Hudbay Minerals Inc.
Q3 2016 Earnings Call Transcript

Published: 6 Nov 2016

[Operator:]

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the HudBay Minerals, Inc. Q3 2016 Conference Call. [Operator Instructions] 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, Thursday, November 3, 2016, at 10 AM Eastern time. I will now turn the conference over to Ms. Candace Brule. Please go ahead.

[Candace Brule:]

Thank you, operator. Good morning, and welcome to HudBay's 2016 third 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 presenter today is Alan Hair, HudBay's President and Chief Executive Officer. Accompanying Alan for the Q&A portion of the call will be David Bryson, our Senior Vice President and Chief Financial Officer; Cashel Meagher, our Senior Vice President and Chief Operating Officer; Eric Caba, our Vice President of the South America business unit; Andre Lauzon, our Vice President of the Manitoba business unit; and Pat Merrin, our Vice President of the Arizona business unit. 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 Alan Hair. Alan?

[Alan Hair:]

Thanks, Candace. Good morning, everyone. And I'd like to begin by taking this opportunity to welcome Andre Lauzon to the HudBay team. We are very pleased to have someone of Andre's caliber to run our Manitoba business. Moving on to the quarter strong operating performance, together with the cost efficiencies achieved at our operations, enabled us to generate increased operating cash flow and earnings during the third quarter. These solid results led to record consolidated copper equivalent production this quarter, in addition to continued low cash costs in both Peru and Manitoba. Production of all metals increased quarter over quarter, with a notable 19% increase in zinc production. Consolidated cash costs net of byproduct credits was $0.91 per pound of copper produced and consolidated all in sustaining cash costs net of byproduct credits was $1.46 per pound of copper produced, supporting solid cash flow generation in a weak metal price environment. Net profits and earnings per share rose to $34 million and $0.14 respectively compared to net loss and loss per share of $6 million and $0.02 respectively last quarter. Similarly, operating cash flow before change in noncash working capital increased to $124 million or $0.53 per share from $75 million or $0.32 per share in the second quarter of 2016. These increases were because of higher sales volumes, slightly higher copper and zinc realized sales prices and ongoing cost optimization initiatives at all sites. As at September the 30th, we had total liquidity of approximately $277 million net of the semiannual bond interest payment at the end of the quarter. Our results this quarter have enabled us to remain on track to meet the production and operating cost targets established earlier this year. In Manitoba, we are tracking to be within our guidance ranges for all the metals produced, while meeting our combined unit operating cost expectations. In Peru, we are tracking to be at the upper end of copper production guidance and have already achieved our precious metals guidance. Combined unit operating costs in Peru remain within guidance ranges. Total sustained capital spending is expected to be approximately 10% lower than initial guidance of $220 million as a result of cost savings and the deferral of some spending to 2017 and subsequent years. As mentioned earlier, we had total liquidity of approximately $270 million at the end of the third quarter. Total liquidity includes cash and cash equivalents of $118 million and availability under our credit facilities of $159 million. Net debt declined to $1.1 billion at September the 30th from $1.17 billion at June the 30th as we released restricted cash back [indiscernible] Peru and used the proceeds to repay advances under the credit facility, resulting in lower interest cost. At current metals prices, we expect our business to generate positive cash flow after sustaining CapEx, interest and copper overhead. Copper production at the Peruvian business unit increased to 35,600 tons in the third quarter compared to 34,700 tons in the second quarter of 2016. Ore mined and ore milled increased during the quarter, while there was no change in milled copper base of 0.62%. Mill throughput during the quarter was marginally affected by the power supply for one of the grinding circuits until the process was [indiscernible]. Both repairs arose from installation issues and steps have been taken to prevent future impact from these issues. Optimization of plant performance remains a primary focus for Constancia. Total copper recovery continues to improve and was 83.6% this quarter compared to 82.7% in the second quarter. As oxidized copper in the ore feed was lower and the metallurgy associated with the varying ore types continues to be better understood. The molybdenum plant was commissioned and began producing saleable concentrate in July of this year with grades over 50%. Moly production quantities are expected to remain modest, but steadily increase as a growing proportion of higher molly grade hypogene ore is processed. Combined unit operating costs in the third quarter were affected by reduced capitalized stripping compared to prior quarters. And therefore, a higher portion of stripping costs was expensed and included in operating costs. Also, milling costs reflect routine maintenance activities ramping up as the plant matures. Combined unit operating cost year-to-date remains within guidance expectations. Cash cost per pound of copper produced, net of byproduct credits for the third quarter was$1.13. An increase in the previous quarter due to the larger portion of stripping costs has been expensed, as previously mentioned, and higher treatment and refining costs per pound of copper produced since there was high copper concentrate and sales volume (inaudible) the previous quarter. Similarly, sustaining cash cost per pound of copper produced, net of byproduct credits, for the third quarter was $1.60,?an increase from the previous quarter due to high cast costs to sustain capital spending in the quarter. As we move into the fourth quarter, we expect overall mine grades at Constancia to start to decline as we move lower into the pit. But nonetheless, we expect overall copper production from Peru to reach the high end of the guidance range for the year. Production at our Manitoba business increased for zinc and precious metals primarily as a result of high grade 777 mine. Ore mined at the Manitoba mines during the third quarter decreased when compared to the second quarter. 777 tons mined were lower than prior quarters as all these distances increase and stock sizes become smaller. As we go deeper into the mine, higher zinc and precious metal grades are expected to help offset the lower tonnage. Total ore processed in the concentrators was relatively consistent with last quarter. Our zinc, gold and silver recoveries were higher as a result of higher head grades. Copper recovery was slightly low due to lower copper head grades. Combined mine, mill and G&A unit operating costs for the entire Manitoba business unit was higher than the second quarter primarily due to higher maintenance expenses at the Flin Flon concentrator, but remain within full year's guidance expectations. Cash costs net of byproduct credits in the third quarter was $0.18 per pound of copper produced, a decrease of 51% compared to the second quarter. The decrease is largely the effect of a decrease in general support costs as a result of cost reduction initiatives, as well as increased revenue from sales of zinc metal. Sustaining cash cost, net of byproduct credits, was $0.69 per pound of copper produced, a decrease of 37% compared to the second quarter, and was affected by the same factors impacting cash cost in the third quarter as well as reduced capital expenditures. Our goal this year was to generate free cash flow from our business in a weak natural price environment while at the same time, optimizing our operations. Our performance this quarter well positions us to achieve that goal. We also remain committed to realizing the full potential of our growth opportunities pipeline. We are on track to publish an update at 43101 technical reporting Constancia by the end of the year, which will contain further insights and the opportunity from developing the Pampacancha satellite deposits and incorporating it into the Constancia mine plan. At Lalor, we're continuing to work on completing an updated technical report incorporating a new mine plan with the integration of the New Brittania gold mill and a potential increase in zinc ore throughput at the sole concentrator. The report is also expected to include an update [Indiscernible] estimate for the Lalor gold zone and the impact of a pace backfill plant at Lalor. We are also evaluating the potential for additional zinc ore through the existing sole concentrator. We expect to finalize the updated technical report in the first quarter of 2017. At Rosemont, we continue to advance permitting activities and engineering studies. We expect to publish a new technical report on Rosemont in the first quarter of 2017 outlining the feasibility work completed to date and an updated reserve and resource estimate. We also continue to advance [Indiscernible] exploration opportunities in Chile, Peru and the Snow Lake area, providing a long term organic growth potential in our pipeline. In summary, we continue to believe that HudBay is uniquely positioned amongst our peers with attractive, low cost producing assets in low risk jurisdictions, providing near term downside protection and strongly [Indiscernible] to an eventual recovery in copper prices and growing exposure to zinc. HudBay also offers a strong pipeline of internal growth opportunities with attractive potential returns in Lalor, Pampacancha, Rosemont and our exploration opportunities. With that, we'd be pleased to take your questions.

[Operator:]

Thank you. [Operator Instructions] We will go first to Matt Murphy.

[Unidentified Analyst:]

I had a question. It looks like a good quarter for sales at Constancia. Just wondering though, given all the news on Las Bambas and the events there, if there's any sort of local color you could provide us, what you're seeing on the ground, or if you're unaffected?

[Alan Hair:]

Matt, at this stage, we've been unaffected by what's happened at Las Bambas.

[Unidentified Analyst:]

Okay. Okay. And then just one on the 777 zinc reserve grade. So I'm just wondering you've been under the zinc reserve grade for some time and now, we've got the first quarter in a little while with higher grades. Just wondering if this is something we should be thinking about being consistent going forward, or will it still be somewhat variable?

[Cashel Meagher:]

Matt, Cashel here. Yes, in the 777 mine, zone 30 is considerably higher grade and there's the proportion of tonnage in the future plans for the remaining years. More will be mined out of zone 30 so we can expect the zinc grade to go up versus what we have done earlier. So yes is the answer.

[Operator:]

And we next to Matthew Fields.

[Unidentified Analyst:]

Just wanted you to elaborate on sort of your sources of future growth. Can you just remind us all like what's the CapEx and sort of timing associated with these initiatives, the New Brittania mill refurbishment, the Pampacancha expansion? What's the latest timing and scope of the CapEx on that? And then we can forget about Rosemont for a while, but are those the two main kind of bogies and sort of what's the spend and timing to get there?

[Alan Hair:]

I don't know if you'd use the term bogies, but we're looking at within Snow Lake, the CapEx will be mainly on the pace backfill plants in 2017 with the upgrades to the process facilities more likely to be in 2018. But we'll be providing full detail in the technical reports in the first quarter of next year. Pampacancha, our current view is that we'll be looking to incorporate that into the mine plant by the end of 2018, given that metal prices respond the way we expect them to. And again, we'd see the majority of that capital expenditure being in early 2018 as well. But again, we're going to have the technical report out shortly, which will give the detail around that.

[Unidentified Analyst:]

And New Brittania is supposed to be about 120 of CapEx and Pampacancha is 100, low 100s as well?

[Alan Hair:]

I think Pampacancha, because of that, I know a two-faced approach to the mine plant changes the treatment of deferred stripping and things. so the actual upfront CapEx, which should be significantly lower for Pampacancha, as I say, that will be provided shortly in the technical report. We're still working a number of options on our Snow Lake processing. As we've indicated, we're now seeing the potential for further relatively low CapEx ability to [expand] our zinc production there. And again, we'll provide close-in guidance with the technical report next quarter.

[Operator:]

And we go next to Orest Wowkodaw.

[Orest Wowkodaw:]

It's Orest with Scotia. Similar to Matt's question about grades, but this time at Constancia, I've been surprised that you've been able to maintain the copper grade around that .62 level. Clearly, it has to fall, as you move through the high grade and I'm just wondering if t; trajectory that you now see is actually just a bit more flattish than we previously would've expected. And curious on what you think the average grade might be in 2017, given it looks we're coming into about close to a .6 grade for this year.

[Cashel Meagher:]

Orest, Cashel here. And not to give up all the answers, as Alan said, we're going to put out a tech report shortly that'll give some more clarity as to our learnings, since we've constructed and been mining Constancia. But I'd say in short term sort of described before, the drill spacing at the top of the deposit was somewhat problematic. And also there was some conservatism in the generation of the mineral wire frames. So with that, while we continue to mine through some of the super gene phase, we see this sort of copper total enrichment, both in the sulfide and the soluble copper components. So I think we'll see a little bit of it, but not to the extent or proportion we've seen in the past simply because the mine is getting deeper. So we believe we'll continue to trend toward reserve grade and there will be a drop off in grade next year. And as I said and shortly coming will be the tech report that'll disclose the detail on that.

[Orest Wowkodaw:]

But is the drop off next year, how significant is it? I'm currently using a .4 grade, which is obviously way below the .6 this year. Is it potentially something closer to .5?

[Cashel Meagher:]

No, I don't think you're far off with the .4 grade. That was the previous tech report. We haven't put more drill holes into the deposit. There are some areas we're treating a little bit differently relative to some of the reconciliation processes we've undertaken now that we've been milling these various ore types. So I don't, we don't think you're way off, but again, I'll sort of express we're still in a phase of super gene, a little bit of super gene next year in phase two. So there might be some benefit there that we haven't necessarily baked in. But more of this will become more clear when we publish our tech report.

[Orest Wowkodaw:]

Okay. And that tech report again that you're saying that would come out in December?

[Cashel Meagher:]

Yes, before the end of the year.

[Orest Wowkodaw:]

Okay. Thank you.

[Operator:]

We will go next to Greg Barnes.

[Unidentified Analyst:]

Cashel, just to belabor the point a little bit then, what percentage of supergene ore next year this is primary roughly?

[Cashel Meagher:]

So off the top of my head, I don't have the proportion of supergene. However, it's nothing like what we've experienced in the past two years, so it's much lower. So the proportion of hypogenes going up as such, we're forecasting a little higher recovery obviously, because with the lower proportion of oxide or soluble copper, then there would be more treatment of primary sulfide. Therefore, a little higher recoveries, but as we know, a little lower grade. So like I said, the tech report will have more clarity on that on what we expect as proportions by ore type.

[Unidentified Analyst:]

Great. Thanks, Cashel. Just a second question David Bryson, there's still a lot of focus on the balance sheet, the maturities coming up in 2019 and 2020. How do you see they handling that situation?

[David Bryson:]

Greg, it's David. Clearly, we've got quite a bit of time before those maturities come up. It's just under four years for the main bond maturity. But having said that, we've certainly seen a dramatic recovery in the high yield market with our bonds now trading meaningfully above par. So that's very encouraging and our bonds became callable on October 1, so we're monitoring opportunities and going to see where that goes. But refinancing is certainly something that we're thinking about.

[Unidentified Analyst:]

And the line of credit?

[David Bryson:]

I think that the first thing that we'd want to do, if the opportunity presents itself, would be to look at a refinancing of the bonds. Once the bond maturity is pushed out, then discussions around the maturity of the revolver become very easy and we would love to do some work on the revolver, which would be structurally beneficial to both the bond holders and the banks in a way that I think we could have very much of a win win negotiation with the banks on improving some of the terms in our favor, and pushing out the maturity.

[Unidentified Analyst:]

[indiscernible] dream sale on Lalor to fund some of the upcoming projects?

[David Bryson:]

The way that Cashel and the team have been sequencing the growth initiatives, we don't think that we're going to have a lot of growth CapEx required in 2017. And as things look right now, at current metal prices, it looks like the business should be in a position to fund any growth spending in 2017 out of cash flow from our existing business without needing to draw on our liquidity or enter into a gold stream transaction. So our focus right now is on completing the work on Lalor, getting the technical report done. And we're going to monitor the environment in 2017 and see how things go in terms of funding potentially into 2018. But right now, we're feeling no pressure to execute a gold stream transaction.

[Unidentified Analyst:]

All right. Thanks, David.

[Operator:]

[Operator Instructions] Next question comes from Stefan Ioannou.

[Unidentified Analyst:]

I hope my question has been anwered, but I'm just wondering, just looking at the credit facility, I noticed the letters of credit underpinning it have gone from sort of $36 million to over $100 million over the quarter. Could you just give us a little color on that?

[David Bryson:]

Yes, what we had was $62 million of letters of credit in Peru that were collateralized by cash, Stefan. During the quarter, in order to reduce our interest costs, we were able to use the new credit facilities we put in place earlier this year. And we reissued those LCs as ones back to buy the credit facility, released the restricted cash and used that cash to repay indebtedness. And so we ended up repaying indebtedness of about $80 million under the facilities but as you pointed out, the LCs went up by $62 million.

[Stefan Ioannou:]

Okay. Okay. Got it; got it. And just maybe one other question -- I know at the end of Q2, you had a bit of a concentrate buildup at the port in Peru (inaudible) the ocean salt and stuff. And that got sold obviously early in Q3. Have you guys sort of fully caught up with getting your concentrate sales out the door? And obviously, with the big port expansion that went on there through I guess Q2 and into Q3, is that running smoothly now in terms of their logistics at the port?

[David Bryson:]

Yes, absolutely. Things have been working really well at the port. To be honest, the issue at the end of June were ocean swells across the whole South American coast. You saw a number of producers out of Chile also experiencing sales backups at the end of June. So really, other than that, there's been no port issues at all in 2016.

[Stefan Ioannou:]

Okay, great. Thanks very much, guys.

[Operator:]

Okay, and we will take a follow up question from Orest Wowkodaw.

[Orest Wowkodaw:]

Sorry, just a clarification. David, did I hear you say that you expect to be essentially free cash flow neutral or better in 2017 at current metal pricing?

[David Bryson:]

We're working through our budget process right now, Orest. And obviously, that's going to be a function of where we land with respect to the timing of growth CapEx, but I think with the Lalor pace plant, we're definitely

[Orest Wowkodaw:]

Okay, great. Thank you.

[Operator:]

And that will conclude our question and answer session. I'd like to turn the conference back over to Ms. Brule for any additional or closing remarks.

[Candace Brule:]

Thank you, operator, and thank you, everyone, for participating. Please feel free to reach out to our Investor Relations team if you have any further questions.

[Operator:]

And that does conclude today's conference. We thank you for your participation. You may now disconnect.