Hudbay Minerals Inc.
Q2 2019 Earnings Call Transcript

Published: 9 Aug 2019

[Operator:]

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Hudbay Second Quarter 2019 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 9th at 9

[Candace Brûlé:]

Thank you, Operator. Good morning, and welcome to Hudbay's 2019 second quarter results conference call. Hudbay's financial results were issued yesterday and are available on our website at www.hudbay.com. A corresponding PowerPoint presentation is also available and we encourage you to refer to it during this call.Our presenters today are Peter Kukielski, Hudbay's Interim President and Chief Executive Officer; and Cashel Meagher, our Senior Vice President and Chief Operating Officer. Accompanying Peter and Cashel for Q&A portion of the call will be David Bryson, our Senior Vice President and Chief Financial Officer; and Eugene Lei, our Senior Vice President, Corporate Development and Strategy.Please note that comments made on today's call may contain forward-looking information, and this information, by its nature, is subject to risks and uncertainties and as such, actual results may differ materially from the views expressed today. For further information on these risks and uncertainties, please consult the company's relevant filings on SEDAR and EDGAR. These documents are also available on our website.As a reminder, all amounts discussed on today's call are in U.S. dollars, unless otherwise noted.And now, I'll pass the call over to Peter Kukielski. Peter?

[Peter Kukielski:]

Thank you, Candace, and good morning, everyone.I'm pleased to be here today and I'd like to begin today's call with a brief introduction of myself. I was most recently President and CEO of Nevsun Resources from May 2017 until its acquisition in December 2018. Prior to that, I held various Senior Executive roles in the base metals, precious metals, and bulk materials sectors globally. I have been the Interim CEO at Hudbay for a month now and my focus has been on getting to know the people and developing a deeper understanding of the assets.I must say, I've been impressed with what I've seen so far, and I believe that we have a solid team in place to continue to execute on our growth strategy to create long-term value for shareholders.The search for the permanent CEO is underway, and in the meantime, the management team is focused on progressing the value creation opportunities we have in each of our business units.I would also like to make a few initial remarks about last week's court decision regarding Rosemont. We are obviously deeply disappointed and frustrated by the decision which appears to overturn decades of settled mining law in the United States. We're evaluating all of our options including appealing the decision. We are also encouraged by the support we are receiving from the rest of the mining industry following the decision. However, it may take some time for any appeal to be heard and decided upon. We believe that one to two years is typical in cases like this. In the meantime, we are assessing other options to advance Rosemont. We have suspended most work on the early works program and now expect total Rosemont's project capital spending of $30 million compared to the previous guidance of $122 million. These costs are in addition to $20 million of Rosemont's non-project costs that are still expected to be incurred in 2019.Given how recently the decision was received, as well as the ongoing legal process, there is not much else we can share with you at this time regarding either the legal process or our plans for Rosemont. We continue to look at all of our options within the context of this decision and the current environment.I will now move on to a review of our results for the quarter, together with some comments on the progress of our growth initiatives in Peru and Manitoba. I will close with an overview of our strategy and a summary of our upcoming catalysts.Building off a solid first quarter, Hudbay delivered strong operating results in the second quarter, including record mine production at Lalor, record throughput at the Stall concentrator, and strong production results in Peru, notwithstanding the planned semiannual maintenance activities at the Constancia Mill.Based on these results, we are on track to achieve our full 2019 production cost and capital expenditure guidance.We produced 30,000 tonnes of copper in the quarter, a decrease compared to the last quarter due to lower grades of 777 and Constancia along with reduced throughput at Constancia from the planned six-day mill maintenance shutdown. This was offset by increased ore from 777 in Lalor and the exceptional performance from the Stall mill during the quarter.Consolidated cash cost per pound of copper produced, net of by-product credits, was $1.27 an increase over last quarter primarily due to lower copper production.Similarly all-in sustaining cash costs increased to $2.26 driven mainly by the decrease in copper production and increased sustaining capital expenditures.Earnings and earnings per share in the second quarter were affected by several factors. The first was a write-down of the loan receivable from the previous minority joint venture partners on the Rosemont Copper project. As previously disclosed, we completed the acquisition of the minority interest in April, consolidating a 100% interest in Rosemont. Restructuring of the acquisition for tax efficiency resulted in the loan receivable being written off for accounting purposes, a non-cash transaction that did not alter the underlying economic arrangements with the sellers. This affected earnings per share by $0.10.The second factor was non-cash deferred tax adjustments which affected earnings per share by $0.06. And as disclosed previously, we incurred costs related to the recent proxy contest amounting to $0.01 per share.Our balance sheet remains strong and we ended the quarter with $490 million in cash and a net debt position of $488 million positioning us well to fund our future growth initiatives.With our second quarter results, we are pleased to announce the initial resource estimate for the 1901 deposit in Snow Lake only six months from the initial discovery of the deposit. Cashel will touch on the 1901 deposit in more detail shortly, but not before I stress the significance of this discovery to the Manitoba business.Now I'd like to turn to our South America business unit where Constancia continued to perform well in accordance with our expectations. During the second quarter of 2019, we were mining in areas with higher strip ratio and lower copper grades in line with the mine plan which resulted in lower mines and lower grades compared to the first quarter of 2019.Mills copper grades were also lower than the most recent quarter as a result of the planned lower mined grades. Mill throughput in the second quarter of 2019 was consistent compared to the same period in 2018, but lowered in the first quarter of 2019 due to the regularly scheduled mill maintenance shutdown occurring in the second quarter each year. However throughput in the second quarter was in line with the mills design capacity rate.Copper recoveries in the second quarter of 2019 were 84.7% reflecting sustained metallurgical improvements initiated in 2018. While recovery vary from quarter-to-quarter depending on the complexity and grade of the ore feed, we continue to see results from ongoing recovery improvement initiatives.These initiatives include those targeting flotation operating efficiencies and the integration of an automated advanced process control system in the grinding and bulk flotation circuits. We are pleased with the copper recovery performance in the mill and are on track to achieve the copper recoveries we've previously forecasted.During the second quarter, Constancia produced 24,000 tonnes of copper, 12,000 ounces of precious metals, and 334 tonnes of moly.In addition to the regular semiannual maintenance work, we continued the installation of new equipment in support of efforts to optimize recoveries at the Constancia mill. Combined mill, combined mine mill, and G&A units operating cost per tonne reflects the higher maintenance costs and associated lower tonnage resulting in higher unit costs compared to the first quarter, but consistent with unit costs in the same quarter last year.Cash cost per pound of copper produced net of by-product credits for the second quarter of 2019 was higher than the first quarter due to lower copper production but in line with the same period in 2018. Sustaining cash cost per pound of copper produced net of by-product credits for the second quarter was $2.09 reflecting higher sustaining capital expenditures in line with the mine plan.The maintenance shutdown and the variations in copper grades are consistent with the full-year plan for Constancia and we continue to expect production and cost guidance to emerge for the full-year 2019. Constancia continues to be one of the lowest cost sulfide copper mines in South America.We remain focused on adding value at Constancia through bringing the Pampacancha satellite deposit into production which will extend the high grade profile. We continue to make progress on our discussions with the local community of Chillarajoto to acquire the surface rights at Pampacancha. We have recently come to terms on amendments to prior agreements with Chillarajoto and are now turning our attention to Pampacancha.Given our strong social license in Peru, we continue to believe our measured approach to community relations will prevail. As announced last quarter, an agreement with Chillarajoto would be subject to completion of the Consulta Previa process with the Peruvian government which typically takes approximately three to six months in Peru.Given that Chillarajoto is an established community with a majority voting process requiring two-thirds of community vote to approve agreements, we don't anticipate the Consulta Previa process to be a significant hurdle for accessing Pampacancha.As mentioned in our press release, we have been affected by the recent protests related to the Tia Maria project which have involved a road blockade preventing access to the Port of Matarani. We currently have intermittent access to the port and there has been recent progress by the Peruvian government in opening the roads. While our team in Peru has done an excellent job of mitigating the impact of this, we are continuing to monitor the situation closely and would not be surprised to have excess concentrate inventory on hand at the end of September.Turning to the rest of the Constancia region. We are excited to test the potential of the other nearby satellite deposits we acquired last year including the Maria Reyna, Caballito and Kusiorcco targets which could provide higher grade feed to the Constancia mill after the Pampacancha ore body has been mined. Geophysical characteristics indicate these satellite properties have the potential to be even more prospective than the Constancia and Pampacancha ore bodies.We continue to advance permitting, community relations, and technical activities, required to access and conduct drilling activities on these properties and plan to drill one of the properties later this year.Moving on to Manitoba, the second quarter results reflect the first full quarter of the Lalor mine achieving 4,500 tonnes per day and the Stall mill achieving record quarterly throughput over 3,700 tonnes per day.The 777 mine also had a strong quarter with a 4% increase in ore mines compared to the first quarter and a 35% increase over the same quarter last year. 777’s mining cost per tonne have also been trending lower compared to the same quarter last year.As a result of the strong performance from the mines, total ore mined at the Manitoba operations during the second quarter of 2019 increased by 5% compared to the first quarter. Similarly total ore mills increased by 16% from first quarter levels resulting in a 12% reduction in total concentrator unit cost per ton. The Stall concentrator achieved a record 3,700 tonnes per day due to ongoing operational and maintenance improvements. Ore mill at the FlinFlon concentrator increased by 27% over the first quarter as a result of higher production at 777.Total combined Manitoba production increased across all metals compared to the first quarter of 2019. Zinc production increased by 14% to 32,000 tonnes, precious metals production increased by 15% to 28,000 ounces, and copper production slightly increased to 6,000 tonnes. Full-year production of all metals is expected to be within the annual guidance ranges.Manitoba combined mine, mill, and G&A units operating costs in the second quarter of 2019 were 8% lower than last quarter due to the lower concentrator unit costs. Manitoba combined unit costs are expected to be within guidance ranges for the full-year 2019.Cash cost per pound of copper produced net of by-product credits in the second quarter of 2019 was negative $0.15. These costs were lower compared to the first quarter primarily as a result of higher by-product revenue. Sustaining cash cost per pound of copper produced, net of by-product credits in the second quarter was $2.11 which was lower than the first quarter also as a result of higher by-product credits.In addition to the strong operating performance in Manitoba, we announced an initial resource estimate at the 1901 deposit in Snow Lake only six months after its discovery in February of this year.In visiting recently with a team at site, I have been impressed by the level of excitement around the 1901 deposit and the significant upside potential that exists.I will now have Cashel provide more details on the 1901 deposit. Cashel?

[Cashel Meagher:]

Thanks Peter.We were able to achieve this initial resource estimate in record time due to the focused drill program, geological interpretation, and resource modeling the team has conducted over the last few months. The deposit is located between the former producing Chisel North mine and Lalor mine. Less than 1,000 meters from an active underground ramp at a depth ranging from 550 to 650 meters, and within 15 kilometers striking distance of the Stall concentrator.The property is 100% owned by Hudbay free of any royalties or streams. The mineralization is interpreted as two zinc rich VMS lenses with locally high grade gold and silver content and occurs along the hanging wall contact of the stratigraphic horizon hosting the Chisel North deposit.Based on the recent drilling results we have defined an initial resource estimate of 2.1 million tonnage grading 9.67% zinc with the potential to add meaningful gold resources. We have recently changed the way we report mineral reserve and resource estimates in Manitoba and that exact methodology was followed on this initial resource estimate for the 1901 deposit.The methodology constrains the resource with the stoke optimization envelope that ensures continuity of mineralization with economic potential into mineable shapes and therefore most of this resource estimate is expected to convert to mineral reserves.The deposit remains open in several directions and exploration targets for new discrete lenses also exist in the immediate vicinity of 1901. We continue to test the limits of the deposit with two drills actively exploring in the area. We're also advancing feasibility studies to develop the 1901 deposit with a focus on optimizing the net present value of the Manitoba business unit.In addition to the current 1901 resource estimate, we have also identified several high grade gold and copper gold zones at the deposit. But drilling density is not yet at a level to establish a mineral resource estimate. Highlights of the drill hole intersections occurring in the footwall of the zinc rich lenses include one drill hole which has a 29.8 grams per tonnes gold and 401.8 grams per tonnes silver over 7.5 metres. And another which adds a 3.2 grams per tonne gold and 19.9 grams per tonne silver and 2.83% copper over nine metres.Several other high grade copper and gold intersections of less than three metres occur throughout the footwall zone in altered felsic units. As drilling progresses to an infill stage to convert the inferred zinc rich resource estimates to an indicated category, the company also expects to establish the continuity of gold and copper gold rich mineralization and report a mineral resource estimate for this portion of the mineralization.The gold and copper gold rich mineralization is likely to constitute a suitable feed for the New Britannia Gold mill after its refurbishment is completed in 2022 and could further enhance the gold production profile from the Snow Lake camp.To help with the size of the 1901 deposit into perspective based on the initial inferred resource estimate, the deposit already ranks in the top 10 largest deposits in the FlinFlon and Snow Lake regions. Given our past history of successful mine life extension in Manitoba, and the potential to grow through new lenses and the inclusion of the high grade gold material, the 1901 deposit is expected to become an important part of value creation in Manitoba.In addition to the active exploration program at the 1901 deposit, we have also continued in-mine exploration activities at the Lalor mine and progressed engineering studies for other 100% own deposits in the Snow Lake area including WIM, PEN, and New Britannia. Drilling and studies will continue throughout the year and are expected to be incorporated in the Annual Mineral Reserve and Resource Estimate in early 2020.With that, I'll pass the discussion back to Peter.

[Peter Kukielski:]

Thanks, Cashel.Looking forward to the second half of the year, and into 2020, while we have already achieved several significant catalyst year-to-date, we believe, we still have meaningful near-term catalysts within our pipeline. In the Snow Lake region, we will continue to explore our large land package to provide potential additional feed to our Stall and New Britannia Mills.Lalor has several upcoming catalysts such as upgrading the inferred resources into reserves, additional Lalor in-mine exploration, and ultimately achieving first gold production out of New Britannia by 2022.We will continue studies on WIM, PEN, and New Britannia zones to upgrade them to a reserve classification, while advancing feasibility work on the 1901 deposit, along with the continued exploration at 1901 and the incorporation of the gold mineralization.Additionally, we expect to be drilling at one of the satellite targets near Constancia later this year and continue to make progress on discussions to reach a community agreement on Pampacancha.We continue to believe that Rosemont is one of the world's best undeveloped copper projects delivering a 15.5% after-tax unlevered IRR at a copper price of $3 per pound based on the 2017 technical report. We are continuing to evaluate the options to move Rosemont forward and expect to provide more information on our plans later this year.And lastly, we have plans to drill high grade targets at Ann Mason with a focus on enhancing project economics along with advancing exploration activities on our other prospective grassroots exploration properties in Chile, Peru, and Canada.I'd like to conclude with a recap of Hudbay's investment rationale. We have continued to execute on our consistent long-term growth strategy and developing our world-class asset base. We have a proven track record of successful project development through best-in-class construction and ramp up of Constancia and Lalor.Our flagship mines are among the lowest cost in their respective regions confirming our operational excellence and we continue to add value through successful exploration at our mines.Although we are never satisfied, we are pleased with our operating results and financial performance as we continue to generate strong cash flow from unhedged copper and zinc production positioning us well for our future capital allocation plan. We have a robust pipeline of near-term catalysts. We have the team in place to deliver on these catalysts and we look forward to continuing to deliver on our objectives through safe and responsible practices.That concludes my presentation portion of the call and we are pleased 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 Orest Wowkodaw with Scotiabank. Please go ahead.

[Orest Wowkodaw:]

Hi, good morning. Peter, you mentioned earlier that you're evaluating kind of other options with respect to Rosemont. Can you elaborate what you're referring to there; I mean what other options are there besides appealing the core process?

[Peter Kukielski:]

Good morning, Orest, and thanks for the question. Our initial plans are to launch the process in conjunction with the early works program. So at this point, we are looking at all of our options and developing relationships. It's a little bit difficult to say exactly what the options are that are available to us right now. We think there are serious issues in the court's decision and we believe that decision will be overturned. We believe in the work that the agency did. We'll know more with time but to comment on the options available to us now would be premature.

[Orest Wowkodaw:]

Okay. And as a follow-up to that I mean given the setback here on Rosemont does this perhaps change any of the strategic directives of the company in terms of where growth may come from like this. Is there a chance you may look for a different growth vehicle given Rosemont is now more a long data?

[Peter Kukielski:]

Orest, I think it's premature again to say that we will look at alternatives right now. We remain very, very committed to Rosemont. I think that if you look at Rosemont in the holistic context of the company's strategy, we are continuing to prosecute that strategy with vigor. We always look at options that may arise as sort of part of our capital allocation process and we'll continue to do that. But just one week into the period of these decisions, very difficult to say exactly what that might be.

[Orest Wowkodaw:]

Okay. And then finally, Peter, just as a new CEO coming in. Have you had a chance to evaluate the Hudbay asset base? And I'm curious whether you see an opportunity for any strategic change of direction with the assets?

[Peter Kukielski:]

Thank you for that question. Look I visited the Manitoba sites, I visited the Arizona sites, and I'm heading to Peru next week. So far I'm really pleased to see the bench strength that we have across the company including at the operations. There's a vibrant atmosphere in the head office.Overall this is a super bunch of people and when you put good people in front of challenges you get creative things happening. I think that there is enormous opportunity ahead of this company and I think that having an interim CEO in this seat at the moment doesn't change anything. I believe that the company's strategy is pretty straightforward, great people, good assets, and I think the outlook is pretty positive.

[Operator:]

Our next question is from Ralph Profiti with Eight Capital. Please go ahead.

[Ralph Profiti:]

Good morning. Thanks for taking my questions. Peter or Cashel, I'd like to talk a little bit about the gold potential at 1901. And just wondering how you're seeing the similarities with Lalor and is there a scenario where you potentially can be looking at opportunities for modifications of New Brit or should we be thinking about the gold potential there as sort of great enhancement and things like mine life extension?

[Cashel Meagher:]

Ralph, Cashel here. Yes, I think it is the recent analogy for 1901. As we sort of stated in the script, it's early days, but there are intersections in the felsic football units and we see that same goal associated with lenses 10 and 20 in Lalor where we called it previously confirmable gold zones and we mined them together sometimes with the base metal zones and that really that those gold zones provided the foundation for the business case for the refurbishment of New Britannia to move the Stall gold recoveries from 55 to be able to get closer to 90 or mid-90s on gold recovery at New Britannia. So this fits perfectly in with that strategy.And with respect to 1901 itself, it is higher grade zinc than what we're currently mining at Lalor and what the future reserve at Lalor is. So we see the potential for it to maybe replace some of the feed that Lalor is currently providing sooner into the Stall complex and the base metals and then therefore extending the life of the Snow Lake camp. So I think given time over the next several months, we'll be able to put this story together for the most optimum plan to deliver the best value for our shareholders out of the Manitoba business unit.

[Ralph Profiti:]

Got it, got it. Okay. If I can switch gears and maybe ask a question on the port issues at Matarani, just where do you think the biggest risks are. Things like concentrate storage come to mind for me. But is it possible that we could be looking at more risks in the supply chain consumables area and procurement being potentially a bigger issue. Can you touch on that please?

[Peter Kukielski:]

Yes, Ralph, look I think that obviously it all depends on how long closure lasts. And I'd note also to that that we have had intermittent access to the port and that -- but to be clear, we certainly it has impacted our ability to bring some consumables in. You're aware I believe that we've stopped Moly production in the meanwhile because of lack of availability of sodium hydro sulfide. But at the same time we are ahead on Moly production for the year in any case. The team has done an excellent job at managing the situation and minimizing the impacts of the disruptions. Depends on how long they last and they put this for a while we'll provide an updated day to date on the expected impact on Hudbay. But I have to say the team has done a tremendous job of being able to stockpile material in the interim and to actually procure fuel and stuff that we need on site.

[Operator:]

Our next question is from Matthew Fields with Bank of America Merrill Lynch. Please go ahead.

[Matthew Fields:]

Hi everyone and welcome and congratulations, Peter.

[Peter Kukielski:]

Thank you.

[Matthew Fields:]

Understanding that obviously it's early days in the Rosemont appeal process and you're sort of going on with other options as well. Just want to know obviously you have earmarked a lot of cash on the balance sheet for eventual Rosemont development. What is the balance sheet looks like, if Rosemont can't go forward. And sort of what's Plan B for that sort of cash?

[Peter Kukielski:]

Thanks, Matthew. As you know we have $490 million of cash in the balance sheet. We got net debt of 480-ish million dollars. We've got liquidity of $911 million right now. As far as what happens, if we don't have to spend money in the near-term that's not such a bad thing. But why don't I let David speak more specifically to your question.

[David Bryson:]

Yes, I think as we've said before with respect to Rosemont, its early days. We've got some really exciting opportunities with the refurbishment of the New Britannia mill, the 1901 Zone. We're sort of looking forward to moving forward with Pampacancha. So we think that there is a number of organic growth opportunities inside the business already that have some capital requirements associated with it. And so I think it's way too premature to be sort of thinking about any capital structure or sort of liability management implications of any of this and certainly not on our minds at this time.

[Matthew Fields:]

I guess the sort of natural extension is if Rosemont can't go forward, do you envision a lower level of absolute debt for your balance sheet going forward?

[David Bryson:]

We'd have to assess that if we actually found ourselves in that scenario.

[Operator:]

Our next question is from Jackie Przybylowski with BMO Capital Markets. Please go ahead.

[Jackie Przybylowski:]

Thanks very much. I guess my first question just following up on the Rosemont theme. Can you give us an idea assuming that the appeal continues through 2020? Do you have any spending plans, capital spending plans at Rosemont in 2020 and maybe just related to that can you maybe talk a little bit about what you expect the timeline for the appeal process might look like?

[Peter Kukielski:]

Yes, thanks, Jackie. Look as we've said, the appeal process can be expected to take anything from 12 to 24 months. We don't know how long it will take. In the meanwhile we have guided towards what we expect our expenditures to be in the near-term. Certainly this year we talked about $30 million and of which a fair amount is spent but a small amount will be spent on continuing to hone in on some of the work that needs to be done such as water management, such as further engineering associated with tailings management that sort of thing. So it's normal core stuff that will add value in any case but our capital spending of course will be at a much lower level.

[Jackie Przybylowski:]

I guess I saw it in the release you mentioned that you're demobilizing a lot of those activities that you were doing this year like the engineering. So I was just wondering if there was a significant amount that was maybe going to continue after that demobilization happened.

[Peter Kukielski:]

No, the engineers basically being demobilized. We're just keeping the core staff on hand to do the work that needs to be done to progress work around tailings management and water management that sort of thing.

[Jackie Przybylowski:]

Got it, okay. Thanks. And maybe just a separate topic. Congratulations on the appointment by the way and look forward to working with you again. Can you talk a little bit about what the plan is at the board level as far as you're aware for the CEO position? And what maybe you could speak to like if it's something that you're interested in doing longer-term as a permanent position and if you have any idea of what the timing would be on when a permanent appointment would be made?

[Peter Kukielski:]

Of course and thank you for that. The first appointment that will be made is the appointment of a Chair. We expect that that search is well underway right now. We anticipate that the Chair certainly will be appointed in advance of the end of the year. The process for -- the search process for a CEO has been kicked-off, internal candidates will be considered. I am one of those candidates and I think that the board will have a pretty good slate of people from whom to make a really informed decision. So you can expect the Chair to be appointed later this year. Following that the CEO will be appointed.

[Jackie Przybylowski:]

Best of luck with everything and with the new role. Thanks very much.

[Peter Kukielski:]

Thank you.

[Operator:]

Our next question is from Greg Barnes with TD Securities. Please go ahead.

[Greg Barnes:]

Yes, thank you. I think it's a question for David Bryson it's said in the MD&A that in Arizona you had $200 million of committed CapEx of which $87.5 million couldn't be terminated, just want to understand that better?

[David Bryson:]

Sure, Greg. The sort of the $200 million relates to sort of cancellable $120 odd million of cancellable orders which obviously we've gone and canceled in light of winding down most of the early works program, of the $80 million much of that relates to some equipment purchase orders that actually had been in place prior to our acquisition of Augusta and sort of have remained in place. But there is no real deadline for those equipment purchase orders to be carried out there. They've been around for a long time but sort of they remain in our recommended schedule just kind of given the technical legal issues there. But it's not something that we anticipate being a sort of a hit to CapEx or liquidity in the foreseeable future. So we are going to wind down some of the non-cancelable contracts, some pipe orders, debottle mobilization costs on the engineering and that's incorporated into the $30 million that we guided to for project spending for the balance of the year.

[Greg Barnes:]

And what do you think carrying costs will be then Rosemont over the next two years on an annual basis?

[David Bryson:]

We sort of had non-projects sort of carrying costs, if you will, at the start of this year of $20 million before we got the 404 permit. We're going to go through our budget process but I think sort of the spending levels for Rosemont are going to be informed by our assessment of the options that are available to us alongside a appeal of the District Court decision. So it's really too early for us to be guessing on what the spending level at Rosemont is going to be in 2020 or beyond until we have a little bit more clarity on what the business plan is going to be.

[Greg Barnes:]

Thank you. On Pampacancha and I understand you've cleared up some issues with the local community wanted to deal with existing agreements. How can you move this process forward now it's been going on an awfully long time? I think everyone wants to see some kind of closure on this.

[Peter Kukielski:]

So, Greg, what I would say is that as you saw we sort of laid to rest some of the issues that the Committee of Chillarajoto want to address before negotiating on Pampacancha. So we're now moving forward into that negotiation, we expect that those negotiations will go reasonably smoothly.And then of course there's the Consulta Previa process to be undertaken with the government. That process typically takes three to six months. and then once that process is over then we can expect to start doing some of the pre-development work. So I mean obviously we can't promise you a timeline but we do believe that things are going pretty, pretty well as planned at the moment and we anticipate getting into discussions with the community on Pampacancha very shortly.

[Greg Barnes:]

Are there any specific issues surrounding the access to Pampacancha that the community has an issue with to address? Is it simply money?

[Peter Kukielski:]

No not, which I'm aware.

[Greg Barnes:]

And I understand that doesn't require very many replacements or resettlements?

[Peter Kukielski:]

No.

[Greg Barnes:]

No, those are basically money that we're talking about then?

[Peter Kukielski:]

Typically always is money in these negotiations.

[Operator:]

Our next question is from George Topping with Industrial Alliance. Please go ahead.

[George Topping:]

Great, thank you. Hello everyone. Nice, Peter. See Peter any consideration being given for share buybacks?

[Peter Kukielski:]

Good morning, George. Look the company will always take a look at capital allocation mechanisms ahead of it and that's something that the company does regularly in any case. So are we considering share buybacks as a consequence of a decision on Rosemont? Absolutely not. It's something that we would just consider in the normal course of things as part of our capital allocation processes.

[George Topping:]

Okay. And then just secondly with Cashel, on the 1901 deposits to the access is really easy. The depth, unfortunately, is flat. But do you have the average what of the mineralization?

[Cashel Meagher:]

Of the deposit?

[George Topping:]

Yes.

[Cashel Meagher:]

It varies from between sort of three meters to 15 meters and in some places up in the north end we've actually had some pretty thick intersections where they could be amenable to long-haul stoping. So again with the amount of drill holes we have. It's a bit premature to say what the mining method will be. But if you took an overall average, it's eight to 10 meters.

[Operator:]

Our next question is from Stefan Ioannou with Cormark Securities. Please go ahead.

[Stefan Ioannou:]

Thanks very much. Just think way back to Ralph's question just on the some of the issues stemming from the whole port issue in Peru, just I remember back in the early days at Constancia there was some the concentrator storage onsite got pretty full. Are you anywhere near that sort of level yet or like is the shed anywhere near being full and you're storing concentrate outside again or is there still some buffer there?

[Cashel Meagher:]

Yes, Stefan. We, yes, certainly we have experienced this before. Logistical interruptions in Peru seem to be commonplace and we've sort of established a mitigation plan that we reinitiate whenever these things happen. And so we are -- we have since that other than the last time; we built new concentrator storage facilities onsite for this event and we still have room to accommodate more production.

[Stefan Ioannou:]

Okay, okay great. And then just maybe just not to belabor Rosemont but just you mentioned you're going to be doing some drilling at Ann Mason, does this sort of the Rosemont uncertainty sort of prompt maybe potentially a slower sort of schedule in terms of exploring and moving forward on Ann Mason or is it Ann Mason sort of still status quo going forward?

[Peter Kukielski:]

There's no relationship between the two. Anything you would do the opposite.

[Operator:]

[Operator Instructions].Our next question comes from Lawson Winder with Bank of America Merrill Lynch. Please go ahead.

[Lawson Winder:]

Hi Peter, Cashel, David, thank you all for your comments today. They've all been very helpful. Just a few questions for me on Constancia and Pampacancha Access. So one thing I would be really helpful to understand is sort of what your understanding is of the ILO 169 consultation process with the government just in terms of sort of the steps and whether or not there's any court approvals required before that's actually finalized. Thanks.

[Peter Kukielski:]

Yes, the Consulta Previa process is really just a prior consultation process that is undertaken in order to ensure that proper processes have been followed. There's no court hearing or anything like that. There's a fair amount of precedence both in the mining and the oil and gas industry with respect to how these processes have been conducted. They've taken anywhere from two months to five months. So we don't anticipate any complexity around it.

[Lawson Winder:]

Okay, that's helpful. And then also to what extent does Hudbay sort of get consulted in that process or do you guys just sort of stand in the sidelines and let the government handle it all?

[Peter Kukielski:]

It is a process that's handled by between the government and the community.

[Lawson Winder:]

Okay, that's very helpful. And then one other thing that and you kind of spoke in -- your team's kind of spoken about it on past calls but I mean the original thought process was get access to Pampacancha and then that'll set a precedent for getting access to Maria Reyna, Caballito, Kusiorcco and some of these other very prospective deposits but I'm just curious is there a possibility sort of flip that logic and go for access to those others given the delays in Pampacancha?

[Peter Kukielski:]

I mean the one, the one -- the two are not necessarily interrelated. I would say that certainly we'll be pragmatic. But to be more specific to your question, I will let Cashel answer that.

[Cashel Meagher:]

Yes, so the two communities that are the principal communities Chillarajo and Kusiorcco are the ones we dealt with Constancia when we originally got the land acquisition and we've been moving both of them in parallel actually. And what we've recently done is renegotiated some nets that the communities had with the original agreements. Those are put to bed now and we've made it part and parcel that for those to be auctioned that we need to have progress on Pampacancha and the exploration properties to the north and the communities have agreed to that. And so now we're meeting with those communities in parallel and independently. And they both know that we're doing it together with them. So we're very optimistic that we're moving forward and that we will get access to Pampacancha and to the exploration properties.

[Lawson Winder:]

Okay but the exploration property is done. I mean if I'm understanding what you just said then there is sort of a path dependency in that, it's one or all?

[Cashel Meagher:]

It is actually, there is actually several communities, we have access to one, we've been rolling there by the end of the year, we're going through the permitting process to the EIS permitting process with the Peruvian government right now. We'll be drilling there by the end of the year. We have about five or six targets we're pursuing, there are about three other communities we're dealing with. But the most perspective community is Kusiorcco one which is the one with Caballito and the Maria Reyna drill intersections that already exist.

[Lawson Winder:]

Okay, that's very helpful, thank you Cashel. And just one final question from me on Manitoba, with the higher production I would have thought that the unit costs would have dropped a little bit. What was it that was keeping those a little bit higher? Thanks.

[Cashel Meagher:]

Yes. So I think the way to look at it is to be able to achieve and to get the 4,500 tonnes a day we did see drop in our unit rate cost in the mills because of the additional tonnage going through. But specifically in the mines in Lalor, we've had to really change the concept to maintain 4,500 tonnes a day to a fly in, fly out operation. So two-thirds of the workforce would be fly in, fly out. And with that, it's changed the cost structure a little bit. Although we still lie within the guidance ranges. It's maybe a little bit variance to what was in the technical report.

[Operator:]

Our next question is from Mark Llanes with Credit Suisse. Please go ahead.

[Mark Llanes:]

Hi, thank you for taking my questions. Just two questions on Rosemont, for the joint venture partner search would you say that that would be put on pause until after the appeals period is done?

[Peter Kukielski:]

Mark thanks for the question. Look our initial plans were to launch the process in conjunction with the early works program. And the idea really was that we would start to build relationships, it wasn't something that was sort of a -- that a clock was ticking on. So we'll continue to work on those relationships to shift and build those relationships, sort of unhampered by any clock at the moment. So we'll continue with that.

[Mark Llanes:]

Okay. And similar to delayed payments you have with precious metals related to the Pampacancha deposit, can you remind me again on how that works with Rosemont if there are any?

[Peter Kukielski:]

Sorry, could you repeat that question please, Mark.

[Mark Llanes:]

Similar to the delayed payments you have with precious metals related to the Pampacancha deposit, can you discuss any delayed payments you might have with Rosemont if there are any?

[Peter Kukielski:]

So David will take that question.

[David Bryson:]

With respect to Rosemont, there are none.

[Operator:]

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

[Orest Wowkodaw:]

Yes, hi. Thanks for the follow-up, just a quick accounting question. Notice that depreciation moved up in the quarter despite being kind of a low point on volumes. Is there -- is that a one-off or is that should we read anything into that moving forward?

[David Bryson:]

Orest, it’s probably going to be a little bit higher going forward. It's partly a function of getting Lalor up to 4,500 tonnes per day and the sort of depreciation on the production there. And on Peru it's sort of a function of the throughput but also sort of the fairly solid sales that we had on the copper side in the second quarter. And so we sort of drawdown a little bit of inventory then you see depreciation tick-up. But I'd say on balance that these depreciation rates are probably indicative of what would be normal going forward.

[Operator:]

Our next question is from Dalton Baretto with Canaccord Genuity. Please go ahead.

[Dalton Baretto:]

Hey good morning guys. Most of my questions have been answered but maybe if I could just ask one on Rosemont, as I think ahead to your probability of success of the appeals process, are there projects or mines you can point us to in the U.S. that have been approved and I guess direct opposition to the crux of the U.S. Court ruling on Rosemont?

[David Bryson:]

It could be sorry good morning, Dalton. I think it would be fair to say that almost every, if not every permit has been issued and turned down by a court has actually been reversed on appeal. I'm not aware of any that haven't.

[Dalton Baretto:]

I see. So there is precedent for this. Any examples come to mind?

[David Bryson:]

Yes, indeed. So I mean we had one I think it was an air permit overturned by a judge at one level a few years ago and then that was subsequently reversed on appeal.

[Dalton Baretto:]

Okay. And then maybe just another one more on the strategy side of things, Peter, are you comfortable right now making bigger, more permanent strategic decisions with the interim title or do we need to wait until the Chair is in place on the permanent CEO?

[Peter Kukielski:]

You know what, Dalton; I think that's a great question. The company has an established strategy. I think that there are substantial opportunities that lie ahead of us. We spoke to exploration potential in both Manitoba and Peru, we talked about the opportunities associated with 1901 mineralization and the gold side of that, we've got a solid good bunch of people and like I said a little bit earlier and when good people are challenged, they get creative. So, no, we are not going to be held back by making strategic with respect to making strategic decisions, we have a strong Board with some new membership in that Board. So the Board is raring to go. With the support of that Board, we will make strategic decisions if they need to be made and while at the same time being cognizant that there will be somebody potentially somebody else in the seat. But we are not going to sit idly by and waiting for that to happen not by any stretch of the imagination.

[Operator:]

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

[Candace Brûlé:]

Thank you, operator, and thank you everyone for participating today. Please feel free to reach us to our Investor Relations team if you have any further questions. This concludes our call. Please disconnect your lines at this time.