Hudbay Minerals Inc.
Q4 2015 Earnings Call Transcript

Published: 25 Feb 2016

[Operator:]

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the HudBay Fourth Quarter 2015 Results Conference Call. At 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 questions. [Operator Instructions] I would like to remind everyone that this conference call is being recorded today, February 25, at 10

[Candace Brule:]

Thank you, operator. Good morning and welcome to HudBay’s 2015 fourth quarter results 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 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, Rob Winton, 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 risk 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 many are aware, effective July 1, we converted reporting to U.S. dollars and therefore all amounts 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. I am pleased to have the opportunity to speak to you today as HudBay’s new CEO. We have a clear strategy and a strong track record of execution and I look forward to the challenges and opportunities that await us. That said, my appointment as CEO has coincided with the marked deterioration in both the current copper price and expectations for the copper pricing in the short term. As such, the immediate focus for HudBay has turned to enhancing our liquidity position with growth being put in the back burner until this commodity cycle picks back up. Our assets have been twofold, firstly on implementing immediate operational improvements and secondly on restructuring our current credit facilities. In January, I trade all of our business units with [Indiscernible] to reinforce our changed objectives for 2016 and to identify efficiency improvements in both our operations and projects. This exercise has reaped substantial rewards. In addition, working with David Bryson as CFO we have successfully amended our credit facilities to provide more flexibility in our capital structure. I believe that these actions now leave HudBay well positioned to both write out the current and commodity price environment and to be ready to refocus on growth when conditions improve. 2015 was very much a transitional year for HudBay, with a very successful ramp-up at our Constancia mine improve achieving commercial production in the second quarter of 2015 and full production in the second half of the year. The result of logistical issues related to concentrate transportation improved and returned to normal working inventory levels at the end of the year. In Manitoba, we settled contracts with all of our unions at our operations, completed the ramp up of production at our Lalor mine and Snow Lake concentrator and acquired the New Britannia mill and Snow Lake, a low cost option to process gold ore from the Lalor mine. We achieved 2015 full year production guidance at all of our operations and met or beat cost guidance delivering set to even growth in low cost copper production. We expect to achieve further growth in copper, zinc and precious metals in 2016 and have taken actions to ensure that the company can successfully weather a period of low commodity price issues. Our fourth quarter results reflect the growth in production from our Constancia and Lalor mines. Copper sales volume increased 850% year-over-year to a record 58,700 tonnes as excess inventory was drawn down and gold and silver sales were significantly higher compared to the fourth quarter of 2014. Cash cost net of byproduct credits were $1.24 per pound of copper produced in the fourth quarter and $1.14 per pound for the full year down 21% from $1.45 per pound in 2014. Cash cost in the fourth quarter were affected by elevated treatment and refining charges and trade cost improved as sales volumes exceeded production due to the drawn down of excess copper concentrate inventory. As a result, the consolidated cash costs were approximately $0.23 per pound higher in the fourth quarter than they would have been if Peru sales had matched production. Fourth quarter revenue increased three fold year-over-year to more than $336 million and operating cash flow improved substantially to approximately $106 million compared to a cash outflow of $2 million in the fourth quarter of 2014. Although cash flow was enhanced with the sale of excess copper concentrate inventory during the quarter, some of the cash related to late December sales was received in early January. This is reflected in our year-end liquidity of $288 million which includes approximately $54 million in cash and cash equivalents and $46 million in short term accounts receivables as well as availability under our revolving credit facility. During the fourth quarter of 2015, we recognized enough to tax impairment of just under $200 million in Constancia, as a result of lower expected copper prices. In addition, an after tax impairment of $114 million was recognized in Rosemont mainly as a result of lower expected copper prices and an expected delay in the start of construction. Engineering and permitting activities at Rosemont are progressing as expected. We remain committed to advancing Rosemont with limited spending during 2016 and expect it to be one of the first new copper projects to be built when prices and market conditions improve. As a result of these non cash impairment charges, we reported a fourth quarter net loss of $255 million or $1.09 per share. Following last year’s ramp-up to Constancia and Lalor, we began reviewing companywide efficiencies and improvements. To date, we’ve identified more than $100 million of spending reductions compared to 2016 estimates while maintaining our production guidance. Operating cost savings has been identified which are expected to reduce 2016 operating and general and administrative costs by approximately $55 million. All of these operating cost reductions are considered to be sustainable assuming the input prices remain near current levels. While sustaining capital expenditures in 2016 have been reduced by approximately $50 million, which includes the deferral of approximately $20 million in Constancia tailings dam construction cost into 2017. It is important to note that even with this deferral, 2017 spending is expected to be lower than revised 2016 levels. 2018 spending is expected to be substantially lower given the completion of the initial Constancia tailings dam raise in 2017 and lower capitalized development spending at the 777 and Reed mines. Based on the detailed review of our operations, we are confident that these cost reductions are achievable and we are continuing to pursue initiatives to further optimize our operations. In addition to the cost reduction initiatives, we expect further improvements to our liquidity position through the harmonization of our credit facilities. Our objectives were twofold; to defer the amortization of approved facility of approximately $50 million on each of 2016, 2017 and 2018 and also to address the covenants in our Canadian facility. With strong support from our lead banks, who maintained or increased the commitments and other existing vendors we currently have commitments of $500 million to the harmonized facilities. We are continuing to work through the syndication process with other lenders to reach the total facility size of $550 million. As a result of these amendments, both facilities will now be repayable through in March 2019. As a result, we have deferred approximately $50 million of 2016s scheduled principal repayments related to the Peru Facility in addition to extending this on both facilities. Both facilities will have the same financial covenants including consolidated senior secured to EBITDA of no more than 3.25 times, which we would expect to meet comfortably at current metal prices even the facilities were fully drawn down. These revised financial covenants provides us with more flexibility and ensure that we’re well positioned should copper prices remain low for an extended period. Closing of the amendments is expected in March 2016. In Peru, during the fourth quarter of 2015 mining operations continued as planned and cost optimization is underway. Equipment availabilities are within design parameters, and both loading and hauling efficiencies remain consistent with expectations. Cost performance remained very strong with a combined unit operating cost of $8.57 per tonne in the fourth quarter and $8.41 for the full year below the full year guidance range. Optimization of plant performance remains the primary focus, as more is understood about varying ore types. During the fourth quarter of 2015, shipments of copper concentrates in the Constancia mine to the port in Matarani improved with increased trucking capacity, resulting in significant inventory drawdown to normal working levels. All of the excess copper concentrate was sold by year end. Expansion at the port of Matarani is nearing completion initially [Indiscernible] shipments from the new Pier F facility are underway. Completion of the new facility is expected to alleviate port congestion as other mines ramp-up production. Constancia's production in the first quarter of 2016 is expected to be affected by the replacement of the trunnions on both the SAG and ball mills on one of the two grinding circuits. The trunnions were damaged due to a lubrication failure during the commissioning period, and the affected line is expected to be shut down at the end of February to begin an outage of about six to eight week to replace the trunnions. During this time the second grinding circuit is expected to continue to operate normally. In Manitoba, for the fourth of 2015, production of copper and gold remain consistent compared to the same period last year while zinc and silver increased by 69% and 35% respectively, as a result of increased production at Lalor and higher zinc and silver grades at both the 777 and Reed mines. In 2015 production of all metals increased compared to 2014 as a results of increased production at Lalor and higher copper grades at Reed. We met our guidance targets for both production and unit operating costs. We are continuing to study – we’re continuing our study optimize the Lalor mine surface processing facilities and expected results by the end of the year. Our transformation in 2015 together with the initiatives we’re on plan to-date in 2016 lead us well-positioned in the difficult external environment. We believe it is prudent to maintain our optionality with our pipeline of growth opportunities at both Rosemont and Lalor. We planned to advance studies and promising this year in order to maximize the value of these assets. We’re also continuing our 11,000 meter drill program in the gold-zone at Lalor which will form the basis of an updated plan for mining and processing in the Snow Lake area. Beyond those assets our priority in this environment is to manage our business to generate sufficient cash flow from our operations to more than cover our capital spending and interest expense. With the revisions we have made to our credit facilities and the specific actions we have taken to reduce capital and operating cost, we expect to meet that objective in 2016 and 2017 and maintain our enhanced liquidity as a copper price at $2. In closing, I’m honored to have the opportunity to lead Hudbay. Our organization has demonstrated its ability to execute in the construction and ramp-up of major new mines and has a strong track record of safe and reliable alternations. We are positioning Hudbay to capitalize in these strengths and capture the opportunities to present themselves as a mining industry works through a challenging environment. With that, we are pleased to take your questions.

[Operator:]

Thank you. [Operator Instructions] We’ll move to our first question from Matthew Fields. Please go ahead.

[Matthew Fields:]

Hey, everyone. Hi, Alan congratulations on the new gig and good luck. I just want to ask, I don’t know if I caught this right what you said about sort of feature your CapEx, did you say that 2017 CapEx would be lower than 2016 despite sort of pushing some items from 2016 into 2017?

[Alan Hair:]

That’s correct. So, even with the deferrals of 2017 -- the deferrals from 2016 into 2017 forecast CapEx expenditure in 2017 will still be lower than 2016 and then will be significantly lower in 2018.

[Matthew Fields:]

Do any sort of order of magnitude or scope of those of the levels of declines in CapEx for those years?

[Alan Hair:]

We’d expect that 2017 should come in less than 200 million, but as I mentioned we still going to have. The CapEx is being deferred from 2016. As we look out to 2018, I think we would reduce spending in both the business units. We’d expect to see sustaining CapEx moving to the low 100 million range, but I think we point out that CapEx on the new facilities pace plant and the New Britannia concentrator and spending Pampacancha are not included in those estimates.

[Matthew Fields:]

Okay. Got it. Thank you very much. And then, just sort of another question focus on liquidity, I know you guys did make great strides on the facility and bringing up an amortization is a big deal. But if in the instance the copper maybe takes another like lower, what are your sort of preferred options for additional liquidity? Would it in terms of selling a minority stake in Constancia, or doing additional streaming, delaying New Britannia mill, what are kind of the options in the order of performance, if you have to get to that point?

[Alan Hair:]

Well, if we had to get to that point, our options in order of presence are obviously continue to reduce – make savings and gain efficiencies in our operations, whether that through increased production and lower cost, we think there’s still room for further improvement there, so that’s the most obvious place to tackle. With regards streaming however we wanted to do that to ideally once we’ve our better understanding of what we have it at Lalor which should be later this year. And really any – sale of any interest in our assets would be lowered on our list of preferences.

[Matthew Fields:]

Okay. Thanks very much.

[Operator:]

Thank you. We’ll move to our next question from the line of Orest Wowkodaw. Please go ahead

[Orest Wowkodaw:]

Hi, good morning guys. I just wanted to take a bit deeper CapEx going forward as well in Manitoba specifically. Can you walk through what the implications are if of differing the pace backfill plan at Lalor. What is that, due to cost maybe where your current headset is in terms of how much CapEx that could be? I think in the past you talked about something around 80 million to 100 million for that in Canadian dollars. And as well with the New Britannia what kind of CapEx that could look like? What sort of timeframe that could be spend? Thank you.

[Alan Hair:]

Orest, I can say that we’re continuing to do engineering work and I think very successfully we’ve actually are looking towards lower CapEx number of the pace plant, I think we’re indicating maybe more in the out of $50 million there. And we still doing the work in New Britannia. There’s still some metric and test work that we – that’s underway before we’re going to be able to fully understand what that number will be.

[Orest Wowkodaw:]

In that 50 million, is that Canadian or U.S.?

[Alan Hair:]

That’s Canadian.

[Orest Wowkodaw:]

Canadian 50. And if you don’t do how much does that to operating cost?

[Alan Hair:]

Maybe a different way to look at it is right now with the Post Pillar mining we’re doing and filling using rock fill we’re sort of getting somewhere around to 70% recovery on mine ability and sometimes depending on the zone of low 60% recovery and we would expect with the pace fill to move that up into the high 80s as far as recovery and mine ability go. So, we’re working through those numbers and obviously those are key numbers for our trade off studies, so as they become more clear we’ll be more transparent with them.

[Orest Wowkodaw:]

Okay. When you pull a trigger – assuming you pull a trigger on that, is that something that takes for 12 months to do or is that something you do quick -- really quickly?

[Alan Hair:]

Our target would be to have – we looking to have a pace, ideally have a pace through solutions by the end of the 2017.

[Orest Wowkodaw:]

Okay. Thank you very much.

[Operator:]

Thank you. We’ll move to our next question from Alex Terentiew. Please go ahead.

[Alex Terentiew:]

Hey, guys. I just want to explore similar question, but this time in Constancia, so basically the question is the impact of -- deferrals on future production and at that mining when do you expect the higher grade Pampacancha pit to just start adding to production and if its delayed do you have the ability to reject the Constancia mine plant at all to keep some of the higher grades, higher for longer?

[Cashel Meaghe:]

Yes. Hi, Alex, Cashel here. I guess the easiest answer is, is right now obviously we’re in a cost-cutting and capital constraint mode and so we’re focused on that. And one of the requirements of Pampacancha is an influx of capital for it to be developed. So that’s probably the biggest reason why we’re deferring it right now. In the 43-101 itself it breaks out of the grade of the Constancia as it is and what Pampacancha does give to us. So, Pampacancha itself offers the opportunity for higher grades in the future and maybe to take advantage of a recovery metal cycle should be sees one. But I think the biggest reason we’re not doing it right now is the capital that we think is associated to bring it on and having a deferred. As far as our opportunities in the near future for grade, the reason, the average grade at Constancia and the reserves about 0.37 and of course it’s a typical sort of deposit where the supergene is higher grade and we’ve been benefiting from that this year and next year. So, over the next two years we’ll see the grade gradually decline towards the average grade of the deposit. But we will be looking for recovery to bring Pampacancha and get result of boosting grade for the four years we’ll be mining in.

[Alex Terentiew:]

Okay. And the amount of capital to bring public content and then understanding there are some community payment, some roads and some stripping there, but can you quantify that at all?

[Alan Hair:]

I think the best think what we’re going to do we get this question quite a bit, we’re going to – we’ve been doing some work on it, so we want to publicize it. So probably near the end of this year we’d looking to disclose the new 43-101 or a new technical report for Constancia that will give – will breakout Pampacancha sort of modular fashion so it can be float [ph] around and you can figure out how it would fit in different places.

[Alex Terentiew:]

Okay. Great. Thanks. And just one other question and sticking with Constancia, With responders now ramping up and so do you expanding. Can you just elaborate a bit for us on the concentrated transferred logistics specifically if the additional congestion is causing any problems or is the infrastructure in place proving to be sufficient to handle all the additional tonnes?

[Alan Hair:]

Sure. There are two places to look out. One is congestion of the road, the road traffic itself and actually road traffic we imagine would be both the same or less during the list of farmers [ph] construction period and during our construction period there is considerably more traffic on the road. With that being said, many people focus on the port of Matarani, the existing load out facility is Pier C, that is where most of the congestion has been focused, but in the last two weeks [Indiscernible] officially now moved and commissioned in to their Pier F warehouse and very shortly were told those farmers will be moving over there and also [Indiscernible] guy and the successful loading of the [Indiscernible] ships of late have indicated to us that that congestion will no longer be an issue.

[Alex Terentiew:]

Okay. Great. Thank you.

[Operator:]

Thank you. And we’ll move to our next question from Greg Barnes. Please go ahead.

[Greg Barnes:]

Thanks. It’s just a follow-up to the pace backfill question, do you just have a solution by the end of 2017 that doesn’t mean you’d have it in place and ready to go by the end of 2017 as same in the current environment?

[Alan Hair:]

We would hope to have in place and ready to go by the end of 2017.

[Greg Barnes:]

So that will require $50 million of CapEx next year then Alan?

[Alan Hair:]

Yes. But our view would be that when we consider potential streaming transaction to fund them, things like that if conditions haven’t picked up.

[Greg Barnes:]

Okay. I see. So you’ll have the better sense on Lalor gold inventory by the end of this year and then say 2017 you feel extreme to fund the pace backfill at the Constancia plant?

[Alan Hair:]

Yes. On the refurbishment of the New Britannia concentrates we think that when we run the numbers we’ll be issuing a technical report later this year when we run the numbers, I mean, we’re going to have a good growth story there at Lalor, a very neat relative well capital cost option to optimize the whole Lalor mining processing in general. The acquisition of new Brit [ph] is really well for us.

[Greg Barnes:]

At the end of this year we got New Britannia pace backfill technical studies, some idea what that’s going to cost stream sale over next year and then…?

[Alan Hair:]

Yes. I mean the big issues to get the gold-zone drill that, so the 11000 meters of drilling budgeted for this year. And then we need to get that done. Hope the result comes to the numbers and we’re looking to upgrade that to reserve classification and issue a new technical report.

[Greg Barnes:]

So that lower gold-zone at Lalor, that is purely gold as far as we understand it right now?

[Alan Hair:]

Gold zone 25 is actually what we focused on in 27 and 25 itself is principally gold, there is some associated sulfide of course, but I think what is not well understood is we’ve actually cross the gold zone on our on our current levels in our current mining, So we’re drilling off at a definition portion with 11,000 meters. So we’ve been in there we have doing some detail geological mapping, structural mapping, so we’re getting a very good understanding of the gold zone as we are going along and we will be able to do things like pilot testing in various -- and drift testing along it. So, I think we will have by the end of the year a very, very good understanding of the controls on this gold zone.

[Greg Barnes:]

What kind of grades are you seeing there, Cashel? What was in the original 43-101, you did on this? I know you had conceptual in the third gold.

[Cashel Meagher:]

Yes. We had a range of grades, so we believe there were somewhere probably between the four to six gram area and that would be a resource grade, so we need to understand the mineability and the dilution associated with that?

[Greg Barnes:]

Okay. Good. Thank you.

[Operator:]

Thank you. And we will move to our next question from Farooq Hamed. Please go ahead.

[Farooq Hamed:]

Hi, guys. Good morning. My question’s really around the credit facilities. Maybe just the first one, so it looks like the revised facilities are going to go to $350 million in Canada and $200 million in Peru from $450 million before. What was the reasoning behind that shift in the size of the facilities and given that Peru probably has more approved as a more value now in your portfolio, why is the Peru facility still smaller than the Canadian facility?

[David Bryson:]

Hey, Farooq. It’s David Bryson. The reason for this structure that we ended up with is mainly driven by constraints in our bond debenture that have limitations on the baskets where we can incur indebtedness and the ability to sort of provide secured guarantees across the group. So, as you are pointing out, Peru is where a lot of the asset value is and so moving from 150 to 200. 200 is essentially where the limit is in terms of our ability to incur that indebtedness in Peru and then the balance of the facility would be available in Canada. From our perspective, it’s more or less transparent. It’s more of just a security issue for the lender group. We can move cash around the system as we see fit. So whether it’s 150 and 400 or 200 and 350, it isn’t really relevant from our perspective.

[Farooq Hamed:]

Okay. I guess the reason why I’m asking the question is that as we go out to when those facilities will potentially mature, I guess in March of 2019; the Canadian business will look quite different, with the 777 being right to the end and Reed being finished. So, I’m wondering what the ability will be to, if say metal prices don’t change in the next little while, would the ability will be to kind of revise your or go forward your facilities at that point? I know it’s quite ways in the future but I’m just wondering what’s the thought process, or is that too far out to really discuss at this point?

[David Bryson:]

Look, the bonds mature in October of 2020. So, we’ve got quite a bit of runway and our expectation would be that with operational improvements that we can generate additional cash flow from the business as sustaining CapEx starts to drop off later in the decade. But ultimately, we are strong believers that cooper supply deficit is going to emerge if $2 cooper is sustained for three or four years. There is just too much production that’s going to be uneconomic. It is going to run out of cash at those levels. So, our expectation is that we will find ourselves in an environment where refinancing the bank debt and refinancing the bonds will not be difficult.

[Farooq Hamed:]

Okay. Okay. And then just one last question. So, you see that right now there is commitments of $500 million and ongoing discussions as you say it will go to $550 million. What’s the sticking point as to why it hasn’t been to $550 million already, given the old facilities totaled $550 million? What’s the pushback you are receiving, if you can discuss that?

[Alan Hair:]

Yes. I can’t get into too much details. You would appreciate it. I think that it’s fair to say that we’ve had very good support from our lead banks, from all of the Canadian banks that are in our facility. We are seeing sort of some lenders in the natural resources space that are struggling with some of their book. There has been media reports as to some banks pulling back a bit from their natural resources lending. We are seeing other lenders take interest in the facility. This has all come together sort of in fairly short order. We identify the opportunity to consolidate the facility’s move to this consolidated secured debt to EBITDA ratio approach, sort of mid to late January and have been working to get the syndication done on that. And just to say, we are pleased with the support that we have. At $500 million, we are still much better off than we are with the old facilities. Clearly, the covenant issues are go way, with the revised covenants structure and given the amortization of the Peru facility in the old facilities who would have been down $50 million by the end of 2016 regardless. So, I think that there is a number of options that we have for getting from $500 million up to $550 million. But regardless, we fully expect to close with at least $500 million and if we can get the other $50 million in that would the icing on the cake for us.

[Farooq Hamed:]

Okay. Great. No, thanks. That’s helpful and good job on amending those facilities and getting the covenant release.

[Alan Hair:]

Thanks.

[Operator:]

Thank you. And we will move to our next question from Stefan Ioannou [ph]. Please go ahead.

[Unidentified Analyst:]

Great. Thanks very much. Just a question, back on Constancia, just more of a curiosity. It was good to see the recovery up in Q4 there despite the head grade being a bit lower than Q3. And I’m just wondering is that a reflection of the ore fleet being more “hypogene” in nature, or are you seeing notable improvements just in how the plants running in general to get those higher recovery rates even at lower rates?

[Alan Hair:]

Yes. I think it has to do with ore makeup. Earlier on in the year, we were treating more of a ratio at a higher percent oxide. Of course in a total copper calculation for recovery, that impacts recovery quite a bit because of course our floatation selves aren’t designed to float oxide into a concentrate. So, yes, it is. And we can expect this year some fluctuation of the recovery because we will be going back in an area called phase two where we will have to go through some oxides zones again. But we feel we have very good control on it now going forward and we’ve improved on the type of reagents mix we are doing and so we are getting a good handle on ore type to recovery now for cooper.

[Unidentified Analyst:]

Okay. Great. Great. And just remind me, is it sort of the first half of 2017, when you finally get through all of sort of oxide and mixed transitional stuff and you are into sort of “hypogene” on a go-forward basis?

[Alan Hair:]

No. The Constancia pit is a six phase pit.

[Unidentified Analyst:]

Okay.

[Alan Hair:]

And so in different places, we do push backs and whenever we do a pushback and we are starting to strip down from the surface again, we get back to get this oxide stuff.

[Unidentified Analyst:]

Okay. Fair enough.

[Alan Hair:]

So it’s a function of where the push backs are and what sequence we are doing the push backs in.

[Unidentified Analyst:]

Okay. Got it. Got it. Thanks very much, guys.

[Operator:]

Thank you. And I will move to our next question from Charles Wardlaw [ph]. Please go ahead.

[Unidentified Analyst:]

Hi, guys. I was wondering if you could provide additional color or comments under the $12 million of refundable tax that build taxes in Peru. You mentioned expecting to receive it this year. Is there a specific timeline that we should be looking at, or any form of comments you could add that would be great? Thank you.

[Alan Hair:]

Sure, Charles. That $112 million is a combination of Peruvian IGV that was incurred during construction that under the Peruvian rules gets drawn down as we export cooper over time and then there is a component of it that is just sort of normal course. We pay IGV on purchases and then get credit back on that as we sell cooper. So, our expectation is to have sort of working capital release if you will at current cooper prices and sales expectations in the $40 million to $50 million range in 2016 and then maybe another $20 million or $30 million in 2017 by which point in time, we would expect them to be fully down to sort of a normal run rate.

[Unidentified Analyst:]

Okay. Perfect. Thank you very much.

[Alan Hair:]

Yes.

[Operator:]

Thank you. [Operator Instructions] And we will take our next question from Oscar Cabrera. Please go ahead.

[Oscar Cabrera:]

Thank you, operator. Good morning, everyone. Just curious about your all-in sustaining costs. Towards the end of last year, we had talked about under $2 a pound on cooper or all of the operations with Manitoba around $1.85 and Constancia $2. And then Constancia dropping to about $1.60 a pound after you finish the tailings. Within the cost savings that you are forecasting now and the shift in CapEx, what do those look like in 2016 and then ’17?

[David Bryson:]

Oscar, with the cost reductions and our CapEx reductions and deferral side, I think we expect sort of both Manitoba and Peru to be in the mid $1 range on all-in sustaining costs and probably being in that range, maybe a little bit lower as we head into 2017. Obviously, Manitoba’s numbers significantly impacted by the by-product credits that we got on zinc and gold given that those are the primary products from Lalor. But in Peru, we do expect to see all-in sustaining costs substantially below $2, as a result of the works that’s been done in particular to reduce operating costs.

[Oscar Cabrera:]

Right. Thanks David. And assuming -- and this is -- you talked about the $55 million in savings to be sustainable right. So that’s -- if oil process don’t go up and then the rest of the consumers, you will be at about a $1.50 going forward. Is that right?

[David Bryson:]

Yes. I mean just to be clear, so we are talking about the same thing when -- we are thinking about that. We are adding to cash costs, the sustaining CapEx and adding the royalties at the business unit level, obviously business unit of the G&As are already included.

[Oscar Cabrera:]

Right. Yes. This is clear. And then on Rosemont, not that I’m surprised but I’m a little bit surprised that you are still spending money there. I can understand the concept of getting all what you need to move forward with the project and increase the optionality. But if push comes to shovel those $30 million, are you going to spend them in the project?

[Alan Hair:]

I think Oscar, I mean if there was a severe change in the market environment, we might reconsider but right now we see moving the project alone through permitting and completing the DFS is the best way to realize value will be a really good shovel ready project that is just sitting there waiting for the market conditions to improve. We want to try and maintain a certain amount of momentum to keep the project moving along. We think we’d lose value if we just stop dead in these tracks. But obviously, if things took a severe turn for the worse then that’s always an option.

[Oscar Cabrera:]

Okay. Great. Congratulations on the move, Alan and we look forward to working with you. Thanks everyone.

[Alan Hair:]

Thanks, Oscar.

[Operator:]

Thank you. And we will move to our next question from Lorrie Baulker [ph]. Please go ahead.

[Unidentified Analyst:]

Hi, guys. I just had a quick question. In regards to the near-term production, have you guys thought about any sort of downside hedging just to protect the liquidity that you’ve put in place with what you just said about where all-in sustaining costs are clearly, you will have to more or less off for everything to go down but just trying to protect from the covenant and liquidity issues, which I know you fully have taken care of and which we are really happy to see but I just wanted to hear your thoughts on that?

[Alan Hair:]

Hi, Lorrie. We do maintain a hedge book to manage the quotational period risk in our copper concentrate sales. So, we do ensure that once we book a sale that there is no residual copper exposure associated with past sales. But at this point, we do feel like we are seeing some green shoots with respect to cooper. I think, as you’ve alluded to, we believe that the best hedge against low copper prices is to have low cost production and that’s what we are delivering with the cost reductions that we are talking about today. So, we are not currently planning on a major hedging program. We do think that cooper could chug along at these levels for a period of time. But we really don’t think that $1.75 or $1.50 cooper would be sustainable for an extended period of time. Those sorts of levels, we believe would necessitate pretty sharp supply side response would rebalance the market in a hurry.

[Unidentified Analyst:]

Okay. And then the covenant, the secured debt-to-EBITDA, is that a maintenance covenant or incurrence?

[Alan Hair:]

That’s a maintenance covenant in the facilities.

[Unidentified Analyst:]

Okay. Okay. Great. Nice work getting that off. Taking care of it. Thanks a lot.

[Alan Hair:]

Thanks.

[Operator:]

Thank you. It appears there are no further questions at this time. Mr. Hair, I’d like to turn the conference back to you for any additional or closing remarks.

[Alan Hair:]

Thank you, operator and thank you all for participating. I look forward to connecting with you on a more regular basis going forward. Thanks.

[Operator:]

This concludes today’s call. Thank you for your participation.