Hudbay Minerals Inc.
Q3 2014 Earnings Call Transcript

Published: 1 Nov 2014

[Operator:]

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the HudBay’s Third Quarter 2014 Results Conference Call. All this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. Instructions will be provided at that time for you to queue up for question. (Operator Instructions) I will now turn the conference over to Candace Brule, Director of Investor Relations. Please go ahead

[Candace Brule:]

Thank you, operator. Good morning and welcome to Hudbay’s 2014 third quarter conference call. Hudbay’s financial results were issued yesterday and are available on our website at www.hudbayminerals.com. A corresponding PowerPoint presentation is also available and we encourage you to refer to it during this call. Our presenter today is David Garofalo, Hudbay’s President and Chief Executive Officer. Accompanying David for the Q&A portion of the call will be David Bryson, our Senior Vice President and Chief Financial Officer; Alan Hair, our Senior Vice President and Chief Operating Officer; Brad Lantz, our Vice President Business Development and Technical Services; Cashel Meagher, our Vice President of the South America Business Unit; Rob Winton, our Vice President of the Manitoba Business Unit; and Pat Merrin our Vice President of the Arizona Business Unit. Please note the comments made on today’s call may contain forward-looking information, and this information by its nature is subject to risks and uncertainties and as such actual results may differ materially from the views expressed today. For further information on these risks and uncertainties, please consult the Company’s relevant filings on SEDAR and EDGAR. These documents are also available on our Web site. For the purposes of this presentation we have assumed a U.S. to Canadian dollar conversion ratio of 1

[David Garofalo:]

Thanks Candace. Good morning everyone. In the third quarter of 2014, we continue to build on the momentum that started last quarter with strong growth in copper production and cash flows, as compared to the same period last year. Copper production grew 23% and operating cash flows nearly doubled during the quarter, when the onetime effects of Augusta transaction cost are excluded. Positive results from the now steady states Lalor and Reed mines, offsetting an expected decline in ore production from maturing 777 mine, contributed to 15% higher ore production and a 3% improvement in combined mining and milling cost in the Manitoba business unit. As a result overall production, our operating cost guidance for 2014 is unchanged even taking into consideration an unscheduled two week shutdown of the 777 shaft in October. And as Constancia approaches first copper concentrate production in the fourth quarter, we are entering an extended period of sustained growth in copper production and cash flows and declining capital investment. Hudbay is now poised to deliver free cash flow from its newly expanded business after four years of mine building, which it allows to return capital shareholders and compound these returns in new opportunities such as Rosemont. Our growth projects continue to proceed well as we achieved significant project milestones. At Constancia, we achieved over 18.5 million hours without a loss-time accident to the end of September 2014. The project is approximately 94% complete and is on track toward initial production later this year. At the Lalor project, we have surpassed the 1000 day mark without a loss-time accident. The second phase of the Lalor mine achieved commercial production at the end of third quarter. And at Rosemont, we have begun a drill program to gather addition technical information while continuing our permitting efforts. At Constancia, the project was approximately 94% complete on proportion-spend basis at the end of September 2014. We have incurred approximately $1.6 billion in cost to that date and entered into an additional approximately $64 million in commitments of the total project CapEx of $1.7 billion. The power transmission line to site has been commissioned, plant commissioning activities are well underway and pre-stripping is well advanced with sufficient broken ore available for the initial requirements of the ramp-up schedule. Conveyance testing is underway and ore commissioning at the crusher has been completed. Major mechanical installation is complete in the grinding area with work focused on finalizing piping and electrical installation. Tank and flotation cell leak testing is near completion in the flotation and thickening area. All major reagents and consumables are now under contract in support of operations. All required start-up water is captured and the tailings dam has reached its milestone height in preparation for production. The project workforce is in a ramp down phase with a significant number of heavy civil earth works contractors being demobilized. Staffing of the technical and labour workforce is proceeding as planned and necessary training is underway and on schedule. We have also awarded the concentrate transport contract and mine offices and maintenance facilities are now complete. The project remains on track for first concentrate production in the fourth quarter of 2014 and commercial production in the second quarter of 2015. At Lalor mine in Manitoba, we achieved yet another milestone with second phase of project archiving commercial production at the end of the third quarter. We have invested approximately $413 million of the total mine construction budget bordering $441 million and have entered into an additional $26 million commitments to September 30, 2014. Major items to be completed include the installation of the surface exhaust fans and the construction of an office and change house complex. This work is expected to be completed in the fourth quarter of 2014. In the third quarter, we mined nearly 160,000 tonnes of ore at a copper grade of 0.72% and a zinc grade of 8.91% from a combination of ore development, cut and fill, and longhole stope mining. 88,391 tonnes of ore were hoisted up the main production shaft following its commissioning in August 2014. We have also commissioned the refurbished Snow Lake concentrator, which now has the capacity to treat 2,700 tonnes per day. The major catalyst for the Lalor is the underground exploration ramp which we’ve progressed well during the quarter and is more than 25% complete. We use the exploration ramp to assist the upgrading of inferred resources to a higher resource category and to establish an underground drilling platform in 2015, to further test the down dip extension of the copper/gold zone. At the Rosemont project in Pima County, Arizona, we have commenced drill program which is intended to gain a better understanding of the geological setting and mineralization, and to collect additional metallurgical, geotechnical and hydrological information. Also, permitting efforts at Rosemont are ongoing. We have total pro forma available and committed liquidity of over $600,000 million, including approximately $418 million in cash and cash equivalents at September 30, 2014 in availability under our Constancia corporate credit facilities. During the last quarter 2014, we anticipate making approximately $118 million in capital expenditure on the Constancia and Lalor projects in addition to $164.5 million in accrued, but unpaid expenditures on these projects as of September 30, 2014. 2014 represents a year of significant growth milestones for HudBay. Earlier this year, we achieved commercial production at the Reed mine and now enjoyed the benefits of full production. This quarter we achieved another development milestone by reaching commercial production at the Lalor mine on time and on budget. And now we’re enjoying the benefits of the new production shaft operating at steady state and the refurbished Snow Lake concentrator which now has the capacity to treat 2700 per day. Our next major milestone at Lalor is completing the exploration ramp, which we’ve already begun and is progressing well. As we head into last two months of the year and into 2015, our next major milestone is at the Constancia project which is on track for first production during the fourth quarter of this year and commercial production expected during the second quarter of 2015. With that operator, we’ll pleased to take questions.

[Operator:]

(Operator Instructions) And your first question comes from the line of Matt Murphy of UBC. Please go ahead.

[Matt Murphy:]

You’ve talked about mine staffing at Constancia, just wondering how far along you’re and how are you finding a labor market for operators down there? Are people generally available or is it essentially bidding for labor? Thanks

[David Garofalo:]

I think it characterizes [masses] is quite a good market to fill most positions. There have been a number of mines where we trenched people, so only maybe in one or two very specialized areas that we’ve struggled. But the mining plan is actually going along very well so far.

[Matt Murphy:]

Okay thanks and then just on 777 with the two weeks shaft outage. Can you still prep the ore underground at all? Or does that translate to two weeks less production by the end of the quarter?

[David Garofalo:]

Well, the incidents is behind us, so the hoisting capacity was unavailable for the two weeks although the for one week of that activity was able to take place underground, but it was two weeks hoisting that was lost.

[Operator:]

Your next question comes from the Ralph Profiti of Credit Suisse. Please go ahead.

[Ralph Profiti:]

I am hoping to get an update on the concentrate transportation option. Now that the contract has been awarded and particularly where we stand on the Las Bambas access road and if you’re looking at it more from a cost savings item or risk mitigation going forward?

[David Garofalo:]

We concentrate contract that’s in place is for trucking all the way to the port and we will ultimately revisit the bimodal transport, that’s something that we understand that’s Las Bambas are looking at as well. And in terms of the road, our roads -- the existing provincial highway is sufficiently adequate to haul concentrates on. The Las Bambas road will be a preferable option because it’s a more direct route. We don’t think there would be really any significant cost savings by using it. But it would be slightly better logistically, so obviously Las Bambas has gone through ownership change and we’re really just reconnecting with them over our ability to share that infrastructure. Everybody is keen to work together ourselves, Las Bambas and the government and I think ultimately we will end up using the Las Bambas road, but it’s really a bit non-issue as far as we’re concerned right now.

[Ralph Profiti:]

Okay understood and how was commissioning of the second line tracking versus the first line. Are we still tracking one month behind the first line relative?

[David Garofalo:]

I think in relative terms that would be -- that has been our expectation. I mean with no commissions to crusher we should be starting to commission the first milling line next week and depending on how it goes and wrap up of construction we’re still anticipating to be commissioning the second line by early December.

[Operator:]

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

[Orest Wowkodaw:]

I am just curious in terms of the potential Lalor concentrator. Wondering if you could give us an update of what you’re thinking is about now in terms of whether to go ahead and build that or whether just to stick with the refurbish Snow Lake concentrator.

[David Garofalo:]

We’re not quite ready to answer that question yet, Orest. We’re doing quite a detailed trade-off study, there is a number of things to consider and the best way to optimize both the concentrator option and the mine plan. So we target to having an answer to that question by the end of this year.

[Orest Wowkodaw:]

Would that be included in a new mine plan then for later, at the same time?

[David Garofalo:]

Depending on what we’d end up on in terms of timing at May, but right now I think it would be -- I would expect it would be very similar to what our current expectations are.

[Operator:]

Your next question comes from Alex Terentiew of Raymond James. Please go ahead.

[Alex Terentiew:]

Just one quick question. In your MD&A you note that you have both $63 million in contractual commitments for Rosemont that they can’t cancel. Can you elaborate a bit for me on what those relate to? And is there a point in time, say if permitting drags out a little bit, where you have to make that payment?

[David Bryson:]

It’s David Bryson, those commitments relate primarily to purchase orders that Augusta had placed for the mobile fleet at Constancia, at Rosemont. And so we don’t expect to incur those costs until after the projects been sanctioned and constructions begun there. Actually, moderately favorable in terms of the price relative to our current market rates for equivalent equipments. So we’re happy to keep them in place and I think we have a pretty good relationship with Cat, with work that we’ve done with them at Constancia.

[Alex Terentiew:]

I mean if permitting takes 1, 2, 3 for example say if it takes five years. Is there a point where Cat says, okay we’ve got these things for you, you need to pay for them now, even if you don’t need them?

[David Bryson:]

I think Cat was remarkably patient with Augusta during its permitting process.

[Operator:]

Your next question comes from Stefan Ioannou of Haywood Securities. Please go ahead.

[Stefan Ioannou:]

I think most of my questions have been answered. But just wondering with the exploration ramp at Lalor, just wondering when it was within 2015, when do you see it being a benefit? How much actually drilling do you think you might actually get out of thing next year?

[David Bryson:]

Well there’s actually two phases to the ramp. So, the first to the development it gets to a position where we can better define the existing copper/gold zone and then there will be a further extension later in the year to access the area of those high grade intercepts. We haven’t actually finalized our exploration budget for 2015, so I cannot give you the absolute meters at this stage.

[Stefan Ioannou:]

So you think -- so that phase two which is the big upside, do you think you’ll get a fair bit Phase 2 type drilling done next year. Is that going to be right at the end of the year into 2016?

[David Bryson:]

No, I would say that’ll be a lot later, we’ve got quite bit on it and all this in our fleet in terms of just dealing with the copper/gold zone.

[Operator:]

Your next question comes from the line of David Charles of Dundee Capital Markets. Please go ahead.

[David Charles:]

Just a quick question, in my time flow in Hudbay, I have never seen -- that I can remember anyway a hoisting issue at 777. Should we worry about issues like this going forward? Or now that you fixed it, is it over with as far as you’re concerned? And I suppose the question is -- well as looking into 2015, I do not understand during your budgeting process -- should we see further declines in production from 777? Or do you see a sort of a steady state which has being the case in the couple of years?

[David Bryson:]

To answer your first question, I think the difference with this incident was the time it took, it was the skip got jammed in a very difficult position, so to safely recover it -- took the time, it’s not that we haven’t had more minor issues, but the learnings out of this incident make us confident that we can avoid reputation at both 777 and Lalor, you remember Lalor is basically a carbon copy of 777. So I think we’ll be in good shape in that respect. And you’re right, we have had -- generally had very good availability from our 777 shaft. As regard to second question, I mean 777 is a little bit like myself, it’s getting a bit older. So 2013 was the peak production year for 777 and we expected the tonnage to come off a bit as we go forward. I mean we’re developing accessing areas for example below the shaft bottoms for those – higher, longing trucking distances and we generally say we get less flexibility in our mine plan going forward, but we think we can hold the line in round about where we are right for a few more years, but it will be a ever increasing challenge.

[Operator:]

Your next question comes from Cliff Hale-Sanders of Cormark Securities. Please go ahead.

[Cliff Hale-Sanders:]

I just had a question on the balance sheet just because it’s been brought at the few times with me, I wondered if you could review your comfort level that you have corporately in terms of your liquidly. Obviously, you provided to us that you have current liquidity available about $600 million, spending to of $300 million, but clearly you’re going to have a working capital needs, some ramp up capitalize losses from Constancia. Just wondered, if you could review the other sort of comfort level that you have in terms of how much cash you’d like to keep on the balance sheet just so that we can address this issues, I don’t think it’s a big issues, but I know I have been asked at multiple times, so you could run through you comfort level that will be great.

[David Bryson:]

With regards to liquidly, I think you’ve sort of set out some of the key moving parts pretty well. We do expect positive cash flow from the businesses in Manitoba now that Lalor and Reed are complete. And we do expect some cash flow from initial production from Constancia, just given the high ore grade that we’re going to see initially, so being at minimum cash or minimum liquidity is probably the better way think about it. I think we are still comfortable that we should be around $300 million of minimum liquidity as we approach that point likely late in first quarter or early in the second quarter based on the ramp-up schedule that we currently we have and we think that level of liquidly should be ample for the forcible requirements.

[Operator:]

Your next question comes from the line of Oscar Cabrera, Bank of America Merrill Lynch

[Oscar Cabrera:]

If I may just take the previous question a step further, this is a significant increase in EBITDA, in free cash flow in our estimates. Assuming the world doesn’t come to an end like the market seems to think today, just trying to establish the priority level in terms of reinstating a dividend versus reinvesting the money that you’re getting from your projects now into Lalor or the potential start of construction in Rosemont?

[David Bryson:]

To answer your question, dividends and reinvesting in new opportunities will be really driven by our cash flow our existing portfolio of assets, so we really need to establish the steady state haul for these mines before we visit our divided policy and investing the substantial capital in Rosemont or any other opportunities. It doesn’t mean we’re going to slow the progress on permitting at Rosemont. Once we have the permitting there, we will try to move that project forward as quickly as possible once we have the permitting we have discretion in terms of timing and staging the capital expenditures. So we won’t strain the balance sheet for dividends and for new projects.

[Operator:]

(Operator Instructions) And you next question comes from [Robert Vaughn] of Jefferies. Please go ahead.

[David Jolkovsky:]

Hi, guys, this is a David Jolkovsky. So I have a handful of questions the one relates to Constancia. I think in the slide -- and I apologize I hopped on a minute late, if you covered these, I think you said that commercial construction -- commercial production rather would begin in the second quarter of 15, just want to understand is that 60% of full capacity and at that time do you anticipate being cash flow positive at Constancia or just give a little bit of color around cash cost around 2Q15?

[David Bryson:]

We -- our accounting definition for commercial production on Constancia is going to be 60% of full production on average over three months and we expect to reach that milestone some point in the second quarter at that point in time roughly give or take a month we’d expect to be free cash flow positive from Constancia taking everything into account in terms of cash cost for next year. I don’t think that we want to speak to that until we provide formal guidance and completed our budget process for next year.

[David Jolkovsky:]

So then in terms -- of assuming your cash flow positive from Constanica in 2Q that would imply that -- and I think you said as earlier that but 1Q, 2Q is kind of the low point of total liquidly $300 million, can we safely assume than that liquidity will improve upon commercial production at Constancia?

[David Bryson:]

Right.

[David Jolkovsky:]

Okay and then is it safe to say that you’d be entering 2016 in a maybe at or near capacity? Or are we looking at more of like a 12 month type ramp to full capacity from the 60%?

[David Bryson:]

Sorry, can you repeat the question?

[David Jolkovsky:]

Yes, basically just trying to get a sense for how quickly you think you could get Constancia up to full capacity as supposed to getting the commercial production?

[David Bryson:]

Well as we said we expect to be in commercial production by Q2 and would anticipate having hit full production by round about the end of Q3.

[David Jolkovsky:]

And then again I apologize, most of you went over this. But have you sort of [circled the wagons] in terms of where think CapEx might be in 2015? And then sort of to follow up on that, does the capitalized interest start flowing through the income statement instead of the cash flow statement, upon achieving commercial production?

[David Bryson:]

The interest will flow through the P&L as soon as we declare our commercial production at Constancia.

[David Jolkovsky:]

And then in terms of your ‘15 thoughts on CapEx.

[David Bryson:]

I think that we’re going through the budget process right now. And so we’ll provide guidance on CapEx for 2015 once we’re through that likely early or next year.

[David Jolkovsky:]

Okay and then David, I think you mentioned to another caller that you think minimum liquidity would be somewhere around $300 million. I mean worst case scenario let’s say copper drops 275 or something to that effect. Is there an order in which you would either raise additional liquidity in terms of -- would you prefer debt or equity? And what is your sort of minimum comfort zone dollar wise?

[David Bryson:]

I think that as we say $300 million leaves us fairly comfortable in terms of the potential contingencies that could arise. Constancia is a low cost producer particularly with the high grades and softer ore that we have in the first few years. So I think even at weaker copper prices than what we’re currently seeing I think we’d still be comfortable in being in a free cash flow positive situation. If copper drops precipitously tomorrow, we still do have a little bit of hedging left over on our 2014 copper sales. But really there is only about one quarter remaining in 2015 before we reach minimum cash. So I think as we -- now that we’ve completed Lalor, we’ve completed Reed, I think that our corporate revolver which is really keyed of off the Manitoba assets. I think that we’ll probably be looking at when is the appropriate time to be resizing the corporate revolver upwards and we haven’t made any decisions on that. But I think that there is certainly additional capacity, if it’s necessary and if it makes sense for the business to look at some additional opportunities there. But I think if we did bring on additional low liquidity, we’d really see it as just a bridge to the free cash flow that we think is highly likely even if in a softer metal price environment.

[David Jolkovsky:]

And I apologize, one final follow up. Its great point about the copper hedge or the hedges I apologize I don’t recall at what price they’re at. And also do you have anything in terms of 1Q ‘15 in place?

[David Bryson:]

Our copper hedges and we also have hedges on our zinc production. So copper is about 70% hedged in the fourth quarter zinc about 40% hedged. The copper has a floor price of $3 a pound, the zinc has floor price of $0.80 a pound, so obviously zinc is not likely to kick in but we do have some protection on the downside with copper. We do not have any hedging in place for 2015 and have no plans to implement anything.

[Operator:]

And there are no further questions at this time. I would now like to hand the call over to Mr. David Garofalo for closing remarks.

[David Garofalo:]

Well thank you everybody for attending and we’ll talk to you soon.

[Operator:]

Ladies and gentlemen this concludes the conference call for today. We thank you for your participation. You may now disconnect your line and have a great day.