Hudbay Minerals Inc.

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the HUD-Bay Minerals, Inc. Third Quarter 2024 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, November the 13th, 2024, at 11 a.m. Eastern Time. I would now like to turn the conference over to Candice Brulé, Vice President, Investor Relations. Please go ahead.

Thank you, Operator. Good morning and welcome to HUD-based 2024 Third Quarter Results Conference Call. HUD-based financial results were issued this morning 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 Kikilski, 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 Plus 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. Good morning, everyone, and thank you for joining us for today's call. In the third quarter, we delivered another quarter of strong operational and financial performance with steady free cash flow generation and continued debt reduction. This was largely a result of our unique copper and gold production diversification with strong operating cost control that provides attractive free cash flow generation, expanding margins, and strong leverage to higher metal prices. We saw record gold production in Manitoba, driven by new quarterly record throughput levels at the New Britannia Mill. The Constantia Mill performance was also very strong, with higher levels of throughput achieved this quarter, and Copper Mountain achieved the highest copper recovery levels at the operation since inception. Our enhanced operating platform continues to deliver solid production and better than expected cost performance, enabling us to reaffirm our 2024 consolidated production guidance and announce yet another improvement in our consolidated cash cost guidance for the second quarter in a row. I'll go into more detail on our quarterly achievements throughout today's presentation, along with updates on our exciting growth initiatives that are underway. Slide three summarizes the impressive operating performance in the third quarter. Consolidated copper production was 31,000 tons in the quarter, in line with our mine plan expectations. Consolidated gold production was 89,000 ounces, well exceeding management expectations and representing a 52% increase from the second quarter. Stronger gold production was driven by higher gold grades and mill throughput in all operations, but most notably at the New Britannia Mill in Manitoba. Consolidated cash costs were 18 cents per pound of copper in the third quarter, which significantly improved from $1.14 in the second quarter. Consolidated sustaining cash costs were $1.71 per pound, and all-in sustaining cash costs were $1.95 per pound, representing a similar meaningful improvement from the prior quarter. The lower cash costs reflect higher byproduct credits, higher copper production and lower mining, milling, treatment and refining costs as a result of strong cost control. With the production performance to date and the continued expectations of higher copper production in the fourth quarter of 2024, we are reaffirming 2024 consolidated production guidance for all metals. Consolidated copper production is expected to trend towards the lower end of the guidance range, while consolidated gold production is expected to trend towards the top end of the guidance range. As a result of the exceptional cost performance year-to-date, we are again improving our full-year 2024 consolidated cash cost guidance to a range of 65 cents to 85 cents per pound of copper. This is a further reduction from the previously announced range of $0.90 to $1.10 per pound and the original guidance range of $1.05 to $1.25 per pound. We are also improving our consolidated sustaining cash cost guidance to a range of $1.75 to $2.20 per pound from the original guidance of $2 to $2.45 per pound. Operating cash flow before change in non-cash working capital was $186 million, 53% higher than the second quarter due to higher gold production and sales volumes in Manitoba, strong operational cost performance across the business, and higher realized gold prices. Similarly, adjusted EBITDA was $206 million, a 42% increase compared to $145 million in the prior quarter. This has resulted in trailing 12-month adjusted EBITDA of $840 million, substantially higher than the $499 million a year ago. Adjusted earnings attributable to owners was 13 cents per share in the third quarter. And with $86 million of free cash flow generation in the quarter, we have now delivered five consecutive quarters of meaningful free cash flow generation as a result of recent Brownfields investments in our operations continuous improvement efforts and steady cost control across the business. Turning to slide four, our strong free cash flow generation has enabled us to make additional progress against our deleveraging targets with more than $65 million of debt and gold prepay liabilities paid back in the quarter, resulting in nearly $300 million in gross debt reduction over the past 12 months. This included $49 million of additional open market purchases of our senior unsecured notes during the quarter, bringing our long-term debts to $1.1 billion as of September the 30th. We also completed the final monthly payment to settle the gold prepayment facility that was used to fund the New Britannia gold mill refurbishment project, now providing full upside to higher gold production and gold prices. While a majority of our revenues continue to be from copper, our unique copper and gold diversification adds further cash flow resiliency and strong leverage to higher metal prices. This is seen through the increasing portion of our revenues from gold, representing 36% of total revenues in the third quarter compared to 27% a year ago, further diversifying our revenue streams and enhancing our overall financial performance. As a result of the impressive cash flow generation and deleveraging efforts, we have reduced net debt by more than $500 million over the past 12 months. This brings our net debt to adjusted EBITDA ratio to 0.7 times compared to 1.6 times at the end of 2023. The improved balance sheet flexibility and accelerated debt reduction significantly advances our progress as part of our 3P plan for sanctioning Copperworld, and results in the successful achievement of the targeted 1.2 times net debt to EBITDA ratio well ahead of schedule. Subsequent to the quarter end, we took further action to improve long-term balance sheet resilience with a proactive three-year extension of our revolving credit facilities from October 2025 to November 2028. This provides increased financial flexibility to accretively maintain our 4.5% coupon bonds until maturity in 2026 and advance Copperworld towards a sanctioned decision in accordance with the 3P plan. The newly extended $450 million revolving credit facility includes an improved pricing grid reflecting the enhanced financial position of HUD-Bay and features an opportunity to increase the facility by an additional $150 million at our discretion, providing additional financial flexibility. Looking at our Peru operations on slide five, we produced 21,000 tons of copper, 20,000 ounces of gold, roughly 650,000 ounces of silver, and 362 tons of molybdenum. Copper, gold, and silver production was higher than the second quarter as the operations continued to benefit from strong mill throughput, achieving 88,000 tons per day in the third quarter. With the completion of the planned stripping program in Peru at the end of the third quarter, post-quarter production results have already delivered higher copper and gold grades as the mining of the high-grade zones at Pampa Cancha is underway in line with the mine plan. We expect to achieve 2024 production guidance for all metals in Peru, with the fourth quarter expected to be the strongest quarter in Peru this year. Peru full-year copper production is expected to trend towards the lower end of the guidance range due to lower than expected grades, while gold production is expected to trend towards the higher end of the guidance range, primarily due to a larger portion of the ore feed coming from Pampacancha stockpiles containing higher gold grades. Total ore mined in the third quarter decreased by 27% compared to the prior quarter, in line with the mine plan and the completion of the planned stripping program at Pampacantia in late September. Similar to the second quarter, total ore milled includes supplemental ore feed from stockpiles as the team completed the pit stripping activities. Milled copper and gold grades increased by 7% and 57%, respectively, compared to the second quarter as higher grades were mined in both the Constanza and Pampacantia pits, and there was an increase in ore mined from Pampacantia. Copper recoveries were relatively unchanged from the prior quarter, while gold recoveries increased to 68%. Peru's cash costs were $1.80, relatively unchanged from the second quarter, as higher copper production offset higher mining and freight costs and lower byproduct credits. Full-year cash costs are expected to be favorably positioned at the lower end of the cost guidance range, primarily due to higher gold byproduct credits. Slide 6 highlights the operational excellence achieved at our Constantia mill, a result of the team's commitment to continuous improvement and leading cost performance. When HUD-Bay commissioned the Constantia mill in 2014, it was designed with a throughput capacity of 76,000 tons per day. Within five months, the team had the operations fully ramped up to targeted levels, and we have consistently operated the mill above the design throughput level since 2017. We've seen further increases in mill throughput this year, averaging 87,000 tons per day year to date, representing a remarkable 15% increase above name plate capacity. And as mentioned earlier, the mill processed 88,000 tons per day in the third quarter. The strong mill performance and focus on cost efficiencies has broadly positioned Constantia as the lowest cost open pit copper mine in South America. We are also evaluating opportunities to further increase mill throughput in the medium to long term after the government recently approved a regulatory change to allow mining companies to increase throughput by up to 10% above permitted levels. This opportunity has the potential to increase production volumes to partially offset grade declines following the depletion of Pampa Kancha later next year. Moving on to our Manitoba business on slide seven. The operations delivered record results in the third quarter and continued to exceed expectations in performance and efficiency. Manitoba achieved a new quarterly record for gold production at 62,000 ounces, representing a 44% increase from the second quarter. The operations also produced 3,000 tons of copper, 8,000 tons of zinc, and 281,000 ounces of silver during the quarter. The increased gold and silver production is due to our strategy of mining and allocating more La La Gold ore feed to New Britannia to achieve higher recoveries combined with higher precious metal grades mined in the quarter. We now expect to exceed the top end of our 2024 gold production guidance range in Manitoba. This is driven by continued outperformance at New Britannia with throughput achieving new record levels along with LALO delivering better than expected gold grades by focusing on ore quality improvements. Manitoba copper production is also expected to trend towards the higher end of the 2024 guidance range, and we are well on track to achieve zinc and silver production guidance. Total ore mined at LALO in the third quarter was 7% higher than the second quarter, with higher gold, copper, and silver grades mined. The strong mine performance benefited from improved long-haul muck fragmentation and a consistent higher-grade mining sequence that surpassed our forecasted metal grades. We also completed planned maintenance to enhance the efficiency and reliability of the key mine infrastructure and performed ongoing modifications to stope design to further enhance mucking efficiency throughout the life cycle of stopes. As mentioned, the New Britannia Gold Mill had another quarter of exceptional performance with throughput hitting new quarterly records of 2,080 tons per day. And recoveries remained strong at 90% for gold and 93% for copper in the third quarter. At the Stahl Base Metal Mill, the third quarter had slightly reduced throughput levels as more ore was diverted to New Britannia. Benefits from recent recovery improvement programs continue to be realized with gold recoveries of 71% achieved during the third quarter. We continue to optimize recoveries at store with the installation of new elongated cyclones in one of the two milling circuits late in the third quarter. These cyclones are designed to improve grind size and pending positive performance would be implemented across other circuits. Manitoba gold cash costs were $372 per ounce in the quarter, a meaningful decrease of 52% compared to the prior quarter. This improvement was due to significantly higher gold production and higher byproduct credits, partially offset by higher milling, G&A, and freight costs. We expect 2024 gold cash costs to be favorably positioned at the lower end of the cost guidance range, reflecting the strong cost control and gold production achieved to date. We are extremely proud of the success we've had at our New Britannia mill, as summarized on slide eight. In 2021, we completed the high return brownfield investment in New Britannia and refurbished the mill with a nominal capacity of 1,500 tons per day to provide additional processing capacity at the Snow Lake operations. This also allowed us to achieve higher gold recoveries of approximately 90% as Lauro transitioned to the higher gold and copper areas of the mine plant. The mill has consistently exceeded performance expectations, achieving throughput levels of 1,650 tons per day in 2023, more than 1,850 tons per day in the first half of 2024, and reaching a new quarterly record of 2,080 tons per day in the third quarter. Plant availability continues to improve, supported by low-capital projects aimed at further increasing throughput while continuing to achieve targeted gold recoveries of 90%. Notably, enhancements made in the elution and stripping cycles contributed to increased gold dollar rate production in the quarter. As I mentioned in August, we completed the final payment under the New Britannia Gold Pre-Pay Facility, which further enhances our exposure to higher gold production in Snow Lake and leverage to higher gold prices. With approximately 2 million ounces of contained gold in current reserves and another 1.4 million ounces of contained gold in inferred resources, the New Britannia investment has unlocked significant value in Snow Lake. This could be further enhanced by regional exploration upside and the current strong gold price environment. Earlier this year, we received a permit to increase the production rate of New Britannia to 2,500 tons per day, which will provide the opportunity to process more Arlo ore at the New Britannia mill and create additional processing capacity at store for potential new regional discoveries in Snow Lake. Slide 9 discusses the benefits from our stabilization plans at the British Columbia operations since our acquisition in June 2023. Our stabilization efforts have focused on opening up the mine by reactivating the full mining fleet, adding additional mining faces, optimizing the ore feed to the plant, and implementing plant improvement initiatives that mirror the successful processes at Constantia. In the third quarter, British Columbia produced 6.7 thousand tons of copper 6.3,000 ounces of gold, and 56,000 ounces of silver. Copper production was in line with the prior quarter, while gold production increased by 41% and silver production decreased by 28%. This was a result of the head grades in the stockpiled ore that was used to feed the mill. Due to lower grades in stockpiled ore and the ramp up of stabilization efforts throughout the year, We expect to be slightly below the low end of the 2024 guidance range for copper production in British Columbia. Gold and silver are expected to be within the 2024 production guidance ranges. Mill processed a total of 3.4 million tons of ore during the quarter, a 4% increase compared to the prior quarter. Mill availability averaged 95% while maintaining a stable throughput rate. A number of initiatives were advanced in the quarter to address identified milling constraints and improve throughput to targeted levels, with the benefits expected to be realized in the fourth quarter of 2024. Proper recoveries of 84% were higher than the second quarter, exceeding management's expectations despite processing lower grades. This was the result of improvements in the regrind circuit constraint and implementation of flotation operational strategy improvements. including reagent selection and dose modification. Similarly, higher milled gold grades resulted in higher gold recoveries of 67% in the third quarter. Cash costs were $1.81 per pound in the third quarter, 32% lower than the prior quarter. This was driven by lower mining and milling costs, higher production, and the benefits from the various stabilization initiatives implemented over the course of this year. We have successfully achieved sequential quarterly improvements in units operating costs and cash costs this year, with the third quarter of 2024 being the lowest cost quarter at Copper Mountain since HUD Bay's acquisition. While year-to-date cash costs are above the higher end of the 2024 guidance range in British Columbia, we expect fourth quarter costs to continue to improve and result in full-year costs to be near the upper end of the cost guidance range. Slide 10 highlights some of the successes from the completion of our stabilization phase and the focus areas for our optimization phase. Mine ramp-up activities have been completed by successfully remobilizing all 28 haul trucks and adding five additional haul trucks this year to execute the planned accelerated stripping campaign at a lower cost and avoid contractor mining costs. This has successfully increased the total tons moved to 23 million tons in the quarter compared to 16 million tons in the same period last year. Mill stabilization activities have been completed and have resulted in stronger mill performance as demonstrated by record mill availability of 95% and record copper recoveries of 84% achieved in the third quarter. As a result, year-to-date mill performance has resulted in the highest mill availability and highest copper recoveries achieved at the Coff Mountain Mine in the last decade. Our stabilization efforts have successfully reduced combined unit operating costs to $19.56 Canadian per tonne year-to-date, significantly lower than $21.38 per tonne milled in the second half of 2023. And the third quarter represented the lowest cost quarter at Copper Mountain since our acquisition at $15.58 per tonne. We already achieved and exceeded the targeted $10 million in annualized corporate synergies earlier this year. As part of our optimization efforts to increase copper production and operating cash flow, mining activities will continue to execute the three-year accelerated stripping program to mitigate the reduced stripping that occurred over the four years prior to HUD-based acquisition. The stripping program is intended to bring higher-grade ore into the mine plan and further benefit operating costs. Mill throughput optimization activities will focus on advancing various engineering studies to increase mill throughput to its permitted levels of 50,000 times per day earlier than was originally contemplated in the technical report. These capital growth projects include the potential conversion of the third ball mill to a sag mill to alleviate capacity limitations. With efforts now focused on optimizing the operations throughout the balance of 2024 and into 2025, we are well on track to realize the three-year annual operating efficiencies target of $20 million. Our enhanced operating platform continues to deliver meaningful cash flow generation, and together with a significantly improved balance sheet and financial flexibility, we are well positioned to advance our many growth initiatives and unlock significant value in our copper pipeline. Slide 11 discusses copper world. the next greenfield copper development project in our pipeline, which offers significant copper exposure and highly attractive project economics. Copper World is a standalone operation acquiring state and local permits and is expected to produce 85,000 tons of copper per year over the initial 20-year mine life in the first phase. Copper World is one of the highest-grade open-pit copper projects in the Americas, with mineral reserves of 385 million tons at 0.54% copper in Phase 1. The project generates an NPV of $1.1 billion and an after-tax internal rate of return of 19% at a copper price of $3.75 per pound. We remain committed to prudently advancing Copperworld in accordance with our 3P plan as shown on slide 12. In August, we achieved a significant milestone with the receipt of the aquifer protection permit from the Arizona Department of Environmental Quality. We worked closely with the ADEQ throughout the process, ensuring transparency and providing comprehensive and detailed information. With the receipt of the aquifer protection permit, we have commenced activities related to the preparation of feasibility studies. As previously announced, we increased growth capital spending in Arizona by an additional $25 million to account for this early feasibility work. The final required permit is the air quality permit, which was submitted to the ADEQ in late 2022 and has followed a similar robust process, including a public comment period that concluded in September, 2024. Upon receipt of the final permit, we intend to commence a minority joint venture partnership process. The potential partner is anticipated to participate in the funding of definitive feasibility study activities in 2025, as well as in the final project design and construction of Copperworld. We look forward to prudently advancing Copperworld to a sanctioned decision, which is not expected until 2026 based on current estimated timelines. Once in production, Copperworld is expected to be a meaningful copper producer in the United States domestic supply chain. The made-in-America copper cathode anticipated to be produced is expected to be sold entirely to domestic U.S. customers and would make Copperworld the third-largest cathode copper producer in the United States. We have several exploration opportunities as part of our long-term growth pipeline. and we remain focused on advancing many of the high priority initiatives as noted on slide 13. In Peru, our exploration activities surrounding the Maria Reina and Caballito property near Constancia continue to focus on permitting and drill preparation. As part of the drill permitting process, environmental impact assessment applications were submitted for Maria Reina in November 2023 and for Caballito in April 2024. The environmental impact assessment for Maria Reina was approved by the government in June 2024. And more recently, in September, the environmental impact assessment for Caballito was approved. This represents one of the several steps required as part of the drill permitting process, which we anticipate will be completed in 2025. In Manitoba, we continue to execute our large 2024 exploration program focused on extending known mineralization near Larlow to further extend mine life, as well as find a new anchor deposit within trucking distance of the Snow Lake processing infrastructure. The 2024 program included the largest geophysical program in the company's history in the region, completing surface electromagnetic surveys over a 25 square kilometer area, detecting targets at depths of more than 1,000 meters. The company had eight drill rigs turning in Snow Lake during the quarter, including two drills completing follow-up drilling at Lalo Northwest, located within 400 meters of the existing Lalo underground infrastructure. The other six drill rigs were testing new geophysical targets and completing follow-up drilling at potential regional satellite deposits. One of the geophysical targets is a very strong deep anomaly located at Cook Lake North, approximately six kilometers from Lalo. Drilling activities are expected to continue throughout the winter season and assay results are pending. At the 1901 deposit, we continue to advance the exploration drift from the existing LALO ramp, and the drift is expected to reach mineralization in early 2025. We plan to conduct definition drilling next year to confirm the optimal mining method, evaluate the ore body geometry and continuity, and convert inferred mineral resources in the gold lenses to mineral reserves. In October, we initiated the development of an adjacent haulage drift to further de-risk future full production from the 1901 deposit in 2027. Additionally, in Flin Flon, we continue to advance tailings reprocessing studies to evaluate the potential to repurpose the existing Flin Flon concentrator, which is currently on care and maintenance, to reprocess tailings. The tailings reprocessing opportunity is expected to recover critical minerals and precious metals while creating environmental and social benefits for the region. An early economic study to evaluate the opportunity has confirmed the potential for a technically viable reprocessing alternative, so we have further engineering work underway. Including on slide 14, HUD-BAE's leading copper development and exploration pipeline and low-cost stable operating platform in tier one jurisdictions offers investors meaningful copper exposure complementary gold exposure and strong near-term cash flow generation. We produce approximately 150,000 tons of copper per year, which is further augmented by our complementary gold exposure that offers cash flow resiliency in volatile pricing environments. We believe that copper has the best long-term supply and demand fundamentals in the sector, as global copper mine supply will be unable to meet demand from global decarbonization initiatives, and growing copper demands. HUD-based strong operating platform and resilient balance sheet offers significant upside potential for further value creation at higher copper and gold prices. And with that, we are pleased to take your questions.