Hudbay Minerals Inc.
Q2 2020 Earnings Call Transcript

Published: 12 Aug 2020

[Operator:]

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Hudbay Minerals Second Quarter 2020 Results Conference Call. At this time, all participants are in listen-only mode. Following the presentation, we will conduct a question-and-answer session. [Operator Instructions] I would like to remind everyone, that this conference call is being recorded today, August 12, 2020, at 8

[Candace Brûlé:]

Thank you, Operator. Good morning and welcome to Hudbay's 2020 second quarter results conference call. Hudbay's financial results were issued yesterday and are available on our Web site 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 recently appointed Senior Vice President and Chief Financial Officer; Cashel Meagher, 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 Web site. 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 thank you for joining us. I'd like to start out by saying that I hope everyone has been able to stay safe and healthy as this public health crisis has evolved over the past several months. We too have been closely monitoring the rapidly changing environment while continuing to execute on our business response plan to minimize the overall impact of the pandemic on our operations. We remain focused on the health and safety of our employees, their families and the communities in which we are closely tied while engaging with local stakeholders and public health authorities to ensure the effective implementation of our response to the pandemic. Today, I'll touch on the highlights of our second quarter financial and operating results, along with updated guidance for our Peru operations. I will also explain how the recent 1901 upgraded resource estimate fits into our plans for advancing the third phase of our Snow Lake gold strategy. And I will provide an update on the progress of the new Britannia mill refurbishment and the timelines to first production expected in 12 months. But before we jump into all of that, I'd like to take a moment to thank you Eugene for stepping into the role of Interim CFO, while we advanced our search for a permanent CFO. And I'm pleased to introduce Steve Douglas who was appointed to the role effective June, 30. For those who have not met or spoken to Steve before, he is highly regarded by the street and brings over 25 years of resource industry and senior finance leadership experience to our team. Over the last several weeks, Eugene and Steve have worked closely together to continue to execute our financial objectives. And I have been impressed with how smoothly the transition has been. I've said it many times before, Hudbay has a disproportionately talented team for a company of our size and I have no doubt that Steve will bolster our team. Welcome, Steve. Now, beginning on Slide 3, Hudbay second quarter results were boosted from another solid operating quarter in Manitoba, even with strict adherence to COVID protocols that have been implemented. I would like to thank the Manitoba team for their strong efforts in achieving these outstanding milestones, while adapting to this challenging external environment. We saw strong production and cost performance in Manitoba, with an increase in production of precious metals and zinc over the first quarter, driven by record gold production from increasing Lalor gold grades and record gold recoveries at Stall. Copper production declined by 27% from the first quarter due to the temporary suspension of Constancia until mid-May, however, consolidated copper equivalent production only declined by 12% as a result of higher precious metals and zinc production in the quarter. Consolidated cash cost net of byproduct credits was $0.64 per pound of copper, a 47% improvement over the first quarter. Given the significant reduction in Constancia production in the second quarter, this measure is more heavily impacted by Manitoba production, which contains meaningful zinc and gold byproduct revenue components. Consolidated all in sustaining cash costs also improved from the first quarter to $2.26 per pound of copper, driven by the same factors affecting cash cost along with reduced sustaining CapEx in Peru from the temporary suspension. Operating cash flow before change in non-cash working capital was $30 million in the quarter, reflecting a decrease of $12 million compared to the first quarter. The decrease in operating cash flow is primarily the result of lower Constancia production and sales due to the temporary suspension. However, this decrease was partially offset by higher gold production and sales in Manitoba, as well as higher realized gold prices. We've been planning for the introduction of adjusted metrics for several months. And we are pleased to have Steve support this change shortly after he joined. We believe these metrics will provide further transparency for readers into our financial performance after normalizing for one-off or non cash adjustments. During the second quarter, we've adjusted for temporary suspension costs in Peru and the reversal of a portion of the Peru inventory write down from the first quarter, amongst other items. Adjusted net loss was $0.15 per share and adjusted EBITDA was $49 million. The strong performance from the Manitoba operations during the quarter helped to offset the reduced contribution from the Peru operations, resulting in minimal change in the quarter-over-quarter adjusted earnings and only a slight decrease in adjusted EBITDA. We exited the quarter with $391 million in cash and equivalents and continued to take prudent steps to manage our balance sheet. In the second quarter, we entered into discussions with a syndicate of banks in our revolving credit facilities to restructure the facilities in order to provide enhanced financial flexibility during the development of the new Britannia and Pampacancha projects. Each of the banks in the syndicates received credits approval to amend the facilities on the proposed terms and the transaction is expected to close shortly. As a result of the amendment, total available borrowings under the credit facilities were right sized to $400 million to reflect Hudbay's anticipated business requirements until June 2022, when the credit facilities mature. However, it is important to note that we do not intend to draw down these facilities for the purposes of achieving our business plans. We also revised the maintenance covenants to a net debt to EBITDA ratio of less than 5.25 and an interest coverage ratio of greater than 2.50 until the end of 2021, which provides additional financial flexibility. The Manitoba business unit had solid operating performance across the mines, mills and zinc plant during the second quarter, as shown on Slide 4. In response to the COVID-19 pandemic, Hudbay has worked collaboratively with its health and safety committees and the local health authorities to continue to keep employees and communities safe by implementing a number of layered workplace controls. As a result, the second quarter Manitoba, operating results were largely unaffected by the pandemic and we are on track to achieve annual production and cost guidance. Manitoba achieved higher production results in all metals quarter-over-quarter. The enhanced precious metal production was driven by higher gold and silver grades at Lalor as a result of prioritizing resources within the higher value portions of the base metal lenses. Developments in the Gold Rich lenses 25 and 27 advanced the head of schedule and production from these areas is expected ahead of the new Britannia mill start as Lalor transitions to a gold mine. The 777 mines with higher ore grades during the second quarter, which were expected and consistent with stopes sequencing outlined in the mine plan including the mining of higher grade copper stopes during the quarter. Combined mine mill and G&A unit operating costs in Manitoba was slightly higher than the first quarter but in line with expected annual guidance ranges. Slide 5 outlines the enhanced performance we've seen at the Stall mill as a result of our focus on continuous improvement. The throughput of the mill has steadily increased over the last several years and in the first half of 2020, we've seen an 11% increase in throughput to average 3900 tons per day. This is a result of improved maintenance programs, which have increased plant availability runtime to an impressive 95% up from 91% in 2019. The Stall mill also achieved record gold productions in the second quarter, increasing to 62.3% compared to 52.5% in same period last year. This is due to improved maintenance program, higher gold head grades, improved plant stability due to grade control and the processing of ore with intrinsically higher recoverable gold content. Turning to our Peru operations on Slide 6, after an 8-week temporary mine suspension, we successfully achieved the efficient restart of operations at Constancia in mid-May, with increased government supported COVID-19 health and safety protocols in place. The mine achieved normal mill throughput levels on May the 18th within 48 hours after restart and continued at these levels for the remainder of the second quarter. The initial 6 weeks following the restart focused on milling activities while processing stockpile ore. This was followed by a ramp up of mining activities commencing in the last week of June with a full ramp up to normal levels in early July. Production results from Constancia were lower than the first quarter as a result of the temporary suspension and processing of stockpile or following the restart of operations during the quarter. Despite milling activities being suspended for 8 weeks, the care and maintenance activities performed and the proactive mine restart planning during the shutdown, facilitated an efficient ramp up and steady performance of the mill after ramp up. Over the period when the mill was fully operational during the quarter, average daily throughput was above 95,000 tons per day. Mills copper grades in the second quarter were flat compared to the first quarter, but the characteristics of the stockpile ore that was processed negatively impacted copper recoveries. Combined units operating costs in the second quarter was 17% lower than in the first quarter, primarily due to lower operating costs as a result of constraint activity during the temporary suspension and significantly reduced mining costs during the quarter. We also deferred a second quarter plant maintenance shutdown from May to the third quarter as a result of proactive plant maintenance completed during the eight week temporary suspension. I would like to commend our Constancia team, who has done a tremendous job ramping up operations while adhering to enhanced health and safety protocols in an extremely challenging COVID-19 environment in Peru. As you are aware, in response to the uncertainty around the ongoing pandemic and the resulting temporary suspension of operations at Constancia earlier this year, we suspended our previously issued 2020 guidance for Peru operations. Following a full resumption of Constancia mining and milling operations, we are now in a position to be able to issue updated 2020 guidance for Peru. The situation in Peru, however, remains fluid. The state of emergency first declared by the government in response to the COVID-19 pandemic on March 15 has since been extended to August 31. And there remains a risk of further disruptions to mining operations. We are actively monitoring the situation and any potential future impact on Constancia operations. The updated annual production and operating cost guidance along with capital and exploration expenditure forecasts are presented in the table on Slide 7. The updated Peru guidance assumes we are able to continue to safely operate for the remainder of the year, while adhering to all existing health protocols required by the Peruvian government. Our Manitoba operations are on track to achieve the guidance ranges and therefore the guidance remains unchanged from previously disclosed expectations. The revised production guidance for Peru reflects the reduction of approximately 15,000 to 20,000 tons of copper and 20,000 ounces of precious metals compared to the original guidance. This reduction reflects the lost production during the 8-week temporary suspension at Constancia, in addition to revised mine plans for the remainder of the year, and the resulting deferral of some higher grade ore into 2021. Precious metals production also reflects the revised expected Pampacancha production start date of early 2021 compared to the second half of 2020 previously, this is due to the COVID-19 related government declared state of emergency in Peru and the resulting impact on the Consulta Previa consultation process. Peru sustaining capital of $80 million reflects the deferral of approximately $20 million into 2021 due to the resequencing of capital activities such as tailings and capitalized stripping. The revised unit cost guidance for Peru reflects lower mining costs during the gradual ramp up of mining activities in the quarter, there was no change to exploration guidance. Peru's growth capital of $70 million includes initial expenditures for developing the Pampacancha deposit and acquiring surface rights from the local community, but excludes the costs associated with recognizing the current uses of the land by certain community members. We have made significant progress with these individual land user agreements and have approximately two thirds completed to-date with the remaining agreements expected to be completed during the third quarter of 2020. Similarly, we have also made progress with the land clearing activities and approximately one-third of the land has been vacated and turned over to Hudbay. As discussed last quarter, we have demonstrated significant value in our Snow Lake gold business through executing Phase 1 and Phase 2 of our Snow Lake gold strategy, as highlighted on Slide 8. Phase 1 was announced in February of 2019 after several years of detailed drilling and economic trade off studies, which resulted in a 65% increase in gold reserves at Lalor, and determined that the refurbishment of the new Britannia gold mill was the optimal processing solution for Lalor's gold ore. It was through this first phase that we repositioned Lalor as a goldmine with precious metals contributing a majority of the life of mine revenues. We then spent the next 12 months optimizing Lalor's mine plan, drilling the in mind exploration targets and conducting advanced engineering studies on the regional deposits win in three zone and in March of 2020, we unveiled the second phase of our Snow Lake gold strategy, which further increased the gold reserves by 35% to 2.2 million ounces increased Lalor's life of mine gold production by 41% and extended the mine life of the Snow Lake operations to 18 years. Slide 8 also highlights the third phase of our Snow Lake gold strategy focused on further expansion potential and I'll touch on this in a few moments. Slide 9 demonstrates the 2020 has been the year of executing our Snow Lake gold strategy. After releasing the enhanced second phase of our plan, we were able to unlock the value of future gold ounces through the recent gold prepaid transaction. This transaction fully funded the new Britannia refurbishment costs and positioned us well for continuing to execute on our plan. In preparation for the restart of the new Britannia mills in the first half of 2020, we commenced underground development and early mining of the gold zone. Gold production from Lalor is expected to be 74000 ounces in 2020 and 102,000 ounces in 2021. In 2022, upon completion of the new Britannia mill refurbishment average annual gold production from Lalor is expected to increase to over 150,000 ounces at cash costs and sustaining cash costs, natural byproduct credits of approximately $480 and $655 per ounce, respectively during the first eight years. We believe there is potential to further increase the annual production and extend mine life through several upside opportunities as summarized on Slide 9. We are examining the potential to further optimize both the Stall and new Britannia mills, which could create additional value for the regional deposits we have in Snow Lake such as the 1901 deposit. At the Stall mill, we are initiating studies to examine the potential to increase gold and copper recoveries and we'll also be completing studies to potentially expand the new Britannia mill capacity beyond the current plan 1500 tons per day. We expect to complete these economic studies in the first half of 2021 as we execute the third phase of our Snow Lake gold strategy. Slide 10 highlights the progress we've made at the new Britannia mill over the last few months. Detailed engineering is currently approximately 90% complete, procurement is 65% complete and construction activities are approximately 25% complete to-date. On the procurement side, we have placed orders for 100% of the long lead items and we are pleased to say that there hasn't been any impact on the supply chain due to COVID-19. Construction of the pipeline between the new Britannia and Stall Mills continues as planned. We broke ground at the new Britannia site with the start of construction for the new copper flotation building in May. Also repairs to the new Britannia mill building are underway. And this includes items such as repairs to the carbon in leach tanks, demolition of stairs and cladding and placement of the grounding grid for the electric building. Refurbishment activities are on track to be completed within 12 months in August 2021, with plant commissioning and ramp up expected during the second half of 2021. We are also pleased to report that through our expertise in project development and the advancement of the detailed engineering work, we have identified the potential to produce gold from the new Britannia mill earlier than expected in 2021. The team is exploring this early gold opportunity and we expect to provide an update in the third quarter. The significant gold exposure from Hudbay's Snow Lake gold business offers investors an attractive balance between growing gold cash flows and the stable low cost copper business through the other key assets in our portfolio. On Slide 11, we sensitize the expected annual cash flows or gross margin from Snow Lake gold at various gold prices. For example, at a gold price of $1600, Snow Lake gold is expected to generate approximately $200 million in annual gross margin and this would increase to over $240 million at the current spot gold price of approximately $1900. Given that Lalor is located in one of the best mining jurisdictions and is a high quality low cost asset already in production, there remains significant opportunity to unlock further value for Snow Lake gold within Hudbay. Lalor is not unlike other polymetallic mines in Canada, where the VMS deposit is characterized by base metal zones that are mined in the early years followed by higher value gold zones that transform the mine into a primary gold asset. We are excited about this value potential and we believe as we continue to execute our Snow Lake gold strategy, we will create value for all of our stakeholders. This quarter, we also announced an updated resource estimate for the 1901 deposit, which was discovered in February of 2019 and is located near the Lalor mine in Snow Lake. This resource update was planned as part of Phase 3 of our Snow Lake gold strategy. This past winter, we completed a drill program to upgrade the classification of a significant portion of the previously reported 2019 inferred resources and to define an initial inferred resource estimate for the gold mineralization that had been intersected near the two zinc rich lenses. You will recall that 1901 is located halfway between the former Chisel North mine and Lalor mine and it is less than 1000 meters away from an active underground ramp, as outlined on Slide 12. It is within 15 kilometers tracking distance on both the Stall and new Britannia processing facilities and the property is 100% owned by us free of any royalties or streams. The mineralization is similar to Lalor, with zinc rich VMS lenses containing high grade gold lenses an indication of a copper gold rich feeder zone. The updated measured and indicated resources for the base metal zone are shown in the table on Slide 12, and are equivalent to 100% of the initial tonnage in the 2019 inferred resource estimate. The zinc grade is 12% lower, but the gold grade in the base metal zone has more than doubled. The 2020 drilling program was successful in defining an initial inferred resource estimate for the gold zone of 500,000 tons at 6.8 grams per ton gold. Total gold resources have significantly increased with 122,000 ounces measured and indicated and 137,000 ounces in inferred compared to a total of 58,000 ounces previously, which continues to demonstrate the gold potential of the Snow Lake camp. The methodology we use to estimate the 1901 mineral resources is identical to the approach we use for the Lalor mine, which constraints the resources within a stope optimization envelope. This conservative approach to resource estimation is expected to lead to a higher mineral resource to reserve conversion factor. There remain opportunities for extension and additional conversion of mineral resource estimates at the 1901 deposit. We are actively pursuing engineering activities to develop a robust economic mine plan for 1901 that could supplement the production from Lalor to take advantage of the future food processing capabilities of our mills in the Snow Lake region. We expect to complete pre-feasibility study on 1901 in the first half of 2021. The northern and eastern parts of the deposit remain open as shown on Slide 13. We have also identified additional exploration drill targets located between the 1901 and Lalor deposits that remain to be tested. In addition, recent drilling has identified several high grade copper gold zones that have not been included in the current resource estimate due to limited drilling density. Looking at the many mines we've discovered and operated in the Flin Flon and Snow Lake camps, we have a strong track record of significantly expanding the reserves of these VMS deposits as shown on Slide 14, the 1901 deposit is exhibiting the same characteristics as Lalor and we will continue exploring this deposit with another drill program planned for early next year. And as our history suggests, this should translate to increased production and increased mine life for the Snow Lake operations. I'll conclude today's presentation with an overview of the low risk high return strategic priorities we expect to deliver in the next 12 to 18 months as summarized on Slide 15 and 16. We've touched on a number of these catalysts today, such as the new Britannia mill refurbishment milestones, a new gold zone and upgraded resource estimates of the 1901 deposit, the Stall mill recovery improvement program and the potential to expand the new Britannia mill beyond 1500 tons per day. As mentioned earlier, we are making significant progress on Pampacancha and anticipate mining early in the new year which is expected to significantly increase cash flows from Constancia due to higher copper and gold grades. We also expect to advance exploration activities on our regional properties near Constancia after reaching an exploration agreement with the Quehuincha community in early 2019 and subsequently completing the Consulta Previa process, we are on track to commence our planned drill program in the fall of 2020 to test a high grade skarn target on the Quehuincha north property. The follow up drilling program on the previously disclosed Constancia North intersections continues to test a possible extension of copper porphyry and high grade skarn mineralization occurring within 300 meters of the edge of the current Constancia fit. We expect to have the results from this drilling program in the third quarter of 2020. The Rosemont appeal process continues to move forward. In June, we filed our initial brief alongside the U.S. government with the Ninth Circuit Court of Appeals in relation to the July 2019 District Court decision. Both Hudbay and the U.S. government emphasized that current law broadly authorizes mining related activities such as ore processing and tailing storage to be conducted on open Forest Service lands. The district court's determination at the Forest Service's mining regulations do not apply to mining activities unless those activities are conducted entirely on valid mining claims is contrary to plain language reading of the general mining law. It also contradicts Forest Service regulations, which explicitly allow for mining related activity to occur on land not covered by any mining claim. It is expected that a decision at the Ninth Circuit Court of Appeals will be made before the end of 2021. And lastly, we continue our infill exploration program at Lalor to convert additional resources to reserves in addition to testing areas of potential extension at Lalor. We expect to provide an updated mineral reserve and resource statement for Lalor with our annual plan -- with our annual update in March of 2021. We have made significant progress advancing our various organic growth initiatives and we believe we are well positioned to deliver on a number of near term and longer term catalyst. We knew 2020 was a year of investment at Hudbay and these high return investments will pay off next year as we increase cash flows and create value for all of our shareholders. And with that, I'm now happy to take your questions.

[Operator:]

Thank you, ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Fahad Tariq of Credit Suisse. Please go ahead.

[Fahad Tariq:]

Maybe first on Manitoba, you mentioned that there's potential to produce gold from new Britannia before 2021. I'm just trying to figure out what's the upside from the 100,000 ounces base case next year? Like how much more could it be versus that?

[Peter Kukielski:]

Fahad, thanks very much for the question. It's a good question. So we're not ready yet to provide numbers on that. We will advancing the work pretty significantly and we expect to have a lot more information on this next quarter, but Cashel do you want to provide any other insight?

[Cashel Meagher:]

Yes. So I think the way to look at it is, the new Britannia mill itself is a refurbishment, whereas the copper flotation building is a new build. And we saw the opportunity to advance in the schedule, the completing of the refurbishment, which would allow us to mill some of our higher grade gold zone 25 in advance of the completion of the copper flotation building. And so as you can imagine, with that opportunity, we need to change the sequencing of what we might be mining next year to be able to deliver zone 25 earlier. While it's pre-developed, the stope sequencing would be that. So in the next quarter, we hope to be able to give a more direct answer of what we had previously disclosed as 2021 ounces produced at Manitoba, it will be increased and we'll be able to give you that in the next quarter. The amount it will increase.

[Fahad Tariq:]

Okay. And maybe just switching gears to Peru, at Constancia, my understanding there is no positive COVID cases right now but Peru unfortunately seems to be a bit of a hotspot for COVID. And even among, some of your mining peers there's been some outbreak. So I'm wondering, if the government were to impose further restriction that and contention have to shut down again, what are the levels of stockpiles? And how did the stockpile grades compared to the fresh ore? Thanks.

[Peter Kukielski:]

I'm not sure how much worse it's going to get in Peru. Peru, as you know, is pretty bad right now. And we have very, very, very strong precautions in place in order to prevent the pandemic from coming to the mine. I think you're aware that we hotel all of our personnel in either Cusco and Arequipa and we tested for COVID during their period of quarantine. So that it doesn't get up to the mind and this is quite consistent with requirement of the Peruvian government. We feel that it is likely that we will not experience another shutdown, if we do, it will likely be in a similar form to the previous one because we would stop milling at that stage if we required to shut down. But with the stockpiles are a little bit higher in zinc and lead, which is effectively what constraints or reduces the recoveries that we experienced. But of course, those stockpiles are limited, Cashel, do you want to comment further on that?

[Cashel Meagher:]

I think that covers most of it, Peter, maybe I'd add that those precautions we have with COVID to-date have worked extremely well. In fact, we increased our workforce over the last couple of weeks to accommodate some shutdown maintenance work that was completed successfully. And we now sort of have a system whereby the workers themselves are onsite for longer shift rotations and so we've mitigated a lot of this, a lot of our peers to also have done this. It took a while to be able to manage to this current sort of new normal, we call it a new normal and we're operating under those parameters.

[Operator:]

Our next question comes from Orest Wowkodaw of Scotiabank. Please go ahead.

[Orest Wowkodaw:]

In February, you issued multi-year guidance. And I'm just curious, at the time you had issued 2021 production guidance for Constancia of 80,000 to 100,000 tons of copper and 85,000 to 100,000 ounces of total precious metals. I'm just wondering how that may have changed with some of the delays of Pampacancha pushing to the first quarter of '21. I guess partially offset by some of the higher grade material from this year being pushed from the main pit into '21. Are those guidance ranges still valid?

[Peter Kukielski:]

Orest, thanks for the question. I would suggest that they still are because so effectively what we're doing is, we're just pushing off the plan by a couple of months. And we did mine -- we did used a bunch of stockpile material, which is why you've seen lower recoveries during the quarter. But I would suggest that because the Pampacancha ore is of lower grade initially, we should essentially just be pushing it out a couple of months.

[Orest Wowkodaw:]

Okay. That's great. And then just curious on Manitoba, I mean, with gold continuing to run up, maybe except for yesterday. Does that in any way change your thinking strategically in terms of potentially monetizing Manitoba whether, there's perhaps some thought of advancing that strategic move?

[Peter Kukielski:]

It's a good question. We're very much a business in transition and we're in execution mode right now. And our focus is 100% on executing our Snow Lake gold strategy by delivering new Britannia on time and on budget, which we think generates significant value for us and for our shareholders. The investment in new Brit generated 25% after tax IRR, it's 1500 hold. So we just think that's the right thing to do stay focused on that. Absolutely focus on that and then deliver on it and we will maximize value by doing that, and we'll worry about what to do with it, at a later point.

[Orest Wowkodaw:]

Okay. And then, just finally, I've noticed your environmental provisions in terms of liability on the balance sheet has increased materially, again, this quarter, is that the year-to-date increase? Is that purely a function of just lower discount rates? I'm just curious what's going on there and how much of that is Manitoba? Thank you.

[Peter Kukielski:]

Just a lower discount rates and exchange rate impacts.

[Operator:]

Our next question comes from Greg Barnes of TD Securities. Please go ahead.

[Greg Barnes:]

Yes, thank you. Peter or Cashel, is there an optimal point in the mine plan when 1901 [Technical Difficulty]?

[Peter Kukielski:]

Greg, thanks for that. So we need to complete the pre-feasibility work to understand better exactly where it fits. I mean, if the question is, does it extend the zinc plant? The answer to that is no, because we need to complete the pre-feasibility work in the next couple of years of pre-development work to be done.

[Greg Barnes:]

So that means you would be shipping zinc skarn out from 1901, when you get to that kind of -- producing from it, then?

[Cashel Meagher:]

It's lower grade zinc and it's not enough base zinc out of Lalor combined with 1901 to continue unfortunately, or perpetuate the life of zinc plant was which is still slated for sometime mid-2022 to be closed. However, what 1901 does present to us, Greg is, it gives us the opportunity one to use the grind capacity that exists in new Britannia moving it from 1500 tons a day to 2200 tons a day, it provides an extra workplace within the Lalor mine, where we can produce more gold and more zinc. And in fact, Peter outlined it in his presentation that stall has been really hitting records sort of throughput production and those sync zones themselves which go through the stall mill. So if we see ourselves being able to hoists more, maybe next year out of Lalor than we have this year, we see ourselves being able to mill in the future more at a new Britannia than what we're currently refurbishing it to. And we also see the capacity of Stall being more than it has been. So it fits in quite nicely to the Lalor life of mine as providing an extra workplace with multiple headings and increase the overall production of gold, copper and zinc out of the Snow Lake complex.

[Greg Barnes:]

Thanks guys. So by the middle of next year, we're going to have a better sense of what the ultimate production rates gold, copper zinc from Snow Lake is going to be.

[Cashel Meagher:]

Yes. I think that's exactly what it is. In fact, in our normal guidance process in our budgeting process, the team has been working towards incorporating that into it. So part of the pre-feasibility will be when next year how that then fits into the Lalor life of mine and the complex life of mine. There are several other pre-visibility's that I mentioned that are in parallel, which is understanding maybe what Stall of leaching of tails to increase the gold recovery from it, because we still get quite high gold. Gold entails from Stall. So that's one potential pre-feasibility, the other pre-feasibility is the increase in throughput at Britannia from the 1500 to the 2200 tons a day. And then, how exactly 1901 in some of these other satellite deposits we've spoken about fit into the life of mine to be able to utilize all that capacity that's available to us. So I think incrementally there'll be more [indiscernible] and more stories happening. Yes, I think this time next year, you can expect 1901 and exactly how it fits in. But before that, you're going to learn more between -- when we present the guidance, what we believe next year's, the increase of hoisting at Lalor will be and also, the earlier gold to be produced out of new Britannia itself.

[Greg Barnes:]

Right. That's helpful. And just a final question, on 16, your bubble charts of catalysts. I see a Constancia mill expansion and what's that all about?

[Cashel Meagher:]

Well, what we see is, we see some potential to be able to put more throughput through Constancia. One of the things we're challenged with, of course, at Constancia is after the life mine of Pampacancha, the grades decrease quite dramatically and we want to change the dynamic, we don't want it to be a near long-term high cost producer. So we have multiple strategies we're evaluating one is obviously putting more throughput we're actually, our fleet has been quite efficient and the mine is not the constraint. So the constraint has been in a little bit in the grinding. And we believe there are some ways we're working on to be able to increase the throughput there. Now there's some constraints on it with respect to permitting, but we believe we can get it up closer to 110,000 tons a day, from where we're currently at 90,000 tons a day, and that really improves the future economics. So it's incumbent on us to do this to be able to get the best value out of our current infrastructure. And then of course, our real home run plan will be to execute on some of these other satellite deposits around Constancia to increase the feed rate that it has available to it.

[Operator:]

Our next question comes from Matthew Murphy of Barclays. Please go ahead.

[Matthew Murphy:]

Just had a question on what the remaining risks to your timing at Pampacancha. I'm pretty confident that this will be done in Q3 just wondering -- do you think COVID could delay that? Do you think that remaining negotiations, present any risk or anything else?

[Peter Kukielski:]

Thanks for the question Matt. So the real impact on Pampacancha has been the posing of interaction by the government with the community as required by the Consulta Previa process. Because of the highly sort of personnel contact nature of the process, it caused posing the government declared a state of emergency. But the government is very, very keen to get mines up and running again and to get to increase or to expedite the approval of projects. And so we have been working hard with the Ministry of Energy and Mines to design alternatives with which we can approach Consulta Previa process. We are pretty confident that with the Ministry support, we will get the Consulta Previa process completed this year and that means that we will be mining or early next year. The other element that you touching, of course, is the access to the property because of surface rights. So as you know, we have an agreement with the community of Quehuincha. We are in the process now of finalizing agreements with all of the tenants of the land or possessors of the land. So that we get access to land, we have access to a third of the land right now. And we expect to complete a negotiation with the rest of the folks in the third quarter. So we don't expect that to inhibit our access to Pampacancha at all. So we're pretty confident we have access to it early next year.

[Matthew Murphy:]

Okay. And the land clearing that's referred to in your press release. What does that involve?

[Peter Kukielski:]

So, the term clearing perhaps is used, we just need to get the folks and the facilities off the land. So there are some informal miners who would be mining on the land they need to get their equipment off the land. There's some folks who have been grazing livestock on the land they need to get the livestock off the land. That's what it amounts to.

[Operator:]

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

[Jackie Przybylowski:]

Most of my questions have already been answered. I guess I just circle back to Manitoba. And congratulations to the team there for a phenomenal quarter. I know you made some comments in your earlier remarks about why production was so strong there, higher gold grades, increasing recoveries at Stall, can you maybe give us a little bit more color on what exactly was done there to have such a terrific result? And can we expect to see some of that carry forward into the second half of the year. I know you haven't changed your guidance there, but is there any kind of opportunity to exceed that with strong activities for the rest of the year?

[Cashel Meagher:]

Hi, Jackie. Yes, I don't think we're going to change the guidance. The guidance becomes much more prudent now. And we have an opportunity to accede at short. That's what is there. What has happened -- it's really principally at the Stall processing facility itself. They've been able to increase their throughput, which gives us the benefit of lower costs because we're not shipping the excess or that Lalor hoist to Flin Flon anymore. And it sort of simplifies the process we have and gives us a lower cost. The other is, is there's been quite a bit of work in the last couple of years on maintenance improvement practices within the Stall mill itself. And they've done a phenomenal job of incorporating a sort of what some people call a continuous improvement culture, but they're making it part of their job every day. And what they do is, they've really decreased the downtime, so higher throughput. But one of the benefits we got out of this improved steady runtime and less maintenance interruptions, is we've been able to optimize some of the reagents we're using and get a better steady flow through the process plant itself. And what we've noticed is actually that maintenance practice, in the end has contributed to the optimization of our reagent utilization, which in the end has increased probably our recovery goal at Stall from what we had forecasted before 55% gold recovery closer to the low 60, 61, 62. And we believe that is sustainable, as you've sort of noted, going forward.

[Jackie Przybylowski:]

That's fantastic. I think the other question that maybe I'll ask is on Consulta Previa. I know you guys have talked about it with respect to Pampacancha. And it sounds like things are going very well for you. I'm going to [indiscernible] this one but Quehuincha property where you're going to be drilling soon. And if you could maybe give us a little bit of update on what the process is for some of the other deposits or targets that you guys were looking at Maria Reyna, Caballito, Kusiorcco, some of those other ones, is that Consulta Previa process back on track, or is it still on hold?

[Peter Kukielski:]

Yes. Jackie, so we are not at the Consulta Previa stage yet. For Maria Reyna and for Caballito and Kusiorcco. So for those assets, we still need to complete surface rights with the communities. So you may recall, that what happened was we were not in fact in discussions with those communities while we were resolving surface rights for Pampacancha with community of Chilloroya. And all eyes on what happened there so that they would sort of get a view with respect to what it's meant to them. So the community of Uchuccarco, which is a community with whom we negotiate for Maria Reyna and Caballito, for example, is very, very motivated to get an agreement in place with us now, so that we can in fact, start to Consulta Previa process and move towards permitting so that we can get access to start drilling those properties. So the steps that remain to be taken are, secure surface rights agreements with the community of Uchuccarco on Caballito and Maria Reyna following which the Consulta Previa process and other in fact environmental processes will follow.

[Jackie Przybylowski:]

That sounds like that's maybe a couple of years away before you'd have access to drilling on those lens.

[Peter Kukielski:]

We are pretty hopeful that it'll be less than that. And, what we've said previously is that the process is pretty complex. And it's exactly the same as the process for getting the permanent phasing order to mine. And the government recognizes that it needs to be streamlined. And so the government is ahead -- well, certainly before the pandemic, it was on track to start simplifying that process. We think that with the pandemic, now they will be even more motivated to simplify that process. So I don't think that it's a couple of years away. We had always said that we thought that by before the end of next year, we will probably get access to these properties. And I think that still holds true and I think there's opportunity to improve on that.

[Jackie Przybylowski:]

Sounds, great. And again, congratulations on a great quarter and welcome, Steve, it's a great addition to your team.

[Operator:]

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

[Matthew Fields:]

Just want to ask you a couple about the new credit facilities, seeing those aren't posted yet. So the total facilities are down to 400 million from 550. Is that for the entire life of the facilities or is that for the couple years of covenant relaxation or what? And then how is that split between Peru and Canada?

[Steve Douglas:]

I think to put it into context, Matthew, thanks for the question. I think to put it into context, the removal or the downsizing from 550 to 400 is really not a reflection of any lack of confidence or a diminution in our ability to service though, it's really a reassessment of what we needed from a size perspective you haven't get to stay anchored in the fact that these facilities are not in the context of our current business plan and [cashless] [ph] needs contemplated even be drawn. So sitting there paying standby fees on additional facilities of $150 million, didn't seem to us to be an effective use of our capital. And we take a look at all the things Peter and Cashel have been talking about with respect to the redevelopment and cash flow growth initiatives were underway for the next 12 to 18 months. Making a more permanent decision on the type of financing, we're going to put into place really isn't necessary at this point in time when you contemplate our EBITDA is going to go up enormously once those projects are put into place, putting us into a very different position vis-à-vis how we might finance or the kind of cash flows sort of the kind of credit requirements we would require. And I think from a split perspective, we've done similar things. So we're 150 allocate it to the proven operations in 250 to corporate, which is merely nothing more than an administrative allocation that has no bearing on our ability to draw.

[Matthew Fields:]

Okay, great. And then I know that the 115 gold prepay is not treated as debt for the purposes of the net debt covenant calculation. However, it's obviously a financial liability on your balance sheet new this quarter. Can you sort of get that down and start delivering gold before January 2022 or make any kind of financial payments to sort of reduce that obligation before January 22 or do you basically have to start delivering monthly in January of '22?

[Steve Douglas:]

I think the intent is for us to deliver monthly and I'm not sure why we extinguish the obligation in any event. You're correct. It's not treated as obligation. It's a deferred revenue amount according to our presentation, but I'm not sure we would be surrendering that financing anytime soon in any event.

[Matthew Fields:]

Okay. And then last one for me, obviously the world's changed a lot in the three months since your last earnings call and high yield market has tightened significantly gold is up significantly. It seems like now it would be a pretty opportune time to term out those 2023 notes. What are your thoughts about that?

[Steve Douglas:]

Again, I'll go back to my anchor on what I said around the changes in cash flow. Clearly it's incumbent on us to monitor the market. And you're absolutely right both on a macro and a micro level with respect to our name we have seen our potential spreads tightened immensely. The windows there the high yield markets remain very strong. But we're in no hurry. We have the flexibility of as I said those growing cash flows, we can function well within our current liquidity and cash flow needs. And obviously, subject to the risk and vagaries of high yield market, we need to be monitoring that. But I'm not sure we're in a hurry to perpetuate that structure just yet again, against the backdrop of the significant cash flow changes upon completion of these projects. So it's something we're monitoring, but I think, we come to work every day and our job in this side of the balance sheet is to drive down our cost of capital. And that's what we're looking to do. And I'm not going to say, clearly the most -- the easy button would be go and refinance them today. But again, given those cash flow changes, we want to make sure we're maximizing our potential as an organization.

[Matthew Fields:]

So does that mean I'm sorry, the last one, does that mean you're sort of more content to wait a little bit, see how things play out and maybe refinance something with smaller than 400, when it comes to that, rather than sort of do it now at 400?

[Steve Douglas:]

My posture in any organization I've been in and I think we talked about this internally and we all agree. And it's a continuation of the strategy, I think Eugene adopted. We are in a rising cash flow market. We're in a rising cash flow situation for ourselves. I guess you could say yes, I'm in no hurry because I do see a lot of positive momentum vis-à-vis options and our cash flows. And we do have turn. I think the rush to finance it is really driven by outside influences. We do have term. And I don't foresee a hurry at this point. As a matter of policy, I can tell you, I've always believed that an organization should always be in a position to strike in a market should the opportunity arise and it's right. But I see no reason to print a number today that's higher. That's a higher carry cost than what we're paying on it today. And I think we'll hang tight till something satisfies us on a lot of fronts.

[Operator:]

Our next question comes from Oscar Cabrera of CIBC. Please go ahead.

[Oscar Cabrera:]

I was just wondering if you can remind me to meet the numbers you provided for Constancia in 2021. When you have started stripping the cost and then when did you -- do you think you can start putting or from Pampacancha and the Constancia mill?

[Peter Kukielski:]

Look, I think to do that we can pretty well in the first -- we're looking at the first quarter of 2021 likely for all of that work. I would anticipate that we start sort of pre-development work early in the new year. And that by the end of the first quarter, we are actually feeling the pressure.

[Oscar Cabrera:]

Okay. I thought your comments on Consulta Previa are interesting. Could you provide context around these alternatives that the government of Peru may be considering what the process is?

[Peter Kukielski:]

And Oscar, what the government is trying to do to streamline the process is to see how they can actually minimize the human contact element of it. So, they are designing, looking at where the processes can be designed whereby they can interact with a smaller number of people through perhaps community associations. And that's what they're looking at. So, suffice it to say that the communities and the ministry are both motivated towards finding better solutions and the solutions that they are looking for hopefully entail minimizing human contact.

[Oscar Cabrera:]

Right. And then just, pulling on the same subject. I can appreciate you providing those with the amount of land that you have rights for now, which is, I believe two thirds, but for the remaining third, like, are you negotiating with 10 people -- could you provide context around that?

[Peter Kukielski:]

Certainly with the exact number of people that we negotiating with, but it is -- there is not a lot. So we have got two thirds of those agreements, if I remember, right, there was something like 80 individuals. And so they called it two thirds -- one third of that, so probably 25 or so, folks. I don't know the exact numbers, if that's helpful.

[Cashel Meagher:]

Maybe -- it's more like there are several people you need to negotiate with but the actual land packages is less than 10 remaining that we need to negotiate. So like six or seven, I think it is. They make progress every day. So the number changes every day, the number keeps going down. And just to add to Peter's comments on Consulta Previa, I think what the government's trying to do, they recognize that there was agrarian reform, they recognized that the community already voted the whole community, two thirds already voted in assembly individually to grant the rights for sale to Hudbay for the mineral rights. We are now working with the individual landholders. So while it is two thirds actually we were beyond those milestones in those markets, liberating Pampacancha and making it available for mining. We also haven't disbursed funds for the original agreement. And that is one of the options to the community that if they do want to get paid, then the land needs to be liberated. So recognizing that they already have dominion over their land, they have title to their land. It's more like a Consulta Previa light that the government is proposing. So it's more of a administrative process than a negotiated process.

[Oscar Cabrera:]

Okay, great. That's real cool, Cashel. Thank you. Then lastly, your growth initiatives and the bubbles are helpful just to put context around, how you're thinking about things that, it's interesting that Mason is [indiscernible], we haven't heard about any updates on that. I was just wondering, as you stand here today with metal prices, where they are and your views on the market? Would it be fair to say that Manitoba is sort of like, your first priority then followed by Constancia then Rosemont gets resolved, agreed. And but Mason, we can think about it as being something that will come out, of course 2022.

[Peter Kukielski:]

Oscar, look, I think that -- I don't really think in terms of the initiatives that we have underway this year is having relative priorities. I think that I agree with you that, progress on new Britannia is rapidly rising gold price, of course lends a little bit more urgency to it. And but we have no intention of letting up or assigning a lower priority to Pampacancha, for example. We think it's something that we committed to delivering and we're going to deliver it. Similarly, Rosemont and Mason are both valuable elements of our pipeline. Rosemont is hugely important to us. And we believe, deeply believe that we will actually be successful at the Ninth Circuit next year and that we'll get Rosemont back on track. But in the meanwhile, as we've told you -- mentioned before, we are applying all the lessons that we've learned at Constancia and at Rosemont and elsewhere to Mason. And by doing that we are finding ways of improving the economics of Mason. And so, we would like to get Mason rapidly into a form where it is actually where proper sort of PEA can be done on it, and we can determine what the next steps are. But we think that Mason is a very valuable element of our pipeline, too. It's just not as advanced as the others. So I don't like to think of it in terms of relative priority. I think that -- I like to think of it in what we have committed to do to you and our shareholders and get that done without a sense of relative urgency.

[Oscar Cabrera:]

Great answer Peter. And congratulations on the strong performance in the current environment and wishes to you and your family to stay healthy and well.

[Operator:]

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

[Lawson Winder:]

Just one follow up on the Consulta Previa discussion, you've given us a lot of detail here. And I wonder if it would be a stretch to infer that, if the state of emergency were extended, there's now been processes put in place that the Consulta Previa could still continue nevertheless, would that be fair to say?

[Peter Kukielski:]

Lawson, thanks for the question. I think that that is fair to say yes.

[Lawson Winder:]

Okay. That's really helpful. And then just looking at the second half of Constancia for -- the ore that will be knelled. Cashel perhaps you could maybe provide some guidance on the expected split between mined ore and stockpiled ore that will be put to the mill.

[Cashel Meagher:]

Yes. Lawson, thanks. Yes, with the stockpiled ore, I mean, we've worked our way quite through it. And that's why the second half of the year will be better recoveries and will be better ore because we've managed a lot of the -- what we call the deleterious ores that we were going to blend in and not impact any of this sort of recovery. Now, a lot of that is on. So during the period, we were as high one week I think 80% was stockpiled, 20% was mine, and then we reversed it now we're like 20%, where we were then for some of the weeks 20% sort of stockpiled and 80% mine and I think going forward to be back to sort of normal like 90% will be mine feed. And we might get 10% from the stockpile feed, but we're back to managing the deleterious parts so that we can optimize and improve our recoveries and optimize and improve the throughput. And we see us back to a new normal like I said in an earlier question. This is the new normal and we sort of got into this cadence now and we're now producing as we were before.

[Lawson Winder:]

Okay. That's great. And then, just two questions from me on Lalor and that'll be it. One, how long is the hoist maintenance going to take and will that mean a complete shutdown of mining?

[Cashel Meagher:]

Yes. It's just a two weeks. And yes, the mining will be shut down for that period. It's already complete. So it went off without a hitch. And so they're up and running full steam right now.

[Lawson Winder:]

And then, finally just on Lalor gold zone did underground or the ground conditions, meeting your expectations?

[Cashel Meagher:]

Yes. I was underground. I want to say three weeks ago, at Lalor. I isolated myself in Northern Ontario and that was deemed acceptable to the citizens of Manitoba. So I went underground, I saw the zones. The ground conditions are great. So it's going to benefit from the long-haul mining we had proposed. And we expect yet good production at zones 27 and 25. And as I said earlier, what we're trying to do now is, change the sequence and try and meet with the challenge we've put forward and the optimization of bringing the new Britannia refurbishment earlier and therefore the mining from zone 25 earlier, so we can increase the number of ounces we produce next year.

[Operator:]

Our next question comes from Stefan Ioannou of Cormark Securities. Please go ahead.

[Stefan Ioannou:]

Just following up on Greg's question, just on the capacity at Constancia, it was noted in the press release that during the days that the mill was actually running your averaging 95,000 tons a day, which was great to see. Is that a reflection of some of that stockpile or maybe just being a bit softer, or was the mill actually just operating even that much better? And then beyond that, I think we talked about in the past and it was alluded to earlier today that, the capacity I can say, it is in part limited by permits. Can you just remind us what that level is, I think was on an annualized basis, but what it sort of translates into on a ton per day basis, and sort of where you see yourself falling into, say the second half of this year versus that 95,000 tons a day that was -- at least partially running during Q2?

[Peter Kukielski:]

Stefan, so the average that in terms of our permit is about 90,000 tons a day. As we had the suspension for two months, of course we can exceed that number. So we've been operating at about 95,000 tons a day. And I would anticipate that we try and maintain that.

[Stefan Ioannou:]

Okay. So basically you can just sort of given downtime you can overshoot when you're not down to get to that 90 average that's what you're saying?

[Cashel Meagher:]

Yes. So the bucket is 31.1 million tons. That's what the current is, I did allude in Greg's question that we're looking for any IA modification in the future to increase that. We believe that we can do that. But this year, there is one phase of phase two, I believe. That is slightly harder. So we'll see some moderation around the 95,000 tons a day. We believe we can run steady at 90. There will be opportunity need to make up some of that lost opportunity. But, obviously, we're not going to make up eight weeks worth. So we'll try -- they'll try and but there is some hard or in part of the sequence but it's not 100% of the feed, that's hard ore it's only like 10% or 20%.

[Stefan Ioannou:]

Okay. And just I mean, just maybe take it one step further, I mean, ore hardness aside, are you finding if you push the mill as hard as you can, is sort of 95,000 ton a day the maximum you're getting out of it right now.

[Cashel Meagher:]

Yes. Those are the numbers sort of we feel is under the current flow sheet is sort of its capability and it's sort of an top end and instantaneous, so recognize that, you still have maintenance practices that interrupt production on a normal basis.

[Operator:]

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

[Candace Brûlé:]

Thank you, Operator, and thank you everyone for participating today. Please feel free to reach out to our Investor Relations Department, if you have any questions. Now disconnect your lines.