Hudbay Minerals Inc

NYSE:HBM

Earnings Call Transcript 2019-Q1

[Operator]

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Hudbay Minerals, Inc. Q1 2019 Conference call. [Operator Instructions] I would like to remind everyone that this conference call is being recorded today, May 7, 2019, 8:00 AM Eastern Time.I will now turn the conference over to Ms. Candace Brule. Please go ahead.

[Candace Brûlé, Director of Investor Relations]

Thank you, operator. Good morning, and welcome to Hudbay's 2019 first quarter results conference call.Hudbay's financial results were issued yesterday and are available on our website at www.hudbay.com. A corresponding PowerPoint presentation is also available and we encourage you to refer to it during this call.Our presenter today is Alan Hair, Hudbay's President and Chief Executive Officer. Accompanying Alan for the Q&A portion of the call will be David Bryson, our Senior Vice President and Chief Financial Officer, and Cashel Meagher, our Senior Vice President and Chief Operating 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, the amounts discussed on today's call are in U.S. dollars, unless otherwise noted.And now I'll pass the call over to Alan Hair. Alan?

[Alan T. C. Hair, Former President, CEO & Director]

Thanks, Candace. Good morning, everyone.I'd like to begin today's call by welcoming the incoming members of our Board. We are pleased to have the proxy contest behind us and appreciate the strong support we received from our shareholders. We look forward to continuing to execute our growth strategy to create long-term value for shareholders.The presentation I will be delivering on today's call will start with an overview of our corporate achievements so far in 2019 and highlights from our financial results this quarter. I will then review the performance of each operating business unit during the quarter, along with Rosemont developments and the regional growth potential in each of our business units. I'll spend a few minutes reiterating the elements of our growth strategy and will conclude the presentation with a summary of our near-term and medium-term catalysts.2019 has been a busy year for Hudbay so far and I am very proud of our team's execution on delivering several growth initiatives at both the Manitoba and Arizona business units. In February, we released the new mine plan for our Lalor mine in Snow Lake, which will double the annual gold production at industry-low sustaining cash costs and significantly increase the reserve and resource estimates at Lalor.The new Lalor mine plan is the culmination of extensive work completed by the team over the last 3 years on the gold zone, including over 100,000 meters of drilling, construction of bulk sampling tower, underground development and test mining of the gold zone and the evaluation of several different scenarios to validate that this new mine plan was the most economic and generates the highest shareholder value.The Lalor mine also achieved its ramp-up to 4,500 tonnes per day in February, resulting in record mine production during the first quarter. The Stall concentrator in Snow Lake achieved record quarterly production as a result of several operating and maintenance improvements. In February, we discovered a new deposits in Snow Lake called the 1901 Zone, which is located approximately 1,000 meters off the existing underground ramp, which is to north of Lalor. We recently extended the 777 mine life and expect the life of the Flin Flon processing facilities to 2022.We've also achieved several milestones at our Rosemont project in Arizona this year, including receiving the Section 404 water permit from the Army Corps of Engineers on March 8. This was the final Federal permit needed for Rosemont and completed a lengthy 12-year permitting process. I would like to congratulate our team in Arizona who've worked hard in this process for several years.Shortly after the receipt of the 404 permit, we announced an agreement to purchase the Korean joint venture partner's minority interests, which closed in late April, providing Hudbay with 100% ownership of Rosemont today. We also received the mine plan of operations from the U.S. Forest Service in March and subsequently announced the sanctioning of $122 million early works program at Rosemont for 2019, with a focus on developing the offsite infrastructure.In the first quarter of 2019, we continued to maximize the potential of our Peru and Manitoba operating assets with record copper recoveries at Constancia and record throughputs at both the Lalor mine and the Stall concentrator. We produced 58,000 copper equivalent tonnes in the quarter, an increase from last quarter due to higher copper and zinc production, partially offset by lower precious metals production. We are proud of the operating performance in both Peru and Manitoba, continuing the trend of strong -- of recent strong production quarters.Cash cost of $1.11 per pound of copper in the quarter were higher than the previous quarter, primarily due to lower zinc byproduct credits from lower sales volumes. All-in sustaining cash cost of $1.81 per pound of copper were 5% higher than last quarter due to the same reasons, and higher general and admin expenses were due primarily to increased share-based expense from the higher share price.Earnings and earnings per share in the first quarter were affected primarily by 2 factors. The first was non-cash deferred revenue adjustments from increased reserves and resources, which affected earnings per share by $0.06. The second was an accrual for a Pampacancha delivery obligation of approximately $0.03 per share, and I'll explain in more detail shortly.We ended the year with $486 million in cash and the net debt position of $491 million, positioning us well to fund our future growth initiatives. First quarter results are on track to meet our production cost and capital spending guidance in 2019.Now let's turn to our South American business unit, our Constancia mine, where it continues to perform well with strong mill throughput, record copper recoveries and lower unit and cash cost in the first quarter of 2019. We continue to be pleased with the mill's performance, averaging approximately 89,000 tonnes per day during the first quarter. The mill achieved record copper recoveries of over 86% in the quarter.While recoveries will vary from quarter to quarter depending on the complexity of the ore feed, we continue to see the results from the recovery improvement initiatives that we are implementing. These initiatives are part of key operational strategies that include continuous improvement efforts targeting flotation operating efficiencies and the integration of an automated advanced process control system in the grinding and bulk flotation circuits.Slide 7 shows the results of these continuous improvement efforts with the improving trend in copper recoveries over the last several quarters. During the first quarter, Constancia produced 32,000 tonnes of copper, 14,000 ounces of precious metals and 304 tonnes of moly. Combined unit costs were $8.87 per tonne in the quarter, lower than the last quarter, in line with the guidance range for 2019.When compared to other open pit copper sulfide mines in South America, Constancia has the lowest operating cost per tonne, which is even more compelling considering several of the other mines in that comparable group are larger and benefit from economies of scale. Constancia's cash costs and sustaining cash costs were 10% and 16% lower, respectively, than the fourth quarter primarily as a result of lower unit costs and higher copper production. During the second quarter of 2019, a 6-day maintenance shutdown of the Constancia mill was planned. In addition to regular semi-annual maintenance work, we plan to install new equipment in support of efforts to further optimize recoveries at Constancia.Combined unit costs in the second quarter of 2019 are expected to reflect correspondingly lower ore throughput and higher maintenance costs. In addition, in line with the mine plan, mine copper grades are expected to be lower than the annual average during the second quarter of 2019, which is expected to affect contained metal production and cash costs compared to other quarters in 2019. The maintenance shutdown and the variations in copper grade are consistent with the full year plan to Constancia and we continue to expect production and cost guidance we've made for the full year 2019.We expect to continue to add value to Constancia through bringing the Pampacancha satellite deposit into production, which will extend the current high-grade profile. We are pleased with the progress of our recent discussions with the local community of Chilloroya to acquire the surface rights at Pampacancha. We continue to take a disciplined, measured and patient approach to these negotiations as this has proven to be an effective way of engaging in previous instances and is consistent with our proven long-term strategy for securing social license and developing our business in Peru. The southern Peru copper mining corridor has seen heightened political activity over the past several months. We are pleased that to date, these activities have not impacted operations at our Constancia mine.During April 2019, the Chilloroya community was added to a list of communities designated as indigenous by the Ministry of Culture for the purposes of Peru's Consulta Previa law, which implements Peru's commitment to ILO Convention 169 consultation requirements. As a result, once an agreement is reached with Chilloroya, the Consulta Previa law requires additional consultation between the Peruvian government and the local community before work could begin. Based on other recent consultation processes, we would expect additional government consultation period to take between approximately 3 to 6 months after we reach an agreement with Chilloroya. Given this change, although Pampacancha development activities may still be able to commence in 2019, we expect the ore production at Pampacancha will not begin until 2020 and have recognized an obligation to deliver additional precious metal credits to Wheaton Precious Metals in accordance with the streaming agreement we have in place.Turning to the rest of the Constancia region. We are excited to test the potential of other nearby satellite targets we acquired last year, including the Maria Reyna, Caballito and Kusiorcco targets, which could provide higher grade feeds to the Constancia mill after the Pampacancha ore body has been mined. Geophysical characteristics indicate the satellite properties of the potential to be even more prospective than the Constancia and Pampacancha ore bodies. We have commenced permitting, community relations and technical activities required to access and conduct drilling activities in these properties and have been successful in reaching an agreement with plans to drill one of the properties later in 2019.Moving on to our Manitoba operations. Total ore mined was 19% higher in the first quarter compared to the fourth quarter of last year. Higher production volumes at 777 were attributable to improved availability of the scoop and truck fleet and the focus on increasing the key performance indicators in the drilling, blasting and backfilling processes. Higher production volumes at Lalor were due to having more mining fronts available and improvements to the stope cycle time. As a result, total mining costs per tonne decreased by 10% from last quarter. Total ore milled at both of our concentrators was higher quarter-over-quarter. The Stall concentrator continues to perform well and achieved a record throughput of over 3,500 tonnes per day in the first quarter.As a result of ongoing operational and maintenance improvements, total concentrator unit operating costs improved by 16% this quarter compared to the fourth quarter last year. Despite lower mining costs and milling unit costs in the first quarter, Manitoba combined unit operating costs per tonne milled was slightly higher as a result of transportation delays when trucking excess ore from Lalor to Flin Flon for processing, causing mined ore to exceed milled ore by 9% in the quarter. The related mining costs are included in the numerator of the combined unit costs in the first quarter, while the excess ore inventory is expected to be drawn down in the second quarter. Combined unit costs are expected to be within the guidance target for the full year 2019.Cash costs and sustained cash costs per pound of copper produced in the first quarter were both higher than the fourth quarter primarily as a result of the timing of zinc and precious metal sales volumes causing lower byproduct revenue. The zinc cash cost was also affected by increased capital development expenditures at Lalor.We've been highly active in the Manitoba region over the past several years, with a focus on leveraging our exploration expertise, our existing process infrastructure and several inexpensive acquisitions to develop a compelling strategy to maximize the value of Lalor and the nearby deposits.As mentioned earlier, we are very pleased to release the new Lalor mine plan in February. Lalor's annual gold production is expected to more than double from current levels once the New Britannia mill is refurbished by 2022, with average annual production of approximately 140,000 ounces during the first 5 years at a sustaining cash cost net of byproduct credits of $450 per ounce. That will make Lalor one of the lowest cost gold mines in Canada. The new Lalor reserve estimate supports a 10-year mine life, but there remains significant opportunity to extend the mine life beyond 10 years and potentially further increase annual production to utilize the full capacity of both the Stall and New Britannia mills in Snow Lake.The first area of opportunity is within the current Lalor resource estimate. There are currently almost 6 million tonnes in Lalor's inferred resource category. Hudbay is implementing a more stringent approach to resource reporting for underground deposits. With this approach, the potential for economic extraction of the mineral resource estimates at Lalor are reported within the constraint of a stope optimization envelope process, similar in concept to a pit shell for an open pit deposit.This excludes from the resource estimate small individual resource blocks that may meet an economic cutoff criteria on an individual basis but could not be aggregated into mineable shapes. As a result, we expect a high conversion ratio from resources into reserves than would otherwise been the case from the previous Lalor non-resource estimates.The second area of opportunity to extend mine life in Snow Lake is through the deposits with current known resources within trucking distance of Stall and New Britannia. These include the WIM, PEN II and New Britannia mine deposits. As shown on Slide 12, non-mineral resources at these nearby satellite deposits include over 4 million tonnes of indicated resource estimates and over 500 million tonnes of inferred resource estimates.The WIM deposit was acquired for approximately $500,000 and is a copper-gold deposit that starts from surface and is located approximately 15 kilometers by road from New Britannia. Hudbay is developing a mine plan and conducting metallurgical testing on the deposits, with the objective to upgrade the resource to a reserve with the 2019 annually year-end reserve and resource update. WIM has the potential to be developed via an underground ramp and could feed the New Britannia mill after the richest portions of the Lalor reserves and resources have been depleted.New Britannia is a former goal producing mine, with significant mineral resources, which remain accessible in 3 zones with some investment in the existing mining infrastructure. We continue to advance studies to determine the technical and economic viability of the existing mineral resources and the potential to process this material at the New Britannia mill.PEN II is a low tonnage and high-grade zinc deposit that starts from surface and is located within trucking distance from the Stall mill. PEN II could constitute a supplemental source of feed for this mill.A third area of opportunity for mine life extension is through Lalor in-mine exploration. We continue to advance exploration activities at Lalor mine where drilling has confirmed the extension of known high grade lenses. Lalor in-mine exploration drilling will continue throughout the year and is expected to be incorporated in the annual reserve and resource estimate for the year ended 2019. We plan to drill Lens 17 from underground during 2019. To date, Lens 17 has only been explored from surface holes and through a 2 phase underground drilling approach this year will test both the upper and lower portions of this analog to the copper-rich at Lens 27.As shown in the diagram on the right of Slide 14, recent infill drilling of Lens 25 has extended lenses 23 and 32 with drill widths of 20 to 25 meters combined. Lenses 23 and 32 still have room to extend down plunge. We expect to include the results from this drilling in the annual reserve and resource updates at the end of the year. Within the Lalor mine, we also expect to conduct some deep exploration drilling from underground in 2019 to test for new base metal lenses and copper-gold feeders. This drilling will commence after phase one of the Lens 17 drill program is complete this summer.In February 2019, we announced the discovery of the 1901 Zone located between the former producing Chisel North mine and Lalor mine. This discovery is situated less than 1,000 meters from an existing active underground ramp at a depth ranging from 520 to 620 meters and within 15 kilometers of the Stall concentrator. The mineralization is interpreted as a volcanogenic sulfide deposit fed by a system of discrete copper-gold rich feeder zones intersected during previous drilling. We continue to delineate the deposit with several significant intersections to date. The zone remains characterized for grade zinc with locally high-grade gold and silver content.The mineralization occurs along the hanging wall contact of the stratigraphic horizon hosting the Chisel North deposit. The drill program continues on surface to both to find the lateral extent of this new discovery and to establish the spatial continuity of the high-grade lenses located within the mineralized zone. Based on drilling success, an underground exploration platform may be developed later this year from the Chisel-Lalor ramp in order to access and further define the deposit. We expect to publish an initial resource estimate for the 1901 Zone in the second half of 2019.I would like to recognize the efforts of the Manitoba business unit stakeholders and their continued commitment to optimizing operations and evaluating opportunities to extend the life of the asset infrastructure in the Flin Flon region. Over the last several years, the combined efforts have resulted in the extension of the 777 mine life to the second quarter of 2022, which provides for the continuance of the Flin Flon mill and zinc plant to the second quarter of 2022 as well. There remains some exploration activities in the region, which is why we intend to place the Flin Flon mill in care and maintenance, with the hope that this infrastructure may be utilized again in the future. In the meantime, with the growth expected in the Snow Lake region, we remain focused on a seamless transition of the workforce in Flin Flon to Snow Lake over the next several years.I'll now turn to our Arizona business unit, where we've achieved several significant milestones in the past 2 months as highlighted earlier in my presentation. The permitting process at Rosemont concluded in March 2019, with the receipt of the Section 404 Water permit from the U.S. Army Corps of Engineers and the mine plan of operations from the U.S. Forest Service. Rosemont is now a fully permitted, shovel-ready project.As part of the initial development plans, our Board has approved an early works program with spending of $122 million over and above the $20 million of Rosemont spending previously included in the 2019 growth capital expenditure guidance. The early works program will be funded from cash on hand and as part of Rosemont's total project capital cost estimate of $1.9 billion, as disclosed in the 2017 technical report for Rosemont. We are moving ahead with the early works and financing activities in parallel in 2019 and we expect to seek Board approval to commence the construction of Rosemont by the end of the year. This will enable first production by the end of 2022.On April 25, 2019, we completed the previously announced acquisition of our minority joint venture partner's interest in Rosemont for an initial cash consideration of $45 million. Hudbay now owns 100% of Rosemont, allowing greater strategic flexibility with respect to capital structure and project financing alternatives. We intend to evaluate a variety of options, including the addition of a new committee joint venture partner for the development of Rosemont. Hudbay will carry out this process in parallel with advancing the early works, with the objective to select the highest value maximizing scenario and the base case assumption of ultimately holding approximately 70% interest while maintaining operatorship. In this base case, we expect our share of total initial capital cost estimate to be in the order of approximately $100 million, as shown on Slide 20. We believe we would be in a strong position to fund Rosemont with the almost $1 billion in total liquidity today.Rosemont, located in Arizona, is one of the world's best undeveloped copper projects delivering a 15.5% after-tax unlevered rate of return at a copper price of $3 per pound. The project is expected to produce approximately 127,000 tonnes of copper annually at a cash cost of $1.14 per pound net of byproduct credits over the first 10 years of operations. Once in production, Rosemont will be the third largest copper mine in the US.As we plan for the construction of Rosemont and to select a potential minority joint venture partner, our past success with the construction and ramp-up of Constancia provides Hudbay with the expertise to replicate that success through the development of Rosemont into a future operating mine. To put Constancia's development into perspective, we acquired the deposit in 2011, sanctioned full project development in 2012 after completing our own detailed engineering studies and achieved commercial production in early 2015. As shown on Slide 22, the mine was completed on time with [ leading ] capital cost control compared to other mining projects.In addition, Constancia's commissioning schedule was the fastest ramp-up time line achieved in the industry. Other global mining companies have recognized this achievement and use Constancia as a benchmark for their own mine commissioning schedules. We look forward to leveraging our development and operating capabilities to create long-term value for our shareholders through the development of Rosemont which is expected to more than double our current annual EBITDA estimates and significantly grow our annual copper production.We are proud of our success of executing on our consistent growth strategy since 2010, which has provided us with a diversified portfolio of operating mines and an extensive development pipeline to support long-term value creation for shareholders. Through both organic exploration and our disciplined acquisition and divestitures strategy, we have developed a large portfolio of earlier stage opportunities to provide future optionality to grow the business with the highest-return assets.While we have already achieved several significant catalysts year-to-date in 2019, we believe we still have an abundance of near-term and medium-term catalysts within our robust growth pipeline. We have near-term Rosemont milestones, with the execution of the early works program in the second half of 2019, to bring power and water to the site, significantly de-risking the project construction process. We're moving the joint venture process forward, and we have been pleased with the level of interest we've received so far.Lalor has several upcoming catalysts as I highlighted earlier. This includes the conversion of resources to reserves, incorporating the known satellite resource into the mine plan, additional Lalor in-mine exploration, and ultimately achieving first gold production as of New Britannia by 2022. We expect to be drilling at one of the satellite targets near Constancia later this year and expect to reach community agreement at Pampacancha to be in a position to commence mining the Pampacancha deposit in 2020.In the Snow Lake region, we intend to explore a large land package to provide additional feed to our Stall and New Britannia mills, in addition to continuing exploration activities at the new 1901 deposit. We expect to publish a maiden resource in the 1901 Zone in the second half of 2019. We're drilling high grade targets at Ann Mason this year with a focus on enhancing project economics, along with advancing exploration activities on our other prospective grassroots exploration properties in Chile, Peru and Canada.In conclusion, we have continued to execute on our consistent long-term growth strategy and developing our world-class asset base. We have demonstrated a proven track record of successful project development through best-in-class construction and ramp-up of Constancia and Lalor. Our flagship mines are amongst the lowest cost in the respective regions, confirming our operational excellence and we continue to add value through successful exploration at all of our mines.We are pleased with our operating results and financial performance as we continue to generate strong cash flow from un-hedged copper and zinc production but assisting us as well for our future capital allocation plans. We have a robust pipeline of near-term and medium term catalysts, we have the team in place to deliver on these catalysts and we look forward to continue to deliver on our objectives through safe and responsible practices.That concludes my presentation portion of the call, and we are pleased to take your questions.

[Candace Brûlé, Director of Investor Relations]

Operator, can you please poll for questions?

[Operator]

[Operator Instructions] We will now take our first question from Oscar Cabrera from CIBC.

[Oscar M. Cabrera, Research Analyst]

Good morning, everyone. Can you hear me, Alan?

[Alan T. C. Hair, Former President, CEO & Director]

Yes, I can, Oscar.

[Oscar M. Cabrera, Research Analyst]

Okay, sorry about that. Yes, just asking about Constancia and Pampacancha. The technical report calls for lower grade from the Constancia open pit. So in the event that Pampacancha gets delayed into 2020, say, second half, do you think that the level of grade that you are achieving right now in the open pit can be sustained out of the main pit?

[Alan T. C. Hair, Former President, CEO & Director]

I'll just point you back to the technical report, Oscar, because we break down the ore production obviously from Constancia and Pampacancha separately. So just offset the Pampacancha portion accordingly, and have [indiscernible] of the equivalent tonnes from the Constancia portion.

[Oscar M. Cabrera, Research Analyst]

Yes, I think, what I'm trying to drive at, Alan, is that the Pampacancha has grades of 0.5 or higher whereas the Constancia open pit has grades declining from the current 0.47 to 0.34 and lower. So the question, I guess, is you have been getting positive grade reconciliation for the last several quarters. So can that -- do you have access to that same grade material if Pampacancha gets delayed?

[Alan T. C. Hair, Former President, CEO & Director]

I think, Oscar, we're mining as per the short-term planning version of the long-term mine plan that's within the technical report. And in terms of grade, any grade bias is within what we consider to just be normal statistical variance. So we're not -- I think we keep guiding to the fact that you're best going by the technical report numbers.

[Oscar M. Cabrera, Research Analyst]

Okay, fair enough. Then, if I may, the designation of indigenous people for the town of Chilloroya, can you just talk about that, provide context? Was this initiated by the town folks? How do we get to this point and what other processes that you are aware of? Because you're saying that it's 3 to 6 months. Is there a precedent for all these -- or for this time period?

[Alan T. C. Hair, Former President, CEO & Director]

Yes. This is part of an ongoing process. I mean the implementation of ILO 169, I think, was originally focused on the oil and gas exploration in the Amazon Basin and then subsequently they started to apply it to the high Andes. We were somewhat surprised back in October 2015, the community of Uchuccarco was designated as an indigenous community. And we were surprised at that time that Chilloroya, which is like an adjoining community, wasn't. But Chilloroya was subsequently added to the database in the April iteration, along with some other communities in the region. The consultation the Peruvian government carries out I think is fairly standard. I mean there are other examples. Given that we've got existing agreements with the community at Chilloroya and those community agreements have been voted on by like two-thirds of the community, we don't really see the consultation hurdle as being a particularly high bar as it were, but it's just another piece of bureaucracy that will need to occur. So I think in the order of 3 to 6 months would be reasonable, and that's certainly consistent with what we've seen in some other exploration and operating situations.

[Oscar M. Cabrera, Research Analyst]

But, I mean, based on the process that you have so far, are you confident you can start mining ore from Pampacancha during the first half of 2020? Or should -- is it -- do you think that this can be pushed to the second half of 2020?

[Alan T. C. Hair, Former President, CEO & Director]

Obviously, it depends exactly how long the consultation takes. So it's hard to give an exact time, but then, it would be reasonable to think by the middle of the year we should be in a position to mine.

[Operator]

[Operator Instructions] We now take our next question from Matt Vittorioso from Jefferies.

[Matthew Vittorioso, Analyst]

Just quickly on the financing for Rosemont. So the updated estimated share for your portion of the CapEx is $800 million. You've got $940 million of liquidity. Is there any contemplation currently to issue new high yield debt or any other kind of debt to support this funding? Or do you currently think you can kind of fund it with your existing liquidity and ongoing free cash flow? What are your thoughts there?

[Alan T. C. Hair, Former President, CEO & Director]

Well, we're going to develop the full funding plan as we go through the JV process and move towards to project sanction by the end of the year. So obviously, exactly how that funding plan will look will be partly dependent on market conditions at the time. When we do go to sanction the project, although as you point out, we could do on a basis of cash on hand and future operating cash flow, we want to make sure that we build in protection to the downside in case there is any dip in metal prices during the construction. So we may look to, at project sanction, to potentially take on some additional debt or even do some hedging to provide that cushion. But that will really depend on how the world unfolds over the next few months.

[Matthew Vittorioso, Analyst]

Okay. And then just with that sort of downside in mind, with copper down below $2.80 -- obviously, copper moves around a lot, and the trajectory thus far has generally been better over the last 6 months, but how do you think about the Rosemont project in the context of copper below $3? I mean historically, you had said you'd wanted copper at $3 to really push forward. Obviously, we've kind of bounced up towards $3 and come back down. But are the long-term economics still okay if copper kind of hangs out where it is today?

[Alan T. C. Hair, Former President, CEO & Director]

Well, we remain very bullish on copper, and certainly the economics of Rosemont are based on what we think is a relatively conservative long-term copper incentive price of $3. And obviously, so the long-term price of $3, you would expect some of that time to be at $2.50 and some of that at time to be at $3.50. So we remain confident of the -- that Rosemont is actually one of the better projects out there. In terms of -- if you're talking about would we go ahead with full-blown sanctioning of the project at $2.80, I think I'd point to the fact that with things like recent joint venture processes have tended not to reflect current spot copper prices, but actually tended to reflect the longer-term estimates that copper is going to be like $3 or above. So I think we still remain in a very good situation to come up with a funding plan for Rosemont even in a lower copper price environment. Obviously, if copper drops significantly further, then we may have cause to pause and reflect. But certainly, I remain very confident on the fundamentals of copper and that we'll see a significantly high copper price for a period going forward.

[Matthew Vittorioso, Analyst]

Great. And then just one quick follow-up. Sorry if I missed it, but just on the timing of the 30% JV share sale, is that something that you think would be announced in the next few months? Or just what's the general timing around that?

[Alan T. C. Hair, Former President, CEO & Director]

Just consistent with the project delivery, we would be looking to ideally sanction the project at the end of the year so the JV process will be running consistent with the ultimate project sanctioning target.

[Operator]

We take our next question from Greg Barnes from TD Securities.

[Greg Barnes, Managing Director and Head of Mining Research]

Alan, I want to focus on the Rosemont funding as well. Number one, the Wheaton precious metal funding, I think the initial payment of $50 million was due when permitting is received. When do you expect that to come in?

[Alan T. C. Hair, Former President, CEO & Director]

We choose when to call it, Greg, so there is no requirement right now for it.

[Greg Barnes, Managing Director and Head of Mining Research]

Okay. And then secondarily on the chart on Page 20 of the presentation. You got the buy-in of $250 million to $300 million. Is that a number that is floating around out there? Have you come to that range?

[Alan T. C. Hair, Former President, CEO & Director]

That was just a bit of a thumbs-up based on the previous transactions, the precedence transactions that took place and the NAV multiples that they implied.

[Greg Barnes, Managing Director and Head of Mining Research]

Okay. So you're getting indications in that range? Or is it we're not at that point yet?

[Alan T. C. Hair, Former President, CEO & Director]

We're not at that point yet, Greg. But certainly, I mean, I think it's fair to say that a good copper asset in a safe jurisdiction is highly desirable.

[Operator]

We take the next question from Orest Wowkodaw from Scotiabank.

[Orest Wowkodaw, Senior Equity Research Analyst of Base Metals]

Just turning back to Constancia again, with the changes around some of the rules regarding Pampacancha. Do you anticipate that this new consultation will ultimately result in higher cost to you with respect to acquiring the surface rights? And then, I'm also wondering whether the other communities in those other satellite deposits, the Maria Reyna, Kusiorcco and others are already included in this new policy or whether that impacts your ability to go drill there once you've obtained rights for drilling. Thank you.

[Alan T. C. Hair, Former President, CEO & Director]

So, to answer your first question, I don't see that there should be any link between this consultation requirement on the part of the government and any costs. On the second part, it's been a bit of a ad hoc process in terms of getting these communities added. I believe, with this latest iteration of the database, I think most of the communities in that region are now classified as indigenous. It was a little bit strange actually that some were and some weren't previously. So I think it's a bit more consistent now. And that will add a similar consultation step, whether it's an exploitation agreement, which we have with -- looking to develop the Pampacancha, or an exploration agreement, the process from a government consultation point of view is the same.

[Orest Wowkodaw, Senior Equity Research Analyst of Base Metals]

So does that mean that likely pushes out the exploration plans for those satellite deposits beyond 2020?

[Alan T. C. Hair, Former President, CEO & Director]

I mean the consultation can actually be done relatively quickly in some cases, we've seen. So we've been fairly conservative in our estimates. So I don't see it's been a huge issue to be honest, Orest. It's just another part of doing business.

[Operator]

We take our next question from Stefan Ioannou from Cormark Securities.

[Stefan Ioannou, Analyst]

Great. Thanks very much, guys. Just wondering, also at Pampacancha, just, I know in the formal guidance for 2019, the CapEx budget in Peru continued to include $45 million of growth capital. Does that number stand to change just with the delay at Pampacancha? Or how should we think about that number going forward?

[Alan T. C. Hair, Former President, CEO & Director]

We're still guiding to that because we hope still to be in a position to advance the -- to be advancing Pampacancha by the end of the year. The only difference is we want to be in ore, so that is why we are taking the Wheaton hit.

[Operator]

We take our next question from Baljir Baatartogtokh from Haywood Securities.

[Baljir Baatartogtokh]

I did have a very quick question on just the lower sales volume for Q1. I was wondering what drove that, what was the cause of the lower sales on copper, gold and zinc? Thank you.

[Alan T. C. Hair, Former President, CEO & Director]

Sorry, could you repeat the question?

[Baljir Baatartogtokh]

Just for Q1, I'm noticing -- that lower metals were sold. So historically, it's one of the lowest sales volumes, and I was just wondering what was the cause of that.

[Alan T. C. Hair, Former President, CEO & Director]

I think -- hi. Yes. We typically get some variation quarter-to-quarter depending on circumstances. Certainly -- you get the situation, I think it was the case in the end of Q1 where you get -- sometimes the ocean swells at the port of Matarani and that may have delayed some shipments. Likewise, there were some railcar issues with -- in Manitoba, which delayed some zinc shipments. So it's just I think the normal variation that you get with some of the logistical challenges of moving material.

[Baljir Baatartogtokh]

Logistical challenge? Okay.

[Operator]

We now take the next question from Mark Llanes, Credit Suisse Company.

[Mark Llanes, Analyst]

Hi, thank you for taking my questions. Just going back to Pampacancha, I know that you've already recorded the obligation on your books for the guarantees to Wheaton Precious Metals for 2019. But have you done any recording for 2020? And if not, how can you quantify how much would the impact be? Thank you.

[Alan T. C. Hair, Former President, CEO & Director]

Well, we haven't done anything for 2020 because we believe we will have mined the required tonnage in 2020 even if that was a fairly significant consultation period. So, no, we wouldn't book that. If we had to, it would be a similar order of magnitude to what we booked this year.

[Mark Llanes, Analyst]

Okay. And then going to Manitoba, I know that you had mentioned that the transportations delays were the reasons for the Manitoba costs being higher for the quarter. Could you let me know how much of the total ore from Lalor will be processed at Stall versus Flin Flon for Q2?

[Alan T. C. Hair, Former President, CEO & Director]

Well, we're basically -- Lalor's running at sort of nominal 4,500 tonne per day rates and Stall is limited to about 3,500 tonnes a day, so it's in the order of just that delta which is a little bit under 1,000 tonnes a day.

[Mark Llanes, Analyst]

Okay. And then plus the ore that was delayed from Q1?

[Alan T. C. Hair, Former President, CEO & Director]

Yes. Remember this. There's lots of capacity in Flin Flon. Flin Flon is 2.2 million tonne per annum facility.

[Mark Llanes, Analyst]

Okay. And then the transportation costs that were the cost to move the ore from Lalor to Flin Flon, that was already recorded in Q1 and we won't see that in Q2?

[David Stewart Bryson, Senior VP & CFO]

It's David. To the extent that the ore was still in Snow Lake, that would not have been incurred in Q1. That will be incurred in Q2. But the mining costs associated with that ore, which should be the bulk of the total delivered cost to Flin Flon, was obviously incurred in the first quarter and in the numerator of the combined unit cost ratio.

[Operator]

We now take our next question from Jackie Przybylowski from BMO Company.

[Jackie Przybylowski, Analyst]

Yes, all my questions have been answered. I look forward to seeing you guys at the AGM in a little while.

[Alan T. C. Hair, Former President, CEO & Director]

Okay. Thanks, Jackie.

[Operator]

We now take our next question from Matthew Fields, Bank of America.

[Matthew Wyatt Fields, Director]

Just wanted to ask about Rosemont funding as well. Are you locked in at that 30% figure that you'd like to sell? Or, if copper prices are a little lower, are you willing to sell a higher proportion of the project, maybe 40% to reduce your CapEx burden?

[Alan T. C. Hair, Former President, CEO & Director]

I think it's fair to say that that 30% is a nominal number, meaning we're looking to maximize the value, and if we wouldn't [ receive ] a very compelling offer for a slightly higher stake, we would obviously consider it.

[Matthew Wyatt Fields, Director]

Because -- using your numbers on Slide 20, if you sold 40% instead of the 30%, your share of CapEx would be closer to $500 million or $550 million, which seems much more manageable. And then, just a housekeeping thing, I guess. The $1,921 million of total initial CapEx. By the end of this year, that would be reduced by the $120 million or $140 million that you're spending this year on the project, right? So at the year-end date, that initial CapEx number would actually only be $1.8 billion. Is that the right way to think about it?

[Alan T. C. Hair, Former President, CEO & Director]

Yes, that's correct.

[Matthew Wyatt Fields, Director]

Okay. And then last, just in case copper prices stay low for a little while, are there any Canadian assets that you'd be willing to sell to help fund development of Rosemont?

[Alan T. C. Hair, Former President, CEO & Director]

I think, I mean, we're always open to looking at how we can maximize shareholder value. I think if you look at our current asset base, we see, whether it's Manitoba or Constancia, we see such lots of unrealized exploration upside. I think we'd be leaving some significant value in the table if we considered selling stakes in any of our assets currently. Constancia has obviously got we think really significant upside with those land positions we've consolidated. And you saw from the presentation, within Manitoba, I mean, we're still drilling 19 -- the new zone between Lalor and Chisel, and we see that the significant potential to increase reserves both in mine at Lalor and in the region. So, while those things could be considerations, I don't think that was the time to be doing because we're leaving money on the table.

[Matthew Wyatt Fields, Director]

So the priority would be to slow down Rosemont and keep all your Canadian assets, if you're forced to choose to prioritize?

[Alan T. C. Hair, Former President, CEO & Director]

I think if you look at the -- any funding requirements for Rosemont, I'd actually consider that with the current position we are in, we're actually well placed in -- to continue to develop Rosemont in all but a really severe downturn in the copper price.

[Matthew Wyatt Fields, Director]

Okay. But I just -- sorry to keep asking this question, but at $2.75 copper, obviously, that's not where your IRR model is. So at $2.75 copper, are you sort of saying that the IRRs of your Manitoba assets are better than Rosemont, at $2.75 copper?

[Alan T. C. Hair, Former President, CEO & Director]

Well, we are obviously going through a process moving towards full-blown project sanctioning. So the early works program is consistent with the project development, but the project hasn't been fully sanctioned yet. And obviously, we can't take into account prevailing economic conditions at the end of the year. But I'll repeat what I said earlier. When we look at project economics, the IRR is based on the long-term copper price, and with the long-term copper price of $3, you'd expect some of that time the price to be below $3 and some of that time the price to be above $3. So it doesn't really change the long-term economics.

[Operator]

We now take our next question from Ralph Profiti from Eight Capital.

[Ralph M. Profiti, Former Research Analyst]

Alan, can you hear me okay?

[Alan T. C. Hair, Former President, CEO & Director]

Yes, I can. Thanks.

[Ralph M. Profiti, Former Research Analyst]

Okay. Two questions from me. Just want to come back to the Rosemont funding question. Can we think about this as the early works programming on Hudbay's equity interest being put forth and then kind of Hudbay's equity CapEx kind of goes into a lull, say, sort of 2020 and then kind of comes back from an equity interest standpoint sometime in 2021, if kind of all things go according to plan? Is that how the CapEx profile on the Hudbay equity interest works?

[Alan T. C. Hair, Former President, CEO & Director]

Yes, that's correct.

[Ralph M. Profiti, Former Research Analyst]

Okay. And then, I just want to come back to Pampacancha and ILO 169. Are there any new bodies of work that need to be done while this consultation process goes on, things like baseline studies and assessments? And does the actual community agreement, is that the binding agreement? Or does it have to go back to the Peruvian government for approval?

[Alan T. C. Hair, Former President, CEO & Director]

Well, no, the agreement with the community is the agreement. So all that we're talking about is an additional step of consultation, and that's to make sure that the process was conducted with free, prior and informed consent, that's all. It's really more an administrative step then on the government's part it has announced to fulfill its commitment to ILO 169.

[Ralph M. Profiti, Former Research Analyst]

Okay. Okay. So sounds more procedural, if you would say.

[Alan T. C. Hair, Former President, CEO & Director]

Correct.

[Operator]

We now take our next question from Dalton Baretto from Canaccord Genuity.

[Dalton Baretto, Analyst]

Just on this Rosemont JV process here. Do you have a preference for the type of partner you bring on in terms of strategic versus off-take partners versus finance partners?

[Alan T. C. Hair, Former President, CEO & Director]

Not really. At the end of the day, Dalton, it's just going to -- the biggest check I think would be the main consideration.

[Dalton Baretto, Analyst]

Okay. So it's really just a number thing. You don't have a preference for a partner bringing something else to the table?

[Alan T. C. Hair, Former President, CEO & Director]

We are not -- what we're looking for is some additional financial into [ here ], where we think that we've got the right team to build the project.

[Dalton Baretto, Analyst]

Okay, great. And then just may be one quick one on the ILO 169. Some of the other assets I cover in other countries that have gone over this process. There's a pre-consultation phase to define terms and conditions and there is a consultation phase and -- I guess my question is what gives you comfort that this will get done within the 3 to 6 month period? Are there precedent processes that you can point to in Peru?

[Alan T. C. Hair, Former President, CEO & Director]

Yes. And I think the pre-consultation phase has been completed because they're now on the database.

[Operator]

We now take our next question from Orest Wowkodaw from Scotiabank.

[Orest Wowkodaw, Senior Equity Research Analyst of Base Metals]

Just a quick one. The SG&A spiked up in the quarter to the $15 million. Is that just solely related to the proxy battle? And I'm wondering if we can expect something similar here for Q2. Thank you.

[Alan T. C. Hair, Former President, CEO & Director]

No, Orest. I think we mentioned in the script. The biggest driver of that was the appreciation in the share price, so share-based comp appreciated accordingly.

[Orest Wowkodaw, Senior Equity Research Analyst of Base Metals]

Okay. Can you quantify what the costs of the proxy battle have been?

[Alan T. C. Hair, Former President, CEO & Director]

I think it's -- I mean the number of aspects that you count into what was the cost of a proxy battle is not always just straight dollars, either.

[Orest Wowkodaw, Senior Equity Research Analyst of Base Metals]

Okay. Maybe then the better question is, how much impact could it have on SG&A in Q2?

[David Stewart Bryson, Senior VP & CFO]

Orest, this is David. I think we'd expect about $0.01 of EPS impact based on the costs that will flow through in Q2.

[Operator]

Okay. There are no further questions at this time, sir. I will be handing over the call back to you for any further or additional comments.

[Candace Brûlé, Director of Investor Relations]

Thank you, operator. And thank you, everyone, for participating. Please feel free to reach out to our Investor Relations team if you have any further questions.