Hudbay Minerals Inc.

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the HUD-Bay Minerals, Inc. Second Quarter 2021 Results Conference Call. At this time, all participants are in listen-only mode. Following the presentation, we will conduct a question and answer session. To join the question queue, you may press star then 1 on your telephone keypad. Should you need assistance during the conference call, you may signal an operator by pressing star and 0. I would like to remind everyone that this conference call is being recorded today, August 10, 2021, at 8.30 a.m. Eastern Time. I will now turn the conference over to Candice Brule, Director of Investor Relations. Please go ahead.

Thank you, Operator. Good morning and welcome to HUD-BAY's 2021 Second Quarter Results Conference Call. HUD-BAY's financial results were issued yesterday and are available on our website at www.hudbay.com. A corresponding PowerPoint presentation is available, and we encourage you to refer to it during this call. Our presenter today is Peter Kakilski, HUD-based President and Chief Executive Officer. Accompanying Peter for the Q&A portion of the call will be Steve Douglas, our Senior Vice President and Chief Financial Officer, Kaushal Maher, our Senior Vice President and Chief Operating Officer, and Eugene Lee, our Senior Vice President, Corporate Development and Strategy. Please note that comments made on today's call may contain forward-looking information, and this information by its nature is subject to risks and uncertainties, and as such, actual results may differ materially from the views expressed today. For further information on these risks and uncertainties, please consult the company's relevant filings on CDAR and EDGAR. These documents are also available on our website. As a reminder, all amounts discussed on today's call are in U.S. dollars unless otherwise noted. And now I'll pass the call over to Peter Kakilski. Peter.

Thank you, Candice, and good morning, everyone. Thanks for joining us. As we're halfway through the year and starting to see a bit of light at the end of this long 18 month tunnel, we're still facing COVID related impacts on the business. We will continue to be vigilant and adapt to the changing environment with our focus remaining on safe and efficient operations. This quarter marks the beginning of our transition to higher production and cash flows as we complete the investment programs at our growth projects. After the successful ramp-up of the high-grade copper-gold Pampacancha deposit, our Peru operations achieved record gold production in the second quarter and are on track for higher copper and gold production in 2022. The New Britannia gold mill remains ahead of the original schedule as the first gold pour is expected this month and the copper flotation circuit remains on track for commissioning and ramp up by the end of the year. We expect to see increased cash flows from these high return investments beginning in the second half of 2021. In this presentation today, I'll touch on our second quarter results, discuss the progress we've made on our growth and ESG initiatives in more detail, and recap the many near-term catalysts we have ahead. Second quarter consolidated copper production was 23.5,000 tons, a 4% decrease from the first quarter of 2021. This was primarily as a result of lower copper grades at the 777 mine in Manitoba, partially offset by higher throughput at the Constancia operation in Peru. Consolidated gold production was approximately 40,000 ounces, an increase of 12% compared to the previous quarter, due to record gold production achieved in Peru from Pampa Concha. Consolidated zinc production in the quarter decreased by 23%, while silver production decreased by 2% versus the first quarter, primarily as a result of lower grades and recoveries. Consolidated cash cost per pound of copper produced was 84 cents in the second quarter, an improvement over the first quarter, mainly due to higher byproduct credits. sustaining cash costs increased to $2.25 per pound in the second quarter, primarily due to higher sustaining capital expenditures, partially offset by higher byproduct credits. We continue to expect consolidated cash costs and sustaining cash costs to be within our annual guidance ranges for 2021. Operating cash flow before change in non-cash working capital was $133 million during the second quarter, reflecting an increase of $42 million compared to the first quarter of 2021. The increase is primarily the result of higher realized metal prices and higher copper and precious metal sales volumes partially offset by lower zinc sales volumes. Metal sales volumes partially offset by lower zinc sales volumes. Adjusted net earnings and adjusted EBITDA in the second quarter were $0.02 per share and $143 million, respectively, after adjusting for the net mark-to-market loss on financial instruments, among other items. As discussed last quarter, sales volumes that were affected by shipping delays in the first quarter were recognized as revenue during the second quarter, which was partially offset by higher tax expenses. We exited the quarter with $294 million in cash and equivalents, lower than the previous quarter, mainly as the result of capital investments as we complete our growth initiatives in Manitoba and Peru, along with interest payments during the quarter. Our full year 2021 key production and operating cost guidance has been reaffirmed. Turning to slide four, you'll find a summary of our operating results for our Peru business unit during the quarter. Constantia produced 19,000 tons of copper, 10,000 ounces of gold, 468,000 ounces of silver, and 295 tons of molybdenum. Production was higher than the first quarter of 2021, primarily as a result of increased throughput and improved gold grades and recoveries compared to the first quarter. Though it is a small part of our business, We note that molybdenum production is anticipated to be below annual guidance in 2021, but in line with the recent mine plan published for Constantia. We expect the production of all our key metals in Peru to be in line with 2021 annual guidance. All mines during the second quarter was 16% higher than the first quarter as a result of strong operational efficiencies and a smooth ramp up at Pampa Concha. Due to its short ramp-up period, Pampa Concha also achieved commercial production in April of 2021. Ore milled during the second quarter was 17% higher than the first quarter, as the prior period was impacted by a scheduled mill maintenance shutdown, offset slightly by increased ore hardness in the most recent quarter. Milled grades for copper were lower than the prior quarter, in line with the mine plan, and milled gold grades increased by 75% due to higher gold head grades from Pampacantia. As a result of these higher grades, we achieved record gold recoveries during the second quarter. Unit operating costs improved over the first quarter of 2021, primarily due to a higher volume of ore milled, partially offset by higher costs associated with COVID-19 protocols. COVID-related costs in Peru of $6.3 million in the quarter were higher than budgeted and are expected to continue at these levels for the remainder of the year. Excluding these costs, unit costs were $10.40 per ton in the second quarter, and we expect unit costs to be in line with the 2021 guidance range after adjusting for unbudgeted COVID-related costs. Peru's cash cost was relatively unchanged in the second quarter compared to the first quarter, Higher mining costs and higher G&A costs from enhanced COVID-19 protocols were generally offset by lower milling costs and higher gold byproduct credits. Sustaining cash costs increased this quarter due to the same factors affecting cash costs offset by higher sustaining capital expenditures. As mentioned previously, first production at Pampacantia was achieved in early April 2021. The team has executed a quick and efficient ramp up, achieving the timelines assumed in our recently published mine plan for the Constantia operations. Slide five shows recent photos of the mining activities in the Pampacantia pit, where you can see the significant progress made during the second quarter. Pampa Kancha contributes to the improved Constancia mine plan by incorporating higher copper and gold grades from 2022 to 2025 and increasing annual copper production to above 100,000 tons beginning in 2022. Moving to the next slide on Manitoba, but before I discuss the results, I want to take a moment to extend our deepest condolences to the family and those affected by the fatal injury at Lalor in June. This was the first fatality at Hud Bay in over a decade and we have completed a thorough investigation of this tragic incident. We are committed to preventing similar occurrences and we have undertaken an initiative to apply lessons learned from this loss across our business. Overall production in Manitoba in the second quarter was lower than the first quarter, primarily as a result of COVID-19 related absences and interruptions at our Snow Lake and Fern Flon operations. a scheduled maintenance shutdown at Lalor, and a temporary suspension of operations at Lalor at the end of June for the investigation of the fatal incident. The operations produced 21,500 tons of zinc, 4,400 tons of copper, 30,000 ounces of gold, and 218,000 ounces of silver. Lower recoveries and or stockpiling for the New Britannia Mill also contributed to lower production this quarter. While all mines during the quarter was lowered in the first quarter due to the factors I mentioned earlier, gold grades were higher as we move into the gold-rich zones at Larlor, consistent with the mine plan expectations. Copper, zinc, and silver grades were lower in part due to remnant mining at 777, which resulted higher quarter-over-quarter variation as 777 nears the end of its mine life and the mining sequences at Lalor. Development and underground construction activities continue in the lower part of the Lalor mine to support the startup and ongoing operation of New Britannia Mill. At the end of the second quarter, approximately 47,000 ounces of gold I'm sorry, 47,000 tons of gold had been stockpiled as initial feed for the New Britannia Mill, an increase of 21,000 tons from the end of the first quarter. The incremental mining actively associated with growing the gold ore stockpile has contributed to elevated combined mine, mill, and G&A operating costs during the first and second quarters of 2021. Install concentrated processed ore available ore during the second quarter. which was 12% lower than the first quarter of 2021. Stalled recoveries during the second quarter were higher for copper and lower for zinc and precious metals versus the previous quarter, but were consistent with metallurgical models. Ore processed at the flint front concentrator increased 16% compared to the previous quarter as a result of processing available ore stockpiles. Unit operating costs slightly decreased compared to the first quarter and remained within the annual guidance range. Manitoba's cash cost per pound of copper produced was negative $3.51, lower than the first quarter primarily due to higher byproduct revenues and lower copper production. Sustaining cash cost per pound of copper produced was $0.36, which was lower than the first quarter primarily due to the same factors affecting cash costs. Full year production of all metals and unit operating costs in Manitoba are on track to achieve the guidance ranges for 2021. Slide seven discusses the progress of the New Britannia project in more detail. Refurbishment activities at the gold mill were completed in June and commissioning and startup activities occurred in early July. As I mentioned, the first gold pour is expected in August, in line with the timelines assumed in our guidance. which are ahead of the original schedule to produce first gold before the end of the year. Annual gold production from Larlor and the Snow Lake operations is expected to increase to over 180,000 ounces at average cash cost and sustaining cash cost net of byproduct credits of $412 and $788 per ounce of gold respectively during the first six full years of New Britannia's operation. The construction of a new copper flotation facility is on track for commissioning and ramp up in the fourth quarter of 2021. The overall project is approximately 95% complete as of the end of July. As noted last quarter, we have seen COVID-related cost pressures on the project capital forecast at New Britannia and have been areas of cost escalation with industry cost inflationary pressures as the project nears completion. As a result, we expect approximately $20 million in additional growth capital to be spent this year at New Britannia. We also expect an additional $10 million to be spent on the advancement of the Stalled Recovery Improvement Project, early works of the LALA expansion to 5,300 tonnes per day, and the impact of foreign exchange movements. This additional spending represents the next phase of growth in Snow Lake, where we are bringing forward and prioritizing the low capital, high return brownfield growth projects that were contemplated in the recently published optimized mine plan. Therefore, Manitoba's total growth capital guidance in 2021 has increased to $105 million from $75 million. Slide eight provides highlights of the exciting exploration initiatives underway in each of our regions. In March of this year, we announced our Copper World discovery where our 2020 initial drill program intersected high-grade copper sulfide and oxide. 2020 initial drill program intersected high-grade copper sulfide and oxide mineralization on our private land in Arizona at depths much shallower than Rosemont. The 2020 program confirmed the discovery of four deposits at Copper World with a combined strike length of over five kilometers and opportunities to discover additional mineralization between the deposits. The intersections included 440 feet of 1.38% copper and 246 feet of 0.7% copper starting at surface, which serves as an example of the high grade and shallow nature of the copper mineralization. The expanded 2021 exploration program at Copperworld is well advanced with 85,000 feet of drilling completed in the first half of the year. and four drill rigs currently turning at site. We expect to publish an update once the majority of assays have been received for the holes drilled during the first half of 2021. We are advancing the many technical studies for copper world. We are also evaluating several targets identified through geophysical surveys on our extensive regional land package. We are on track to complete an initial inferred resource estimate before the end of the year. and the preliminary economic assessment in the first half of 2022. In Peru, we continue to progress discussions with the community over Chicago on a highly prospective Maria Reina and Caballito properties, both of which are located within 10 kilometers of Constancia. At the end of June, we commence drilling at the Yaga and Copper Porphyry target located in Northern Peru, near the city of Trujillo, and in close proximity to existing infrastructure. The initial confirmatory phase of the drill program consists of 5,000 meters with two drill rigs presently turning at site. Pending positive results from this initial drilling phase, the second phase aimed at defining an initial mineral resource for Yagen is expected in the following quarters. A scouting eight-hole drill program was completed at the Kawincha North Target near Constantia during the quarter. Copper sulfides and oxides were intercepted, but at grades too low to be economic. Regional exploration efforts in the Snow Lake area continue, following on the success from the 2021 winter drill program in the Chisel Basin, where the copper gold rich feeder of the 1901 deposit was discovered and high-grade zinc and gold mineralization was confirmed through infill and extension drilling. Our summer program includes a follow-up limited drill program on a new target identified immediately north of the Lalor Mine from a borehole survey completed early this year. The results from our 2021 drill program in Snow Lake are expected to be incorporated into the annual mineral reserve and resource estimates to be published at the end of March 2022. Turning to slide nine, I'd like to highlight a number of ESG accomplishments and initiatives we've undertaken. as outlined in our 2020 Integrated Annual and Sustainability Report published in May. We truly do believe that continuously improving how we manage the social, environmental and economic risks, impacts and opportunities associated with our activities is critical for our long-term success. A large part of achieving this objective is to ensure our disclosure is clear and transparent. As such, The data in our sustainability report is mapped to the Global Reporting Initiative, the SASB Metals and Mining Industry Standard, and TCFD. Additionally, we provide disclosure through the CDP climate, water, and forests questionnaires. On the environmental side, I'd like to acknowledge that over 50% of our total energy consumption in 2020 was from renewable sources and all electricity at our operations is supplied by third parties via regional grids. This reflects that nearly all of the electricity produced in Manitoba is through renewable hydropower, and in Peru, over 50% is from renewable sources. We voluntarily support several international best practice standards, including ISO 14001, ISO 45001, ISO 9001, towards sustainable mining, the voluntary principles on security, and the human rights and international finance corporation performance standards. As a member of the Mining Association of Canada, we have implemented the towards sustainable mining protocols at all of our operations with the goal to maintain the score of A or higher for all protocols. One requisite of maintaining this score is the commitment to ensuring that our tailing storage facilities are constructed following the Canadian dam safety guidelines which represents substantial alignments to the new global tailing standard released in 2020. And of course, the new global tailing standard released in 2020. And of course, top of mind in our field is always safety, especially with the recent incident at Lalor. We have a culture focused on safety at Hudbay and doing our best to ensure everyone has the tools and protocols they require to go home safely at the end of every shift. but we are never satisfied when it comes to safety, and we are committed to continuously improving on our performance. At HudBay, we recognize the tremendous opportunity that we and the mining industry have to positively contribute locally and globally to a more sustainable world. We will continue to use the 17 United Nations Sustainable Development Goals that are part of the United Nations 2030 Agenda for Sustainable Development to inform and guide our business decisions and sustainability performance. I'd like to take a moment to congratulate David Clary, our Vice President of Corporate Social Responsibility, on his recent appointment as Chair of the Mining Association of Canada. This is a remarkable achievement and one that is well deserved. As a CSR leader, David is a driving force for positive change and we know he will help guide our industry and HudBay to ever higher standards during a crucial time for Canada's mining sector. I'd like to conclude with slide 10, summarizing the many catalysts that are coming up in the near term, and we do have an exciting back end to 2021. In Manitoba, we anticipate our first gold pour during this quarter and completing the copper flotation circuit before the end of the year. We'll also continue our work on executing the third phase of our Snow Lake Gold Strategy, including the preparation for the ramp-up to 5,300 tons per day at Lalor and the recovery improvement program at the Stoll Mill. We also continue this year's exploration program in the Chisel Basin, and as I touched on earlier, we'll incorporate the results into our annual mineral reserve and resource update in March next year. In Peru, I mentioned the drilling that is underway at Yagen. and the potential to initiate a second phase aimed at defining an initial mineral resource estimate in 2022. We are hopeful that we will achieve an exploration agreement with the community of Uchikako on exciting greenfield properties to the north of Constantia. In Arizona, we expect to provide an exploration update in the coming months, followed by an initial resource estimate before the end of the year. and a PEA to be released in the first half of 2022. We are also awaiting a decision at the United States Ninth Circuit Court of Appeals relating to the Rosemont federal permits before the end of the year. And at Mason, we will continue to compile and interpret historical data on our land package in preparation for a future drill program. As I've said before, we are a disciplined copper-focused growth company. And as we look to deliver the next stage of growth at Hyde Bay, our priorities over the medium term will be to unlock value at Rosemont, drill the copper world discovery, test the Constantia regional exploration targets, add reserves to the Snow Lake mine plan, advance mason and exploration pipeline projects, and optimize value from Snow Lake Gold while remaining vigilant for other opportunities that match our strategic criteria and never losing focus of prudently managing our balance sheet. And with that, we are now happy to take your questions.