Hudbay Minerals Inc. (HBM) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to the 2020 Annual and Special Meeting of Shareholders of Hudbay Minerals. My name is Stephen Lang, and I am the Chair of the Board of Directors of Hudbay. I would like to welcome all of the shareholders, employees and other stakeholders that are attending our first virtual annual shareholders meeting via live webcast. Please note that there may be slight delays when different speakers begin or as we respond to questions. Although we are disappointed that we can't see each of you today in person, our thoughts are with you, your families and your communities. We would like to thank you for your patience as we navigate through this difficult situation, and hope that you are staying pretty well wherever it is you're joining us from today. Before we turn to the formal portion of the meeting, I would like to take this opportunity to acknowledge the remarkable efforts of all the members of the Hudbay team over the past year, especially during this pandemic period. Many of our employees have remained on-site during this difficult time, working tirelessly to maintain the safety and security of our projects. We are very thankful. Let me begin by introducing the members of the Hudbay Board of Directors who are with us on the webcast today. Carol Banducci; Igor Gonzales; Richard Howes; Sarah Kavanagh; Carin Knickel; Peter Kukielski, who is also our President and Chief Executive Officer; Daniel Muñiz; Colin Osborne and David Smith. Also with us is Patrick Donnelly, our Vice President and General Counsel, who will act as secretary of the meeting. We will start with formal part of the meeting, which we will try to complete as quickly as possible. I have asked certain shareholders to move and second the proposals we have on the agenda. After all of the motions have been tabled, we will open the floor to discussion and questions on the motions. [Operator Instructions] Patrick will then raise these questions during the discussion period, and we will respond. The only questions that will be permitted prior to the discussion period will be those related to the procedural matters. If you are not a registered shareholder and would like to ask the Board of Directors a question, e-mail and mailing details are included in our circular. As mentioned in our management information circular, only shareholders and proxy holders are able to vote and ask questions at the meeting. Voting will be open for all resolutions at the same time. This will allow you to choose to vote on each of the resolutions immediately or to wait until the discussion concludes on each resolution prior to casting your vote. Should you choose to do so, you will be able to change your vote on any resolution until the voting is closed at the end of the formal period of the meeting. Once the voting has closed, we will take a few minutes to tabulate a preliminary report. During this time, Peter will make a brief presentation, discussing Hudbay's operations and strategic outlook, including our COVID-19 business preparedness plans and our recent Snow Lake gold strategy announcement. Peter will then address any questions on the presentation after the conclusion of the formal portion of the meeting. I will now call the meeting to order. I will act as Chair of the meeting, and I will ask Patrick to act as Secretary of the meeting; and Christopher de Lima of TSX Trust Company to act as Scrutineer. Patrick has advised me that the calling -- the notice calling the meeting together with the form of proxy, management information circular and Hudbay's financial statements and the MD&A for the year ended December 31, 2019, have been forwarded to each registered shareholder and intermediary record of the record date for the meeting. Links to the materials are also available on the leasehold homepage for the meeting. Patrick has advised that has provided with the Scrutineers report, which shows that there are 352 shareholders represented at the meeting by -- or by proxy holding, in aggregate, 172,558,339 or 66.04% of the outstanding common shares. Accordingly, this meeting is duly called and properly constituted. I would ask Patrick to attach the affidavit of mailing, copies of the meeting material and the Scrutineer's report to the minutes of the meeting. I do not plan to read the minutes of last year's meeting. Any shareholder who would like to review those minutes should contact Patrick after the meeting. He can be reached by e-mail at [email protected]. The first item of business on our agenda is the presentation of the financial statements of Hudbay for the year ended December 31, 2019, the other with the related auditors report. These were included in the materials that we mailed to shareholders. Links to the material are also available on Lumi's homepage for this meeting. These documents have been tabled and no further action is required. We will now proceed with the next item of business, the election of directors. Voting through the Lumi web portal is now open on all resolutions. I would like to remind you that you are able to change your vote until voting closes. We will give you notice before this occurs. In addition to myself, the proposed nominees for election as directors of Hudbay are: Peter Kukielski, Carol Banducci, Igor Gonzales, Richard Howes, Sarah Kavanagh, Carin Knickel, Daniel Muñiz, Colin Osborne and David Smith. If elected, we expect that these nominees will hold office until the next annual meeting of shareholders or until their successors are elected or appointed. In light of our advance by notice law, I declare the motions closed. As contemplated by our corporate governance guidelines, we intend to apply our policy regarding majority voting on an individual basis, with respect to each proposed nominee in today's election of directors. As described in the management information circular, in order to be approved, each director must be elected by a majority of the votes cast. However, I am advised based on the proxies received today, each proposed nominee would receive a greater number of votes for his or her election than would be withheld from his or her election, and none of the proposed nominees would be required to tender his or her resignation under the policy. So unless a shareholder or proxy holder requests separate motions to elect the individual nominees, I propose that we proceed with a single motion. May I have a motion for the election of the 10 individuals nominated as directors.

I move to elect each of the 10 nominees as directors of Hudbay on the basis proposed.

I second the motion.

Thank you. Voting on this resolution is open via Lumi for all shareholders and proxy holders registered to vote. The third item of business is the appointment of the auditor, the authorization of the Board of Directors upon the recommendation of the Audit Committee to fix the auditors' remuneration. It is proposed that Deloitte LLP be reappointed as the auditor of Hudbay until the next annual meeting of shareholders or until its successor is duly appointed and the Board of Directors upon recommendation of the Audit Committee be authorized to fix the remuneration. May I have a motion on this matter, please?

I move that Deloitte LLP be reappointed as the auditor of Hudbay on the basis proposed.

I second the motion.

Thank you. In order to be approved, the motion must be passed by a majority of the votes cast. As mentioned before, voting on this resolution is open via Lumi for all shareholders and proxy holders registered to vote. The final item of business is to consider, and if thought advisable, to pass nonbinding advisory resolution on executive compensation. Text of the resolution, which I don't plan to read, is set out in the management information circular. May I have a motion on this matter, please?

I move that the nonbinding advisory resolution accepting Hudbay's approach to executive compensation be approved.

I second the motion.

Thank you. In order to be approved, the motion must be passed by a majority of the votes cast. As mentioned before, voting on this resolution is open via Lumi for all shareholders and proxy holders registered to vote. Is there any other formal business that may be properly brought before this meeting? As there is no other formal business, voting will be closing shortly. For those of you who have not voted on all of the resolutions, please do so now. We would like to open the floor to discussion regarding the business of the motions. Patrick, have we received any questions or comments concerning the motions before us today?

There are no questions, Steve.

All matter is now closed. I will ask Peter to provide a brief update.

Thank you, Steve. And good morning, everyone. This is my first Hudbay AGM as President and CEO. After some 10 months with the company, it's clear to me that this is truly an iconic Canadian mining company. I wanted to provide a brief presentation on what I believe are the key advantages Hudbay brings to shareholders and to our other stakeholders. So we're a diversified mid-tier copper miner focused on low-cost, long-life assets in the Americas. In Manitoba, we have the 777 polymetallic mine in Flin Flon that has been in operation for over 16 years. And we have the Lalor zinc, copper, gold mine in Snow Lake that is expected to significantly increase gold production through developments of the New Britannia gold mill over this year and next. In Peru, we have our Constancia mine with a high-grade satellite pit called Pampacancha that we are progressing towards exploitation, and we have a highly prospective land package around Constancia, where we are advancing exploration activities. In Arizona in the United States, we have Rosemont, a large copper development asset that was recently stalled by an unprecedented court ruling, and we are advancing an appeal alongside the Department of Justice of the U.S. to overturn the judge's decision. In addition to these properties, we have an extensive portfolio of exploration assets in the Americas. Turning to the next slide. I'd like to spend a few minutes talking about the 6 competitive advantages listed on this slide that Hudbay has, which differentiates us from our peers. On the next slide, we touch on the first advantage, specifically that our key assets all have total mine lives of greater than 15 years, which ensures our stakeholders reap their rewards through several commodity cycles during the mine life. This, coupled with the fact that our assets are located in the first quartile of attractive mining regions in the world, positions us well to provide a stable, low-risk vehicle for investors. Turning to the next slide. We address here our second advantage. We're especially proud of our proven track record of operational excellence. We have a strong record of achieving or exceeding copper production guidance over the past 5 years, and we're well positioned on the cash cost curve, reflecting our focus on cost control, operational efficiencies and continuous improvement. This low-cost profile enables Hudbay to continue to generate positive cash flows even in lower commodity price environments. The next slide provides a prime example of our focus on cost control and operational efficiencies, which is seen through Constancia's unit cost benchmarking. As shown on this slide, I'm particularly proud to say that Constancia is one of the lowest-cost open-pit copper mines in South America. The next slide covers our third advantage. The benefit of low-cost and efficient operations is that the business generates free cash flow in all stages of the commodity price cycle as it has over the past 4 years. Through prudent management of our balance sheet, we are investing in low capital, high-return brownfield projects with short paybacks, both the Pampacancha development and the New Britannia gold mill refurbishment are examples of these prudent investments. In February this year, we proactively renegotiated the covenants of our revolving credit facilities, and we replaced total debt-to-EBITDA with net debt-to-EBITDA to allow us greater flexibility during 2020. We are prudently managing the business and the impact of the pandemic through approximately $150 million in incremental liquidity this year, and in addition, our forecasted cash flows are expected to benefit from the Canadian dollar cost structure of our Manitoba operation and from the anticipated increase in cash flows from Lalor due to higher precious metals production expected this year. Turning to the next slide. We highlight here the advantages of the 2 prudent near-term investments we are making. In Peru, Pampacancha has an expected 1-year payback and offers a significant increase in both copper and gold grades at Constancia. In Manitoba, the New Britannia mill refurbishment has an expected 2-year payback, which is potentially shorter at today's gold prices, and through the significantly higher gold recoveries at the mill, it will increase Lalor's annual gold production to over 150,000 ounces by 2022. It also has the potential to unlock further value in the Snow Lake region due to the increased value per tonne of ore. And the next slide addresses people. I've often said since joining Hudbay that this company has a disproportionately talented team for a company of our size. We really have some of the best mining folks in the industry. We have strong expertise in all aspects of the mining cycle from exploration through project development and operations. Our exploration team has been highly successful in growing the reserve base at Constancia and Lalor. Lalor was an in-house geophysical discovery on our land. It was discovered in 2007, and construction was completed on time and on budget in 2014, one of the fastest time lines of discovery to first production in the industry. Our team is one of the better mine development teams around and has an experience in both large-scale open-pit and underground mines. We acquired the Constancia deposit in 2011, completed engineering in 2012 and achieved commercial production in early 2015. Constancia's ramp-up was one of the fastest in the industry at 5 months versus the peer average of 17 months. And we achieved this while simultaneously building the Lalor and Reed mines on time and on budget. How extraordinary is that? On the next slide, let me briefly describe our Snow Lake gold strategy. Through exploration success and as part of the first phase of our Snow Lake gold strategy, we announced a 65% increase in Lalor's gold reserves in February last year and transformed Lalor into a gold mine with processing of the gold ore at the refurbished New Britannia mill. In March of this year, we announced the second phase of the strategy, whereby we've optimized the mine plan, converted a significant further portion of Lalor's resources to reserves and incorporated satellite gold deposits into the mine plan. We increased annual gold production to over 150,000 ounces per year, starting in 2022 at first quartile cash costs and all-in sustaining costs, and we nearly doubled the mine life in Snow Lake to 18 years. Refurbishment of the New Brit mill has commenced. Construction activities are expected to continue until August of 2021 with plant commissioning and ramp-up occurring during the second half of 2021. There remains a third phase of potential value creation at Snow Lake Gold. The third phase will address several areas of potential upside, including the potential to expand the New Britannia mill beyond the currently planned throughput rate. This is compelling, given there remains approximately 1.3 million ounces of gold in the inferred resources in Snow Lake and further exploration upside exists both at Lalor and in the regional gold targets. The next slide touches on our fifth advantage. We are a copper-focused company with a diversified organic growth pipeline. Our primary source of revenue is from copper and the fundamentals for copper remain strong with the expectations of a significant long-term supply and demand gap. Copper demand will benefit from the imperative of a greener future and copper itself has one of the lowest carbon footprints of conducting metals. Despite copper being our primary metal, Hudbay offers the unique opportunity of growing exposure in both copper and gold. By 2022, precious metals are expected to account for 1/3 of our overall revenues. This commodity diversification offers investors a unique investment vehicle with significant leverage to copper and growing countercyclical gold exposure. Moving to the next slide. Our strategy leverages our key competitive advantages of successful exploration, proven mine development, efficient operations and ESG excellence to create real value. As I mentioned earlier, our near-term priorities include refurbishing the New Britannia mill to increase gold production, delivering free cash flow from Pampacancha and drilling Lalor gold to add reserves and extend the mine life. We're a disciplined growth-focused company. And as we look to deliver the second stage of growth at Hudbay, our priorities over the medium-term will be to unlock value at our properties in the United States, test the Constancia regional exploration targets and to optimize value from Snow Lake gold while remaining vigilant for other opportunities that match our strategic criteria, while never losing focus of prudently managing our balance sheet. On the next slide. I've touched on several of our pipeline assets throughout the presentation, but this slide provides a snapshot of our leading organic growth pipeline. We believe we are well positioned with strong assets at several different stages within our portfolio. We believe this unique pipeline provides significant growth potential for Hudbay, and we have the right team and core competencies to execute on this pipeline to deliver on our strategic priorities and to create value for all of our stakeholders. Turning to the next slide. Our strong track record in ESG is just as important as our technical track record. This slide highlights a few of our achievements and important initiatives each of the environment, social impact, health and safety and governance areas. As a member of Mining Association of Canada, we follow the Towards Sustainable Mining program. And I'd like to recognize the sustainability efforts of our Manitoba team who in 2019 received the Mining Association of Canada's Towards Sustainable Mining Leadership Award for achieving a Level A ranking in their results across all 6 areas of sustainable performance. From a social side, we are providing relief to nearby communities during the COVID-19 pandemic. Diversity in the workplace is extremely important to us. We've received the government of Canada's Employment Equity Achievement Award in Manitoba, and in Peru, we are proud to say that 40% of our mining operators come from the nearby communities. We are a leader on health and safety in Peru with the best safety track record among the Peruvian copper mining companies, and we are striving to become even better. On the governance side, we have a refreshed Board with 3 female directors and have ranked favorably in recent government ranking surveys. We are the only base metal mining company to be ranked in the top 100 of all Canadian public companies. Turning to the next slide. Let me finally touch on how we are responding to the COVID-19 pandemic. Following its onset, we implemented our business response planning in January. As the pandemic worsened globally, our company-wide crisis response plans were activated in early March. The plans were established based on 2 tiers of crisis response. The first tier is at the corporate level with a focus on ensuring overall business stability, continuity and coordination. The second tier is at the business unit level, where the response plans are developed based on the dynamics and context of the local situation. Our business units engage with local communities, health authorities, governments and other stakeholders in each of our regions. Each of the business units has worked to develop site-specific measures to limit and identify COVID-19 exposure and transmission and maintain a safe environment for its workers and its communities. Site-specific measures include pre-screening protocols, quarantine periods for incoming workers, workplace physical distancing protocols, adjustment of work rotation schedules, deferral of certain project activity and working from home for office staff. These measures will continue to evolve as the status of the state of emergency changes in each of our operating regions and we adapt our measures to the latest regional health authorities' restrictions and guidelines, including reopening protocols. In Peru, the government declared a state of emergency in March, which remains in place. The decree was issued on May 3, indicating the mining sector would reopen in May. While our Constancia mine was temporarily suspended from March 19 to May 14, our resumption plans were approved by the government last week, and we have resumed operation. It is a dynamic environment, but we believe our proactive COVID-19 response measures and our restart preparedness planning will ensure a continued safe workplace for our employees. We also continue to do our part in helping our nearby communities to ensure they have sufficient supplies and food. In Manitoba, we continue to operate and ship concentrates and zinc metal despite the pandemic. The leadership team is actively engaged with employees, contractors, local communities and public health authorities to manage the evolving situation and continuously adapt and implement its business response plan. We have also been working closely with various groups within our communities to identify where we can help those in need. While we recognize the situation is dynamic, we are proud indeed of the extensive efforts our sites have taken to mitigate the risks of COVID-19. Finally, on the next slide, please note that our 2019 Annual and Sustainability Report is hot of the press and is available on our website. Thank you. And Steve, over to you.

Thank you, Peter. Final tabulation of the voting results will be provided by TSX Trust after the meeting and will be posted on our website and SEDAR. However, as a preliminary matter, I can share with you that with respect to the election of directors, the motion has been approved. I declare Carol Banducci, Igor Gonzales, Richard Howes, Sarah Kavanagh, Carin Knickel, Peter Kukielski, Daniel Muñiz, Colin Osborne, David Smith and myself duly elected directors of Hudbay Minerals Inc. With respect to the appointment of our auditor, the motion has been approved. With respect to the advisory resolution on executive compensation, the motion has been approved. Ladies and gentlemen, that concludes the formal business of the meeting. May I have a motion to terminate the formal portion of the meeting, following which we will have an opportunity for investor questions.

I so move.

I second the motion.

Thank you. Unless there are any objections, I declare the annual and special meeting of shareholders of Hudbay Minerals Inc. to be concluded. If any shareholder has questions for myself or Peter, they should raise them now. [Operator Instructions]

Thank you. As there are no questions, this concludes our meeting. Thank you very much for joining us today. Please stay safe and well.