Hudbay Minerals Inc. Q2 FY2020 Earnings Call

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Hudbay Minerals Second Quarter 2020 Results Conference Call. At this time, all participants are in listen-only mode. Following the presentation, we will conduct a question-and-answer session. I would like to remind everyone that this conference call is being recorded today, August 12, 2020, at 8:30 AM Eastern Time. I'd now like to turn the conference over to Candace Brûlé, Director of Investor Relations. Please go ahead.

Thank you, Operator. Good morning and welcome to Hudbay's 2020 second 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 available and we encourage you to refer to it during this call. Our presenter today is Peter Kukielski, Hudbay's President and Chief Executive Officer. Accompanying Peter for the Q&A portion of the call will be Steve Douglas, our recently appointed Senior Vice President and Chief Financial Officer; Cashel Meagher, our Senior Vice President and Chief Operating Officer; and Eugene Lei, our Senior Vice President, Corporate Development and Strategy. Please note that comments made on today's call may contain forward-looking information and this information by its nature is subject to risks and uncertainties, and as such, actual results may differ materially from the views expressed today. For further information on these risks and uncertainties, please consult the company's relevant filings on SEDAR and EDGAR. These documents are also available on our website. As a reminder, all amounts discussed on today's call are in U.S. dollars, unless otherwise noted. And now, I'll pass the call over to Peter Kukielski. Peter?

Thank you, Candace. Good morning everyone and thank you for joining us. I hope everyone has been able to stay safe and healthy during this evolving public health crisis. We have been closely monitoring the rapidly changing environment while executing our business response plan to minimize the pandemic's impact on our operations. We are focused on the health and safety of our employees, their families, and the communities we are connected to while working with local stakeholders and public health authorities to effectively implement our pandemic response. Today, I will highlight our second quarter financial and operating results, as well as provide updated guidance for our Peru operations. I will also discuss how the recent upgraded resource estimate aligns with our plans to advance the third phase of our Snow Lake gold strategy, and I will update you on the refurbishment of the new Britannia mill and the timelines for first production, expected in 12 months. Before we proceed, I want to thank Eugene for stepping in as Interim CFO while we search for a permanent CFO. I am pleased to introduce Steve Douglas, who was appointed to the role on June 30. For those who haven’t had the chance to meet Steve, he comes with over 25 years of experience in the resource industry and senior finance leadership. Over the past few weeks, Eugene and Steve have collaborated closely to ensure we meet our financial objectives, and I’m impressed with how smoothly this transition has occurred. Hudbay has an exceptionally talented team for a company of our size, and I am confident that Steve will enhance our team. Welcome, Steve. Now, moving to our second quarter results, Hudbay saw strong performance in Manitoba despite strict COVID protocols. I want to commend the Manitoba team for their exceptional efforts in achieving these milestones in a challenging environment. We experienced strong production and cost performance in Manitoba, with increases in precious metals and zinc production during the quarter, driven by record gold production from improved Lalor gold grades and stellar recoveries at Stall. Copper production declined by 27% from the first quarter due to a temporary suspension of operations at Constancia until mid-May; however, our consolidated copper equivalent production only dropped by 12% due to increased precious metals and zinc production for the quarter. The consolidated cash cost, net of byproduct credits, was $0.64 per pound of copper, marking a 47% improvement over the first quarter. This measure reflects a significant impact from Manitoba's production, which includes meaningful zinc and gold byproduct revenues. Consolidated all-in sustaining cash costs improved to $2.26 per pound of copper, driven by the same factors affecting cash costs, along with reduced sustaining capital expenditures in Peru due to the temporary suspension. Operating cash flow before changes in non-cash working capital was $30 million for the quarter, a decrease of $12 million from the prior quarter. This drop is primarily due to lower production and sales at Constancia stemming from the temporary suspension; however, it was partially offset by increased gold production and sales in Manitoba along with higher realized gold prices. We have been planning to introduce adjusted metrics for some time, and we are pleased to have Steve support this initiative shortly after his arrival. We believe these adjustments will enhance transparency regarding our financial performance after normalizing for one-off or non-cash adjustments. In the second quarter, we accounted for temporary suspension costs in Peru and partially reversed a Peru inventory write-down from the first quarter, among other items. Our adjusted net loss was $0.15 per share, and adjusted EBITDA was $49 million. The strong performance from Manitoba helped offset the reduced contribution from Peru, leading to only minimal changes in quarter-over-quarter adjusted earnings and a slight decrease in adjusted EBITDA. We ended the quarter with $391 million in cash and equivalents and continued to take prudent measures to manage our balance sheet. During the quarter, we began discussions with a group of banks regarding our revolving credit facilities to restructure them for enhanced financial flexibility during the development of the new Britannia and Pampacancha projects. Each bank approved the terms for amendment, and we expect the transaction to close soon. The amendment adjusted total available borrowings under the credit facilities to $400 million to align with our anticipated business needs until June 2022 when the facilities mature. It is important to note that we do not plan to draw down these facilities for business objectives. We also revised the maintenance covenants to a net debt to EBITDA ratio of less than 5.25 and an interest coverage ratio of greater than 2.50 until the end of 2021, providing additional financial flexibility. The Manitoba business unit performed well across the mines, mills, and zinc plant this quarter, as noted in our presentation. In response to COVID-19, Hudbay has collaborated with health committees and local authorities to keep our employees and communities safe by implementing layered workplace controls. As a result, the second quarter operating results in Manitoba were largely unaffected by the pandemic, and we remain on course to meet our annual production and cost guidance. We saw improved production results for all metals compared to the prior quarter. Enhanced precious metal production achieved from higher gold and silver grades at Lalor, driven by prioritizing resources in higher value areas. Development of the Gold Rich lenses advanced ahead of schedule, and production is expected before the new Britannia mill starts, as Lalor transitions into a gold mine. The 777 mine had higher ore grades this quarter as expected, consistent with our mining plans. Combined operating costs in Manitoba were slightly higher than the first quarter but aligned with our annual guidance. We have seen enhanced performance at the Stall mill through our focus on continuous improvement. The mill's throughput increased by 11% in the first half of 2020, averaging 3900 tons per day. This improvement is due to enhanced maintenance programs increasing plant uptime from 91% in 2019 to an impressive 95%. The Stall mill also achieved record gold production in the second quarter. Regarding our Peru operations, we successfully restarted operations at Constancia in mid-May after an 8-week suspension, implementing increased government-supported health protocols. The mine returned to normal throughput levels within 48 hours after restart and continued at those levels for the remainder of the second quarter, focusing initially on milling stockpiled ore. Mining activities ramped up by the end of June, leading to normal levels in early July. Although production results from Constancia were lower than the prior quarter due to the temporary suspension, average daily throughput was above 95,000 tons per day when the mill was operational. The processed stockpiled ore impacted copper recoveries. Our combined unit operating costs decreased by 17% in the second quarter, primarily due to lower costs during the temporary suspension and reduced mining expenses during that time. We also deferred our second-quarter maintenance shutdown from May to the third quarter due to effective proactive maintenance during the suspension. I commend our Constancia team for their excellent efforts to ramp up operations while adhering to strict health protocols. In light of the pandemic-related uncertainties, we suspended our 2020 guidance for Peru operations. Following a full resumption of operations at Constancia, we can now provide updated guidance for Peru. However, the situation in Peru remains fluid with an extension of the state of emergency to August 31, and there is still a risk of further disruptions. We are continuously monitoring any potential future impacts on Constancia. The updated annual production and operating cost guidance is presented in our materials. This guidance assumes we can continue safe operations aligned with existing health protocols. Our Manitoba operations remain on track, and those guidance figures remain unchanged. The revised guidance for Peru reflects a reduction of about 15,000 to 20,000 tons of copper and 20,000 ounces of precious metals compared to the original guidance, attributing to the production lost during the 8-week suspension and revised plans that defer some higher-grade ore into 2021. The expected Pampacancha production start date is now early 2021 due to pandemic-related delays. The sustaining capital for Peru is $80 million and reflects approximately $20 million deferred into 2021, with a growth capital expenditure of $70 million for the Pampacancha deposit development and acquiring land rights from the local community. We have made substantial progress on land user agreements, having completed approximately two-thirds so far, with the remainder to be finished in the third quarter. We have also progressed in clearing land, with about one-third vacated and handed over to Hudbay. As discussed previously, our Snow Lake gold strategy has added significant value, with notable advances in Phase 1 and Phase 2. Phase 1, released in February 2019, led to a 65% increase in gold reserves at Lalor and identified the refurbishment of the new Britannia gold mill as the optimal processing solution for Lalor's gold ore. This phase positioned Lalor as a gold mine, creating a majority of life-of-mine revenues from precious metals. We spent the next year optimizing the mine plan, drilling exploration targets, and advancing engineering studies. In March 2020, we announced the second phase, increasing gold reserves by 35% to 2.2 million ounces, improving the life of mine gold production by 41%, and extending the Snow Lake operations' life to 18 years. We emphasize the third phase focused on further expansion potential. This year has been pivotal for executing our Snow Lake gold strategy. The recent gold prepaid transaction unlocked future gold ounces value and fully funded the new Britannia refurbishment costs, allowing us to advance our plans. We began underground development and early mining at the gold zone, expecting to produce 74,000 ounces of gold from Lalor in 2020, increasing to 102,000 ounces in 2021. In 2022, after the new Britannia mill refurbishment, we anticipate average annual gold production from Lalor to exceed 150,000 ounces, with cash costs of approximately $480 and sustaining cash costs net of byproduct credits of about $655 per ounce for the first eight years. There’s potential for further annual production increases and mine life extensions through various opportunities. We are evaluating ways to optimize the Stall and new Britannia mills to add value to our regional deposits. At Stall, we are beginning studies to improve gold and copper recoveries and will explore potentially expanding the new Britannia mill's capacity beyond the current plan of 1500 tons per day. We aim to finish these economic studies in the first half of 2021. Regarding the new Britannia mill, detailed engineering is about 90% complete, with procurement at 65% and construction roughly 25% finished. We have ordered all long-lead items without significant supply chain impacts due to COVID-19. Construction continues as planned, with activities including the copper flotation building and repairs to the existing mill structure. The refurbishment is on track for completion by August 2021, with plant commissioning and ramp-up expected in the latter half of 2021. We are thrilled to explore potential early gold production from the new Britannia mill in 2021, and we aim to provide updates in the third quarter. The significant gold exposure from Hudbay’s Snow Lake business offers investors a striking balance between growing gold cash flows and stable low-cost copper operations through our other key assets. We have presented expected annual cash flows from Snow Lake gold at different gold prices; for example, at $1600 per ounce, we forecast about $200 million in annual gross margin, climbing to over $240 million at current gold prices around $1900. Lalor's location in a prime mining jurisdiction, along with its status as a low-cost production asset, offers substantial opportunities to enhance Snow Lake gold's value. The 1901 deposit, discovered in early 2019, is positioned near the Lalor mine and is wholly owned by us. This deposit reflects similar mineralization to Lalor with high-grade gold zones indicating potential for copper-gold feeder zones. The updated resource estimates show a significant increase in total gold resources, reinforcing the gold potential of the Snow Lake camp. Looking ahead, we plan to conduct a pre-feasibility study on the 1901 deposit in the first half of 2021 and continue exploring it with a drill program early next year. Our history in Flin Flon and Snow Lake shows we can significantly expand VMS deposit reserves. Our upcoming strategic priorities for the next 12 to 18 months reflect our growth initiatives, including the new Britannia mill refurbishment, a new gold zone, and upgraded resource estimates for the 1901 deposit. We are progressing on the Pampacancha development and expect to initiate exploration activities on our regional properties. Our drilling programs planned for fall 2020 aim to evaluate high-grade targets near Constancia. Updates on these initiatives, along with the ongoing Rosemont appeal process and infill exploration at Lalor, will be addressed in our annual update in March 2021. We are well positioned to advance our growth initiatives and are optimistic about delivering value for our shareholders in the coming year. I am now happy to take your questions.

Thank you, ladies and gentlemen. We will now begin the question-and-answer session. Our first question comes from Fahad Tariq of Credit Suisse. Please go ahead.

Maybe first on Manitoba, you mentioned that there's potential to produce gold from new Britannia before 2021. I'm just trying to figure out what's the upside from the 100,000 ounces base case next year? Like how much more could it be versus that?

Fahad, thanks very much for the question. It's a good question. So we're not ready yet to provide numbers on that. We will advance the work pretty significantly and we expect to have a lot more information on this next quarter, but Cashel, do you want to provide any other insight?

Yes. So I think the way to look at it is, the new Britannia mill itself is a refurbishment, whereas the copper flotation building is a new build. And we saw the opportunity to advance in the schedule the completion of the refurbishment, which would allow us to mill some of our higher-grade gold zone 25 in advance of the completion of the copper flotation building. And so, as you can imagine, with that opportunity, we need to change the sequencing of what we might be mining next year to be able to deliver zone 25 earlier. While it's pre-developed, the stope sequencing would be that. So in the next quarter, we hope to be able to give a more direct answer of what we had previously disclosed as 2021 ounces produced at Manitoba; it will be increased and we'll be able to give you that in the next quarter.

Okay. And maybe just switching gears to Peru, at Constancia, my understanding there are no positive COVID cases right now but Peru unfortunately seems to be a bit of a hotspot for COVID. And even among some of your mining peers, there's been some outbreak. So I'm wondering, if the government were to impose further restrictions that might necessitate a shutdown again, what are the levels of stockpiles? And how do the stockpile grades compare to the fresh ore? Thanks.

I'm not sure how much worse it's going to get in Peru. Peru, as you know, is pretty bad right now. And we have very, very strong precautions in place in order to prevent the pandemic from coming to the mine. I think you're aware that we hotel all of our personnel in either Cusco or Arequipa and we test for COVID during their period of quarantine so that it doesn't get up to the mine, and this is quite consistent with the requirements of the Peruvian government. We feel that it is likely that we will not experience another shutdown; if we do, it will likely be in a similar form to the previous one, because we would stop milling at that stage if we are required to shut down. But with the stockpiles, they are a little bit higher in zinc and lead, which is effectively what constraints or reduces the recoveries that we experienced. But of course, those stockpiles are limited. Cashel, do you want to comment further on that?

I think that covers most of it, Peter. Maybe I'd add that those precautions we have with COVID to-date have worked extremely well. In fact, we increased our workforce over the last couple of weeks to accommodate some shutdown maintenance work that was completed successfully. And we now sort of have a system whereby the workers themselves are onsite for longer shift rotations and so we've mitigated a lot of this; a lot of our peers have also done this. It took a while to manage to this current sort of new normal we call it, and we're operating under those parameters.

Our next question comes from Orest Wowkodaw of Scotiabank. Please go ahead.

In February, you issued multi-year guidance. And I'm just curious, at the time you had issued 2021 production guidance for Constancia of 80,000 to 100,000 tons of copper and 85,000 to 100,000 ounces of total precious metals. I'm just wondering how that may have changed with some of the delays of Pampacancha pushing to the first quarter of '21. I guess partially offset by some of the higher grade material from this year being pushed into '21. Are those guidance ranges still valid?

Thanks for the question, Orest. I believe they still are valid because we are just delaying the plan by a few months. We utilized a significant amount of stockpiled material, which explains the lower recoveries during the quarter. However, since the Pampacancha ore is initially of lower grade, we should expect to push it out by just a couple of months.

Okay. That's great. And then just curious on Manitoba, I mean, with gold continuing to run up, maybe except for yesterday. Does that in any way change your thinking strategically in terms of potentially monetizing Manitoba? Whether there's perhaps some thought of advancing that strategic move?

It's a good question. We're very much a business in transition and we're in execution mode right now. And our focus is 100% on executing our Snow Lake gold strategy by delivering new Britannia on time and on budget, which we think generates significant value for us and for our shareholders. The investment in new Brit generated a 25% after-tax IRR; it's 1500 hold. So we just think that's the right thing to do: stay focused on that. Absolutely focus on that and then deliver on it, and we will maximize value by doing that, and we'll worry about what to do with it at a later point.

Okay. And then, just finally, I've noticed your environmental provisions in terms of liability on the balance sheet has increased materially, again, this quarter. Is that the year-to-date increase? Is that purely a function of just lower discount rates? I'm just curious what's going on there and how much of that is Manitoba? Thank you.

Just lower discount rates and exchange rate impacts.

Our next question comes from Greg Barnes of TD Securities. Please go ahead.

Yes, thank you. Peter or Cashel, is there an optimal point in the mine plan when 1901?

Greg, thanks for that. So we need to complete the pre-feasibility work to understand better exactly where it fits. I mean, if the question is, does it extend the zinc plant? The answer to that is no, because we need to complete the pre-feasibility work in the next couple of years of pre-development work to be done.

So does that mean you would begin shipping zinc skarn from 1901 when you start producing it?

It's lower grade zinc and it's not enough base zinc out of Lalor combined with 1901 to continue unfortunately or perpetuate the life of the zinc plant which is still slated for sometime mid-2022 to be closed. However, what 1901 does present to us, Greg, is it gives us the opportunity one to use the grind capacity that exists in new Britannia moving it from 1500 tons a day to 2200 tons a day, it provides an extra workplace within the Lalor mine, where we can produce more gold and more zinc. And in fact, Peter outlined it in his presentation that Stall has been really hitting record throughput production and those sink zones themselves which go through the Stall mill. So if we see ourselves being able to hoist more, maybe next year out of Lalor than we have this year, we see ourselves being able to mill in the future more at new Britannia than what we're currently refurbishing it to. And we also see the capacity of Stall being more than it has been. So it fits in quite nicely to the Lalor life of mine as providing an extra workplace with multiple headings and increasing the overall production of gold, copper, and zinc out of the Snow Lake complex.

Thanks guys. So by the middle of next year, we're going to have a better sense of what the ultimate production rates for gold, copper, and zinc from Snow Lake is going to be.

Yes. I think that's exactly what it is. In fact, in our normal guidance process and our budgeting process, the team has been working towards incorporating that into it. So part of the pre-feasibility will be when next year how that then fits into the Lalor life of mine and the complex life of mine. There are several other pre-visibility studies that I mentioned that are in parallel, which is understanding maybe what Stall of leaching of tails to increase the gold recovery from it, because we still get quite high gold. Gold entails from Stall. So that's one potential pre-feasibility study. The other pre-feasibility is the increase in throughput at Britannia from the 1500 to the 2200 tons a day. And then, how exactly 1901 and some of these other satellite deposits we've spoken about fit into the life of mine to be able to utilize all that capacity that's available to us. So I think incrementally there'll be more information and more stories happening. Yes, I think this time next year, you can expect 1901 and exactly how it fits in. But before that, you're going to learn more between when we present the guidance, what we believe next year's, the increase of hoisting at Lalor will be and also, the earlier gold to be produced out of new Britannia itself.

Our next question comes from Matthew Murphy of Barclays. Please go ahead.

I have a question about the remaining risks regarding the timeline at Pampacancha. I'm quite confident this will be completed in the third quarter, but I'm curious if you think COVID could cause any delays. Do you believe that ongoing negotiations could pose any risks or if there are any other concerns?

Thanks for the question Matt. So the real impact on Pampacancha has been the posing of interaction by the government with the community as required by the Consulta Previa process. Because of the highly sort of personnel contact nature of the process, it caused posing the government declared a state of emergency. But the government is very, very keen to get mines up and running again and to expedite the approval of projects. And so we have been working hard with the Ministry of Energy and Mines to design alternatives with which we can approach the Consulta Previa process. We are pretty confident that with the Ministry's support, we will get the Consulta Previa process completed this year and that means that we will be mining early next year. The other element that you touch on, of course, is the access to the property because of surface rights. So as you know, we have an agreement with the community of Quehuincha. We are in the process now of finalizing agreements with all of the tenants of the land or possessors of the land so that we get access to land; we have access to a third of the land right now. And we expect to complete a negotiation with the rest of the folks in the third quarter. So we don't expect that to inhibit our access to Pampacancha at all. So we're pretty confident we have access to it early next year.

Okay. And the land clearing that's referred to in your press release. What does that involve?

So, the term clearing perhaps is used, we just need to get the folks and the facilities off the land. So there are some informal miners who would be mining on the land; they need to get their equipment off the land. And there are some folks who have been grazing livestock on the land; they need to get their livestock off the land. That's what it amounts to.

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

Most of my questions have already been answered. I guess I just circle back to Manitoba. And congratulations to the team there for a phenomenal quarter. I know you made some comments in your earlier remarks about why production was so strong there, higher gold grades, increasing recoveries at Stall; can you maybe give us a little bit more color on what exactly was done there to have such a terrific result? And can we expect to see some of that carry forward into the second half of the year? I know you haven't changed your guidance there, but is there any kind of opportunity to exceed that with strong activities for the rest of the year?

Hi, Jackie. Yes, I don't think we're going to change the guidance. The guidance is now more prudent. We have an opportunity to manage efficiently in the short term. What has happened is primarily at the Stall processing facility itself. They have increased their throughput, which reduces our costs since we are no longer shipping excess or the Lalor hoist to Flin Flon. This simplifies our process and lowers our expenses. Additionally, there has been significant work in the last couple of years focusing on maintenance improvements at the Stall mill. They have done a great job of fostering a continuous improvement culture as part of their daily operations. This has led to reduced downtime and increased throughput. One of the advantages we've gained from this steady operation and fewer maintenance interruptions is the optimization of the reagents we are using, resulting in a better flow through the process plant. We've observed that these maintenance practices have actually enhanced our reagent utilization, which has likely increased our recovery goal at Stall from the previously forecasted 55% gold recovery to around 60, 61, or 62%. We believe that this level is sustainable moving forward.

That's fantastic. I think the other question that maybe I'll ask is on Consulta Previa. I know you guys have talked about it with respect to Pampacancha. And it sounds like things are going very well for you. I'm going to ask this one but Quehuincha property where you're going to be drilling soon. And if you could maybe give us a little bit of update on what the process is for some of the other deposits or targets that you guys were looking at Maria Reyna, Caballito, Kusiorcco, some of those other ones, is that Consulta Previa process back on track, or is it still on hold?

Yes. Jackie, so we are not at the Consulta Previa stage yet. For Maria Reyna and for Caballito and Kusiorcco. So for those assets, we still need to complete surface rights with the communities. So you may recall, that what happened was we were not in fact in discussions with those communities while we were resolving surface rights for Pampacancha with the community of Chilloroya. And all eyes on what happened there so that they would sort of get a view with respect to what it meant to them. So the community of Uchuccarco, which is a community with whom we negotiate for Maria Reyna and Caballito, for example, is very, very motivated to get an agreement in place with us now, so that we can in fact start the Consulta Previa process and move towards permitting so that we can get access to start drilling those properties. So the steps that remain to be taken are, secure surface rights agreements with the community of Uchuccarco on Caballito and Maria Reyna, following which the Consulta Previa process and other environmental processes will follow.

That sounds like that's maybe a couple of years away before you'd have access to drilling on those lenses.

We are quite optimistic that it will take less time than anticipated. Previously, we mentioned that the process is quite intricate, similar to obtaining the permanent phasing order for mining. The government acknowledges the need to streamline this process, and before the pandemic, there were already steps being taken to make it simpler. We believe that the pandemic will further motivate the government to expedite these changes. Consequently, I do not believe that we are looking at a two-year timeline. We have always indicated that we expect to gain access to these properties before the end of next year, and I still stand by that assertion, suggesting there may even be a chance for an earlier timeline.

Sounds great. And again, congratulations on a great quarter and welcome, Steve, it's a great addition to your team.

Our next question comes from Matthew Fields of Bank of America. Please go ahead.

Just want to ask you a couple about the new credit facilities, seeing those aren't posted yet. So the total facilities are down to 400 million from 550. Is that for the entire life of the facilities or is that for the couple of years of covenant relaxation or what? And then how is that split between Peru and Canada?

I think to put it into context, Matthew, thanks for the question. I think to put it into context, the removal or the downsizing from 550 to 400 is really not a reflection of any lack of confidence or a diminishment in our ability to service though; it's really a reassessment of what we needed from a size perspective. You have to stay anchored in the fact that these facilities are in the context of our current business plan and cashless needs contemplated even to be drawn. So sitting there paying standby fees on additional facilities of $150 million didn't seem to us to be an effective use of our capital. And we take a look at all the things Peter and Cashel have been talking about with respect to the redevelopment and cash flow growth initiatives we're underway for the next 12 to 18 months. Making a more permanent decision on the type of financing we're going to put into place really isn't necessary at this point in time when you contemplate our EBITDA is going to go up enormously once those projects are put into place, putting us into a very different position vis-à-vis how we might finance or the kind of cash flows sort of the kind of credit requirements we would require. And I think from a split perspective, we've done similar things so we're 150 allocated to the proven operations in 250 to corporate, which is merely nothing more than an administrative allocation that has no bearing on our ability to draw.

Okay, great. And then I know that the $115 million gold prepay is not treated as debt for the purposes of the net debt covenant calculation. However, it's obviously a financial liability on your balance sheet new this quarter. Can you sort of get that down and start delivering gold before January 2022 or make any kind of financial payments to sort of reduce that obligation before January 22 or do you basically have to start delivering monthly in January of '22?

I think the intent is for us to deliver monthly, and I'm not sure why we extinguish the obligation in any event. You're correct: it's not treated as an obligation; it's a deferred revenue amount according to our presentation, but I'm not sure we would be surrendering that financing anytime soon in any event.

Okay, and then last one for me, obviously the world's changed a lot in the three months since your last earnings call and the high-yield market has tightened significantly; gold is up significantly. It seems like now it would be a pretty opportune time to term out those 2023 notes. What are your thoughts about that?

I'll revisit my point regarding cash flow changes. It is essential for us to keep an eye on the market. You are correct that we have observed a significant tightening in our potential spreads on both macro and micro levels. The opportunity exists, and the high-yield markets are holding strong. However, we are not in a rush. We have the flexibility to manage our growing cash flows effectively within our current liquidity and cash flow requirements. Of course, we must be aware of the risks and uncertainties in the high-yield market. While we are monitoring the situation, we do not feel the need to rush into refinancing just yet, especially considering the substantial cash flow changes expected upon the completion of our projects. Our focus remains on driving down our cost of capital, and while it might seem straightforward to refinance today, we want to ensure we are optimizing our potential as an organization given the current cash flow circumstances.

So does that mean I’m sorry, the last one, does that mean you're sort of more content to wait a little bit, see how things play out and maybe refinance something smaller than 400 when it comes to that, rather than sort of do it now at 400?

My posture in any organization I've been in and I think we talked about this internally and we all agree. And it's a continuation of the strategy, I think Eugene adopted. We are in a rising cash flow market. We're in a rising cash flow situation for ourselves. I guess you could say yes, I'm in no hurry because I do see a lot of positive momentum vis-à-vis options and our cash flows. And we do have term. I think the rush to finance it is really driven by outside influences. We do have term, and I don't foresee a hurry at this point. As a matter of policy, I can tell you, I've always believed that an organization should always be in a position to strike in a market should the opportunity arise and it's right. But I see no reason to print a number today that's higher, that's a higher carry cost than what we're paying on it today. And I think we'll hang tight till something satisfies us on a lot of fronts.

Our next question comes from Oscar Cabrera of CIBC. Please go ahead.

I was wondering if you could remind me of the numbers you provided for Constancia in 2021. When did you start to cut costs, and when do you think you can begin processing ore from Pampacancha and the Constancia mill?

I think we can accomplish that in the first quarter of 2021 for all of that work. I expect that we will begin the pre-development work early in the new year. By the end of the first quarter, we should be feeling the pressure.

Okay. I thought your comments on Consulta Previa were interesting. Could you provide context around these alternatives that the government of Peru may be considering what the process is?

And Oscar, what the government is trying to do to streamline the process is to see how they can actually minimize the human contact element of it. So they are designing, looking at where the processes can be designed whereby they can interact with a smaller number of people through perhaps community associations. And that's what they're looking at. So, suffice it to say that the communities and the ministry are both motivated towards finding better solutions and the solutions that they are looking for hopefully entail minimizing human contact.

I appreciate you sharing the amount of land for which you currently have rights, which I understand is about two-thirds. Regarding the remaining third, are you in negotiations with a number of parties? Could you provide some context on that?

Certainly, we are in negotiations with a specific number of individuals, but it's not a large group. We have secured agreements with two-thirds of the parties involved, which I believe includes around 80 individuals in total. Therefore, one-third of that would likely amount to about 25 people. I don't have the precise figures, but I hope that helps.

There are several people we need to negotiate with, but there are fewer than 10 land packages remaining that we still have to negotiate. I believe it's about six or seven. Progress is being made daily, so the number is decreasing. Regarding Consulta Previa, the government acknowledges the agrarian reform and that the community voted, with two-thirds of the members granting Hudbay the rights to the mineral rights. We are now collaborating with the individual landholders. While two-thirds have agreed, we have already surpassed those milestones in the markets, liberating Pampacancha for mining. Additionally, we have not yet disbursed funds for the original agreement, which means the community could choose to get paid if the land is liberated. The community already has ownership and title to their land, and what the government is proposing is more of a simplified administrative process rather than a full negotiation process.

Okay, great. That's really cool, Cashel. Thank you. Lastly, your growth initiatives and the bubbles provide helpful context for your thinking. It's interesting that we haven't heard any updates on Mason. I was wondering, considering the current state of metal prices and your market views, would it be fair to say that Manitoba is your top priority, followed by Constancia, and then Rosemont once it is resolved? Also, can we expect some information about Mason to come out in 2022?

Oscar, I don’t view our initiatives this year as having relative priorities. I agree that the rising gold price adds urgency to the new Britannia project. However, we are not downgrading Pampacancha’s importance; we are committed to delivering it. Rosemont and Mason are also crucial to our pipeline. Rosemont is particularly important, and we strongly believe we will succeed at the Ninth Circuit next year to get it back on track. In the meantime, as previously mentioned, we are applying the lessons learned from Constancia and Rosemont to Mason, which is helping us enhance its economics. Our goal is to advance Mason quickly so we can conduct a proper PEA and outline the next steps. While Mason is valuable, it’s not as progressed as the other projects. I prefer to focus on our commitments to shareholders and deliver on them without comparing urgency levels.

Great answer Peter. And congratulations on the strong performance in the current environment and wishes to you and your family to stay healthy and well.

Our next question comes from Lawson Winder of Bank of America Merrill Lynch. Please go ahead.

Just one follow-up on the Consulta Previa discussion, you've given us a lot of detail here. And I wonder if it would be a stretch to infer that if the state of emergency were extended, there's now been processes put in place that the Consulta Previa could still continue nevertheless, would that be fair to say?

Lawson, thanks for the question. I think that that is fair to say yes.

Okay. That's really helpful. Looking at the second half of Constancia regarding the ore to be milled, could you provide some guidance on the expected split between mined ore and stockpiled ore that will be processed?

Yes, Lawson, thanks. We have worked our way through the stockpiled ore, which is why we expect better recoveries and improved ore quality in the second half of the year. We have managed a significant portion of the lower-quality ores that were mixed in without affecting our recovery rates. Much of that material is now gone. During the period, we saw weeks where stockpiled ore made up 80% of our supply and mined ore 20%, but this has now reversed. Currently, we are at about 20% stockpiled and 80% mined, and we anticipate returning to a more typical scenario with around 90% mined feed. We may still have about 10% coming from stockpiled ore, but we are focused on managing the lower-quality portions to optimize our recoveries and improve throughput. We have settled into a new normal, and we are producing at levels similar to where we were previously.

Okay. That's great. And then just two questions from me on Lalor, and that'll be it. One, how long is the hoist maintenance going to take and will that mean a complete shutdown of mining?

Yes. It's just two weeks. And yes, the mining will be shut down for that period. It's already complete. So it went off without a hitch. And so they're up and running full steam right now.

And then, finally just on Lalor gold zone did underground or the ground conditions meet your expectations?

Yes. I was underground. I want to say three weeks ago, at Lalor. I isolated myself in Northern Ontario and that was deemed acceptable to the citizens of Manitoba. So I went underground, I saw the zones. The ground conditions are great. So it's going to benefit from the long-haul mining we had proposed. And we expect good production at zones 27 and 25. And as I said earlier, what we're trying to do now is change the sequence and try and meet with the challenge we've put forward and the optimization of bringing the new Britannia refurbishment earlier and therefore the mining from zone 25 earlier, so we can increase the number of ounces we produce next year.

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

Thank you, Operator, and thank you everyone for participating today. Please feel free to reach out to our Investor Relations Department if you have any questions. Now disconnect your lines.