Hudbay Minerals Inc. (HBM) Q3 2015 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to the HudBay Third 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 for question. [Operator Instructions] I will now turn the conference over to Jackie Allison, Director, Investor Relations. Please go ahead.

Thank you, Operator. Good morning and welcome to HudBay’s 2015 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. Accompanying David for the Q&A portion of the call will be David Bryson, our Senior Vice President and Chief Financial Officer; Alan Hair, our Senior Vice President, Chief Operating Officer; Brad Lantz, our Vice President, Business Development and Technical Services; Cashel Meagher, our Vice President of the South America Business Unit; Rob Winton, our Vice President of the Manitoba Business Unit; and Pat Merrin, our Vice President of the Arizona Business Unit. Please note 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 David Garofalo. Dave?

Thanks, Jackie. Good morning everyone. With the first full period of commercial production, our third quarter results reflect the positive impact Constancia is having from both the production and cost perspective. Constancia together with our Manitoba operations enabled us to achieve significantly higher production rates across all our metals compared to the third quarter of 2014. Copper production increased nearly five-fold in cash cost and then the byproduct credits were $0.90 per pound of copper produced. Operating cash flow increased 559% to approximately $80 million compared to the third quarter of 2014 due to significant growth in production and sales of most metals in a low cash cost. Cash flow would have been even higher if we had sold all the metal produced in the quarter. At the end of the third quarter, we had approximately 100,000 tons of copper concentrate and inventory between Manitoba and Peru, containing 25,000 tons of copper, 20,000 ounces of gold, and 490,000 ounces of silver. At the Constancia mine, optimization continues and we are steadily resolving our transportation constraints. I’ll address this in more detail later in the presentation. In the third quarter of 2015, we continue to benefit from economies of scale and improved operating efficiencies. With Constancia now at design capacity and transportation, logistics in both Peru and Manitoba improving, we expect even stronger revenues in operating cash flows going forward. We remain on track to achieve full year 2015 production and cost guidance at all of our operations. During the third quarter, we increased the size of our credit facility from $300 million to $400 million, which provides us with additional liquidity. At September 30, our total liquidity was approximately $300 million including $114 million and cash equivalents and $186 million in commitments under our credit facility. In the coming months, we also expect to realize approximately $60 million in net cash flow from the sale of our excess copper concentrate inventory. We expect our liquidity position to improve going forward as we are now generating net free cash flow from the Manitoba and Peru operations at current metal prices. All four of our mines are at steady state and our capital expenditures have declined significantly. At Constancia, mining operations continued as planned and remained focus on plant optimization. As we mentioned on last quarter’s conference call, there is more oxide ore than previously anticipated in the upper sequence of the mine. This has led to a plateau in copper recoveries at 80%. However, metals production targets continued to be achieved as we reduce ore recoveries have been offset by higher-than-expected copper grades and ore throughput. Through October and into November, reconciliation of the mill head grade has 5% higher than the reserve block model. During mining of the supergene and mix transition zone, steady state throughput has been greater than planned by about 5% to 10%. Monthly ore throughput increased from 2 million tons in July to 2.6 million in September, an average daily rate of more 86,000 tons. Cost performance has been strong with a combined unit operating cost of $7.77 per ton in the third quarter, below the lower end of the full year guidance range. During the third quarter, shipments of copper concentrate from mine site to the port in Matarani were principally constrained by truck driver availability and truck turnaround time caused by road refurbishment. Due to these issues and the rapid ramp up in production, concentrate on site increased to approximately 65,000 tons at quarter end. With a significant increase in trucking capacity since the middle of September, considerable progress has been made moving the excess copper concentrate from the Constancia site to port. The majority of the excess inventory is expected to be sold during the fourth quarter. Since September 30, inventory levels at the Constancia mine site have declined by approximately 30%. In Manitoba, compared with the third quarter of 2014, ore process was relatively consistent, copper, zinc and gold grades were higher and silver grades were lower due to normal mine sequencing. Combined Manitoba unit operating cost rose by 34% year-over-year due to increased production at Snow Lake which is higher unit cost and a decrease in production at the 777 mine. In the fourth quarter, we expect to realize sequential improvements in metals product and unit cost per ton of ore process as the 777 mine is beginning to benefit from the effects of its plant mine fleet renewal. The collective agreements with each of the seven labor units represent employees at our Manitoba business unit expired on December 2014. All seven units have now ratified new three-year agreements and the labor disruption experience in the second and third quarters has ended. With the ramp up of Constancia proceeding well, we continue to focus on optimizing production and cost performance at our operations. We expect to generate free cash flow from our operations in the fourth quarter at current metal prices. During 2016, we expect to publish our expansion plans for Lalor, incorporating the recently acquired New Britannia concentrator and an updated mine plan with the anticipated construction of a peaceful [ph] plant. We are also continuing our planned 8,500 meter drill program at Lalor which consist of 15 to 20 exploration holes, targeting the lower portion of the main copper-gold zone and down plunge potential. We anticipate initial phase two drill results to be published with our fourth quarter earnings release in February 2016. At the Rosemont project, we continued our permitting efforts and the technical work required to advance the project, Ausenco which led the successful construction of Constancia was appointed as EPCM contractor for Rosemont in August. We believe that Rosemont will provide an attractive opportunity to compound the returns from our four existing mines and we look forward to making a strong investment case for the project in 2016. Operator, we’d be pleased to take questions at this point.

Thank you. [Operator Instructions] Your first question will come from Matt Murphy with UBS, please go ahead.

Good morning. Just some questions on cost. So Constancia cost have been great. I’m just wondering, as you talk about optimizing what the view is if there’s more downward potential there or if this is as good as it gets.

Hi, Matt, this is Alan Hair here. When you say down work, you mean the down work caps is under the--?

No, he said downwards.

Oh, downward, sorry.

Yes, downward potential.

Downwards on cost.

Downward potential. No, I think, I mean, I can talk over the cash with some detail but obviously we’re still trying to wear the newness of the operations and hold distances and the likes are a lot shorter maybe. Cashel?

Yes, no, I think we’re still sort of tracking towards guidance. The past quarter we had probably better performance and that was just due to the fact that the haul distances were short from the phase one and they’re pretty efficient on the mining cost. And, of course, we’re seeing good benefit on the milling cost because as Alan mentioned, things are new and there’s less maintenance required. So we had sort of not as many maintenance issues. So I still think, that’s probably on the low side but it’s still tracking where we think we should be.

Sure. Okay. And then on the Manitoba side, I guess, things have been trending a little bit high and the MDA mentioned 777 should be declining. I’m just wondering though what you’re seeing on cost on Lalor these days and if there’s potential to see that number start to come down.

Well, I think Lalor is a bit of a similar story to Constancia. We’re still in this ramp up mode and still establishing baseline operations in the number of areas. So, I don’t really see significant change in Lalor. I mean, we do have a number of cost containment initiatives underway but that’s more around holding the line, especially this 777 starting to get older.

Sure. Okay. And then there will be a new mine plan coming out on Lalor with like a cost forecast. Will it be sort of comprehensive economics included in that?

Yes, that’s our intent. There’s quite a few moving parts obviously at Lalor as we try and optimize the mining plan in relation to the flow sheet that we’ve got now with both New Britannia and the Snow Lake concentrator. So there’s still quite a bit of work to do. We will publish still some results from that when we’re completed.

Okay, great. Thanks.

Your next question will come from Orest Wowkodaw with Scotia Bank. Please go ahead.

Hi, good morning. Just wondering if you made a decision on whether you plan to take the mill down, one of the mill lines down at Constancia in the first quarter to replace the Tranians [ph]. Just wondering if there’s been a decision there.

Yes, Orest, I mean, that’s currently our plan for a variety of reasons to actually take that line down in the first quarter.

And would you have an estimate in terms of what that would mean at this point for guidance for next year?

We’re actually in the middle of budgeting cycle right now, Orest, so you got us at a bit of a disadvantage but I think it’s safe to assume that line will be down for six weeks, give or take, in Q1. So we’ll be operating at half capacity to that six-week period. And then we’ll provide fulsome guidance as we normally do in early January when our budgets are approved by the Board and whatnot.

Okay, no, fair enough.

Okay.

In terms of depreciation, I was a little surprised how high it was this quarter. Can we expect this to be kind of the new run rate, say, on a per pound basis, like around $0.50, $0.60 a pound now at Constancia? Is that something reasonable from a sales perspective moving forward?

Hey, Orest, it’s David. Yes, we, certainly depreciation is going to track our sales volumes, just given the depreciation flows into inventory and then flows back out to our P&L via sales. I think the Q3 run rate of, certainly looking at Peru’s depreciation, dividing that into the sales, the copper sales figure for Q3 is going to give you a pretty reliable number per pound or per ton of copper sales going in to Q4 and beyond. So, clearly, as we draw down the Constancia inventory as we get that inventory moved to port and sold, you’ll see significantly higher depreciation in the fourth quarter that’ll then sort of normalize to run rate levels after the inventory has been drawn down to normal levels.

Okay, that’s perfect. Thanks very much.

Your next question will come from Alex Terentiew with Raymond James. Please go ahead.

Hey, good morning, guys. I just got a couple of questions really on Manitoba. First, just following on a question for Matt there or you mentioned new mine plan for Lalor in 2016. What’s the timing on that? Is it first half of the year? Second half?

We’re hoping to have it by middle of the year. It depends. There’s a number of things around the New Britannia flow sheets in terms of how it’s best set up to deal with both the gold zone and the copper-gold zones. It’s requiring some test work that’s also dependent and some drilling that’s currently underway. So we’re targeting mid-year but there could be a bit of slippage on that. But that’s certainly what we’re aiming for.

Okay. And then just on the Manitoba existing ops. We obviously don’t have as much insight as to how each of the mines and the province [ph] is doing and mill tonnage, I think, was a little bit lighter than what I was expecting. Now, with that in mind, can you just elaborate a bit for me which mines are doing better or worse than last year? And I guess, how was Lalor’s ramp up towards the 2,700 ton a day Snow Lake concentrated design going.

I’d characterize, I mean, Lalor has generally been very good. As you see, Snow Lake, the Snow Lake concentrates is the ultimate bottleneck there. Although there’s work that’s going to be done there in the longer term. Reeds have been doing very well. 777, we mentioned some of the suits [ph] issues that we had there. So 777 has been down a bit and also as we keep mentioning the mine is getting older and a bit tougher to operate. So you see, I think, it’s better to say there’s been good numbers from Lalor and Reed and that 777 will, as its best days are behind it.

I think, I can’t remember who it was in the past, somebody said that, you know, at times, Snow Lake was able to get above that 2,700 ton a day mark. Is that still something that you guys are seeing now that you’re hitting a bit more of a steady state? I mean, basically, what sort of steady state number do you think is reasonable for that mill in the mine?

The issue has been, as you say, I mean, stall has been good at hitting higher tonnages for relatively short periods. Our focus now is in improving some of the maintenance practices to get that availability number up. So we’re not really ready to put a stake in the ground and what the ultimate throughput will be.

Okay, good. Thank you.

And your next question will come from Matthew Fields with Bank of America. Please go ahead.

Hey, guys, I just have a housekeeping question first. I saw the cash cost company-wide came down to $0.90 per pound from $1.29 last quarter. But I was just a little confused looking at the year-on-year comparison. It said in the MD&A this year that last 3Q was $0.41 per pound, the one I went back to the year ago report still in C dollars [ph]. It was C$1.62, Canadian dollars. Obviously, the exchange rate doesn’t get you there. So what was the difference in how that was calculated?

Matt, the main change was that we’ve altered how we calculate the cash cost per pound and gone from cost per pound sold in the quarter to cost per pound produced in the quarter. And we did that partly because with inventory movements and other things, we were seeing quite a bit of volatility from period to period. And we think that doing it on a cost per pound produced basis. So we’ll tie the cost more closely to what we’re actually producing.

Okay. I guess that’ll do it. And I know you’ve had the statement about your liquidity in the past few quarterly announcements about, you know, if the materials, if metals prices decline or if there’s unanticipated needs. How do you feel about your current liquidity given maintenance CapEx levels next year and anticipating sort of funding for Rosemont? I know you don’t have a guidance, but can you talk about how you think liquidity shakes out over the next 15, 18 months?

I think that we’re pretty comfortable with our liquidity situation in terms of the base business. As mentioned we’re generating free cash flow, I think, our budgeting process for 2016 is still working through. But I think that we can see all in sustaining cost for both Manitoba and Peru coming in at or below $2 per pound copper. And so, I think that we don’t see any significant draws on our liquidity associated with continuing the current operations. In terms of Rosemont, we’re going to have to see. That’s going to depend on the results of the definitive feasibility study and the business case there. And we’re going to try and work on what the right financing solution is for Rosemont alongside that work.

Aside from, eventually, Rosemont construction and the New Britannia mill refurbishment, is there any big chunky uses of cash you see coming down the pipe?

I think we’re going to continue to see sustaining CapEx levels in Peru sort of at about the levels that we’ve been running at in 2015. So that should start to drop off as we get in to 2017 as we complete some of the tailing dam races [ph]. But other than maintaining that, I don’t, other than items that you’ve noted, we don’t see any major draws on liquidity the next year or two, no.

Okay, thanks very much.

Thanks.

Your next question will come from Greg Barnes with TD Securities. Please go ahead.

Yes, thank you. David Bryson, a question around the inventory drawdown. If tonnage will be moved, I guess, to the port by the end of the year, how of that do you think you’ll book as sales in Q4?

The majority. I don’t think that I want to put a stake in the ground there, Greg. It depends on performance at the port. We’ve been pretty pleased with how that’s gone. But part of what we’ve been doing is we’ve been booking 20,000 tons on one vessel. We’ll load 10,000 tons. It’ll go back out into the harbor while we stage the next 10,000 and it’ll come back in. So the draw down from the port tends to be a little bit lumpy. We can move 20,000 tons of con [ph] over the course of a couple of days and then it would build back up again over the course of a week or week and a half. So I think we do feel good about getting that material down to the port but there are a few more moving parts.

Yes.

Contract terms and the like, so I think we should see most of that material moved. But I’d be very pleasantly surprised if we got all of that put on to the revenue line by the end of the year.

Do you book it as a sale when it crosses the ship’s railing?

It depends on the contract. A lot of our contracts, we get rev rec when we get paid for it which is usually within a few days of it crossing the rail, but there are some others where we don’t book rev rec until it actually arrives at the destination port although that’s a smaller part of our contract portfolio.

Okay. Thanks, Dave. Just on another matter, Cashel, since we were at the mine, I guess, a month ago now, has your thinking evolved at all about the recoveries and how you are managing the oxide ore?

I think when you guys visited the mine, we were on to sort of a theory and a process and that’s sort of coming true. So it’s holding true. It’s truly this valuable portion of the copper within the mix transition zone that’s obviously unrecoverable. If you back that out and through reconciliation process as we’ve done, we are getting a high 80s recovery of sulfides.

Oaky.

So we think we are where we are and we think it’s working going forward. So we’re now going to be incorporating that into plans going ahead with our new understanding of the oxide content in the ore.

And how much longer do you think this oxide issue is going to last?

Right now we believe the impactful proportion of oxide will be on and off to mid-2017 and then after that we should be out of that type of ore.

Okay, great. Thank you.

Your next question will come from Joseph Gallucci with Dundee Capital Markets. Please go ahead.

Hi, guys, two quick ones on Constancia. The first one is just on the trucks. November is the peak month going to 250 trucks just based on the presentation from the site. Just wondering if you can give us a bit of color on truck driver availability and what the road conditions are given this raining season.

It’s actually been very good. So we’re up over 200 trucks now in the fleet which is more than enough obviously for daily production. So we’re working on the inventories and that is as a result of truck driver availability. So that’s going well. As far as road conditions go, they’ve been very good. Early on we did suffer from a few incidents in the road, but the incident rates per hours or truck kilometer count has gone down, way down. So that’s going well. And actually, the rainy season has sort of started but not with the intensity it was last year. So as far as road closures due to climate, we haven’t experienced that as of yet this season so far.

Okay. And the second question I have is on the Molly Circuit [ph], can we expect any benefit at all on cost going down a little bit just from the Molly [ph] in 2015 or is it just going to be impacted in your more 2016 numbers?

The impact if we get into it would be in 2016. It probably wouldn’t be material impactful in 2015.

I think at sort of $5 a pound Molly [ph] numbers the byproduct there is going to be pretty modest in any event.

All right. Thanks guys.

[Operator Instructions] We’ll now take our next question from John Tumazos from John Tumazos Very Independent Research. Please go ahead.

Good morning. Congratulations on pretty good results all things considered [ph]. Could you update us on your acquisition criteria whether you’ll consider anything outside of the Americas, whether you’re focus is copper only or gold only, whether things would only be in the development stage or whether your accept producing cash flow properties overnight First Quantum with a couple nickel properties in Australia and Finland up for sale free port, it has things all over the place? And I guess, as companies conclude their budget processes at year end at lower metals prices all sort of goodies are becoming available.

Yes, John, I’d say, since I started here in 2010, our acquisition criteria really haven’t changed at all. Geographically, it’s still the Americas and it’s really only five countries that we’re interested in all investment grade—Canada, U.S., Mexico, Chile and Peru. I would say, geologically, we’re focused on VMS and port-free deposits. I think we’re still pretty metals agnostic. Admittedly, we’ve become much copper skewed given the scale at Constancia right relative to our existing business. And Rosemont obviously skews us even more towards copper but those in our view were the two best Greenfield projects available over the last five years that really state our criteria. So I wouldn’t say that we’ve really widened our criteria at all. We would consider operating assets and we’ve certainly looked at them. But generally, they’ve created significant premiums and we just - when we have put in indicative bids on these things, we just haven’t been competitive because we have very stringent return-on-capital criteria and so we just haven’t been able to transact. Typically, when we’re looking at operating assets, we’re not looking to buy annuities. We’re looking to buy something that has exploration upside or the potential to be scaled. And those are few and far between to be quite honest with you. But we continue to look for those things. Particularly around our areas of influence where we already have critical mass in terms of management within existing business units in Canada, U.S. and in Peru and Chile.

Thank you.

That concludes today’s question-and-answer session. Mr. Garofalo, at this time, I’d like to turn the conference back to you for additional closing remarks.

Yeah, well, thank you everybody for your kind attention. And of course, Jackie, David and myself are always available for questions. If you have follow-ups, please call us directly.

Ladies and gentlemen, this does conclude the conference call for today. Thanks for participating. You may now disconnect.