Hudbay Minerals Inc.
Q4 2020 Earnings Call Transcript

Published: 19 Feb 2021

[Operator:]

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Hudbay Minerals Inc. Fourth Quarter and Full Year 2020 Results and Annual Guidance 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, February 19, 2021, at 9 a.m. Eastern Time. I will now turn the conference over to Candace Brûlé, Director of Investor Relations. Please go ahead.

[Candace Brûlé:]

Thank you, Operator. Good morning. And welcome to Hudbay’s 2020 fourth 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 will pass the call over to Peter Kukielski. Peter?

[Peter Kukielski:]

Thank you, Candace. Good morning, everyone, and thanks for joining us. I know it’s been a long week for you all, so we at HudBay are especially appreciative of you all joining us for this call. I hope that everybody is staying safe and healthy as we approach the anniversary of the pandemic. We continue to focus on the safety of our employees and stakeholders and we believe that our diligence in screening, testing and workplace protocols has been effective in achieving our objective of being a safe employer and neighbor, and we will continue to adapt our site specific measures to conform to the regional health authorities latest guidelines. In this presentation today, I will touch on our corporate achievements and challenges in 2020, followed by an overview of our production and cost outlook as we execute our key strategic objectives for 2021. 2020 was an extraordinary year, while it brought many unforeseen challenges, we face these, we persevered and we achieved production and unit cost guidance, while advancing our growth initiatives. In March, we announced the second phase of our Snow Lake gold strategy, which saw a 35% increase in our Snow Lake gold reserves, a 41% increase in the life of mine gold production at Lalor and increased the annual gold production at Lalor to over 150,000 ounces at lowest quartile cash costs and sustaining cash costs.

[Operator:]

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

[Orest Wowkodaw:]

Hi. Good morning. Obviously you got a lot of growth initiatives ahead of you here. Can you give us a bit of color on what this Constancia North deposit could do to the mine plan? Is it substantially higher grade? And I am also curious if your -- if this new mine plan that will come out will include a mill expansion at Constancia or is that more likely to come later?

[Peter Kukielski:]

Good morning, Orest, and thanks very much for the question. Look, we are currently completing the work on Constancia North, but we expect to incorporate it into our reserve at Constancia, which will extend the pit, as I said. We will provide more details with the Annual Reserves and Resource Updates at the end of March. To your question with respect to mill, no we are not currently planning within our mine plan for any expansion to the mill. Cashel, any additional color you would like to provide to that?

[Cashel Meagher:]

It always -- thanks Peter. And it always remains a future option to us and its work we are working on. But this current mine plan was developed to update what’s happening at Constancia and to incorporate the Constancia Norte discovery over the last couple of years.

[Peter Kukielski:]

Does that answer your question…

[Orest Wowkodaw:]

Okay.

[Peter Kukielski:]

… Orest?

[Orest Wowkodaw:]

Well, just curious if you can give a sense of how much better grade is the north deposit versus the main. Is it just slightly better or materially better?

[Peter Kukielski:]

I would say, Orest, it’s slightly better. It certainly is better than the main body. It’s not as good as Pampacancha.

[Orest Wowkodaw:]

Okay. And is the idea to sequence that concurrently with Pampacancha?

[Peter Kukielski:]

It’s -- Cashel?

[Cashel Meagher:]

Yeah. The idea is to incorporate it the best way optimally with an NPV optimization process and so we run several iterations of the mine to come up with the optimum value. And we expect that some of that material will move earlier into the mine plan versus holding it for later.

[Orest Wowkodaw:]

Okay. And then, just finally, I mean, to me it would seem like a mill expansion at Constancia would make a ton of sense, given the lower grade profile of the main pit. What’s holding you back there in terms of moving that project forward? Is it a permitting issue or I am just curious why that’s not being fast tracked?

[Peter Kukielski:]

Yeah. I think you nailed it. It’s about the permits and the permitting process. So that’s ongoing and we sequence the permit with the process to get to different mining sequences and so the latest one is with the agreement on Consulta Previa. We are able to close the permit and hold the permits required to mine at Pampacancha and so the next permit iteration we would work on would be including something like an expansion at Constancia.

[Orest Wowkodaw:]

Okay. Okay. Thank you very much.

[Operator:]

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

[Greg Barnes:]

Yeah. Thank you. In the MD&A or in the press release last night, there’s a comment about steady state production particularly of copper in the 22 to 25 range. Is that something in the plus 100,000 tons to 115,000 tons a year of copper X or even before you include these new mine plans in the profile?

[Peter Kukielski:]

Yeah. That’s correct, Greg.

[Greg Barnes:]

And how long do you think it’s been sustaining that level of production?

[Peter Kukielski:]

I would say through to the completion of the depletion of Pampacancha.

[Greg Barnes:]

Okay.

[Peter Kukielski:]

And then…

[Greg Barnes:]

And then the 25 to 26?

[Peter Kukielski:]

Yeah. Roughly that. And you get some additional kick from Constancia North potentially, as Cashel mentioned.

[Greg Barnes:]

Okay. Now on cost pressures, you have some upward cost pressures or some upward revisions to costs for this year. But we are getting mixed messages from the various companies about whether they are getting cost pressures or not getting cost pressures. I just want to nail down and get some commentary from you on what you are seeing or what you are experiencing on the cost side in this environment?

[Cashel Meagher:]

Yeah. I think, Greg, it’s Cashel here. I think there is definitely on our base cost there is and there are some pressures. And we have seen them sort of sustainably creeping in and they are not in the 1% or 2% but they are not in the 10%, so they are somewhere in between. But I think we will have real clarity on what those are and what we foresee them to be with these two mine plans coming out the -- near the end of March and that’s Lalor and Constancia, and so there will be lots of clarity on it then.

[Greg Barnes:]

Okay. And finally, Peter, I appreciate all of the talk about the growth initiatives you have and the things you are doing. You have been through a big phase of capital investment. But what about shareholder returns and when do you think you will be in a position to start talking meaningfully about the dividend and taking that higher?

[Peter Kukielski:]

Greg, I mean, share returns obviously is a key element of capital allocation. It’s something that we think about all of the time and we are singularly focused on delivering what we have to so that we can enter into that phase, so we actually delivered sustainable shareholder returns. But, Steve, do you want to comment on that further.

[Steve Douglas:]

Yeah. I agree wholeheartedly, Peter, and Greg, I -- look, we appreciate the need frankly, as I have always been spoke that the dividends are a cost of capital and there should be set such that they are sustainable growing over the course of -- in the case of a cyclical over the course of a sustained cycle. I also look at where we are at in terms of our opportunity set and our development potential going forward. And I think, as it stands now, probably the better use of our capital is ensuring that we have got a conservatively financed balance sheet, but also the financial horsepower to be able pursue our expansion plans, to be able to put us in a position to sustain that growing sustainable dividend over the span of time. Once we get ourselves positioned in terms of getting all of our assets working as optimally as we think we can. But the question is that is it perfectly appropriate one and something as Peter pointed out, we discuss actively every day.

[Greg Barnes:]

Okay. So do you think you are about a year away from that process?

[Steve Douglas:]

No. I wouldn’t.

[Greg Barnes:]

Okay.

[Steve Douglas:]

Again, I look at all -- I think we look at all competing needs for capital and depending on the outcome of the Rosemont process, depending on the outcome of our extensive expiration, we are going to have to evaluate at any given time the opportunity set versus expanding those returns. But it’s definitely and I know this is perhaps cool comfort, but it’s more than aspirational if we want to return to the growth being a sustainable dividend payer over the cycles. But we also want to make sure we get our -- all of our asset base working in a fashion that will support that.

[Greg Barnes:]

Great. Okay. Thank you.

[Operator:]

Our next question comes from Fahad Tariq of Credit Suisse. Please go ahead.

[Fahad Tariq:]

Hi. Good morning. Just following up on the last question but more related to CapEx. As you think about the 2021 guidance, maybe can you give some color on how much of the $340 million is kind of the deferred from 2020 versus maybe just higher pre-stripping or stripping cost at Peru? Like I am just trying to get a sense of, obviously, the overall number was a bit higher than expected. I am just trying to get a sense of how much of that is deferrals versus the actual scope of the activities have increased? Thanks.

[Peter Kukielski:]

Sure, Fahad. It’s -- and thanks for the question. In -- so in Peru, we deferred approximately $20 million of capitalized stripping from 2020 into 2021, because of the pause in mining activity during the pandemic. We also of course moved some capital associated with Pampacancha into 2021. And then in -- at New Britannia quite a bit of our, I think, it was approximately $20 million of capital was moved from 2020 into 2021. So those are the primary areas of movement from 2020 into 2021 and the rest is largely consistent with what we had before. So we had telegraphed the tailings work that was going to be done in Peru previously. For example, we had telegraphed the tailings work that was being done in Manitoba. But those are the key elements of what has been deferred.

[Fahad Tariq:]

Okay. And just -- that’s helpful. Thank you. And a quick follow up on 2020 that was obviously the capital -- the CapEx was ahead of guidance. Now is that most of that is chalked up to the land user agreements? Is that a fair assumption?

[Peter Kukielski:]

Yes. That is a fair assumption.

[Fahad Tariq:]

Okay. And then just lastly on that, you mentioned there’s obviously a few land user agreements left for 2021, but most were completed in 2020. So should we assume just like a little bit higher versus the CapEx guide just to account for that, would that be a fair assumption as well?

[Peter Kukielski:]

I would say that you -- it will not be material. So we have one remaining negotiation with one family left to conclude. And we remain optimistic that that will be included in time to allow us to start mining activities in the second quarter. I would mention that that last negotiation -- the last negotiation is always last because it’s the most complicated. But we are a little bit frustrated as is the community of Chilloroya that it’s taken so long. But we do believe that we are in the final stages of concluding it now and we do also think that the amount that it will entail will not be material.

[Fahad Tariq:]

Okay. That’s very clear. That’s it for me. Thank you.

[Operator:]

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

[Jackie Przybylowski:]

Thanks very much everyone for taking my question. I wanted to switch gears and talk about Manitoba for a minute. With the 777 accident last year, you also reshuffling things a little bit and maybe gave you an opportunity to test out some of the limits at Lalor. I see that you have raised the guidance for 2021 to combine 4,650 tons rather than the 4,500 tons run rate that you were previously assuming. Is there room to move that further with 777 closing, does the Flin Flon mill become an option that you could factor into the plan ramp access, would that be part of the plan as well, I know this is all probably coming out in March. But can you give us an idea sort of big picture what the opportunities are and maybe what your strategy might look like two years, three years, four years down the road? Thanks.

[Peter Kukielski:]

Yeah. Sure. Happy to do that, Jackie. Thanks for the question. We have seen outstanding productivity at the Lalor mine, where we averaged over 4,900 tons per day over the last couple of months. And that’s been the result of several initiatives taken in 2020, including a bunch of things that we talked about before the new Lalor garage, the Mobilaris Mining Intelligence Technology system that allows us to get real time look at the operating at the operation and to optimize safety. But, more than that, with the addition of people or the movement of people and equipment from 777 to Lalor during the shaft outage at 777, we were able to test the entitlement at Lalor. And we expect that we can probably achieve an additional 650 tons per day up the ramp at Lalor, which previously we would not done before. So I think that provides you with a sense of what might be possible. Cashel, would you comment any further on that or?

[Cashel Meagher:]

Well, all I’d add is obviously, we have the installed capacity to treat that material after it comes up the ramp and the shaft that in Snow Lake itself. We don’t need to keep obviously the Flin Flon mill open. Stall itself last year, as Peter said in his text, was over 3,800 tons a day and I think recently we achieved over 4,000 tons a day there and the design capacity for New Brit is 1,500 tons a day. And I’d remind people that quite often when we have refurbished and/or we built some of these new processing facilities, it’s quite often in the end we exceed that throughput capacity that is in the design like we did in Constancia. So with that, we are over 6,000 tons a day capacity and like, Peter said, we are currently hoisting over or close to 5,000 tons a day at Lalor, so with an extra 500 or 600 up the ramp, we start getting what is the future of Lalor. And I think we will have some clarity for that at the end of March.

[Jackie Przybylowski:]

That’s great. Thank you. And maybe just a follow-up question on Manitoba, the guidance that you gave last night for 2021 at Manitoba. If I am comparing that with the guidance that you gave around this time last year, it looks like your zinc production for this year is lower than you would previously expected and maybe the precious metals are higher. You have broken it out a little differently before? But if I use the same conversion ratio, looks like your precious metals are higher. Is this a function of maybe just changing the mine plan or are you accessing a different part of the Lalor ore body in 2021 than one you would previously planned or what’s driving those changes?

[Peter Kukielski:]

Yeah. I think what it is a preparation. The Manitoba team is actually stockpiling some of our pre-test ore out of Zones 25 and 27, which are our gold zone and our copper gold zone. Also there’s been a focus to prepare those zones and mine those zones more intensely to take advantage of the higher grade. And in any sort of NPV optimization, you are looking for the value of ore and the margin of the value of ore rather than a metal itself. And so with these optimizations what we see is, is we are seeing that value more in the gold end of it. We will continue to mine zinc. But obviously the Lalor zinc grade is declining as the mine ages and we took advantage obviously of the zinc upfront, because the zinc was in the shallower part of the mine in the first part we access -- we access the higher grade first. So we are doing the same with the gold now in late 2021. And again, with the mine plan that we will publish in March it will get more clarity to that NPV optimization.

[Jackie Przybylowski:]

Perfect. That’s it from me . Thanks very much, Cashel and Peter.

[Peter Kukielski:]

Thanks.

[Operator:]

Our next question comes from Dalton Baretto of Canaccord. Please go ahead.

[Dalton Baretto:]

Thanks. Good morning, Peter and team. Peter, sticking with Manitoba, and probably, a bigger picture question for you, while you were speaking copper went up to $4 a pound and gold’s in the $1,700 now and you were just a few months away from the new mine plan, as well as the completion of New Brit. How are you thinking about that business now just in the context of your portfolio?

[Peter Kukielski:]

Dalton, we are loving it. It doesn’t change our view with respect to how we are focusing on the assets you know. So, as I have said consistently over the last few quarters, we are in delivery mode right now and we are singularly focused on getting New Brit refurbishment up and running, so that we can deliver those gold ounces, as well as enhanced copper recoveries as well with what you are talking about with our Stall mill enhancements. So, once you have completed this work and we have done all of this optimization work through the rest of the year, then I think we can pause and we can think of what it might mean. But true to some of the questions that you heard before, we really, really want to accelerate cash flows in this company and take advantage of the current environment. So that we can actually start pursuing other initiatives and returning cash to our shareholders. So, again, and as I have said before, no apologies for cash flows, we think this business is a great business. We think that there’s a lot of potential to be exposed to continuing with our optimization efforts and performance improvement efforts in Manitoba and some time we will pause and we will see what that all means us. But we are on a rip right now to try to deliver and we are not getting defocused by what the world might be or what it might mean later on.

[Dalton Baretto:]

Okay. Great. And then just maybe speaking of some of these other initiatives, so on Rosemont you have got a decision now coming sometime in H2 and fingers crossed for you guys. But what happens if it’s not successful? What do you do then and how fast can you move on some of these alternative options?

[Peter Kukielski:]

That’s a great question. So, look, as I have always said, we continue to remain focused on the appeals process as our primary area of focus. But at the same time, we do continue to pursue alternatives. What I can say is that, I am convinced that we will build Rosemont in one way or another. So while we wait for the decision to be rendered, we continue to investigate other opportunities. We continue to look at expanding our resource base. But I think let’s wait for that decision and then we will have a much clearer picture. But I believe we will develop Rosemont.

[Dalton Baretto:]

Okay. Great. And then just maybe one final one from me, with regards to the expired CBAs and particularly in Peru, just with the run in the copper price and an election coming on April 11th and just given what happened with Candelario last year, are you at all concerned?

[Peter Kukielski:]

Dalton, no, we are not concerned, in short. Okay. The reason why I say so is that, in Manitoba we haven’t had a strike in 20 years. We have a good relationship with our employees and we continue to or we have -- I mean we have small strike in 20 years. But we have a great relationship with our employees. We understand what the issues are. We are in dialogue with them. We don’t believe that this will end up in an interruption. And in Peru the same thing, we are in discussions with our employees. There are a couple of elements that remain to be resolved. But at the end of the day, I don’t think that it will result in an interruption. So short answer to your question is that, while we remain focused on it and we are -- of course dialogue with our employees is incredibly important. We are not concerned about interruptions.

[Dalton Baretto:]

That’s great. Thank you, Peter.

[Peter Kukielski:]

You are welcome.

[Operator:]

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

[Stefan Ioannou:]

Okay. Thanks guys. Yeah. I am just curious shifting gears to the exploration, just on the exploration particular north -- regional exploration north of Constancia right now, that’s now underway. If I remember correctly there is a pretty compelling geophysical anomaly there. Can you just maybe comment like is it -- on how big the drill program is there to start with? And is it -- can you remind me, is it sort of a near surface target or is it something that maybe a bit deeper?

[Peter Kukielski:]

Yeah. So I will give you a few comments and I let Cashel expand a little bit. But so we only have one drilling program underway at present, which is on the Quehuincha North property. And with respect to Maria Reyna and Caballito we are negotiating with the community of Uchuccarco in order to get surface rights to start -- to allow us to start drilling and then we have to go through the permitting process including Constancia previous process, which would deliver the permits required. Our assessment under the current law regime is that it would be unlikely that we will start drilling before the end of this year or early next year on those targets. But we are continuing to drill at -- we are drilling at Quehuincha North and we expect to be able to talk to some of those results in the quarters ahead of us. Now with respect to the depth of mineralization, Cashel do you want to comment on that?

[Cashel Meagher:]

Yeah. All of what we are targeting is similar to Constancia and Pampacancha. It’s all shallow targets generated from V10 geological mapping and ground geophysics. Quehuincha Norte, although it’s not our number one target as we speak about Caballito or Maria Reyna, it is a very good target and we are drilling there currently. So that’s a great sign for us. So we got started early despite the rainy season here now. With that too, we do have a permit to drill on another prospect in northern Peru that we are quite excited about. It’s near the community of the city of a million people about three hours away on the mid coast of Peru, Trujillo there. The property is called Llaguen. So we are quite excited at the end of this rainy season to get started there with some follow-up advanced exploration. There’s quite a number of drill holes already there indicating mineral endowment. And then I would also mention our other exploration efforts in Manitoba to follow up on some targets like the 1901 between Lalor and 1901 itself. And of course, we are drilling currently in the Helvetia historical copper mining districts that saw mining continuous from the late 1800s to the mid 1900, more following up, I think, there’s some 20 sort of pick and shovel underground operations and currently we have three drills turning there. And I think we are going to go up with a couple more drills and we are excited to talk about what we see there geologically. And when we get fulsome report on all our assets both the total copper and the sequential copper assets, we are excited to report those along in the timeline with our two mine plans at Constancia and Lalor.

[Stefan Ioannou:]

Okay. Okay. Good. And maybe just on the Manitoba is all the exploration there and then focus right now around the epicenter of sort of Lalor and 1901 or is there any sort of broader regional stuff looking maybe into that sort of till all this cover and whatnot?

[Cashel Meagher:]

Yeah. Right now the focus is that Chisel Basin itself…

[Stefan Ioannou:]

Okay.

[Cashel Meagher:]

To really understand what is the endowment available to us to optimize now the two plants we have the base metal and gold plant that are within truckable distance of the Snow Lake. So that’s the principle focus right now in Manitoba. And as I said, the other focus are some of the quite compelling targets we have Norte Constancia, Llaguen, and of course, adjacent in north to our Rosemont Deposit.

[Stefan Ioannou:]

Got it. Great.

[Cashel Meagher:]

Yeah.

[Stefan Ioannou:]

Okay. Great. Thanks very much guys.

[Operator:]

Our next question comes from John Tumazos of John Tumazos Research. Please go ahead.

[John Tumazos:]

Thank you very much. Congratulations on all the progress. With the good copper price, are there any mitigations you might do, given the historic volatility of the copper price or the company, such as buying put or raising equity to repay debt? Secondly, what is your minimum size threshold for pursuing new projects? We know there is Rosemont and Mason in the various zones in Manitoba. But there might be some medium-sized copper projects that look a lot more robust with the copper price rebound?

[Steve Douglas:]

John, thanks for your question. Steve here. I think your question is two sides of the same one. You kind -- and I don’t want to -- if I misread, please tell me. But I think your first question is do we have the intent to perhaps hedge to take advantage of this robust copper environment. And our traditional answer has been no. We like the exposure to the spot market. It’s been rewarding thus far and I think our shareholders appreciate the fact that we have not taken that joy out of the copper price. So I think that policy remains in place. We may strategically look at it now and again on a short term basis to try to -- and we typically do hedge quotational period pricing. But outside of that, we are not looking at this point in time on hedging the long term. Had we --if we are in the midst of building an asset like a Rosemont or something, that the financing conditions that maintain certain cash flow levels, we might entertain that. But then again that would be short term and really looked at from the development perspective. And as it relates to raising equity to repay debt, I think, obviously, the prices are robust. But we -- as I have said on many occasions we are in the process today of transforming two assets through the acquisition of Pampacancha pit and obviously through the refocusing of the Lalor and Snow Lake Camp on the gold assets and the new bid refurbishment. Both of those are going to generate substantial capital. And at this point, I think raising equity would -- while it may be advantageous in terms of paying down debt, it’s -- I am not sure our shareholders see it as the way when we are in a world of returning in a very short order to generating significant free cash flow as a consequence of the pricing and the we are planning the changes we are making to the portfolio. So there aren’t any terms in the near -- there aren’t any thoughts in the near-term or reissue effort.

[Peter Kukielski:]

And John, I would just…

[John Tumazos:]

What is your minimum to size threshold?

[Steve Douglas:]

On the project size.

[Peter Kukielski:]

We -- John we don’t really consider things in terms of minimum size, because if you look at some of the projects that we are undertaking at any of our brownfield sites, we have no shame in investing $20 million for -- a one-year payback for example. So we don’t think in terms of minimum size thresholds. In bigger picture when we think in terms of our production profile then I think the minimum threshold you are referring to might be more appropriate. But again it’s a matter of returns. If we could put into production quickly and easily a 20,000 ton a year copper producer, we would consider it provided the returns are right. Obviously, we have the capacity to develop much larger assets. So we look what’s optimal in the context of good for the organization and what our technical and execution skills might permit. So there’s no hard and fast answer, but over time, for sure, we would like to be expanding our copper production profile.

[John Tumazos:]

Thank you. The latter answer is most refreshing.

[Operator:]

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

[Candace Brûlé:]

Thank you, Operator, and thank you everyone for participating today. Please feel free to reach out to our Investor Relations teams, if you have any further questions. This concludes our call and you can disconnect your lines now.