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Enter Symbol
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Hudbay Minerals Inc
Symbol HBM
Shares Issued 261,272,151
Close 2018-10-31 C$ 5.17
Market Cap C$ 1,350,777,021
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Hudbay Minerals earns $22.8M (U.S.) in Q3

2018-10-31 17:24 ET - News Release

Mr. Alan Hair reports

HUDBAY ANNOUNCES THIRD QUARTER 2018 RESULTS

Hudbay Minerals Inc. today released its third quarter 2018 financial results. All amounts are in U.S. dollars, unless otherwise noted.

Summary:

  • Earnings per share of nine cents and cash from operating activities of $113.8-million in the third quarter of 2018;
  • Achieved record mill throughput and copper recoveries at Constancia;
  • Trade-off studies have been completed and Hudbay believes the refurbishment of the New Britannia mill is the optimal processing scenario for the Lalor gold and copper-gold zones;
  • Entered into a friendly agreement to acquire Mason Resources Corp., owner of one of the largest undeveloped copper porphyry resources in North America, for an enterprise value of approximately $15-million.

"In Q3, we executed well against our strategic priorities and generated strong earnings and cash flow as we continued to focus on developing and operating our portfolio of high-quality assets in mining-friendly jurisdictions," said Alan Hair, president and chief executive officer. "Record mill throughput and record copper recoveries at our Constancia mine reflected the success of optimization efforts we have been making over the past several years. We are also very encouraged by the progress we have made at Lalor, where we believe we can enhance the long-term value of the Manitoba business by refurbishing the New Britannia gold mill."

Hudbay believes the most significant opportunities for long-term value creation are through exploration and mine development. The company's record of successful exploration, industry-leading development and mine ramp-up, and highly efficient operation of the Constancia mine in Peru, along with its long history of responsible, mining life cycle experience in Manitoba, provides Hudbay with a competitive advantage to create long-term shareholder value. Hudbay considers acquisition opportunities against a number of criteria; the company targets copper deposits in mining-friendly jurisdictions, with the potential to be long-life low-cost operations once developed. Potential opportunities should involve a meaningful operating role for Hudbay and be accretive to net asset value per share and/or reserves/resources per share.

"Hudbay's acquisition of Mason meets our stringent acquisition criteria and is a unique opportunity to create value with our proven drill and build strategy," stated Mr. Hair. "It provides us access to a copper deposit in Nevada with measured and indicated resources comparable to Constancia and Rosemont at a cost of approximately 30 per cent of our 2018 exploration budget. We have followed the Ann Mason project for quite some time as a shareholder and believe it is an ideal fit for our project pipeline. We're pleased to acquire a deposit of this scale at an early stage and we look forward to applying our exploration, engineering, permitting and construction expertise to unlock the project's potential and maximize value for our shareholders."

Net profit and earnings per share in the third quarter of 2018 were $22.8-million and nine cents, respectively, compared with net profit and earnings per share of $36.3-million and 15 cents, respectively, in the third quarter of 2017. In the third quarter of 2018, cash generated from operating activities was $113.8-million, which decreased from $167.9-million in the same period of 2017, due to lower realized prices for all commodities, lower sales volumes of copper and higher operating costs, partially offset by increases in the sales volumes of precious metals and zinc.

Net profit and earnings per share in the third quarter of 2018 were affected by, among other things, items shown in the associated table.

                               ITEMS AFFECTING NET PROFIT 

                                      Pretax gain (loss) After-tax gain (loss) Per-share gain (loss) 
                                            ($ millions)          ($ millions)             ($/share)             
                                                                                                          
Foreign exchange gain                              (1.2)                 (0.8)                    -
Mark-to-market adjustments of various items         1.3                   0.5                     -
Non-cash deferred tax adjustments                     -                   1.3                     -

Compared with the same quarter of 2017, production of contained copper equivalent metal in concentrate decreased by 10 per cent, primarily as a result of lower production in Manitoba. The decrease in Manitoba production was partially offset by higher copper production at Constancia arising from improved mill throughput and recoveries.

In the third quarter of 2018, consolidated cash cost per pound of copper produced, net of byproduct credits, was 88 cents, a marginal increase compared with 86 cents in the same period last year. Cash costs, byproduct credits and copper production in the third quarter of 2018 were all substantially similar to the equivalent values in the third quarter of 2017. Incorporating sustaining capital, capitalized exploration, royalties, and corporate selling and administrative expenses, consolidated all-in sustaining cash cost per pound of copper produced, net of byproduct credits, in the third quarter of 2018 was $1.43, which has decreased from $1.64 in the third quarter of 2017, as a result of reduced sustaining capital spending.

Cash and cash equivalents increased by $103.4-million from Dec. 31, 2017, to $459.9-million as at Sept. 30, 2018. This increase was a result of cash generated from operating activities of $342.2-million. These inflows were partly offset by $133.5-million of capital investments primarily at Hudbay's Peru and Manitoba operations and interest payments of $74.8-million.

Net debt decreased by $106.7-million from Dec. 31, 2017, to $516.4-million at Sept. 30, 2018, primarily due to free cash flow generation. At Sept. 30, 2018, total liquidity, including cash and available credit facilities, was $878.4-million, up from $859.2-million as at June 30, 2018.

Based on knowledge gained from test mining of the Lalor gold zones, infill drilling of the copper-gold zone and mineral processing trade-off studies on the Lalor gold and copper-gold zones, Hudbay believes the optimal processing scenario is to refurbish the New Britannia mill, which is expected to have gold recoveries of approximately 90 per cent, compared with gold recoveries of less than 65 per cent in Hudbay's existing facilities.

Based on results to date, Hudbay is on track to meet its production and cost guidance expectations, as revised for Manitoba costs in the second quarter of 2018.

                             FINANCIAL PERFORMANCE
         (in thousands of dollars, except per-share and cash cost amounts)

                                              Three months ended     Nine months ended
                                                        Sept. 30              Sept. 30          
                                                 2018       2017       2018       2017

Revenue                                    $  362,649 $  380,181 $1,120,593 $  977,980
Cost of sales                                 277,367    260,624    822,079    713,792
Profit before tax                              30,287     53,752    153,187     93,326 
Profit                                         22,808     36,304     88,926     45,413 
Basic and diluted earnings per share       $     0.09 $     0.15 $     0.34 $     0.19   
Operating cash flow before change 
in non-cash working capital                   122,097    153,943    385,524    358,662

Peru operations review

In addition to achieving record mill throughput, copper recoveries reached record levels in the third quarter of 2018, as a result of several metallurgical initiatives intended to improve copper recoveries, while gold recoveries remained consistent compared with the same period in 2017. While recoveries vary from quarter to quarter depending on the complexity of the ore feed, the company is seeing results from recovery improvement initiatives and is on track to deliver the recoveries anticipated in the National Instrument 43-101 technical report issued earlier in 2018.

During the third quarter of 2018, the Peru operations produced 32,976 tonnes of copper, which was approximately 7 per cent higher than production in the third quarter of 2017, due to higher throughput and improved recoveries. The molybdenum plant continued to operate at higher rates during the quarter, resulting in the production of 370 tonnes of molybdenum. Production for the first three quarters of 2018 for all commodities increased due to improved mill throughput and higher recoveries, partially offset by lower copper grades in accordance with the mine plan. Production results to date are on track to meet full-year guidance.

Combined mine, mill and G&A (general and administrative) unit operating costs in the third quarter of 2018 were 16 per cent higher than the same period in 2017. The higher combined unit operating costs were due to a decrease in capitalized stripping and higher costs for diesel, steel and power, partially offset by higher mill throughput. Also, increased utilization of the molybdenum plant contributed to higher unit costs but reduced Peru cash costs due to higher byproduct revenue. Combined unit operating costs for the year to date include accruals for signing bonuses for the three-year collective bargaining agreement agreed to earlier in 2018.

Cash cost per pound of copper produced, net of byproduct credits, for the three and nine months ended Sept. 30, 2018, was $1.22 and $1.38, increasing by 3 per cent and 11 per cent, respectively, from the same period in 2017. The increase for the first nine months is mainly as a result of higher consumable costs and lower capitalized stripping, partially offset by higher byproduct credits. Sustaining cash cost per pound of copper produced, net of byproduct credits, for the three and nine months ended Sept. 30, 2018, was $1.38 and $1.54, decreasing by 23 per cent and 12 per cent, respectively, from the same period in 2017, as a result of reduced sustaining capital spending on heavy civil works, which more than offset the factors noted above.

Manitoba operations review

During the third quarter of 2018, the Manitoba operations produced 26,228 tonnes of zinc, 7,506 tonnes of copper and 26,118 ounces of gold equivalent precious metals. Zinc production was 28 per cent lower compared with the same period in 2017 as a result of lower grades at Lalor and 777, in line with the mine plan. The Reed mine closure in August negatively affected contained copper production compared with the third quarter of 2017.

Ore mined at Hudbay's Manitoba operations during the third quarter of 2018 decreased by 15 per cent compared with the same period in 2017. Increased production at the 777 mine was offset by decreased production at the Lalor and Reed mines. Over all, gold grades were 1 per cent higher, while copper, zinc and silver grades were 23 per cent, 17 per cent and 7 per cent lower, respectively, in the third quarter of 2018, compared with the same period of 2017. Grade variances reflected anticipated declines in 777 and Lalor grades in accordance with their respective mine plans, together with reduced high-grade copper production from Reed due to its closure. Unit operating costs for all Manitoba mines for the third quarter of 2018 increased by 6 per cent compared with the same period in 2017 for the reasons described below.

Ore mined at Lalor decreased by 18 per cent compared with the same period last year. Lower production tonnage is primarily attributed to the exhaust fan failure in June that constrained ventilation and production from areas of the mine until mid-August. In addition, a fall of ground in August delayed the timing of a production stope, and the mine has been affected by a shortage of skilled workers. The Lalor paste plant was commissioned during the quarter, with backfill voids being managed within normal thresholds. Higher unit operating costs reflect the repairs to the exhaust fan failure and ground rehabilitation work completed in the quarter. The Lalor production ramp-up to 4,500 tonnes per day is now expected in the first quarter of 2019.

The Reed mine produced its last ore in August and processing of Reed ore was completed in early September. Production volumes and grades exceeded the company's expectations over the third quarter. The production costs were at a lower unit cost because the upfront development and longhole drilling activities were completed in the first half of the year. Reed closure costs are included in other operating expenses, and site clearing work has been completed ahead of schedule.

Ore processed in Flin Flon in the third quarter of 2018 was 15 per cent lower than the same period in 2017. Lower production at the Lalor and Reed mines was offset partially by increased ore from the 777 mine. Copper and zinc recoveries in the third quarter of 2018 were 1 per cent and 6 per cent lower, respectively, compared with the same period in 2017, while gold and silver recoveries were each 2 per cent higher. Ore processed was 4 per cent higher and copper recoveries were consistent at the Stall concentrator in the third quarter of 2018 compared with the same period in 2017, as a result of continuing operational and maintenance improvements and better metallurgical understanding of the Lalor ore.

Production of all metals is expected to be within full-year guidance.

Manitoba combined mine, mill and G&A unit operating costs in the third quarter and year to date in 2018 were 3 per cent and 10 per cent higher, respectively, than in the same periods in 2017, due mainly to higher 777 and Lalor mining costs, Flin Flon mill maintenance, and ore rehandling costs.

Cash cost per pound of copper produced, net of byproduct credits, in the third quarter of 2018 was negative 61 cents per pound of copper produced. These unit costs were lower compared with the same period in 2017, primarily as a result of lower mining and administrative costs, partially offset by lower copper production.

Sustaining cash cost per pound of copper produced, net of byproduct credits, in the third quarter of 2018 was $1.23, which is higher than the prior-year period as the lower cash cost was more than offset by higher sustaining capital expenditures. Sustaining cash cost per pound of copper produced increased by 40 cents year to date compared with the same period in 2017, as a result of increased capital development expenditures at Lalor and planned increased sustaining and exploration capital spending.

Lalor gold

A key area of focus at Lalor this year has been test mining in the gold zones, and additional infill drilling in the gold and copper-gold zones, both in support of trade-off studies to assess the mining and processing options for Lalor gold. The trade-off studies have been completed, and Hudbay believes the optimal processing scenario is to refurbish the New Britannia gold mill, with significant upside potential from nearby satellite deposits.

Over the past few months, Hudbay has continued drilling and test mining in the gold-rich Lens 25, confirming the existence of a continuous high-grade core of mineralization within the wider lower-grade mineral resource estimates reported in the 2017 NI 43-101 technical report for Lalor. In parallel, Hudbay has revised its geological model of the copper-gold-rich Lens 27, which better reflects the orientation of the mineralization observed during core logging. This reinterpretation indicates that there is a simpler and more consistent and reliable mineralized envelope that is expected to result in an increase in tonnage of this high-grade mineralization.

Based on the detailed work completed in the last 12 months, Hudbay believes that the refurbishment of the New Britannia mill, including the addition of a copper flotation circuit, is the optimal processing scenario. The company believes there is substantial additional upside potential from known mineral resources at nearby satellite deposits and other promising exploration targets, including the historical estimates of mineral resources at Hudbay's New Britannia and Squall Lake deposits, as well as the recently acquired Wim deposit (1), and from other promising exploration targets in the Snow Lake region.

Hudbay is currently working on an updated mineral reserve and resource estimate and related technical work to confirm its assumptions and determine an optimal configuration of the New Britannia mill. The company expects to provide more details in the first quarter of 2019 as it advances the engineering and mine planning work.

(1) Refer to historical estimates of mineral resources at the end of this news release.

Acquisition of Mason

On Oct. 31, 2018, Hudbay entered into an agreement pursuant to which it will acquire the remaining 86 per cent of the issued and outstanding common shares of Mason that it does not already own. Under the agreement, Mason shareholders will receive 40 Canadian cents in cash for each Mason common share owned. The transaction is expected to close in December, 2018, subject to the approval of Mason's shareholders, court approval of a plan of arrangement and other customary conditions.

Mason's Ann Mason project is a large greenfield copper deposit located in the historic Yerington district of Nevada and is one of the largest undeveloped copper porphyry deposits in North America. Mason's measured and indicated resources are comparable in size with Constancia and Rosemont, and Hudbay is acquiring the asset for an enterprise value (net of its current ownership) of approximately $15-million, a cost that is approximately 30 per cent of its 2018 exploration budget.

      MINERAL RESOURCE (1) STATEMENT FOR THE ANN MASON DEPOSIT BASED ON A CUT-OFF OF 0.20 PER CENT COPPER

Classification           Tonnage                                Grade                            Contained metal
                             (Mt)  Cu (%)   Mo (%)  Au (g/t)  Ag (g/t)     Cu (Mlb)  Mo (Mlb)  Au (Moz)  Ag (Moz)

Measured                     412    0.33    0.006      0.03      0.64      3,037.6      58.1      0.37      8.46
Indicated                    988    0.31    0.006      0.03      0.66      6,853.3     128.5      0.97     21.00
Measured and indicated     1,400    0.32    0.006      0.03      0.65      9,890.9     186.6      1.33     29.46
Inferred                     623    0.29    0.007      0.03      0.66      3,897.2      96.2      0.58     13.16

(1) For additional information, refer to the technical report dated March 3, 2017, filed by Mason on SEDAR.

          BLUE HILL DEPOSIT (1) INFERRED MINERAL RESOURCES (EFFECTIVE DATE MARCH 3, 2017)

Zone                         Cu cut-off     Tonnes     Grade   Contained Cu     Mo        Au       Ag  
                                     (%)       (Mt)    Cu (%)          (Mlb)    (%)     (g/t)    (g/t)

Oxide zone                         0.10      47.44      0.17         179.37      -         -        -
Mixed zone                         0.10      24.69      0.18          98.20      -         -        -
Oxide plus mixed zone              0.10      72.13      0.17         277.49      -         -        -
Sulphide zone                      0.15      49.86      0.23         253.46  0.005      0.01      0.3

(1) For additional information, refer to the technical report dated March 3, 2017, filed by Mason on 
SEDAR.

Hudbay views Mason as a long-term option for potential future development after Rosemont and a strong addition to the company's pipeline of long-term growth opportunities. The Ann Mason project will become one of Hudbay's high-priority exploration projects in North America. Hudbay plans to conduct geological mapping, geochemical sampling and geophysical surveys in 2019, as well as diamond drilling to identify potential sources of high-grade mineralization that could enhance the feed grade in the early years of a future milling operation. High-priority exploration targets include near-surface skarn showings as well as untested induced polarization (IP) anomalies. Hudbay is pleased to acquire a deposit of this scale at an early stage where the company can apply its experience in exploration, engineering, construction and permitting to unlock the project's potential and maximize value for Hudbay's shareholders.

Other matters

A requisition for a meeting of Hudbay's common shareholders has been submitted by a shareholder for the purpose of considering an advisory resolution with respect to certain potential transactions. Per the company's Oct. 23 press release, Hudbay's board is considering the requisition and will respond in due course.

Non-IFRS (international financial reporting standards) financial performance measures

Net debt is shown in this news release because it is a performance measure used by the company to assess its financial position. Cash cost, sustaining and all-in sustaining cash cost per pound of copper produced are shown because the company believes they help investors and management assess the performance of its operations, including the margin generated by the operations and the company. These measures do not have a meaning prescribed by IFRS and are therefore unlikely to be comparable with similar measures presented by other issuers. These measures should not be considered in isolation or as a substitute for measures prepared in accordance with IFRS and are not necessarily indicative of operating profit or cash flow from operations as determined under IFRS. Other companies may calculate these measures differently. For further details on these measures, including reconciliations to the most comparable IFRS measures, please refer to page 30 of Hudbay's management's discussion and analysis for the three and nine months ended Sept. 30, 2018, available on SEDAR and EDGAR.

Conference call and webcast

Date:  Thursday, Nov. 1, 2018

Time:  10 a.m. ET

Webcast:  at the company's website

Dial-in:  416-849-1847 or 1-866-530-1554

Qualified person

The technical and scientific information in this news release related to the Constancia mine and Rosemont project has been approved by Cashel Meagher, PGeo, Hudbay's senior vice-president and chief operating officer. The technical and scientific information related to the Manitoba sites and projects contained in this news release has been approved by Olivier Tavchandjian, PGeo, Hudbay's vice-president, exploration and geology. Mr. Meagher and Mr. Tavchandjian are qualified persons pursuant to NI 43-101. For a description of the key assumptions, parameters and methods used to estimate mineral reserves and resources at Hudbay's material properties, as well as data verification procedures, and a general discussion of the extent to which the estimates of scientific and technical information may be affected by any known environmental, permitting, legal title, taxation, socio-political, marketing or other relevant factors, please see the technical reports for the company's material properties as filed by Hudbay on SEDAR.

Historical estimates of mineral resources

The mineral resource estimates for the New Britannia, Squall Lake and Wim deposits that have been included in this news release are historical estimates within the meaning of NI 43-101 and not current mineral resources, as a qualified person has not performed sufficient work for Hudbay to classify the historical estimates as current mineral resources.

In parallel with its technical work on Lalor, Hudbay plans to carry out the work required to verify the relevance and reliability of the historical estimates, including verification of the data, assumptions, parameters and methods used to estimate the mineral resources.

About Hudbay Minerals Inc.

Hudbay is an integrated mining company primarily producing copper concentrate (containing copper, gold and silver), zinc concentrate, molybdenum concentrate and zinc metal. With assets in North America and South America, the company is focused on the discovery, production and marketing of base and precious metals. Directly and through its subsidiaries, Hudbay owns four polymetallic mines, four ore concentrators and a zinc production facility in Northern Manitoba and Saskatchewan (Canada) and Cusco (Peru), and a copper project in Arizona (United States).

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