Hudbay Minerals Inc.

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the HUD-Bay Minerals, Inc. Fourth Quarter 2021 Results Conference Call. At this time, all participants are in listen-only mode and the conference is being recorded. 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 zero. I would like to remind everyone that this conference call is being recorded today, February 24th, 2022, at 8.30 a.m. Eastern Time. I will now turn the conference over to Candice Brule, Vice President of Investor Relations. Please go ahead.

Thank you, Operator. Good morning and welcome to HUD-based 2021 Fourth Quarter Results Conference Call. HUD-based 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 Kikilski, 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. Andre Lauzon, our recently appointed Senior Vice President and Chief Operating Officer, and Eugene Lee, our Senior Vice President, Corporate Development and Strategy. Please note that the 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 Pakilski. Peter?

Thank you, Candice. Good morning, everyone, and thanks very much for joining us. 2021 was the year of execution and delivery for HUD-BAY as we completed Brownfield's investments of approximately $250 million in our Peru and Manitoba operations. It was the year of focus and dedication as our operations continued to navigate the challenging environment with supply chain and labor constraints caused by the COVID-19 pandemic. It was the year of value creation as we made a new copper discovery on our private land in Arizona and demonstrated the value in our Mason copper project in Nevada. We continue to be more focused than ever on maintaining our strong safety culture and ensuring the safety of everyone at our operations and those within the communities in which we operate. In this presentation today, I'll go into more detail about our achievements and challenges in 2021, touch on the operating and financial performance of the business, and discuss an overview of our production and cost outlook as we execute on our key strategic objectives for 2022. But before we get into results, I'd like to congratulate Andre Lauzon on his recent appointment to Senior Vice President and Chief Operating Officer. Andre joined HUD-Bay in 2016 and was formerly Vice President of our Arizona Business Unit. He has held both strategic and operational leadership roles at the company, including Vice President of the Manitoba Business Unit. His appointment reflects both his readiness and his valued expertise and comes at an opportune time as our operations are embarking on a period of significant production and cash flow growth. Andre is a most welcome addition to our executive team. Further to this, Javier Del Rio has been appointed to Vice President South America and United States. Javier has over 25 years of mining experience and has been with HUD-Base since 2010. He was instrumental in establishing and growing our Peruvian business, including making Constancia one of the lowest cost open pit mines in the Americas, and overseeing the negotiation of key community agreements leading to the development of Pampa Concha. Prior to joining HUD-Bay, Javier held management roles in various areas and of increasing responsibility at Newmont Mining in the United States. His appointment also comes at an opportune time as we advance our United States business towards development to position us for the next stage of growth. These internal promotions serve to highlight the deep bench strength that we have at HUD-Bay. Now, starting on slide three, 2021 was a year of investment for HUD-BAY as we completed our short payback high return investment programs at Pampa Concha and New Britannia. In early 2021, Peruvian regulators granted HUD-BAY the final mining permit for the development and operation of the Pampa Concha deposit. We commenced pre-development activities following the finalization of the remaining land user agreements and achieved first production in April. This was a major milestone for us and the community, demonstrating a smooth ramp up and our strong social license to operate. We're also proud of the team's efforts in maintaining strong operations in Peru during the year, despite operating in a challenging environment with the recent political changes, social pressures, and COVID-19 impacts on our workforce. They navigated this environment and achieved our copper production guidance and exceeded our gold production guidance. In March 2021, we released our annual reserve and resource update, along with updated mine plans for our two main operations. The Constantia updated mine plan reflected an increase in copper and gold production from 2022 to 2025, as the higher grades from the Pampa-Cuncha deposit enter the mine plan. It also incorporated higher grade reserves from the Constantia-Norte pit extension, which extended the higher grade profile to 2028. This resulted in an increase of approximately 11% in contained copper and 12% in contained gold over the prior year's reserves. The Snow Lake updated mine plan released phase three of our Snow Lake Gold Strategy, focusing on expansion and further optimization of operations. The mine plan enhancements included optimized recoveries and throughput at store, the conversion of additional resources to reserves at LALOR, plans to expand LALO to 5,300 tons per day by 2023, and the mining of zinc reserves from the 1901 deposit starting in 2026. As a result of these initiatives, the annual production of gold, copper, and silver is expected to increase by 18%, 35%, and 27% respectively from 2022 to 2027 compared to the previous mine plan. Our New Britannia project was completed ahead of the original schedule, with first gold production being achieved in August. Commissioning and startup activities of the gold circuit were completed in July. We also completed the construction of a new copper flotation facility in October, followed by a brief commissioning period, and first production of copper concentrate was achieved in October. New Britannia achieved commercial production in November, and the ramp-up was best in class when compared to industry benchmarks which I'll touch on later. In June, we experienced a very unfortunate incident that occurred during underground mining operations at Lalor. A worker was fatally injured from a fall while working at height. We are still deeply saddened by this unfortunate incident and we're committed to preventing similar occurrences. We've undertaken an initiative to apply lessons learned from this loss across our business to ensure everyone goes home safely following every shift. We also took further steps to strengthen our balance sheet in 2021 with the issuance of new senior notes in March that lowered our interest rate by more than 3.5%. We also renegotiated our revolving credit facilities in October to increase the size to $450 million, reduce the interest rate, and extend the term, which provides significant financial flexibility. In the United States, we announced the initial discovery of four deposits at Copper World on our wholly owned private land adjacent to Rosemont in Arizona. We continued drilling and expanded mineralization to seven deposits later in the year. Before the year was out, we announced an initial mineral resource estimate that was larger and at a higher classification than we initially expected, and I'll touch on this shortly. And we published our initial PEA for Mason in April of 2021, which contemplated 27-year mine life and production levels that could more than double our production profile. At a copper price of $3.25, the NPV for Mason is three-quarters of a billion dollars with an IRR of 15%. High-quality copper projects in preferred jurisdictions are scarce, and we are uniquely positioned with the Copper World, Rosemont, and Mason copper projects in our project pipeline. These projects offer incredible leverage to copper and long-term optionality for future copper growth. Turning to slide four, we began to see increased production and cash flows from our recent brownfield investments during the fourth quarter. Q4 consolidated copper production increased by 21% from the third quarter of 2021 primarily as a result of higher throughput and copper grades in Peru. Consolidated copper production increased by 18% compared to the third quarter, a record for HADBE, primarily due to higher gold production in Snow Lake with the commissioning of the New Britannia Mill in the fourth quarter. For the full year 2021, we achieved consolidated copper, gold, and silver production guidance, while zinc production fell short of the 2021 guidance range. Peru copper production met 2021 guidance expectations with strong operating performance in the fourth quarter, including the continued ramp-up of Pampa Concha. Manitoba zinc production was below 2021 guidance primarily due to higher dilution and mine plan limitations at the 777 mine as it approaches closure. Consolidated cash cost declined from third quarter levels. This 18% improvement was mainly a result of higher copper production and higher gold byproduct revenue. Sustaining cash cost was relatively unchanged from the third quarter, as lower cash costs were offset by higher sustaining capital expenditures in royalties. Operating cash flow before changes in non-cash working capital was $157 million during the fourth quarter, reflecting an increase of $53.4 million compared to the third quarter, primarily the result of higher realized base metal prices and higher gold and copper sales volumes. Adjusted net earnings per share in the fourth quarter was 13 cents after adjusting for the impairment charge related to the revaluation of the environmental obligation in Flin Flon, among other items. Fourth quarter adjusted EBITDA was $180 million compared to $119 million in the third quarter of 2021. results were higher than the third quarter primarily due to higher copper and gold sales volumes and higher realized prices, partially offset by higher exploration and selling and administrative expenses. We exited the year with $271 million in cash and equivalents, as well as undrawn availability of nearly $350 million under our revolving credit facilities. On slide five, we summarize our Peru operating results. During the quarter, copper production was 22,856 tons, a 26% increase over the third quarter due to an increase in throughput, grades, and recoveries. This was another record quarter for gold production in Peru. Full year 2021, copper production increased by 6% year over year to 78,000 tons, achieving the annual guidance range. Full-year 2021 gold production increased by 306% year-over-year to over 50,000 ounces and exceeded the 2021 guidance range due to increased throughput, higher grades from Pampacantia, and higher gold recoveries. Total ore mines during the fourth quarter increased by 19% from the third quarter as mining levels were optimized for mill throughput. Ore mills during the fourth quarter was 15% higher than the previous quarter, while milled copper grades were also higher due to higher grades from the Constantia pit in the quarter. Unit operating costs in the fourth quarter were $10.47 per ton, a 10% improvement over the third quarter. COVID-related costs in Peru were $4 million in the fourth quarter, and excluding these costs, unit operating costs were $9.96 per ton. Full-year unit costs were higher than 2020, and the guidance ranged due to higher costs for consumables energy and COVID-19 measures. Peru's cash costs in the fourth quarter were $1.28 per pound of copper, relatively in line with the prior quarter. Sustaining cash costs increased quarter over quarter, primarily due to higher capitalized expenditures. Peru's fourth quarter production and cash cost performance was strong and represented the best copper production quarter in 2021, as seen on slide six. Not only did we achieve our 2021 guidance expectations, but we also demonstrated our mine development and operating expertise as we successfully ramped up the Pampa Concha mine and delivered on our plan in Peru. Moving to the next slide on Manitoba, during the fourth quarter of 2021, gold production was 46,424 ounces, an 11% increase from the third quarter due to the ramp up at New Britannia, Copper production was 5,342 tons, slightly higher than the third quarter. Full-year Manitoba copper production achieved 2021 guidance. However, zinc, gold, and silver production for the year fell short of guidance. Zinc production was predominantly impacted by higher-than-planned dilution at 777 as the mine nears the end of life. Gold and silver production were below guidance. primarily due to higher dilution at 777 in the fourth quarter and the deferral of some higher gold content ore for future processing at New Britannia to achieve higher gold recoveries. Mining operations at Laal Ore have fully established processes to consistently produce and separate the gold and copper gold ores in feed for the stall and New Britannia mills. A production ramp-up strategy to achieve 5,300 tons per day at Lalor by the end of 2022 is underway. That includes advancing development for new mining fronts, additions to the mine equipment fleet, transition of workforce from the 777 mine upon closure, and expansion of change house and office facilities. The 777 mine is within months of closure, and the focus continues to be on safely mining out the remaining reserves by completing the necessary ground rehabilitation to access remnant and pillar stoping blocks. Challenging ground conditions have caused delays in the production sequence and resulted in higher dilution than planned, as mentioned earlier. Combined units operating costs in the fourth quarter increased by 14% compared to the third quarter, primarily due to higher milling costs in Snow Lake with the ramp-up of the new Britannia mill in the quarter partially offset by higher tons processed. Full year unit costs were within the guidance range. Manitoba's cash cost per pound of copper in the fourth quarter was negative $2.77, lower than the third quarter. Similarly, sustaining cash cost per pound of copper in the fourth quarter was negative $0.23, lower than the third quarter, primarily due to increased gold revenues. We intend to disclose cash cost per ounce of gold starting with first quarter results in 2022, given gold revenue is becoming the most significant contributor to total revenue in Manitoba for the foreseeable future. As I mentioned earlier, the construction of the new copper flotation facility at New Britannia was completed in October 2021. The New Britannia mill achieved commercial production on November 30th. after reaching the required recoveries and throughput in the copper and gold circuits. During the fourth quarter, New Britannia processed over 100,000 tons of ore, averaging over 1,100 tons per day. In December, the New Britannia mill throughput averaged 1,200 tons per day, with gold and silver recoveries in line with the metallurgical model. A number of initiatives are underway to continue to improve the mechanical availability of grinding, leaching, and tailing circuits. The New Britannia mill is expected to average 1,500 tons per day in 2022, with continued ramp-up activities and rod mill liner maintenance expected during the first quarter, and targeted throughput rates are expected to be achieved in the second quarter. We are pleased with the performance of New Britannia, and as shown on slide 8, the mill has steadily increased throughput rates since commissioning. Its ramp-up achieved best-in-class timelines as represented by widely recognized industry plant ramp-up curves. The mill has seen several days operating at or above design rates and is expected to achieve sustained design throughput within six months from commissioning. This included a one-week ramp-up of the new copper flotation circuit, which was remarkable by industry standards. I frequently say that we have a disproportionately talented team for a company of our size at Hyde Bay, and the completion of the New Britannia project was yet another example of the strong technical capabilities of our team. Slide 9 is a compelling slide as it illustrates the inflection point at which we are in terms of increased copper and gold production. 2022 represents the first of many years of meaningful production growth with consolidated copper production expected to increase by 17% compared to 2021 and consolidated gold production expected to increase by 28% in 2022. Consolidated copper production is expected to further grow to 133,500 tons by 2024, a 34% increase from 2021 levels. Similarly, gold production is expected to increase to over 300,000 ounces in 2024, which represents an increase of 59% from 2021. This is expected to lead to growing EBITDA and expected future cash flows after completing approximately $250 million in our brownfield investment programs. We are a primary copper producer with unique complementary exposure to gold, and we believe our high-quality pipeline of attractive development and exploration opportunities will further add to this growth. A key focus for HUD-Bay is our Copper World project in Arizona. After the initial discovery in early 2021, we completed an aggressive drilling program which led to an initial resource estimate in December 2021 that is larger and at a higher level of geological confidence than we expected at this stage. The initial resource estimate included indicated resources of 272 million tons and inferred resources of 142 million tons at 0.36% copper. We also successfully expanded our private land package after the Copper World discovery and now hold over 4,500 acres to support an operation entirely on private land, which is outlined on slide 10. One of the many attractive characteristics of Copper World is the near-surface nature of the deposits with the potential for minimal waste stripping. The global resource contains a higher-grade zone with indicated resources of 96 million tons at 0.57% copper and inferred resources of 31 million tons at 0.71% copper, as outlined on slide 11. The high-grade resources expected to be mined earlier in the mine life comprises both sulfide and oxide mineralogy and is potentially amenable to both flotation and heap bleach processing methods. We continue to drill at site with six drill rigs currently turning to conduct infill drilling in support of future economic studies. The PEA for Copperworld is well advanced and we are on track to publish the results in the first half of 2022. While we continue to await a decision from the Ninth Circuit Court of Appeals relating to Rosemont, we are also evaluating the potential synergies between Copperworld and Rosemont and our preliminary expectations will likely be reflected in the upcoming PEA. Our exploration efforts don't stop in Arizona. As highlighted in slide 12, we continue drilling and scoping studies to evaluate the underground potential at Constantia Norte in Peru, and the results are expected to be incorporated into the annual mineral reserve and resource update for Constantia in March this year. We are also continuing to progress exploration agreement discussions with nearby communities on prospective properties located near Constantia. Drilling continues at the Yagen copper porphyry target located in northern Peru. The confirmatory phase of the drill program has totaled over 7,000 meters in 16 holes with two drill rigs continuing to turn at site. Assay results have been received for five holes with all holes intersecting mineralization. Pending positive results from this initial drilling phase, a second phase will focus on defining an initial inferred mineral resource estimate for Yagen in the third quarter of 2022. In the Snow Lake area, we are actively conducting surface and underground winter drilling activities, primarily focused on testing down-plunge extensions of the copper-gold-rich feeder zone at the 1901 deposit, the drilling gap between 1901 and Lens 17 at Lalor, and a high-priority geophysical target located immediately north of Lalor. In addition, we continue to compile drilling results from the 2021 program at Lalor and 1901 which are expected to be incorporated into the annual mineral reserve and resource estimates to be published at the end of March. Earlier this year, we commenced a confirmatory drill program on the tailings facility in Flin Flon to support the completion of a PEA on the tailings reprocessing opportunity by the first quarter of 2023. We are also completing engineering and test work throughout 2022 to support the PEA. If economics, This opportunity could utilize the Flin Flon Concentrator with modifications after closure of the 777 mine, creating operating and economic benefits to the Flin Flon community. It could also provide the opportunity to redesign the closure plans, increase metal production, defer or reduce certain closure costs, and reduce the environmental impacts of the tailings facility. Slide 13 highlights the three-year production outlook I mentioned earlier. and includes production by business unit and by metal. The meaningful three-year production growth is due to the increase in copper and gold grades expected at Pampa Cancha in Peru and the increased gold production from the Slow Lake operations over the next several years. This growth is expected to more than offset the lost copper and gold production from 777 after its closure in mid-2022. Peru's mine plan has been re-sequenced since the publication of the March 2021 Constancia Technical Report, resulting in higher gold grade areas in the Pampacuncha pit being moved from 2022 to 2023, which is expected to lead to a 41% increase in gold production in 2023 from 2022 levels. Manitoba's 2022 production guidance reflects continued strong production from the Lalor mine operating at a throughput rate of 4,650 tons per day and ramping up to 5,300 tons per day by 2023. 2022 production assumes lower mining rates at the 777 mine as the mine approaches closure in June 2022, and the low end of the production guidance ranges reflects reduced output from the 777 mine to capture the potential for higher dilution and increased variability in remnant stopes. The low end of the 2023 production guidance range reflects a more conservative project start and ramp up of the store recovery improvement program. The production numbers exclude the impact of upside opportunities such as the potential to operate New Britannia above design capacity. Slide 14 summarizes our cost guidance for 2022. Total capital expenditures are expected to decline by 17% compared to 2021, primarily due to lower expected sustaining capital in Peru and lower growth spending in Manitoba in 2022. The growth capital guidance includes $10 million on continuous improvement initiatives in Peru and $50 million on enhancements and expansions as we execute growth in Manitoba. We have also allocated $35 million to growth spending in Arizona, higher than previous years, as we advance permitting and economic studies at Copper World in the first half of 2022. We may allocate additional capital to Copper World in the second half of the year, pending positive PEA results. Total expected exploration expenditures of $65 million in 2022 reflect continued exploration of Copper World and additional drilling activities for brownfield exploration and to test the promising targets in Peru and Manitoba that I highlighted earlier. We also plan to conduct an initial drill program at the Mason Valley SCARN properties in late 2022. We're introducing cash cost guidance in 2022 for each of our operations. including copper cash cost guidance in Peru and gold cash cost guidance in Manitoba. We continue to provide combined mine mill unit operating cost guidance by site and consolidated copper cash cost and sustaining cash cost guidance given copper remains our primary metal on a consolidated basis. In Peru, combined unit costs are higher in 2022 versus 2021 as a result of higher consumable costs including grinding media and fuel, higher mill maintenance costs due to general cost pressures seen in the industry, and the impact of processing harder ore in the Constantia pit. Copper cash costs in Peru are expected to decline in 2022 compared to 2021 due to higher gold byproduct credits and higher copper production. In Manitoba, 2022 combined unit costs are forecast to be higher than 2021 levels, primarily due to the expected cost inflation on materials and consumables and the inclusion of the new Britannia mill, which is expected to result in higher milling unit costs compared to the Flin Flon and Storr mills as disclosed in the Snow Lake Operations Mine Plan released in March 2021. Manitoba unit costs also reflect the closure of the 777 mine in June 2022, and the transition of a portion of the workforce to Snow Lake. Gold cash costs in Manitoba are expected to be $300 to $550 per ounce in 2022 as gold production increases year over year and the operations transition to becoming a majority gold producer. The midpoint of our consolidated copper cash cost guidance range is higher than last year's levels due to the expected increase in unit costs as mentioned. partially offset by expected higher copper production and higher gold byproduct credits. The midpoint of the guidance range for consolidated sustaining copper cash cost is lower than 2021 levels due to lower sustaining capital expenditures and higher copper production, partially offset by the increase in unit costs. Slide 15 summarizes our near-term copper production growth and our high-quality organic copper pipelines. 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 metal peers. And we have successfully increased our copper equivalent resources per share by more than two and a half times over the past 10 years. For these reasons, we believe HudBay is uniquely positioned to offer attractive copper production growth and long-term optionality for investors. To summarize, we are a diversified mid-tier copper producer as shown in slide 16. Our existing operations offer 17% copper production growth in 2022 and a leading low-cost profile which is expected 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've seen through this presentation, with the recent execution of our brownfields investment programs, we are now in a position to deliver meaningful copper and gold production growth to generate positive cash flow and strong returns on invested capital. We will continue to unlock value in Arizona through accelerating drilling, economic studies, and permitting activities at Copper World and identifying synergies with Rosemont. In Snow Lake, we plan to execute the third phase of our Snow Lake Gold Strategy by optimizing the new Britannia mill, preparing for the ramp-up to 5,300 tons per day at Laalor, and initiating the stall mill recovery improvement program. In Flin Flon, we are focused on transitioning the 777 mine, mill, and zinc plant through orderly closure while further exploring the potential to reprocess tailings. 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 reach a community agreement to explore the prospective properties near Constantia. We will continue to conduct targeted brownfield and greenfield exploration programs in the Snow Lake region, Peru, Arizona, Nevada, and Chile for new mineral discoveries. We also look to enhance our ESG objectives through the introduction of new greenhouse gas emissions reduction targets in 2022. And finally, we will remain vigilant in evaluating growth opportunities that meet our stringent strategic criteria that will create sustainable value for the company and our stakeholders. And with that, we are pleased to take your questions.