Good morning ladies and gentlemen. Thank you for standing by. Welcome to the Hudbay Minerals Inc. Second Quarter 2023 Results Conference Call. [Operator Instructions] I would like to remind everyone that this conference call is being recorded today, August 9, 2023, at 8:30 a.m. Eastern Time. I will now turn the conference over to Candace Brule, Vice President Investor Relations. Please go ahead.

Thank you, operator. Good morning and welcome to Hudbay 2023 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 available in the investor events section of our website and we encourage you to refer to it during this call. Our presenter today is Peter Kukielski, Hudbay's President and Chief Executive Officer. Accompanying Peter for the Q&A portion of the call will be Eugene Lei, our Chief Financial Officer; and Andre Lauzon, our Chief Operating Officer. 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 Peter Kukielski.

Thank you, Candace. And good morning, everyone. Thank you for joining us. In today's presentation I will discuss our second quarter results, touch on the operating and financial performance of the business and provide insight into recent strategic initiatives and corporate achievements. Second quarter was one of transition and expansion for Hudbay. We took many meaningful steps across the business to enhance our operating platform, deliver production and cash flow growth and create opportunities for potential mine life extension. The integration of our newly acquired Copper Mountain Mine in British Columbia has transformed our organization into a premier America's focused copper mining company with 3 long-life mines in Tier 1 jurisdictions, steady 150,000 tons per year copper production levels and a world class pipeline of organic copper growth projects. The combined company makes Hudbay the third largest copper producer in Canada. In Peru, operations performed in line with our expectations as we completed the plant highest stripping period at Pampacancha to allow us to access higher grades starting the third quarter of 2023. And we have achieved those higher grades in July, with 1.6 million tons of ore mined from Pampacancha and impressive grades of point 0.63% copper and 0.31 grams per ton of gold. In Manitoba, we completed the implementation of the first phase of the stall recovery improvement program to deliver higher copper and gold recoveries had stalled in the second half of this year. We discovered new mineralized zones near Lalor and expanded our long-term growth opportunities through the consolidation of highly prospective land in the Snow Lake region. We also entered into a framework for a potential exploration partnership in Flin Flon with Marubeni to explore priority targets on our mineral properties within close proximity to our idled Flin Flon processing infrastructure. We remain on track…

[Operator Instructions] Our first question comes from Orest Wowkodaw of Scotiabank.

Wanted to talk about the balance sheet and some of the strategic directions of the company. I was surprised to see that net debt increased as much as it did quarter-over-quarter. I think about $265 million, largely from the Copper Mountain transaction. But I'm curious, given the optionality that you have at Copper Mountain with, I guess, for stabilizing that asset and then potentially growing it, can you just remind us, have the criteria changed at all for the development of Copper World? And I believe one of the previous criteria was a minimum cash balance of $600 million. I'm just wondering if any of these metrics have changed given Copper Mountain is now within the portfolio?

This is Eugene Lei here. No, the criteria has not changed. In fact, as Peter mentioned in his remarks, the addition of Copper Mountain enhances our ability to unlock the pipeline, including Copper World. So yes, the net debt did increase during the quarter. We assumed $145 million of the Nordic bonds with Copper Mountain. That's a short-term increase. And obviously, there were some transaction costs related to it. So we are on track to meet our deleveraging target progress toward that 3P plan. So this would be the high point in our net debt and our net debt-to-EBITDA ratio and we expect to actually make meaningful progress towards that 1.2x leverage ratio even this year. So -- and beyond that, this year, obviously, Copper Mountain will provide a stable platform of copper production and free cash flow through to the end of the decade and that would enhance our ability to deliver Copper World when that time comes.

Okay, Eugene, but just as a follow-up, does this push out the potential development time line for Copper World, just given it's going to take you longer to reach those debt metrics?

No, it does not push out time lines for Copper World. It actually enhances our ability to do so. So we expect to get to the 1.2x net debt-to-EBITDA and the $600 million minimum cash amount in the time lines that we outlined and we think this is a stronger platform during the build period for Copper World.

Okay. And then just shifting gears quickly, Peter, can you remind us when we could start to see some exploration results coming out of the satellite deposits near Constancia?

Yes, certainly, Orest. I think that -- I mean, I think the first comment that I would make is the process in the – the turning process in Peru is fairly complex. And it's difficult to put a time line on to it. So we have completed all the technical activities that are required to submit the application for the exploration permit. And we're effectively now in the hands of the government. But it could take up to a year to get those -- to get the permit. It could also take much less.

Sorry, Peter, do you say it could take up to a year to get the permits?

It would take up to a year to get permits. That's correct.

Our next question comes from Ralph Profiti of Eight Capital.

I want to come back to this Marubeni agreement. And just wondering what allows Hudbay to execute its strategy with Marubeni that you could not have done yourselves, right? And just sort of can you kind of show us and give us a path to kind of like the strategic rationale there on why a joint venture is the best way forward for this particular -- for this particular strategy if an agreement were to come through?

Thanks for the question. Look, I think a couple of things. One is that I actually -- my personal experience with joint ventures has been very good and I like working with partners who are motivated to get results. In this specific case, Marubeni is pretty excited about the Flin Flon area and Marubeni is prepared to fund the activities associated with the initial exploration program. So rather than us dishing out cash during a period when you really are trying to increase our cash balance and move towards the targets that Eugene just outlined, somebody else gets to spend the money at this point. And we have very, very close alignment with these guys and they would, of course, be potential partners for us in other initiatives.

Okay. Yes, fair. The original agreement did outline a $10 million to $15 million investment or up to that for exploration. I'm just wondering, is that an annual figure? And could we infer anything that when you proportionalize that against sort of the Manitoba $15 million of exploration that Hudbay's spending on a stand-alone basis, that's something like a 50-50 is sort of in the range of what you could possibly see out of this JV?

Yes, I think it's early days. So the commitment that they're indicating is a onetime commitment. And I guess depending on the results, we'll take it from there.

Our next question comes from Lawson Winder of Bank of America.

I just wanted to touch base on Copper Mountain. So you did not mention the guidance from the prior owners, but did mention that you'd update that in Q4. I'm just wondering if you can give us an early look on what you're thinking around that guidance and whether or not the production is achievable for 2023, particularly with respect to comments you've made prior that the owners previously were high-grading that mine?

Look, we expect Cooper Mountain to perform better in the second half of the year versus the first half with stronger expected throughput levels. But the mine may not have met the previous guidance issued by Copper Mountain mining company. I would say that we're still finalizing our detailed plans, which will be in our updated technical report in the fourth quarter of the year and we expect to provide 2023 guidance for the Copper Mountain mine with our third quarter results.

That's fine. And then -- but I wanted to ask about balance sheet strength and whether or not just to -- I mean, you ventured into some copper hedges. You've deferred some additional CapEx this quarter in addition to some from prior quarters. I'm just curious, are there any other things you're sort of considering to help sort of conserve cash and accelerate that balance sheet strengthening process?

It's Eugene here again. The expected free cash flow in the second half of this year is very strong. So if you look at our production profile, we're expecting copper production to be in the second half to be pretty much double what our copper production was in the first half. And given the margins in Peru in particular, the high grade, the free cash flow generation is going to be significantly back-end weighted. So we -- as I mentioned to Orest though, we expect the second half of this year to be very strong in production and free cash flow. We did do some hedges in the first quarter for the second half of this year. With that in mind that it was back-end weighted and want to make sure that we protected some of that cash flow and those hedges still exist at the collar between $395 million and $428 million and as well as some forwards that we got -- that we put in for the Copper Mountain Mine with our JV partner, again, to ensure that we realize strong cash flow. So we expect to be in a very -- in a stronger cash position by the end of the year. We expect to have meaningfully made progress on the net debt-to-EBITDA ratio with the inclusion of Copper Mountain in the second half of the year. And so we're pretty pleased with the sort of this -- the starting point. And as Peter mentioned, this is really the very significant inflection point in our production and free cash flow generation.

Okay. Great. And just maybe one final question for me on copper, rather on Copper World with the study anticipated quite soon. So I mean, my sense from your comments is that the PFS will feature either an elimination of the sulfide leach or a consideration for delaying the sulfide leach. And my guess is that saves you roughly $400 million to $500 million. So the question is, I mean, is that accurate? I mean could you -- is that kind of the scope of CapEx reduction we'd be talking about if you could eliminate the sulfide leach? And then what is your thinking on that versus -- on elimination versus deferral?

Lawson, I would say you're -- in general, you're right. That's certainly what we are contemplating. The question that we really -- so the technical work has been completed for the PFS. Really, what we're considering at this point is what sulfide leaching looks like in terms of time line. I would say that the copper's inclusion by the Department of Energy in the critical minerals list also may influence the timing associated with when we would build a sulfide or a concentrate leaching facility. But we haven't taken the decision that it's not fully baked yet, but you can expect it to be fully baked by the time we release the PFS. Andre, would you add anything to that? No, I think.

Our next question comes from Greg Barnes of TD Securities.

Just sticking with the Copper World on -- noted the state permits have slipped into early 2024 now when do you expect to get them from, I think, mid-2023? Just some background behind what's going on there?

Hi, Greg, thanks for that. If I -- you could also -- it's -- I view it in marginally positive light in a sense. So as you know, the state permits are technically driven permits. And we've been working very closely with Arizona Department of Environmental Quality to ensure that they have all the data that they need. So based on several productive interactions with the ADEQ, the review process is progressing well. Both parties are focused on ensuring that the permits are robust and defendable. But in that respect, Arizona -- the ADEQ asked for additional geotechnical data, which actually required us to do some additional drilling. So the process is expected to stretch out a little bit longer, but it doesn't impact our time lines as we won't be able to be in a position to sanction the project until 2025 at the earliest, in any case, based on our 3P plan for sanctioning Copper World. But I would say it is -- it's not a negative reflection on -- by any stretch of the imagination. I would say it is more positive because of the continued close collaboration with ADEQ.

And Eugene, on these Nordic bonds, the Copper Mountain bonds, is the plan to pay off the balance to basically $60 million in the second half of the year with the free cash flow that you will generate? And then the amount that you put on to your own credit facility, would you pay that back too in the second half of the year?

Thanks for that question. Yes, we took on the bonds as part of the transaction. They had a change of control put that was exercisable within 20 days of the transaction. That's why these were classified as a current liability. Since that date, we've taken $86 million of that, redeemed that and put that on our revolver, which really increases our financial flexibility to pay those off before the 2026 maturity. So this gets to our deleveraging targets. And so with the free cash flow generation that we expect in the second half of this year, I think we would be in a position to certainly do that well before 2026. With respect to the remaining bonds that are not on the revolver, the $59 million, we'll take our time, the call price is 104 starting in October. So we'll be patient with that and redeem those at the appropriate time, but no decision has been made on those ones yet. I think we'll deal with the $90 million that we take on in the short term to be -- to sort of deleverage and reduce that cash balance or reduce that debt balance certainly sooner than the maturity date.

Our next question comes from Bryce Adams of CIBC.

I wanted to go back to Copper Mountain. Eugene, you mentioned the small forward sales there. Sorry if I missed it, but why were those added? And given that it's only 2,000 tons, does the volume go higher in the near term?

Yes, it represents approximately 10% of the production in the second half of the year as originally projected. It's -- you may recall that Copper Mountain previously had collars. I think it was 360 floors in the collar. And so given the production in the second half of this year with our partner, the joint decision to ensure that there was strong free cash flow generation while we stabilize the mine. So 386 is the average price, and it's done -- the 2,000 tons are in equal amounts from August till December on a monthly basis.

Okay. So you don't expect to add any more there?

Opportunistically, we could look at that. But the plan at the moment is that there's just a bit of insurance again to ensure that we have stable cash flows while we destabilize the mine.

Okay. And then maybe for Andre, for the expansion potential at Copper Mountain, prior management had looked at 65,000 tons per day. They looked at other trade-offs up to 100,000 tons a day. How are you guys thinking about the expansion scenarios there?

Good question. So in the short term, like Eugene had mentioned, our plan is to stabilize the operation and get it to the established infrastructure at site, which is around the 45,000 tons per day. And we'll look at -- there's lots of optionality to increase production. The current permit is up to 50,000 tons per day and so we'll look for opportunities with improvements to increase to that. Any further expansions which are possible, they would have to compete for capital in our pipeline across the overall business. And so we're not ruling it out at the moment, but we see stabilizing, getting it to the 45,000, potentially getting it to the target of the current permit limit as the sort of the near midterm focus for us at the time.

Okay. So it sounds like expansions above the current permit level for Copper Mountain would be on the other side of Copper World?

Lots of things can happen, right? So with the project, it gives us all kinds of optionality within our portfolio. As things change, it could be accelerated or it could be after. But right now the main focus is just to make it a strong cash flow generator that could help enhance the 3P plan that Eugene and Peter mentioned in their remarks.

Our next question comes from Alex Terentiew of Stifel.

I just wanted -- first question, just to circle back on earlier question about drilling -- exploration drilling in Peru. I just wanted to clarify, have the permits for drilling at Maria Reyna and [indiscernible], have they been submitted now? I just want to get some clarity on the up to a year time line. So I just -- so that's the first question.

Hi, Alex. So the short answer is the permit applications have not been submitted yet. They are ready to be submitted. The technical work underpinning those permit applications has been submitted. But the -- we're working with the community to optimize the time line associated with submission of them because we want to make sure that we have full community support as we move into that process. And I'm not suggesting we don't have community support, but we recently had a community election and there's a new leader in the community, we want to make sure that everybody is on sides. So I would say that submission is imminent, but it has not formally been made yet.

Okay. Great. And my second question, on operating costs, both Peru and Manitoba, cost per ton were higher than I expected and you guys have noted some reasons there. So -- but I'm just wondering, can you walk us through how you see cost per ton evolving over the rest of 2023? Obviously, I expect them to come down a little bit as you guys have made some comments here, but just a little bit more color on that would be appreciated.

Sure, it's Andre. The big driver, particularly is around Peru. And as you recall from early on in the year when we are on a, call it a, restricted operation and conserving fuel, we have a -- we deferred a little bit of the Pampacancha strip. And to get to the high grade where we are now, over the last quarter, we've had to strip very heavily at Pampacancha and less at Constancia. And so Constancia stripping is generally capitalized. It's much longer term where Pampacancha is not, as it is short term in nature. And so what you're seeing is less capitalized stripping against our unit cost per ton as we went into this heavy phase. And now that will start winding down a bit as well on a cost per pound basis. The metal units are going to increase drastically as Eugene said, as we go into the second half of the year. We've already seen it. In Manitoba, it's not quite the same story, is we're ramping up. And so we've seen an increase in production quarter-over-quarter from Lalor mine and we expect that to grow. The mine's been debottlenecking a number of processes. We've been successful at the operation around the elimination of hoisting, I mean, trucking rock and ore to surface. And so that was around 600 tons a day before. Now with the increased tonnage that we've been producing, all of that's going up the shaft. And so we're seeing benefits on that that will improve over time.

[Operator Instructions] Our next question comes from Jackie Przybylowski of BMO Capital Markets.

I just have a few quick ones, if you don't mind. First one, if you can maybe give us some color on where you see stripping at Pampacancha going from here? I think this last stripping that we saw through Q1 and Q2 kind of maybe at least took me off guard, caught me off guard. Are we expecting any more periods of major stripping in the next -- well, I guess, over the life of Pampacancha?

There will be continued stripping, but what you saw in the last quarter was us catching up, right? So when we were in fuel conservation mode, we were not stripping at all and we were just heavily focused on using all of our fuel to feed the -- grab from the stockpile and feed the mills. And so this was a bit of an unusual peak. And so it should stabilize in the coming quarters.

Okay. That's great. And staying in Peru, maybe just another quick question. Just looking through some old notes of mine that said that the collective bargaining agreement with the union in Constancia expires later this year. I think I've got November written down. Is that still the case? And have you guys started negotiations with the union yet?

Yes. So the teams are actively working with our employees and negotiating with also the community agreements as well and they're all on track. There's nothing unusual to note at the moment.

Okay. And maybe just one last one on Manitoba. I know Peter mentioned at the beginning of the call, the Marubeni agreement in Flin Flon and the Rockcliff transaction at Snow Lake. Can you guys talk a little bit about where you see throughput through, I guess, specifically the Snow Lake Mills in the future? I know your plans now are to use the shaft at Lalor and not the ramps. But do you see a opportunity for those mills to get pushed a little harder with external feed, whether it's still properties that I mentioned or other properties that you guys have in your portfolio? Or should we expect that the shaft capacity at Lalor is basically the throughput constraint for the medium term?

That's a good question, Jackie. So like the history of Hudbay and Manitoba has been mining a lot of these satellite deposits, which we just recently acquired through Rockcliff. I think we've had 4 very large -- call them anchor, we call them anchor deposits, main mine 777 trade in Lalor. And those are the really big ones. But of the 28 or 29 mines that we've mined in our history, the remaining were all less than 3 million tons. And so with the acquisition of Rockcliff and the Cook Lake properties, it brings 5 or so of these smaller deposits that have the potential to be supplemental feed to stall mill. There's about 1,000 tons a day capacity at stall today. The Marubeni, before I jump to the Marubeni, that whole Cook Lake area is really, really attractive. It's an exciting -- there's many more deposits all around the area from Penn to the Balmer Zone [ph] to the Cook -- there's a Cook Lake deposit at Rainbow One. There's mineralization everywhere in this and a range of copper, zinc and gold mineralization. So it's perfect for our mills. And so there's so much to explore in the Snow Lake area. It just makes sense like with the Marubeni deal in the Flin Flon area, those properties are more focused to the potential reactivation of the Flin Flon mill which is on care and maintenance. And so there's 6,000 tons a day capacity there. And so the goal is to try to put together enough in that vicinity for that mill that's not utilized today. So it remains an opportunity.

This concludes the question-and-answer session. I would like to turn the conference back over to Candace Brule for any closing remarks.

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

This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.