Hudbay Minerals Inc. (HBM) Q3 2020 Earnings Report, Transcript and Summary

Good morning. My name is James and I'll be your conference operator today. At this time, I would like to welcome everyone to the Copper Mountain Mining Corporation Third Quarter 2020 Earnings Conference Call. [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 third quarter 2020 Management's Discussion and Analysis for more information. I would now turn the call over to Gil Clausen, President and CEO of Copper Mountain Mining.

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 and then we'll wrap up on our growth plans and open the call to questions. Turning to Slide 4, we had a strong quarter as a result of our fast action in implementing a revised mine plan in early March in response to falling copper prices due to the global COVID-19 pandemic. We reacted the markets quickly, developed a plan and implemented it swiftly. Our plan was focused on lowering mining costs and shifting the focus to mine areas that carried solid margins at lower copper price without impacting the long range plan. Our team of professionals at the mine were able to navigate through the low copper price environment and even exceeded plan expectations. And we're now benefiting from the higher copper price while maintaining a low cost profile, allowing us to generate strong cash flows. We're building out significant cash position to restart actually the Ball Mill 3 construction and we expect to start in earnest early next year. Most importantly, our operating team and all employees remain vigilant when it comes to health and safety. In regards to COVID-19, we've had no cases at the mine. I want to give a quick shout out to our crews, their family and the people of Princeton and surrounding areas. Thanks. Copper Mountain had solid production in the quarter. Copper production has been steadily increasing quarter-over-quarter this year and we expect the fourth quarter to be even stronger as we are now back into higher grade ore. But now we're mining that higher grade with the lower cost profile, higher grades are expected to continue through 2021. Our plan was to mine at a lower cost per pound and we were successful. Cash cost AISC and all-in cost in Q2 and the third quarter were low. And we are expected to remain lower through Q4. As a result we're decreasing our all-in cost guidance to a range of US$1.85 to $2 from US$2.20 to $2.35. We're reiterating our production guidance of 70 million to 75 million pounds of copper, but expect to be at the higher end of that range in the fourth quarter forecast and to be the strongest quarter of 2020. I'll now turn the call over to Don who will go into more detail on our mine plan operation results and projects.

Thanks Gil. Starting on Slide 6. Mine performance was in line with expectations during the quarter, but solid execution of the mine plan as Gil stated. Ore supply for the quarter was equally supplied from all three mining phases. In Q3, we completed mining of Phase number one and have transitioned into Phase number three. We're able to move significant waste rock tonnage from Phase number three with the short haul backfilling Phase number one. Phase number three will be the main ore supply for Q4 and throughout 2021. The mine is well established to deliver higher grade ore to the mill for this period. The changes we implemented in the mine plan early in this year in response to the COVID-19 pandemic continues to demonstrate the flexibility within the mine. Turning to Slide number 7, mill continues to operate very consistently on all metrics during the quarter and performance was in line with expectations. Recovery returned to historical levels as we completed Phase number one, and transition to coarser mineralogy. The improvement projects we implemented last year, including the SAG mill discharge screen replacement, and the Ball Mill transformer replacements continued to support the stable production. Also the commissioning of the direct flotation reactors in July of this year has produced the plan step change in concentrate grade, with final concentrate grade increasing from a little over 24% to 28% copper. As part of the Ball Mill number three expansion project we have completed the concrete foundation and floor of the new mill maintenance building. We will complete construction of this building before the end of this year. We're advancing detail engineering and procurement of equipment for the expansion project to achieve that project schedule commissioning starting before the end of Q3, 2021. With commissioning late Q3 of 2021, we will start increasing the mill tonnage rate to the design of 45,000 tonnes per day and start producing a finer grind to increase the recovery to 83% to 85%, depending on ore mineralogy. As we look ahead, we expect the mill grade to continue to improve in Q4 and forward into 2021 with the higher grade or from Phase three of the mine. Turning to Slide number 8, we continue to move forward as planned with mending our permits for New Ingerbelle, targeting completion in late 2021. We are working closely with our consultants, the upper and lower [indiscernible] and the BC government to achieve this. It is worth noting that these permits were originally issued for Ingerbelle in the early 1970s. In addition to the present reserve at New Ingerbelle, we expect the deposit continues at depth and there's significant upside potential. This year, we completed a couple of deeper exploration holes focused on testing the depth extension of the ore body. And in September, we provided this information in a press release. These first two holes encounter long intersections of high grade mineralization, which supported our expectations. These results indicate that deposit as potential to extend at least another 250 metres. Over the last few years, we have more than doubled the copper mine reserve, and I've extended the mine life to plus 30 years. Despite this significant increase in reserve, the deposit is open in all directions and as significant growth potential. We recognize need for exploration investment and we're planning a more extensive exploration program in 2021. We plan to define this initial stage of depth potential new Ingerbelle and explore mineralization extensions of the North Pip. With the present plus 30-year mine life and significant potential for reserve growth, we're studying a further mill expansion from 45,000 to 65,000 tonnes per day. We are well advanced with the study and we'll be publishing a technical report in Q4 of this year. We believe our focus on exploration and mill capacity as a potential continue to add significant value to the Copper Mountain mine. Turning to Slide number 9 as we discussed in the Q2 quarterly call, we are member of the Mining Association of Canada and we are committed to fully implementing the Towards Sustainable Mining Standard or TSM. We're making excellent progress in implementing the Eighth VSM protocol. One of those protocols is energy use and GHG management. This slide shows how we compare to global open pit copper production, and how our development plans are designed to significantly reduce our carbon intensity. Carbon intensity is measured in tonnes of CO2 per tonne of copper equivalent produced. Available information indicates global open pit copper production averages an intensity of three and we are presently around that average. However, when we look forward with our development plans and project plans, we have defined several steps which will significantly reduce our carbon intensity. One key focus area is working with BC Hydro to increase electrification capacity and reduce our diesel consumption, which is the main source of our emissions. We're also partnered with the BC Government, BC Hydro Tohmatsu, SMS and ABB to move forward with trolley assist and demonstrate this technology in Canada and reduce our carbon intensity. Trolley assist uses electricity to replace diesel and power haul trucks. This is mainly focused on uphill hauls where diesel consumption is the highest. We are presently targeting three stages of trolley assist installations, which is part of our initial plan to get below our carbon intensity of one. We have a bold vision to get to a carbon intensity of zero by 2035. And we will continue to work with partners to find ways to achieve that vision building on the six steps we have defined in this graph. We believe implementing TSM is a key component and continuing to add value to our business. I now turn the call over to Rod to go over our financial results.

Thank you, Don. Starting on Slide 11 as noted by Gil the company had a very strong third quarter this year, and the financial results show it. Revenue for the third quarter of 2020 was $95 million on the sale of nearly 18 million pounds of copper, approximately 6,200 ounces of gold and about 68,000 ounces of silver. Higher revenue in the third quarter was a result of higher copper production and metal prices, including a positive mark-to-market adjustment on concentrate sales of about $11.3 million. Cost of sales for Q3, 2020 was $53 million as compared to $64 million in Q3, 2019. The decrease in cost of sales is a result of the cost saving initiatives implemented in the revised plan which utilized less mining equipment in Q3, 2020 as compared to Q3, 2019. This all resulted in a gross profit of $42 million for the third quarter of 2020 as compared to a gross loss of $1.4 million for the third quarter of last year. Turning to Slide 11, the company recorded a net income of $33.2 million in Q3, 2020 or $0.13 per share, as compared to a net loss of $10.6 million or $0.05 per share in Q3, 2019. Net income for Q3, 2020 included a non-cash unrealized foreign exchange gain of $6.9 million as compared to a non-cash unrealized foreign exchange loss of $4 million in Q3, 2019. This represents a differential of approximately $10.9 million, which was primarily related to the company's U.S. dollar denominated debt. For the third quarter of 2020, the company recorded EBITDA of $51.2 million after backing out the unrealized foreign exchange gain and the mark-to-market adjustments for the quarter. adjusted EBITDA was $33 million. Cash flow from operations was $38.6 million for the third quarter of 2020, which allowed us to end the quarter with approximately $53.6 million in cash on hand and increase of $25 million over the prior quarter end. I will now turn the call back to Gil.

Thanks Rod. Slide 14 as we discussed, our cost guidance has been reduce US$1.85 to US$2.00 per pound of copper all-in. We're maintaining our production guidance range of 70 million to 75 million pounds of copper, but we do expect to close out the year at the high end of that guidance range, as the fourth quarter should be our strongest production quarter in 2020. I think we're continuing to demonstrate why many analysts say that we have the best NAV and EBITDA leverage to copper price amongst our peers. And we also have substantial leverage to gold and silver through our byproduct production. Which better positions Copper Mountain over a lot of our peers 30% of our reserve value is in precious metals we remain 100% unhedged on all our metals. On Slide 15, we're highlighting the catalysts that we have planned for the remainder of the year into next as we have greatly expanded our reserves over the last year and a half our reserve life now materially out-sizes our annual plant capacity or run rate. We are evaluating a further expansion to test the economics for a 65,000 tonne per day mill. We expect to announce the results of this study in a technical report within the quarter. Given timing, this study will not include an updated reserve for the drilling that's currently underway, like the recent New Ingerbelle drill results. I will provide an updated reserve and resource for the Copper Mountain mine that includes these drill results and others in the first quarter of 2021. And by any means we are certainly not done expanding the reserve and resource base immense upside remains at Copper Mountain as Don has alluded to. Earlier in the year, we expect to kick off the final phase of installation of the third Ball Mill. We plan on commissioning during the third quarter of 2021. And you'll see the full impact of that mill on throughput and recover in the fourth quarter next year. Earlier this year, we completed a bankable feasibility study for our Eva Copper Project in Australia that demonstrated improved metrics across the board. Eva is one of the only projects in the world in a Tier 1 jurisdiction that has a long mine life will produce over 100 million pounds of copper a year and has a low median cash costs with CapEx well below $500 million. And it's the only project in all of Australia and the Americas, north and south with these positive attributes. So, low capital, low operating costs, material copper production, and plenty of upside still remain in exploration of the known and associated deposits at Eva. There's a lot of value and plenty of options for Eva, and we're doing an assessment for our Board on the best development strategy for Copper Mountain shareholders. On that note, we're pleased to announce the addition of Mr. Peter Sullivan to our Board. His considerable experience in corporate strategy in mining in Australia will be extremely valuable to the company as we move through our strategic plans and options. In our view, Eva has low risk mine development, especially as copper price strengthens. We believe on its own it merits development and should be built. We expect to provide clarity on our company's plans for Eva in the first half of 2021. Concluding on Slide 16, our internal growth profile is quite impressive. The 45,000 tonne per day mill expansion is new Ingerbelle and the potential for 65,000 tonne per day expansion. All of which are low risk, low capital projects that the company expects can be funded entirely with internal mine cash flow. Eva Copper, as we discussed is also a solid low risk project. But what is also really exciting is the highly perspective land package that we have in the Mount Isa region. Many high potential targets that we plan to start exploring interest. And with that, I'd like to open up the call for questions.

[Operator Instructions] And our first question comes from the line of George Topping with Industrial Alliance. Go ahead please. Your line is open.

Don just the carbon intensity slide. Have you got any preliminary ideas of CapEx and cost benefit that you might get from that and what type of payback it might have?

I'll take that and I think Don can follow-up with it. You were actually very excited about this, George as you know, we have extremely low energy costs in British Columbia, we're all hydro power and our cost per kilowatt hour is amongst the lowest in the world. And so, we see a tremendous economic benefit in terms of utilizing some of that low cost energy to power, the motive effort of the mobile equipment vehicle. We've got a relatively low cost plan here and as a high return, I think as we get into these plans a little bit more, you'll see. And we're also getting tremendous support, as Don alluded to from our BC government in terms of credits and also with respect to BC Hydro in terms of their support directly through their power smart initiative. So it will have, I think very solid, positive financial impact to the mine. It's just a good business practice, not just from a societal perspective, in terms of us producing metals that are focused on. And it's our growth in metals is focused on a green economy, but also demonstrating that as a producer of these metals that are critical to a green economy. We can get our carbon footprint way, way down and we hope to eliminate it by 2035 and do it very economically. So I see positive economics. George. Anything you want to add Don?

No, I think that's well covers it Gil. I guess that's part of the reason we done in three stages is this first stage we'll learn a lot from. And then we can really incorporate it into our site economics with greater clarity. So as Gil said, I think it's going to add a lot of value.

For the technical report on the 65,000 tonne a day plan, should we look for all of these initiatives to be included in the technical report or is it something that's going to come through optimization?

No, those will all be looked at separately, I think in this technical report, you can expect an analysis of the existing reserves. You can compare it to our last technical report. And you'll see the impact of moving some of those cash flows forwards on this plan and the cost reduction effort that can be had or outcome that can be had with respect to, the economies of scale so to speak so there should be a direct comparison. We won't be including, a lot of these types of project benefits that have proven it is a technical report that has to stand up to do that proven scrutiny.

Then just final one for Rod as the BC power deferment plan, I think that ended in August for heavy industry. Have you paid that back yet or is it still to come in Q4?

No, we actually paid that back ahead of schedule, just as you probably know as a result of the strong copper prices we've seen in the second half of the year here.

Our next question comes from line of Orest Wowkodaw from Scotiabank. Go ahead please. Your line is open.

I'm just curious on what the outlook might look like for [2001] (sic) 2021 in terms of the mine plan and obviously 2020 got changed a fair amount given the pandemic. And I'm just curious whether we should anticipate still a fairly large ramp up in copper grade in 2021. Somewhere, perhaps in the mid around 0.35 or so or is that or should we anticipate that getting more smoothed out in later years?

Hi Orest, I don't want to steal the thunder, the technical report is coming out here our guidance in January, but we did allude to the fact that we expect as we're quite - as phase three of the main - contributes a significant portion of our production in 2020 you can expect, grades to continue to improve. I think you'll see 2021 being a stronger grade year, certainly then 2020 was and that our production rates should reflect that. And then of course, we also have the higher throughput rate of 45,000 tonnes per day in the fourth quarter of the year. So I think, as with this year, you'll see continued trend of grade improvement through 2021. And I think, we'll be clearly talking about that as we get through, the feasibility study out.

Okay, so the new?

The publication and guidance so.

With a new mine plan, I guess it comes out by the end of the year will that include, like a year-by-year, updated kind of grade and tonnage profile?

Yes, no absolutely. No, you'll see a full basically model outcome in that report yes - grade for mine plan, life of mine plan Orest yes.

Okay, perfect. And then just separately, I'm just curious given how elevated precious metal pricing is. It is - are you at all considering perhaps adding a stream to the Copper Mountain mine to raise capital maybe to fund Eva or I'm just wondering if that's even in the sphere of possibility?

No it's not our intent at all. We at the Copper Mountain mine we want to continue to maintain to be completely unhedged. And we're going to fund we're going to fund all our development within Copper Mountain from cash flow and existing cash flow. So we don't and there's a lot of growth and it's probably the most is the highest return on invested capital growth that we have in the company. These expansions at Copper Mountain so we want to use the cash within the business and so to our partners to be able to grow - the business and our partners are certainly interested in maintaining or certainly enhancing the production output of the mine. Because this is probably in their view some of their best concentrate, if not their best concentrate that they put through the smelters and it's extremely high quality and it's good high grade. So the more the merrier as far as they're concerned. And I think that's the same way when we look at our operations on a go forward basis. We're really sort of very comfortable with the plan and how it's shaking out and understanding that the Copper Mountain can support its own growth and has plenty of upside. And that makes it a kind of a unique asset in our view.

Our next question comes from the line of Raphael de Souza with CIBC. Go ahead please. Your line is open.

So you mentioned that you're expect improved recoveries in the fourth quarter and 2021 to the type of ore from pit three? What sort of recovery should we expect?

Yes, when we look at Q4 and 2021, we expect recoveries to be in that low of 80 range in pit three, until we complete the mill expansion as we talked about in Q4 of next year when we see a step change in our recovery with the finer grain.

Okay. And during this period, majority of the ore is going to come from pit three, correct?

Yes, the majority of the ore will be pit three over the next 15 months.

15 months, okay. Another question somewhat on that front as well so I noticed that the strip ratio was quite high this quarter what you expect going forward, especially for the fourth quarter?

I think you're probably looking at, similar results as we had in the third quarter. And as we look into next year, as we're looking at it at, increasing our overall production, we're looking at a cost structure that's not going to be significantly changed from where we are right now. And there's going to be some give and take on stripping from quarter-to-quarter that generally speaking, I think we're in a little bit of a steady state here. We've done the work on stripping in pit three we're back into pit three again. The stripping that we did last year, and some of the high costs that were associated with that you're set us up for this year and into the future. And so, a lot of that investment has been made, certainly on this phase of the development of pit three. We mined out pit one it allowed us to get the short haul and put the material back into that pit from pit three, which reduced our cost significantly for moving waste material in pit three. And as we move through the next phase as you're going to see, pit three probably a little being the biggest contributor over the next three to four years at Copper Mountain as we move through subsequent development cycles in pit three and Ingerbelle, of course, as Ingerbelle comes into the plan. So it's going to be, I think, an interesting technical report that you'll see. And I think that will probably answer a lot of the questions that you may have about what might be coming in terms of Copper Mountain's production and recovery and grade and things like that year-by-year. Now, with the caveat that we continue to find more, I mean that Ingerbelle exploration is very exciting. And so as the exploration potential of Copper Mountain, so our philosophy here is to continue to refine and update our models as we go forward. And provide input to the market in published technical reports. So that there's transparency in what we're doing so we're very sort of pleased in - the direction of the development of this mine. And I think that it's one of those situations here where we've got, so much exploration, upside at Copper Mountain equally in our assets in Australia.

Okay, thank you and just a quick last question. So I believe you mentioned in the MD&A that you still haven't restarted exploration at Eva. You have any timelines for that or is it like 100% COVID dependent in the country?

Well, it's actually more weather dependent than anything else. I mean Australia you're in the desert and you're in Northern Queensland and it's too hot and rainy this time of the year you get temperatures like 40 Celsius. And the rainy season, is during our winter months, their summer months. So, generally speaking exploration happens in earnest in March of every year and kind of wraps up this time of year or up to around Christmas when the rainy season gets hitting in earnest. So you would expect that if we’re doing exploration in Australia that would be the typical season. And also, we're really starting to look and we want to focus on some of these great prospects that we have outside of our project area. The either project itself is going to be self sustaining from an exploration perspective. And I mentioned earlier that there's lots of targets within the Eva mining licenses that we have their right now. But the exploration of some of this other land package of mine are there is so many high quality targets, gold targets, copper targets, copper only targets, copper gold targets, and that we already have drill holes in most of them are very shallow. And we need to do some more work. I think principally with some diamond drilling in some of these areas. And we hope to find the next mine in our land package. So there's so much organic potential here on that land package. And we can't just say that we have to look at getting after some of this stuff. So that creates good value for our shareholders.

[Operator Instructions] Our next question comes from line of Stefan Ioannou from Cormark Securities. Go ahead please. Your line is open.

I'm just wondering on the exploration front obviously some nice results there deep at New Ingerbelle. Can you maybe give us a little bit more color on sort of what the plan is going into next year, from an exploration point of view? Do you have a budget set in terms of metres or dollars to spend and sort of maybe what the targets might be?

We're going through a budgeting phase right now. So we're going to be wrapping that up. We've, been doing a little bit more work late this fall, some of its associated with the technical report, and some geotechnical holes that we had put in. But also, our full exploration program will probably take place next year. Can't give you too much color on that but I can tell you where we are going to be focused. If you look at that section that Don put up, we're going to be looking at doing more drilling to define that large gap that's in between those great holes that we have on that section, because that's easily mineable material. And if you look at the topology or topography of that area, you can quickly see that you can expand Ingerbelle without materially changing the strip ratio and get at much deeper material, especially as the deposit moves towards the south, which is towards the viewer when you look at that cross section. And we're in a valley so, it has some great geometrical strengths so to speak with respect to looking at some of that deepening arm we'll focus on that.

Okay. I mean, not to put the cart ahead of the horse or anything, but obviously, you've got a lot of resources and reserves, already sort of, in the bank, but obviously with this potential now at depths and elsewhere. I mean looking ahead is, do you think there's a potential here that the 65,000 tonne a day study actually may be short lived, and there's something that's even bigger, that's warranted or is there a threshold in your pocket that might, justify something even bigger in terms of mine life?

I like your thinking Stefan I think, most importantly we got to do that drilling, and we've got to do the analysis. And but to be fair, I guess we haven't had this intense focus on exploration and looking at the realization of the potential of Copper Mountain, and we've certainly been doing that over the last couple of years and we continue to do that in the future. We don't know I don't think we ultimately know what's the right size here. Right now we have 50 years of resource on the books and we have 30 years of proven reserves and we haven't closed off anything yet Copper Mountain North at Ingerbelle. And, but so, behooves us to really do some investment. This is all self-sustaining investment when we give our forecasts and guidance but that's going to include a solid, solid exploration plan. We've invested also - separate from exploration we've invested in a lot of drilling in pit for definition drilling. So we've been utilizing RC drilling in our pit to continue to define the existing reserves to a high degree of confidence so that we can get out to a year to 18 months of completely drilled off to 2P solidly proven reserves over our budget cycle and beyond. And we intend to carry that out like we did last year, that's why our result, I think you'll see are going to be more predictable, as we closed out any sort of gap. And we've been in the 18 month plan, and it's up to two years, we're eliminating a lot of the sort of indicated or probable type reserves in our plan and really filled it in well. So I'm very, very pleased with the process that we're going through, not just in terms of the definition drilling, I just talked about and getting confidence, complete confidence in the plan. It's also the potential for exploration as we do deeper diamond drilling and not even deeper, in some cases that's adjacent to the existing pits, that is really, I think it's the gift that keeps on giving Copper Mountain its great deposit.

Our next question comes from the line of Craig Hutchison with TD Securities. Go ahead please. Your line is open.

With respect to restart of the third Ball Mill here, can you remind us how much capital is still to be spent on that and where we should be kind of waiting the spending in terms of the next two or three quarters?

Yes, we've got no change in our capital estimates - so what we defined the total project cost, was about US$22 billion roughly, and that's all about what I guess it's higher 20s Canadian in that range. So it's not like it's any change at all from the existing, what we previously announced like I should say. The balance of what's remaining to be done as you know, the DFR were done and Don alluded to the shop basically being completed, which we have the shop in the Ball Mill Bay, where the Ball Mill is going to be installed. And so we had to move that maintenance shop, basically out of there. We'll start, busting out the concrete and excavating and pouring the foundations and then we'll be ready to set the mill. We've been working on tie-ins, we've been looking at removing some other miscellaneous material in that area. So we're getting ready to actually break some ground.

Okay. In terms of spending we just assume must have spent evenly over the next three quarters or so or would you be more heavily weighted starting next year?

I would say it's more heavily weighted to the start of next year, but it's evenly spread out. And as you know from a cash perspective, payables tend to lag construction. And so I would say you probably, if you evenly spread this stuff out over the year, it's fine. It's fine way to estimate.

Okay. And I'm understanding you guys are exploring strategic partners for Eva, just curious, if you were to get somebody who was willing to offer you for the strong economics, would you consider minority interest holder Eva is your intent to be majority owner and operator?

Well, I tell you what, I think we're working hard on several options here, right now, I think that, our intent is if we - pulling a partnership position, we're going to be the operator of this month. And so, we don't - we have no intent to go down to a minority position on this. We would I think in that situation, we probably better we’ll be better off to put it into somebody else's hands entirely. And but yes our intent would be under any partnership or self development thing to be obviously the operator and we have a huge amount of expertise. And it's a solid plan that's been put together by that technical team. And we have the construction guys to be able to do it, which we've demonstrated we can do these projects and do them very well.

And there are no further questions in queue at this time. I'd like to turn the call back over to Gil Clausen for some closing remarks.

Well listen, thanks everybody for joining the call today. And I just want to say to everyone on the call, please stay healthy and stay safe and have a great day. Thanks bye.

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