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

Hello, and welcome to the Hudbay Minerals, Inc. Annual and Special Meeting of Shareholders. Please note that today's meeting is being recorded. If you have already voted by proxy and you vote again during the online ballot during the meeting, your online vote during the meeting will revoke your previously submitted proxy. If you have already voted by proxy, and you do not wish to revoke your previously submitted proxy, there is no need to vote during the meeting. During the meeting, we will have a question-and-answer session. If you logged in with a control number, you can submit questions or comments at any time by clicking on the "Ask a Question" icon located toward the top of the information page. It is now my pleasure to turn today's meeting over to the Chair of the Board of Directors, Stephen Lang. Mr. Lang, the floor is yours.

Good afternoon, ladies and gentlemen, and welcome to the 2021 Annual and Special Meeting of Shareholders of Hudbay Minerals, Inc. My name is Stephen Lang, and I am 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 virtual shareholders' meeting via live webcast. Please note that there may be slight delays when different speakers begin or as we respond to questions. This is our second virtual shareholders meeting since the onset of the pandemic. Indeed, when we look back at 2020, the first thing we think of will be COVID-19. Never in our company's 90-plus-year history has something like this affected the lives of each and every one of our stakeholders. However, when we think of Hudbay in 2020, the impact of COVID-19 is only part of the story as our team delivered outstanding performance in all aspects of our business. I would like to take this opportunity to acknowledge the remarkable efforts of all of the members of the Hudbay team over this 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 grateful. Let me begin by introducing the members of the Hudbay Board of Directors who are on this webcast with us today: Carol Banducci, Igor Gonzales, Richard Howes, Sarah Kavanagh, Carin Knickel, Peter Kukielski, who is also our President and Chief Executive Officer; Daniel Muñiz and David Smith. Colin Osborne was unable to attend. Also with us is Patrick Donnelly, our Vice President and General Counsel, who will act as secretary of the meeting. We will start with the 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 motion. If a registered shareholder or proxy holder has a question related to one of the matters to be considered, I'd ask that they type it into the questions interface on Lumi. 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 procedural matters. If you are not a registered shareholder or proxy holder 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 registered shareholders and proxy holders are able to vote at the meeting. Voting will be open for all resolutions at the same time. This will allow you to choose to vote on each resolution immediately or 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 portion 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. Peter will then address any questions on the presentation after the conclusion of the formal portion of the meeting. I now call the meeting to order. I will act as Chair of the meeting. I will ask Patrick to act as Secretary of the meeting. And Christopher de Lima of TSX Trust Company to act as scrutineer. This year, Hudbay has used notice and access to provide shareholders with access to materials for our annual and special meeting. Patrick has advised me that the notice and the access -- notice and Form of Proxy have been forwarded to each registered shareholder and intermediate of record of the date of the meeting. Notice and access allows Hudbay an environmentally friendly and cost-effective way to provide shareholders with electronic access to the Management Information Circular other and proxy-related materials instead of mailing paper copies. All of the proxy-related materials are available electronic on our corporate website; on the website of our transfer agent, TSX Trust Company; and under our profile on SEDAR and EDGAR. Links to these materials are also available on Lumi's homepage for this meeting. In addition, shareholders may obtain paper copies of the proxy related materials by contacting our transfer agent, TSX Trust Company, according to the instructions on the notice and access notice. Patrick has advised me that he has been provided with the scrutineers' report, which shows there are 347 shareholders represented at the meeting or by proxy holding in aggregate 198,406,327 or 75.89% 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 mailing -- of the meeting materials and the scrutineers' 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 may contact Patrick after the meeting. He may 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, 2020, together with the related auditor's report. These were made available to shareholders through notice and access. Links to these materials are also available on the Lumi homepage for this meeting. These documents have been tabled and no further action is required. We will now proceed with our next item of business, the election of directors. Voting through the Lumi web portal is now open for all resolutions. I would like to remind you that you will be able to change your vote until voting closes, and 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 advanced notice bylaw, I declare the nominations 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 of the proposed nominees 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 that based on the number of proxies received to date, each 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 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 and authorization of the Board of Directors upon the recommendation of the Audit Committee to fix the auditor's 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 the recommendation of the Audit Committee be authorized to fix their remuneration. May I have a motion, 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 a nonbinding advisory resolution on executive compensation. The 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 the meeting? As there is no other formal business, voting will be closed shortly. For those of you who have not voted on all the resolutions, please do so now. We would like to open the floor for a discussion regarding the business of the motion. Patrick, have we received any questions or comments from -- regarding the motions before us today?

There are no questions, Steve.

Voting on all matters is now closed. I will ask Peter to provide a brief business update presentation. Peter?

My apologies, I was having trouble with unmuting. Thank you very much, Stephen. I'd like to draw your attention to the cautionary information on this slide. Following which, I'd like to start off with a brief overview of who we are on this slide. We are a diversified mid-tier copper miner focused on low-cost, long-life assets in the Americas. Copper is our primary metal. And as you can see from the pie graphs in this slide, our copper exposure is expected to increase to nearly 60% of our revenues over the next few years. We also offer investors increasing exposure to gold and this commodity diversification is due to the fact that our highest return investments in the near term are balanced between copper and gold. In Peru, we have our flagship, Constancia mine, with a high-grade copper gold satellite pit called Pampacancha that recently achieved first production at the end of April. In Manitoba, we have the 777 copper, zinc, gold, silver mine in Flin Flon that has been in operation for over 17 years; and we have the Lalor gold, zinc, copper, mine in Snow Lake, where we are expecting to significantly increase gold production through the completion of our New Britannia gold mill refurbishment this year. In the United States, we have Rosemont in Arizona, a top-tier copper development asset that was recently stalled by an unprecedented court ruling, where we are currently advancing an appeal alongside the United States Department of Justice to overturn the judge's decision. We've recently made an exciting new exploration discovery on our private lands near Rosemont, which we are calling Copper World and we believe this has the potential to be a world-class copper asset and is certainly the best discovery Hudbay has made since the Lalor discovery in 2007. We also have the Mason copper project in Nevada where we've just released a positive PEA that sees a 27-year mine life and attractive project economics at a $3.10 copper price. In addition to these properties, we have an extensive portfolio of exploration assets in the Americas. Next slide, please. I'd like to now spend a few minutes highlighting the 6 competitive advantages listed on this slide that Hudbay has, which differentiates us from our peers. Next slide, please. What I want to stress here on this slide, and it is a key advantage in our view, is that the foundation of our business, no matter which jurisdiction we are operating in is our ESG principles. We believe that our approach to sustainability sets us apart. We treat the people in our host communities with the dignity and respect that they deserve. Our actions are guided by the policies, procedures and the numerous voluntary codes we adhere to in critical areas such as community relations, environmental stewardship, health and safety and human rights. By living our values, we are able to build strong relationships with our host communities and governments, making us a better partner and a better company. Each of our business units focuses on sustainability in a different manner, reflecting their own environments and needs all while adhering to our overarching values. Next slide, please. We are industry leaders in responsible mining and ESG is fundamental to our business and embedded in every decision we make at Hudbay. This slide highlights a few of our achievements and important initiatives in each of the environment, social impact, health and safety and governance areas. We follow that towards sustainable mining program, as outlined by the Mining Association of Canada. And I am proud to say that both of our tailings facilities have a AA rating as Constancia's rating was recently upgraded from A. We are focused on reducing our greenhouse gas emissions. And when compared to our base metal peers, our emissions are lower than the peer average. From a social side, we continue to provide relief to nearby communities during the COVID-19 pandemic in both Peru and Manitoba. In addition, diversity in the workplace is extremely important to us and we prioritize opportunities for local community members and indigenous groups. In Peru, we are proud to say that 40% of our mining operators come from the nearby communities. And in 2020, one of our new hires was a woman from the local community of Uchucarcco who became the first female shovel operator at a mine in Peru. 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 3 female directors, have ranked favorably in recent governance ranking surveys and are the only base metal mining company to be ranked in the top 100 of all Canadian public companies. Next slide, please. Another competitive advantage that Hudbay offers is a quality asset base. Our key assets are all -- have all held reserve lives in excess of 15 years with potential mine life extensions to ensure our investors and stakeholders reap their rewards through several commodity cycles during the mine life. This, coupled with the fact that our assets are located in friendly jurisdictions within countries that have investment-grade ratings positions us well to provide a stable, low-risk vehicle for investors. Next slide, please. Constancia is a low-cost, long-life copper mine in Peru and a cornerstone asset that provides stable cash flow for the company. Constancia has been in production since 2014 and was built on time and within budget, a feat the entire company is proud of. The mine will process an average of 90,000 tonnes per day, and I'm proud to say that it is one of the lowest-cost open-pit copper mines in South America. This is only possible through a relentless focus on asset optimization, and we have increased throughput far beyond Constancia's original design capacity as seen on the bar graph on this slide. We've recently announced a larger and higher grade reserve estimate in Constancia, which incorporates the Constancia North pit extension. This, together with the higher grades from Pampacancha over the 2022 to 2025 period, results in an expected average annual copper production from Constancia of 102,000 tonnes over the next 8 years at first quartile cash costs. Constancia really is a flagship asset as we have the potential to add even more value through exploring our large land package with prospective targets that we expect will provide additional sources of high-grade ore in the medium to long term. Next slide, please. Our operations in Manitoba, Canada consists of the Lalor mine and processing facilities in Snow Lake, as well as the 777 mine in Flin Flon, which is nearing the end of its mine life after 17 years of operation. Our plan is to keep the Flin Flon processing asset on care and maintenance after the mine closure to maintain regional optionality. The exciting growth in Manitoba is at our Snow Lake operations. Lalor is a high-grade, long-life underground mine that has been in production since 2014 and has steadily increased the production rates from the mine over the last several years, as seen by the chart on this slide. While traditionally a zinc, copper mine, Lalor will transition to a primary gold mine as we complete the refurbishment of the New Britannia mill in the middle of the year. The Lalor deposits, together with the regional deposits in Snow Lake currently support a 17-year mine life based on reserves. There remains potential for further mine life extensions both at Lalor and in the region. Today, the ore mine in Lalor is being processed at 2 plants: The Stall mill and Flin Flon. Once the New Britannia mill is commissioned, Lalor ore will feed the nearby Stall mill and New Britannia mill. Over the past several years, we have been executing a multiphase growth strategy at our Snow Lake operations, and our recent updated mine plan released at the end of March demonstrates the next phase of value creation. We are implementing technology to optimize recoveries and throughput at Stall. We've converted additional resources to reserves at Lalor. We have plans in place to expand Lalor to 5,300 tonnes per day by 2023 and have incorporated the nearby 1901 Deposit into our Snow Lake mine plan. As a result of executing our Snow Lake gold strategy, we have steadily increased the annual gold production from 140,000 ounces to 150,000 ounces and now to over 180,000 ounces. Next slide, please. 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 5 years. We've generated $2.2 billion of adjusted EBITDA and approximately $650 million of free cash flow during the last 5 calendar years. We have been and will continue to prudently manage our balance sheet and see the decisions we have made over the past several years begin to pay off in 2021. The recent investment in the Pampacancha project and the refurbishment of the New Britannia mill are 2 very exciting, low-capital, high-return brownfield projects with short paybacks that will increase cash flow for years to come. In Peru, Pampacancha has an expected 1- to 2-year payback and offers a significant increase in both copper and gold grades at Constancia. We are pleased to have achieved first production at Pampacancha at the end of April. In Manitoba, the New Britannia mill refurbishment also has an expected 1- to 2-year payback through an increased gold production as a result of significantly higher gold recoveries than we currently are getting at the Stall mill. The project is approximately 82% complete, and we expect the mill to be online by midyear. Through these prudent investments, our EBITDA is expected to grow in 2021 and more than double in 2022 and 2023. Next slide, please. I believe we have one of the best technical teams with strong expertise in all aspects of the mining cycle from exploration to project development and operations. We acquired Constancia in 2011, completed engineering in 2012 and achieved commercial production in early 2015 after a highly successful ramp-up that was one of the fastest in the industry. Our exploration team has more than doubled the size of our reserve base, and there remains room to further grow this space with a significant exploration potential that exists in the region. 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. And we've increased reserves by 155% since our initial mineral reserve estimate. There remains another 1.5 million ounces of gold in inferred resources that may further add to this increase. With the exciting portfolio of exploration assets near Constancia, in the U.S. and near infrastructure in Snow Lake, I am confident this will be an area of incremental value creation for Hudbay shareholders. Next slide, please. We are a copper-focused company. And as we look out into the future, I believe that the fundamentals for copper are very strong. There is an undeniable trend that the world must and will move towards a greener, more sustainable future. A key element in attacking climate change is copper, which is key to electrification and to decarbonization. The move towards electric vehicles and the social and political pressure towards renewable sources of energy and 0 emissions targets will undeniably drive demand. But more fundamentally, copper remains a core raw material for the industrialization of economies and has no real practical substitute. At the same time, large high-grade copper projects are becoming even more scarce and the technical and social hurdles to bring these projects online are becoming more complex. Next slide, please. Here, we see our prudent management of capital paying off beginning this year, not only in terms of growing production and cash flow profile, but also being a copper-focused company with a diversified organic growth pipeline. Our growth strategy has been successful with a significant increase in near-term copper and gold production. Through our well-thought-out investments in Pampacancha and the New Britannia mill refurbishment, we expect to begin reaping the benefits of these decisions this year and more fully in 2022 and beyond. Next slide, please. We believe we have 3 of the best undeveloped copper deposits in our portfolio that provide the potential to further grow our medium- to long-term production profile. Rosemont is one of our more advanced projects with attractive returns and a 19-year mine life based on a recent feasibility study. Once in production, Rosemont is slated to be the third largest copper mine in the United States. Though we have run into a delay with an unprecedented court ruling, we continue to explore our wholly owned private land in the district adjacent to Rosemont. In March of this year, we announced our Copper World discovery where our 2020 initial drill program intersected high-grade copper sulphide and oxide mineralization at depths much shallower than Rosemont and all located on our private land. In this photo on this slide, you can see the green oxidized copper on the side of the mountain at Copper World. We've commenced a larger 2021 drill program to test the limits of these deposits and the potential for a viable open pit operation at Copper World. And in April, we published our initial PEA for Mason, which contemplates a 27-year mine life and production that could more than double Hudbay's production profile. We acquired this project for $15 million, and it's 100% owned by Hudbay. It has a large measured and indicated resource base at 2.2 billion tonnes and has the potential to host high-grade satellite deposits on our adjacent land claims similar to Copper World. Next slide, please. We also have several exploration initiatives in both our Peru and Snow Lake operations. In Peru, the Constancia North discovery enhanced the mineral resource estimates through an improvement on the head grade at Constancia. There also remain further opportunities to extend the Constancia North resources through a potential underground operation. Discussions continue to progress with the community of Uchucarcco on the Maria Reyna and Caballito properties, both of which are located within 10 kilometers of Constancia, and we expect to reach an agreement in due course. We have been drilling the Quehuincha North target, and we also expect to commence drilling activities at the Llaguen property in the coming weeks. Llaguen is a copper porphyry target located in Northern Peru, near the city of Trujillo and in close proximity to existing infrastructure. Exploration efforts at the Lalor mine in 2020 continued to be successful with the definition of additional inferred mineral resources, which have the potential to extend the Lalor mine life beyond the current estimate of 10 years and maintain the 5,300 tonnes per day production level beyond 2027. Preliminary results from Manitoba's 2021 winter drill program in the Chisel Basin in Snow Lake indicate that a potential copper-gold feeder zone to the 1901 Deposit exists with 1 hole intersecting 11.6 meters at 2.7% copper and 3.4 grams per tonne of gold, which is similar to the known geology at the Lalor deposit. We also continue to test other targets that exist within the Chisel basin. The next slide summarizes our strategy, which leverages our key competitive advantages of successful exploration, proven mine development, efficient operations and ESG excellence with a focus on capital allocation and risk-adjusted returns to create value for all of our stakeholders. We are a disciplined, growth-focused company. And as we look to deliver the next stage of growth at Hudbay, our priorities this year will be to continue to execute the many growth initiatives I've highlighted throughout the presentation while continuing to support our workforce, their families and communities consistent with our ESG principles and also evaluating opportunities that meet our stringent strategic criteria to create sustainable value for our stakeholders. And finally, on the last slide, I invite you to view our 2020 annual sustainability report, which is published today and is available on your website. 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, first, 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 as duly elected Directors of Hudbay Minerals. 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 shareholders have any questions for myself or Peter, they should raise them now. Please type in your questions in the Lumi Q&A where indicated. We will allow about 30 seconds for any questions to be raised. Seeing no questions. This concludes our meeting. Thank you for joining us today, and please stay safe and well.