Hudbay Minerals Inc. (HBM) Q4 2019 Earnings Report, Transcript and Summary

Good morning. My name is Julianne, and I will be your conference operator today. At this time, I would like to welcome everyone to the Copper Mountain Mining Corporation Fourth Quarter 2019 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] Please note that comments made today are not of a historical factual nature and may contain forward-looking statements. This information by its nature is subject to risks and uncertainties that may cause the stated outcome to differ materially from actual outcomes. Please refer to slide 2 of today's presentation and Copper Mountain's fourth quarter 2019 management discussion and analysis for more information. I will now turn the call over to Gil Clausen, President and CEO of Copper Mountain Mining.

Good morning, everyone and thanks for joining us. As you can see on slide 3, I have with me Don Strickland, Copper Mountain's Chief Operating Officer; and Rod Shier, our Chief Financial Officer. I'll begin by providing brief highlights and achievements in the year and Don will provide a more detailed discussion on our operations, followed by Rod who will speak to our financial results. I'll then wrap up and open the call for questions. Starting on slide 4. We finished the year in a solid position with strong production in the fourth quarter as planned. We moved 72 million pounds of copper and -- we produced rather 72 million pounds of copper in 2019 meeting guidance for the year. With the development that we completed in 2019, we expect to see the grade improvements we saw in the fourth quarter continue into 2020 and 2021. We're forecasting a substantial increase in production to 86 million to 96 million pounds of copper which is over 100 million pounds on a copper equivalent basis. And as we complete the mill expansion at the end of 2020, we expect production to remain at a similar level in 2021 and going forward. You'll note 2022 is a little lower production year but this is just due to mine sequencing. We expect to revert back to higher levels immediately afterwards. Our C1 cash cost per pound was US$1.92 in 2019. This is slightly higher than in 2018 mostly as a result of lower copper production. However, if you look at the total all-in cost to operate the mine it's pretty steady. Costs were 2% lower year-over-year about $233 million compared to $238 million in 2018. This is a testament of our cost-containment efforts and illustrate the mines consistently -- consistency and reliability year-after-year. Most of the cost variances on a unit basis are primarily due to copper grade and recovery fluctuations. Going forward as a result of higher production and improved grades, we expect our C1 cost to improve by 28% to $1.30 to $1.45 in 2020. Our all-in cost which includes sustaining capital and deferred stripping is expected to be US$1.95 to US$2.20 per pound in 2020. And we continue to invest in our business and to pay down debt finishing the year with $32 million in cash. Of note, subsequent to year-end we came to an agreement with our partners Mitsubishi Materials Corporation to extend our current related party debt to the mine until June 2023 making it a long-term liability. This improves immediately our working capital by about $100 million. This is not reflected on our year-end balance sheet but will be in the first quarter of this year. I'll now turn the call over to Don to go over our operational results. Don?

Thanks, Gil. Both the mine and mill continued to perform well during the quarter with the grade increasing as planned. Starting on slide 6, this slide highlights the areas mined during the quarter. The main ore supply came from the highlighted area on the west side of the main pit while smaller amounts of ore came from the highlighted areas on the north and south sides of main pit. Our strip ratio dropped to 2.7 during the quarter down from 4.1 in Q3 as we exposed more ore. We continued our focus on lease development in the south side of the main pit. We remain on plan to expose higher-grade ore for 2020 and 2021 production, as per our guidance. The grade is scheduled to increase throughout 2020 as we access more high-grade ore, resulting in production more weighted towards the second half of the year. Tonnes noted on the slide are exited tonnes. However, I would like to highlight, that the mine continued at a high tonnage rate, moving 18.1 million tonnes during the quarter and 69.7 million tonnes for the year. These numbers include 3.5 million tonnes of waste, placed within the pit during the quarter. And a total of 7.6 million tonnes of waste placed within the pit during the year. These in-pit placements provided working access to advanced high-grade ore, reduced haulage cost and increased overall productivity. These in-pit placed tonnes -- in-pit waste tonnes are scheduled to be relocated to the final location within the pit, during 2020 and 2021. Turning to slide 7, during the quarter we commissioned three new haul trucks and we plan to commission four new haul trucks in 2020. These trucks will replace the older trucks in our fleet. But we're excited that these trucks are being purchased as trolley capable and are part of a plan to trial trolley assist. With trolley assist, the haul truck connects electricity supply, like a street car and replaces diesel consumption with electricity. This is targeted to reduce our greenhouse gas emissions and reduce our operating costs, as we replace diesel with electricity. And increase mine productivity, as haul trucks travel faster with trolley assist. We are partnered with Komatsu, SMS and the B.C. government to advance this trial. We are presently designing the trial, including redesigning haul ramps to support maximizing use of trolley assist. We will complete this trial in the Copper Mountain main pit, on an approximately 1 kilometer long, haul ramp. In anticipation of the trial being successful, we are completing new designs to be able to utilize trolley assist in the future, this schematics of the New Ingerbelle waste dump, incorporates a trolley assist design. We have also incorporated trolley assist in the ore haul design from New Ingerbelle, to the primary crusher. We are very excited by this opportunity and how it fits into our ESG objectives. Turning to slide 8, the mill continues to operate consistently during the quarter, achieving high tonnage rates and high operating time. The new SAG mill stream, and ball mill transformers, installed in Q3, continued to perform well, and as expected. Following the ball mill transformer installations in Q3, the ball mill speeds were increased in late Q4, achieving the higher mill tonnage rate, as targeted. The one item for discussion in the quarter is the slightly lower recovery. Turning to slide, in Q4, and during the early part of 2020, we are mining a small area of the reserve that has the finest mineralogy, and lower associated recovery. This schematic shows the three pits, main, north and New Ingerbelle. The majority of the reserve is coarse and medium-grain mineralogy, while a very small part of our reserve in the middle of the main pit is of finer mineralogy. We are mining in this area in Q4. And that is the reason for the lower recovery. The recovery was in line with expectations. Turning to slide 10, we are advancing several projects in 2020, to continue to improve the operation. As of the start of this year, we have expanded the copper concentrate filtering capacity, to handle the higher scheduled copper production in 2020 and 2021. We are now focused on installation of the direct flotation reactors, as a second flotation cleaner, by mid-2020. This project will provide capacity and stability to the cleaner circuit, supporting a higher copper concentrate grade. This was a low-CapEx, high-value project that we are expediting. The schematics on the top right of this slide shows, where the DFRs will be installed within the plant. We are continuing to move forward with the ball mill three expansion project the ball mill is now on site, as shown in this picture. We are targeting commissioning in late 2020, funded through operating cash flow. As we previously noted, we have had tremendous exploration success, with more than doubling our reserve over the last two years. We plan to continue our exploration program in 2020, focused on mineralization extensions around the, Copper Mountain north and Copper Mountain main pits. We'll be starting our exploration program, in late Q1. Turning to slide 11, we are very committed to ESG and the Mining Association of Canada, Towards Sustainable Mining or TSM standard. We will be confirming our AA tailings management rating in early 2020 and are targeting to achieve AA or A ratings on all TSM protocols over 2020 and 2021. Our progressive reclamation work as previously highlighted and shown in this slide is based on an innovative agreement with the city of Metro Vancouver Aero Transportation and our local First Nation partners. Our objective is to advance progressive recognition. We are designing for it and executing on our plan. Our focus on reducing greenhouse gas emissions, including the trolley assist trial discussed earlier is another progressive partnership. Our objective is to advance this technology and reduce our GHG emissions. We will continue to update you on our ESG activities. Summarizing our Q4 operational results, the grade has increased as planned, and we are transitioning into higher-grade ore in 2020 and 2021. The new SAG screen and ball mill oil-field transformers installed in Q3 are performing as planned. We have increased the ball mill speeds and are operating at the targeted higher mill tonnage rate. We are now focused on successfully executing the DFR and ball mill three installations in 2020. We are continuing exploration focused on adding reserves and better defining our longer-term planning. We are working towards AA or A ratings on all TSM protocols in 2020 and 2021. I'll now turn the call over to Rod to go over our financial results.

Thank you, Don. As noted on slide 13, revenue for the fourth quarter of 2019 was $73.7 million, on the sale of 17.6 million pounds of copper approximately 6,000 ounces of gold and 76,800 ounces of silver. Revenue was relatively flat when comparing Q4, 2019 to Q4, 2018, despite lower sales during the fourth quarter of Q4, 2019 because of a 20% increase in gold prices experienced during Q4, 2019 when comparing quarter-over-quarter. This was partially offset by a 5% lower copper price realized in Q4, 2019. In addition, at the end of the quarter, there was a positive $6.5 million mark-to-market adjustment as compared to a negative $2.4 million adjustment in the fourth quarter of 2018. Mark-to-market adjustments are a requirement under IFRS for shipments outstanding and not settled at the quarter end or year-end. Revenue for the full year of 2019 was $288 million on the sale of 71.9 million pounds of copper, approximately 26,500 ounces of gold and 254,500 ounces of silver, as compared to revenues of $296 million on the sale of 79.2 million pounds of copper, approximately 26,800 ounces of gold and 284,000 ounces of silver for 2018. The 2019 revenue included a positive mark-to-market adjustment of $8.5 million for unsettled shipments at year-end as compared to a negative mark-to-market adjustment of $900,000 for the 2018 year-end. As noted on slide 13, cost of sales for the fourth quarter of 2019 was $72.1 million as compared to $65.3 million for the fourth quarter of 2018. The increase in cost of sales in Q4, 2019 as compared to Q4 2018 is primarily the result of mined cost of $7.3 million being allocated to deferred stripping and the low-grade stockpile in Q4, 2018, as compared to only $900,000 in Q4, 2019. Cost of sales for the year ended 2019 were $263 million, as compared to $270 million for the year ended December 31, 2018. The decrease in cost of sales is a result of selling lower quantities of copper, gold and silver in the year and as a result of a $33 million of stripping costs that have been deferred for the year ended December 31, 2019 as compared to only $20 million for the year ended December 31, 2018. Turning to slide 14, all of this resulted in gross profit of about $1.6 million and a net loss of $35.7 million in the fourth quarter of 2019 as compared to a gross profit of $18.1 million and a net loss of $19 million in Q4, 2018. The net loss position in Q4, 2019, was directly attributable to the large increase in mineral reserves as a result of the successful 2018/2019 exploration programs that significantly increased the mine's reserve and consequently the mine's life from 14 years to 31 years. As a result, the expected start-up of milling of the low-grade stockpile has been extended to 2038 on the increased mine life. This pushes out the discounting of future cash flows required to value the low-grade stockpile and resulted in a one-time non-cash write-down of $48.8 million on the low-grade stockpile's value effective at the end of the 2019 year. This was partially offset by the deferred tax recovery of $12.9 million recognized on the write-down of the low-grade stockpile and the $5.5 million non-cash unrealized foreign exchange gain recorded during the quarter. The non-cash unrealized foreign exchange adjustments are mainly related to our debt that is denominated in U.S. dollars. The net loss of $25.9 million for the year ended 2019 was also impacted by the same one-time non-cash write-down of $48.8 million on the low-grade stockpile's value. This was partially offset by the deferred tax recovery of $14 million recognized on the write-down of the low-grade stockpile and $14.2 million of the non-cash unrealized foreign exchange gain recorded for the year. Again, the FX gain is mostly related to the treatment under IFRS of our U.S. dollar-denominated debt. On an adjusted basis, the adjusted net income for the quarter was $1.3 million or $0.01 per share. And for the 2019 year, we reported an adjusted net income of $800,000 or nil per share. Adjusted EBITDA was $1.7 million for the fourth quarter of 2019 and $30.4 million for the full year of 2019. Cash flow from operations was about $4.3 million for the quarter and $51.2 million for the year, which allowed us to end the year with $32 million of cash on hand. As noted by Gil earlier in the call, we have come to an agreement to extend Mitsubishi's related party debt from a number of one-year maturities to collectively all being due on June 2023. This has an immediate impact on improving our working capital by $101 million, as our partners' current related party debt gets transferred to long term. We appreciate Mitsubishi's cooperation on this issue and it once again shows their strong long-term support for the mine. And now, I will pass it over to Gil for a few words.

Turning to slide 16. Thanks, Rod. In summary, we have a very busy year ahead. Work on the Eva Copper bankable feasibility study is going quite well. We expect to announce results by the end of the first quarter. These results will include the Blackard deposit which we announced a resource for last October of 836 million pounds of copper. We've also optimized the flow sheet and the mine plans and we expect that work to result in substantial improvements in production and cost for the project. Mid-year, we plan on commissioning the DFRs, as Don has noted, and the first stage of our mill expansion project then comes the installation and commissioning of the third ball mill by the end of the year. And that will take us to 45,000 tons per day sustainable and support our improved recoveries and higher production with the improvements in grinding. As we continue to explore and drill throughout the year, we'll be updating the reserve and resource for the Copper Mountain Mine and you can expect that to come out sometime in the fourth quarter. So with these greatly expanded reserves that we created last year, as Don mentioned, we are currently in a situation where our reserve life materially outsizes our planned production rate at 45,000 tons a day. Consequently, we're working on a further expansion study designed to test increased production at the copper mine to 60,000 tonnes to 70,000 tonnes per day from the 45,000 tonnes per day post-completion of the current mill expansion. We expect to announce the results of this study before the end of this year so sometime in the fourth quarter. There remains huge untapped potential at the Copper Mountain Mine and we're committed to realizing that value for our shareholders. Just to conclude, we built a solid foundation in 2019 and we are now set up to deliver on a high-growth year in 2020 with improved grades, increased production and lower costs. We expect a strong 2020 and beyond. And with that, I will open up the call to questions.

[Operator Instructions] Your first question comes from Orest Wowkodaw from Scotiabank. Your line is open.

Hi. Good morning. Rod, can you give us some more details around the deferral of the related party advance with Mitsubishi? I mean, obviously that's very positive to push it out middle of 2023. But can you give us some details on then what the repayment schedule looks like beginning in 2023?

Sure, Orest. As you know, Mitsubishi has been very, very supportive of the project. And these one-year notes have really started from day one. And the intent has always been that they'd be long term and now we're just getting them characterized as long-term. The interest rate is around 2.88%. And they're going to -- the repayment terms will be matched to the cash flow of the mine at that point in time. So it's very flexible financing. So I think the best way to think about it is that very attractive JPEG financing that we have just continues on to match the cash flow of the mine.

So will they take then starting in 2023 kind of a disproportionate share of the free cash flow of the mine to start paying down that related party piece? Is that the way to think about it?

Yes. That's a good way to think about it in terms of it's all -- this all depends on copper pricing and gold pricing and where the cash flow of the mine is. You'll see that if you run your numbers $0.10, $0.20 higher that accelerates the repayment and vice versa the other way.

Okay. But is there a formula you can give us in terms of what percent of free cash flow or anything like that, or...

No, there's nothing like that and there hasn't been from day one.

Okay.

And Mitsubishi has been very supportive as you know. And we didn't -- you go back to 2015 when copper was $1.95, $2 and they were very supportive. And that's where this rolling of these notes really -- the genesis started from.

Okay. Thanks very much.

[Operator Instructions] Your next question comes from Stefan Ioannou from Cormark Securities. Your line is open.

Yeah. Thanks very much, guys. Maybe just a couple for me. Just wondering with the work going through this year to increase the grinding capacity thanks very much for that slide that sort of shows just the distribution of fine versus coarse grain in the pit. But will that optimization actually take care of some of the finer grain door that might be left in the mine plan going forward, or is it more just enhance the sort of, the regular for lack of a better word type of mineralization?

Yes, Stefan. Certainly, the improvement in the grind with the ball mill expansion has a larger impact on the fine mineralogy. And so overall there is an improvement on all these domains for the mineralogies, but there's a bigger positive impact on the fine and very fine mineralogy.

Okay. Okay, great. And just wondering just on the just with the deferred stripping this past quarter I think the strip ratio was 2.7:1, but that's still -- that's higher than your sort of latest life of mine number but yet you didn't defer any stripping. Can you just maybe remind me how exactly that's working right now?

As you know Stefan our life of -- our new life of mine average strip ratio for this coming year is significantly lower because of the mine life. So…

Yeah.

And we're not anticipating significant dollars this year around $13 million, if our mine plan comes in as estimated. But, it's basically if you go above your life of mine strip under the accounting rules, they make you normalize it. So, you take those dollars out and you have to defer them and then amortize them over the rest of the mine life. If you go under the strip ratio, you do nothing. You just take it as it comes.

Yeah. So, what was your -- I mean what strip ratio were you comparing to, I guess for Q4 like to have deferred versus not? What was the -- can you just remind what the number was?

The one in Q4 was a little bit higher. We were still operating under the previous resource, and I think it was about 2.88:1. And now we've brought that down with more advancement in our long-term plan versus mine life.

Yeah. Yeah. Okay. I know it's quite a bit lower. No, that's right. Okay. And just...

You'll also notice that long-term extension of the mine life also impacts our depreciation. You're going to see that cut in about half.

Got it. Okay. Okay. Thanks very much. And then, maybe Gil can you just comment -- obviously it's great to see like Orest mentioned just getting the debt pushed out to middle 2023. Has there been any more thought on sort of just looking at your debt overall, and sort of maybe sort of restructuring it to sort of look at sort of what you want to do with New Ingerbelle and then also into Australia over time?

Stefan, I think we are pretty comfortable with the low cost of our debt at Copper Mountain and our ability to be able to fund expansions at Copper Mountain. So, your question really is about the financing of the Eva project. And you'll see that when we complete the Eva feasibility study at the end of the first quarter, our expectation is that we'll see quite a robust project. And it's our intent, as we've mentioned previously, to put together a complete financing strategy for that on a project finance basis and look at the options related to Eva at that time. We have a lot of lending interest for the project on a project basis in Australia, and we have a lot of triggers that we can pull to manage that development in a non-dilutive way to our shareholders. So, I'd say just stay tuned a little bit on that. It's a great project. And generally speaking, projects -- great projects have a way to get done and get financed, and we're looking forward to be able to give a little bit more color and clarity as we move forward in the year on that project.

Okay, great. Thanks very much, guys.

We have no further questions. This will conclude today's conference call. Thank you for your participation. You may now disconnect.

Thank you.