Hudbay Minerals Inc.

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the HUD-Bay Minerals, Inc. 4th 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 press star, then 0. I would like to remind everyone that this conference call is being recorded today, February 24, 2023, at 8.30 a.m. Eastern Time. I will now turn the conference over to Candice Brule, Vice President, Investor Relations. Please go ahead.

Thank you, Operator. Good morning and welcome to HUD-Base 2022 Fourth 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 Kekielty, HUD-Bay's President and Chief Executive Officer. Accompanying Peter for the Q&A portion of the call will be Eugene Lee, our Senior Vice President and Chief Financial Officer, and Andre Lauzon, our Senior Vice President and Chief Operating Officer. 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.

Thanks very much, Candice. Good morning, everyone, and thank you for joining us. 2022 was a year of dedication, discipline, and delivery for HUD-BAE, as we completed our first full year of New Britannia and Pampacantia 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'll 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 three, We're proud to have achieved our 2022 consolidated production guidance for all metals and consolidated cash cost 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 Pampa Concha 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 tons of tailings that have been deposited over the span of 90 years. We plan to complete metallurgical test work on the flint-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 tons per day is ongoing and the stall 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 the Uchacaco community in August, providing access to the Maria Reyna and Caballito satellite properties located within trucking distance of Constantia, 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 tons at 1.2% copper. The study concluded that the two high-grade SCARN 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 Yagen and identified a higher-grade core. Yagen is a 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 political 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 one reflects a 16-year standalone operation on private land with average annual copper production of approximately 86,000 tons 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 Copperworld expands mining activities onto federal land and extends the mine life to 44 years with average annual copper production of approximately 100,000 tons. 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 this 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 CopperWorld, 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 CopperWorld. Finally, we have been rationalizing our non-core asset portfolio, and divested our 100% interest in the Lordsburg property in New Mexico, which was acquired 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 four, we started to see the benefits from our recent brownfields 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 declining 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 five, we summarize our Peru operating results. During the quarter, we produced 27,000 tons of copper and 21,000 ounces of gold, a 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 tons, 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 prioritized the processing of lower-grade stockpiles and shorter haulage distances of ore from the Constantia 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 a 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 costs in the fourth quarter declined by 20% to $1.34 per pound compared to the third quarter due to higher copper production and higher byproduct 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 tons of copper concentrate was unsold at the end of the quarter due to nationwide blockades. Given that, we have been able to continuously operate. Our concentrate inventories at site reached a peak of approximately 47,000 tons 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 positive cash flow generation and continued financial discipline, We expect to extend our existing quotational period hedging program to cover approximately 13,000 tons 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. ore mined at 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 long-haul inventory, improving stope muck 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 tons per day in the fourth quarter. Combined unit operating costs in the fourth quarter were relatively in line with the third Full-year combined unit operating costs increased by 27% compared to 2021, reflecting the standalone 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. full-year 2022 cash costs were $297 per ounce, which was impressively below the low end of the annual guidance range. Slide 7 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 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 Pampacuncha 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 8 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 plant during the regional logistical challenges. This is expected to result in more ore being mined from Constantia and less from the Pampa-Cuncha pit in the early part of the year. Despite these changes and a period of higher stripping at Pampa-Cuncha, 2023 production is expected to be 103.5 thousand tons of copper and 95.5 thousand 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 Larlor mine. The 2023 mine plan at Larlor 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 levels above nameplate capacity. These mine plan enhancements result in 2023 gold production levels being consistent with the most recent mine plan for Snow Lake, but without the full ramp-up to 5,300 tons per day, as we focus on maximizing the value per ton of ore at Lalor. Year-over-year, zinc production is expected to decline by 42%, primarily due to the recent closure of the 777 mines. 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 lower than 2022 due to lower equipment spending at Larlor 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 stall 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 drill preparation for the Maria Reina and Caballito properties near Constantia, a limited drill program at Pampa Cancha to evaluate the potential to add an incremental mining phase at depth, and a winter drill program in Snow Lake focused on testing the deep extensions at Lalor. Copper cash costs in Peru are expected to decline by 26% in 2023 versus 2022, primarily due to higher gold byproduct 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 a 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 de-risking activities including the completion of a pre-feasibility 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 pre-feasibility study for phase one of Copper World are now complete. The pre-feasibility 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 of 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 leaching tradeoff evaluations. The prefeasibility study results are expected to be released by the end of the second quarter of 2023. Copperworld requires only state-level permits for phase one, 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 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 Copperworld is not expected until 2025 based on current estimated timelines and reflects a conservative approach to spending at Copperworld over the next two years. The 3P plan for sanctioning Copperworld that I mentioned earlier is laid out on this slide. This plan ensures HUD-BAE 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 of Uchikako allows for exploration of the Maria Reina and Kabayito properties. HUD-BAY owns the mineral rights to these properties that are located within trucking distance of the Constantia 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 archaeological 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 improves. Our geological team commenced surface investigation activities and field evidence confirms that both Caballito and Maria Reina host sulfide and oxide-rich copper mineralization in scarns, hydrothermal breccias, and large porphyry intrusive bodies. Similar to Papacancha, Caballito is located about five 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 tons at 2.3% copper for the open pit mine. Berea Reina is approximately 10 kilometers from Constantia, 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-dipped gold and copper extensions of the Laalor deposit. This is the first time we have completed step-out drilling in the deeper zones at Laalor 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 Laalor which is another highly prospective location next to the main LALA 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 sources, including nearly 100% renewable energy in Manitoba, we are leading emissions rankings amongst peers as seen on slide 12. We also align 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 one and scope two emissions by 2030. We plan to be reporting on material scope three emissions in the near term and continuing to be transparent with greenhouse gas performance data disclosure. Through our emissions reduction roadmap, 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 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 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 HUD-Bay 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 14. Our strong copper and gold production growth in 2023 and leading low-cost profile 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, 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 3P 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 tons per day and complete the Storm Mill Recovery Improvement Program early in 2023. And we'll conclude our drilling program to test the deep extensions at LALOR with the potential to expand gold mineral reserves and resources. In Peru, we'll continue to progress Constancia'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 Reina 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 pleased to take your questions.