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

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Hudbay Minerals, Inc. and Copper Mountain Mining Corporation Joint Conference Call. [Operator Instructions] I would like to remind everyone that this conference call is being recorded today, April 13 at 8:30 a.m. Eastern Time. I would now like to turn the conference over to Candace Brule, Vice President, Investor Relations. Please go ahead.

Thank you, operator. Good morning, and welcome to the conference call announcing the combination between Hudbay and Copper Mountain. The news release announcing the transaction is available on our website at www.hudbay.com. A corresponding PowerPoint presentation is available under the Events section on our website and we encourage you to refer to it during this call. Our presenters today are Peter Kukielski, Hudbay's President and Chief Executive Officer; and Gil Clausen, Copper Mountain's President and Chief Executive Officer. Accompanying Peter and Gil for the Q&A portion of the call will be Eugene Lei, Hudbay's Chief Financial Officer; Andre Lauzon, Hudbay's Chief Operating Officer; and Letitia Wang, Copper Mountain's Chief Financial 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 SEDAR 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 Kukielski and Gil Clausen.

Thank you, Candace. Good morning, everyone. We are really pleased to be here today announcing the combination of Hudbay and Copper Mountain to create a premier Americas-focused copper producer. The combined company will be the third largest copper producer in Canada with a balanced asset base across the mining-friendly jurisdictions of Canada, Peru and the United States. We are well positioned to deliver sustainable cash flows from our operating portfolio of 3 long-life mines as well as organic growth from a world-class pipeline of ground field expansions and copper development projects. In this presentation today, Gil and I will discuss why this combination represents a great strategic fit for both companies. We'll also discuss the substantial value to be unlocked through synergies that will benefit both sets of shareholders. Before we discuss the strategic rationale for the transaction, let me begin by reviewing the transaction terms on Slide 3. Hudbay will acquire 100% of the issued and outstanding common shares of Copper Mountain. Copper Mountain shareholders will receive 0.381 of Hudbay share for each Copper Mountain share. As of the last trading day on April 12, the transaction represents a 23% premium based on the 10-day VWAP. After the combination, Hudbay shareholders will own 76% of the combined entity and Copper Mountain shareholders will own 24%. The Board of Directors of both companies have unanimously approved the transaction and the deal is subject to shareholder and customary approvals. Post transaction, 2 directors will be appointed from Copper Mountain and the management team will be augmented with certain members from Copper Mountain. We expect the transaction to close late in the second quarter or early in the third quarter of 2023. Hudbay has been executing a consistent and disciplined growth strategy for over a decade, and this has been a continued focus of mine since I became CEO over 3 years ago. Our strategic objective is to create sustainable value for our stakeholders by evaluating opportunities that meet our stringent financial and acquisition criteria. This includes long-life low-cost assets that can capture peak pricing across multiple commodity price cycles in jurisdictions that support responsible mining that are consistent with our ESG principles. And equally as important, we pursue opportunities where we can create value and are accretive to Hudbay. I've always said we have a disproportionately talented team for a company of our size. We see a tremendous opportunity to apply our team's core technical and operating capabilities and our high-efficiency Constancia framework to the Copper Mountain mine. This, combined with Copper Mountain's leading technological and ESG practices will position the operation as an industry leader. This combination is on-strategy for both Hudbay and Copper Mountain and it offers several strategic benefits, as shown on Slide 4. First, Copper Mountain enhances the scale of our business. We will have a total of 6 key operating and development assets and 1 of the largest copper mineral resource phases among our peer group. Second, it geographically balances our portfolio in top-tier jurisdictions. On a pro forma basis, the combined net asset value is estimated to be 55% from North America and 45% from South America on a street consensus basis. Third, it increases our exposure to copper with expected 2023 copper production of more than 150,000 tonnes. This is complemented by meaningful gold production that helps maintain a second quartile position on the copper cost curve. Fourth, as mentioned earlier, we believe there's great opportunity to unlock value at the Copper Mountain mine using our high-efficiency framework from our Constancia mine given the similarities between these operations. Fifth, the combination provides incremental cash flows, which further strengthens the balance sheet and supports our deleveraging initiatives. And lastly, the combination will allow us to unlock value from a larger organic growth pipeline by more efficiently allocating capital to projects that yield the highest risk-adjusted returns. We have a proven track record of efficiently operating mines and successfully adding value to our operations through exploration and brownfield expansions. We believe we can bring significant technical and operational expertise to the Copper Mountain mine to create considerable value for all stakeholders. As shown on Slide 5, the combined company will have a strong presence across the Americas with operating and development assets in Canada, the United States and Peru. As I mentioned, the combined company will have 6 key assets, 3 long-life producing assets that produce more than 150,000 tonnes of copper and more than 300,000 ounces of gold and 3 highly prospective copper development projects in Tier 1 operating jurisdictions and these projects have the potential to add more than 200,000 tonnes to our long-term copper production profile. The Constancia copper mine in Peru is a 16-year mine life open pit operation with annual production of approximately 110,000 tonnes of copper over the next 3 years. We're also exploring highly prospective targets located adjacent to Constancia that have the potential to provide additional sources of high-grade ore and extend the production profile and mine life. In Manitoba, we have the Snow Lake gold operations where we recently refurbished our New Britannia mill to significantly grow our gold production to over 190,000 ounces per year. The operations have a 16-year mine life and we are in the process of completing step-out drilling as the mine remains open at depth. In the United States, we have the Copper World project in Arizona, a top-tier copper development asset that has a 16-year mine life entirely on private lands and is currently being advanced through pre-feasibility studies. We also have the earlier stage Mason copper project in Nevada, where we released a positive PEA that sees a 27-year mine life and attractive project economics. The Llaguen project in Northwestern Peru is a copper-molybdenum porphyry deposit located near existing infrastructure and provides additional long-term copper growth potential in our pipeline. And now I'll pass it over to Gil to provide an overview of the Copper Mountain mine. Gil?

Thanks, Peter, and good morning, everyone. I'm very pleased to be here today with Peter and the team discussing this compelling combination. I believe the Copper Mountain mine's full potential will be realized within Hudbay's larger portfolio where it will benefit from the team's combined technical skills and additional resources available as part of a larger diversified company. The Copper Mountain mine is in a very favorable jurisdiction located about 20 kilometers south of Princeton in British Columbia. The mine is 75% owned by Copper Mountain and 25% owned by partner Mitsubishi Materials, who we think is an exceptional joint venture partner. The mine has a long-life copper gold open pit mine that achieved commercial production in 2011 and is like Hudbay's Constancia mine, both geologically and operationally. The mine has historically produced about 40,000 tonnes of copper per year. While we faced some operational challenges in 2022, we are on track with stronger copper production in 2023 and beyond. We've gotten to know Hudbay quite well throughout this process and have really been impressed with their operating expertise, particularly at the Constancia mine in Peru. I have no doubt that they will unlock significant operating efficiencies at Copper Mountain. Copper Mountain and Hudbay share a strong commitment to operate with the highest use ESG principles as summarized on Slide 7. One of the things that struck me personally was the alignment philosophically on ESG and efficiencies. Both companies are committed to operate in a manner that demonstrates a strong focus on the environment and our local communities and indigenous cultures. We strive to practice responsible mining while producing the materials essentially for a future built on sustainable energy. Our operations are well positioned in the lower half of the global greenhouse gas emissions curve for copper mines. However, we're continuously striving to do better and therefore, we have both aligned our greenhouse gas reduction targets with global net 0 emission goals. We're also aligned with the Mining Association of Canada's towards sustainable mining protocols at each of our operations with the goal to maintain a strong score of an A or higher for all protocols. We believe this model delivers ongoing shared value for all stakeholders and minimizes our impact on the environment for long-term success and a more sustainable future. Moving on to Slide 8. Innovation is key to our ESG principles at Copper Mountain. To reach our goal of net 0 carbon emissions by 2035, it's necessary to shrink our carbon footprint throughout our operations and apply innovative technology to reduce environmental impacts. We're fully aligned with the government of BC and the Government of Canada's commitment to advancing its clean growth agenda as well as the Peru's climate accords. We believe that the Copper Mountain Mine has the potential to be the lowest emitting open pit copper mine in the world by 2035 through the implementation of several net 0 carbon initiatives. This includes the recent successful commissioning of electric trolley assist haulage in 2022. Electric-powered haul trucks now travel up our main haulage ramp at twice the speed, 1/10 of the energy cost with near 0 greenhouse gas emissions. We're also actively testing and researching renewable diesel, hydrogen, battery and fuel cell technology to power our haulage units off the trolley lines to achieve our goal of net 0 carbon emissions at the Copper Mountain Mine by 2055. I'll now hand the call back over to Peter.

Thanks very much, Gil. Hudbay has recently embarked on our own greenhouse gas reduction road map to reduce emissions by 50% by 2030 and achieve net 0 by 2050. Our road map includes the evaluation of several of the technologies that the Copper Mountain team has evaluated and implemented at their mine. We will have the ability to apply Copper Mountain's expertise in carbon reduction initiatives to the Constancia mine and Copper World project. I believe Copper Mountain's demonstrated expertise in arresting climate change will help Hudbay achieve our medium- and long-term climate change goals and position the combined company as a leader among our peers. Taking a closer look at the strategic rationale the transaction enhances the combined company size and scale, as shown on Slide 10. Relative to other intermediate copper producers, the combined company would rank in the top 3 in terms of annual copper production and would have the second highest EBITDA profile while maintaining the lowest costs in our peer group. We would also have the largest mineral resource base in the space with a total of 16 million tonnes of copper contained in measured and indicated resources. The combined company also compares very well with OZ Minerals, which is in the process of being acquired by BHP for over USD 6 billion. Canada is one of the top mining jurisdictions globally. Hudbay has been operating in Canada for nearly 100 years and operations in Northern Manitoba. We value Canada's political stability, tremendously skilled workforce, constructive regulatory framework and long mining history. Both Hudbay and Copper Mountain have a deep commitment to Canada, and we are excited to become the third largest copper producer in the country, as highlighted on Slide 11. Slide 12 highlights the improved liquidity as a result of the transaction. The pro forma company will be a larger and more liquid name for investors. We will be among the leaders of our peer group for trading liquidity and will fill the gap left by the recent acquisitions of Oz and Turquoise Hill. This will ultimately create a more investable and desirable company for investors. Turning to Slide 13. The combined company will have a balanced geographic exposure across North and South America. Based on broker consensus estimates, approximately 55% of the combined net asset value will be in North America, while the remaining 45% will be in South America. In addition, we would be 1 of a few intermediate mining companies with 100% exposure to the Americas. Copper Mountain has a complementary portfolio that is primarily copper with gold as a secondary metal as shown on Slide 14. On a consolidated basis, the combination increases the percentage of Hudbay's reserves and revenue from copper. Approximately 60% of the pro forma revenues will be from copper and more than 65% of the reserves are copper. The balance of the combined portfolio will be gold and zinc, which are complementary commodities to copper and help maintain a lower copper cash cost profile, as mentioned earlier. The next few slides highlight the potential for meaningful efficiencies and synergies from this combination. We think there's a substantial opportunity to unlock value for the benefit of all shareholders. At Hudbay, we believe 1 of our core competencies is operating efficiency. As Slide 15 illustrates, we have historically leveraged our extensive operating knowledge to operate Constancia as one of the most cost efficient and consistent copper mines in South America. Due to similarities between Copper Mountain and Constancia, we have great insight into the opportunities to optimize the Copper Mountain mine, and we think the potential is significant. We also believe we will benefit from sharing services across our Canadian assets as our Manitoba operations have recently reduced in size with the depletion of one of our mines in 2022. We estimate around USD 30 million of annual efficiencies and synergies highlighted on Slide 16. This includes $10 million of annual corporate shared synergies and tax attributes. In addition, we expect to achieve an estimated $20 million per year in operating cost improvements over time through the application of our framework, improving productivity, reducing costs and achieving consistent and stable operations at the Copper Mountain mine. This further builds on the great work done by the team at site and recent positive momentum experienced at the mine. As I mentioned before, there are many key similarities between Copper Mountain and Constancia as listed on Slide 17. They are both large-scale open pit copper mines with gold and silver byproducts, they both also have high-grade satellites, including Constancia's Maria Reyna and Caballito deposits and Copper Mountain's New Ingerbelle deposit. The age of equipment is also similar, having been built within a few years of each other and currently utilize similar sized haul trucks and shovels. As you'll see on the right side of this slide, Constancia's industry-leading efficiencies drive the huge potential we see at the Copper Mountain mine. The Copper Mountain milling operations have demonstrated the ability to exceed 45,000 tonnes per day but such performance has not been consistent. This has been partly due to the need for capital. Through our extensive due diligence, we believe that over time, we can consistently achieve a milling throughput level of greater than 45,000 tonnes per day by deploying our operating practices from Constancia. Slide 18 lays out our multiphase operational plan for the Copper Mountain mine. Our first phase of integration will be focused on stabilizing the Copper Mountain mine to have consistent operations. We also expect to build upon the Copper Mountain team's recent mill initiatives by improving flexibility at the mine, opening several additional mining phases and focusing on enhancing equipment availability. We'll publish a Hudbay technical report and an updated resource estimate within this first phase of integration. Following year one, we plan on improving beyond the base operations and evaluating opportunities to expand Copper Mountain beyond nameplate capacity, which we are calling the optimization phase. This will be achieved through low capital initiatives, such as utilizing a SAG mill that Hudbay currently has in storage in Arizona. In this phase, we would also examine the size of the mining fleet and contractor usage to optimize the structure of the operation. We believe there are several metallurgical opportunities to increase production capacity, and we'll continue to explore additional rollouts of trolley assist. The region near Copper Mountain remains highly prospective for future exploration success. We would expect to conduct infill and exploratory drilling as part of the optimization phase. Slide 19 shows the significant improvement in our near-term leverage position as a result of this transaction. Today, Hudbay's stand-alone net leverage ratio is 2.0x net debt to 12 months trailing EBITDA. On a combined basis, we expect the net leverage ratio to improve to approximately 1.4x based on 2023 street consensus EBITDA. This transaction is expected to enhance our ability to prudently develop the next meaningful copper growth project through a stronger balance sheet and increased operating cash flows and is consistent with our 3P plan for financing and sanctioning Copper World. This is further discussed on Slide 20. Our improved leverage profile and expanded operations will allow us to more efficiently allocate capital across the business. As we think about the combined portfolio, we expect to immediately pursue high return and short payback initiatives such as the completion of the first phase of the Stall mill recovery improvement program in Manitoba. We expect to then pursue low-risk minimal capital brownfield expansions such as throughput optimization at the Copper Mountain mine and the Stall recovery improvement programs. This will position the core business for future transformational initiatives such as our Copper World project in Arizona and better position us for the next wave of consolidation in the copper space. Slide 21 further discusses the 3 categories of capital allocation opportunities at Hudbay. Our first priority pipeline opportunity will be focused on stabilizing and upgrading Copper Mountain's operations and unlocking the mine's full potential through applying Constancia's consistent operating efficiency practices. We will also complete the recovery improvement programs that are underway at Stall and Constancia to further enhance operating performance. We have several brownfield expansion opportunities, including expanding Copper Mountain to increase economies of scale and exploring the Maria Reyna and Caballito properties near Constancia to extend mine life and our Copper World and Mason development projects continue to be key pipeline assets that will serve as the next stage of meaningful copper growth at Hudbay. After fully integrating the Copper Mountain mine, we would be in a position to explore additional value-enhancing opportunities across the portfolio. Overall, with a larger portfolio of projects, we can focus our capital and attention on those that generate the highest risk-adjusted returns. I'll conclude the presentation on the pro forma positioning section, starting on Slide 22. The combined company has the potential for a valuation re-rating from the benefits of being a larger scale, more diversified and more liquid copper producer. The pro forma company will fill a unique niche of midsized copper companies. This size of bracket of mid-tier copper companies have garnered significant interest from investors and has historically been very active in industry consolidation. Larger, more diverse companies generally trade at premium multiples, this transaction will create an enhanced company that we believe will be well positioned to re-rate towards our larger peers with the enhanced production, trading liquidity and scale. The pro forma company will be well positioned amongst its core peer group, as shown on Slide 24. The combined company will be of similar scale to Lundin, Capstone and OZ Minerals with a leading cash cost position and copper development pipeline. And lastly, Slide 25 recaps the strategic rationale for this transaction as it's an on-strategy combination for Hudbay and unlocks meaningful value for Copper Mountain shareholders. The transaction increases company scale provides attractive geographic diversification, enhances our exposure to copper, allows us to extract further value by utilizing our core operating strengths, positions the balance sheet for further deleveraging and improves our ability to allocate capital to create sustainable long-term value for both Copper Mountain and Hudbay's shareholders. And with that, we are pleased to take your questions.

[Operator Instructions] Our first question comes from Orest Wowkodaw of Scotiabank.

Congrats on the transaction. Peter, from a Hudbay perspective, does adding Copper Mountain and focusing on the growth options there, does that implicitly give you more optionality to push out the, call it, the higher CapEx Copper World project to a later date? Is that part of the strategy here?

Thanks very much for the well wishes and for your comments. Look, I think what this does really is it accelerates our deleveraging and it creates a stronger platform on which we can execute these longer-term initiatives. I think I've said to you quite frequently that we are not in a rush to build Copper World, and we'll do it in due course. But what this does for us is it puts us in a much stronger position to be able to accelerate our deleveraging and to build a platform that will ultimately enable us to much more easily execute Copper World based on those sort of the 3P principles that Eugene Lei laid out last October.

Okay. And as a follow-up, I mean, Copper Mountain's had its fair share of operating challenges last year. How confident are you that the operating issues there are solvable? And do you see improvement to the current mine plan at Copper Mountain?

Orest, I'm going to give you a quick answer, and then I'm going to ask Andre to comment. But there is an outstanding team at the Copper Mountain mine. The key will be integration of the teams to ramp up resources and eliminate bottlenecks and I think we have the technical strength that will facilitate those type of synergistic effect. But Andre, perhaps you can comment a little bit further.

Sure, sure. Thanks Peter and Orest. Yes. So if I start by -- when I first went to site is when I walked into the plant and met the people and the like and what I thought was a very well-capitalized mine. The equipment was in great shape. And they definitely had a clear strategy on what they needed to and how they are going to improve the operation. The timing in terms of the speed at which they were working towards, call it, removing bottlenecks or the like was somewhat limited by the size and scale of the company. And I think the combined company will have access to funds to be able to expedite that. They've done some significant investment in terms of solving on the grinding and the, call it, the filter concentration part of the process. There remains a few bottlenecks. So there's some very obvious technical solutions to them. One of the key bottlenecks is around their secondary crushing system, and it poses a bottleneck for the mine and the mill. And if you go back in the history for Copper Mountain, they didn't have a secondary grinding circuit. It was -- as they went to ramp up it, some challenges on the hardness of the ore, and it was somewhat of a during production field fit type of thing. And so we have some solutions that we think with working with their teams that we'd like to go through, and we think they're completely solvable. And then the second part about it, and I think is really, really important is around changing the scale of the mine. And so the mine did operate back in 2017, '18-ish around 65 million tonnes to 75 million tonnes of your total material movement. It's dropped in recent years for a variety of reasons. And our intention would be to get it back up and get us stripping the mine, opening up wider. So we have access to somewhere between 60 benches per year. What that would allow us to do is to move towards the variable cutoff which they once did have and then come to a more sustainable, steady, higher grade for the mine and maybe not peaks of high grade, but a very steady, higher grade than what we've been currently operating at. So the nice thing about this operation, it's in a favorable district. The employees when I saw we're very well engaged, and we have a great group of people there. And so it would be just around working with the teams at site to have a very concise. It's not a very complicated strategic plan, and they've been working on it already to date, and we would look to accelerate that with the combined pro forma company.

Our next question comes from Matthew Murphy of Barclays.

Hello. I'm wondering if you can give any thoughts around -- there's been a few comments over capital constraints in the past at Copper Mountain. So any idea how much CapEx you might be looking to spend in sort of the year 1 turnaround? How much you might spend on stripping to open up the pit? And then when you look at the optimization phase, sounds like you can save some costs with an existing mill, but any ideas around CapEx? And is that in sort of the effort to get to the 65,000 tonnes per day scenario? Or do you see a different ideal level of throughput?

Andre?

Sure. Like Peter said, our plan is through the course of this year to release a new technical report that we'll have all of those details in it. And like I mentioned earlier, the mine is well capitalized. They do have the fleet. They have a very large fleet of trucks. The existing shovel capacity. So for example, their shovels are around 74 tonnes a bucket or 70-ish tonnes per bucket. We are ones at Constancia around 50 tonnes. We're -- at Constancia we move around 24.5 million tonnes with our smaller shovel then they're moving about 25 tonnes, 25.5 tonnes. And so we think there's some very, very low cost opportunities and Copper Mountain was on the process of working on those. And so some of those opportunities will help us become much more productive, very quickly, utilizing the existing equipment and capital. What I didn't mention on the other is we also have capital from our other operations. So Peter touched on the SAG mill in Arizona. And one of the challenges to solve the secondary pressure at Copper Mountain, we need to work with the teams at site, but we do have equipment like the SAG mill, other operations in Australia use them as SAG mills if you have a large enough size to it. And so 1 of the things that we may consider is utilizing a SAG mill that we currently have at the Copper World or the old Rosemont that we don't plan on using for the current plan and converting the 2 to Ag mills and potentially discarding the pebbles and use the existing crusher -- the pebble crusher, which would lower the operating costs on a very low CapEx solution. In terms of stripping, that I'll come through. They do have a good plan. I've reviewed the plan for the budget for 2023. There is no rush to do a major shift. So we'll have to take some time and work with the teams to understand what really makes the most sense for this year, but that will be outlined in the technical report as we go forward.

If I could add a little bit to that -- to Andre's answer. We're going to be focused on free cash flow generation in the combined company. And as Peter outlined in the presentation. We expect this year to be a deleveraging year for the company combined, and we will allocate both the personnel and capital over the next 12 and 24 months as Andre outlined to open up the mine and increase efficiencies. But there's no significant capital outlay this year that we need to make these improvements over the course of the next few years.

Our next question comes from Stefan Ioannou of Cormark.

Congratulations the transaction makes a lot of sense. Just -- maybe just a slight follow-up to that. I guess Matt kind of touched on it. But previously, Copper Mountain has done a lot of work at sort of looking at the next growth step for the mine and potentially a 65,000 tonne a day study was done there and arguably, there's room for it to be even bigger than that. Do you -- in your due diligence, do you see that potential? Does that factor into your sort of medium- to longer-term planning? Or should we expect to see the Copper Mountain mine within Hudbay sort of that 45,000 tonne maybe 50,000 tonne a day run rate for the foreseeable future for now?

Andre?

Sure. That's a great question. And again, don't [ put it ] off to the 43-101 report today, but I will in some ways. It's a very large resource, right? And so with it being very large resource at the current throughputs and rates is probably something that -- it's definitely an opportunity to increase in size and scale. What is the right number? I think that's where we have to work with the team. Like we've done a very thorough review. We have some really good ideas that our technical teams have been, but also that's from a due diligence stage. And I think we have to really work closely with the team to fine-tune those before we give you an absolute number, is it 65, 60 or something bigger or less. But it's probably -- it's definitely more than what it's currently at. And when we see opportunities like you say, to increase. And it also comes back to what is the rate grade. And so -- but definitely, there's room for growth in the copper production on an annual basis. We see that. But the right throughput is something we're going to have to work with the local teams in the next few months to own in on what that real number is.

Okay. That's fair enough. That's great to hear. And Andre, sorry, my own follow here, just as a housekeeping question. So just that mill that's in storage in Arizona, just I want to be clear. So that wasn't earmarked for Copper World then?

No. No. So we reviewed the -- we looked at the possibility of using it for Copper World. But with the hardness of the ore and the throughput that we are looking at, we didn't feel it was adequately sized for what we want to do with it. So -- but it's rated for about 60,000 tonnes per day, depending on what the hardness of ore may be, but one of the initial thoughts was potentially is converting -- utilizing it at site at Copper Mountain and then converting both SAG mills to Ag mills, which would run at a lower operating cost, and that would solve a lot of the secondary crushing problem or a challenge that's faced as a bottleneck for the mine and then the existing crushing circuit that they have could be re-purposed around the pebble crushing in an optimized way. [indiscernible], obviously, and that's something we need to work with the teams. There might be better solutions out there that teams have already been thinking of. And I think that's the benefit of working -- putting the 2 teams together. We'll come up with some really interesting and innovative things, and there's lots of resources available that they may see within our company that may be deployed to the operation that we had considered. So really looking forward to getting to work with the teams there and coming up with some novel solutions.

And Stefan, I'm just chuckling in the background because I'm thinking that you may be extrapolating and thinking, does that increase the cost or the cost estimate of Copper World to be [indiscernible].

Yes. No, exactly, exactly.

Our next question comes from Jackie Przybylowski of BMO Capital Markets.

Congrats again on the transaction. I was wondering if you could just maybe give us a little bit more color as to how this came together, how long has you and Copper Mountain been kind of talking and maybe if you had considered any other strategic options, whether it's acquisition or other, I guess, in this process?

Thanks, Jackie. Good morning. This has been going on for about a year. I mean we've been looking at this for a long time. We've done a very, very detailed due diligence on one another. But I think that the most important thing has always been that from Hudbay side, we've always said anything that we do has to be accretive on a NAV basis for our shareholders. And clearly, conversely, Copper Mountain had their own criteria to deal with. I think, though, that ultimately, what really pulled us together was our view with respect to the unique operational efficiencies and synergies that the combined company has. I'm putting words into Gil's mouth by saying this, but certainly we'll offer Gil the opportunity to comment. But we think that a single -- a mine like Copper World absolutely -- I'm sorry, Copper Mountain absolutely belongs in an organization with more mines that allows the flexibility to actually be able to do what it's got to do to get to the next level. So Gil, maybe you want to comment on it, but this has been going on for a long time, and we've been looking at how to capture the unique operational efficiencies and synergies.

Yes. Thanks very much, Peter. Yes, we actually -- Jackie, we see this is an accretive transaction for both groups of shareholders. It certainly allows us to eliminate our single asset risk and allow us the acceleration of the development plans that we've always contemplated here. And we like the concept that Hudbay has with respect to their look at deploying some of their capital assets at Copper Mountain. We think that, that has huge potential with respect to lowering costs and improving production. And we're very excited that this creates a leading low-cost American-based copper producer. I mean, we're going to have pro forma 2023 production of greater than 550 million pounds of copper equivalent, copper and gold and the cash costs are extremely low. So that reduced operational risk really comes where you can get the critical mass and have a quality diverse asset portfolio. So we think that this combination makes a huge amount of sense for both companies. And as Peter described in the presentation, there's huge opportunistic synergies for both companies here.

And maybe if I could just ask as a follow-up. You guys mentioned in the prepared remarks that you're going to be more focused in North America now than South America. And that makes a lot of sense, especially given the challenges that have been happening in Peru lately. Can you talk about how -- I know you've kind of mentioned this, but can you talk about how this maybe affects your plans to do exploration of future development in Peru? Does this buy you a little bit more time on whether it's Llaguen or the Maria Reyna and properties around that area. Is that going to be maybe a lower priority focus for the next couple of years?

Thanks, Jackie. I think the way I would characterize it is this rebalances the portfolio. So it doesn't change focus. We remain absolutely committed to Peru and confident in the ability of Constancia to grow its resource base through the opportunities north of the mine at Maria Reyna and Caballito. So it absolutely will not slow down our focus on getting those satellites drilled. In fact, I think it enhances our ability to do that. So we will continue to implement the exploration program over there. Llaguen is obviously a slower burner as is Mason. But our focus certainly will not be diminished at all in Peru. I think this platform just allows us the opportunity to enhance that focus. But can I ask Gil may have a comment, too.

Yes. I've also got to say, Jackie, that one of the, I think, exciting opportunities that we saw as Copper Mountain shareholders was the huge exploration potential that this combined company has, we're excited about the potential that we have at Copper Mountain to be able to discover high-grade zones at our existing deposit, and we're currently engaged in a pretty advanced exploration program this year. But we have to say we really like the potential of the satellite deposit set at Constancia and feel that, that whole area has got highly -- is highly prospective from an exploration perspective. So I would suggest that yes, a focus on exploration and creating value in the drill bit is something that will happen at Hudbay and it's going to pay off for shareholders in the long run.

Wonderful. Well, congrats, Gil and Peter and team.

Our next question comes from Greg Barnes of TD Securities.

Just again, coming back to Copper World and Orest's question at the beginning of whether this would delay your interest in developing Copper World. Wouldn't this actually improve your ability to develop that project given the deleveraging that's going to happen on the improved cash flow from the combined company?

Greg, and thanks for answering your own question. I think the answer is absolutely, yes. This could certainly accelerate our ability to implement Copper World. I mean Copper World remains a key initiative for the company. And as I said before, effectively, this combination accelerates our deleveraging and just creates a stronger platform on which to develop Copper World. So yes, you're absolutely right. I did say we're not in a hurry. And the reason I say that is because I just want to ensure that everybody understands that the 3 conditions that Eugene laid out still remain paramount, but this does enhance our ability to do that.

Yes. And just again, following up on the first part of Jackie's question. Was this a competitive process with Copper Mountain?

No. This was a bilateral process that was conducted between the 2 companies over time.

Our next question comes from Pierre Vaillancourt of Haywood.

Actually, Greg asked the question I was going to ask. But just since I've got you, so do we assume the time line for Copper World is as originally planned? Or do we look for PFS and in the first half of a feasibility study and starting up in the second half, leading to a sanctioning decision in late '24? I mean I'm just wondering to the point you just made, whether it does accelerate or do we just stay with this timetable as is for now or what?

Pierre, I'll give you 2 answers. The first -- probably the most important answer is that we will look at this in the framework of the capital allocation program that we have in place. And that is going to be the most important consideration. The second piece is -- so absolutely, we're on track to complete the prefeasibility study first half of the year. We're on track to -- we have submitted applications for the permits, the 2 outstanding permits. We expect those to be issued during the course of this year. Once we have those permits in hand, once we have the prefeasibility behind us, we will start taking a look at the potential for partnering or joint venture partnering of the asset with a view then to go forth with the definitive feasibility study. So nothing changes in that sense.

[Operator Instructions] Our next question comes from John Tumazos of Very Independent Research.

Thank you for taking my question and maybe for the patience, it's going to require. I apologize, I hadn't been careful in studying Copper Mountain since Newmont sold it in '88. Your Slide 10 shows $100 million of EBITDA but the financials of Copper Mountain show minus CAD 25.5 million of EBIT in '22 and plus CAD 320.9 million of EBIT in 2021 at lower copper prices. So please walk us through how we normalize the results of Copper Mountain. And then how much Copper Mountain improves with this CapEx program that you described, but in my unfamiliarity I probably didn't comprehend at all as well as the $30 million of synergies you're discussing?

John, it's Eugene Lei speaking. And as Gil and Peter outlined, 2022 was a difficult year for Copper Mountain Mine and the EBIT in 2022 was -- EBITDA or EBIT in 2022 was not representative, but we feel would be the mine going forward. You will have noticed that the Copper Mountain team provided the 2023 guidance about...

I don't notice, how much is their guidance?

Their guidance is, I believe, 88 to 98 million pounds of copper over a year at C1 cash cost of $2.25 per pound at the midpoint. And so the EBITDA that we show on Slide 10 is actually the street consensus EBITDA for both Hudbay and Copper Mountain combined. So it's...

So the Street consensus appears to discount Copper Mountain's guidance by at least 1/3 at today's copper price.

I think there's a wide range of analysts that cover the stock. We can probably look at the averages. And given the mines underperformance in 2022, as was noted, there may be some discount that the Street has provided. And what we see here is a potential upside as [indiscernible] in getting the mine back and running at full capacity and the future cash flow generation potential. So we see this as additive to the company from both a cash flow standpoint this year as well as a net leverage standpoint. So the other point to make is that the Copper Mountain company owns 75% of the mine, while Mitsubishi Materials owns 25% of mine. In the financials, it's consolidated as 100%, and given the structures that they currently have in place, they will expect to still get 100% of the free cash flow from the mine for this foreseeable future.

The second part of my question, how much is the improvement potential from the CapEx programs that maybe were discussed, but I didn't fully comprehend lacking background as well as the $30 million synergies?

From the synergies that we disclosed, we're anticipating -- we mentioned $30 million of annual synergies coming from corporate synergies as well as operational efficiencies. We expect approximately 50% of that, call it, $15 million a year to be in -- within -- be achieved within the first year. And as we outlined up to $30 million will be achieved by the third year. So the ramp is probably $15 million of efficiencies in the first year, ramping up to $20 million, $25 million in the second year and then $30 million in the third year. We do see opportunities to go actually beyond that, and we've been a little bit conservative and not keeping everything -- stating everything upfront. As Andre mentioned, we intend to put out a technical report in the coming months. So that's what we see and feel comfortable with disclosing today, but we do see opportunity on that. Andre is anything further to add on my plan.

No. I think you covered that well, Eugene.

So following up again, and forgive my persistence, you're not prepared to say how much is the EBITDA contribution from the next investment program contemplated as an alternative for Copper Mountain. You're waiting for the technical report, and I'm just being too anxious, right?

Eugene maybe if I. Yes, I think there's a lot of work that we have to do. We've done in isolation, right? There was a due diligence process, and it was very thorough. But I think there's a lot of fine-tuning that needs to be done with the people who actually know them. We have some ideas on that, but working together, I think we're going to come up with a really good plan. And I think it's just a little premature to say exactly what it is. We have to combine the team and put our heads together, and I think we're going to come -- I know we're going to come to something really good.

I don't think Copper Mountain is the lowest grade conventional mill operating copper mine in the world. But after the first cup of coffee, I can't think of one that's lower grade. Is it the lowest grade operating mine in the world with a conventional grinding mill?

Gil?

This is Gil Clausen here. No. In fact, we generally operate about 0.3% copper. Our reserve grade is about 0.24% copper. It's pretty typical of mines in British Columbia that also has the benefit of low-cost hydropower. So generally, our cost structures are supported by low-cost power, et cetera. The stripping ratio at our operation is relatively low as well. So from a cost perspective, just to go further on a little bit perhaps before Hudbay does its optimization to you, so to speak, with the rest of the Copper Mountain team here. We've been looking forward to a year of maybe the next 5 years without any significant increase in capital that would have been similar to what we are forecasting this year in terms of cost and production. But there's a lot of opportunity to improve upon that as Andre outlined here. So I think the upside potential on the resource side and the ability to be flexible with respect to cutoff grades, et cetera, and implement that into the mine plan as we did, as you pointed out the year in 2021, but in prior years as well has allowed this operation to be able to perform at a pretty decent cost basis. We've always been sitting in the upper second quartile of the cost range as a producer, but the opportunity with expansion and the investments that we've put into the mine over the last 2 years are going to open up the opportunity to lower those costs and increase production.

I could ask more questions because I'm not current, but thank you for your patience with my uninformed questions.

John, it's Peter Kukielski. I think that it's somewhat a great to Boliden Aitik mine [ to use that ].

Our next question comes from Ed Brucker of Barclays.

Congrats on the acquisition. Just some maintenance ones for me. Are you expecting any cost to achieve the $30 million in synergies?

It's Eugene here. No, obviously, this is $30 million over 3 years, as I mentioned, $15 million off the top and no cost to gain those synergies.

Got it. And then there is a small amount of debt at Copper Mountain. Just want to get your thoughts or, I guess, your plan to either address that debt, redeem or assume it? I know there's a lot of cash. It looks like on the balance sheet at Copper World, but I just want to get your thoughts.

Sure. As I understand that the -- there are -- there's USD 140 million of Nordic bonds outstanding. There is a change in control on those bonds to be able to put it at 101. We intend to keep those outstanding as a base case. But obviously, the holders want to put to us, we have ample cash and liquidity to redeem those. We do not intend on adding or refinancing those immediately and adding more debt to our permanent capital structure.

This concludes the question-and-answer session. I would like to turn the conference back over to Candace Brule for any closing remarks.

Thank you, operator, and thank you, everyone, for joining us today. If you have any further questions, please feel free to reach out to our Investor Relations team. Thank you.

Ladies and gentlemen, this concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.