Hudbay Minerals Inc.

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the HUD-Bay Minerals, Inc. Second Quarter 2023 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 0. I would like to remind everyone that this conference call is being recorded today, August 9, 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 2023 Second 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 in the Investor Events section of our website, and we encourage you to refer to it during this call. Our presenter today is Peter Kokilski, HUD-based President and Chief Executive Officer. Accompanying Peter for the Q&A portion of the call will be Eugene Lee, our Chief Financial Officer, and Andre Lauzon, our 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.

Thank you, Candice, and good morning, everyone. Thank you for joining us. In today's presentation, I'll discuss our second quarter results, touch on the operating and financial performance of the business, and provide insight into recent strategic initiatives and corporate achievements. The second quarter was one of transition and expansion for HUD-Bay. We took many meaningful steps across the business to enhance our operating platform, deliver production and cash flow growth, and create opportunities for potential mine life extension. The integration of our newly acquired copper mountain mine in British Columbia has transformed our organization into a premier Americas-focused copper mining company with three long life mines in tier one jurisdictions, steady 150,000 tons per year copper production levels, and a world-class pipeline of organic copper growth projects. The combined company makes HudBay the third largest copper producer in Canada. In Peru, operations performed in line with our expectations as we completed the planned higher stripping period at Pampa Cancha to allow us to access higher grades starting the third quarter of 2023. And we have achieved those higher grades in July, with 1.6 million tons of ore mined from Pampacantia at impressive grades of 0.63% copper and 0.31 grams per ton of gold. In Manitoba, we completed the implementation of the first phase of the Stall Recovery Improvement Program to deliver higher copper and gold recoveries at Stall in the second half of this year. We discovered new mineralized zones near Lalor, and expanded our long-term growth opportunities through the consolidation of highly prospective land in the Snow Lake region. We also entered into a framework for a potential exploration partnership in Flin Flon with Marubeni to explore priority targets on our mineral properties within close proximity to our idle Flin Flon processing infrastructure. We remain on track to meet our 2023 guidance levels as we completed many transitional activities in the second quarter that position us for strong production, improved costs, and higher free cash flow generation in the second half of 2023. With our now larger and more resilient operating platform, we are well positioned to deliver diversified cash flows to prudently advance our leading organic pipeline of brownfield expansion and greenfield exploration and development opportunities across our portfolio. Jumping into our second quarter results on slide four, Consolidated copper production was 22,000 tons, a slight decrease compared to the first quarter as we completed the planned high stripping program at Pampacantia and the scheduled mill maintenance program at Constantia. This was partially offset by a 10-day stub period of production from the newly acquired copper mountain mine. Consolidated gold production was 49,000 ounces, a 4% increase due to slightly higher gold grades and higher gold recoveries in Peru. Consolidated zinc production was 9,000 tons, an 11% decline due to lower throughput and zinc head grades at stall. Consolidated copper cash costs were $1.60 per pound compared to $0.85 in the prior quarter. This increase was mainly the result of higher mining, milling, and treatment and refining costs and lower copper production. The cash costs for the first six months of the year came in above 2023 guidance ranges but remained in line with quarterly cadence expectations. We reaffirm our consolidated cash cost guidance as we expect cash costs to significantly decline in the second half of 2023. Similarly, copper sustaining cash costs increased to $2.73 per pound, primarily due to the same reasons affecting cash costs. Second quarter operating cash flow before changes in non-cash working capital was $56 million, and adjusted EBITDA was $81 million, both impacted by higher operating costs in Peru associated with the scheduled mill maintenance program and higher planned stripping activities at Pampa Concha, which offset higher revenue from an increase in sales volumes. At the end of the second quarter, our liquidity included $180 million in cash, and $184 million in undrawn availability under our revolving credit facilities. Following quarter end, we drew $90 million from our credit facilities to finance the redemption of a portion of Copper Mountain's Nordic bonds, which reduced the aggregate amount of the bonds outstanding to $60 million. This also improves our ability to deleverage and repay debt sooner than the 2026 bond maturity. Based on the expected free cash flow generation in the second half of this year, we continue to expect to make progress on our deleveraging targets as outlined in our 3P plan for sanctioning copper world. We are on track to deliver annual discretionary spending reduction targets for 2023 with lower growth capital and exploration expenditures compared to 2022. As a result of a continued focus on discretionary spending reductions, Total capital expenses for 2023 are expected to be approximately $15 million lower than guidance levels, representing approximately 5% of our total capex guidance for 2023. There are no major capital expenditures expected in the second half of 2023, which together with the expected increase in production across the business will significantly improve our free cash flow generation in the second half. With the completion of the Copper Mountain acquisition on June 20th and the first shipment of copper concentrate under our ownership on July the 23rd, our second quarter results were not materially affected by Copper Mountain's operations with no revenues or corresponding cost of sales recorded during the 10-day period in the second quarter. I'm moving to slide five. As I mentioned earlier, our Peru operations performed in line with our expectations this quarter. Constantia produced 18,000 tons of copper, 13,000 ounces of gold, 420,000 ounces of silver, and 414 tons of molybdenum. With a period of higher planned stripping activities in the Pampacantia pit completed in June and the achievement of significantly higher grade ore mined from Pampacantia in July, the company is on track to achieve the higher expected production in the second half of the year in line with the full year production guidance ranges. Total ore mined increased by 41% compared to the first quarter as mining activities returned to normal after we reduced mining activities to conserve fuel in response to logistical constraints caused by civil unrest in the first quarter. Ore milled was 6% lower than the first quarter due to a scheduled plant maintenance shutdown. Copper grades were slightly lower than last quarter, with the continued processing of lower-grade ore from stockpiles as we completed the higher planned stripping activities at Pampacuncha in June. Recoveries of copper in the second quarter remained at low levels, as expected, due to higher levels of impurities in the stockpiled ore. Recoveries for gold and silver were higher due to higher gold grades and lower zinc content impurities in ore processed. Second quarter combined units operating costs were 23% higher than the first quarter, primarily due to higher costs associated with the schedule shutdown and lower milled ore throughput. Peru's cash costs were $2.14 per pound in the second quarter. However, cash costs are expected to decline meaningfully in the second half of 2023, and the full-year cash cost is expected to remain within the 2023 guidance range. Sustaining cash costs were $3.06 per pound, higher than in the first quarter due to the same factors affecting cash costs. Looking at slide six, our Manitoba operations produced 35,000 ounces of gold, roughly 9,000 tons of zinc, 3,000 tons of copper, and 181,000 ounces of silver. Production of copper and silver was higher than the first quarter due to higher grades and recoveries. Production of gold and zinc was lower due to lower recoveries and lower zinc grades, partially offset by higher gold grades. We completed a number of key initiatives aimed to continue to support higher production levels at Larlor, improve metal recoveries at the mills, and prioritize the mining of higher gold-grade zones at Larlor in the second half of 2023 as planned. As such, full-year production of all metals in Manitoba remains on track to achieve guidance ranges. However, with a slower ramp-up of gold recoveries associated with Store Phase 1 recovery improvement project in the second quarter, gold production is trending towards the lower end of 2023 guidance range for Manitoba, while zinc and copper production is trending towards the higher end of the production guidance ranges. On the stall recovery improvement program, the first phase of the project was completed during the second quarter. Commissioning of the circuits quickly achieved targeted copper and zinc concentrate grades, while gold recovery improvements progressed slower than planned. Changes to optimize the circuit are underway, and we expect to achieve higher gold recoveries in the second half of 2023. Significant progress has been made at the Larwhal Mine in optimizing the development drift size, improving shaft availability, and implementing changes to achieve better stoke muck fragmentation, which eliminated inefficient trucking of water surface via the ramp late in the second quarter. We also implemented tailings deposition improvements that are expected to maximize the Anderson facility tailings capacity and defer incremental dam construction activities to future years. We completed planned maintenance at Laror during the second quarter. Despite this planned maintenance program, all mined from Laror increased by 11% from the prior quarter, averaging over 4,500 tons per day. Laror continues to implement improvements to reduce costs and target higher production levels with a focus on equipment fleet availability and building of long-haul inventory. Grades in the second quarter were consistent with the mine plan, with gold, copper, and silver grades increasing by 3%, 42%, and 28%, respectively, and zinc grades decreasing by 5%. The stall mill processed similar levels of ore compared to the first quarter due to downtime to complete the phase one recovery improvement project and the commissioning of new Jamison cells. As a result, there was a buildup of approximately 30,000 tons of stockpiled base metal ore above normal levels at the end of the second quarter that will be milled during the second half of 2023. The New Britannia Mill continued to achieve consistent production, averaging approximately 1,560 tons per day. There was a buildup of 15,000 tons of gold ore stockpiles, which will be milled during the second half of 2023. We continue to advance improvement initiatives at New Britannia requiring minimal capital outlays with a focus on reducing reagent and grinding media consumption while further improving overall metal recoveries and copper concentrate grades. Combined unit operating costs in the second quarter slightly increased, reflecting lower mill throughput and the surface ore stockpile buildup. Manitoba's gold cash costs were $1,097 per ounce, higher than the first quarter, driven by higher mining costs, treatment and refining charges, and low gold production. Gold cash costs are expected to decline in the second half of 2023, and the full-year cash cost is expected to remain within the 2023 guidance range. Gold sustaining cash costs were $1,521 per ounce in the second quarter. Turning to slide seven. The copper mounted integration activities are progressing in line with our expectations, and over 50% of the targeted annualized corporate and tax synergies have already been achieved to date. Moving forward, we will continue to advance our plans to stabilize the operations, including opening up the mine by adding additional mining faces and remobilizing idle haul trucks, optimizing the ore feed to the plant, and implementing plant improvement initiatives. We will provide further plans in a technical report including an updated mine plan, revised mineral reserve and resource estimates, and updated annual production and cost estimates for Copper Mountain in the fourth quarter. Turning to slide eight, in July we announced positive results from our 2023 winter drill program in Snow Lake, Manitoba. The program included the testing of a geophysical anomaly located northwest of Lalo within 500 meters of our existing underground infrastructure. All holes intersected an alteration zone that is known to host the larval mineralization with certain holes intersecting several sulfite horizons with zinc and copper-gold-silver mineralization. One of the holes intersected a high-grade zone with 3.5 meters of 3.81% copper, 3.75 grams per ton of gold, and 104.5 grams per ton of silver. The drilling program also included testing of the down-plunge copper-gold extensions of the Larlor deposit, the first drilling in the deeper zones at Larlor since the initial discovery. This initial campaign consisted of eight widely spaced drill holes over two kilometers, and all holes intersected the zone of strong alteration known to host the Larlor mineralization and have shown the potential of higher-grade copper-gold feeder zones. These initial results are a very encouraging indication that the rocks hosting the rich copper gold mineralization are consistent with LALOR. This quarter, we entered into agreements to significantly consolidate our land holdings in Snow Lake through several transactions, increasing our holdings by more than 250% in the region. We intend to explore these claims with the aim of finding a new anchor deposit to maximize and extend the life of HUD-based Snow Lake operations beyond 2038. We completed the acquisition of the Cook Lake properties from Glencore in late June, and as shown on slide 9, the Cook Lake properties are located within 10 kilometers of the Larlor mine and have the potential to host a new discovery at depth. The properties include the Cook Lake north and south properties, which are within 30 kilometers of our Stahl and New Britannia mills. We received data regarding approximately 60,000 meters of historical drilling that was completed over 10 years ago at a fraction of Lalor's current known depth. The mineralization indicates that there is the potential for new deposits on the same favorable mineralized horizons as many known deposits in the area, including the Lalor 1901 and Chisel deposits. The Cook Lake properties are untested by modern deep geophysics, which was the discovery method for the Lalor mine. In June, we also announced an agreement to acquire Rockcliffe Metals Corp. The enterprise value to HudBay net of Rockcliffe's cash is approximately $13 million. As shown on slide 10, the acquisition would add more than 1,800 square kilometers to our land holdings across the Snow Lake area. It would consolidate our ownership of the Talbot deposit and add prospective land adjacent to our PEN2 deposit in addition to other exploration properties in the vicinity of the Stawell and New Britannia Mills. Completion of the Rockcliffe transaction is contingent upon court approval and Rockcliffe shareholder approval. The transaction is expected to close in the third quarter. Moving on to slide 11, we continue to work towards de-risking the Copper World project, and we expect to receive our two outstanding state permits by early 2024. In May, we received a favorable ruling from the U.S. Court of Appeals for the Ninth Circuit that reversed the U.S. Fish and Wildlife Services designation of the area near Copper World and the former Rosemont project as jaguar critical habitat. While this ruling doesn't impact the state permitting process for phase one of Copper World, it is expected to simplify the federal permitting process for phase two of the Copper World project. We're encouraged by the US Department of Energy's recent addition of copper to the critical minerals list. Pre-feasibility activities for phase one are well advanced, and a pre-feasibility study is expected to be released in the third quarter of 2023. We intend to initiate the process of establishing a minority joint venture partner prior to commencing a definitive feasibility study which will allow the potential joint venture partner to participate in the funding of the definitive feasibility study activities in 2024, as well as in the final project designed for Copperworld. During the second quarter, we were proud to have launched our company's purpose statement, which is shown on slide 12. Our company enjoys a rich history that grounds us and a purpose that leads to a bright future. Our purpose, we care about our people, our communities, and our planet embodies how we plan to provide the metals the world needs, work sustainably, transform lives, and create better futures for communities. We are committed to finding and producing copper and other critical metals needed to support a more sustainable future while operating responsibly, minimizing the environmental footprint, ensuring our activities benefit the communities near our operations, and delivering dependable value for our stakeholders. I'll conclude the conference call presentation on slides 13 and 14, which detail our enhanced copper production platform of three operating mines in tier one jurisdictions, providing near-term production growth and free cash flow generation, along with leading organic growth. After completing a transitional second quarter with the Copper Mountain mine acquisition, a successful pumpercuncher stripping period and completion of the Store Recovery Improvement Project, we are well positioned to deliver strong production growth and significant free cash flow generation in the second half of 2023. Of note, copper mountain integration and mine stabilization are progressing as planned, and Constantia has already delivered higher copper and gold grades in July, in line with our production and cash flow cadence as projected for 2023. This medium-term production growth and diversified free cash flow generation will enable us to pursue a longer-term investment opportunities in our leading organic growth pipeline at Copper World for Constantia satellite properties, as well as potential mine life extensions in Snow Lake and Copper Mountain, which provide unparalleled copper and gold optionality for investors. We continue to believe that copper has the best long-term supply-demand fundamentals with the growing demands from global decarbonization initiatives. HUD-BAY is uniquely positioned to benefit from the strong outlook for copper with an attractive copper production growth profile. HUD-BAY offers investors the highest near-term free cash flow yields coupled with significant long-term upside through our leading copper mineral resource base. And with that, we're pleased to take your questions.