the Pampacancha surface rights are ongoing with recently changes of proposals. With community elections scheduled for October, we are continue to allow time for the process to run its course. The Manitoba operations produced approximately 33,000 tonnes of zinc, 10,800 tonnes of copper, and 32,400 ounces of gold equivalent precious metals during the second quarter, all of which increased over the first quarter of 2018. Ore mine during the second quarter 2018 slightly decreased compared to the first quarter as increased production at our Reed mine was offset by decreased production at a 777 mine. Ore processed in Manitoba during the second quarter increased over the first quarter as the transfer of excess Lalor ore to the Flin Flon concentrator and higher-than-expected ore output from the Reed mine together to draw down of our stockpiles sustained solid mill throughput. While the mines also produced higher than usual copper and zinc grades in the second quarter, we expect grades come back down close to reside levels in the second half 2018. Manitoba combined mine, mill and G&A unit operating costs in the second quarter were lower than the first quarter benefitting to significantly higher throughput as the Flin Flon mill recovered from some of the challenges experienced in the first quarter. Manitoba cash costs and sustaining cash cost both net of byproduct credits decreased in the first quarter of 2018 as a result of significantly higher zinc byproduct credits. A failure of one of two main exhaust fans at Lalor in June created operating restrictions underground, those are impacting daily production and dealing the mines ramp up to 4,500 tonnes per day. We expect repairs of the fan to be completed in August. By our critical development required for future production is continuing, the mine is producing ore at a rate of approximately 3,000 tonnes per day due to the ventilation restrictions. As a result of this, we expect Lalor unit cost to be higher than normal in the third quarter. Production of all metals from the Manitoba business unit is expected to be within two year guidance. As we look towards the balance of 2018, our priorities include completing the ramp up of production at Lolla, enhancing Constancia production through higher recoveries and throughput optimization, completing the Pampacancha surface rights negotiations, advancing our exploration pipeline, and seeing the Rosemont permitting process through its completion. We remain very positive about the long term supply and demand fundamentals recover and believe that our business is well positioned to create value as those fundamentals materialize. With that we're pleased to take your questions.

[Operator Instructions] We'll go first to Orest Wowkodaw with Scotiabank.

Hi, good morning. Alan, I was hoping we could get a little bit more color about what's going on operationally in Manitoba. I mean this asset seems to be continuing to disappoint most certainly your guidance but also expectations. The latest issue at Lalor, I find particularly troublesome just because this is a new mine rather than 777. Can you give us a sense of what's going on there and whether you know you think this is going to impact performance beyond 2018?

Orest, I may actually pass that over to Cashel to answer.

Sure. Hi Orest.

Hi Cashel.

Yeah. So there was a particular one-off issue that was a legacy commissioning issue from when we ramped up Lalor. The particular OEM recommendations for the fan weren't followed to the latter and there was some checks on acid integrity that fell through the cracks. So I don't know what to say, it's an unfortunate events that's costing us obviously some repair costs and then also costs us some time to get us to the ramp up. So it's a bit of an unfortunate event. So with that behind us and with us double checking our commissioning on all of our project as we constructed Lalor and moving forward, we're at midst of commissioning our wall at phase plants, we're pouring as of June and also this month and will be up to we believe full capacity of that in August. So we have a positive outlook as far as looking forward. We continue being pleasantly surprised with what we're finding in the gold zone. We're doing advanced engineering on our copper gold zone. So all these things as well as we're doing down plunge, up plunge extensions on our base metal zone, as far as the in mine exploration goes. So we view Lalor you know on a long term basis as being very solid and being able to achieve our 4,500 tonnes. Like I said it's very unfortunate this one sort of event happens. But otherwise up until that event, Lalor was performing very well and moving forward and certainly will benefit tremendously from the pace fill taking place of the cemented rock feel that we are having to re-handle. That we still believe in Lalor and the ramp up capacity and the capability and the availability of LHDs underground no longer hauling rock and being able to place. So, I guess...

And in terms of unit costs, I mean you increased your guidance there. Is that I mean with 777, I assume unit cost per tonne are going to continue to move higher, is that mine sort of winds down even though labor costs should come down. But on an overall basis, should we anticipate that you know cost per tonne in Manitoba are going to stay I don't know 120 to 120 level pretty much for the next couple of years?

I think what it is, is over time we're seeing a trend upwards you know. Manitoba historically produced more tonnes than what we're producing now. You know we've just recently we're closing, would close the Reed mine and the volume going through the Flin Flon mill, the asset in Flin Flon is getting older, the mill, and also as you point out the mine, reconditioning costs in 777 are going up. You know as we see the volume increase in Lalor, we'll see also volume decrease probably you know in 777 and so the overall effect is what we're seeing is a trend upwards in those costs. But we're working hard to be able to try and extend the life of 777, identifying remnants to try and increase the volume. And we also have a full some exploration program because now we have capacity within our surface plants to be able to bring on other ore.

Okay, but Cashel, it sounds like you're sort of saying that costs are going to remain elevated for the next couple of years, is that fair?

I'd say with Lalor, you know we're going, the cost will come down on our unit book volume the way it is. But you know when we had –when we were filling all the plants, yeah the costs were lower. It's just they're trending upwards now.

It's David. Like we've got the sort of clearly some you know one-off issues that are affecting 2018 costs that we do not expect to re-curve, but as Cashel saying, there's also an underlying trend with the sort of reduced mine production without Reed is, 777 moves to the end of its mine life that you know sort of you know is going to have you know a trend over time on costs. But you know sort of what we're going through the budget process for 2019 will give guidance once we've done that. But I think you know sort of the levels that we're seeing for 2018, I don't think that's a new baseline against which to expect further cost escalation, you know there is a combination of trend as well as one-offs that's affecting our revised guidance.

Okay, thank you. I will open it to others. Thank you.

Thanks.

[Operator Instructions] We'll go next to Stefan Ioannou with Cormark Securities.

Hey, thanks very much, guys. I guess just staying on the Manitoba a little bit. I just kind of curious obviously you know you're still trucking ore from where all way over the Flin Flon concentrator, just kind of curious you know given where metal prices have started to dip to more recently. Is there sort of a tipping point you know on think into copper pricing, or you start to maybe think about not trucking ore that distance or is that decision really more based on sort of a need to just keep you know is going through the Flin Flon concentrators as long if you can?

Hi Stefan, it's Cashel here. I think it's very simple. It's you know as long as the fixed costs, the base costs will be covered by 777 and Flin Flon concentrator. Every time we put through that concentrator is a benefit to the business. So as simple as that.

I think Stefan, we're a long ways away from being at a point where it makes sense to actually reduce throughput on account of metal prices.

Okay, okay, that helps us, perfect. Thanks very much, guys.

We'll take our next question from John Tumazos - John Tumazos Very Independent Research.

Thank you very much. Could you just refresh us as to which months there will be no more Reed mine ore left mill and when the schedule end of mining and milling is for 777?

John, the Reed mine is basically will be done this month as per the original plan. And 777 as Cashel alluding to we're still looking at possible options there to potentially extend the mine life. We're currently was saying 2021.

Thank you very much.

And with no other questions in queue at this time, I'd like to turn the call back to Miss. Carla Nawrocki for any additional and closing remarks.

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

Ladies and gentlemen, this does conclude today's conference. We thank you for your participation. You may now disconnect.