Hudbay Minerals Inc. Q4 FY2020 Earnings Call

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Hudbay Minerals Inc. Fourth Quarter and Full Year 2020 Results and Annual Guidance 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, February 19, 2021, at 9 a.m. Eastern Time. I will now 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 fourth quarter results conference call. Hudbay’s financial results were issued yesterday and are available on our website. 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 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. As a reminder, all amounts discussed on today’s call are in U.S. dollars unless otherwise noted. And now, I will pass the call over to Peter Kukielski. Peter?

Thank you, Candace. Good morning, everyone, and thanks for joining us. I know it’s been a long week for you all, so we at Hudbay are especially appreciative of you all joining us for this call. I hope that everybody is staying safe and healthy as we approach the anniversary of the pandemic. We continue to focus on the safety of our employees and stakeholders and we believe that our diligence in screening, testing and workplace protocols has been effective in achieving our objective of being a safe employer and neighbor, and we will continue to adapt our site specific measures to conform to the regional health authorities' latest guidelines. In this presentation today, I will touch on our corporate achievements and challenges in 2020, followed by an overview of our production and cost outlook as we execute our key strategic objectives for 2021. 2020 was an extraordinary year; while it brought many unforeseen challenges, we faced these, we persevered, and we achieved production and unit cost guidance while advancing our growth initiatives. In March, we announced the second phase of our Snow Lake gold strategy, which saw a 35% increase in our Snow Lake gold reserves, a 41% increase in the life of mine gold production at Lalor, and increased the annual gold production at Lalor to over 150,000 ounces at the lowest quartile cash costs and sustaining cash costs. In May, we funded the New Britannia mill refurbishment project with a timely gold prepay transaction. We have advanced the project to 73% completion to-date. We also identified the potential to produce gold from the New Britannia mill earlier than expected in 2021 through the installation of modular flotation cells at the gold plant. We upgraded the NI 43-101 resource estimate at the 1901 deposit and increased the size of the base metal resources while defining a new gold-rich inferred resource. From an operating perspective, we experienced an unfortunate incident in October with the 777 mine hoist rope and skip. The team quickly remedied the problem and the repair activities were completed well ahead of the estimated schedule and budget. Despite the 777 production interruption, our Manitoba operations exceeded the top end of our 2020 copper production guidance range and refined zinc metal production was higher than it has been in over 10 years. We were extremely pleased with the productivity at our Snow Lake operations, as the Lalor mine and Stall concentrator both achieved record quarterly and annual production during the year. In Peru, we signed the Pampacancha surface rights agreement with the community of Chilloroya in February of 2020, after which we initiated the Consulta Previa process and discussions with individual land users. However, with the onset of the pandemic in March, the Peruvian government declared a national state of emergency. This halted the Pampacancha process until later in the year once meetings were able to be held virtually or in-person while adhering to social distancing protocols. We were pleased to finally complete the Consulta Previa process at the end of the year with strong community support, which led to the receipt of the final mining permit for Pampacancha in early 2021. Limited site predevelopment activities have commenced, discussions with the one remaining land user family are ongoing, and we expect the initial mining of the deposit will commence in the second quarter of 2021. Following the government’s declaration of a state of emergency, Constancia operations were temporarily suspended for eight weeks from March until May. The mine completed a quick and efficient ramp up to full production while operating under increased COVID-19 measures of extensive quarantining and testing of workers prior to coming to site. In September, Constancia became the first mine to obtain the safeguard certification from Bureau Veritas in Peru for compliance with all of the protocols from its COVID-19 surveillance plan after an exhaustive audit of the mine’s policies and procedures. During the third quarter, we announced follow-up drilling results on our Constancia North target, which intersected porphyry and skarn mineralization north of the Constancia pit and the mineralization remains open to the north. The encouraging results will be incorporated into our annual reserve and resource update for Constancia, which will be released at the end of March. In 2020, we advanced the exploration programs at Quehuincha North, where we recently commenced drilling, and at the Llaguen property in Northern Peru, where we received all required permits to begin drilling this year. We also advanced several other strategic initiatives across the organization. Our teams have done an outstanding job of implementing COVID-19 protocols in all of our operations. Their focus on achieving strong results despite changing the way they work has been quite remarkable. In Arizona, we advanced the appeals process for Rosemont with the filing of our initial briefs in June, followed by final briefs in November, in conjunction with the filings of support briefs by the federal government. In the second half of the year, we commenced an exploration drill program on our wholly-owned land near Rosemont in a historic copper mining district called Helvetia. We also continue to consolidate lands near our Mason project in Nevada and advanced work in preparation for a preliminary economic study for Mason. We solidified our management team with my confirmation as CEO earlier in the year and the appointment of Steve Douglas as CFO in June. In September, we completed the refinancing of our 2023 senior unsecured notes, which pushed out the maturity to 2029 and lowered the interest rate by over 1%. Lastly, we maintained ongoing dialogue with our surrounding communities in Peru and Manitoba to provide pandemic relief support. Turning to slide four, fourth quarter consolidated copper production increased by 7% from the third quarter of 2020, primarily as a result of higher mill throughput and recoveries at Constancia and higher copper grades and recoveries in Manitoba. Consolidated gold production increased by 14% compared to the third quarter, due to higher grades at Lalor and higher recoveries at the Stall Mill. Zinc production contained in concentrate declined quarter-over-quarter as a result of the reduced output from the 777 mine. However, refined zinc metal production increased from the third quarter as we continued to process available zinc concentrate inventories at the zinc plant while the 777 shaft was being repaired. The strong copper, gold, and silver production in the quarter offset the lower zinc production, resulting in relatively no change in copper equivalent production compared to last quarter. Consolidated cash costs declined from the third quarter levels due to higher copper production and higher byproduct revenue, partially offset by higher operating costs. Consolidated all-in sustaining cash cost remained relatively unchanged from the third quarter. Operating cash flow before change in non-cash working capital was $86 million during the fourth quarter, reflecting a slight increase from the third quarter due to higher realized copper and zinc prices and working capital changes. This also led to significantly improved adjusted net loss and adjusted EBITDA results in the fourth quarter. Adjusted net loss was $0.06 per share and adjusted EBITDA was $107 million. For the full year 2020, we met the guidance ranges for all of our metals. Copper production was lower year-over-year as a result of lower grades at Constancia and the impacts of the eight-week temporary production interruption. However, consolidated gold production increased by 9% over 2019 levels, as significantly higher gold production from Manitoba more than offset lower production in Peru. This allowed us to capitalize on higher gold prices this year, as we saw a 24% increase in Manitoba’s gold sales volumes in 2020 compared to 2019. We exited the year with $439 million in cash and equivalents, which positions us well to pursue our strategic growth investments in 2021. On slide five, you will find a summary of our Peru operating results. Our Constancia team delivered strong performance this year while operating in a challenging social and political environment. During the quarter, production of copper, gold, and silver were higher than the third quarter of 2020 as a result of the ramp up to full production after the temporary suspension of operations. Full year 2020 production levels were lower than 2019 due to lower grades in line with mine plan and the production interruption in the second quarter. The mine achieved excellent operational efficiencies during the quarter with a 10% increase in ore mined compared to the third quarter. Ore milled was also higher than the third quarter as a result of a fourth quarter plant maintenance shutdown that was deferred to January 2021. Recoveries of copper, gold, and silver were all higher in the third quarter due to ongoing recovery optimization efforts and actively managing the characteristics of the ore feed. Unit operating costs in the fourth quarter were higher than in the third quarter, primarily as a result of higher mining costs, but full year combined unit operating costs were in line with 2019 levels. Peru’s cash cost was lowered in the previous quarter due to higher byproduct credits and higher copper production. Sustaining cash cost increased quarter-over-quarter primarily due to capitalized exploration related to option payments for properties surrounding Constancia in the fourth quarter. As I mentioned previously, we achieved our production and unit cost guidance ranges for Peru in 2020. Now moving to the next slide on Manitoba, we were pleased with the business unit response to the 777 shaft incident. The business continuity plan relocated employees and equipment from 777 to Lalor and utilized Lalor’s ramp to truck additional ore to surface from the upper parts of the mine at a rate of approximately 650 tons per day. This allowed Lalor to achieve record quarterly production averaging over 5,000 tons per day in the fourth quarter. Lalor continued to produce at a higher tonnage rate through the month of December, mainly due to ongoing continuous improvement initiatives. As a result of these efforts, together with high head grades and recoveries, production of copper and gold was higher than the previous quarter. We continue to see strong performance from the Stall concentrator with record throughput of over 4,000 tons that they achieved in the fourth quarter and approximately 3,870 tons per day on an annual basis. Full year ore processed at Stall increased by 9% as a result of ongoing continuous improvement initiatives and higher ore availability from the Lalor mine. Unit operating costs in the fourth quarter increased by 11% compared to the third quarter, but remained within the annual guidance range despite the 777 production interruption. Manitoba’s cash cost and sustaining cash cost per pound of copper produced continued to benefit from higher byproduct credits. As I mentioned previously, Manitoba exceeded the top end of our copper production guidance range and met all other production and unit cost guidance by a significant margin for 2020. Turning to slide seven, while 2021 continues to be a year of execution and delivery for Hudbay, our achievements in 2020 have positioned us well to deliver on many key objectives this year. Our 2021 objectives are to focus on operational efficiencies and maintain our low cost of production to continue to generate positive cash flow and strong returns on invested capital, to execute development and commence mining activities at the high-grade Pampacancha satellite deposit, further enhancing Constancia’s production and cost profile, to deliver the refurbishment of the new Britannia gold mill to significantly increase gold production from Lalor, and completing the second phase of the Snow Lake gold strategy. Additionally, we will progress the third phase of our Snow Lake gold strategy to further increase annual production scale by advancing studies to optimize recoveries, throughput, resource conversion, and exploration. Further, we plan to advance the appeals process and explore alternative options to unlock value at Rosemont, maintain Constancia’s industry-leading efficiency metrics by identifying areas of upside through continuous improvement initiatives at the mill, drill regional copper exploration targets near Constancia in Northern Peru and at Rosemont, while continuing to advance exploration programs in the Snow Lake region and Nevada. We are also committed to supporting our workforce, their families, and the communities in which we operate through continuing to prioritize health and safety and providing ongoing COVID-19 support in line with our ESG principles. Lastly, we will evaluate exploration, organic growth, and acquisition opportunities that meet our stringent strategic criteria and allocate capital to pursue those opportunities that create sustainable value for the company and our stakeholders. Moving to the subject of guidance, in 2021, we forecast consolidated copper production to increase by 7% compared to 2020 production, primarily as a result of higher expected copper production in Peru. We expect consolidated gold production in 2021 to increase by 62% year-over-year due to higher gold production in both Manitoba and Peru. In Manitoba, we expect gold production to increase by 40% in 2021 due to the planned early startup of the new Britannia mill. In Peru, we expect gold production to be more than triple that in 2020 as we begin to see the benefits from the higher grades at the Pampacancha satellite deposit. We expect zinc production to decline year-over-year as a result of prioritizing the mining of the gold-rich zones at Lalor in connection with the early startup of the new Britannia mill, which will result in mining less of the zinc-rich base metal zones at Lalor. Peru’s 2021 production guidance assumes mining of Pampacancha will begin in the second quarter, with the initial phase of lower copper grades but higher gold grades expected to continue for the balance of the year before higher copper grades are forecast to enter the mine plan in 2022. Manitoba’s 2021 production guidance contemplates an increase in Lalor’s mine throughput to 4,650 tons per day from the previous 4,500 tons per day, as we expect the recent trend of stronger production from the mine to continue. We plan to publish updated mine plans for our Constancia and Snow Lake operations with our Annual Mineral Reserve and Resource Update at the end of March 2021. Given the pending mine plan updates, we will issue our updated three-year production outlook in conjunction with the release of the updated mine plans. We expect the new Constancia mine plan to reflect an increase in copper and gold production from 2022 to 2025, as the higher grades from the Pampacancha deposit come into the mine plan. This is expected to offset the lost copper production from the 777 closure in mid-2022 and enable a steady state in our consolidated copper production. It will also incorporate new reserves from the Constancia North property, which will extend the Constancia pit. We expect the New Snow Lake mine plan to reflect an increase in Lalor’s mine production rate beyond 4,650 tons per day and incorporate the results of the 1901 prefeasibility study and the Stall mill recovery improvement study. Now turning to annual cost guidance, we expect total capital expenditures to decline by 11% year-over-year, primarily due to lower expected growth spending in Peru in 2021. Total planned sustaining capital expenditures are expected to increase from 2020 levels, mainly due to the deferral of heavy civil works and capitalized stripping expenditures in Peru from 2020 into 2021. A tailings dam raise is underway at Constancia, and the associated heavy civil works accounts for a significant portion of the 2021 sustaining costs in Peru. Also, a portion of the Pampacancha heavy civil works has been reclassified from growth to sustaining capital expenditures in 2021. We expect Peru’s sustaining capital expenditures to begin to decline in 2022. Manitoba growth capital of $75 million includes approximately $70 million for the remaining spend on the New Britannia mill refurbishment project and approximately $5 million for the construction of a new long-term camp facility in Snow Lake. The increase in Manitoba’s growth capital spending includes approximately $20 million in New Britannia project expenditures deferred from 2020 into 2021 and approximately $13 million in additional project costs as a result of the completion of a definitive estimate that incorporates project scope additions and COVID-19-related costs. Peru's growth capital spending of $5 million includes a portion of the Pampacancha project development expenditures that was deferred from 2020 but excludes the costs associated with completing the remaining individual land user agreements due to the ongoing nature of the negotiations. A significant portion of the total land user agreements cost was completed last year. We expect total exploration expenditures in 2021 to be higher than in 2020, as we plan to conduct additional drilling in Peru and Arizona. In Peru, we are drilling the Quehuincha North skarn property located approximately 10 kilometers north of Constancia. We also plan to start drilling the Llaguen greenfield project located near the city of Trujillo in Northern Peru after the rainy season is complete. In Manitoba, we are conducting a winter drill program focused on expanding the 1901 deposit and testing drill targets identified between 1901 and Lalor mine. And in Arizona, we continue to drill in the Helvetia copper region, following up on interesting intersections, and we will provide further details once we receive all of the assay results. We expect unit operating costs in 2021 to be modestly higher than in 2020 with the inclusion of the New Britannia mill and higher input costs in Peru. Hudbay introduced consolidated cash cost and sustaining cash cost guidance in 2021; we expect consolidated cash cost per pound of copper produced net of byproduct credits to slightly increase from 2020 levels due to the expected increase in unit costs, partially offset by expected higher copper production and higher byproduct credits. We expect consolidated sustaining cash costs to be consistent with 2020, as lower sustaining capital expenditures are expected to offset the increase in cash costs. The last topic I will touch on is the execution of our growth initiatives. We continue to make significant progress at the New Britannia refurbishment project. The project continues to track ahead of the original schedule, with overall project progress at approximately 73% complete. Construction of the new copper flotation building continues to advance as planned. Construction of the pipeline between the New Britannia and Stall mills has been completed. Total project spending in the New Britannia refurbishment project is forecast to be approximately $13 million higher than budget. As I mentioned earlier, as the project nears completion, we have a higher classification of the project capital estimate. The project scope has been adjusted to incorporate changes to the Stall tailings pipeline configuration due to processing considerations, in addition to the implemented scope changes related to the installation of temporary modular copper flotation cells to achieve early production at the gold plant. Also, as you can imagine, the COVID-19 pandemic has given rise to some additional costs associated with remote project management and pandemic safety protocols. Refurbishment activities at the gold plant continue to remain ahead of the original schedule with commissioning expected to be completed in mid-2021. Ramp-up and first production at the gold plant is expected early in the third quarter of 2021. Copper flotation building construction activities are on track for commissioning and ramp-up during the fourth quarter of 2021. Operational readiness activities in support of the early startup of New Britannia are on track, with the underground development rates in gold-rich Lenses 25 and 27 at Lalor proceeding ahead of plan. In addition to delivering on the New Britannia mill refurbishment project and the development and mining of Pampacancha, there are other strategic growth initiatives we expect to execute this year. In Snow Lake, we continue to advance Phase 3 of our gold strategy. As I mentioned, we will update our mine plan at the end of March, and we believe this new mine plan will optimize our Snow Lake milling capacity with an expected higher production rate at Lalor, improved recoveries at the Stall mill, and the incorporation of the 1901 deposit into the operations. Our focus will be on implementing these mine plan enhancements, while continuing to examine the opportunity to expand the New Britannia mill capacity beyond the currently planned 15,000 tons in the future. We have various exploration programs underway, including our drilling activities in Peru and Arizona that I mentioned earlier, and we continue to advance exploration agreement discussions with the community of Kusiorcco on the Maria Reyna and Caballito properties north of Constancia. Maria Reyna is a prospective copper skarn-porphyry target, and Caballito is a past-producing copper oxide mine, both of which are located within 10 kilometers north of Constancia. We also expect to be finalizing our work on the Mason project preliminary economic study, which is expected to be published this year. We believe we have several exciting optimization, expansion, and exploration opportunities that will be studied and advanced in 2021, creating many growth catalysts for the company this year. We look forward to delivering on those growth catalysts while executing our high-return investment opportunities as we increase cash flows and create value for all of our shareholders. And with that, we are pleased to take your questions.

Thank you. Our first question comes from Orest Wowkodaw of Scotiabank. Please go ahead.

Hi. Good morning. Obviously you have a lot of growth initiatives ahead of you. Can you give us a bit of color on what this Constancia North deposit could do to the mine plan? Is it substantially higher grade? And I am also curious if your new mine plan that will come out will include a mill expansion at Constancia, or is that more likely to come later?

Good morning, Orest, and thanks very much for the question. Look, we are currently completing the work on Constancia North, but we expect to incorporate it into our reserve at Constancia, which will extend the pit, as I said. We will provide more details with the Annual Reserves and Resource Updates at the end of March. To your question with respect to the mill, no, we are not currently planning within our mine plan for any expansion to the mill. Cashel, any additional insight you would like to provide?

Thanks, Peter. It always remains a future option for us, and it’s work we are working on. But this current mine plan was developed to update what’s happening at Constancia and to incorporate the Constancia Norte discovery over the last couple of years.

Does that answer your question, Orest?

Okay. Well, just curious if you can give a sense of how much better the grade is for the North deposit versus the main. Is it just slightly better or materially better?

I would say, Orest, it’s slightly better. It certainly is better than the main body. It’s not as good as Pampacancha.

Okay. And is the idea to sequence that concurrently with Pampacancha?

Cashel?

Yeah. The idea is to incorporate it the best way optimally with an NPV optimization process, and so we run several iterations of the mine to come up with the optimum value. We expect that some of that material will move earlier into the mine plan versus holding it for later.

Okay. And then, just finally, I mean, to me it would seem like a mill expansion at Constancia would make a ton of sense, given the lower grade profile of the main pit. What’s holding you back there in terms of moving that project forward? Is it a permitting issue or I am just curious why that’s not being fast-tracked?

Yeah. I think you nailed it. It’s about the permits and the permitting process. So that’s ongoing, and we sequence the permit with the process to get to different mining sequences. So the latest one is with the agreement on Consulta Previa. We are able to close the permits required to mine at Pampacancha, and so the next permit iteration we would work on would be including something like an expansion at Constancia.

Okay. Okay. Thank you very much.

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

Yeah. Thank you. In the MD&A or in the press release last night, there’s a comment about steady state production, particularly of copper in the 22 to 25 range. Is that something in the plus 100,000 tons to 115,000 tons a year of copper X or even before you include these new mine plans in the profile?

Yeah. That’s correct, Greg.

And how long do you think it’s been sustaining that level of production?

I would say through to the completion of the depletion of Pampacancha.

Okay. And then the 25 to 26?

Yeah. Roughly that. And you get some additional kick from Constancia North potentially, as Cashel mentioned.

Okay. Now on cost pressures, you have some upward cost pressures or some upward revisions to costs for this year. But we are getting mixed messages from the various companies about whether they are getting cost pressures or not getting cost pressures. I just want to nail down and get some commentary from you on what you are seeing or experiencing on the cost side in this environment?

Yeah. I think, Greg, it’s Cashel here. I think there are definitely some pressures on our base costs, and we have seen them sort of sustainably creeping in. They are not in the 1% or 2%; they are not in the 10%, so they are somewhere in between. But I think we will have real clarity on what those are and what we foresee them to be with these two mine plans coming out near the end of March, and that’s Lalor and Constancia, and so there will be a lot of clarity on it then.

Okay. And finally, Peter, I appreciate all of the talk about the growth initiatives you have and the things you are doing. You have been through a big phase of capital investment. But what about shareholder returns and when do you think you will be in a position to start talking meaningfully about the dividend and taking that higher?

Greg, I mean, shareholder returns obviously is a key element of capital allocation. It’s something that we think about all of the time and we are singularly focused on delivering what we have to so that we can enter into that phase, so we actually delivered sustainable shareholder returns. But, Steve, do you want to comment on that further?

Yeah. I agree wholeheartedly, Peter, and Greg, I look at the need frankly. As I have always spoken, dividends are a cost of capital, and there should be set such that they are sustainable, growing over the course of a sustained cycle. I also look at where we are at in terms of our opportunity set and our development potential going forward. As it stands now, probably the better use of our capital is ensuring that we have got a conservatively financed balance sheet but also the financial horsepower to be able to pursue our expansion plans, which puts us in a position to sustain that growing sustainable dividend over the span of time. Once we get ourselves positioned in terms of getting all of our assets working as optimally as we think we can. But the question is perfectly appropriate and it’s something we discuss actively every day.

Okay. So do you think you are about a year away from that process?

No, I wouldn’t.

Okay.

Again, I think we look at all competing needs for capital and depending on the outcome of the Rosemont process, depending on the outcome of our extensive exploration, we are going to have to evaluate at any given time the opportunity set versus expanding those returns. It’s definitely aspirational if we want to return to growth as a sustainable dividend payer over the cycles. But we want to make sure we get all of our asset base working in a fashion that will support that.

Great. Okay. Thank you.

Our next question comes from Fahad Tariq of Credit Suisse. Please go ahead.

Hi. Good morning. Just following up on the last question but more related to CapEx. As you think about the 2021 guidance, maybe can you give some color on how much of the $340 million is kind of the deferred from 2020 versus maybe just higher pre-stripping or stripping cost at Peru? Like I am just trying to get a sense of, obviously, the overall number was a bit higher than expected. I am just trying to get a sense of how much of that is deferrals versus the actual scope of the activities that have increased? Thanks.

Sure, Fahad. Thank you for the question. In Peru, we deferred approximately $20 million of capitalized stripping from 2020 into 2021 due to the pause in mining activities during the pandemic. We also moved some capital associated with Pampacancha into 2021. At New Britannia, quite a bit of our, I think, about $20 million of capital was moved from 2020 into 2021. So those are the primary areas of movement from 2020 into 2021 and the rest is largely consistent with what we had before. We had telegraphed the tailings work that was going to be done in Peru and Manitoba. But those are the key elements of what has been deferred.

Okay. That’s helpful. Thank you. I have a quick follow-up on 2020; the capital expenditures were above guidance. Can we assume that most of that was due to the land user agreements?

Yes, that is a fair assumption.

Okay. And then just lastly on that, you mentioned there’s obviously a few land user agreements left for 2021, but most were completed in 2020. So should we assume just like a little bit higher versus the CapEx guide just to account for that, would that be a fair assumption as well?

I would say that it will not be material. We have one remaining negotiation with one family left to conclude. We remain optimistic that that will be included in time to allow us to start mining activities in the second quarter. I would mention that the last negotiation is always last because it’s the most complicated. But we are a little bit frustrated, as is the community of Chilloroya, that it’s taken so long. However, we do believe that we are in the final stages of concluding it now, and we do think that the amount that it will entail will not be material.

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

Thanks very much everyone for taking my question. I wanted to switch gears and talk about Manitoba for a minute. With the 777 accident last year, you also reshuffled things a little and maybe gave you an opportunity to test out some of the limits at Lalor. I see that you have raised the guidance for 2021 to combine 4,650 tons rather than the 4,500 tons run rate that you were previously assuming. Is there room to move that further? With 777 closing, does the Flin Flon mill become an option that you could factor into the plan ramp access? Would that be part of the plan as well? I know this is all probably coming out in March. But can you give us an idea sort of big picture what the opportunities are and maybe what your strategy might look like two years, three years, four years down the road? Thanks.

Yeah. Sure. Happy to do that, Jackie. Thanks for the question. We have seen outstanding productivity at the Lalor mine, where we averaged over 4,900 tons per day over the last couple of months. That’s been the result of several initiatives taken in 2020, including the new Lalor garage, the Mobilaris Mining Intelligence Technology system that allows us to get a real-time look at the operation and optimize safety. More than that, with the addition of people or the movement of people and equipment from 777 to Lalor during the shaft outage at 777, we were able to test the entitlement at Lalor. We expect that we can probably achieve an additional 650 tons per day up the ramp at Lalor, which previously we would not have done before. So I think that provides you with a sense of what might be possible. Cashel, would you comment any further on that?

All I’d add is obviously we have the installed capacity to treat that material after it comes up the ramp and the shaft in Snow Lake itself. We don’t need to keep the Flin Flon mill open. Stall itself last year, as Peter said in his text, was over 3,800 tons a day, and I think recently we achieved over 4,000 tons a day there with a design capacity for New Britt at 1,500 tons a day. I’d remind people that quite often when we have refurbished and/or built some of these new processing facilities, it’s quite often in the end we exceed that throughput capacity that is in the design, like we did in Constancia. We are currently hoisting over or close to 5,000 tons a day at Lalor, so with an extra 500 or 600 up the ramp, we start getting what is the future of Lalor. We will have some clarity for that at the end of March.

That’s great. Thank you. And maybe just a follow-up question on Manitoba, the guidance that you gave last night for 2021 at Manitoba. If I am comparing that with the guidance that you gave around this time last year, it looks like your zinc production for this year is lower than you would previously expected and maybe the precious metals are higher. You had broken it out a little differently before? But if I use the same conversion ratio, it looks like your precious metals are higher. Is this a function of maybe just changing the mine plan or are you accessing a different part of the Lalor ore body in 2021 than one you would previously planned, or what’s driving those changes?

I believe the main factor is preparation. The Manitoba team is currently stockpiling some of our pre-test ore from Zones 25 and 27, which include our gold and copper-gold zones. Additionally, there has been an increased focus on preparing and intensively mining these zones to capitalize on the higher grades available. In any NPV optimization, the focus is on the value of the ore and its margin rather than the metal itself. With these optimizations, we are observing a greater value in the gold segment. We will continue mining zinc; however, the grade of Lalor zinc is declining as the mine matures, and we initially focused on the zinc because it was more accessible in the shallower part of the mine. We are currently applying the same strategy to gold as we approach late 2021. Our mine plan, which will be released in March, will provide further clarity on that NPV optimization.

Perfect. That’s it from me. Thanks very much, Cashel and Peter.

Thanks.

Our next question comes from Dalton Baretto of Canaccord. Please go ahead.

Thanks. Good morning, Peter and team. Peter, sticking with Manitoba, probably, a bigger picture question for you, while you were speaking copper went up to $4 a pound and gold’s in the $1,700 now, and you were just a few months away from the new mine plan, as well as the completion of New Brit. How are you thinking about that business now just in the context of your portfolio?

Dalton, we are loving it. It doesn’t change our view with respect to how we are focusing on the assets you know. As I have said consistently over the last few quarters, we are in delivery mode right now and we are singularly focused on getting New Brit refurbishment up and running so that we can deliver those gold ounces as well as enhanced copper recoveries with what you are talking about with our Stall mill enhancements. Once you have completed this work, and we have done all of this optimization work through the rest of the year, then I think we can pause and think of what it might mean. But true to some of the questions that you heard before, we really, really want to accelerate cash flows in this company and take advantage of the current environment so that we can actually start pursuing other initiatives and returning cash to our shareholders. Again, as I have said before, no apologies for cash flows; we think this business is a great business. We think that there’s a lot of potential to be exposed to continuing with our optimization efforts and performance improvement efforts in Manitoba. At some point we will pause and see what that all means us, but we are on a roll right now to try to deliver, and we are not getting defocused by what the world might be or what it might mean later on.

Okay. Great. And then just maybe speaking of some of these other initiatives, so on Rosemont you have got a decision now coming sometime in H2, and fingers crossed for you guys. But what happens if it’s not successful? What do you do then and how fast can you move on some of these alternative options?

That’s a great question. Look, as I have always said, we continue to remain focused on the appeals process as our primary area of focus. At the same time, we do continue to pursue alternatives. What I can say is that I am convinced that we will build Rosemont in one way or another. While we wait for the decision to be rendered, we continue to investigate other opportunities. We continue to look at expanding our resource base. I think let’s wait for that decision; we will have a much clearer picture. But I believe we will develop Rosemont.

Okay. Great. And then just maybe one final one from me, with regards to the expired CBAs and particularly in Peru, just with the run in the copper price and an election coming on April 11th, and just given what happened with Candelario last year, are you at all concerned?

Dalton, we are not concerned. In Manitoba, we haven’t experienced a strike in 20 years and maintain a strong relationship with our employees. While there have been minor strikes in that time, we understand the issues and are in ongoing dialogue with them. We don't anticipate any disruptions. Similarly, in Peru, we are engaged in discussions with our employees regarding a few unresolved elements, but we don’t expect it to lead to any interruptions. In summary, while we remain attentive and value communication with our employees, we are not worried about any disruptions.

That’s great. Thank you, Peter.

You are welcome.

Our next question comes from Stefan Ioannou of Cormark Securities. Please go ahead.

Thanks, everyone. I'm interested in the exploration efforts, specifically regarding the regional exploration north of Constancia that is currently in progress. If I recall correctly, there is a significant geophysical anomaly in that area. Could you provide some insight into the scale of the drill program there? Also, could you clarify whether this is targeting near-surface deposits or if it's expected to be at a greater depth?

I will provide some comments and let Cashel elaborate further. Currently, we have only one drilling program in progress, which is located at the Quehuincha North property. Regarding Maria Reyna and Caballito, we are in negotiations with the Uchuccarco community to obtain surface rights necessary to commence drilling. Following that, we will need to go through the permitting process, including Consulta Previa, to secure the required permits. Based on our evaluation of the existing legal framework, it seems unlikely that we will begin drilling on those targets before the end of this year or early next year. Nevertheless, we are actively drilling at Quehuincha North and anticipate being able to share some results in the upcoming quarters. Cashel, would you like to provide input on the depth of mineralization?

Yeah. All of what we are targeting is similar to Constancia and Pampacancha. It’s all shallow targets generated from V10 geological mapping and ground geophysics. Quehuincha Norte, although it’s not our number one target as we speak about Caballito or Maria Reyna, it is a very good target and we are drilling there currently. So that’s a great sign for us. We got started early despite the rainy season now. We do have a permit to drill on another prospect in northern Peru that we are quite excited about. It’s near the community of the city of a million people about three hours away on the mid-coast of Peru, Trujillo there. The property is called Llaguen. We are quite excited at the end of this rainy season to get started there with some follow-up advanced exploration. There are quite a number of drill holes already indicating mineral endowment. I would also mention our other exploration efforts in Manitoba to follow up on some targets like the 1901 between Lalor and 1901 itself. We are currently drilling in the Helvetia historical copper mining districts that saw mining continuously from the late 1800s to the mid-1900s, more following up on what I think, there are some 20 sort of pick and shovel underground operations, and currently we have three drills turning there. I think we are going to go up with a couple more drills and we are excited to talk about what we see there geologically. When we get a fulsome report on all our assets both the total copper and the sequential copper assets, we are excited to report those along in the timeline with our two mine plans at Constancia and Lalor.

Okay. Okay. Good. And maybe just on Manitoba, is all the exploration there and then focused right now around the epicenter of sort of Lalor and 1901 or is there any broader regional stuff looking maybe into that sort of till all this cover and whatnot?

Yeah. Right now the focus is that Chisel Basin itself to really understand what is the endowment available to us to optimize now the two plants we have, the base metal and gold plant that are within truckable distance of Snow Lake. So that’s the principal focus right now in Manitoba. As I said, the other focus are some of the quite compelling targets we have Norte Constancia, Llaguen, and of course, adjacent in north to our Rosemont Deposit.

Got it. Great.

Yeah.

Okay. Great. Thanks very much, guys.

Our next question comes from John Tumazos of John Tumazos Research. Please go ahead.

Thank you very much. Congratulations on all the progress. With the good copper price, are there any mitigations you might do, given the historic volatility of the copper price or the company, such as buying puts or raising equity to repay debt? Secondly, what is your minimum size threshold for pursuing new projects? We know there is Rosemont and Mason in the various zones in Manitoba, but there might be some medium-sized copper projects that look a lot more robust with the copper price rebound?

Thank you for your question, John. I believe your inquiry has two aspects. First, you want to know if we intend to hedge to take advantage of the strong copper market. Our usual response has been no, as we prefer exposure to the spot market, which has been beneficial, and I think our shareholders value that we haven't limited our participation in the copper price. Therefore, that policy stays the same. We may strategically consider hedging on a short-term basis, particularly for quoted period pricing. However, we are not looking to hedge long-term at this moment. If we were in the process of developing an asset like Rosemont, potentially requiring financing to maintain certain cash flows, we might consider that, but it would be a temporary measure and focused on development needs. Regarding raising equity to pay down debt, while current prices are strong, we are actively transforming two assets by acquiring Pampacancha pit and refocusing Lalor and Snow Lake Camp on gold assets and the Britt refurbishment. These efforts are expected to generate significant capital. Therefore, while raising equity could help reduce debt, I'm not convinced our shareholders would view it favorably when we are close to generating significant free cash flow due to current prices and portfolio changes. So, there are no near-term plans for any equity reissue.

And John, I would just add our policy has not changed. We don’t really consider things in terms of minimum size because if you look at some of the projects that we are undertaking at any of our brownfield sites, we have no hesitation in investing $20 million for a one-year payback, for example. So we don’t think in terms of minimum size thresholds. From a bigger picture perspective, when we consider our production profile, then the minimum threshold you are referring to might be more appropriate. But again, it’s a matter of returns. If we could put into production quickly and easily a 20,000 ton a year copper producer, we would consider it provided the returns are right. Obviously, we have the capacity to develop much larger assets. We look at what’s optimal for the organization and what our technical and execution skills might allow. There’s no hard and fast answer, but over time, we would definitely like to expand our copper production profile.

Thank you. The latter answer is most refreshing.

This concludes the question-and-answer session. I would like to turn the conference back over 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 team if you have any further questions. This concludes our call and you can disconnect your lines now.