TSX, NYSE – HBM 2023 No. 8 Hudbay Announces First Quarter 2023 Results
Toronto, Ontario, May 8, 2023 – Hudbay Minerals Inc. (“Hudbay” or the “company”) (TSX, NYSE:HBM) today released its first quarter 2023 financial results. All amounts are in U.S. dollars, unless otherwise noted.
First Quarter Operating and Financial Results; Production and Cost Guidance Reaffirmed
- Consolidated production in the first quarter included 22,562 tonnes of copper and 47,240 ounces of gold. Consolidated cash cost and sustaining cash cost per pound of copper produced, net of by-product creditsi, were $0.85 and $1.83, respectively, representing an improvement of 21% and 17%, respectively, compared to the fourth quarter of 2022.
- Reaffirmed full year 2023 consolidated production guidance of 100,000 to 128,000 tonnes of copper at a cash cost of $0.40 to $0.80 per poundii and sustaining cash cost of $1.35 to $2.05 per poundii as first quarter production was in line with quarterly cadence expectations.
- Peru operations successfully managed through a complex environment to maintain steady performance and produce 20,517 tonnes of copper in the first quarter. The Peru team remained focused on maintaining strong margins and achieved a cash cost per pound of copper produced, net of by-product creditsi, of $1.36, which was overall in line with the strong cost performance in the fourth quarter of 2022. Transportation and supply chains in Peru have normalized since mid-February and Constancia's concentrate inventory is now at normal levels, well ahead of schedule.
- Full mining activities resumed at the Pampacancha pit in February and the period of higher stripping from March to June is progressing well with mining of higher-grade ore now expected to commence late in the second quarter of 2023, slightly ahead of schedule.
- Manitoba operations produced 36,034 ounces of gold at a cash cost per ounce of gold produced, net of byproduct creditsi, of $938, which was affected by temporary challenges at the Lalor mine in the quarter that were partly offset by strong throughput and gold recoveries at the New Britannia mill.
- Lalor ore production reached 4,800 tonnes per day late in the first quarter and throughout April after implementing changes to improve stope fragmentation and load-haul-dump equipment availability, together with many production optimization initiatives underway at the mine.
- First quarter net earnings and earnings per share were $5.5 million and $0.02, respectively. After adjusting for a non-cash gain of $8.2 million related to a quarterly revaluation of the closed site environmental reclamation provision and a $6.1 million revaluation loss related to the gold prepayment liability, among other items, first quarter adjusted earnings per share were $0.00.
- Operating cash flow before change in non-cash working capital was $85.6 million and adjusted EBITDAi was $101.9 million in the first quarter.
- Cash and cash equivalents increased during the first quarter to $255.6 million and were positively impacted by the steady operation of the Constancia mill throughout the transportation and supply chain interruptions earlier in the quarter and the successful conversion of concentrate inventory into cash during the quarter, ahead of schedule.
- Signed a new 10-year agreement for 100% renewable energy supply to Constancia, resulting in an expected 40% reduction in total Scope 1 and Scope 2 greenhouse gas emissions company-wide, in line with Hudbay’s climate change target of a 50% reduction by 2030.
Executing on Growth Initiatives and Prudent Financial Planning
- On April 13, 2023, Hudbay announced a definitive agreement (the “Arrangement Agreement”) to acquire all issued and outstanding common shares of Copper Mountain Mining Corporation (“Copper Mountain"), to create a 150,000-tonnes-per-year copper producer with three long-life mines in tier-one jurisdictions and a world-class pipeline of organic copper growth projects. The combined company will be the third largest Canadian copper producer and its complementary asset base and technical expertise is expected to unlock $30 million in annual operating efficiencies and corporate synergies over the course of three years.
- Three-year production guidance includes average annual copper production of 110,000 tonnes from Constancia and average annual gold production of more than 190,000 ounces from Snow Lake, a 23% and 30% increase, respectively, from 2022 levels.
- Received positive permitting update at Copper World from the Army Corps of Engineers (“ACOE”) and the required state level permits continue to be expected in 2023. Pre-feasibility study for Phase I of the Copper World project is well-advanced and on track for mid-2023.
- Peru exploration activities resumed with a focus on drill permitting for highly prospective satellite properties while evaluating the potential for reserve expansion at Constancia and Pampacancha through future mining phases.
- Snow Lake exploration activities are prioritizing step-out drilling for new discoveries to support future growth in annual production and mine life extension.
- Lalor 2023 winter exploration program intersected numerous occurrences of disseminated copper sulfides over two kilometres down plunge, indicating the potential close proximity of copper-gold feeder zones similar to the deeper lenses at Lalor.
- The Stall recovery improvement program is on track for commissioning in May with ramp-up to higher metal recoveries by mid-2023.
- Nevada drill program is planned for late 2023 to test high-grade skarn and large porphyry targets identified through recent geophysical surveys on private land claims near Mason.
- To benefit from strong current gold prices, Hudbay deferred eight months of prepaid gold deliveries from 2023 into 2024, which is expected to increase the company’s cash position by approximately $53 million in 2023 at prevailing gold prices.
- As an additional prudent measure to ensure free cash flow generation in 2023, Hudbay entered into a zerocost collar program in April for approximately 10% of copper production expected in the second half of 2023 at a floor price of $3.95 per pound while providing upside to copper price increases up to $4.28 per pound.
- On track to deliver the discretionary spending reduction targets for 2023 with lower growth capital and exploration expenditures compared to 2022.
“We continue to be on track to achieve higher production and cash flows in 2023 as we successfully managed the recent Peru logistical interruptions to ensure steady operations at Constancia and are executing initiatives to increase the output from our Lalor mine in Snow Lake,” said Peter Kukielski, President and Chief Executive Officer. “We took several prudent measures this quarter to improve our free cash flow for 2023 and we remain focused on being disciplined with capital allocation as we continue to de-risk Copper World. We are also pleased to be expanding our copper production profile with the recently announced combination with Copper Mountain, which creates a larger, more resilient and more diversified cash flow platform to prudently advance our leading organic copper growth pipeline.”
Summary of First Quarter Results
Consolidated copper production in the first quarter of 2023 was 22,562 tonnes, a decrease compared to the fourth quarter of 2022 primarily due to lower copper grades in Peru and Manitoba, as planned. Consolidated gold production was 47,240 ounces, a decrease compared to the fourth quarter primarily due lower gold grades in Peru, partially offset by higher throughput in Snow Lake. Consolidated zinc production in the first quarter was 9,846 tonnes, higher than the fourth quarter primarily due to higher zinc grades and throughput in Snow Lake. First quarter production was in line with expectations and Hudbay has reaffirmed its 2023 production guidance for all metals.
Consolidated cash cost per pound of copper produced, net of by-product creditsi, in the first quarter of 2023 improved to $0.85, compared to $1.08 in fourth quarter of 2022. This significant improvement was primarily a result of lower mining, milling and freight costs and higher by-product credits, partially offset by higher general and administrative costs and lower consolidated copper production. Consolidated sustaining cash cost per pound of copper produced, net of by-product creditsi, was $1.83 in the first quarter compared to $2.21 in the fourth quarter. This decrease was primarily due to the same reasons outlined above and lower sustaining capital expenditures and capitalized exploration. Both measures are expected to further decline in future quarters with higher expected copper production and contributions from precious metals by-product credits. The company is reaffirming its full year 2023 consolidated cash cost and sustaining cash cost guidance. Consolidated all-in sustaining cash cost per pound of copper produced, net of byproduct creditsi, was $2.07 in the first quarter, 14% lower than $2.41 in the fourth quarter of 2022, primarily due to the same reasons outlined above.
Cash generated from operating activities in the first quarter of 2023 decreased to $71.3 million compared to $86.4 million in the fourth quarter of 2022. Protests and civil unrest in the southern Peru mining corridor impacted the company’s Peru operations early in the first quarter; however, these disruptions have abated since mid-February. Transportation of Constancia’s concentrate and critical supplies has since returned to normal. Operating cash flow before change in non-cash working capital was $85.6 million during the first quarter of 2023, compared to $109.1 million in the fourth quarter of 2022. This decrease was primarily the result of lower copper and zinc sales volumes, partially offset by higher realized prices of all metals.
Net earnings and earnings per share in the first quarter of 2023 were $5.5 million and $0.02, respectively, compared to a net loss and loss per share of $17.4 million and $0.07, respectively, in the fourth quarter of 2022. The 2023 first quarter results were positively impacted by a non-cash gain of $8.2 million related to the quarterly revaluation of the company’s closed site environmental reclamation provision and a $5.0 million variable consideration adjustment with respect to stream revenue and accretion. These items were offset by a $6.1 million revaluation loss related to the gold prepayment liability.
Adjusted net earningsi and adjusted net earnings per sharei in the first quarter of 2023 were $0.1 million and $0.00 per share, respectively, after adjusting for the non-cash revaluation gain of the environmental reclamation provision and the revaluation loss on the gold prepayment liability, among other items. This compares to adjusted net earnings and adjusted net earnings per share of $2.6 million, and $0.01 in the fourth quarter of 2022. First quarter adjusted EBITDAi was $101.9 million, compared to $124.7 million in the fourth quarter of 2022 because of the same factors affecting operating cash flow noted above.
As at March 31, 2023, the company’s liquidity includes $255.6 million in cash as well as undrawn availability of $355.4 million under its revolving credit facilities.
| Consolidated Financial Condition ($000s) | Mar. 31, 2023 | Dec. 31, 2022 | Mar. 31, 2022 |
|---|---|---|---|
| Cash | 255,563 | 225,665 | 213,359 |
| Total long-term debt | 1,225,023 | 1,184,162 | 1,181,119 |
| Net debt1 | 969,460 | 958,497 | 967,760 |
| Working capital2 | 100,987 | 76,534 | 161,846 |
| Total assets | 4,367,982 | 4,325,943 | 4,538,214 |
| Equity | 1,574,521 | 1,571,809 | 1,561,978 |
1 Net debt is a non-IFRS financial performance measure with no standardized definition under IFRS. For further information, please see the “Non-IFRS Financial Performance Measures” section of this news release.
2 Working capital is determined as total current assets less total current liabilities as defined under IFRS and disclosed on the interim consolidated financial statements.
Consolidated Financial Performance Three Months Ended
| Mar. 31, 2023 | Dec. 31, 2022 | Mar. 31, 2022 | ||
|---|---|---|---|---|
| Revenue | $000s | 295,219 | 321,196 | 378,619 |
| Cost of sales | $000s | 228,706 | 251,520 | 293,351 |
| Earnings (loss) before tax | $000s | 17,430 | (14,287) | 88,861 |
| Earnings (loss) | $000s | 5,457 | (17,441) | 63,815 |
| Basic and diluted earnings (loss) per share | $/share | 0.02 | (0.07) | 0.24 |
| Adjusted earnings per share1 | $/share | 0.00 | 0.01 | 0.02 |
| Operating cash flow before change in non- | $ millions | 85.6 | 109.1 | 77.6 |
cash working capital Adjusted EBITDA1 $ millions 101.9 124.7 110.2 1 Adjusted earnings (loss) per share and adjusted EBITDA are non-IFRS financial performance measures with no standardized definition under IFRS. For further information, please see the “Non-IFRS Financial Performance Measures” section of this news release.
Consolidated Production and Cost Performance Three Months Ended Mar. 31, 2023 Dec. 31, 2022 Mar. 31, 2022 Contained metal in concentrate and doré produced1
| Copper | tonnes | 22,562 | 29,305 | 24,702 |
| Gold | ounces | 47,240 | 53,920 | 53,956 |
| Silver | ounces | 702,809 | 795,015 | 784,357 |
| Zinc | tonnes | 9,846 | 6,326 | 22,252 |
| Molybdenum | tonnes | 289 | 344 | 207 |
Payable metal sold
| Copper | tonnes | 18,541 | 25,415 | 20,609 |
| Gold2 | ounces | 49,720 | 47,256 | 48,343 |
| Silver2 | ounces | 541,884 | 559,306 | 864,591 |
| Zinc3 | tonnes | 5,628 | 8,230 | 17,306 |
| Molybdenum | tonnes | 254 | 421 | 213 |
Consolidated cash cost per pound of copper4
| Cash cost | $/lb | 0.85 | 1.08 | 1.11 |
| Sustaining cash cost | $/lb | 1.83 | 2.21 | 2.29 |
| All-in sustaining cash cost | $/lb | 2.07 | 2.41 | 2.54 |
1 Metal reported in concentrate is prior to deductions associated with smelter contract terms.
2 Includes total payable gold and silver in concentrate and doré sold.
3 For the three months ended March 31, 2023 and December 31, 2022 this metric includes payable zinc in concentrate sold. For the three months ended March 31, 2022, this metric also includes payable refined zinc metal sold.
4 Cash cost, sustaining cash cost and all-in sustaining cash cost per pound of copper produced, net of by-product credits, are non- IFRS financial performance measures with no standardized definition under IFRS. For further information, please see the “Non-IFRS Financial Reporting Measures” section of this news release.
Peru Operations Review
Peru Operations Three Months Ended
| Mar. 31, 2023 | Dec. 31, 2022 | Mar. 31, 2022 | ||
|---|---|---|---|---|
| Constancia ore mined1 | tonnes | 3,403,181 | 5,614,918 | 6,908,151 |
| Copper | % | 0.34 | 0.40 | 0.32 |
| Gold | g/tonne | 0.04 | 0.04 | 0.04 |
| Silver | g/tonne | 2.52 | 3.48 | 3.22 |
| Molybdenum | % | 0.01 | 0.01 | 0.01 |
| Pampacancha ore mined | tonnes | 897,295 | 3,771,629 | 847,306 |
| Copper | % | 0.49 | 0.37 | 0.27 |
| Gold | g/tonne | 0.52 | 0.29 | 0.43 |
| Silver | g/tonne | 5.12 | 3.84 | 4.06 |
| Molybdenum | % | 0.01 | 0.01 | 0.01 |
| Total ore mined | tonnes | 4,300,476 | 9,386,547 | 7,755,457 |
| Strip ratio2 | 1.84 | 0.97 | 1.10 | |
| Ore milled | tonnes | 7,663,728 | 7,795,735 | 7,213,833 |
| Copper | % | 0.33 | 0.41 | 0.31 |
| Gold | g/tonne | 0.08 | 0.12 | 0.08 |
| Silver | g/tonne | 3.69 | 3.93 | 3.26 |
| Molybdenum | % | 0.01 | 0.01 | 0.01 |
| Copper recovery | % | 81.7 | 85.1 | 85.3 |
| Gold recovery | % | 56.8 | 69.6 | 59.8 |
| Silver recovery | % | 60.7 | 66.5 | 66.9 |
| Molybdenum recovery | % | 34.8 | 37.7 | 21.1 |
Contained metal in concentrate
| Copper | tonnes | 20,517 | 27,047 | 19,166 |
| Gold | ounces | 11,206 | 20,860 | 10,789 |
| Silver | ounces | 552,167 | 655,257 | 505,568 |
| Molybdenum | tonnes | 289 | 344 | 207 |
Payable metal sold
| Copper | tonnes | 16,316 | 23,789 | 16,825 |
| Gold | ounces | 11,781 | 15,116 | 14,452 |
| Silver | ounces | 392,207 | 411,129 | 636,133 |
| Molybdenum | tonnes | 254 | 421 | 213 |
| Combined unit operating cost3,4,5 | $/tonne | 11.47 | 13.64 | 12.37 |
| Cash cost5 | $/lb | 1.36 | 1.34 | 1.54 |
| Sustaining cash cost5 | $/lb | 2.12 | 2.09 | 2.27 |
1 Reported tonnes and grade for ore mined are estimates based on mine plan assumptions and may not reconcile fully to ore milled. 2 Strip ratio is calculated as waste mined divided by ore mined.
3 Reflects combined mine, mill and general and administrative (“G&A”) costs per tonne of ore milled. Reflects the deduction of expected capitalized stripping costs.
4 Excludes approximately $0.7 million, or $0.09 per tonne, of COVID-related costs during the three months ended December 31, 2022 and $2.3 million, or $0.32 per tonne, during the three months ended March 31, 2022.
5 Combined unit operating cost, cash cost and sustaining cash cost per pound of copper produced, net of by-product credits, are non-IFRS financial performance measures with no standardized definition under IFRS. For further information, please see the “Non- IFRS Financial Performance Measures” section of this news release.
During the first quarter of 2023, the Constancia operations produced 20,517 tonnes of copper, 11,206 ounces of gold, 552,167 ounces of silver and 289 tonnes of molybdenum. Production levels were lower than the fourth quarter of 2022 due to lower grades from the processing of stockpiles, as discussed below. Due to this and higher stripping activities planned in the Pampacancha pit in the second quarter of 2023, Hudbay continues to expect 2023 Peru production to be higher in the second half of 2023 and the company is on track to achieve full year 2023 Peru production guidance.
Ore mined from Pampacancha in the first quarter of 2023 was 897,295 tonnes at record high grades of 0.49% copper and 0.52 grams per tonne gold. Despite this achievement, total ore mined in the first quarter of 2023 was lower than the fourth quarter of 2022 mainly due to the processing of stockpiles in order to conserve fuel during protests and civil unrest in Peru that occurred in early 2023. Since mid-February, transportation of Constancia’s concentrate and critical supplies has returned to normal.
Full mining activities resumed in the Pampacancha pit in February and the period of higher stripping from March to June is progressing well with mining of higher-grade ore now expected to resume late in the second quarter of 2023, slightly ahead of the original schedule.
The logistical risk mitigation plans implemented during the first quarter, together with strong continued support from the local communities, enabled Hudbay’s plant to continue to operate uninterrupted at full capacity supplemented with approximately 3.9 million tonnes of stockpiled ore. Ore milled during the first quarter of 2023 was relatively unchanged from the fourth quarter of 2022. Milled grades decreased in the first quarter compared to the fourth quarter due to the processing of lower-grade stockpiles as discussed above. Recoveries of all metals during the first quarter were lower than the fourth quarter due to higher levels of impurities in stockpile ore. Hudbay expects to continue to process a significant amount of stockpiles during the second quarter of 2023 while the company completes the planned threemonth stripping period in the Pampacancha pit, in line with the mine plan.
Combined mine, mill and G&A unit operating costsi in the first quarter of 2023 were 16% lower than the fourth quarter of 2022 primarily due to lower mining costs.
Peru’s cash cost per pound of copper produced, net of by-product creditsi, in the first quarter of 2023 was $1.36 and relatively unchanged from the fourth quarter of 2022. This cost measure remains slightly above the upper end of the 2023 guidance range. However, cash cost per pound of copper produced, net of by-product credits, is expected to decline and full year cash costs are expected to remain within the 2023 guidance range with higher expected copper production and contributions from precious metal by-product credits later this year.
Peru’s sustaining cash cost per pound of copper produced, net of by-product creditsi, in the first quarter of 2023 was $2.12 and relatively in line with the fourth quarter of 2022 as lower mining costs and capitalized exploration were offset by lower copper production.
Manitoba Operations Review
Manitoba Operations Three Months Ended
| Mar. 31, 2023 | Dec. 31, 2022 | Mar. 31, 20221 | ||
|---|---|---|---|---|
| Lalor ore mined | tonnes | 373,599 | 369,453 | 386,752 |
| Gold | g/tonne | 3.96 | 4.00 | 3.76 |
| Copper | % | 0.57 | 0.73 | 0.80 |
| Zinc | % | 3.32 | 2.17 | 4.06 |
| Silver | g/tonne | 18.24 | 19.37 | 22.94 |
New Britannia Mill:
| Ore milled | tonnes | 143,042 | 141,142 | 124,176 |
| Gold | g/tonne | 6.05 | 6.11 | 5.63 |
| Copper | % | 0.61 | 0.91 | 0.86 |
| Zinc | % | 0.76 | 0.67 | 0.85 |
| Silver | g/tonne | 22.39 | 22.09 | 22.03 |
| Copper recovery - concentrate | % | 91.7 | 89.3 | 89.0 |
| Gold recovery - concentrate | % | 62.0 | 56.6 | 61.4 |
| Silver recovery - concentrate | % | 61.9 | 55.4 | 63.4 |
Stall Concentrator:
| Ore milled | tonnes | 242,619 | 204,350 | 273,125 |
| Gold | g/tonne | 2.78 | 2.50 | 3.07 |
| Copper | % | 0.59 | 0.61 | 0.81 |
| Zinc | % | 4.81 | 3.43 | 5.78 |
| Silver | g/tonne | 17.14 | 19.24 | 23.68 |
| Copper recovery | % | 87.0 | 89.0 | 86.7 |
| Zinc recovery | % | 84.4 | 90.1 | 85.7 |
| Gold recovery | % | 61.9 | 62.4 | 55.8 |
| Silver recovery | % | 56.3 | 56.6 | 58.6 |
Total contained metal in concentrate and doré2
| Gold | ounces | 36,034 | 33,060 | 43,167 |
| Copper | tonnes | 2,045 | 2,258 | 5,536 |
| Zinc | tonnes | 9,846 | 6,326 | 22,252 |
| Silver | ounces | 150,642 | 139,758 | 278,789 |
Total payable metal sold
| Gold3 | ounces | 37,939 | 32,140 | 33,891 |
| Copper | tonnes | 2,225 | 1,626 | 3,784 |
| Zinc | tonnes | 5,628 | 8,230 | 17,306 |
| Silver3 | ounces | 149,677 | 148,177 | 228,458 |
| Combined unit operating cost4,5 | C$/tonne | 216 | 241 | 176 |
| Gold cash cost5 | $/oz | 938 | 922 | 416 |
| Gold sustaining cash cost5 | $/oz | 1,336 | 1,795 | 1,187 |
1 The 777 mine and Flin Flon concentrator information for March 31, 2022 is not disclosed in the table above. The operations were closed in June 2022. The relevant comparative information can be found in the Summary of Results section in the Management’s Discussion and Analysis for the third quarter of 2022. Total contained metal in concentrate and doré, total payable metal sold, unit cost and cash costs for March 31, 2022 include the impact of the Flin Flon operations.
2 Doré includes slag and carbon fines in the first quarter of 2023.
3 Includes total payable precious metals in concentrate and doré sold.
4 Reflects combined mine, mill and G&A costs per tonne of ore milled.
5 Combined unit operating cost, cash cost and sustaining cash cost per ounce of gold produced, net of by-product credits, are non- IFRS financial performance measures with no standardized definition under IFRS. For further information, please see the “Non-IFRS Financial Performance Measures” section of this news release.
During the first quarter of 2023, the Manitoba operations produced 36,034 ounces of gold, 9,846 tonnes of zinc, 2,045 tonnes of copper and 150,642 ounces of silver. Production of gold, zinc and silver were higher than the fourth quarter of 2022 primarily due to higher throughput and higher grades. Copper production was lower than the fourth quarter due to lower head grades. With the completion of a number of key initiatives aimed to support higher production levels at Lalor, improved metal recoveries at the mills and a prioritization of mining higher gold grade zones at Lalor throughout the year, as planned, full year Manitoba production of all metals remains on track to achieve guidance ranges for 2023.
The Manitoba team continues to advance a number of key initiatives to support higher production levels and improved metal recoveries at Hudbay’s Snow Lake operations and have made significant progress in building longhole inventory, optimizing the development drift size and focusing on shaft availability improvements to enable more ore to be hoisted to surface while minimizing inefficient trucking of ore via the ramp. The first phase of the Stall mill recovery project, consisting of new cyclone packs, state-of-the-art Jameson Cells on the copper and zinc circuits and process control improvements, is on track for commissioning in May with ramp-up to higher metal recoveries expected by mid-2023.
Ore mined at Lalor was slightly higher than the fourth quarter of 2022 despite being impacted by stope muck fragmentation issues that created delays at the rock breakers and low load-haul-dump equipment availability in March. The company implemented changes to improve stope fragmentation and load-haul-dump equipment availability, which together with the many production optimization initiatives underway at Lalor, resulted in Lalor achieving higher production levels of 4,800 tonnes per day late in the first quarter and throughout April.
The Stall mill processed 19% more ore in the first quarter compared to the fourth quarter of 2022, in line with the base metal ore production from Lalor. Stall recoveries were consistent with the metallurgical model for the head grades delivered. The New Britannia mill continued to achieve consistent production above its nameplate capacity in the first quarter of 2023, averaging approximately 1,590 tonnes per day. Hudbay continues to advance improvement initiatives at New Britannia with a focus on reducing reagent and grinding media consumption. These initiatives entail minimal capital outlays while further improving overall metal recoveries and copper concentrate grades.
Combined mine, mill and G&A unit operating costsi in the first quarter decreased by 10% compared to the fourth quarter of 2022, reflecting higher throughput as a result of the production efficiency initiatives underway.
Cash cost per ounce of gold produced, net of by-product creditsi, in the first quarter was $938, slightly higher than the fourth quarter of 2022 primarily due to lower by-product credits and higher G&A, partially offset by higher gold production. Full year cash costs are expected to decline to be within the 2023 guidance range with increasing gold production throughout the year from higher grades and throughput at Lalor and the completion of the Stall recovery project in the second quarter, as planned.
Sustaining cash cost per ounce of gold produced, net of by-product creditsi, in the first quarter was $1,336, lower than the fourth quarter of 2022 primarily due to lower sustaining capital expenditures.
Combination with Copper Mountain to Create a Premier Americas-Focused Copper Producer
On April 13, 2023, Hudbay entered into the Arrangement Agreement to acquire all of the issued and outstanding common shares of Copper Mountain (the "Transaction").
Upon completion, the Transaction will create a premier Americas-focused copper mining company with annual copper production of 150,000 tonnes, based on 2023 production guidance, from three long-life mines and a world-class pipeline of organic copper growth projects. The combined company will represent the third largest copper producer in Canada based on 2023 estimated copper production, and its complementary assets are expected to unlock $30 million in annual operating efficiencies and corporate synergies over the course of three years. The combined company will be wellpositioned to deliver sustainable cash flows with compelling organic growth and the opportunity for a valuation re-rate as a larger, more diversified copper producer with enhanced liquidity. The Transaction meets Hudbay’s stringent financial and strategic acquisition criteria for pursing value accretive opportunities and the incremental diversified cash flows will further strengthen the company’s balance sheet and support its deleveraging initiatives.
Under the terms of the Transaction, Copper Mountain shareholders will receive 0.381 of a Hudbay common share for each Copper Mountain common share held, representing approximately C$2.67 per Copper Mountain common share and a US$439 million equity value based on Hudbay’s closing share price on April 12, 2023. The Transaction will be implemented by way of a court approved plan of arrangement under the Business Corporations Act (British Columbia). In addition to court approval, the Transaction is subject to customary closing conditions, including approval by Hudbay and Copper Mountain shareholders and approval under the Competition Act (Canada). The Transaction is expected to close by late June 2023.
100% Renewable Power Supply at Constancia
During the first quarter of 2023, Hudbay signed a new 10-year power purchase agreement with ENGIE Energía Perú for access to a 100% renewable energy supply to its Constancia operations in Peru. The agreement will come into effect in January 2026 following the expiry of Constancia's existing power supply agreement. The agreement provides several improvements over the existing power supply contract, including improved flexibility in power supply levels, lower contracted costs and guaranteed supply to meet fluctuating demand requirements and no penalties for reduced usage. Total Scope 1 and Scope 2 greenhouse gas ("GHG") emissions company-wide at Hudbay’s current operations are expected to decline by 40% during the life of the contract, positioning the company well to achieve its 2030 climate change target of a 50% reduction in Scope 1 and Scope 2 GHG emissions.
Copper World Positive Permitting Update; Pre-Feasibility Study Well-Advanced
In March 2023, Hudbay received confirmation from the ACOE that its previous surrender of the Section 404 Clean Water Act permit for the former Rosemont project (“404 Permit”) was formally accepted and revoked as requested. The ACOE also reaffirmed the validity of the March 2021 approved jurisdictional determinations whereby the ACOE determined there are no waters of the U.S. in the area submitted for analysis, which is consistent with internal studies that also contemplate the full Copper World area.
Hudbay surrendered the 404 Permit to the ACOE in April 2022 as there is no evidence of jurisdictional waters of the U.S. on the former Rosemont project site. In May 2022, Judge Soto from the U.S. District Court for the District of Arizona issued a favourable ruling that affirmed Hudbay’s surrender of the 404 Permit was effective and that the new Copper World project is not connected to the previous federal permitting process.
Hudbay commenced the permitting process for Copper World with the approval of a Mined Land Reclamation Plan in May 2022. This approval by the Arizona State Mine Inspector was challenged in state court but the challenge was dismissed in May 2023 as having no basis.
In late 2022, Hudbay submitted the state-level applications for an Aquifer Protection Permit and an Air Quality Permit to the Arizona Department of Environmental Quality. The company continues to expect to receive these two outstanding state permits in 2023.
In May 2023, the Arizona Corporation Commission approved an amendment to the Certificate of Environmental Compatibility (“CEC”) authorizing the electric transmission line to site. The CEC was granted for the Rosemont project in 2012 and the amendment removed the requirements for federal permits so that the CEC can be used to construct the transmission line for Copper World.
Clearing and grading work to prepare for the development of Copper World continues at site, including the construction of roads and other facilities. Phase I of Copper World reflects an operation with processing infrastructure on Hudbay’s private lands and mining occurring on patented mining claims, requiring only state and local permits. Pre-feasibility activities for Phase I are well-advanced and a pre-feasibility study is expected to be released in mid-2023. Upon receipt of the state level permits, Hudbay expects to evaluate a bulk sampling program at Copper World to continue to de-risk the project by testing grade continuity, variable cut-off effectiveness and metallurgical strategies. The company also intends to initiate a minority joint venture partner process following receipt of permits, which will allow the potential joint venture partner to participate in the funding of definitive feasibility study activities in 2024 as well as in the final project design for Copper World.
Continued Focus on Free Cash Flow Generation
Hudbay was successful in ensuring steady operation of the Constancia mill throughout the Peru transportation and supply chain interruptions experienced earlier in the quarter. This was achieved through effective logistical risk mitigation plans and with the continued strong support from the local communities. Despite building up excess concentrate inventories at site in February, the company successfully reduced concentrate inventories throughout March, well ahead of schedule, which improved sales volumes and cash flow during the quarter.
With a focus on generating positive cash flow and strong returns on invested capital in 2023, Hudbay is committed to deleveraging and disciplined capital allocation. In an effort to receive full exposure to current strong gold prices, the company amended its gold forward sale and prepay agreements during the first quarter of 2023 to defer eight months of deliveries starting with February 2023. Deliveries of the outstanding 37,500 ounces of gold will resume in fixed monthly amounts starting October 2023 and continue until August 2024. The deferral of gold deliveries is expected to increase the company’s cash position in 2023 by approximately $53 million at prevailing gold prices as part of its continued focus on reducing net debt.
As an additional prudent measure to ensure free cash flow generation and continued financial discipline in 2023, Hudbay successfully extended its existing quotational period hedging program in the first quarter for approximately 8,000 tonnes of contained copper in the previously unsold concentrate inventory in Peru to lock in prevailing copper prices. In addition, in April 2023, the company entered into a zero-cost collar program for approximately 10% of copper production expected in the second half of 2023. The program is for 1,200 tonnes of copper per month for six months starting in July 2023 and establishes a floor price of $3.95 per pound while providing upside to increases in the copper price up to a maximum of $4.28 per pound.
The company is on track to deliver its discretionary spending reduction targets by reducing growth capital and exploration spending in Arizona, Manitoba and Peru in 2023 compared to 2022. Total growth capital expenditures in the first quarter of 2023 were approximately $16.3 million, a 22% reduction from the fourth quarter of 2022. Total exploration expenses for 2023 are on track to be in line with annual guidance of $20 million, a 42% decrease from 2022 levels.
Annual Reserve and Resource Update
Hudbay provided its annual mineral reserve and resource update on March 30, 2023. Current mineral reserve estimates at Constancia total 492 million tonnes at 0.30% copper with approximately 1.5 million tonnes of contained copper. The expected mine life of Constancia has been maintained and extends until 2038. The copper contained in measured and indicated mineral resources has increased in 2023 due to success in converting inferred mineral resources.
Current mineral reserve estimates in Snow Lake total 18 million tonnes with approximately 2.1 million ounces in contained gold, and the expected mine life of the Snow Lake operations has been maintained and extends until 2038. With the Snow Lake operations achieving higher production levels after the full ramp-up of the New Britannia mill in 2022 and the transition of the Flin Flon workforce and equipment to the Lalor mine, exploration activities are now prioritizing step-out drilling to identify opportunities for meaningful additions to the mineral resource base to support future growth. Total gold contained in inferred resources was unchanged at 1.7 million ounces, which provides the potential to maintain strong production levels beyond 2030 and further extend the mine life in Snow Lake.
The company released its updated three-year production guidance with its annual mineral reserve and resource update. Annual production at the Constancia operations is expected to average approximately 110,000 tonnes of copper and 87,000 ounces of gold over the next three years, representing a 23% and 49% increase, respectively, from 2022 levels. Annual gold production from Snow Lake is expected to average more than 190,000 ounces over the next three years, which represents a further increase of 30% from 2022 levels.
Exploration Update
Constancia and Pampacancha In-Mine Exploration
Hudbay is completing a limited drill program and technical evaluations at the Constancia deposit to confirm the economic viability of adding an additional mining phase to the current mine plan that would convert a portion of the mineral resources to mineral reserves. The company is also completing a drill program at the Pampacancha deposit to test mineral reserve extension potential. The results from these drill programs and technical and economic evaluations are expected to be incorporated in the next annual mineral reserve and resource update.
Maria Reyna and Caballito Exploration
Hudbay controls a large, contiguous block of mineral rights with the potential to host satellite mineral deposits in close proximity to the Constancia processing facility, including the past producing Caballito property and the highly prospective Maria Reyna property. The company commenced early exploration activities at Maria Reyna and Caballito after completing a surface rights exploration agreement with the community of Uchucarcco in August 2022. Surface investigation activities together with baseline environmental and archaeological activities necessary to support drill permit applications have been completed. Drill permit applications are expected to be submitted in the coming months. Surface mapping and geochemical sampling confirm that both Caballito and Maria Reyna host sulfide and oxide rich copper mineralization in skarns, hydrothermal breccias and large porphyry intrusive bodies.
Lalor Near-Mine Exploration
Hudbay commenced a winter drill program in January 2023 with four drill rigs testing the down-plunge gold and copper extensions of the Lalor deposit, in the first step-out drilling in the deeper zones at Lalor since the initial discovery of the gold and copper-gold zones in 2009 and 2010. This initial campaign consisted of eight widely spaced drill holes over a distance of two kilometres. Seven of the drill holes reached their planned minimum depth of 1,500 metres prior to the spring thaw that necessitated an early end of the program. All these drill holes intersected the zone of strong alteration known to host the Lalor mineralization and have shown many occurrences of disseminated copper sulfides indicating the potential close proximity of one or more higher grade copper-gold feeder zones similar to Lens 27 currently in production at Lalor. Furthermore, three of the holes have shown better mineral endowment with several intercepts of a minimum of four metres of copper mineralization. Although assay results are pending, these initial results are very encouraging indications that the rocks hosting the rich Cu-Au mineralization at Lalor continue down plunge. Geophysical borehole surveying will be completed on all drill holes and will help refine the targets for the next phase of drilling to be conducted in early 2024.
One additional drill rig is testing a geophysical anomaly located within 400 metres of existing Lalor underground infrastructure. Four drill holes were completed during the winter drill program and assay results from base metal and copper-gold mineralized intercepts identified from core logging are pending.
Flin Flon Tailings Reprocessing Opportunity
In 2021, Hudbay identified the opportunity to reprocess Flin Flon tailings where in excess of 100 million tonnes of tailings have been deposited for over 90 years. The company completed confirmatory drilling in 2022 which covered about two-thirds of the facility. The results indicated higher zinc, copper and silver grades than predicted from historical mill records while confirming the historical gold grade. Hudbay is completing metallurgical test work and evaluating metallurgical technologies to assess the processing viability of the Flin Flon tailings.
Mason Exploration
The 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. Hudbay completed a PEA in 2021 which demonstrated robust project economics from a 27-year mine life operation. There is opportunity to further enhance the project economics through exploration for higher grade satellite deposits on the company’s prospective land package near Mason, including Mason Valley. The Mason Valley property hosts several historical underground copper mines that were in production in the early 1900s. Much of the Mason Valley property is located on Hudbay’s wholly owned private lands within 15 kilometres of the planned processing infrastructure for the Mason project and contains highly prospective skarn mineralization. A conductivity-resistivity IP ground survey conducted in the fourth quarter of 2022 was successful in identifying the mineralization associated with the historical mines and confirmed the potential for both high-grade skarn targets as well as a large porphyry target below the historical mines. These results, in combination with a re-interpretation of geological data from past operating mines and previous exploration data, will be used to finalize a drill plan to test these targets in late 2023.
Senior Management Team Appointments
In March 2023, Hudbay promoted Javier Del Rio to Senior Vice President, South America and USA and Olivier Tavchandjian to Senior Vice President, Exploration and Technical Services. In March 2023, Hudbay appointed Warren Flannery as Vice President, Business Planning and Reclamation.