Hudbay Minerals Inc. (HBM) Q2 2013 Earnings Report, Transcript and Summary

Welcome to the HudBay’s Second Quarter 2013 Results Conference Call. At this time, all lines are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session and instructions will be provided at that time. (Operator Instructions) I would like to remind everyone that this conference is being recorded today, Thursday, August 1, 2013. And I would now like to turn the conference over to Mr. John Vincic, Vice President at Investor Relations and Corporate Communications. Please go ahead, sir.

Thank you, operator. Good morning and welcome to HudBay’s 2013 second 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. Accompanying David for the Q&A portion of the call will be the following, 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 and Brad Lantz, our Vice President, Manitoba Business Unit. Please note that comments made on today’s call may contain forward-looking information and this information by its nature is subject to risks and uncertainties and as such actual results may differ materially from the views expressed today. For further information on these risks and uncertainties, please consult the Company’s relevant filings on CEDAR 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. HudBay delivered another safe and productive quarter from our existing operations in Northern Manitoba. In particular, unit cost at 777 settled to historic levels in the second quarter on strong ore production and less contractor activity in operations. Also, Lalor delivered strong ore production grades in the first quarter and its first quarter commercial production. Lalor unit costs are expected to improve over the balance of 2013 as we achieve steady state production up at temporary hoist in the ventilation rates. We believe this puts us in a good position to achieve annual operating targets for the seventh consecutive year. Both the new Reed mine and main production shaft at Lalor are nearing completion on time and on budget, putting us in a position to deliver meaningful growth in 2014 from Manitoba operations for the first time, since the start up of 777, 10 years ago. With the construction of the Constancia project in Peru now we are 40% complete and detailed engineering now 90% complete, we believe we have made significant progress in all three of our development projects. However we are disappointed by capital cost increase of approximately 15% at Constancia and we have taken decisive steps to refocus our spending priorities by identifying opportunities to defer approximately one-half of this potential capital increase to Constancia into the production phase by resequencing some non-critical path components of the development plan. Deferring approximately CAD325 million for the construction of the new Lalor concentrator, by doubling the capacity at the Snow Lake plant for CAD9 million to accommodate ore from the new Lalor shaft by the middle of 2014. And reducing and deferring CAD100 million of discretionary expenditures through the end of 2014 including reductions in dividends and exploration and deferring sustaining capital expenditures. As…

Thank you. Ladies and gentlemen, we will now conduct a question-and-answer session. (Operator Instructions) Your first question today will come from the line of Orest Wowkodaw of Scotiabank. Please go ahead. Orest Wowkodaw – Scotiabank: Hi, good morning. A couple of questions, the first one with Constancia; David, can you give us a sense of what your confidence level is in terms of the timing of completing construction and startup? And how much slack is there still in the schedule to meet your year end 2014 timeline?

’:

’: ’: ’: ’: Orest Wowkodaw – Scotiabank: ’:

’: ’: Orest Wowkodaw – Scotiabank: Okay. In terms of the balance sheet, what do you have in terms of target for a minimum cash balance that you want to run with, given all the spending going on?

’: Orest Wowkodaw – Scotiabank: ’: ’:

’: Orest Wowkodaw – Scotiabank: ’:

Yes. Orest Wowkodaw – Scotiabank: Okay. Thank you very much.

Your next question will come from the line of Brett Levy of Jefferies. Please go ahead. Brett Levy – Jefferies & Company: ’:

’: Brett Levy – Jefferies & Company: Hey, David.

’: ’: Brett Levy – Jefferies & Company: ’:

’: Brett Levy – Jefferies & Company: And then after you guys, assuming you hit all your marks, you reach full production in 2Q 2015 at Constancia. Would you guys revisit the Lalor project?

’: Brett Levy – Jefferies & Company: Got it. Thanks very much guys.

Thanks.

Your next question will come from the line of David Charles of Dundee Capital Markets. Please go ahead. David Charles – Dundee Capital Markets: ’:

Your next question will come from the line of Oscar Cabrera of Merrill Lynch. Please go ahead. Oscar Cabrera – Bank of America Merrill Lynch: ’:

’: ’: ’: ’: ’: ’: Oscar Cabrera – Bank of America Merrill Lynch: ’:

’: ’: ’: ’: ’: Oscar Cabrera – Bank of America Merrill Lynch: ’:

’:

’: ’: Oscar Cabrera – Bank of America Merrill Lynch: ’:

Correct. Oscar Cabrera – Bank of America Merrill Lynch: ’:

’: ’:

So Oscar, that should allows to increase obviously the mine production in earlier than we anticipated that. We will have the shaft available for the middle of 2014 and should have the additional milling capacity to allow us to mill more material and anticipate it previously in 2014. Oscar Cabrera – Bank of America Merrill Lynch: ’: ’:

’: ’: ’: ’: ’: ’: Oscar Cabrera – Bank of America Merrill Lynch: ’:

Your next question will come from the line of George Topping of Stifel. Please go ahead. George Topping – Stifel Nicolaus: Great, thanks. Hello, everyone. Alan, maybe you could give us an indication of what production you're expecting from Lalor in 2014 if the shaft comes in a little bit earlier as you'd expect?

We had initially had about just over half a million tons scheduled for 2014 itself. We haven't quite finalized the numbers obviously this is based on estimated shaft commissioning. Brad can maybe give bit of a range.

Yeah, I think on top of Alan like it was closer to the 600,000 ton mark, but there is obviously lots of opportunity George and we have a team right now in Snow Lake that's working on that plan up to the five year plan. So almost I would say is there is certainly opportunity I think to improve on the numbers that we’ve disclosed today, but later in 2013 we should initialize our five year plan. George Topping – Stifel Nicolaus: Okay, fair enough. On Reed, are you expecting any meaningful contribution in Q4 In terms of copper from that or is there going to be right late at the end of the year?

It looks like it will be distributed fairly evenly through the quarter; we are looking at slightly less than plan so we are going to average between 10,000 and 15,000 tons per month in the last quarter. George Topping – Stifel Nicolaus: Okay and then on 777, still mining a little bit below the reserve grades there. When do you expect to see those grades increase and get through sequencing?

We should have a pickup in the second half, we did have just to add some color to that, we did have some difficulty with the paste backfill in fact at a point we were working on clearing the – they were obstructed both of them for a period of about 30 days. So we are delivering pace back underground now and with that we – but this did disrupt the mining schedule and certainly the second quarter, so that paste backfill has been going underground since mid June. So we will get back on sequence here. So we do expect those grades to turn around a little adroit in the second half. George Topping – Stifel Nicolaus: I guess that's it, thank you.

Your next question will come from the line of Matt Murphy of UBS. Please go ahead. Matt Murphy – UBS: Hi, did I hear correctly that the expanded Snow Lake processing cost is – you're thinking is around $16 a ton?

That's correct. Matt Murphy – UBS: I think was that similar to what you were expecting for a new concentrator at Lalor?

I think it was very close in that range Mathew. Bearing in mind that there is an additional $10 a ton of haulage in order to tie it to costs that are comparable to what we reported in unit cost for concentrators. Matt Murphy – UBS: Right, okay. I'm just wondering, is there any I mean, assuming – depending on your assumption on what happens with commodity prices over the next few years, is there any scenarios being looked at where you go beyond 2,700 tons per day at Snow Lake. I think if I recall, in 2010, there had been 3,500 considered as a number, any comments on that?

For the concentrator, like we said, the refurbishment, Matt, will just bring it back what it is, so there isn't much potential to upgrade past the 2,700 and again, when we originally looked at it we were basically maximizing the grinding circuit and flotation. So if you were again – if you ever considered to do anything above that, it would take quite a substantial amount of capital dollars and again, you'd be working on a mill that was built in the '70s. So the new concentrator, obviously, beside the mill, allows for the lower operating costs on the mine, there is no truck haul that allows for ease of paste backfill to the mine, so it also gives you opportunity for scale. So the new concentrator again offers lots of opportunities, really, we're just taking advantage of what was in place now and it seems to fit for us for the short-term. Matt Murphy – UBS: Yeah, yeah. Okay thanks. And just a question on the CapEex so we run at Constancia. Just wondering if you can break out, is any of that increase related to time line in terms of if you think about productivity being slightly lower than expected so far, is any of the CapEx adding labor or adding units of production and make sure you make that time line, or is it all just based on what’s been spent to-date?

I think there is obviously going to be an element of cash up cost in there as well, so suddenly you could say that some scheduling impact with it. Matt Murphy – UBS: Okay. And just on the discretionary sustaining deferrals, what kind of cap ex is that?

All we are looking at – there is a number of items, but the most significant ones are the differing the – or moving the final construction of the west side of the Tailings management facility into the post-construction phase of the projects and also just sequencing the road upgrades, those are the two big ticket items at –

At Lalor, yeah oh sorry.

Matt was your question related to the deferrals in Manitoba, those sustaining CapEx? Matt Murphy – UBS: Yeah, sorry.

Sorry okay. Yeah and that’s what Alan was referring those were expenditures of Lalor that are being differed, essentially Tailings…

No I was (inaudible).

But it is similar story at Lalor. Do you want to add, talk what the deferrals with sustaining CapEx.

Oh the sustaining CapEx deferrals, they are just relatively minor items, I mean we’ve been in this situation before we were sustaining back in decade ago where sustaining numbers have been very low and we’ve obviously caught up there over the years. So we think we are in a position just to defer and delay a whole host of relatively minor projects, there is nothing particular exciting on the list. Matt Murphy – UBS: Okay. Thanks a lot, good luck.

Thanks.

Your next question will come from the line of Alex Terentieu of Raymond James. Please go ahead. Alex Terentieu – Raymond James: Hi, guys, I've got a few more questions for you on Lalor here. Well first, will all the ore go to Snow Lake until the concentrator there is maxed out or will you start sending some ore to Flin Flon ahead of 2015?

Hi Alex its Brad. No it looks like right now certainly everything that we are producing now is processed in Snow Lake, so the matching out of the increasing concentrator capacity and the commissioning of the shaft actually times out extremely well. So I mean that is an option, it is an option for us to (inaudible) so that we do not stockpile that we process what we mined, but it looks like it all matches out right now. Alex Terentieu – Raymond James: Okay. Thank you. Is there any incremental cost into 2015 at Flin Flon that you will need to have to put into – to allow to handle the additional tons and the higher zinc content there?

I wouldn’t say so, they are just being in and in fact it would improve the situation in probably lower cost, so on a unit cost base this should help us if anything.\ Alex Terentieu – Raymond James: Okay, thanks, just a couple more. Actually I just want to make sure then, I guess with this concentrator deferral, you don't really expect any notable impact on your long-term production plans for the mine that's kind of your thinking at the moment for Lalor anyways?

That’s correct, in fact with this proposal it should actually improve and enhance the mine plan so it’s going to give us that ability to process what we mine, so if anything it should benefit the mine plan. Alex Terentieu – Raymond James: Okay. And one last question. Could you keep processing in this scenario, the maxing outs, Snow Lake, and the rest going to Flin Flon, or is there a point in time when it just doesn't make economic or other sense to do so, and a new concentrator at Lalor is absolutely needed? I mean, is there some sort of environmental or other issue, economic, whatever, that's driving you? I mean, I haven't run the economics in my model yet, but I'm just trying to see how long this scenario could keep going if needed?

Well the plan is to keep that scenario going to late 2016 when the new concentrator would be available. Again, as long as Lalor and again as we are expanding and we are starting initial production and we get up about a 1.2 million tons, we could handle with the two concentrators what’s there. The minute again you get up to capacity at Lalor and you get the 1.6 million or potentially better you just could not process what is there, so again the timing of its fairly close at the time we have the concentrator late 2016 would match up with the expansion within the mine plan. Alex Terentieu – Raymond James: So is it – Lalor, I mean, Flin Flon and Snow Lake could handle up to 1.6, but the need to build a new concentrator at Lalor is really if you're going to go any bigger, but beyond a size expansion, you're kind of safe with what you have?

I would say, we would handle both 1.1 million , 1.2 million, when we are at 1.6 million we are stockpiling. Alex Terentieu – Raymond James: Yes, okay. Okay, good. Thank you.

Your next question will come from the line of Patrick Morton of RBC Capital Markets. Please go ahead. Patrick Morton – RBC Capital Markets: Hi, guys. So when you balance out higher capital at Constancia, some savings on the sustaining capital, et cetera, and then deferral of Lalor, your next three years' financing requirement call it to the end of 2015, what is the balance of change in additional financing required from your perspective?

Hey, Patrick, I'd say that sort of all things considered, sort of through to – I mean, we tend to sort of focus on sort of early 2015, just given the strong cash flows that Constancia is expected to generate in the first few quarters, given the high grades in soft ore there. When we think about sort of funding requirements and our target liquidity balances, the sum total of all of this is an improvement in our liquidity position of at least $100 million. Patrick Morton – RBC Capital Markets: Okay great and, we’ve talked a lot about the deferral of the Lalor concentrator and I realize the tonnage constraint is one of the reasons why you don’t want to differ it beyond 2016, but the loss or at least the deferral of call it 400,000 or 500,000 tons a year, why not push out Lalor until you are certain that Constancia is up in running and then start building that $325 million facility one you have the cash flow and you are confident about Constancia, rather than there is still pretty tight balance sheet for the next two and half three years.

No it’s a fair point, I just want to point out Patrick, doing work activity we are going to continue to undertake at Lalor is detailed engineering, so they were in a position to start construction by the middle of 2015, so its about an 18 month construction period, so we will have a very good idea about that point mid 2015 as to how Constancia is performing before we have to make any firm commitments on Lalor. So we do have quite a bit of flexibility, we have a lot of time here to make a definitely commitment. Patrick Morton – RBC Capital Markets: Thanks guys.

Your next question comes from the line of Zach Zonir of GMP Securities. Please go ahead. Zach Zonir – GMP Securities: Hi, guys, thanks for taking my questions. My first actually was just a quick follow-up on, I think, your last answer on Lalor. You mentioned you have to decide by mid 2015, it was an 18 month construction, did you mean mid 2014?

No we are saying we would need the new concentrator by the end of 2016. Zach Zonir – GMP Securities: Okay. Got it, understood. All right. And then my question is – one was a follow-up on liquidity. I think you had just talked about, given the announcements today, it was a net improvement of about $100 million, and then we looked at sort of the streaming and the off-take financing that you also talked about last quarter. So given you're still pursuing those options, I'm just wondering, on a go-forward basis, in terms of operating cash flow internally, have you guys sort of revised your own internal estimates, and if so, from a pricing standpoint, are you looking at, in your internal numbers, pricing similar to today's market for commodities or perhaps lower?

I think what prompted our deferrals and cuts in terms of discretionary expenditures was the reality of the softening metals market, we didn't want to be in a position where our existing business was consuming any of the capital on the balance sheet that was otherwise devoted towards the three development-stage projects. So basically, those discretionary cuts have brought us back to where we were in our budget in a higher metal price environment.

Got it. And it sounds like with the offtake, I mean, your at least initial plans, if your put a facility like place that would remain undrawn and that assumption is also under a scenario perhaps using current metal prices, is that accurate. And then just my follow-up here is just going back to Constancia and the discussions with these offtake partners, I'm just wondering if you could give us a sense, from a reason standpoint, are the smelters that you're talking with, North American, South American? And if so, would there be any differences perhaps with what's in the technical report in terms of transportation costs or so forth and so forth?

Sure. I don't want to get into who we're talking to at this point for competitive reasons, to be honest, but the offtake agreements that would be linked to this, our expectation is that they'd be very much comparable to sort of standard offtake agreements that we would enter into with any of the likely smelters that we would send material to. I mean, as it happens, freight costs to sort of places in Europe are not significantly different than freight to East Asia and so there's a lot of different places that we could send the material to. It's pretty clean concentrate and so, as I say, we've seen good interest from a variety of quarters on the concentrate and we're trying to leverage that into sort of an attractive financing opportunity, but we don't see any adverse impact on the terms of our concentrate sales that would sort of be a price that we would have to pay in order to get this financing.

Yeah, that’s very helpful. Thanks for taking my questions.

Yeah, thanks.

Your next question will come from the line of John Hughes – De Jardin Securities. Please go ahead. John Hughes – De Jardin Securities: Well, thank you operator. Just two quick ones left. One on Lalor Lake, one on Constancia. On Lalor, the advancement on that exploration is very interesting in terms of that advancing a year and getting into the copper-gold zone. And I'm wondering is there any extension underground that has to be driven in order to access where you want to go, or are you going -- is this sort of a planned thing or is this something new? Because it certainly could be quite exciting to get into that copper-gold zone. I don't know if, yes, Brad wants to answer.

Yes, Brad so we’ve had the group working again as I mentioned the five year mining plan one of the requests was you can give us an option to get in an exploration target for the for the copper-gold zone. So again, it appears, with the project development moving along extremely well there down developing a lot of to shaft bottom were down to the 985 level it appear that we could drive address of both 400 meters, 450 meters that would give us a nice real target that would drill our copper-gold zone. So I mean that opportunity exists and it looks like again it’s when we decide to move a head on something along that lines. It’s a dollar items to do it. John Hughes – De Jardin Securities: Oh, I see. So that 400-meter drifts, could the timeframe for completion, would that be sort of a three to four months timeframe?

Would be very, very, very quickly could be develop very quickly. What’s happening again it’s a project development is winding down that the next step of development for the mine will be to develop and prepare for production for when that production shaft is commission next summer. So along the lines with doing that development to prepare for our production. We could parallel drift for exploration for that that zone. John Hughes – De Jardin Securities: Oh, I see. Okay. So and again, we'd be looking sort of like in the first quarter sometime next year; the first opportunity to set up a rig down there if that's the route you decide to go?

That would probably be the earliest date, yes. John Hughes – De Jardin Securities: And the last point on that, what kind of in terms of drilling, like what kind of are we looking at a few hundred meters or longer to get into the copper-gold zone?

I have seen the plans, again I would had be remiss to say , but we were drilling, you'd be drilling from about 980 meter and again the surface drilling I given us own standard 1500 meters in-depth and we certainly were open down one. So I mean the holes would be 500 to 700 meter holes and it certainly that the initial address get you started then as results came in we’ve laid out again additional development that would improve the horizon that drill. What we our plan to do as you use that access drift for drilling and then ultimately either we are going to extract or up that same drift. Just leave it open for possibilities. John Hughes – De Jardin Securities: Okay. Well, that's great. Thank you for the update. A last one just on Constancia with the 15% noted increase in CapEx does the 15% apply to what we had seen before on the CAD1.546 billion or is it 15% on a number less than that, given how much has already been spent?

No it was on the original capital cost of CAD1.546. John Hughes – De Jardin Securities: Okay, that helps. Thank you very much indeed.

Your next question will come from the line of Alex Kaduski of CIBC. Please go ahead. Alex Kaduski – CIBC: Yeah, thanks for taking my question. I just wanted to go over a couple of things. Sorry if you've gone over this already, but is the intention to still issue an updated mine plan for Constancia this fall? And are any of the CapEx changes related to that or is that already incorporated into the plan?

We never had the only mine plan we were updating was actually Lalor's mine plan and we had never intended to update Constancia's. That remains unchanged. Alex Kaduski – CIBC: Okay. So that that (inaudible) for us replacing that.

Yeah, that was already incorporated in version that we did last year. Alex Kaduski – CIBC: Okay. And just with respect to Lalor, I was sort of under the impression that in many ways, the new concentrator was nice to have and it gave you a bunch of benefits. Has the fact that you've scaled back on exploration sort of taken some of the pressure off of developing that on the existing timeline, given you a bit of latitude to shuffle it back?

Well, the exploration actually, we did curtail grassroots exploration and we're focusing on brownfield exploration, and in fact, we're accelerating the underground exploration at Lalor by about a year, given how successful our underground team has been in terms of lateral development. So we can actually get into the copper-gold zone again from underground, or for the first time, from underground, about a year earlier next year. So we are preserving exploration dollars for brownfield exploration like that, high-priority exploration that can add meaningfully to the resource and reserve base in the short term. Alex Kaduski – CIBC: Okay, great thanks.

(Operator Instructions) Your next question is a follow from the line of (inaudible) of Scotia Bank. Please go ahead.

Hi, thanks, it's (inaudible) here. If you go ahead with the Lalor concentrator for startup at the end of 2016, I guess you’d start spending in kind of mid-2015. Can you give us a sense of what the spend would be, say, in each, 2015 versus 2016 on the CAD325 million?

It’s Brad. Should be roughly, and this point number so of my have year about 200 million also in 215, 150 in 2016.

Okay. And can you remind us what the timing is for the new Lalor mine plan in terms of that being released?

To be fourth quarter 2013.

Okay. And just finally with Constancia, in terms of the port and the power agreements, any update on sort of your expected timeline to complete some agreements there? When do those become sort of, I guess the concerning to the schedule?

(inaudible). There would be no concerns around schedule, but can like Cashel will give you some additional color on where we stand with those.

Hi, Orris the power agreement is imminents we work with the port operator all the issues of accommodating our ore until the expansion is in there waiting to put in their capital dollars to the expansion when they get certainty of the construction at Las Bambas and Serra Verde underway because they have much higher volumes of concentrate, but we worked around the warehouse facility that will be use for Constancia and there will be able to accommodate all our production. In that short-term until Las Bambas is up and running we will paying a higher 14 rehandling fees that’s slightly higher them what we gave in our technical report example, but when the expansion in there would be the cost to the port will be lower. So that port agreement is imminent. We're just working out final details on language but the major business items are done. And with the power agreement the power purchase agreement itself. Again we get we benefit from the facts that many projects here either suspended or on old and a lot of the gas suppliers have been running ahead with their capital projects. So we got into detail decisions with one provider and we were very close to signing its we got into some discussion on just outside of commercial arrangements more awarding within the contract and we flex and set while we want to go into little more discussion. So that when I would say within the next month will be there. So the two of them are really imminent and we work through all the business discussion and there just very few I’s and T’s to be dotted and crossed at this moment.

Okay. So you expect by end of the year to have them both in hand?

Yeah with out it know.

Okay. Thanks so much.

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

Well, thank you are going to participating, unfortunate the capital cost is I think over shadow the fact that Constancia we make considerable fiscal progress on the construction and we are welcoming the investment committee for visit for them to see for themselves its been September so we hope to see that site. Thanks very much and have a nice day.

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