Peter Kukielski
Analyst · Credit Suisse. Please go ahead
Thanks very much, Candace. Good morning, everyone, and thank you for joining us. 2022 was a year of dedication, discipline and delivery for Hudbay as we completed our first full year of New Britannia and Pampacancha operations transitioned our Manitoba operation with a new focus on Snow Lake managed through political uncertainty and logistical constraints in Peru and committed to further improving our already low carbon footprint. We were faced with a period of higher input prices and volatile copper prices, but we took measures to reduce our discretionary spending as part of our commitment to disciplined capital allocation and generating free cash flows. More than ever, we are focused on maintaining a strong safety culture in our workplace and continued alignment with our local communities. In this presentation today, I will go into more detail about our achievements and challenges in 2022, touch on the operating and financial performance of the business and provide an overview of our production and cost outlook as we execute on our key strategic objectives for 2023. Starting on slide 3, we're proud to have achieved our 2022 consolidated production guidance for all metals and consolidated cash costs and sustaining cash cost guidance in a difficult environment. This was due to the strong ramp-up of the New Britannia mill which successfully increased annual Snow Lake gold production by 46% in its first full year of operations. Similarly, in Peru, a full year of production at Pampacancha helped to bring copper and gold production each by approximately 15% year-over-year. In Manitoba, 2022 has been a transition year as we closed our 777 mine and Flin Flon metallurgical complex after decades of steady operations. The Manitoba team continued to focus on integrating the Flin Flon employees and equipment into the Snow Lake operations in order to significantly reduce our reliance on higher cost contractors. We also completed confirmatory exploration drilling at our Flin Flon Tailings facility in 2022, which indicated higher grades than reported from our historical mill records. This facility holds in excess of 100 million tonnes of tailings that have been deposited over the span of 90 years. We plan to complete metallurgical test work on the Flin Flon Tails to assess the metallurgical recoveries. Furthermore, our Anderson Tailings facility in Snow Lake contains significant amounts of gold deposited over many decades. Given our enhanced gold processing capacity in Snow Lake, we are in the early stages of evaluating a similar opportunity to reprocess the Anderson Tailings as well. Elsewhere in Snow Lake, the Lalor expansion beyond 4,650 tonnes per day is ongoing, and the store recovery improvement program is well advanced and on track for completion in early 2023. We also repaid 50% of the gold prepay facility that helped fund our new Britannia mill refurbishment. In Peru, we announced the signing of an exploration agreement with Uchucarcco community in August, providing access to the Maria Reyna and Caballito satellite properties located within trucking distance Constancia, and I'll touch on these opportunities shortly. In early 2022, we completed an internal positive scoping study at Constantia Norte, highlighting an inferred mineral resource estimate of 6.5 million tonnes at 1.2% copper. The study concluded that the two high-grade skarn lenses could be mined by underground methods starting in 2029 to supplement the open pit production. Later in the year, our team also completed an initial mineral resource estimate for Llaguen and identified a higher-grade core. Llaguen is 100% owned copper-molybdenum porphyry deposit located in the La Libertad region in Northwestern Peru near the city of Trujillo and within close proximity to existing infrastructure, water and power supply. More importantly, in Peru, we're extremely proud of the team's efforts in maintaining strong operations throughout the year despite operating in a challenging environment with heightened inflation recent vertical changes and logistical challenges. The team has been able to successfully navigate this environment, while maintaining steady operations and achieving our copper production guidance in 2022. In the United States, we demonstrated the value at our copper world project with the release of the preliminary economic assessment in June. The PEA outlined a two-phase mine plan incorporating the newly discovered deposits along the East deposit, formerly known as Rosemont. Phase 1 reflects a 16-year stand-alone operation on private land with average annual copper production of approximately 86,000 tonnes at attractive cash costs of $1.15 per pound. Phase 1 generates robust economics with an after-tax net present value of $741 million at a 10% discount rate and an internal rate of return of 17% using a copper price of $3.50. Phase 2 at Copper World expands mining activities on to federal land and extends the mine life to 44 years with average annual copper production of approximately 100,000 tonnes. The projected after-tax NPV of the second phase at the time of sanction would be $2.8 billion, which demonstrates the significant upside opportunity, the second phase brings to the project. After the completion of our PEA for Copper World, we initiated the state-level permitting process and received the first of the state permits, the mined land reclamation plan in 2022. We completed the technical work to support the pre-feasibility study for Copper World, which I'll touch on in more detail later in the presentation. And in late 2022, as part of our disciplined financial planning, we announced three specific prerequisites including specific financial leverage targets that would need to be achieved prior to making an investment decision in Copper world. Finally, we have been rationalizing our non-core asset portfolio and divested our 100% interest in the Lordsburg property in New Mexico, which was applied through the Mason acquisition in 2018. And we completed the sale of our equity interest in Fireweed metals, which we received in 2018 in exchange for the sale of our Tom and Jason properties in the Yukon. Turning to Slide 4. We started to see the benefits from our recent brownfield investments through increased production and cash flows in our 2022 results. Fourth quarter consolidated copper production increased by 20% from the third quarter, primarily due to higher copper grades in Peru, consolidated gold production was slightly higher than the third quarter due to higher gold grades in Peru, which were partially offset by lower Lalor gold grades in Manitoba. As I mentioned, we achieved full year consolidated production guidance for all metals. Annual copper and gold production was on the lower end of the guidance range, primarily due to lower than planned grades in the fourth quarter in Peru as we implemented short-term mine plan changes to mitigate the risks associated with logistical and supply chain disruptions. Consolidated copper cash costs increased from the third quarter levels as a result of lower precious metal sales volumes and continued inflationary cost pressures, partially offset by higher copper production. Sustaining cash costs also increased from the third quarter due to the same reasons affecting cash costs and higher capitalized exploration, slightly offset by lower sustaining capital expenditures. Operating cash flow before changes in non-cash working capital was $109 million during the fourth quarter, reflecting an increase of $27 million compared to the third quarter Fourth quarter adjusted EBITDA was $125 million compared to $99 million in the third quarter. Results were higher than the prior quarter due to higher copper sales volumes and higher copper, gold and molybdenum prices but partially offset by the temporary buildup of unsold inventory in Peru. In light of the environment in the second half of 2022, with increasing input prices and decline in copper prices, we delivered $30 million in discretionary cost reductions across the business through lower growth capital and exploration expenditures. We exited the year with $226 million in cash and equivalents as well as undrawn availability of nearly $350 million under our revolving credit facilities. On Slide 5, we summarize our Peru operating results. During the quarter, we produced 27,000 tonnes of copper and 21,000 ounces of gold at 21% and 64% increase, respectively, over the third quarter. These production increases were due to higher grades and recoveries, and the fourth quarter was a record quarter for gold production in Peru. Full year copper production increased by 15% year-over-year to 89,000 tonnes, achieving the annual guidance. Full year gold production increased by 16% year-over-year to over 58,000 ounces but fell short of 2022 guidance. This was due to a short-term change in the mine plan where we prioritize the processing of lower grade stockpiles and shorter haulage distances of ore from the Constancia pit. This allowed us to reduce our fuel consumption and keep the mill at steady production during a period of nationwide social unrest and road blockades following the change in Peru's political leadership in early December. Despite these changes, total ore mined during the fourth quarter increased by 7% and total ore mined was slightly higher than the pre-quarter. Unit operating costs in the fourth quarter were 4% higher than the third quarter primarily due to higher mining costs and continued inflationary pressures. Full year unit costs were 19% higher than 2021 due to a higher strip ratio higher mining costs and inflationary pressures on fuel, consumables and energy costs, partially offset by higher ore milled. Peru's cash cost in the fourth quarter declined by 20% to $1.34 per pound compared to the third quarter due to higher copper production and higher by-product credits resulting from higher grades. Sustaining cash costs decreased by 15% quarter-over-quarter, primarily due to the same factors affecting cash costs and lower sustaining capital expenditures, partially offset by higher capitalized exploration. While we were successful in completing two port shipments in December, inventory of approximately 25,000 metric tonnes of copper concentrate was unsold at the end of the quarter due to nationwide blockades. Given that, we have been able to continue to operate our concentrate inventories at site reached a peak of approximately 47,000 tonnes in mid-February. We were able to complete three concentrate port shipments in January and regular transportation of concentrate has resumed since mid-February. We expect to return to normal concentrate inventory levels in the next several months. As an additional prudent measure intended to ensure a positive cash flow generation and continued financial discipline, we expect to extend our existing quotational period hedging program to cover approximately 13,000 tonnes of contained copper in the unsold concentrate inventory to lock in current copper prices. Moving to the next slide on Manitoba. Gold, zinc and silver production declined during the fourth quarter compared to last quarter, primarily as a result of lower grades at Lalor in line with the mine plan. Copper production was slightly higher than last quarter. Full year 2022 production in Manitoba was impacted by the planned closure of 777 in June, resulting in a decrease in copper, zinc and silver production while annual gold production increased by 13% as New Britannia ramped up to full production. Full year production of all metals in Manitoba achieved the 2022 annual guidance ranges. All in mind that Lalor increased by 6% in the fourth quarter compared to the third quarter, mainly due to the higher production initiatives and the integration of the Flin Flon employees and equipment partially offset by a planned maintenance program at the mine. We continue to advance several key initiatives to support higher production levels at Lalor, including building longhole inventory, improving stope fragmentation, optimizing the development drift size and focusing on shaft availability improvements to enable more ore to be hoisted to surface, while reducing inefficient trucking of ore via the ramp. The combined Snow Lake Mills processed 5% less ore in the fourth quarter due to the employee transition and planned maintenance. The New Britannia Mill continued to achieve consistent production, averaging 1,530 tonnes per day in the fourth quarter. Combined unit operating costs in the fourth quarter were relatively in line with the third quarter Full year combined unit operating costs increased by 27% compared to 2021, reflecting the stand-alone higher cost structure of Snow Lake after the closure of the 777 mine and the Flin Flon operations in mid-2022. Manitoba's gold cash costs were $922 per ounce in the fourth quarter, higher than the third quarter, primarily due to lower byproduct credits and lower gold production. However, full year 2022 cash costs were $297 per ounce, which was impressively below the low end of the annual guidance range. Slide seven illustrates the growth in copper and gold production on the back of the $250 million in brownfields investments we delivered in early 2022. 2023 is expected to be another year of meaningful growth, with consolidated copper production expected to increase by 10% and consolidated gold production is expected to increase by 30% compared to 2022. Consolidated copper and gold production is expected to further grow in 2024 as a result of continued higher grades at Pampacancha and several gold production enhancements in Snow Lake. This is expected to lead to increasing EBITDA and cash flows, and we believe our high-quality pipeline of attractive development and exploration opportunities will further add to this growth in the medium to long term. Slide eight highlights the details behind the 2023 consolidated production growth. In Peru, the mine plan adjustments we saw in the fourth quarter continued into early 2023 to ensure steady operation of the plants during the regional logistical challenges. This is expected to result in more ore being mined from Constancia and less from the Pampacancha pit in early part of the year. Despite these changes and a period of higher stripping at Pampacancha, 2023 production is expected to be 103,500 tonnes of copper and 95,500 ounces of gold, representing year-over-year increases of 16% and 64%, respectively. In Manitoba, 2023 gold production is expected to increase by 18% to 190,000 ounces due to higher gold grades and a 10% increase in ore throughput at the Lalor mine. The 2023 mine plan at Lalor reflects higher production from the gold and copper gold zones, as those zones are expected to be prioritized over the base metal zones. It also reflects a 10% increase in throughput at the New Britannia mill, as the mill has been consistently achieving the levels above nameplate capacity. These mine plan enhancements result in 2023 gold production level being consistent with the most recent mine plan for Snow Lake, but without the full ramp-up to 5,300 tonnes per day, as we focus on maximizing the value per tonne of ore at Lalor. Year-over-year, zinc production is expected to decline by 42%, primarily due to the recent closure of the 777 mine. We expect to release 2024 and 2025 guidance next month, with our annual mineral reserve and resource update. We expect our 2024 production guidance to be similar to the previously issued guidance, reflecting a further increase in copper production in Peru and gold production in Manitoba. More importantly, we now expect mining activities at the Pampacancha deposit to continue into the first half of 2025, which is expected to increase copper and gold production in 2025 beyond the levels shown in the most recent technical report. Slide nine summarizes our cost guidance for 2023. Total expenditures are expected to decline by approximately $65 million compared to last year due to lower discretionary growth capital and exploration spending in 2023. Peru's sustaining capital expenditures are expected to increase year-over-year, but remain in line with the most recent technical report. The higher level of sustaining capital is due to an increase in heavy civil works for the completion of a tailings dam raise in 2023. Manitoba's sustaining CapEx is expected to be lowered in 2022, due to lower equipment spending at Lalor and in the mills after the Snow Lake transition and ramp-up period in 2022. Total growth capital of $55 million in 2023 includes $10 million for mill recovery improvement initiatives in Peru and $15 million for the completion of the store mill recovery improvement project in Manitoba. We have also allocated $30 million to growth spending in Arizona as we advance permitting economic studies and site works at Copper World in 2023. Total exploration expenditures of $30 million in 2023 are 61% lower than 2022 levels, due to our focus on discretionary spending reductions. Our planned exploration activities this year are focused on areas with high potential for new discovery and mineral reserve and resource expansion. These initiatives include permitting and grill preparation for the Maria Reyna and Caballito properties near Constantia, a limited drill program at Pampacancha to evaluate the potential to add an incremental mining phase at depth and the winter drill program in Snow Lake focused on testing the deep extension at Lalor. Copper cash costs in Peru are expected to decline by 26% in 2023 versus 2022, primarily due to higher gold by-product credits and higher copper production. Gold cash costs in Manitoba are expected to increase in 2023 compared to last year as a result of the transition to our primary gold operation with lower byproduct credits after the closure of the 777 mine in June 2022. Consolidated copper cash costs in 2023 are expected to decline by 30% compared to 2022 levels due to the increase in copper production and higher gold byproduct credits from the increase in annual gold production. Consolidated sustaining cash costs in 2023 are expected to be 18% lower than 2022 levels due to the same factors affecting consolidated cash costs, partially offset by slightly higher sustaining capital expenditures. Part of the discretionary spending reductions relate to deferred spending at our Copper World project. The reduced year-over-year spending at Arizona reflects our focus on project derisking activities including the completion of a prefeasibility study, state-level permitting and plans for bulk sampling program in 2023, as shown on slide 10. The majority of the technical work and expenditures related to the prefeasibility study for Phase 1 of Copper World are now complete. The prefeasibility study is expected to support the conversion of the mineral resources to reserves and optimize the layout and sequencing of the processing facilities. Prefeasibility level engineering the main processing facility was completed by year end, together with geotechnical and hydrogeological site investigation activities. Metallurgical test work continued into 2023 and the results are being analyzed as part of concentrate reaching trade-off evaluations. The prefeasibility study results are expected to be released by the end of the second quarter of 2023. The Copper World requires only state-level permits for Phase 1. Late last year we submitted applications for an Aquifer Protection Permit and an air quality permit to the Arizona Department of Environmental Quality known as the ADEQ. We have been working closely with the ADEQ and we expect to receive these two remaining permits in 2023. The other key state permit, the Mined Land Reclamation Plan was received in 2022. In January 2023, we received an approved right of way from the state land department with that will allow for infrastructure such as roads, pipelines and power lines to easily connect between the properties in our private land package. Upon receipt of the state permits, we expect to conduct a bulk sampling program to continue to de-risk the project by testing grade continuity, variable cutoff effectiveness and metallurgical strategies. Additionally, we intend to initiate a minority joint venture partner process, which will allow the potential JV partner to participate in and help fund the definitive feasibility study activities in 2024. The opportunity to sanction Copper World is not expected until 2025 based on current estimated time lines and reflects a conservative approach to spending at Copper World over the next two years. The 3P plan for sanctioning Copper World that I mentioned earlier is laid out on this slide. This plan ensures Hudbay will be in the best position to move the project forward, with the lowest cost of capital and the highest risk-adjusted return on investment. Turning to slide 11, our recently executed Surface Rights Agreement with the community over Chicago allows for exploration of the Maria Reyna and Caballito properties. Hudbay owns the mineral rights to these properties that are located within trucking distance of the Constancia processing facility, and we completed geophysical surveys in the area that indicate large-scale potential at these properties. Shortly after the community exploration agreement was completed, we commenced baseline environmental and archeological activities to advance the permitting process for property drilling in the future. A ground geophysical survey commenced in the fourth quarter, and will continue once the Peruvian social situation improved. Our geological team commenced surface investigation activities and field evidence confirms that both Caballito and Maria Reyna host sulfide and oxide rich copper mineralization in skarns, hydrothermal breccias and large porphyry intrusive bodies. Similar to Pampacancha, Caballito was located about 5 kilometers from Constancia and includes an old open pit mine that was operated by Mitsui until the early 1990s. The US geological survey from 1990 estimated a total resource of 91 million tonnes as 2.3% copper for the open pit mine. Maria Reyna is approximately 10 kilometers from Constancia and artisanal mining activity is present in the high-grade areas. These small-scale miners report an average grade of between 2% and 6% copper in the ore. In Snow Lake, we commenced a winter drill program in January 2023, with four drill rigs testing the down-dip gold and copper extensions of the Lalor deposit. This is the first time we have completed step-out drilling in the deeper zones at Lalor since the initial discovery of the gold and copper gold zones in 2009 and 2010. One additional drill rig is actively testing a target to the north of Lalor, which is another highly perspective location next to the main Lalor ore body that is thought to be offset by post mineralization faulting. The first phase of this program includes a total of 12 holes and over 20,000 meters of drilling followed by a combination of surface and borehole electromagnetic surveys. Based on the results from the first phase program, a follow-up drill program is planned for the winter of 2024. We are committed to operating in a manner that demonstrates our focus on the environment, and we are proud of our already low carbon footprint. With over 50% of our total energy consumption being from renewable resources, including nearly 100% renewable energy in Manitoba, we are leading emissions rankings amongst the peers as seen on slide 12. We also aligned with the highest industry standards to ensure that we are on a par or ahead of industry expectations. We recognize we have a role in mitigating climate change and in December, we were pleased to announce our commitment to achieve net zero greenhouse gas emissions by 2050 and the adoption of an interim target of a 50% reduction in Scope 1 and Scope 2 emissions by 2030. We plan to be reporting on material Scope 3 emissions in the near term and continuing to be transparent with greenhouse gas performance data disclosure. Through our emissions reduction road map, we have identified multiple opportunities to achieve further reductions in emissions, including grid decarbonization in Peru, fleet and heating electrification and fuel switching in mobile equipment. We have been reporting greenhouse gas emissions data and performance to the CDP climate questionnaire for more than 10 years. Our annual sustainability report maps our CDP responses to the task force on climate-related financial disclosures recommendations. We are also aligned with the Mining Association of Canada's Towards Sustainable Mining or TSM protocols at all of our operations with the goal to maintain a strong score of an A or higher for all protocols. We truly believe that our ESG principles are the foundation of our business and are critical for our long-term success. Slide 13 summarizes our near-term cash flow growth in our high-quality organic copper pipeline. We believe that copper has the best long-term supply demand fundamentals in the sector as global copper mine supply will be unable to meet demand from global decarbonization initiatives. We have the highest near-term copper production growth and the highest leverage to copper among our mid-tier base metals peers, and we have successfully increased our copper equivalent resources per share by more than three times over the past decade. For these reasons, we believe Hudbay is uniquely positioned to offer attractive copper production growth and long-term optionality for investors. To summarize, we acted to generate significant near-term cash flows. We also have a world-class organic growth pipeline offering medium to long-term copper production optionality. As you see through this presentation, we have several exciting brownfield and greenfield growth opportunities that we intend to advance with our 2023 key strategic objectives. Our lower discretionary spending in 2023, together with lower year-over-year cash costs, will allow us to generate positive cash flow and advance our copper development pipeline with minimal capital. We will continue to de-risk Copper World with several project catalysts expected in 2023 as we prudently advance our 3D plan for Copper World sanctioning. In Snow Lake, it will be a year filled with several milestones as we execute the expansion and ramp-up of Lalor beyond 4,650 tonnes per day and complete the Stall mill recovery improvement program early in 2023. And we'll conclude our drilling program to test the dip extensions at Lalor with the potential to expand gold mineral reserves and resources. In Peru, we will continue to progress Constantia's leading efficiency metrics by applying smart technologies to continuously improve operating performance, including sensor-based ore sorting and milling flow sheet enhancements. We also aim to further advance the Maria Reyna and Caballito satellite properties through exploration permitting. We will advance our climate change commitments by assessing opportunities that are aligned with global decarbonization goals. And finally, we will remain vigilant in evaluating growth opportunities that meet our stringent strategic criteria that will reflect sustainable value for the company and our stakeholders. And with that, we are please to take your questions.
