Hudbay Minerals Inc.

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the HUD-Bay Minerals, Inc. First Quarter 2022 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, then zero. I would like to remind everyone that this conference call is being recorded today, May 10, 2022, at 8.30 a.m. Eastern Time. I would now turn the conference over to Candice Brule, Vice President, Investor Relations. Please go ahead.

Thank you, Operator. Good morning and welcome to HUD-based 2022 First 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 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. Andre Lauzon, 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 Kokilski. Peter?

Thank you, Candice. Good morning, everyone, and perhaps good afternoon and even good evening to some of you. Thank you very much for joining us. I wanted to begin by acknowledging the conflict in Ukraine. While it has exacerbated global inflationary pressures and supply chain disruptions, these impacts are inconsequential compared to the hardships and losses experienced by the many innocent civilians whose lives have been impacted by this very unfortunate situation. Our hearts go out to all of those affected. In this presentation today, I'll give a brief overview of our first quarter financial and operating results. discuss highlights from our recent annual reserves and resources announcement, and provide an update on the ongoing progress at Copper World and our other growth initiatives. Before we dive into quarterly results, I wanted to congratulate a key member of our technical team, Matthew Taylor, our Executive Director of Metallurgy Technical Services. Last week, Matt received the 2022 Mineral Processor of the Year Award at the CIM and CMP Society Ceremony. He was recognized for a significant mineral processing achievement relating to his work on the Snow Lake and New Britannia processing strategy with the implementation of a novel copper floatation circuit. We look forward to his continued contributions at our many growth initiatives, including Copper World. Beginning on slide three, we maintained steady operations during the first quarter despite being faced with a number of external challenges, including COVID-related absenteeism, extreme weather conditions, and inflationary cost pressures. This was a testament to our effective risk management systems and focus on operating efficiencies, and as a result, we have reaffirmed our full-year production and cost guidance for 2022. Our consolidated copper production in the quarter was 24.7 thousand tons, in line with our expected quarterly cadence for the year, as we anticipate significantly higher copper grades in Peru later this year. Consolidated gold production decreased by 16% compared to the fourth quarter, primarily due to lower gold production in Peru as COVID-19 related absenteeism and high rainfalls limited production from the Pampacancha pit. Consolidated zinc production in the first quarter was 4% lower than the fourth quarter, primarily due to lower zinc grades at LALOR and 777. Consolidated cash costs increased to $1.11 per pound of copper from $0.51 in the fourth quarter. This increase was a result of higher milling costs and lower copper production in Peru as well as higher general and administrative costs in Manitoba. Consolidated sustaining cash costs increased to $2.29 per pound in the first quarter compared to $1.95 in the fourth quarter due to the same reasons affecting cash costs but partially offset by lower sustaining capital expenditures and capitalized exploration. Both measures were slightly above our 2022 guidance ranges, primarily due to lower byproduct credits as a result of lower sales in Manitoba, which I'll provide more details on shortly. Consolidated cash costs and sustaining cash costs are expected to improve in future quarters to be within the 2022 guidance ranges with higher expected copper production and contributions from precious metals byproduct credits throughout the year. First quarter unit operating costs were in line with 2022 guidance ranges at $12.37 per ton in Peru and $176 Canadian dollars per ton in Manitoba. This strong cost performance was achieved despite continuing to experience broad-based inflationary pressures caused by higher input prices for many services and consumables such as power, fuel, grinding media, freight, and insurance. Operating cash flow before change in non-cash working capital was $77 million during the first quarter, reflecting a decrease from the fourth quarter. primarily as the result of lower copper, gold, and zinc sales volumes in Manitoba, partially offset by higher silver sales volumes and higher base metal realized prices. At the end of March, we announced that first quarter Manitoba sales were impacted by limited rail car availability. This resulted in excess inventory of about 7,000 tons of copper concentrate, which contains high amounts of gold, and 6 million pounds of refined zinc at the end of the first quarter. Had the excess inventory been sold during the quarter, we would have realized approximately $45 million of incremental revenue assuming end of quarter commodity prices. Our inventories are expected to be recognized as revenue and converted to cash as levels are drawn down over the next several months with increased rail car access as weather conditions improve. First quarter adjusted net earnings per share was 2 cents after adjusting for a non-cash gain related to the quarterly revaluation of the Flin Flon environmental provision, which decreased as a result of higher long-term risk-free discount rates. First quarter adjusted EBITDA was $110 million, lowered in the previous quarter primarily as a result of the lower sales volumes. We exited the quarter with $213 million in cash, as well as undrawn availability of nearly $357 million under our revolving credit facilities. Given the elevated inventory levels in Manitoba at the end of the first quarter and the positive expected quarterly production cadence, our cash balance is forecasted to grow throughout the remainder of the year based on current commodity prices. On slide four, we summarize our Peru operating results. During the quarter, our Peru business produced over 19,000 tons of copper, 10.8,000 ounces of gold, over 500,000 ounces of silver, and 207 tons of molybdenum. Production of all metals was lower than the fourth quarter, primarily due to a planned semiannual mill maintenance shutdown in January and lower grades. As previously disclosed, Full-year production in Peru is expected to benefit from significantly higher grades in the fourth quarter of 2022. And we have affirmed, or reaffirmed, our 2022 production guidance for Peru. Total ore mine declined during the first quarter due to high rainfalls and COVID-related labor shortages, which resulted in delays affecting the water management system and lower production from Pampa Cancha. ore milled was lower than the fourth quarter due to the planned mill maintenance shutdown in January. Milled copper grades and recoveries were lower than the previous quarter but were consistent with the mine plan. Milled gold grades and recoveries were lower than the previous quarter due to less ore from Pampa Cancha this quarter. With the rainy season now behind us in Peru, we expect Pampa Cancha ore production to return to higher levels in the second quarter. Peru combined unit operating costs in the first quarter were within the guidance range, but higher than the fourth quarter due to continued inflationary pressures on consumables and energy costs, and fewer tons of ore milled due to the planned mill maintenance shutdown. Despite these cost pressures, full-year unit operating costs in Peru are expected to remain within the annual guidance range. Peru's cash costs in the first quarter were $1.54 per pound of copper, higher than the fourth quarter, primarily due to higher milling costs and lower copper production. This was above the upper end of our 2022 guidance range in part due to lower production and higher costs related to the plant maintenance in the quarter. Cash costs are expected to decline. and full-year cash costs are expected to remain within the 2022 guidance range with higher expected copper production and contributions from precious metal byproduct credits later this year. Peru's sustaining cash costs decreased compared to last quarter due to lower sustaining capital expenditures and lower capitalized exploration. Moving to the next slide on Manitoba, During the first quarter, the Manitoba operations produced 43.2 thousand ounces of gold, 22.3 thousand tons of zinc, 5.5 thousand tons of copper, and 279 thousand ounces of silver. Copper production increased by approximately 4% quarter over quarter, whereas gold, zinc, and silver production decreased by 7%, 4%, and 13% respectively due to expected grade variability and lower ore milled. Full-year production of all metals in Manitoba is expected to be within guidance ranges for 2022. Ore mined at the Manitoba operations in the quarter was lower than the fourth quarter due to employee absenteeism caused by COVID-19, unplanned maintenance requirements of the ore handling system that temporarily affected hoisting ability at Lalor, and planned lower production at 777 as the mine approaches closure in June. The production ramp-up strategy at Lalor to achieve 5,300 tons per day by the end of 2022 is underway. It 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. A planned LALOR maintenance period has been advanced to the second quarter of 2022 to allow for increased availability during the third quarter after 777 has closed and the additional workforce and equipment have transitioned to LALOR. The 777 equipment relocation strategy will commence in the second quarter ahead of expected timeframes to advance the production ramp up to 5,300 tons per day. The 777 mine is within one month 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 continue to cause delays in the production sequence and result in higher dilution than planned. These challenges are expected to continue until the end of the mine life in June. Preclosure activities are well underway in mined-out areas to decommission stationary equipment of value for redeployment at Lalor. The New Britannia mill averaged approximately 1,400 tons per day in the first quarter, slightly below the targeted 1,500 tons per day as a result of completing scheduled rod mill liner maintenance during the quarter. Since completing the mill maintenance, New Britannia has consistently achieved greater than 1,500 tons per day in April, With the inclusion of DORE, the gold and silver recoveries at the New Britannia Mill have also improved significantly, with metallurgical recoveries in March higher in relation to previous months. Additional initiatives are planned in the second quarter to further improve recoveries to be in line with targeted levels. Manitoba combined units operating costs in the first quarter were within the guidance range, but 5% higher than the fourth quarter, primarily due to higher propane usage during the colder winter, coupled with continued inflationary cost pressures for bulk commodities and fuel and lower tons processed. Full year combined unit costs are expected to remain within 2022 guidance ranges. With Manitoba's transition to a primary gold producing business, we introduced gold cash cost guidance and disclosure in 2022. Gold cash costs in the first quarter were $416 per ounce, in line with our annual guidance range. Late in March, we provided our annual mineral reserve and resource update. In Peru, mine planning gains and economic re-evaluations resulted in additional mineral reserves at Constantia, with largely offset 2021 mining depletion. Current mineral reserve estimates at Constantia total 521 million tons at 0.31% copper with over 1.6 million tons of contained copper. As a result, Constantia's expected mine life has been extended by one year to 2038. In addition, the Constantia Norte underground mineral resource estimates were added to Constantia's mineral resources. A positive scoping study was completed in 2021 which resulted in an inferred mineral resource estimate of 6.5 million tons at 1.2% copper as shown on slide six. This resource estimate is in two high-grade SCARN lenses located below the open pit in the Constantia Norte area. The study concluded these two lenses could be mined by underground methods starting in 2029 to supplement the open pit production. we intend to conduct infill drilling and an internal pre-feasibility study in hopes of converting the underground mineral resources to mineral reserves for inclusion in the mine plan for the Constantia operations. As a result of exploration success in Manitoba, additional mineral reserves were identified at Lalor and the 1901 deposit in our 2022 reserve update. This extended the mine life of the Snow Lake operations by one year to 2038, maintaining the 17-year mine life. Resource to reserve conversion has more than offset 2021 mining depletion with a net gain for all metals, including an additional 218,000 ounces of gold contained in reserves after adjusting for mining depletion. This is a continuation of our successful year-over-year resource to reserve conversion in Snow Lake. where we have achieved a more than 350% increase in reserves identified to date, as shown on slide 7. Inferred mineral resources at Larora in 1901 increased by 1.1 million tons, bringing the total inferred mineral resources to 8.1 million tons. These inferred mineral resources have the potential to maintain the 5,300 tons per day production level in Snow Lake beyond 2028, and further extend the mine life. Slide 8 highlights the progress we've made on several of our development and exploration growth initiatives. A key focus for HUD-BAE 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. 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. The initial technical studies for Copper World have been completed and the results are being incorporated into a PEA contemplating the development of the Copper World deposits in conjunction with an alternative plan for the Rosemont deposit to capitalize on regional synergies. The PEA is expected to incorporate a two-phase mine plan, with the first phase reflecting a standalone operation utilizing our private land for processing infrastructure and contemplating mining portions of Copper World and Rosemont located on patented mining claims. The first phase is designed as an economically viable standalone plan requiring only state and local permits and is expected to reflect an approximate 15-year mine life. The second phase of the mine plan is expected to extend the mine life and incorporate an expansion onto federal lands to mine the entire Rosemont and Copperwell deposits. The second phase would be subject to the federal permitting process. We expect the PEA to demonstrate positive economics for this low-cost, long-life copper project, and we look forward to publishing the results in a technical report in the second quarter of this year. In April, we commenced early site works at Copper World with initial grading and clearing activities taking place on our private land. We have also increased the number of drill rigs at site to seven to conduct infill drilling and to support future feasibility studies. In addition to infill drilling, we continue to test regional exploration targets at Copper World. There remain several opportunities to further extend economic mineralization within the private land limits at Copper World and Rosemont, including to the north and south of Balsa through drilling to bridge the gaps. In Peru, drilling continues at the Yaga and Copper Porphyry target with over 9,000 meters drilled to date. Based on the positive results from the initial drilling, a second phase of drilling has been initiated aimed at defining an initial inferred mineral resource estimate in the third quarter of 2022. In the Snow Lake region, We had a busy winter exploration program actively conducting surface and underground drilling activities. The program primarily focused on the copper gold rich feeder zone at the 1901 deposit, the drilling gap between 1901 and LEN 17 at Lalor, and a high priority geophysical target located immediately north of Lalor. We also commenced a confirmatory drill program on the Flin Flon tailings facility earlier this year to support the evaluation of the tailings reprocessing opportunity. Slide 9 summarizes our upcoming catalysts. In Manitoba, we are advancing our Snow Lake Gold Strategy with plans underway to achieve 5,300 tons per day at Lalor by the end of the year. as I touched on earlier. We are also implementing a recovery improvement program at the store mill this year to increase copper and gold recoveries as part of our Snow Lake Gold Strategy. We will continue regional drilling in the Snow Lake area to explore for base metal and gold upside, and we will continue to compile results from ongoing infill drilling programs at LALOR in 1901. In Peru, we will continue to move discussions forward with the communities to the north of Constantia working toward mutually beneficial exploration agreements on the highly prospective regional plans in the united states we expect to be submitting state-level permit applications for copper world this year and we continue to await the outcome of the rosemont appeal decision from the ninth circuit court following the publication of a positive pea we expect to advance a copper world pre-feasibility study in the second half of 2022 and on our mason property We intend to launch an exploration program to test SCARN targets later this year. Concluding our presentation on slide 10, HUD-BAY offers leading near-term free cash flow growth and significant copper resource optionality through our high-quality organic pipeline. We believe that copper has the best long-term supply and demand fundamentals in the industry as global copper mine supply will be unable to meet demand from global decarbonization initiatives. We have the highest near-term free cash flow 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 180% 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. And with that, we're happy to take your questions.