Hudbay Minerals Inc. (HBM) Q3 2012 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to the HudBay Third Quarter 2012 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 for analysts and institutional investors. [Operator Instructions] I would like to remind everyone that this conference is being recorded today, Friday, November 02, 2012, at 10 a.m. Eastern Time. And I would now like to turn the conference over to Mr. John Vincic, Vice President of Investor Relations and Corporate Communications.

Thank you, operator and good morning and welcome to HudBay’s 2012 third 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 David Garofalo, HudBay's President and Chief Executive Officer. David will be joined by David Bryson, our Senior Vice President and Chief Financial Officer; Alan Hair, our Senior Vice President and Chief Operating Officer; Cashel Meagher, our Vice President, South American Business Unit; Brad Lantz, our Vice President, Manitoba Business Unit; and Ken Gillis our Senior Vice President, Corporate Development for the Q&A portion of the call. 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. Lastly, please be reminded that currency amounts discussed on today’s call are all in Canadian dollars unless we indicate otherwise. And now I’d like to pass the call over to David Garofalo. Dave?

Thanks, John. Good morning everyone. During the quarter, we continued our track record of steady cash flow generation from our underlying business in Northern Manitoba. The consistency of this business, coupled with the completion of 2 transactions that enabled us to secure $1.25 billion in funding, is expected to allow us to advance our production growth in all of our key metals over the next 3 years with 3 mines now under construction. By backing these projects along development pipeline, we have accelerated the company’s transformation into a leading diversified producer with long life, low cost operations in the Americas. We also continue to be a predictable operator as we remain on track to meet our production and cost guidance for the sixth consecutive year. We reached a major milestone in August at the Lalor project near Snow Lake, Manitoba with first ore production. To-date, we have hoisted approximately 30,000 tonnes of high-grade zinc ore. These grades are consistent with our expectations as we will be mining zinc-rich zones in the early years at Lalor. The development of our Reed Copper Project is also progressing well with the completion of the portal trench excavation during the quarter. The project remains on schedule and we expect initial production by the fourth quarter of 2013. The Constancia project is advancing well in many fronts following a formal go ahead decision in August. We also continued our exploration program at the project which continues to demonstrate the growth potential at the high-grade Pampacancha reserve. Total revenue for the third quarter of 2012 was $144.7 million, which represented a decrease compared to the same quarter last year, mainly because of lower sales volumes as a result of a large draw down of unusually high copper concentrate inventory in the third quarter of 2011. Year-to-date 2012 revenue was $521.6 million. Operating cash flow was $21.5 million for the third quarter of 2012, which represented a decrease compared with the same period in 2011, mainly as a result of lower sales volume I mentioned earlier. Year-to-date 2012 operating cash flows were $133.2 million, which also decreased compared to the last year. Our cash and cash equivalents increased to approximately $1.5 billion as at September 30, 2012, driven mainly by the net proceeds from the long-term bond financing and the precious metal stream transaction. Our operating team delivered another quarter of on-target performance; they did so with continued exceptional safety performance and cost efficiency. Our third quarter ore production at our Manitoba business was 20% lower, compared to the same quarter last year, due to the planned permanent closure of the Trout Lake mine in June 2012, offset partly by the start-up production at Lalor. We met our initial production target at Lalor on-time and on-budget with first ore in August. Overall, mine operating costs per ton were 15% lower than the same quarter of last year, as reduced development costs at the Chisel North mine, which permanently ceased operations as planned in September, were only partly offset by higher costs at 777. Our overall contained metal and concentrate production and unit operating costs for our mines and concentrators remain comfortably in line with full year guidance. After beginning initial production at Lalor during the quarter, we remain on track toward achieving our first full year of production from the main production shaft in 2015. We also expect to reach commercial production for accounting purposes from the initial workings at Lalor in the second quarter of 2013. We have invested approximately $305 million of the $704 million construction budget on the project to September 30, 2012. We have also entered into an additional $76 million in commitments for the project. Underground mobile equipment was delivered during the quarter and we are now in the process of commissioning the fleet. The Chisel North workforce has been transitioned to Lalor and has established ore faces on the 810 and 825 metre levels. The contractor is continuing to ramp from the 840 metre level to the 910 metre level and will develop to the 910 metre production shaft station. The main production shaft is now sunk to approximately 325 metres and is about 33% complete. Lalor ore will be processed at the nearby Snow Lake concentrator until completion of the production shaft and new concentrator. A new copper flotation circuit was installed and commissioned in the Snow Lake concentrator designed to maximize copper recoveries from initial Lalor ore production. Basic engineering for the new concentrator is ongoing with value engineering reviews and design optimization underway. We have placed orders for the surface crusher and the SAG and ball mills, and delivery of these items remain on schedule. We have also submitted an application for an Environmental Act licence for the Lalor, which will allow for production from the main production shaft. We expect to submit applications for Environmental Act licences for the new concentrator and tailings facility expansion in the fourth quarter of 2012 and 2013, respectively. After our board approved a USD 1.5 billion investment in August, the Constancia project began full scale construction. We have invested approximately USD 154 million on the project to September 30 and have entered into an additional USD 322 million in project commitments. Prior to receiving full board approval on the project, our team achieved many accomplishments to help advance Constancia toward a construction decision. First, we completed the front-end engineering and design work and we were granted the principal beneficiation concession or construction permit in June 2012. We have also completed a 2,100 bed camp, which is scheduled to expand to 3,000 beds by the end of the year to accommodate our peak construction workforce. Mobilization of the EPCM contractor is complete and the plant site earthworks are underway. Our major earthworks contractor is also fully mobilized and is currently constructing the tailings management facility, haul roads and water diversion infrastructure. We have also awarded a contract for the concrete installation for the plant construction. Geotechnical drilling and sampling is complete and modeling of updated hydro geological testing is continuing with an updated model expected in mid-November 2012. Major long lead items are secured and include mills, crushers, flotation cells, pumps, regrind mills and mine equipment, including trucks, shovels and drills. Bids have been received from multiple electrical power providers and the costs and availability are expected to fall within operating cost budget assumptions. We also executed a contract for the construction of the 70 kilometre power transmission line from Tintaya. The principal port operator has provided assurances that Constancia concentrate shipments can be accommodated and discussions are currently focusing on optimizing the storage and loading methodologies. Relocation of the 36 affected families is well underway with the construction of new housing in progress. We expect all families to be relocated by the middle of next year. The Constancia development schedule contemplates 9 quarters of construction, with initial production in late 2014 and full production commencing in the second quarter of 2015. On the exploration front at Constancia our focus has been on expanding the current resource outside the known reserve pit shell and we have been successful in achieving that goal so far. Two drills are focusing on infill drilling and step out drilling at Pampacancha. A step out drill hole approximately 50 metres west of the established resource demonstrated that there is mineralization outside the known resource by intersecting 2.03% copper and 0.88 g/t gold over 60.4 metres. Step out drill hole PO-12-110, grading 0.59% copper and 0.33 g/t gold to the east, demonstrates the deposit can also be better defined in that direction. Expansion of the known reserves at Pampacancha will provide HudBay with an opportunity to further optimize the mine plan with enhanced grades in the early years of production. A third drill is now focused on howgee [ph] geological and geotechnical holes providing data to the Pampacancha feasibility study. Favourable geology had been intersected in several drill holes at the Chilloroya South targets showing various thicknesses of mineralized skarn. Compilation of data from this exploration program is underway and assays are pending. Three drills are scheduled to continue at the project for the remainder of the year. At our 70% owned Reed copper project our focus last quarter was to prepare the project site for portal development. During the third quarter, we completed the portal trench excavation. Of our $72 million capital construction budget for Reed, we have invested approximately $16 million on the project to September 30, 2012 and we have entered into an additional $13 million in commitments. We have completed the installation of the new office and dry complex, installed power to the ramp and site, poured the foundations for the shop and warehouse, and installed a ventilation fan, silencers and heater at the portal in preparation for ramp development and onset of winter conditions. Our workforce of development miners, electricians and mechanics are staying at an onsite camp. Necessary materials and mobile equipment for initial ramp development is onsite, and the first portal development round was taken in October. We are in the process of preparing the Environmental Act licence application for the Reed copper project and plan to submit it to the Provincial Government in the fourth quarter of 2012. The project is on schedule and we expect initial production at the Reed copper project by the fourth quarter of 2013 ramping up to full production of approximately 1,300 tonnes per day by the first quarter of 2014. Our transformation into a leading mid-tier diversified producer with long life low cost separations in investment gate countries is underway and being accelerated by the progress we have made to-date at our development projects and the funding we have put in place for these projects. Production at all of our key mills is expected to increase significantly with 420% growth in copper, 35% growth in zinc and a 125% growth in precious metal production by 2015. Advancing our development projects while meeting our corporate objectives of maintaining and growing per share metrics drives our strategic decision-making. The precious metal stream transaction and long-term bond financing help fund our growth ambitions yet do not dilute our shareholder base. On a final note, I ended last quarter by taking a moment to reflect on the closing of our Trout Lake mine after more than 30 years of service. Today, I would like to acknowledge the completion of mining at our Chisel North mine which began production in 2001. Zinc grades at Chisel North were 12% higher than the same period in 2011, because of excellent recoveries from the pillars mined this year. That accomplishment demonstrates the strength and experience of our team and we are pleased to continue working with the Chisel North team, as they have already transitioned to help with the construction and early production at our Lalor mine. In closing 2 mines this year, we undertook no layoffs as we were able to immediately redeploy our very experienced people at Trout Lake and Chisel North into jobs at the new Lalor and Reed mines. I would like to thank all the men and women that contributed to the success of Chisel North and look forward to celebrating many successes at Lalor. Thanks for your time today and we are pleased to take questions now, operator.

Thank you. [Operator Instructions] Your first question today comes from the line of Tom Meyer of Scotiabank.

On Constancia, just looking for an update, what is the timeline where you would like to confirm the port agreement and also the power tariffs?

Cashel?

Tom, we believe we are -- for the power agreements, we're actually in a good position. We put out request for proposals and we had several takers, a combination of hydro and natural gas and as David said, they are falling within our budgeted estimates. So we feel we are actually in a good position of negotiations. So that’s what we are actually doing now is negotiating with the various bidders to find the best solution for the life of mine, for that process. And we are hoping, by the end of this year, or early next year that we’ll sort that one out. As far as the port goes, there is a planned expansion at the port. We are dealing with the principal port operator who is Tisor [ph] and so we are in constant discussion with them. There needs to be a port expansion for the advent of Las Bambas Cerro Verde and ourselves. However that port expansion wouldn’t be complete until 2015 Q3. So most of our efforts have been focused on between 2014, sort of Q3 and 2015 Q3 -- that one year -- how we are going to manage our concentrate. So that’s ongoing. We’ve been told verbally there is not going to be a problem handling our concentrate. It’s just how and what logistical methodologies we are going to use in the meantime while they are constructing the larger port facility. So we are hoping again by the end of this quarter or early next first quarter that there will be -- we’ll have that all sorted out.

Okay, and then on, just as it relates to the port, are they looking for any capital from you guys or are they looking just to handle just the logistic issues on their own?

No, principally we've been negotiating with Xstrata and Cerro Verde on this for some time and now included in the fray is us [ph] , but their preferred methodology is that they put up the capital and recover through their operating fees.

Okay, and then on the geotechnical work at Constancia, I understand the drilling is done. When you model, or are there any opportunities or risks with the updated information on the geotechnical or even the hydro geological front?

With the geotechnical, with the heavy civil works there are always risks associated with that and hopefully some opportunities too. And as you know, that’s where we put most of our contingency with on some of the geotechnical uncertainties, whether it be location of burrow [ph] sites or excavation. So far, we are falling within more or less our plan. We are hoping -- the major earthworks for the tailings facility are underway; the major earthworks for the bog retention dam are underway. We did come across more bogs than we thought, but we’ve actually had to move it less so we haven’t done the net benefit calculation yet on how that works out. So, but right now things appear to be on budget and that’s what we thought. We’ve had some wins, some losses and so we are figuring out those balances now and how they work out. As far as the geotechnical goes for the open pits themselves, the Constancia pit, that work is all done and the reserve holds the actual pit, a very conservative pit shell of the 40 laying back about 42 degrees. The Pampacancha pit itself, there is opportunity in the geotechnical drilling we’ve been doing. What we put into the pre-feasibility study was a conservative pit slope. But all the geotech we’ve been getting back on that and we are underway now in a feasibility study on that deposit looks as though we can steepen up its walls. As far as the hydro geological goes, we did drill the big draw down pump test hole and we are getting preliminary report back from Golder, our service providers, saying that the water balance assumptions we had made previously are slightly conservative and we shouldn’t have any water issues as far as availability.

Your next question comes from the line of George Topping of Stifel.

It seems I have another one for Cashel. On the First Quantum call yesterday, they were talking about permit gridlock in Peru; the Haguira is delayed 2 years. Are there any minor permits that you might still require at Constancia or is there any impact on drilling at Pampacancha, from permits?

Yes, we saw a bit of those comments. What I would say is that, there is always delays in permits but not to that extent for us. We do have exploration agreements with our 2 principal communities and we do have exploration permits for Constancia and for Chilloroya and Pampacancha. So on the exploration front, we are licensed to drill with the communities to access their surface rights for the next 3 years. So we buttoned up those exploration agreements this past summer. As for outstanding permits, in due course there are always permits. There are smaller permits and there are -- that have to go to -- different construction permits, different sewage permits, different water permits. There are delays on some of them but none of them are going to affect our schedule negatively. We don’t have any major delays. The major permits are well in hand, which was obviously the one we’ve been awarded which is our beneficiation concession which allows us to build our tailings facility and the plant thing. We are still awaiting the firm final mining permit, which will allow us to excavate the open pit itself. But we track that, we have a large- - we have a sort of a process we follow where we follow up with the ministries that are involved and we believe those are on track. So, as far as the mining or the construction permits go, we don’t see any of those affecting our current build out schedule.

Right, which one would you say is the closest to being on the critical path? Which one should be to looking for?

There isn’t one on a critical path right now. So what I would say is, there isn’t one. My understanding is that the nature of the Haquira permit is an exploration permit and principally often if you don’t own the surface rights of the land that you want to explore on, part of the permit states that you need to get permission from the service rights holder. And that is often more of a difficulty than getting the government permit itself.

Okay, so that’s enough. I’ll move on to Lalor, just one question. I know its early stage, but how is the ore that you are mining so far reconciling with the reserve model on tonnes and grade?

Brad?

I think reasonably well, George. It’s still again in the early stages. I think as Dave mentioned, we mined 30,000 tonnes out of the base metal line is 10 [ph] which is the zinc ore. We have been processing that at the Snow Lake concentrator, but what we’ve been doing there again is, is we’ve been processing the Chisel North zinc ore -- the remaining portion of it, blending in some of the Chisel North copper and also blending in some of the Lalor so at this point it’s a little early to say we reconciled other than just face samples are coming back along what we expected, George.

So the face samples are fine?

Yes.

Your next question comes from the line of David Charles of Dundee Securities.

A lot of my questions have actually been asked. Maybe I’ll try Constancia in a different way. Cashel, could you speak to maybe some of the positive or negative things that have happened at Constancia since you started construction. I am just wondering are some things better than you expected and are other things a little bit slower than you expected and could you maybe highlight those please?

I’ll be pretty broad in general, but I was kind of -- we didn’t schedule for delays in the labor or recruitment process. But, in the beginning it was a difficult process recruiting people with the necessary skills to build out. With the advent of some of the delays and some of the other South American projects announcement, we’ve actually done quite well in recent times recruiting critical technical people. So that would be a surprise, that was something that was more difficult at the start but now we’ve caught up with and we are sort of well staffed now I would say. We don’t have any -- we might have 1 or 2 critical positions open but we are well on our way to sourcing those. So that was something we were afraid of and we highlighted as a large risk and it’s actually the current state of the economy has helped us out. But, and it remains, probably our number one risk and it remains so, is that we do need to relocate 36 families. We were hoping to have them relocated this July. What's actually happened is we’ve been constructing the new homes and estancias for those families to move. So it’s on us that we haven’t got these things constructed in the timely fashion that we wanted to. So far it doesn’t impact our schedule, but it’s one of these things where you make a commitment to these people that you’ll move them and you’ll have their places ready and you don’t have them on time. And the reason is, is many of the larger contractors they found that the construction of the homes were too small a tender to bid on and we’ve had to go to smaller contractors and the smaller contractors are less capable of holding on to their people or building these things. So we’ve just recently gone through a new strategy where we are going to bundle the remaining of those homes and estancias or farming places up with some of our major construction items, either the truck shop or fuel bay and those types of things, such that we can expedite the process of building those. So, that would be probably one of the disappointments I had is that, we didn’t get those or we haven’t got all those homes constructed as of yet. Although just now this week we’ve constructed the first 8 of the 36 are complete. And we are continuing to build another 10 and we don’t run into a critical path until end of first quarter probably next year on the relocation process as it has it -- with the new information we have with the hydro geological drilling. So those are probably the 2 highlights. One is the advantage of having this downturn in the economy and some technical people available and then the other one is not getting some of these homes built in time.

Do you think that the local community could be a little bit -- how should I say -- frustrated with the delays and do you think that might feed back into some social license issues or have you continuing to work hard with the local communities and explain to them what’s happening?

Yes, we don’t anticipate it to move into a delay. Those houses are being built in their communities. So they see the progress, they see what's happening, they know we are putting our efforts toward it. We are in constant communication with them. So, we are managing that risk. We don’t believe that the relocation itself will amount to any sort of community sort of disapproval of the project. We are currently employing from the local community 900 people. And so, we are now their principal employer. They’ve also embarked on both communities an infrastructure upgrade with installation of sewage. So they are seeing benefits to the project already and we are getting good feedback from them.

Your next question comes from the line of John Hughes of Desjardins Securities.

Just 2 questions, one maybe David Bryson on the revenue, gold revenue, is there a change in or a delay or some type of delay in recognition of revenue given the sale of the precious metal stream? I am just wondering for modeling going forward.

Yes, John, you got it exactly right. With the stream transaction in place now with Silver Wheaton, whereas previously we recognized revenue from the copper as well as the contained gold and silver in our concentrate upon delivery of that material to the off-taker. With the stream agreement in place, the way that the accounting rules are working for that, we are not recognizing the gold and silver revenue until we deliver the precious metal credits to Silver Wheaton under the stream and relative to revenue recognition of the copper, that can be anywhere from a week to a month and a bit after revenue recognition for copper and that delay broke across quarter end this past quarter. So what we did see, the contained gold and silver in one 10,000 tonne copper concentrate parcel having split revenue recognition, we’ll obviously realize that in Q4. But this will be an ongoing issue. I don’t expect to have a significant shortfall again in rev-rec on gold and silver relative to production. But I don’t think that we want to expect that there is going to be a catch up in sales significantly in excess of production in Q4. I think this is kind of more of an ordinary course thing going forward now.

Okay, that’s great. Last question, both Lalor and Constancia when I look at your timing of spending in this quarter release versus Q2, it appears that the spending has been pushed into the future like Lalor I think in Q2, you were looking at $200 million for 2013 and now you are at $162 million. And I am just wondering is this more of a change in expected cash outlay or does it reflect a slowing of construction consciously requiring any -- like a deferral of the costs?

John, this is Alan, no, it doesn’t reflect a slowing in construction. It just basically reflects a better understanding of construction schedules and equipment procurement timelines. When we did the earliest of a capital expenditure we wanted to be conservative around the cash flow. So, as both projects progress and we get more information about more detail around the schedule, we can tighten up on the actual cash outlay projections.

Your next question comes from the line of Alex Terentiew of Raymond James.

Just couple questions. First in Q3 you guys had some leftover ore from Trout Lake that was processed, helping give a little bit of a production boost. Do you have any ore and I think you allude to this a little bit, do you expect to have any ore remaining from Chisel North to be processed in Q4 and if so just if you can help quantify that a little bit.

Brad?

Yes, Alex. There would be minor amounts from Chisel, again I think as Dave mentioned, we closed Chisel at the end of September and we have been stockpiling some copper ore since this summer in just preparation to use this ore as commissioning for the new copper circuits. So we are expecting that all of that ore will be through the concentrator by the end of November. So pretty insignificant amounts.

Okay. Alan -- I'll just stick with Manitoba on Lalor. At the mine site visit back in early October, I think the production rate to the shaft was about 600 tonnes per day. And I believe you guys were targeting around 1,200 by end of Q1 or so next year. Any update you can give us on what the production rate is now?

Well, the ventilation shaft again is kind of the name plate on it is 1,400 tonnes of rock on a daily basis which again assumed an 82% availability. So, we have hoisted 1,700 tonnes on one day. That’s the best we’ve done on it, but on average we're right now Alex, we are just under 1,300 tonnes of rock on a daily basis. The system seems to be working well. I guess if there is any issues maybe our ore is a little too fine and it does cause some sticking problems, but again that’s just normal startup wear and tear. So, all in all actually working out very well.

But I guess I mean -- maybe I am just incorrect in understanding it, but the rate of -- you are saying 1,300 tonnes per day, but of that I guess, how much is ore versus waste material? Because I believe it was 600 tonnes of ore was my understanding back about a month ago and so I’m just trying to get an idea of how quickly or how efficiently that production is ramping up at the mine?

You are absolutely right, that is the daily requirement and again, we met our first ore in August which was very close to the requirement, September again the same. I think in October, we have had some issues again just with some of the headings, but again I don’t see there is anything out of the line looking ahead. So, again to give you any burp on Q4, again I think those totals are well inline and we should be able to achieve those.

Okay.

Alex, we did forecast 86,000 tonnes of ore production from Lalor this year. And we believe we’ll be able to achieve that.

Okay. Last question, Constancia, can you give us a little bit of color on how closely capital spending commitments being signed or tracking relative to your estimates? I know your $1.5 billion CapEx is only a few months old, but what are you guys seeing so far as you actually sign documents to make commitments?

We’re going to let Alan handle that initially and then Cashel can interject after.

Yes Alex, I think it would be fair to say that so far costs have actually very closely tracked our expectations. I think Cashel alluded to earlier there has been a certain amount of -- some have slightly exceeded that, but this has been balanced out but where others have actually come in below our estimates. So far we are actually still on track with the original budget number. I don't know if you want to any provide any additional color, Cashel?

No, I think that’s right. We have had some wins and some losses. But they are been minor on both fronts and so we are more along aligned with our budget estimates.

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

Just wanted to get back to the question you had on your precious metal stream on the 777 mine. When you present your cash cost on a per pound basis, are you assuming realization on gold at $400 or are you just taking the full price and then the rest is -- is that what you are showing in your reconciliation?

Hey, Oscar, it’s David. We did not actually have any gold deliveries to Silver Wheaton during the third quarter. So it wouldn’t have affected our cash costs anyways. But, going forward our intention is to present cash costs based on the realized cash proceeds from precious metals which would be $400 an ounce gold and $598 an ounce silver. The deferred revenue recognition in our P&L is obviously non-cash and if we are presenting sort of cash cost then we don’t think it would make sense to include that.

Okay, now understood. But if you're doing matching, wouldn't that be part of it? I am not sure. It would be helpful to find out what type of amortization you guys are using as well. And then, just getting back to one of the first questions, you said there might be a delay in -- between 2013 and 2014 it might be issues with the port where there was a comment along the lines that you may have to look for an alternative. Can you discuss what are you looking at like going to another port, using a different type of transportation?

Alan?

Oscar, you may have misunderstood. In the interim period before the new port facility is built, there might be requirement to do some double handling of concentrates. So I was just looking at the optimum way to actually deal with obviously to minimize the cost. So that’s the basis of the discussion. It’s not around looking at an alternative port. We have the commitment from the port operator. They will handle our concentrate, we just want to make sure we’ll do as efficiently and cost effectively as possible.

Right, and then is the assumption like in terms of handling the material from Las Bambas and Cerro Verde, those expansions are going to be ongoing presumably you are going to be producing little bit before just about the same time that those 2 projects are ongoing, but what are you assuming in terms of port capacity and production from those 2 other projects?

It might be better if Cashel to answer that, because we've got certain views that might not be fully aligned with the port operator, but anyway, Cashel?

Yes, we know exactly what -- we talk to Cerro Verde and we speak with the Las Bambas people all the time. We all have the similar goal to have low operating cost through the port of Tacer [ph]. And like I said earlier, the port expansion is due in the third quarter of 2015 when Cerro Verde and Las Bambas have ramped up. That port is being expanded to accommodate right now, Las Bambas, Cerro Verde, ourselves and other potential clients. It is going to be oversized. In the meantime, we need to spend one year, post our commissioning to be able to get alternative handling methodologies. We are evaluating several of the methodologies for cost efficiencies, right now. And so that is what we are doing with the port, but right now our full intention and the port’s intention is that the Constancia concentrate will be shipped through the port of Matarani.

Right, that’s where the double handling comes into play, so understood. Thank you for the clarification.

Your next question comes from the line of Patrick Morton of RBC.

Hi guys. Where are we on detailed engineering as far as percent of completion at Constancia?

Cashel?

Yes, right now for the overall project, we are around 57%. The plant itself about 3 months ago went through a 60% completion. So, overall and detailed engineering we are about 57%.

And just regarding these drill results at Pampacancha look kind of interesting with some step out holes. One, what type of upside do you see to the existing reserve resource there? And two, if this becomes more of an important part of the mine plan going forward, where are we on understanding of metallurgy?

Okay, right now, we’ve just awarded our feasibility study of the Pampacancha deposit and its metallurgy and its mine design, actually just last week. So that feasibility study is now underway. We have preliminary studies on the Pampacancha and it’s similar to the skarn material that we have detailed metallurgical studies on in Constancia. We believe that if the Pampacancha deposit expands and we have every reason to believe we will expand it, because we are still open to the west and to the north -- and we also have the advantage in Pampacancha with what I mentioned previously, preferential geotechnical environment where we believe we can steepen up the pit walls. So with all of that being said, we think, with our preliminary metallurgical that we’ve done, it’s not any different than the Constancia skarn. So we don’t see any negative effects and in fact we see a benefit because so far it’s been higher grade. So the net effect of the skarn having a little ore recovery, but a higher grade, the net effect is more metal out of the Pampacancha deposit per tonne than that of the Constancia. So essentially in the future, we see Pampacancha replacing tonnes from Constancia earlier in the mine plan.

[Operator instructions] Your next question comes from the line of Matt Murphy of UBS.

Hey, just a quick one on Snow Lake concentrator with costs up around $40 a tonne. Where do you see them going as you switch on to the Lalor ore?

Brad?

We just are going through that, Matt. So, I’ll give you a range, it’s probably between $20 to $25 in that range in the short term. In the long term obviously with the new concentrate, it will be considerably lower than that.

Your next question comes from the line of Zach Zolnierz of GMP Securities.

First quick question. From Lalor, was any ore actually processed through the Snow Lake concentrator in third quarter?

No. Stockpiled and again in the third quarter, our first copper circuit commissioning was on September 27 and what we did at that point in time we were processing the Chisel zinc ore and blending in some of the copper ore. So the Lalor ore up to that point in the third quarter was just being stockpiled on the surface.

Okay, yes, I just wanted to check more from an accounting standpoint. As we look at the financials and the cash flow statement to see if there was any pre commercial production of cash flow there. But going forward, we would expect that to the next couple quarters to appear in the operating cash flow section?

Lalor will be in commercial production and exploration probably in Q2 of next year. So the revenue would go against the capital account in the interim.

Okay, that’s helpful. And second, just in relation to the debt-to-EBITDA covenant calculations, do you happen to have those handy under the senior versus the credit facility?

You mean, in terms of actuals for the Q3 year-to-date?

Yeah, just basically the LPM, because they both have slightly different hurdles, one's 3x, one's a 2.5x covenant numbers.

The debt-to-EBITDA covenant in the credit facility is net debt-to-EBITDA. So, it’s not meaningful at the moment, because we have $1.5 billion in cash relative to a $500 million high yield note outstanding with respect to the debt-to-EBITDA on the high yield notes. I think as given third quarter results, the results wouldn’t be whole lot different than our trailing 12 that was in the numbers in the Q2 high yield, though low end probably little bit softer than that. But I don’t have that number right in front of me at the moment.

Yes, I think I had about 1.9x. And then just lastly, on the CapEx on Constancia relative to the precious metal stream agreement. I mean, essentially based on the numbers, it looks like that sort of second $125 million payment is coming in around first quarter of 2013 and then the last one is by the end of the year, next year is that accurate?

Yes.

And then lastly, just for next year, any update on sort of exploration and maintenance CapEx spend? I think you gave, total CapEx for each of the growth projects, but any update there?

We will be providing definitive guidance on 2013 once we get through our budget cycle in December.

And Mr. Garofalo, there are no further questions at this time.

Okay, well, thanks everybody for participating. Have a great morning.

Ladies and gentlemen, this does conclude the conference call for today. We thank you for your participation and you may now disconnect your lines.