Hudbay Minerals Inc.
Q1 2021 Earnings Call Transcript

Published: 12 May 2021

[Operator:]

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Hudbay Minerals Inc. First Quarter 2021 Results Conference Call. At this time, all participants are in listen-only mode. Following the presentation, we will conduct a question-and-answer session. I would like to remind everyone that this conference call is being recorded today, May 12, 2021, at 8

[Candace Brûlé:]

Thank you, operator. Good morning and welcome to Hudbay’s 2021 first 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 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 Steve Douglas, our Senior Vice President and Chief Financial Officer; Cashel Meagher, our Senior Vice President and Chief Operating Officer; and Eugene Lei, our Senior Vice President, Corporate Development and Strategy. 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. Peter?

[Peter Kukielski:]

Thank you, Candace. Good morning, everyone, and thanks very much for joining us. Before I begin today's presentation, I wanted to recognize that the COVID situation continues to present a challenging operating environment for our business units. While we are encouraged by the recent rollout of vaccines in certain regions, we remain focused on adhering to our strict COVID protocols and procedures to ensure our workforce returns home safely to their families at the end of every shift. We have recently encountered cases in our operations, and our safety protocols and contact tracing efforts have helped to ensure workplace transmission was limited. We are proud of our team’s strong efforts over the past year, which has allowed our minds to continue to operate safely and efficiently. In this presentation today, I will touch on the past quarter’s results, followed by the progress we have made on our growth initiatives, an overview of our leading organic copper growth pipeline, and a recap of the many near-term catalysts at Hudbay. First quarter consolidated copper production was tons, a 10% decrease from the fourth quarter of 2020. This was primarily as a result of lower mill throughput at Constancia due to a scheduled semi-annual mill maintenance shutdown, partially offset by higher copper grades at 777 and higher copper recoveries at the Flin Flon mill. Consolidated gold production increased by 10%, compared to the previous quarter achieving a new record for Hudbay due to higher gold grades at 777, higher gold recoveries at the Flin Flon concentrator, and higher gold grades at Constancia.

[Operator:]

Thank you. Our first question comes from Orest Wowkodaw of Scotiabank. Please go ahead.

[Orest Wowkodaw:]

Hi, good morning. Could we please get a bit more color on, sort of what happened at Constancia in the first quarter? I realized there was a maintenance shutdown, but the throughput there still seemed really low, unless the maintenance shutdown was over two weeks, I'm not really sure how long it was. And just along those lines, are there any other anticipated maintenance shutdowns later this year?

[Peter Kukielski:]

Morning, Orest and thanks for the question. To start out your question, yes the maintenance shutdown was longer than planned, because we deferred it from the last quarter of last year. So, the duration of it certainly would have impacted results for the quarter. But why don't I ask Cashel to provide a little bit more color around?

[Cashel Meagher:]

Yeah. Good morning Orest. Certainly the maintenance shutdown was a little bit longer than anticipated by the added work from the quarter also, it was longer due to some of the logistical reasons ran into unusual weather during that period and not to mention, the complications with segregating workforces, contractors, etcetera on site, and so, some of the work took longer than the under normal circumstances and obviously impacted the days available for throughput. The other was, is, in the beginning, the sequencing of the mine, we're mining a little bit harder ores for the lower part of Constancia, and so throughputs were a little bit down, but fortunately now, we're mining in Pampacancha and that'll offset a lot of that hardness, that'll be going through and we expect now to be at normal sort of throughput levels going forward. With respect, I believe there is also in Q4 another scheduled maintenance shutdown later in the year.

[Orest Wowkodaw:]

In order to – just on your question on duration, it was approximately two weeks, the shutdown?

[Peter Kukielski:]

Yes.

[Orest Wowkodaw:]

Thank you. And just shifting gears, when we think about your medium-term growth, whether it be Rosemont or Copper World, is it fair to say that the earliest we could see or we should anticipate investment from a development perspective is probably 2024 or do you see a scenario that you could feel really works begin before that?

[Peter Kukielski:]

Orest, I think, you know, your suggestion is certainly reasonable. What I would say with respect to Rosemont is that a number of potential outcomes are possible. But if we succeed, we would be in a position to be exactly where we were back in July of 2019, which could mean that we could effectively be moving into construction pretty quickly. Now remember that back in 2019, the thing that we really had to focus – were focusing were obtaining a partner for Rosemont for joint venture partner, as well as we would likely need to just read – take another look at the estimate in order to revalidate it in the context for some improvements that we made in the Interim, as well as current pricing. So, I think it would be fair to say that if we received a positive court decision this year at Rosemont, we could be in the field as early as 2023. And I would say, 2024 is likely a conservative estimate.

[Orest Wowkodaw:]

Thank you.

[Operator:]

Our next question comes from Jackie Przybylowski of BMO Capital Markets. Please go ahead.

[Jackie Przybylowski:]

Hi, thanks. I guess I'll just start by following up on Orest’s question, when you were talking about doing a PEA at Copper World next year, I think you said – how does that factor in with Rosemont? Are you going to contemplate that PEA as a standalone or is that going to be a complex between the two operations?

[Peter Kukielski:]

Good morning Jackie. Great question. The PEA that we're conducting is for Copper World as a standalone project. They certainly is the potential for it to be combined with a version of Rosemont, but we are approaching it as a standalone project right now.

[Jackie Przybylowski:]

Okay. And so a positive decision on Rosemont would result in you going forward with the construction of Rosemont and then Copper World would sequence in, sort of after that, is that the right way to think about it?

[Peter Kukielski:]

I think we, you know we really needed to complete the work on the PEA for Copper World to better understand how sequencing might occur. So, I think what you're saying is a fair assumption, but certainly is not certain at this point.

[Jackie Przybylowski:]

Right. Okay, that's helpful. And shifting over to Peru, I know, you've probably been asked this a million times, but given that we're getting closer to the runoff election in Peru, can you talk about how is it affecting Hudbay if at all, at this point? Does the increase, kind of attention to different political views does that change the interactions that you're having with the community and the progress you're making on getting access to the exploration properties that you have up there?

[Peter Kukielski:]

Jackie, in a nutshell, I think the team, and his team in Peru are doing an extraordinary job of staying out of politics, and support, contact with the communities in Chumbivilcas, in support of those communities. With respect to the election, I really do think that it's too early to predict the direction that the runoff will take. You will recall that the polls in the first part of the election didn't even include Mr. Castillo in the top five candidates. So, you know, again, as I've said before, if I view Peru in the context of my personal experience over the past couple of decades, almost every election is characterized by extremes. 10 years ago, the same thing happened with who was a left wing candidate, and he was considered to be Armageddon for the mining industry in Peru. But we saw that after his election, he moved to the center and mining continued to be a key driver of the nation's economy. And I see a difference now. Mr. Castillo is already beginning to soften his tone. If he is elected, and this is a big if, Hudbay will work with his administration constructively, as we always do, and we will defend in advance the interests of our investors and our stakeholders. But I do believe, sort of going back to the first part of my answer to you is that the best way to do this is to remain deeply focused on our communities in Chumbivilcas, and on our common purpose. The team is totally focused on that.

[Jackie Przybylowski:]

And the ask from the communities hasn't changed materially with this sort of background noise?

[Peter Kukielski:]

No, no, in fact, we are very, very solidly engaged with the community and we have a number of agreements with the communities.

[Jackie Przybylowski:]

Okay, that's really helpful. Thank you very much, Peter.

[Peter Kukielski:]

You’re welcome.

[Operator:]

Our next question comes from Matthew Fields of Bank of America. Please go ahead.

[Matthew Fields:]

Hey everyone. Thanks for providing the color on the shipments that, sort of got pushed into 2Q. It is it – have you been able to, sort of think about if that 39 million had been in revenue, kind of what the EBITDA throughput would have been in the first quarter?

[Peter Kukielski:]

Thanks for the question, Matt. Why don't I ask Steve Douglas, to respond?

[Steve Douglas:]

It's not a number we really disclose. But suffice to say, you know, I will get back to you on the number as to what the calculation would be.

[Matthew Fields:]

Okay, and then, you know, just thinking about the rest of the year, you know, obviously, global freight, global shipping is challenged right now, for a number of reasons, is there any reason to believe that, you know, this is just a one-time issue, and, you know 2Q will kind of have outsized results, because there'll be nothing pushed into 3Q was this kind of a thing that you're going to be monitoring for the rest of the year to make sure, kind of shipments go out on time and sort of everything that you produce can get sold in a reasonable amount of time?

[Peter Kukielski:]

We have no indication that there is, will be any change. Certainly, we have no indication in the short-term of any changes. And we expect, certainly expecting exporters to go ahead as planned. And there's no indication that things will change from that beyond the second quarter.

[Steve Douglas:]

And I mean, I think it's worth noting, and Peter pointed out in his conference call notes, we actually got paid for the shipment. In accordance with the commercial terms, it was just delayed, literally a matter of few days. So, I mean, these logistical hiccups come and go. And we definitely aspire to not have them. And I think our marketing team does a fantastic job of dealing with a lot of variables. So absolutely, I would reiterate what Peter said that we don't anticipate this occurring again, but that's all subject to the vagaries of the areas in which we function.

[Matthew Fields:]

Alright, fair point. And then last one from me, you know, you start delivering gold ounces under the prepay agreement next year, given the move significantly in prices on gold, but you know, more so on copper, since you signed the gold prepay. Is there any thoughts of kind of taking advantage of the good metal prices to kind of maybe mitigate the impact of those ounces, you know, kind of going away on your cash flow from financing in 2022?

[Peter Kukielski:]

Matthew, I think that be concluded the agreement at a decent price, which is actually not that far off today's price. So, right now, we are not really giving consideration to alternatives with respect to how we make those payments or how we deliver those ounces.

[Matthew Fields:]

Okay. Thanks very much. Appreciate it.

[Operator:]

Our next question comes from Lawson Winder of Bank of America. Please go ahead.

[Lawson Winder:]

Hello, Peter and team, good morning. Thanks for the update. Just a question on Rosemont. In the event that the court actually rules against Rosemont, I'd like to kind of understand what you're thinking is, in terms of how to proceed so, one, are you in a position where you could fairly immediately move ahead with some sort of plan that avoids federal lands? And then how long would it be before you could submit for those state approvals? And then secondly, you know, would your intention be to appeal or just leave it at that?

[Peter Kukielski:]

Good morning, Lawson. Look, I think that's an insightful question. I would say, if we were to lose the case, we would most certainly seek leave to appeal. And the reason why I say that is because this decision, not only does – it not only affects Hudbay and Rosemont, but it affects the entire industry in the Western United States, and possibly the entire United States. And we have previously said that there are some 25 or so projects, and billions of tons of copper that are potentially impacted by this. So, it's something that affects the entire industry. And we think that an appeal certainly would be an order, and would be certainly appealed by the industry and other industry associations. Now, I remain pretty confident that we're optimistic that the appeal will go our away. But that's beside the point. Now, if we do appeal, of course, we would look at alternatives for going into production. I think it's fair to say that the Copper World discovery certainly provides us with an alternative avenue, although a slower avenue. But we continue to look at alternatives with respect to how we might move forward, if we in fact, do lose the appeal.

[Lawson Winder:]

Okay, that's great. Then maybe if I could just ask on the collective bargaining agreements, it seems like this is a bit delay. I was just curious to what you would attribute the delay in getting those contracts finalized. And then, you know, I think it'd be really helpful to get some color on what proportion of each site is unionize, and what job functions are primarily represented by those union members.

[Peter Kukielski:]

Lawson, I would say that, in the case of Manitoba, it's a more complex environment, given the pending closure of 777, but we continue to advance the collective bargaining process there with our unions to work towards, you know, concluding an agreement that works for everybody. Ultimately, we and they are focused on a fair settlement, and we expect to achieve that. Now, to your question of the proportion of personnel who are unionized? In Manitoba, the entire workforce is unionized, and in Peru approximately one-third of the workforce is unionized.

[Lawson Winder:]

And those in Peru, are they concentrated in one particular function or its spread around?

[Peter Kukielski:]

That’s spread around.

[Lawson Winder:]

Okay, that's great. Thanks for that color. And then just one final question, I mean, you mentioned, of course, you reiterated in the guidance, you reaffirm that, and your confidence in meeting that, but I did note that you called out $4.6 million in Q1 of additional costs that I think were unexpected, related to COVID. And yeah, my question would be how persistent in each of the consecutive quarters in 2021 could that $4.6 million cause be? And, you know, if you were to get $4.6 million of additional COVID costs in each of Q2, Q3, and Q4 in 2021, would that put the Constancia guidance at risk at all? I mean, think the high-end is , where there any risk of, sort of reaching that level?

[Peter Kukielski:]

Lawson thanks for that. So, we had initially guided towards some $2.5 million of quarterly costs with respect to COVID. However, with the increased precautions that we're taking, we are now saying that the last quarter was $4.6 million, instead of the $2.5 million run rate that we're experiencing. We expect the overall COVID-related costs for this year to be of the order of $20 million. So, $5 million a quarter, but we do not expect those to impact the guidance that we have issued.

[Lawson Winder:]

Okay, fantastic. Thank you, Peter.

[Peter Kukielski:]

Welcome.

[Operator:]

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

[Candace Brûlé:]

Thank you, operator and thank you everyone for participating today. If you have any further questions, please feel free to reach out to our Investor Relations team. This call has now ended and you may disconnect your lines.