Hudbay Minerals Inc. (HBM) Q1 2020 Earnings Report, Transcript and Summary

Good morning. My name is Amy, and I will be your conference operator today. At this time, I would like to welcome everyone to the Copper Mountain Mining Corporation First Quarter 2020 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 that are not of a historical factual nature 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 first quarter 2020 management discussion and analysis for more information. I will now turn the call to Mr. Gil Clausen, President and CEO of Copper Mountain Mining. Please go ahead.

Good morning, everyone and thank you for joining us. Starting on Slide 3, as you can see, I have with me Don Strickland, Copper Mountain's Chief Operating Officer and Rod Shier, our Chief Financial Officer. I'll begin by providing a brief update and summary of the quarter, Don will provide a more detailed discussion on our operation, followed by Rod, who will speak to our financial results. I'll then wrap up and open the call to questions. Turning to Slide 4, we are all in unprecedented times with the impact of the COVID-19 virus, an impact each one of us individually and of course to our industry on a global scale. We at Copper Mountain reacted quickly and implemented controls and protocols outlined by the provincial and federal governments, as well as additional cautionary measures to mitigate the risk of exposure to COVID-19 at our operation. So far we have no confirmed or presumptive cases of the virus at our mine. We are operating normally under the necessary protocols, and have implemented the revised mine plan we announced early in March, which is based on the $2.20 per pound copper price. With the lower copper price and general market uncertainty, we took a very prudent approach and deferred all major capital expenditures, the largest being the installation of Ball Mill #3, which saves $22 million. Further, we re-sequenced short term production to the lower cost areas in the central and north phases of the main pit in order to maintain positive margins. These areas are closer to the primary crusher and the waste dumps, which result in lower mining costs. We also rescheduled mining of high grade ore from pit three from 2020 to later in the year and 2021 to better match higher metal prices, which should then assist in funding our mill expansion project when we give it green light again. We've updated our 2020 guidance to reflect the modified mine plan and expect production to be between 70 million pounds to 75 million pounds of copper and all in costs to be between $2.20 to $2.35 per pound. In addition to the significant cost reduction efforts we've already put in place, further cost decreases are expected as we continue to see the benefits from lower price diesel and the weaker Canadian to U. S. dollar exchange rate, as well as the BC Hydro cost deferral program, which allows Copper Mountain to defer up to 75% of the mine’s power cost. In these uncertain times, we're focused on maintaining our margins and protecting our cash flow. While the mine plan we have implemented is sustainable longer-term at these low copper prices, we believe this market uncertainty will likely be relatively short-term and fully anticipate the copper price to recover. We have the capability to revert to higher production levels at any time given the flexibility of our operations. Turning to Slide 5. Of note in the quarter, we came to an agreement with our partners, Mitsubishi Materials, to extend our current related party debt to the mine until June 2023, making it a long-term obligation with no payments due until then. This improves our working capital by about 135 million and strengthens our financial position. Production in the quarter was 17.5 million pounds of copper, approximately 6,100 ounces of gold and 80,000 ounces of silver for nearly 22 million pounds of copper equivalent. We significantly revised our mine plan in Q1 and we expect higher production in the second half of the year, as well as overall lower unit costs. Don will go into more detail on our revised plan in a bit. C1 cost in the quarter was about $2 per pound, all in sustaining cost was 2.14 per pound and all in cost, which includes deferred stripping and G&A, was $2.47 per pound. First quarter costs were higher as we are still working off the old plan until early March. We expect to see costs come down considerably from these levels, and we reiterate our March 10th guidance in respect to all in cost and production. I'll now turn the call over to Don to go over our operational results.

Thanks, Gil. Starting on Slide number 7. As Gil mentioned, we implemented a revised mine plan in early March in reaction to the COVID-19 pandemic and the lower copper price environment. We were mining in phases one, two and three as shown on this slide until early March. Our strip ratio was 3.1:1 during the quarter as we have focused on advancing phase number three. Our revised mine plan defers phase number three, which significantly reduces mine operating costs and saves high grade ore for stronger metal price environment. We have cut our mining rate by about 25% from approximately 195,000 tonnes per day to about 145,000 tonnes per day for the remainder of the year. I will discuss the mine operating cost savings in more detail on the next slide. We are presently focused on mining phases number one and two, which are short, low cost, all cycles to the primary crusher and waste dumps. The primary crusher and waste dump are located in the top right of this schematic. Before moving to the next slide, I want to provide you with the orientation of the picture on that slide. It is looking southwest at phase three high wall with the phase one pit located to the right side of the picture. Turning to Slide number 8. This slide visualizes the high cost waste and ore movement from phase number three. The waste and ore were being hauled up these ramps and the waste continued up into the south to the waste dumps, while the ore was hauled around the pit and back to the primary crusher. These are long hauls and fuel intensive hauls. In our revised mine plan, we expedite the completion on mining of phase one, which is on the far right side of this picture. Phase one is mined to the ultimate life of mine pit bottom in early Q3. Once phase one is complete, we then move waste from phase three, a short downhill haul and backfill phase number one. With the completion of phase three -- with the connection of phase three, the existing phase one in pit haul road the ore haul to the primary crusher is also much shorter and lower fuel intensity. This revised mine sequencing provide significant cost savings associated with a much shorter and lower fuel-intensive haul profile. It allows us to significantly reduce our haul truck requirements for 2020. We will continue to focus on phase one and phase two mining through Q2 and then transition to higher grade ore supply from phase three in the second half of the year. We expect the strip ratio to be around 2:1 for the remainder of the year. Turning to Slide number 9. The mill continued to operate consistently during the quarter. The one item to discuss for the quarter is a slightly lower recovery. Turning to Slide number 10. In Q4 of last year and in Q1 of this year, we were mining in a small area of the reserve that has the finest mineralogy and lowest recovery in our life of mine plan. This schematic shows the mineralogy domains in relation to the areas mined in Q1. The majority of the reserve is coarse and medium grain mineralogy, which is a very small portion, while a very small portion of the reserve located in phase one is a finer mineralogy. This fine mineralogy is the reason for the lower recovery during the quarter. As I stated earlier, we will complete the mining of phase one in early Q3. This will complete the mining of this finer grain ore domain for the life of mine plan. Following completion of phase one, the recovery is expected to increase for the remainder of 2020. Turning to Slide number 11. As Gil stated in reaction to the lower copper price, we deferred the installation of Ball Mill #3 to conserve cash. However, we continued with the installation of the direct location reactors, which are being installed as a second cleaner stage for the flotation circuit. This project will provide stability and capacity for the cleaner circuit, supporting production of a higher grade copper concentrate. This is a low CapEx high value project that we are continuing to advance and expect to commission in early Q3. The picture on this slide shows the recent installation of a new splitter box which feeds the existing column flotation cells. The splitter box provides flow stability and improved control to the column cells. The column concentrate will feed the new DFR cells, which will be installed beside the columns located in the top right of this picture. The DFR tails will return to the splitter box. These process connections are being installed in regular scheduled mill shutdowns to support a quick commissioning. The DFR cells are scheduled for delivery and installation in late Q2. I’ll now turn the call over to Rod to go through our financial results.

Thank you, Don. As noted on Slide 13, the mine shipped and sold 17.9 million pounds of copper, 6,364 ounces of gold and 78,572 ounces of silver in Q1 2020. Revenue for the first quarter was $49.6 million net of pricing adjustments and treatment charges, and was based on an average copper price of $2.58 per pound. Revenues were down 43% as compared to the $86.9 million recorded in Q1 2019 in part due to lower sales and metal prices realized in Q1 2020, but also due to $19.1 million negative mark to market and final adjustment from provisional pricing on concentrate sales as compared to a positive mark to market and final adjustment of $9.9 million in Q1 2019, a differential of about $29 million. A majority of this is a non-cash accounting entry that is required under IFRS and the ultimate adjustment to revenue will be recorded when the sales are finalized over the next three months. Cost of sales in Q1 2020 was $64.5 million as compared to $63.6 million for Q1 2019. Despite $4.6 million reduction in site costs, the increase in cost of sales was marginal as Q1 2019 cost of sale was net of $13.6 million of deferred stripping costs, while Q1 2020 cost of sale was net only $7.4 million of deferred stripping cost. Turning to Slide 14. This all results in a gross loss of $14.9 million and net loss of $43.5 million for Q1 2020 as compared to a gross profit of $23.3 million and net income of $17.8 million for Q1 2019. The net loss position for Q1 2020 was directly attributable to two things; the first is COVID-19 and the impact it has had on the world copper markets and the company as we adjusted our 2020 operational plan throughout the first quarter; and, to the non-cash unrealized foreign exchange loss of about $20 million, which is primarily related to the company’s debt that is denominated in U. S. dollars and is required to be made under IFRS as outlined in the company's MD&A and statement of cash flows. As you can see on our income statement, foreign exchange gains and losses can vary significantly on a quarterly and yearly basis. Therefore, we encourage investors to look at adjusted earnings and adjusted EBITDA to better measure the company's financial performance. After removal of all the accounting non-cash items, the company reported adjusted EBITDA of $5.2 million and adjusted earnings of $1.4 million or about $0.01 per share for the first quarter of 2020. Despite the challenges of COVID-19 and reduced prices as a result of it, we were still able to increase our cash position by quarter-end. We started the year with $32 million in cash and ended the quarter with approximately $36 million in cash on hand. I will now pass the call over to Gil for some closing remarks.

Thanks, Rod. If you could turn to Slide 16 please. Despite the uncertainty of this global crisis, we remain focused on completing some major tasks this year. Work on the EVA Copper bankable feasibility study is near completion and we expect to announce results within the next week. These results will include the Blackard deposit, which we announced the resource for last October of 836 million pounds of copper. We've also optimized the no flowsheet and the mine plant, which we expect to result in substantial improvements in estimated production in costs. Early in the third quarter, we plan on commissioning the DFRs as Don has noted and the first stage of our mill expansion project. We will manage project advancement for the installation of the third Ball Mill dependent on market conditions. We have maintained long lead item expenditures that are critical to the project to allow for a rapid restart when markets dictate. On exploration, we continue to drill and we plan on updating the reserve and resource for Copper Mountain in the fourth quarter. With having greatly expanded our reserves last year, we are currently in a situation where our reserve life materially outsizes our annual production rate. So we're working on a further expansion study designed to test increased production at the Copper Mountain Mine to 65,000 tonnes per day. We expect to announce the results of this study in about six months. And before we conclude, I just want to remind our shareholders that the TSX has allowed companies to hold AGMs at anytime in 2020 due to current travel and social distancing restrictions. We've scheduled our June AGM later to September the 9th. We will announce additional details closer to that time. Just to conclude, we remain focused on operating with solid margins and cash flow without sacrificing the intermediate or long-term plan. We have demonstrated our flexibility and ability to react quickly, and response to changing market conditions and metal prices. This flexibility applies both to the downside and of course to the upside if markets recover, we can quickly turn on additional production. However, our top priority is ensuring that we protect the health and safety of our team and the local communities in which we operate. Our team has done an outstanding job implementing and living the new COVID-19 guidelines and procedures at the mine and throughout the organization. I would like to thank our team for their efforts, as well as acknowledge the support of the BC government, our shareholders and stakeholders in these uncertain times. And with that, I will open up the call to questions.

[Operator Instructions] Your first question today comes from the line of George Topping of Industrial Alliance. Your line is open.

Couple of questions in the near term for Q2 and Q3, what would you see the strip ratio for those two quarters are roughly?

George, for the rest of the year, we're seeing 2:1. I don't have the exact strip ratio in front of me right now and maybe we can get that and get it back to you. But for the rest of the year, 2:1.

And then we obviously seen deflation in diesel. Are you seeing other consumables coming down and where do you see unit costs being also in the short-term Q2, Q3 is really we are focused given expect copper prices to recover?

I think principally we're seeing reductions in diesel cost and most of our unit cost reductions are going to come as a result of reduced haulage expenses. So, when we look forward at the cost, we see a declining cost structure for two reasons. One, of course, we're getting into lower mining cost areas of the deposit. But secondly, we'll see increased recovery and increased production through the year. So yes, you'll see our unit cost decline.

And any rough estimate of that? I mean with the power rebate 10% reduction maybe in Q1 type of thing, whether any guidance on that?

Power costs are a real savings there's no question about it. But those savings as those power cost savings, George, are actually a deferral, so they are an obligation that will be owed in the future. In terms of true cost savings, the fuel costs will be the predominant savings. Do you have anything to add on that, Don?

Yes, I guess as Gil stated, George, that fuel is the main one. We do certainly see natural gas inputs impact to things like grinding steel and explosives. And longer term, we expect [higher] [ph] costs to drop but we haven't really looked at those too closely at the stage. As Gil stated, the big cost savings is really the reduction in consumption associated with the revised mine plan and that's really been our focus at this stage.

Other things George that we have done is that we've reduced a lot of contractor costs when we have any special projects to do around the mind. And as we reduced the workforce that's active in projects, they've been reassigned to do some of the project work, capital project work, whether it's geotechnical work or other type of work around the mine.

Your next question today comes from the line of Orest Wowkodaw with Scotiabank. Your line is open.

I was just going to say, with the new mine plan you put out in March, you deferred $22 million mill upgrade. Can you give us what the new capital budget is now for the year, when we think about both sustaining and growth?

Actually from that point, we have done a little bit of additional reduction in capital and operating costs, but I'll let Rod cover that one off.

As you know, the Ball Mill expansion has been deferred. We are continuing to move with long lead items, as Gil mentioned, in terms of keeping our flexibility there. We're spending about little over CAD7 million on that this year. The balance of projects, we chopped down things like pit wireless, we're pushing that out of the year. So we reduced our capital spend from about $52.5 million, down by $33 million to about $19.2 million this year. And that's made up of a number of items such as our Wolf Creek project, the Creek realignment that's an important project to get done this year. So that has maintained 100% budget that's costing us about $2.6 million this year. Our Ingerbelle permitting, well, it's very important to the future of the company. We are able to slow that down a little bit not in terms of time frame but dollars spent. And so if you add all these items up, it's about $19.2 million this year.

And Rod, you had a big influx of working capital, a positive working capital this quarter. How do you see that playing out the rest of the year? Is that going to start reversing?

Well, I guess the big item when you look at working capital, we saw the Mitsubishi debt be pushed out three years. So, that's certainly helped there's no question about that. But when you look at it from on the statement of changes and cash flow, you certainly saw the movement in receivables and payables that really accounted for that. So, it’s going to depend on how we see the pricing come through over the next three months on how that's going to ultimately play out. But we did see, we've provided provision of reduced revenue coming in from our concentrate sales, because of that mark-to-market adjustment that we saw. So, I do expect that to reverse somewhat.

And then just finally on the power deferral can you remind us how much are you paying in power, say in dollars per quarter? I think you said [75%] could be deferred….

We pay about $2.6 million per month and BC Hydro has come out with a couple of programs. The existing program that was there that we utilized back in 2015 is still there, but they came out with a another program over and above that, that allowed you to defer up to 50% of your power bill over the next three months to help specifically address the COVID-19 issue.

And can you remind us the mechanics of that again, like what copper price are you allowed to do that?

The new program that we came out with is just a 50% reduction, is not related to any pricing. The old program, which is still there, relates to pricing and FX. And so it was around 3.40 Canadian copper price that got you sort of a zero deferral and as the adjustments change, you would get a deferral or a repayment, one way or the other. And I can send you a sheet, Orest, that just calculates it for you, so you can put your own numbers in.

[Operator Instruction] Your next question today comes from the line of Stefan Ioannou of Cormark Securities. Your line is open.

So maybe just switching gears over to Eva. I know you mentioned the study is going to be out pretty shortly here, so maybe this question's a bit premature. But obviously, once the study is out, amidst COVID and everything else, can you sort of give us maybe even just a rough idea of what you're taking in terms of moving the project to the next level in terms of advancing sort of financing discussions and what not, or is it sort of going to be on the back burner for at least the foreseeable future until COVID is well beyond this?

Stefan, that's the big question on everybody's mind. I think, you know what do you do with the fabulous project that has really nice economics in an environment like this. And I think, first of all, it's incumbent upon us to continue to do what we say we're going to do. And we announced that we'd be putting out the results of that study around this time and that really will demonstrate the clear value of that project, which has really a lot of option value for us. Whether when you look at the Eva project itself and you've got a great project in a great jurisdiction that is a financeable project, and certainly a financeable project that can be delivered to the market in a short period of time with a short construction phase. It has value. The difficulty is right now, how do you get that project financing completed and raise the capital requirement and put that into production, there's no question that's an issue. Do we have the answer today for you on this call? I would say, we don't have the answer today. But I will say this that there's clearly value in this project, there's no question about it. Significant value that's not being reflected in the value of the company. And I think it's incumbent upon us and it's a value to our shareholders so that they know that this project that has value can be advanced and can be advanced in future when the markets dictate. And I think it's also important for us to let the market know what's happening at Copper Mountain and what our views of Copper Mountain are of our mine in British Columbia as well, and what is the intrinsic value of that asset and collectively the whole company Copper Mountain as a result. So we've always felt that we have a heck of a lot of torque to the copper price, and have probably a lot more than most of our competitors, especially due to the fact that we have such significant growth potential relative low capital costs. So the capital intensity of our growth is extremely low. And the ability to ramp up and torque that value into the share price, we feel is there with Copper Mountain. That was a long answer and I didn't really answer your question…

No, it's helpful to hear the general thoughts. And I mean it's not a surprise at all, but it’s just good to hear that obviously it is a significant part to the overall story. So, it'd be great to watch it sort of unfold as the future allows it to. Thanks very much, guys.

Your next question today comes from the line of Craig Hutchinson of Citibank. Your line is open.

Just a follow up question to some capital guidance for this year, and just as I kind of look at the all in cost guidance of 2.20 to 2.35, and I kind a compare that against the all in sustaining costs. If I adjust the midpoint, I'm sort of coming up with $50 million difference. And I guess that would be attributed to low grade stockpiles, inventory expense, administration, deferred stripping, that number to me seems quite high. How should we be thinking about those costs? Maybe if you can provide some clarity on what you're looking at for deferred shipping and low-grade stockpiles for balance of the year that'd be helpful. Thanks.

Craig, that number seems extremely high to me and maybe offline we can go into more detail and I can help guide you. But for the balance of this year, we deferred about $7.4 million in Q1. We're not expecting significant deferral for the balance here, another maybe $2.5 million get it up to that $10 million mark. And with regard to low grade stockpile, we're not anticipating adding significantly to low price stockpile for the balance of the year, as well as Don mentioned, they're focused on low mining cost areas and we've reduced our tonnes being moved. And one of that functions is to less low grade stockpile and low grade being moved.

So you can see, Craig, if you look at where we pegged our all in and the all in costs we’ve included everything, that's guts feathers and all. You've got all your G&A in there. You've got your deferred stripping. You've got your stockpile, everything's in that number. And our guidance range is 2.20 to 2.35. Now, some of those inputs in and out on a quarter will affect maybe where our cash cost falls and our AISC falls but the bottom line number is the AIC. And that's why we say that that's the number that you can compare to the metal price basically, because that's the cost of running our operation.

[Operator Instructions] And at this time, there are no further questions in queue. I turn the call back to the presenters for any closing remarks.

Listen, this was a very trying time for everybody. And I appreciate you being on the call and those of you listening in, I hope you all stay healthy and well. And thank you for joining us this morning.

And ladies and gentlemen, this does conclude today's conference call. Thank you for your participation. You may now disconnect.