6-K
Hudbay Minerals Inc. (HBM)
UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
FORM 6-K
REPORT OF FOREIGN PRIVATE ISSUER PURSUANT TO RULE 13A-16 OR 15D-16 OF THE SECURITIES EXCHANGE ACT OF 1934
For the month of February, 2020
Commission File Number: 001-34244
HUDBAY MINERALS INC. (Translation of registrant’s name into English)
25 York Street, Suite 800 Toronto, Ontario M5J 2V5, Canada (Address of principal executive offices)
Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F.
Form 20-F [ ] Form 40-F [X]
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1): [ ]
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7): [ ]
Indicate by check mark whether the registrant by furnishing the information contained in this Form is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.
Yes [ ] No [X]
If “Yes” is marked, indicate below the file number assigned to the registrant in connection with Rule 12g3-2(b): 82- _____________________________
EXPLANATORY NOTE
On February 20, 2020, Hudbay Minerals Inc. ("Hudbay") filed on the Canadian Securities Administrators' System for Electronic Document Analysis and Retrieval (SEDAR) website at www.sedar.com the following documents: (1) Consolidated Financial Statements for the year ended December 31, 2019; (2) Management's Discussion and Analysis for the year ended December 31, 2019; (3) News Release dated February 20, 2020; and (4) Code of Conduct.
Copies of the filings are attached to this Form 6-K and incorporated herein by reference, as follows:
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| HUDBAY MINERALS INC. | |
|---|---|
| (registrant) | |
| By: | /s/ Patrick Donnelly |
| Name: | Patrick Donnelly |
| Title: | Vice President and General Counsel |
Date: February 24, 2020
EXHIBIT INDEX
The following exhibits are furnished as part of this Form 6-K:
Hudbay Minerals Inc.: Exhibit 99.1 - Filed by newsfilecorp.com
Audited Consolidated Financial Statements
(In US dollars)
HUDBAY MINERALS INC.
Years ended December 31, 2019 and 2018
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management of HudBay Minerals Inc. ("Hudbay" or the "Company") is responsible for establishing and maintaining internal control over financial reporting ("ICFR").
Under the supervision of and with the participation of the Chief Executive Officer and the Chief Financial Officer, Hudbay's management assessed the effectiveness of the Company's ICFR as at December 31, 2019 based upon the Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, management concluded that Hudbay's ICFR was effective as of December 31, 2019.
The effectiveness of the Company's ICFR as of December 31, 2019 has been audited by Deloitte LLP, Independent Registered Public Accounting Firm, as stated in their report immediately preceding the Company's audited consolidated financial statements for the year ended December 31, 2019.
| Peter Kukielski | David Bryson |
|---|---|
| President and Chief Executive Officer | Senior Vice President and Chief Financial Officer |
Toronto, Canada
February 20, 2020
| Deloitte Canada<br>Bay Adelaide Centre<br>8 Adelaide Street West<br>Suite 200<br>Toronto, ON. M5H 0A9<br>Canada<br><br>Tel: +1 (416) 601 6150<br>Fax: +1 (416) 601 6151<br>www.deloitte.ca |
|---|
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and the Board of Directors of Hudbay Minerals Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Hudbay Minerals Inc. and subsidiaries (the "Company") as of December 31, 2019 and 2018, the related consolidated income statements, consolidated statements of comprehensive loss, changes in equity and cash flows for each of the two years in the period ended December 31, 2019, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and its financial performance and its cash flows for each of the two years in the period ended December 31, 2019, in conformity with International Financial Reporting Standards as issued by the International Accounting Standards Board.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 20, 2020, expressed an unqualified opinion on the Company's internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current-period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Impairment - Assessment of Whether Indicators of Impairment or Impairment Reversal Exist in Non-financial Assets - Refer to Notes 2d, 3j and 12 to the financial statements
Critical Audit Matter Description
The Company's determination of whether an indicator of impairment or impairment reversal exists in non-financial assets at the cash generating unit ("CGU") requires significant management judgment.
While there are several inputs that are required to determine whether or not an indicator of impairment or impairment reversal exists, the judgments with the highest degree of subjectivity are the future long-term copper price, inputs to the market capitalization deficiency assessment (specifically control premiums, industry specific factors and company performance), and the discount rate. Auditing these estimates and inputs required a high degree of subjectivity in applying audit procedures and in evaluating the results of those procedures. This resulted in an increased extent of audit effort, including the involvement of a fair value specialist.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the future long-term copper price, inputs to the market capitalization deficiency assessment (specifically control premiums, industry specific factors and company performance), and the discount rate in the assessment of indicators of impairment or impairment reversal, included the following, among others:
• Evaluated the effectiveness of controls over management's assessment of the indicators of impairment.
• With the assistance of a fair value specialist:
◦ Evaluated the future long-term copper price by comparing management forecasts to third party forecasts,
◦ Performed an assessment of the market capitalization deficiency to the carrying value of the CGUs which included: assessing control premiums, industry specific factors, company performance, and
◦ Evaluated the reasonableness of the change in discount rate by testing the source information underlying the determination of the discount rate.
Impairment - Testing of Impairment of Non-Financial Assets - Arizona CGU - Refer to Notes 6e and 12 to the financial statements
Critical Audit Matter Description
The Company identified an indicator of impairment for the Arizona CGU as a result of a legal ruling in Arizona related to the Rosemont project and the subsequent impact to the Company's market capitalization deficiency. To test for impairment, the Company uses fair value less cost of disposal to determine the recoverable amount of the CGU. It was determined that the recoverable amount of the CGU was lower than its carrying value, causing the Company to recognize an impairment loss.
While there are several assumptions that go into determining the recoverable amount, the judgments with the highest degree of subjectivity in the valuation model are:
• Future long-term copper price
• Discount rate
• Value of mineral resources not included in the life of mine ("LOM") plan (based on the implied per tonne value for the Arizona resources adjusted for characteristics of the resources multiplied by the resources tonnage)
• Beginning date of project cash flows incorporating permit related project delays in relation to commencement of initial construction of the Rosemont project
Changes in these assumptions could have a significant impact on the recoverable amount of the CGU, thereby also having a significant effect on the conclusion surrounding whether an impairment loss exists and if so, the potential quantum of the loss. Auditing the assumptions surrounding the future long-term copper price, discount rate, the value of mineral resources not included in the LOM plan, and the beginning date of project cash flows incorporating permit related project delays to commence initial construction used in the valuation model required a high degree of subjectivity in applying audit procedures and in evaluating the results of those procedures. This resulted in an increased extent of audit effort, including the involvement of a fair value specialist.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the future long-term copper price, the discount rate, the value of mineral resources not included in the LOM plan, and the beginning date of project cash flows incorporating permit related project delays to commence initial construction used in the valuation models to determine the recoverable amount of the CGU included the following, among others:
• Evaluated the effectiveness of the controls surrounding the future long-term copper price, the discount rate, the value of mineral resources not included in the LOM plan, and the beginning date of project cash flows incorporating permit related project delays to commence initial construction used in the valuation models.
• Assessed the information received from internal and external legal counsel to understand developments in legal matters in order to evaluate the beginning date of project cash flows incorporating permit related project delays to commence initial construction.
• Analyzed the probability that management would proceed with extraction of resources, which is an assumption management assigned against the value per pound of resources used in the determination of the value of mineral resources not included in the LOM plan.
• With the assistance of a fair value specialist:
◦ Evaluated the future long-term copper price by comparing management forecasts to third party forecasts,
◦ Evaluated the discount rate by testing the source information underlying the determination of the discount rate, and developing a range of independent estimates and comparing those to the discount rate used, and
◦ Evaluated the value of mineral resources not included in the LOM plan by (1) estimating the value per pound of resources and compared it to management's estimate, and (2) assessing market transactions to determine the range of exploration value per pound observed and compared against management's estimate of the value per pound of resources.
/s/ Deloitte LLP
Chartered Professional Accountants
Licensed Public Accountants
Toronto, Canada
February 20, 2020
We have served as the Company's auditor since 2005.
| Deloitte Canada<br>Bay Adelaide Centre<br>8 Adelaide Street West<br>Suite 200<br>Toronto, ON. M5H 0A9<br>Canada<br><br>Tel: +1 (416) 601 6150<br>Fax: +1 (416) 601 6151<br>www.deloitte.ca |
|---|
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and the Board of Directors of Hudbay Minerals Inc.
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of Hudbay Minerals Inc. and subsidiaries (the "Company") as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended December 31, 2019, of the Company and our report dated February 20, 2020, expressed an unqualified opinion on those financial statements.
Basis for Opinion
The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Deloitte LLP
Chartered Professional Accountants
Licensed Public Accountants
Toronto, Canada
February 20, 2020
| HUDBAY MINERALS INC. | |||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Consolidated Balance Sheets | |||||||||||||||||
| (in thousands of US dollars) | |||||||||||||||||
| Dec. 31, | Dec. 31, | ||||||||||||||||
| --- | --- | --- | --- | --- | --- | --- | --- | ||||||||||
| Note | 2019 | 2018 | |||||||||||||||
| Assets | |||||||||||||||||
| Current assets | |||||||||||||||||
| Cash and cash equivalents | 7 | $ | 396,146 | $ | 515,497 | ||||||||||||
| Trade and other receivables | 8 | 105,994 | 117,153 | ||||||||||||||
| Inventories | 9 | 138,820 | 118,474 | ||||||||||||||
| Prepaid expenses and other current assets | 12,737 | 8,894 | |||||||||||||||
| Other financial assets | 10 | 2,049 | 10,366 | ||||||||||||||
| Taxes receivable | 7,289 | 2,008 | |||||||||||||||
| 663,035 | 772,392 | ||||||||||||||||
| Receivables | 8 | 19,264 | 39,121 | ||||||||||||||
| Inventories | 9 | 19,455 | 19,476 | ||||||||||||||
| Other financial assets | 10 | 11,287 | 15,159 | ||||||||||||||
| Intangibles and other assets | 11 | 10,411 | 4,162 | ||||||||||||||
| Property, plant and equipment | 12 | 3,662,559 | 3,819,812 | ||||||||||||||
| Deferred tax assets | 22b | 69,950 | 15,513 | ||||||||||||||
| $ | 4,455,961 | $ | 4,685,635 | ||||||||||||||
| Liabilities | |||||||||||||||||
| Current liabilities | |||||||||||||||||
| Trade and other payables | 13 | $ | 192,404 | $ | 171,952 | ||||||||||||
| Taxes payable | 2,146 | 5,508 | |||||||||||||||
| Other liabilities | 14 | 49,411 | 30,551 | ||||||||||||||
| Other financial liabilities | 15 | 28,076 | 12,425 | ||||||||||||||
| Lease liabilities | 16 | 32,781 | 20,472 | ||||||||||||||
| Deferred revenue | 18 | 86,933 | 86,256 | ||||||||||||||
| 391,751 | 327,164 | ||||||||||||||||
| Other financial liabilities | 15 | 39,784 | 18,771 | ||||||||||||||
| Lease liabilities | 16 | 49,166 | 53,763 | ||||||||||||||
| Long-term debt | 17 | 985,255 | 981,030 | ||||||||||||||
| Deferred revenue | 18 | 476,823 | 479,822 | ||||||||||||||
| Provisions | 19 | 280,850 | 204,648 | ||||||||||||||
| Pension obligations | 20 | 29,599 | 23,863 | ||||||||||||||
| Other employee benefits | 21 | 116,778 | 93,628 | ||||||||||||||
| Deferred tax liabilities | 22b | 237,832 | 324,090 | ||||||||||||||
| 2,607,838 | 2,506,779 | ||||||||||||||||
| Equity | |||||||||||||||||
| Share capital | 23b | 1,777,340 | 1,777,340 | ||||||||||||||
| Reserves | (24,250 | ) | (41,254 | ) | |||||||||||||
| Retained earnings | 95,033 | 442,770 | |||||||||||||||
| 1,848,123 | 2,178,856 | ||||||||||||||||
| $ | 4,455,961 | $ | 4,685,635 | ||||||||||||||
| Commitments (note 27) | |||||||||||||||||
| HUDBAY MINERALS INC. | |||||||||||||||||
| --- | |||||||||||||||||
| Consolidated Statements of Cash Flows | |||||||||||||||||
| (in thousands of US dollars) | |||||||||||||||||
| Note | Year ended December 31, | ||||||||||||||||
| --- | --- | --- | --- | --- | --- | --- | --- | ||||||||||
| 2019 | 2018<br>(Note 29a) | ||||||||||||||||
| Cash generated from operating activities: | |||||||||||||||||
| (Loss) profit for the year | $ | (343,810 | ) | $ | 85,416 | ||||||||||||
| Tax (recovery) expense | 22a | (108,953 | ) | 85,421 | |||||||||||||
| Items not affecting cash: | |||||||||||||||||
| Depreciation and amortization | 6b | 346,634 | 333,144 | ||||||||||||||
| Share-based payment expenses (recoveries) | 6c | 2,714 | (2,373 | ) | |||||||||||||
| Finance expense, net | 6g | 154,361 | 143,550 | ||||||||||||||
| Change in fair value of derivatives | 6g | 3,708 | (1,514 | ) | |||||||||||||
| Impairment loss | 6e | 322,249 | - | ||||||||||||||
| Amortization of deferred revenue | 18 | (76,103 | ) | (93,382 | ) | ||||||||||||
| Unrealized gain on warrants | 6g | - | (6,748 | ) | |||||||||||||
| Loss on investments | 6g | 4,539 | 3,798 | ||||||||||||||
| Pension and other employee benefit payments, net of accruals | 2,148 | (94 | ) | ||||||||||||||
| Write down of UCM receivable | 6d | 25,978 | - | ||||||||||||||
| Other and foreign exchange | 672 | (8,571 | ) | ||||||||||||||
| Taxes paid | (26,853 | ) | (37,295 | ) | |||||||||||||
| Operating cash flow before change in non-cash working capital | 307,284 | 501,352 | |||||||||||||||
| Change in non-cash working capital | 29a | 3,572 | (21,800 | ) | |||||||||||||
| 310,856 | 479,552 | ||||||||||||||||
| Cash used in investing activities: | |||||||||||||||||
| Acquisition of property, plant and equipment | (259,202 | ) | (190,899 | ) | |||||||||||||
| Proceeds from disposal of investments | - | 53 | |||||||||||||||
| Acquisition of Mason | - | (19,050 | ) | ||||||||||||||
| Acquisition of subsidiary, net of cash acquired | 5 | (44,688 | ) | 4,224 | |||||||||||||
| Change in restricted cash | 3,401 | (3,196 | ) | ||||||||||||||
| Net interest received | 8,119 | 6,732 | |||||||||||||||
| (292,370 | ) | (202,136 | ) | ||||||||||||||
| Cash used in financing activities: | |||||||||||||||||
| Interest paid on long-term debt | (74,750 | ) | (74,750 | ) | |||||||||||||
| Financing costs | (26,149 | ) | (20,564 | ) | |||||||||||||
| Lease payments | (32,952 | ) | (20,926 | ) | |||||||||||||
| Net proceeds from equity transactions | - | (69 | ) | ||||||||||||||
| Dividends paid | 23b | (3,927 | ) | (4,045 | ) | ||||||||||||
| (137,778 | ) | (120,354 | ) | ||||||||||||||
| Effect of movement in exchange rates on cash and cash equivalents | (59 | ) | 1,936 | ||||||||||||||
| Net (decrease) increase in cash and cash equivalents | (119,351 | ) | 158,998 | ||||||||||||||
| Cash and cash equivalents, beginning of the year | 515,497 | 356,499 | |||||||||||||||
| Cash and cash equivalents, end of the year | $ | 396,146 | $ | 515,497 | |||||||||||||
| For supplemental information, see note 29. | |||||||||||||||||
| HUDBAY MINERALS INC. | |||||||||||||||||
| --- | |||||||||||||||||
| Consolidated Income Statements | |||||||||||||||||
| (in thousands of US dollars) | |||||||||||||||||
| Note | Year ended December 31, | ||||||||||||||||
| --- | --- | --- | --- | --- | --- | --- | --- | --- | |||||||||
| 2019 | 2018 | ||||||||||||||||
| Revenue | 6a | $ | 1,237,439 | $ | 1,472,366 | ||||||||||||
| Cost of sales | |||||||||||||||||
| Mine operating costs | 741,342 | 765,959 | |||||||||||||||
| Depreciation and amortization | 6b | 344,555 | 332,667 | ||||||||||||||
| 1,085,897 | 1,098,626 | ||||||||||||||||
| Gross profit | 151,542 | 373,740 | |||||||||||||||
| Selling and administrative expenses | 36,170 | 27,243 | |||||||||||||||
| Exploration and evaluation expenses | 30,774 | 28,570 | |||||||||||||||
| Other operating expenses | 6d | 51,116 | 19,071 | ||||||||||||||
| Impairment loss | 6e | 322,249 | - | ||||||||||||||
| Results from operating activities | (288,767 | ) | 298,856 | ||||||||||||||
| Finance income | 6g | (8,527 | ) | (8,450 | ) | ||||||||||||
| Finance expenses | 6g | 162,888 | 152,000 | ||||||||||||||
| Other finance loss (gains) | 6g | 9,635 | (15,531 | ) | |||||||||||||
| Net finance expense | 163,996 | 128,019 | |||||||||||||||
| (Loss) profit before tax | (452,763 | ) | 170,837 | ||||||||||||||
| Tax (recovery) expense | 22a | (108,953 | ) | 85,421 | |||||||||||||
| (Loss) profit for the year | $ | (343,810 | ) | $ | 85,416 | ||||||||||||
| (Loss) earnings per share | |||||||||||||||||
| Basic and diluted | $ | (1.32 | ) | $ | 0.33 | ||||||||||||
| Weighted average number of common shares outstanding: | |||||||||||||||||
| Basic and diluted | 261,272,151 | 261,271,621 | |||||||||||||||
| HUDBAY MINERALS INC. | |||||||||||||||||
| --- | |||||||||||||||||
| Consolidated Statements of Comprehensive Loss | |||||||||||||||||
| (in thousands of US dollars) | |||||||||||||||||
| Year ended December 31, | |||||||||||||||||
| --- | --- | --- | --- | --- | --- | --- | |||||||||||
| 2019 | 2018 | ||||||||||||||||
| (Loss) profit for the year | $ | (343,810 | ) | $ | 85,416 | ||||||||||||
| Other comprehensive (loss) income: | |||||||||||||||||
| Item that will be reclassified subsequently to profit or loss: | |||||||||||||||||
| Recognized directly in equity: | |||||||||||||||||
| Net gain (loss) on translation of foreign currency balances | 9,220 | (24,371 | ) | ||||||||||||||
| 9,220 | (24,371 | ) | |||||||||||||||
| Items that will not be reclassified subsequently to profit or loss: | |||||||||||||||||
| Recognized directly in equity: | |||||||||||||||||
| Remeasurement - actuarial (loss) gain | (20,072 | ) | 9,060 | ||||||||||||||
| Tax effect | 1,878 | 520 | |||||||||||||||
| (18,194 | ) | 9,580 | |||||||||||||||
| Other comprehensive loss net of tax, for the year | (8,974 | ) | (14,791 | ) | |||||||||||||
| Total comprehensive loss for the year | $ | (352,784 | ) | $ | 70,625 | ||||||||||||
| HUDBAY MINERALS INC. | |||||||||||||||||
| --- | |||||||||||||||||
| Consolidated Statements of Changes in Equity | |||||||||||||||||
| (in thousands of US dollars) | |||||||||||||||||
| Share capital<br>(note 23) | Other capital reserves | Foreign currency translation reserve | Remeasurement reserve | Retained earnings | Total equity | ||||||||||||
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
| Balance, January 1, 2018 | $ | 1,777,409 | $ | 28,837 | $ | 12,552 | $ | (67,852 | ) | $ | 361,399 | $ | 2,112,345 | ||||
| Profit | - | - | - | - | 85,416 | 85,416 | |||||||||||
| Other comprehensive (loss) income | - | - | (24,371 | ) | 9,580 | - | (14,791 | ) | |||||||||
| Total comprehensive (loss) income | - | - | (24,371 | ) | 9,580 | 85,416 | 70,625 | ||||||||||
| Contributions by and distributions to owners: | |||||||||||||||||
| Stock options exercised | (80 | ) | - | - | - | - | (80 | ) | |||||||||
| Warrants exercised | 11 | 11 | |||||||||||||||
| Dividends (note 23b) | - | - | - | - | (4,045 | ) | (4,045 | ) | |||||||||
| Total contributions by and distributions to owners | (69 | ) | - | - | - | (4,045 | ) | (4,114 | ) | ||||||||
| Balance, December 31, 2018 | $ | 1,777,340 | $ | 28,837 | $ | (11,819 | ) | $ | (58,272 | ) | $ | 442,770 | $ | 2,178,856 | |||
| HUDBAY MINERALS INC. | |||||||||||||||||
| --- | |||||||||||||||||
| Consolidated Statements of Changes in Equity | |||||||||||||||||
| (in thousands of US dollars) | |||||||||||||||||
| Share capital<br>(note 23) | Other capital reserves | Foreign currency translation reserve | Remeasurement reserve | Retained earnings | Total equity | ||||||||||||
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | |
| Balance, January 1, 2019 | $ | 1,777,340 | $ | 28,837 | $ | (11,819 | ) | $ | (58,272 | ) | $ | 442,770 | $ | 2,178,856 | |||
| Loss | - | - | - | - | (343,810 | ) | (343,810 | ) | |||||||||
| Other comprehensive income (loss) | - | - | 9,220 | (18,194 | ) | - | (8,974 | ) | |||||||||
| Total comprehensive income (loss) | - | - | 9,220 | (18,194 | ) | (343,810 | ) | (352,784 | ) | ||||||||
| Dilution of Partner's interest in Rosemont (note 5) | 25,978 | 25,978 | |||||||||||||||
| Contributions by and distributions to owners: | |||||||||||||||||
| Dividends (note 23b) | - | - | - | - | (3,927 | ) | (3,927 | ) | |||||||||
| Total contributions by and distributions<br>to owners | - | - | - | - | (3,927 | ) | (3,927 | ) | |||||||||
| Balance, December 31, 2019 | $ | 1,777,340 | $ | 54,815 | $ | (2,599 | ) | $ | (76,466 | ) | $ | 95,033 | $ | 1,848,123 | |||
| HUDBAY MINERALS INC. | |||||||||||||||||
| --- | |||||||||||||||||
| Notes to Audited Consolidated Financial Statements | |||||||||||||||||
| (in thousands of US dollars, except where otherwise noted) | |||||||||||||||||
| Years ended December 31, 2019 and 2018 |
1. Reporting entity
On January 1, 2017, Hudbay Minerals Inc. amalgamated under the Canada Business Corporations Act with its subsidiaries Hudson Bay Mining and Smelting Co., Limited and Hudson Bay Exploration and Development Company Limited to form Hudbay Minerals Inc. ("HMI" or the "Company").The address of the Company's principal executive office is 25 York Street, Suite 800, Toronto, Ontario. The consolidated financial statements of the Company for the year ended December 31, 2019 and 2018 represent the financial position and the financial performance of the Company and its subsidiaries (together referred to as the "Group" or "Hudbay" and individually as "Group entities").
Wholly owned subsidiaries as at December 31, 2019 include HudBay Marketing & Sales Inc. ("HMS"), HudBay Peru Inc., HudBay Peru S.A.C. ("Hudbay Peru"), HudBay (BVI) Inc., Hudbay Arizona Inc, Rosemont Copper Company ("Rosemont") and Mason Resources (US) Inc ("Mason").
Hudbay is an integrated mining company primarily producing copper concentrate (containing copper, gold and silver), molybdenum concentrate and zinc metal. With assets in North and South America, the Group is focused on the discovery, production and marketing of base and precious metals. Directly and through its subsidiaries, Hudbay owns three polymetallic mines, four ore concentrators and a zinc production facility in northern Manitoba and Saskatchewan (Canada) and Cusco (Peru) and copper projects in Arizona and Nevada (United States). The Group also has equity investments in a number of junior exploration companies. The Company is governed by the Canada Business Corporations Act and its shares are listed under the symbol "HBM" on the Toronto Stock Exchange, New York Stock Exchange and Bolsa de Valores de Lima.
2. Basis of preparation
(a) Statement of compliance:
These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards ("IFRS") as issued by the International Accounting Standards Board ("IASB") effective for the year ended December 31, 2019.
The Board of Directors approved these consolidated financial statements on February 20, 2020.
(b) Functional and presentation currency:
The Group's consolidated financial statements are presented in US dollars, which is the Company's and all material subsidiaries' functional currency, except the Company's Manitoba business unit, which has a functional currency of Canadian dollars. All values are rounded to the nearest thousand ($000) except where otherwise indicated.
(c) Basis of measurement:
| HUDBAY MINERALS INC. |
|---|
| Notes to Audited Consolidated Financial Statements |
| (in thousands of US dollars, except where otherwise noted) |
| Years ended December 31, 2019 and 2018 |
The consolidated financial statements have been prepared on the historical cost basis except for the following items in the consolidated balance sheets:
Derivatives, embedded derivatives, other financial instruments, and financial assets measured at fair value through profit or loss ("FVTPL");
Liabilities for cash-settled share-based payment arrangements are measured at fair value; and
A defined benefit liability is recognized as the net total of the plan assets, unrecognized past service costs and unrecognized actuarial losses, less unrecognized actuarial gains and the present value of the defined benefit obligation.
(d) Use of judgements and estimates:
The preparation of the consolidated financial statements in conformity with IFRS requires the Group to make judgements, estimates and assumptions that affect the application of accounting policies, reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and reported amounts of revenue and expenses during the reporting period. Actual results may differ from these estimates.
The Group reviews these estimates and underlying assumptions on an ongoing basis, based on experience and other factors, including expectations of future events that the Group believe to be reasonable under the circumstances. Revisions to accounting estimates are recognized prospectively in the period in which the estimates are revised and in any future periods affected.
The following are critical and significant judgements and estimates impacting the consolidated financial statements:
- Indicators and testing of impairment (reversal of impairment) of non-financial assets (note 3h, 3j and 12) - there are a number of potential indicators that could trigger non-financial asset impairment or reversal of impairment. These indicators may require critical judgements to determine the extent that external and/or internal environmental business changes may impact the Group's overall assessment of the recoverability of non-financial assets. Such business changes include changes to the life of mine ("LOM") plan, changes to budget, and changes to long-term commodity prices. If an impairment or impairment reversal indicator is noted then there are also critical estimates involved in the determination of the recoverable amount of cash generating units ("CGU"). Recoverable amounts are calculated using discounted after-tax cash flows based on cash flow projections and assumptions in the Group's most recent LOM plans. LOM plans are based on optimized mine and processing plans and the assessment of capital expenditure requirements of a mine site. LOM plans incorporate management's best estimates of key assumptions which include future commodity prices, the value of mineral resources not included in the Constancia and Arizona LOM plan, production based on current estimates of recoverable reserves, discount rates, future operating and capital costs and future foreign exchange rates. Most critical to the value of the recoverable amount are the assumptions of future commodity prices and the value of mineral resources not included in the Constancia and Arizona LOM plan. Expected future cash flows used to determine the recoverable amount during impairment testing are inherently uncertain and could materially change over time. Should management's estimate of the future not reflect actual events, impairments may be identified, which could have a material effect on the Group's consolidated financial statements. Although it is reasonably possible for a change in key assumptions to occur, the possible effects of a change in any single assumption may not fairly reflect the impact of CGU's fair value as the assumptions are inextricably linked.
| HUDBAY MINERALS INC. |
|---|
| Notes to Audited Consolidated Financial Statements |
| (in thousands of US dollars, except where otherwise noted) |
| Years ended December 31, 2019 and 2018 |
IFRS 15 - Revenue - adoption for stream transactions (note 18) - The Group has determined that the precious metals stream contracts are subject to variable consideration and contain a significant financing component. As such, the Group started recognizing a financing charge at each reporting period and will gross up the deferred revenue balance to recognize the significant financing element that is part of these contracts. Critical judgements were required in the adoption of IFRS 15 for stream accounting in determining appropriate discount rates for the significant financing component, assessing variable consideration as to its impact on the amortization of deferred revenue and determining the extent and nature the restatement would have on previous impairments and the capitalization of borrowing costs. In addition, significant judgement was required in determining if the stream transactions were to be accounted for as deferred revenue. Management has determined that the stream transactions are not derivatives as such obligations will be satisfied through the delivery of non-financial items (i.e., gold and silver credits) rather than cash or financial assets. It is management's intention to settle the obligations under the stream transactions through its own production and if this is not possible, this would lead to the stream transactions becoming a derivative since a cash settlement payment may be required. This would cause a change to the accounting treatment, resulting in the revaluation of the fair value of the agreement through the income statement on a recurring basis.
Mineral reserves and resources (notes 3i, 3m, 3o and 18) - the Group estimates mineral reserves and resources to determine future recoverable mine production based on assessment of geological, engineering and metallurgical analyses, estimates of future production costs, capital costs and reclamation costs, as well as long term commodity prices and foreign exchange rates. There are numerous uncertainties inherent in estimating mineral reserves and resources, including many factors beyond the Group's control. The estimates are based on information compiled by appropriately qualified persons relating to the geological data on the size, depth and shape of the ore body and interpreting this data requires complex geological judgements. Changes in assumptions, including economic assumptions such as metals prices and market conditions, could have a material effect on the financial position and results of operations.
Changes in the mineral reserve or resource estimates may affect:
the carrying value of exploration and evaluation of assets, capital works in progress, mining properties and plant and equipment;
depreciation expense for assets depreciated either on a unit-of- production basis or on a straight line basis where useful lives are restricted by the life of the related mine or plan;
the provision for decommissioning, restoration and similar liabilities;
the carrying value of deferred tax assets; and
the amortization of deferred revenue.
| HUDBAY MINERALS INC. |
|---|
| Notes to Audited Consolidated Financial Statements |
| (in thousands of US dollars, except where otherwise noted) |
| Years ended December 31, 2019 and 2018 |
- Property plant and equipment (notes 3i and 12) - the carrying amounts of property, plant and equipment and exploration and evaluation assets on the Group's consolidated balance sheets are significant and reflect multiple estimates and applications of judgement. Management exercises judgement in determining whether the costs related to exploration and evaluation are eligible for capitalization and whether they are likely to be recoverable by future exploration, which may be based on assumptions about future events and circumstances. Judgement and estimates are used when determining whether exploration and evaluation assets should be transferred to capital works in progress within property, plant and equipment. For mines in the production stage, management applies judgement to determine development costs to be capitalized based on the extent they are incurred in order to access reserves mineable over more than one year. For depreciable property, plant and equipment assets, management makes estimates to determine depreciation. For assets depreciated using the straight line method, residual value and useful lives of the assets or components are estimated. A significant estimate is required to determine the total production basis for units-of-production depreciation. The most currently available reserve and resource report is utilized in determining the basis which has material impacts on the amount of depreciation recorded through inventories and the consolidated income statements. There are numerous uncertainties inherent in estimating mineral reserves, and assumptions that were valid at the reporting date may change when new information becomes available. The actual volume of ore extracted and any changes in these assumptions could affect prospective depreciation rates and carrying values.
In determining whether stripping costs incurred during the production phase of a mining property relate to mineral reserves and mineral resources that will be mined in a future period and therefore should be capitalized, the Group makes estimates of the proportion of stripping activity which relates to extracting current ore and the proportion which relates to obtaining access to ore reserves which will be mined in the future.
Acquisition method accou**nting (notes 3a and 5) - during the acquisition of UCM's 7.95% interest in the Rosemont project, judgement was required to determine if the acquisition represented a business combination or an asset purchase. Since it was concluded that the acquisition represented the purchase of assets, there was no goodwill generated on the transaction and acquisition costs were capitalized to the assets purchased rather than expensed.
Tax provisions (notes 3o and 22) - management makes estimates in determining the measurement and recognition of deferred tax assets and liabilities recorded on the consolidated balance sheets. The measurement of deferred tax assets and deferred tax liabilities is based on the tax rates that are expected to apply in the period that the asset is realized or liability is settled based on tax rates that have been enacted or substantively enacted by the end of the reporting period. Deferred tax assets, including those arising from unutilized tax losses, require management to assess the likelihood of taxable income in the future periods in order to utilize recognized deferred tax assets. Estimates of future taxable income are based on forecasted cash flows from operations and the application of existing tax laws in each jurisdiction. To the extent that future cash flows and taxable income differ significantly from estimates, the ability to realize the net deferred tax assets recorded at the balance sheet date could be affected. At the end of each reporting period, management reassesses the period that the assets are expected to be realized or liabilities are settled and the likelihood of taxable income in future periods in order to support and adjust the deferred tax assets and deferred tax liabilities recognized on the consolidated balance sheets.
| HUDBAY MINERALS INC. |
|---|
| Notes to Audited Consolidated Financial Statements |
| (in thousands of US dollars, except where otherwise noted) |
| Years ended December 31, 2019 and 2018 |
Assaying utilized to determine revenue and recoverability of inventor**ies (notes 3c and 3f) - assaying of contained metal is a key estimate in determining the amount of revenues recorded in the consolidated income statements. The estimate is finalized after final surveying is completed, which may extend to six months in certain transactions. Since assays are utilized to determine the value of recorded revenues, significant differences in given assays may result in a material misstatement of revenues on the consolidated income statements. Assay survey results are also a factor utilized to determine if inventories on hand have a net realizable value that exceeds cost. Material differences in assay results may lead to misstatements of inventory balances in the consolidated balance sheets.
*Decommissioning and restoration obligation**s (*notes 3m and 19) - significant judgement and estimates are utilized in the determination of the decommissioning and restoration provisions in the consolidated balance sheets. Judgement is involved in determining the timing and extent of cash outflows required to satisfy constructive obligations based on the timing of site closures in the LOM plans, expected unit costs to determine cash obligations to remediate disturbances and regulatory and constructive requirements to determine the extent of the remediation required. The timing of cash outflows and discount rates associated with discounting the provision are also key estimates. Changes in these estimates may result in a change in classification of the provision between non-current and current as well as material differences in the total provision recorded in the consolidated balance sheets.
Pensions and other employee benefits (notes 3I, 20 and 21) - the Group's post retirement obligations relate mainly to ongoing health care benefits plans. The Group estimates obligations related to the pension and other employee benefits plans using actuarial determinations that incorporate assumptions using management's best estimates of factors including plan performance, salary escalation, retirement dates of employees and drug cost escalation rates. Due to the complexity of the valuation, the underlying assumptions and its long term nature, a defined benefit obligation is highly sensitive to changes in these assumptions. Management reviews all assumptions at each reporting date. In determining the appropriate discount rate, the Group considers the interest rates on corporate bonds in the respective currency with at least an AA rating, with extrapolated maturities corresponding to the expected duration of the defined benefit obligation. The mortality rate is based on publicly available mortality tables for the specific country, and the Group bases future salary increases and pension increases on expected future inflation rates for the respective country.
3. Significant accounting policies
The accounting policies set out below have been applied consistently to all periods presented in these consolidated financial statements and by all Group entities.
| HUDBAY MINERALS INC. |
|---|
| Notes to Audited Consolidated Financial Statements |
| (in thousands of US dollars, except where otherwise noted) |
| Years ended December 31, 2019 and 2018 |
(a) Basis of consolidation:
Intercompany balances and transactions are eliminated upon consolidation. When a Group entity transacts with an associate or jointly controlled entity of the Group, unrealized profits and losses are eliminated to the extent of the Group's interest in the relevant associate or joint venture. The accounting policies of Group entities are changed when necessary to align them with the policies adopted by the Company.
Subsidiaries
A subsidiary is an entity controlled by the Group. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases.
Business combinations and goodwill
When the Group makes an acquisition, it first determines whether the assets acquired and liabilities assumed constitute a business, in which case the acquisition requires accounting as a business combination. Management applies judgement in determining whether the acquiree is capable of being conducted and managed for the purpose of providing a return, considering the inputs of the acquiree and processes applied to those inputs that have the ability to create outputs.
The Group applies the acquisition method of accounting to business combinations, whereby the goodwill is measured at the acquisition date as the fair value of the consideration transferred including the recognized amount of any non-controlling interests in the acquiree. When the excess is negative, a bargain purchase gain is recognized immediately in the consolidated income statements. The assessment of fair values on acquisition includes those mineral reserves and resources that are able to be reliably measured. In determining these fair values, management must also apply judgement in areas including future cash flows, metal prices, exchange rates and appropriate discount rates. Changes in such estimates and assumptions could result in significant differences in the amount of goodwill recognized.
The consideration transferred is the aggregate of the fair values at the date of acquisition of the sum of the assets transferred, the liabilities incurred or assumed, and the equity instruments issued by the acquirer in exchange for control of the acquiree. Acquisition-related costs are recognized in the consolidated income statements as incurred, unless they relate to issuance of debt or equity securities.
Where applicable, the consideration transferred includes any asset or liability resulting from a contingent consideration arrangement and measured at its acquisition date fair value. Subsequent changes in such fair values are adjusted against the cost of acquisition where they qualify as measurement period adjustments. All other subsequent changes in the fair value of contingent consideration classified as an asset or liability are accounted for in accordance with relevant IFRS. Changes in the fair value of contingent consideration classified as equity are not recognized.
Where a business combination is achieved in stages, the Group's previously held interests in the acquired entity are remeasured to fair value at the acquisition date, which is the date the Group attains control, and any resulting gain or loss is recognized in the consolidated income statements. Amounts previously recognized in other comprehensive income ("OCI") related to interests in the acquiree prior to the acquisition date are reclassified to the consolidated income statements, where such treatment would be appropriate if that interest were disposed of.
| HUDBAY MINERALS INC. |
|---|
| Notes to Audited Consolidated Financial Statements |
| (in thousands of US dollars, except where otherwise noted) |
| Years ended December 31, 2019 and 2018 |
After initial recognition, goodwill is measured at cost less any accumulated impairment losses. For the purpose of impairment testing, goodwill acquired in a business combination is, from the acquisition date, allocated to each of the Group's CGUs that are expected to benefit from the synergies of the combination, irrespective of whether other assets or liabilities of the acquiree are assigned to those units. Goodwill is allocated to the lowest level at which it is monitored for internal management purposes and is not larger than an operating segment before aggregation. Where goodwill forms part of a CGU and part of the operation within that unit is disposed of, the goodwill associated with the disposed operation is included in the determination of any gain or loss on disposal.
Goodwill is not amortized and is tested for impairment annually and whenever there is an indication of impairment. If any such indication exists, the recoverable amount of the CGU is estimated in order to determine the extent of the impairment, if any. The recoverable amount is determined as the higher of fair value less direct costs to sell and the CGU's value in use. An impairment loss in respect of goodwill is not reversed.
Fair value for mineral interests and related goodwill is generally determined as the present value of the estimated future cash flows expected to arise from the continued use of the asset, including any expansion prospects, and its eventual disposal, using assumptions that an independent market participant may take into account.
Value in use is determined as the present value of the estimated future cash flows expected to arise from the continued use of the asset in its present form and its eventual disposal. Value in use is determined by applying assumptions specific to the Group's continued use and cannot take into account future development.
The weighted average cost of capital of the Group or comparable market participants is used as a starting point for determining the discount rates, with appropriate adjustments for the risk profile of the countries in which the individual CGUs operate and the specific risks related to the development of the project.
Where the asset does not generate cash flows that are independent of other assets, the Group estimates the recoverable amount of the CGU to which the asset belongs. If the carrying amount of an asset or CGU exceeds its recoverable amount, the carrying amount of the asset or CGU is reduced to its recoverable amount. An impairment loss is recognized as an expense in the consolidated income statements.
(b) Translation of foreign currencies:
Management determines the functional currency of each Group entity as the currency of the primary economic environment in which the entity operates.
Foreign currency transactions
Transactions in foreign currencies are translated to the respective functional currencies of Group entities at exchange rates in effect at the transaction dates.
| HUDBAY MINERALS INC. |
|---|
| Notes to Audited Consolidated Financial Statements |
| (in thousands of US dollars, except where otherwise noted) |
| Years ended December 31, 2019 and 2018 |
At the end of each reporting period, monetary assets and liabilities denominated in foreign currencies are translated to the functional currency using the noon exchange rate. Non-monetary assets and liabilities measured at fair value are translated using the exchange rates at the date when fair value was determined. Non-monetary assets and liabilities measured at historical cost in a foreign currency are translated using exchange rates that were in effect at the transaction dates. The same translations are applied when an entity prepares its financial statements from books and records maintained in a currency other than its functional currency, except revenue and expenses may be translated at monthly average exchange rates that approximate those in effect at the transaction dates.
Foreign currency gains and losses arising on period-end revaluations are recognized in the consolidated income statements, except for a financial liability designated as a hedge of a net investment in a foreign operation, or qualifying cash flow hedges, which are recognized in OCI.
Foreign operations
For the purpose of the consolidated financial statements, assets and liabilities of Group entities that have functional currencies other than the US dollar are translated to US dollars at the reporting date using the noon exchange rate. Revenue and expenses are translated at monthly average exchange rates that approximate those in effect at the transaction dates. Differences arising from these foreign currency translations are recognized in OCI and presented within equity in the foreign currency translation reserve. When a foreign operation is disposed, the relevant exchange differences accumulated in the foreign currency translation reserve are transferred to the consolidated income statements as part of the profit or loss on disposal. On the partial disposal of a subsidiary that includes a foreign operation, the relevant proportion of such amount is reattributed to non-controlling interests. On disposal of a partial investment in an associate or joint venture that includes a foreign operation while retaining significant influence or joint control, the relevant proportion is reclassified to profit or loss.
Net investment in a foreign operation
Foreign currency gains and losses arising on translation of a monetary item receivable from or payable to a foreign operation for which settlement is neither planned nor likely to occur in the foreseeable future are considered to form part of a net investment in the foreign operation. Such gains and losses are recognized in OCI and presented within equity in the foreign currency translation reserve.
c) Revenue recognition:
Revenue from the sale of goods is measured at the fair value of the consideration received or receivable, net of treatment and refining charges and pre-production revenue. Revenue from the sale of by-products is included within revenue.
Sales revenue is recognized when control of the goods sold has been transferred to the buyer. Control is deemed to have passed to the customer when significant risk and reward of the product has passed to the buyer, Hudbay has a present right to payment and physical possession of the product has been transferred to the buyer. Sale of concentrate and finished zinc frequently occur under the following terms, and management has assessed these terms in order to determine timing of transfer of control.
| HUDBAY MINERALS INC. | |
|---|---|
| Notes to Audited Consolidated Financial Statements | |
| (in thousands of US dollars, except where otherwise noted) | |
| Years ended December 31, 2019 and 2018 | |
| Incoterms used by Hudbay | Revenue recognized when goods: |
| --- | --- |
| Cost, Insurance and Freight (CIF) | Are loaded on board the vessel |
| Free on Board (FOB) | Are loaded on board the vessel |
| Delivered at place (DAP) | Arrive at the named place of destination |
| Delivered at terminal (DAT) | Arrive at the named place of destination |
| Free Carrier (FCA) | Arrive at the named place of delivery |
Sales of concentrate and certain other products are provisionally priced. For these contracts, sales prices are subject to final adjustment at the end of a future period after shipment, based on quoted market prices during the quotational period specified in the contract. Revenue is recognized when the above criteria are achieved, using weight and assay results and forward market prices to estimate the fair value of the total consideration receivable. Therefore, revenue is initially recorded based on an initial provisional invoice. Subsequently, at each reporting date, until the provisionally priced sale is finalized, sales receivables are marked to market, with adjustments (both gains and losses) recorded within revenue separately as "Pricing and volume adjustments" in the notes to the consolidated financial statements and in trade and other receivables on the consolidated balance sheets. As per IFRS 15 Revenue, variability in price is deemed to be fair value movements on provisionally priced receivables under the scope of IFRS 9 Financial Instruments; variability in quantities is deemed to be variable consideration. The variable consideration from weights and assay changes to quantities has been assessed to be insignificant to warrant precluding revenue being recorded as a result of possible future sales reversals. An annual analysis of the accuracy of our weights and assays is completed, and if the accuracy rate falls below a certain threshold, management may revisit its revenue recognition policy.
The Group only includes in the transaction price an amount which is not highly likely to be subject to significant subsequent revenue reversal. Within sales contracts with customers, separate performance obligations may arise pertaining to the shipping of goods sold. If applicable, costs and the transaction price are allocated on a relative stand alone selling basis to any separate performance obligations and are recognized over the period of time the goods sold are shipped, on a gross basis.
The Group recognizes deferred revenue in the event it receives payments from customers before a sale meets criteria for revenue recognition. There is a significant financing component associated with the Group's precious metal streaming arrangements since funds were received in advance of the delivery of concentrate. When a significant financing component is recognized, finance expense will be higher and revenues will be higher as the larger deferred revenue balance is amortized to revenues. A market-based discount rate is utilized at the inception of each of the respective stream agreements to determine a discount rate for computing the interest charges for the significant financing component of the deferred revenue balance. As product is delivered, the deferred revenue amount including accreted interest will be drawn down. The draw down rate requires the use of proven and probable reserves and certain resources in the calculation that are beyond proven and probable reserves which management is reasonably confident will be transferable to reserves. Key estimates used in determining the significant financing component include the discount rate and the reserve and resources assumed for conversion.
| HUDBAY MINERALS INC. |
|---|
| Notes to Audited Consolidated Financial Statements |
| (in thousands of US dollars, except where otherwise noted) |
| Years ended December 31, 2019 and 2018 |
(d) Cost of sales:
Cost of sales consists of those costs previously included in the measurement of inventory sold during the period, as well as certain costs not included in the measurement of inventory, such as the cost of warehousing and distribution to customers, provisional pricing adjustments related to purchased concentrates, profit sharing, royalty payments, share-based payments and other indirect expenses related to producing operations.
(e) Cash and cash equivalents:
Cash and cash equivalents include cash, demand deposits and short-term, highly liquid investments that are readily convertible to known amounts of cash and are subject to an insignificant risk of changes in value. Cash equivalents have maturities of three months or less at the date of acquisition. Interest earned is included in finance income on the consolidated income statements and in investing activities on the consolidated statements of cash flows.
Amounts that are restricted from being used for at least twelve months after the reporting date are classified as non-current assets and presented in restricted cash on the consolidated balance sheets. Changes in restricted cash balances are classified as investing activities on the consolidated statements of cash flows.
(f) Inventories:
Inventories consist of stockpiles, in-process inventory (concentrates and metals), metal products and supplies. Concentrates, metals and all other saleable products are valued at the lower of cost and estimated net realizable value. Net realizable value represents the estimated selling price for inventories less all estimated costs of completion and costs necessary to make the sale. Where the net realizable value is less than cost, the difference is charged to the consolidated income statements as an impairment charge in cost of sales. Costs associated with stripping activities in an open pit mine are capitalized to inventory and recorded through cost of sales unless the stripping activity can be shown to improve access to further quantities of ore that will be mined in future periods, in which case, the stripping costs are capitalized.
Cost of production of concentrate inventory is determined on a weighted average cost basis and the cost of production of finished metal inventory is determined using the first in first out basis. The cost of production includes direct costs associated with conversion of production inventory: material, labour, contractor expenses, purchased concentrates, and an attributable portion of production overheads and depreciation of all property, plant and equipment involved with the mining and production process. Hudbay measures in-process inventories based on assays of material received at metallurgical plants and estimates of recoveries in the production processes. Due to significant uncertainty associated with volume and metal content, immaterial costs are not allocated to routine operating levels of stockpiled ore. Estimates and judgements are required to assess the nature of any significant changes to levels of ore stockpiles and determining whether allocation of costs is required.
Supplies are valued at the lower of average cost and net realizable value. A regular review is undertaken to determine the extent of any provision for obsolescence.
(g) Intangible assets:
Computer software is measured at cost less accumulated amortization and accumulated impairment losses. Costs include all directly attributable costs necessary to create, produce and prepare the asset to be capable of operating it in the manner intended by management.
| HUDBAY MINERALS INC. |
|---|
| Notes to Audited Consolidated Financial Statements |
| (in thousands of US dollars, except where otherwise noted) |
| Years ended December 31, 2019 and 2018 |
Amortization methods, useful lives, and residual values if any, are reviewed at each year end and adjusted prospectively, if required. When an intangible asset is disposed of, or when no further economic benefits are expected, the asset is derecognized, and any resulting gain or loss is recorded in the consolidated income statements.
Currently, the Group's intangible assets relate primarily to enterprise resource planning ("ERP") information systems, which are amortized over their estimated useful lives.
(h) Exploration and evaluation expenditures:
Exploration and evaluation activity begins when the Group obtains legal rights to explore a specific area and involves the search for mineral reserves, the determination of technical feasibility, and the assessment of commercial viability of an identified resource. Expenditures incurred in the exploration and evaluation phase include the cost of acquiring interests in mineral rights, licenses and properties and the costs of the Group's exploration activities, such as researching and analyzing existing exploration data, gathering data through geological studies, exploratory drilling, trenching, sampling, and certain feasibility studies.
The Group expenses the cost of its exploration and evaluation activities and capitalizes the cost of acquiring interests in mineral rights, licenses and properties in business combinations, asset acquisitions or option agreements. Amounts capitalized are recognized as exploration and evaluation assets and presented in property, plant and equipment. Exploration and evaluation assets acquired as a result of an asset acquisition or option agreement are initially recognized at cost, and those acquired in a business combination are recognized at fair value on the acquisition date. They are subsequently carried at cost less accumulated impairment. No depreciation is charged during the exploration and evaluation phase. The Group expenses the cost of subsequent exploration and evaluation activity related to acquired exploration and evaluation assets. Cash flows associated with acquiring exploration and evaluation assets are classified as investing activities in the consolidated statements of cash flows; those associated with exploration and evaluation expenses are classified as operating activities.
Judgement is required in determining whether the respective costs are eligible for capitalization where applicable, and whether they are likely to be recoverable, which may be based on assumptions about future events and circumstances. Estimates and assumptions made may change if new information becomes available.
The Group monitors exploration and evaluation assets for factors that may indicate their carrying amounts are not recoverable. If such indicators are identified, the Group tests the exploration and evaluation assets or their CGUs, as applicable, for impairment. The Group also tests impairment when assets reach the end of the exploration and evaluation phase.
| HUDBAY MINERALS INC. |
|---|
| Notes to Audited Consolidated Financial Statements |
| (in thousands of US dollars, except where otherwise noted) |
| Years ended December 31, 2019 and 2018 |
Exploration and evaluation assets are transferred to capital works in progress within property, plant and equipment once the Group determines that probable future economic benefits will be generated as a result of the expenditures. The Group's determination of probable future economic benefit is based on management's evaluation of the technical feasibility and commercial viability of the geological properties of a given ore body based on information obtained through evaluation activities, including metallurgical testing, resource and reserve estimates and the economic assessment of whether the ore body can be mined economically. Tools that may be used to determine this include a preliminary feasibility study, confidence in converting resources into reserves and the probability that the property could be developed into a mine site. At that time, the property is considered to enter the development phase, and subsequent evaluation costs are capitalized.
(i) Property, plant and equipment:
The Group measures items of property, plant and equipment at cost less accumulated depreciation and any accumulated impairment losses.
The initial cost of an item of property, plant and equipment includes its purchase price or construction costs, including import duties and non-refundable purchase taxes, any costs directly attributable to bringing the asset into operation, and for qualifying assets, borrowing costs. The initial cost of property, plant and equipment also includes the initial estimate of the cost of dismantling and removing the item and restoring the site on which it is located, the obligation for which the Group incurs either when the item is acquired or as a consequence of having used the item during a particular period for purposes other than to produce inventories during that period.
Capitalization of costs ceases once an asset is in the location and condition necessary for it to be capable of operating in the manner intended by management. At this time, depreciation commences. For a new mine, this occurs upon commencement of commercial production. Any revenue earned in the process of preparing an asset to be capable of operating in the manner intended by management is included in the cost of the constructed asset. Any other incidental revenue earned prior to commencement of commercial production is recognized in the consolidated income statements.
Carrying amounts of property, plant and equipment, including assets under finance leases, are depreciated to their estimated residual value over the estimated useful lives of the assets or the estimated life of the related mine or plant, if shorter. Where components of an asset have different useful lives, depreciation is calculated on each separate component. Components may be physical or non-physical, including the cost of regular major inspections and overhauls required in order to continue operating an item of property, plant and equipment.
Certain items of property, plant and equipment are depreciated on a unit-of-production basis. The unit-of-production method is based on proven and probable tonnes of ore reserves. There are numerous uncertainties inherent in estimating ore reserves, and assumptions that were valid at the reporting date may change when new information becomes available. The actual volume of ore extracted and any changes in these assumptions could affect prospective depreciation rates and carrying values.
| HUDBAY MINERALS INC. |
|---|
| Notes to Audited Consolidated Financial Statements |
| (in thousands of US dollars, except where otherwise noted) |
| Years ended December 31, 2019 and 2018 |
The carrying amount of an item of property, plant and equipment is derecognized on disposal or when no future economic benefits are expected from its use or disposal. Upon derecognition of an item of property, plant and equipment, the difference between its carrying value and net sales proceeds, if any, is presented as a gain or loss in other operating income or expense in the consolidated income statements.
(i) Capital works in progress:
Capital works in progress consist of items of property, plant and equipment in the course of construction or mineral properties in the course of development, including those transferred upon completion of the exploration and evaluation phase. On completion of construction or development, costs are transferred to plant and equipment and/or mining properties as appropriate. Capital works in progress are not depreciated.
(ii) Mining properties:
Mining properties consist of costs transferred from capital works in progress when a mining property reaches commercial production, costs of subsequent mine and exploration development, and acquired mining properties in the production stage.
Mining properties include costs directly attributable to bringing a mineral asset into the state where it is capable of operating in the manner intended by management and includes such costs as the cost of shafts, ramps, track haulage drifts, ancillary drifts, pumps, electrical substations, refuge stations, ventilation raises, permanent manways, and ore and waste pass raises. The determination of development costs to be capitalized during the production stage of a mine operation requires the use of judgements and estimates such as estimates of tonnes of waste to be removed over the life of the mining area and economically recoverable reserves extracted as a result.
A mining property is considered to be capable of operating in a manner intended by management when it commences commercial production. Upon commencement of commercial production, a mining property is depreciated on a unit-of-production method. Unit-of-production depreciation rates are determined based on the related proven and probable mineral reserves and associated future development costs.
Subsequent mine development costs are capitalized to the extent they are incurred in order to access reserves mineable over more than one year. Ongoing maintenance and development expenditures are expensed as incurred and included in cost of sales in profit or loss. These include ore stope access drifts, footwall and hangingwall drifts in stopes, drawpoints, drill drifts, sublevels, slots, drill raises, stope manway access raises and definition diamond drilling.
(iii) Plant and equipment:
Plant and equipment consists of buildings and fixtures, surface and underground fixed and mobile equipment and assets under finance lease.
Plant and equipment are depreciated on either unit-of-production or straight-line basis based on factors including the production life of assets and mineable reserves. In general, mining assets are depreciated using a unit-of-production method; equipment is depreciated using the straight-line method, based on the shorter of its useful life and that of the related mine or facility; and plants are depreciated using the straight-line method, with useful lives limited by those of related mining assets.
| HUDBAY MINERALS INC. |
|---|
| Notes to Audited Consolidated Financial Statements |
| (in thousands of US dollars, except where otherwise noted) |
| Years ended December 31, 2019 and 2018 |
(iv) Right-of-use ("ROU") lease assets:
The Group has applied IFRS 16 using the modified retrospective approach. The impact of the changes in disclosed in Note 4.
At inception of a contract, the Group assesses whether a contract is, or contains, a lease. A contract is, or contains, a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. The group assesses the following criteria in the determination of whether a contract conveys the right to control the use of an identified asset:
• The contract involves the use of an identified asset - this may be specified explicitly or implicitly, and should be physically distinct or represent substantially all of the capacity of a physically distinct asset. If the supplier has substantive substitution rights, then the asset is not identified;
• The Group has the right to obtain substantially all of the economic benefits from use of the asset throughout the period of use; and
• The Group has the right to direct the use of the asset by means of decision making rights that are most relevant to changing how and for what purpose the asset is used. In the case where decisions about the assets purpose is predetermined, the Group is determined to have the right to direct the use of the asset if either:
• the Group has the right to operate the asset;
• or the Group designed the asset in a way that predetermines how and for what purpose it will be used.
The Group has applied this approach to contracts entered into or changed on or after January 1, 2019. The Group's approach to other contracts is explained in Note 4.
The Group recognizes a right-of-use ("ROU") asset and lease liability at the lease commencement date. The initial measurement of the ROU asset is on a present value basis. This is based on the calculated lease liability plus any initial direct costs incurred, an estimate of removal or restoration costs, and any payments made prior to commencement of the lease less any lease incentives received.
The right of use asset is subsequently depreciated using the straight-line method from the commencement date to the earlier of the end of the useful life of the right-of-use asset or the end of the lease term. The estimated useful lives of the right-of-use assets are determined on the same basis as those of property and equipment. In addition, the right-of-use asset is periodically reduced by impairment losses, if any, and adjusted for certain remeasurements of the lease liability.
The lease liability is measured at the present value of the lease payments that are yet to be paid at the commencement date, discounted using the interest rate implicit in the lease or, if that rate cannot be easily determined, the Group's incremental borrowing rate. Generally, the Group uses its incremental borrowing rate as the discount rate.
Lease payments included in the measurement of the lease liability comprise fixed payments including insubstance fixed payments and variable payments that depend on an index or rate, amounts expected to be payable under a residual value guarantee and the additional costs the Group reasonably expects to incur due to purchase options, extension options and termination options reasonably expected to be exercised.
| HUDBAY MINERALS INC. |
|---|
| Notes to Audited Consolidated Financial Statements |
| (in thousands of US dollars, except where otherwise noted) |
| Years ended December 31, 2019 and 2018 |
The lease liability is measured at amortised cost using the effective interest method. It is remeasured when there is a change in the expected future cash flows of a leasing contract either due to a change in index or rate, or due to a change in terms of the contract. When the lease liability is remeasured in this way, a corresponding adjustment is made to the carrying amount of the right-of-use asset, or is recorded in profit or loss if the carrying amount of the right-of-use asset is zero.
The Group has elected not to separate non-lease components and account for the lease and non-lease components as a single lease component for lease contracts of all asset classes.
The Group has elected not to recognise ROU assets and lease liabilities for short-term leases of machinery that have a lease term of 12 months or less and leases of low-value assets. The Group recognizes the lease payments associated with these leases as an expense on a straight-line basis over the lease term.
The Group does not enter into transactions where the Group acts as a lessor.
The incremental borrowing rate used for new ROU leases as at January 1, 2019 and going forward which are required to incorporate assessments of asset specific attributes such as quality and location is a key management judgement.
(v) Depreciation rates of major categories of assets:
• Capital works in progress - not depreciated
• Mining properties - unit-of-production
• Mining assets - unit-of-production
• Plant and Equipment
• Equipment - straight-line over 1 to 20 years
• Other plant assets - straight-line over 1 to 20 years / unit-of-production
• ROU Assets - straight-line over 1 to 23 years
The Group reviews its depreciation methods, remaining useful lives and residual values at least annually and accounts for changes in estimates prospectively.
| HUDBAY MINERALS INC. |
|---|
| Notes to Audited Consolidated Financial Statements |
| (in thousands of US dollars, except where otherwise noted) |
| Years ended December 31, 2019 and 2018 |
(vi) Commercial production:
Commercial production is the level of activities intended by management for a mine, or a mine and mill complex, to be capable of operating in the manner intended by management. The Group considers a range of factors when determining the level of activity that represents commercial production for a particular project, including a pre-determined percentage of design capacity for the mine and mill; achievement of continuous production, ramp-ups, or other output; or specific factors such as recoveries, grades, or inventory build-ups. In a phased mining approach, management may consider achievement of specific milestones at each phase of completion. In a non-phased mining approach, management considers average actual metrics that are at least 60% of average design capacity or plan over a continuous period. Management assesses the operation's ability to sustain production over a period of approximately one to three months, depending on the complexity related to the stability of continuous operation. Commercial production is considered to have commenced, and depreciation expense is recognized, at the beginning of the month after criteria have been met.
(vii) Capitalized borrowing costs:
The Group capitalizes borrowing costs that are directly attributable to the acquisition, construction or production of qualifying assets, which are assets that necessarily take a substantial period of time to get ready for their intended use or sale. Capitalization of borrowing costs ceases once the qualifying assets commence commercial production or are otherwise ready for their intended use or sale.
Where funds are borrowed specifically to finance a project, the amount capitalized represents the actual borrowing costs incurred. Where the funds used to finance a project form part of general borrowings, the amount capitalized is calculated using a weighted average of interest rates applicable to relevant general borrowings of the Group during the period, to a maximum of actual borrowing costs incurred. Investment income earned by temporarily investing specific borrowings pending their expenditure on qualifying assets is deducted from the borrowing costs eligible for capitalization. Capitalization of interest is suspended during extended periods in which active development is interrupted.
All other borrowing costs are recognized in the consolidated income statements in the period in which they are incurred.
(viii) Capitalized stripping costs:
Costs associated with stripping activities in an open pit mine are capitalized to inventory and recorded through cost of sales unless the stripping activity can be shown to improve access to further quantities of ore that will be mined in future periods, in which case, the stripping costs are capitalized. Capitalized stripping costs are included in "mining properties" within property, plant and equipment.
Capitalized stripping costs are depreciated using a units-of-production method over the expected reserves within a given phase of mine development.
| HUDBAY MINERALS INC. |
|---|
| Notes to Audited Consolidated Financial Statements |
| (in thousands of US dollars, except where otherwise noted) |
| Years ended December 31, 2019 and 2018 |
(j) Impairment of non-financial assets:
At the end of each reporting period, the Group reviews the carrying amounts of property, plant and equipment, exploration and evaluation assets and intangible assets - computer software to determine whether there is any indication of impairment. If any such indication exists, the Group estimates the recoverable amount of the asset in order to determine the extent of the impairment loss, if any. The Group generally assesses impairment at the level of CGUs, which are the smallest identifiable groups of assets that generate cash inflows that are largely independent of cash inflows from other assets.
The Group's CGUs consist of Manitoba, Peru, Arizona and greenfield exploration and evaluation assets.
The Group allocates near mine exploration and evaluation assets to CGUs based on their operating segment, geographic location and management's intended use for the property. Near mine exploration and evaluation assets are allocated to CGUs separate from those containing producing or development-phase assets, except where such exploration and evaluation assets have the potential to significantly affect the future production of producing or development-phase assets.
Goodwill, if recorded, is tested for impairment annually and whenever there is an indication that the asset may be impaired.
Where an indicator of impairment exists, a formal estimate of the recoverable amount of the asset or CGU is made. The recoverable amount is the higher of the fair value less costs of disposal and value in use:
Fair value less costs of disposal is the amount obtainable from the sale of the asset or CGU in an arm's length transaction between knowledgeable, willing parties, less costs of disposal. Fair value for mineral assets is often determined as the present value of the estimated future cash flows expected to arise from the continued use of the asset, including any expansion prospects, and its eventual disposal, using assumptions that an independent market participant may take into account. These cash flows are discounted by an appropriate discount rate that reflects current market assessments of the time value of money and the risks specific to the asset to arrive at a net present value of the asset.
Value in use is determined as the present value of the estimated future cash flows expected to arise from the continued use of the asset or CGU in its present form and its eventual disposal, discounted using a pre-tax rate that reflects current market assessments of the time value of money and risks specific to the asset for which estimates of future cash flows have not been adjusted. Value in use calculations apply assumptions specific to the Group's continued use and cannot take into account future development. These assumptions are different to those used in calculating fair value, and consequently the value in use calculation is likely to give a different result to a fair value calculation.
| HUDBAY MINERALS INC. |
|---|
| Notes to Audited Consolidated Financial Statements |
| (in thousands of US dollars, except where otherwise noted) |
| Years ended December 31, 2019 and 2018 |
The Group estimates future cash flows based on estimated future recoverable mine production, expected sales prices (considering current and historical commodity prices, price trends and related factors), production levels and cash costs of production, all based on detailed engineering LOM plans. Future recoverable mine production is determined from reserves and resources after taking into account estimated dilution and recoveries during mining, and estimated losses during ore processing and treatment. Estimates of recoverable production from measured, indicated and inferred mineral resources not included in the LOM plan are assessed for economic recoverability and may also be included in the valuation of fair value less costs of disposal. Gains from the expected disposal of assets are not included in estimated future cash flows. Assumptions underlying future cash flow estimates are subject to risks and uncertainties. Changes in estimates may affect the expected recoverability of the Group's investments in mining properties.
If the carrying amount of an asset or CGU exceeds its recoverable amount, the carrying amount is reduced to the recoverable amount, and an impairment loss is recognized in the consolidated income statements in the expense category consistent with the function of the impaired asset or CGU. The Group presents impairment losses on the consolidated income statements as part of results from operating activities. Impairment losses recognized in respect of a CGU are allocated first to reduce the carrying amount of any goodwill allocated to the CGU and then to reduce the carrying amounts of other assets in the CGU on a pro-rata basis for depreciable assets.
The Group assesses previously recognized impairment losses each reporting date for any indications that the losses have decreased or no longer exist. Such an impairment loss is reversed, in full or in part, if there has been significant changes with a positive effect on the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset's carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortization, if no impairment loss had been recognized for the asset in prior years. Such reversals of impairment losses are recognized in the consolidated income statements. An impairment loss recognized in relation to goodwill is not reversed for subsequent increases in the recoverable amount.
(k) Assets held for sale:
The Group classifies non-current assets, or disposal groups consisting of assets and liabilities, as held for sale when it expects to recover their carrying amounts primarily through sale rather than through continuing use. To meet criteria to be held for sale, the sale must be highly probable, and the assets or disposal groups must be available for immediate sale in their present condition. The Group must be committed to a plan to sell the assets or disposal group, and the sale should be expected to qualify for recognition as a completed sale within one year from the date of classification.
| HUDBAY MINERALS INC. |
|---|
| Notes to Audited Consolidated Financial Statements |
| (in thousands of US dollars, except where otherwise noted) |
| Years ended December 31, 2019 and 2018 |
The Group measures assets or disposal groups at the lower of their carrying amount and fair value less costs of disposal. Impairment losses on initial classification as held for sale and subsequent gains and losses on remeasurement are recognized in the consolidated income statements; however, gains are not recognized in excess of any cumulative impairment loss. Any impairment loss on a disposal group first is allocated to goodwill, and then to remaining assets and liabilities on pro rata basis, except that no loss is allocated to inventories, financial assets, deferred tax assets, employee benefit assets or investment property. Upon classifying assets or disposal groups as held for sale, the Group presents the assets separately as a single amount and the liabilities separately as a single amount on the consolidated balance sheets. When an asset no longer meets the criteria for classification as an asset held for sale, the Group records the asset at the lower of its recoverable amount and the carrying amount before the asset was classified as held for sale.
(l) Pension and other employee benefits:
The Group has non-contributory and contributory defined benefit programs for the majority of its Canadian employees. The defined benefit pension benefits are based on years of service and final average salary for the salaried plans and are based on a flat dollar amount combined with years of service for the hourly plans. The Group provides non pension health and other post employment benefits to certain active employees and pensioners (post employment benefits) and also provides disability income, health benefits and other post employment benefits to hourly and salaried disabled employees (other long-term employee benefits).
The Group accrues its obligations under the defined benefit plans as the employees render the services necessary to earn the pension and post employment benefits. The actuarial determination of the accrued benefit obligations for pensions and post employment benefits uses the projected benefit method pro-rated on service (which incorporates management's best estimate of future salary levels, other cost escalation, retirement ages of employees and other actuarial factors). For other long-term employee benefits, the Group recognizes the full cost of the benefit obligation at the time the employee becomes disabled. Actuarial advice is provided by external consultants.
For the funded defined benefit plans, the Group recognizes the deficit or excess of the fair value of plan assets over the present value of the defined benefit obligation as a liability or an asset in the consolidated balance sheets. However, the Group recognizes an excess of assets only to the extent that it represents a future economic benefit which is available in the form of refunds from the plan or reductions in future contributions to the plan. When these criteria are not met, it is not recognized but is disclosed in the notes to the consolidated financial statements. Impacts of minimum funding requirements in relation to past service are considered when determining the balance sheet position.
Defined benefit costs are categorized as follows:
Service costs (including current service cost, past service cost, as well as gains and losses on curtailments and settlements and administration costs),
Net interest expense or income, and
Remeasurement
The first two components of defined benefit costs shown above are recognized in the consolidated income statements. Past service cost is recognized in the consolidated income statements in the period of a plan amendment. Net interest is calculated by applying the discount rate at the beginning of the period to the net defined benefit liability or asset.
| HUDBAY MINERALS INC. |
|---|
| Notes to Audited Consolidated Financial Statements |
| (in thousands of US dollars, except where otherwise noted) |
| Years ended December 31, 2019 and 2018 |
Remeasurement, comprising actuarial gains and losses, the effect of changes to the asset ceiling (if applicable) and the return on plan assets (excluding interest), is reflected immediately in the consolidated balance sheets with a gain or loss recognised in OCI in the period in which they occur. Remeasurement recognised in OCI is reflected in the remeasurement reserve and will not be reclassified to the consolidated income statements. For the other long-term employee benefits plan, remeasurments are recognized immediately in the consolidated income statements.
Actuarial determinations used in estimating obligations relating to these plans incorporate assumptions using management's best estimates of factors including plan performance, salary escalation, retirement dates of employees and healthcare cost escalation rates. Due to the complexity of the valuation, the underlying assumptions and its long-term nature, a defined benefit obligation is highly sensitive to changes in these assumptions. All assumptions are reviewed at each reporting date. In determining the appropriate discount rate, management considers the interest rates on corporate bonds in the respective currency with at least an AA rating, with extrapolated maturities corresponding to the expected duration of the defined benefit obligation. The mortality rate is based on publicly available mortality tables for the specific country. Future salary increases and pension increases are based on expected future inflation rates for the respective country.
The Group also has defined contribution plans providing pension benefits for certain of its salaried employees and certain of its US employees utilizing 401K plans. The Group recognizes the cost of the defined contribution plans based on the contributions required to be made during each period.
Termination benefits are recognized as an expense when the Group is committed demonstrably, without realistic possibility of withdrawal, to a formal detailed plan to either terminate employment before the normal retirement date, or to provide termination benefits as a result of an offer made to encourage voluntary redundancy. Termination benefits for voluntary redundancies are recognized as an expense if the Group has made an offer of voluntary redundancy, it is probable that the offer will be accepted, and the number of acceptances can be estimated reliably. Benefits that are payable more than one year after the reporting period are discounted to their present value.
(m) Provisions:
Provisions are recognized when the Group has a present obligation (legal or constructive) as a result of a past event, it is probable that an outflow of resources will be required to settle the obligation, and a reliable estimate can be made. The provisions are recorded as management's best estimate of the amount required to settle an obligation.
Provisions are stated at their present value, which is determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the liability.
| HUDBAY MINERALS INC. |
|---|
| Notes to Audited Consolidated Financial Statements |
| (in thousands of US dollars, except where otherwise noted) |
| Years ended December 31, 2019 and 2018 |
Decommissioning, restoration and similar liabilities
Provisions are recorded for legal and constructive obligations associated with the future costs of rehabilitating the Group's current and previous operating and development sites. Such costs are associated with decommissioning and restoration activities such as dismantling and removing structures, rehabilitating mines and tailings, and reclamation and re-vegetation of affected areas.
The present value of estimated costs is recorded in the period in which the asset is installed or the environment is disturbed and a reasonable estimate of future costs and discount rates can be made. The provision is discounted using a risk-free rate, and estimates of future cash flows are adjusted to reflect risk.
Subsequent to the initial measurement, the obligation is adjusted to reflect the passage of time and changes in the estimated future cash flows underlying the obligation. The increase in the provision due to the passage of time is recognized as finance expense, whereas increases and decreases due to changes in the estimated future cash flows, which are not the result of current inventory production, are capitalized and depreciated over the life of the related asset. Actual costs incurred upon settlement of the site restoration obligation are charged against the provision to the extent the provision was established for those costs. Upon settlement of the liability, a gain or loss may be recorded. For closed sites, changes to estimated costs are recognized immediately in the consolidated income statements within other operating expenses.
The Group assesses the reasonableness of its estimates and assumptions each year and when conditions change and the estimates are revised accordingly. Judgement is required to determine the scope of future decommissioning and restoration activities, as well as such estimates and assumptions including discount rates, expected timing of decommissioning and restoration costs, inflationary factors and market risks. Changes in cost estimates, which may arise from changes in technology and pricing of the individual components of the cost may result in offsetting changes to the asset and liability and corresponding changes to the associated depreciation and finance costs. In view of the uncertainties concerning these future obligations, the ultimate timing and cost of reclamation and mine closure may differ materially from these estimates.
If the change in estimate results in a significant increase in the decommissioning liability and therefore an addition to the carrying value of the asset, the Group considers whether this is an indication of impairment of the asset as a whole and, if so, tests for impairment in accordance with IAS 36*, Impairment of Assets.* If, for mature mines, the revised mine assets net of decommissioning and restoration liabilities exceeds the recoverable value, that portion of the increase is charged directly to expense as an impairment loss.
In view of the uncertainties concerning environmental remediation, the ultimate cost of decommissioning and restoration liabilities could differ materially from the estimated amounts provided. The estimate of the total liability is subject to change based on amendments to laws and regulations and as new information concerning the Group's operations becomes available. Future changes, if any, to the estimated total liability as a result of amended requirements, laws, regulations and operating assumptions, as well as discount rates, may be significant and would be recognized prospectively as a change in accounting estimate, when applicable. Environmental laws and regulations are continually evolving in all regions in which the Group operates. The Group is not able to determine the impact, if any, of environmental laws and regulations that may be enacted in the future on its results of operations or financial position due to the uncertainty surrounding the ultimate form that such future laws and regulations may take.
| HUDBAY MINERALS INC. |
|---|
| Notes to Audited Consolidated Financial Statements |
| (in thousands of US dollars, except where otherwise noted) |
| Years ended December 31, 2019 and 2018 |
Onerous contracts
A contract is considered to be onerous when the unavoidable costs of meeting obligations under the contract exceed the economic benefits expected to be received under it. The Group records a provision for any onerous contracts at the lesser of costs to comply with a contract and costs to terminate it.
Restructuring provisions
A provision for restructuring is recognized when management, with appropriate authority within the Group, has approved a detailed and formal restructuring plan, and the restructuring has either commenced or has been announced publicly. Future operating costs are not provided for.
(n) Financial Instruments:
Non-derivative financial instruments are initially recognized at fair value plus, in the case of a financial asset or financial liability not measured at fair value through profit or loss, directly attributable transaction costs. Measurement in subsequent periods depends on the financial instrument's classification. The Group uses trade date accounting for regular way purchases or sales of financial assets. The Group determines the classification of its financial instruments and non-financial derivatives at initial recognition.
Financial assets and liabilities are offset and the net amount presented in the consolidated balance sheets when, and only when, the Group has a legal right to offset the amounts and intends either to settle on a net basis or to realize the asset and settle the liability simultaneously.
The classification of financial assets is based on the results of the contractual characteristics test and the business model assessment which will result in the financial asset being classified as either: amortized cost, fair value through profit or loss ("FVTPL") or fair value through other comprehensive income ("FVTOCI").
(i) Non-derivative financial instruments - classification:
Financial assets at fair value through profit or loss
Provisionally priced copper sales receivables, warrants, investments in securities of junior mining companies and the Group's joint venture receivables are classified as financial assets at fair value through profit or loss and are measured at fair value. The unrealized gains or losses related to changes in fair value are reported in other finance income/expense in the consolidated income statements.
Amortized cost
Cash and cash equivalents and restricted cash are classified as and measured at amortized cost and are carried at amortized cost using the effective interest rate method, less impairment losses, if any.
Non-derivative financial liabilities
Accounts payable and senior unsecured notes are initially recognised at fair value and subsequently accounted for at amortized cost, using the effective interest method. The amortization of senior unsecured notes issue costs is calculated using the effective interest rate method.
| HUDBAY MINERALS INC. |
|---|
| Notes to Audited Consolidated Financial Statements |
| (in thousands of US dollars, except where otherwise noted) |
| Years ended December 31, 2019 and 2018 |
(i) Derivatives:
Derivatives are initially recognized at fair value when the Group becomes a party to the derivative contract and are subsequently re-measured to fair value at the end of each reporting period. The resulting gain or loss is recognized in the consolidated income statements immediately unless the derivative is designated and effective as a hedging instrument. Derivatives with positive fair value are recognized as assets; derivatives with negative fair value are recognized as liabilities.
Contracts to buy or sell non-financial items that meet the definition of a derivative but were entered into and are held in accordance with the Group's expected purchase, sale or usage requirements are not recognized as derivatives. Such contracts are recorded as non-derivative purchases and sales.
(ii) Embedded derivatives:
The Group considers whether a contract contains an embedded derivative when it becomes a party to the contract. Derivatives embedded in other financial instruments or other host contracts are treated as separate derivatives when their risks and characteristics are not closely related to those of the host contracts and the host contracts are not measured at FVTPL.
(iii) Fair values of financial instruments:
The fair value of a financial instrument is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm's-length transaction.
Fair values of financial instruments traded in active markets are determined based on quoted market prices, where available. Bid prices are generally used for assets held or liabilities to be issued; asking prices are generally used for assets to be acquired or liabilities held.
For financial instruments not traded in an active market, fair values are determined based on appropriate valuation techniques. Such techniques may include discounted cash flow analysis, using recent arm's-length market transactions, reference to the current fair value of another instrument that is substantially the same, and other valuation models.
The Group applies a hierarchy to classify valuation methods used to measure financial instruments carried at fair value. Levels 1 to 3 are defined based on the degree to which fair value inputs are observable and have a significant effect on the recorded fair value, as follows:
Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities;
Level 2: Valuation techniques use significant observable inputs, either directly (i.e., as prices) or indirectly (i.e., derived from prices), or valuations are based on quoted prices for similar instruments; and
Level 3: Valuation techniques use significant inputs that are not based on observable market data (unobservable inputs).
An analysis of fair values of financial instruments is provided in note 26.
| HUDBAY MINERALS INC. |
|---|
| Notes to Audited Consolidated Financial Statements |
| (in thousands of US dollars, except where otherwise noted) |
| Years ended December 31, 2019 and 2018 |
(iv) Impairment of financial instruments:
The Group recognizes loss allowances for Expected Credit Losses ("ECL") for trade receivables not measured at FVTPL.
Loss allowances for trade receivables are measured at an amount equal to lifetime ECL. ECL is a probability-weighted estimate and measured as at the present value of all cash shortfalls including the impact of forward looking information.
The Company has established a provision based on the Company's historical credit loss experience, adjusted for forward-looking factors specific to the debtors and the economic environment.
The loss allowance is presented as a deduction to trade receivables in the balance sheets.
(v) Derecognition of financial instruments:
The Group derecognizes financial assets when the contractual rights to the cash flows from the assets expire, or when the Group transfers the rights to receive the contractual cash flows on the financial assets in a transaction in which substantially all the risks and rewards of ownership of the financial asset are transferred. Any interest in transferred financial assets that is created or retained by the Group is recognized as a separate asset or liability.
The Group derecognizes financial liabilities when its contractual obligations are discharged, cancelled or expire or when its terms are modified and the cash flows of the modified liability are substantially different.
(o) Taxation:
Current Tax
Current income tax assets and liabilities for the current and prior periods are measured at the amount expected to be recovered from or paid to the taxation authorities. The tax rates and tax laws used to compute the amount are those that are enacted or substantively enacted by the balance sheet date.
Hudbay is subject to income taxes in numerous jurisdictions. Significant judgement is required in determining the worldwide provision for income taxes due to the complexity of legislation. There are many transactions and calculations for which the ultimate tax determination is uncertain during the ordinary course of business. The Group recognizes liabilities for anticipated tax issues based on estimates of whether additional taxes will be due. Where the final tax outcome of these matters is different from the amounts that were initially recorded, such differences will affect the income tax and deferred tax provisions in the period in which such determination is made.
Additionally, future changes in tax laws in the jurisdictions in which the Group operates could limit the ability of the Group to obtain tax deductions in future periods.
Deferred Tax
Deferred tax is recognized using the balance sheet method in respect of temporary differences at the balance sheet date between the tax basis of assets and liabilities, and their carrying amounts for financial reporting purposes.
| HUDBAY MINERALS INC. |
|---|
| Notes to Audited Consolidated Financial Statements |
| (in thousands of US dollars, except where otherwise noted) |
| Years ended December 31, 2019 and 2018 |
Deferred income tax liabilities are recognized for all taxable temporary differences, except:
where the deferred income tax liability arises from the initial recognition of goodwill, or the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and
in respect of taxable temporary differences associated with investments in subsidiaries, associates and interests in joint ventures, where the timing of the reversal of the temporary differences can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future.
Deferred income tax assets are recognized for all deductible temporary differences, carry-forward of unused tax assets and unused tax losses, to the extent that it is probable that taxable profit will be available against which the deductible temporary differences, and the carry-forward of unused tax assets and unused tax losses can be utilized, except:
where the deferred income tax asset relating to the deductible temporary difference arises from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and
in respect of deductible temporary differences associated with investments in subsidiaries, associates and interests in joint ventures, deferred tax assets are recognized only to the extent that it is probable that the temporary differences will reverse in the foreseeable future and taxable profit will be available against which the temporary differences can be utilized.
To the extent that it is probable that taxable profit will be available to offset the deductible temporary differences, the Group recognizes the deferred tax asset regarding the temporary difference on decommissioning, restoration and similar liabilities and recognizes the corresponding deferred tax liability regarding the temporary difference on the related assets.
The carrying amount of deferred income tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred income tax asset to be utilized. Unrecognized deferred income tax assets are reassessed at each balance sheet date and are recognized to the extent that it has become probable that future taxable profit will be available to allow the deferred tax asset to be recovered.
Judgement is required in determining whether deferred tax assets are recognized on the consolidated balance sheets. Deferred tax assets, including those arising from unutilized tax losses, require management to assess the likelihood of taxable profit in future periods in order to utilize recognized deferred tax assets. Estimates of future taxable income are based on forecast cash flows from operations and the application of existing tax laws in each jurisdiction. To the extent that future cash flows and taxable income differ significantly from estimates, the ability to realize the net deferred tax assets recorded at the balance sheet date could be affected.
Deferred tax is measured on an undiscounted basis at the tax rates that are expected to apply in the periods in which the asset is realized or the liability is settled, based on tax rates and tax laws enacted or substantively enacted at the balance sheet date.
Deferred income tax assets and deferred income tax liabilities are offset if a legally enforceable right exists to offset current tax assets against current tax liabilities and the deferred income taxes relate to the same taxable entity and the same taxation authority.
| HUDBAY MINERALS INC. |
|---|
| Notes to Audited Consolidated Financial Statements |
| (in thousands of US dollars, except where otherwise noted) |
| Years ended December 31, 2019 and 2018 |
Current and deferred taxes relating to items recognized outside profit or loss (whether in other comprehensive income or directly in equity) are recognized outside profit or loss and not in the consolidated income statements. Mining taxes and royalties are treated and disclosed as current and deferred taxes if they have the characteristics of an income tax.
(p) Share capital and reserves:
Transaction costs
Transaction costs directly attributable to equity transactions are recognized as a deduction from equity.
Other capital reserve
The other capital reserve is used for equity-settled share-based payments and includes amounts for stock options granted and not exercised.
Foreign currency translation reserve
The foreign currency translation reserve is used to record exchange differences arising from the translation of the financial statements of foreign operations. Exchange differences arising from the translation of the financial statements of foreign operations form part of the net investment in the foreign operation. Translation gains and losses remain in the reserve until disposal of all or a portion of the foreign operation.
(q) Share-based payments:
Hudbay offers a Deferred Share Unit ("DSU") plan for non-employee members of the Board of Directors and a Restricted Share Unit ("RSU") plan for employees. Hudbay also had options outstanding under a stock option plan. These plans are included in provisions on the consolidated balance sheets and further described in note 24. Changes in the fair value of the liabilities are recorded in the consolidated income statements.
Cash-settled transactions, consisting of DSUs and RSUs, are initially measured at fair value and recognized as an obligation at the grant date. The liabilities are remeasured to fair value at each reporting date up to and including the settlement date, with changes in fair value recognized in the consolidated income statements. The Group values the liabilities based on the change in the Company's share price. Additional DSUs and RSUs are credited to reflect dividends paid on Hudbay common shares over the vesting period. The current portion of the liability reflects those grants that have vested or that are expected to vest within twelve months.
DSUs vest on the grant date and are redeemable when a participant is no longer a member of the Board of Directors. Issue and redemption prices of DSUs are based on the average closing price of the Company's common shares for the five trading days prior to issuance or redemption.
| HUDBAY MINERALS INC. |
|---|
| Notes to Audited Consolidated Financial Statements |
| (in thousands of US dollars, except where otherwise noted) |
| Years ended December 31, 2019 and 2018 |
RSUs are generally issued under Hudbay's Long Term Equity Plan ("LTEP Plan") and vest on or before December 31st of the third calendar year after the year in which the services corresponding to such share unit award were performed. As RSUs are typically granted in the first quarter of each year, their vesting period is typically slightly less than three years. RSUs granted under the LTEP Plan may be settled in the form of Hudbay common shares or, at the option of Hudbay, the cash equivalent based on the market price of the common shares as of the vesting date. Hudbay has historically settled RSUs in cash. Except in specified circumstances, RSUs terminate when an employee ceases to be employed by the Group. Valuations of RSUs reflect estimated forfeitures.
Equity-settled transactions with employees relate to stock options and are measured by reference to the fair value at the earlier of the grant date and the date that the employees unconditionally became entitled to the awards. Fair value is determined using a Black-Scholes option pricing model, which relies on estimates of the future risk-free interest rate, future dividend payments, future share price volatility and the expected average life of the options. The Group believes this model adequately captures the substantive features of the option awards and is appropriate to calculate their fair values. The fair value determined at the grant date is recognized over the vesting period in accordance with vesting terms and conditions, with a corresponding increase to other capital reserves. The amount recognized as an expense is adjusted to reflect the number of awards for which the related service and non-market vesting conditions are expected to be met.
(r) Earnings per share:
The Company presents basic and diluted earnings (loss) per share ("EPS") data for its common shares. Basic EPS is calculated by dividing the profit or loss attributable to common shareholders of the Company by the weighted average number of common shares outstanding during the period. Diluted EPS is determined by adjusting the profit or loss attributable to common shareholders and the weighted average number of common shares outstanding for the effects of all dilutive potential common shares, which previously consisted of stock options granted to employees and warrants.
When calculating earnings per share for periods where the Group has a loss, Hudbay's calculation of diluted earnings per share excludes any incremental shares from the assumed conversion of stock options as they would be anti-dilutive.
(s) Leases:
Finance leases, under which substantially all the risks and rewards incidental to ownership of the leased item are transferred to the Group, are capitalized as assets at the inception of the lease at the lower of fair value or the present value of the minimum lease payments. Lease payments are apportioned between finance charges and the reduction of the liability so as to achieve a constant periodic rate of interest on the remaining balance of the liability. Finance charges are reflected in the consolidated income statements as finance costs.
Under operating lease arrangements, the risks and rewards incidental to ownership are not transferred to the Group. Operating lease payments are recognized as an expense in the consolidated income statements on a straight-line basis over the lease term.
| HUDBAY MINERALS INC. |
|---|
| Notes to Audited Consolidated Financial Statements |
| (in thousands of US dollars, except where otherwise noted) |
| Years ended December 31, 2019 and 2018 |
(t) Segment reporting:
An operating segment is a component of the Group that engages in business activities from which it may earn revenue and incur expenses and for which discrete financial information is available. The Group's chief executive officer regularly reviews the operating results of each operating segment to make decisions about resources to be allocated to the segment and assess its performance. In determining operating segments, the Group considers location and decision-making authorities. Refer to note 30.
(u) Statements of cash flows:
The Group presents interest paid and dividends paid as financing activities, except if the interest is related to capitalized borrowing costs, and interest received is presented as an investing activity in the consolidated statements of cash flow. The Group presents the consolidated statements of cash flows using the indirect method.
4. New standards
New standards and interpretations adopted
(a) IFRS 16, Leases ("IFRS 16")
In January 2016, the IASB issued this standard which is effective for periods beginning on or after January 1, 2019, replaces the current guidance in IAS 17, Leases ("IAS 17"), and is to be applied either retrospectively or using a modified retrospective approach. Under IAS 17, lessees were required to make a distinction between a finance lease (on balance sheet) and an operating lease (off balance sheet). IFRS 16 now requires lessees to recognize a lease liability reflective of future lease payments and a "right-of-use asset" for virtually all lease contracts, which has caused, with limited exceptions, most leases to be recorded on balance sheet.
The Group has selected the modified retrospective approach. Therefore, the cumulative effect of adopting IFRS 16 has been recognized as an adjustment to the January 1, 2019 balance for property, plant and equipment and lease liabilities. There was no retained earnings impact , as the Group elected to set the re-valued ROU assets equal to their lease liabilities.
| HUDBAY MINERALS INC. |
|---|
| Notes to Audited Consolidated Financial Statements |
| (in thousands of US dollars, except where otherwise noted) |
| Years ended December 31, 2019 and 2018 |
The Group applied the practical expedient to grandfather the definition of a lease on transition. This means that it will apply IFRS 16 to all contracts entered into before January 1, 2019 and identified as leases in accordance with IAS 17 and IFRIC 4.
On the transition date of January 1, 2019, former operating leases have been recognized on the consolidated balance sheet, which has increased liabilities and property, plant and equipment balances. As a result of recognizing the former operating leases, this has reduced cost of sales, as previously recorded operating lease expense has been replaced by depreciation expense and finance expense.
.
| HUDBAY MINERALS INC. |
|---|
| Notes to Audited Consolidated Financial Statements |
| (in thousands of US dollars, except where otherwise noted) |
| Years ended December 31, 2019 and 2018 |
(b) Lease standard adopted - Impact Summary
Consolidated Balance Sheet
| As reported<br>December 31, 2018 | Adjustment | Revised opening <br>balance, January 1, <br>2019 | ||||
|---|---|---|---|---|---|---|
| Property, plant & equipment, carrying value | $ | 3,819,812 | $ | 14,980 | $ | 3,834,792 |
| Lease Liability (current) | 20,472 | 4,949 | 25,421 | |||
| Lease Liability (non-current) | 53,763 | 10,031 | 63,794 |
On transition to IFRS 16, the Group recognized an additional $14,980 of right of use assets and lease liabilities. When measuring lease liabilities, the Group discounted lease payments using the incremental borrowing rate at January 1, 2019. The range of interest rates utilized for discounting varies depending mostly on the Hudbay Group entity acting as lessee and duration of the lease; rates ranged from 1.95% to 5.13%, per annum.
For the transition to IFRS 16, effective January 1, 2019, for previous operating leases which were not capitalized, the lease liability is initially measured at the present value of the future lease payments discounted using the Company's incremental borrowing rate. Subsequently, the lease liability is adjusted for interest and lease payments, as well as the impact of lease modifications, amongst others. Since the Company elected not to apply the general requirements of IFRS 16 to short-term leases (i.e. one that does not include a purchase option and has a lease term at commencement date of 12 months or less) and leases of low value assets, the Company recognizes the lease payments associated with those leases as an expense on either a straight-line basis over the lease term or another systematic basis if that basis is representative of the pattern of the lessee's benefits, similar to the previous accounting for operating leases.
The Group used the following practical expedients/elections when applying IFRS 16:
Applied a single discount rate to a portfolio of leases with similar characteristics using a risk adjusted rate
Adjusted the right of use assets by the amount of IAS 37 onerous contract provision immediately before the date of initial application, as an alternative to an impairment review
Applied the exemption to not recognize right of use assets and liabilities for leases with less than 12 months of lease term
Excluded initial direct costs from measuring the right of use asset at the date of initial application
Used hindsight when determining the lease term if the contract contains options to extend or terminate a lease
An election was made to include non-lease components to leases which contain multiple payment components.
| HUDBAY MINERALS INC. |
|---|
| Notes to Audited Consolidated Financial Statements |
| (in thousands of US dollars, except where otherwise noted) |
| Years ended December 31, 2019 and 2018 |
Change in opening lease liability balances:
| Jan. 1, 2019 | |||
|---|---|---|---|
| Total minimum lease payments - lease liabilities, Dec, 31, 2018 | $ | 78,174 | |
| Newly capitalized leases, IFRS 16 | 17,708 | ||
| Total minimum lease payments - lease liabilities, Jan. 1, 2019 | 95,882 | ||
| Effect of discounting | (6,667 | ) | |
| Present value of minimum lease payments | 89,215 | ||
| Less: current portion | (25,421 | ) | |
| $ | 63,794 |
Reconciliation of operating leases in IAS 17 to IFRS 16:
| Operating lease commitments, Dec. 31, 2018 | $ | 63,448 | |
|---|---|---|---|
| Less: short term leases - expedient | (3,663 | ) | |
| Less: low value leases - expedient | (10 | ) | |
| Less: variable consideration leases^1^ | (46,120 | ) | |
| Add: inclusion of non - lease components (election) and expected term extensions | 4,053 | ||
| Lease commitments - capitalizable leases, Jan. 1, 2019 | 17,708 | ||
| Effect of discounting | (2,728 | ) | |
| Newly capitalized leases at January 1, 2019 | $ | 14,980 | |
| ^1^Variable consideration leases include equipment used for heavy civil works at Constancia. |
(c) IFRIC 23 Uncertainty over Income Tax Treatment
The Company adopted Interpretation IFRIC 23 Uncertainty over Income Tax Treatments, which was effective for accounting periods beginning on or after January 1, 2019. The impact of adoption was not significant to the Company's financial statements.
New standards and interpretations not yet adopted
(c) Amendment to IFRS 3 - Business Combinations
The amendment to IFRS 3 clarifies the definition of a business and includes an optional concentration test to determine whether an acquired set of activities and assets is a business. This amendment is in effect January 1, 2020 and will be treated prospectively. The Group will apply these amendments to future acquisition transactions.
| HUDBAY MINERALS INC. |
|---|
| Notes to Audited Consolidated Financial Statements |
| (in thousands of US dollars, except where otherwise noted) |
| Years ended December 31, 2019 and 2018 |
5. Acquisition of remaining interest in the Rosemont project
In March 2019, the Company entered into an agreement with United Copper & Moly LLC ("UCM") to purchase UCM's remaining 7.95% interest in the Rosemont project, and to terminate all of UCM's remaining earn-in and off-take rights. The acquisition was completed on April 25, 2019.
Upfront cash consideration of $45,000 was paid on April 25, 2019, and the Company also committed to pay three annual installments of $10,000 per year, commencing July 1, 2022.
To facilitate an orderly acquisition of UCM's interest in Rosemont, the Group, immediately prior to closing the acquisition, agreed to release UCM from repayment obligations under an intercompany Rosemont project loan in exchange for an increase in equity interest in Rosemont. As a result, the loan receivable balance of $25,978 was written off. The Group recognized the loss on the loan receivable in the income statement (refer to Note 6d). In addition, in order to recognize previously unfunded contributions to the Rosemont Project due from UCM, the Group recognized an increase to other capital reserves, a component of shareholder's equity.
The acquisition provides Hudbay with 100% ownership of Rosemont, allowing greater strategic flexibility with respect to capital structure and project financing alternatives. In exchange for acquiring the percentage ownership not already owned by Hudbay, the Group paid:
| Cash | $ | 45,000 |
|---|---|---|
| Present value of future cash installments | 23,557 | |
| Total consideration | $ | 68,557 |
As part of the increase in ownership of the Rosemont Project, Hudbay acquired and assumed the following assets and liabilities, which represented the fair value of the assets and liabilities not already owned by Hudbay at the time of transaction:
| HUDBAY MINERALS INC. | |||
|---|---|---|---|
| Notes to Audited Consolidated Financial Statements | |||
| (in thousands of US dollars, except where otherwise noted) | |||
| Years ended December 31, 2019 and 2018 | |||
| Current assets | $ | 343 | |
| --- | --- | --- | --- |
| Non-current assets | 68,904 | ||
| Liabilities | (690 | ) | |
| Net assets acquired | $ | 68,557 | |
| HUDBAY MINERALS INC. | |||
| --- | |||
| Notes to Audited Consolidated Financial Statements | |||
| (in thousands of US dollars, except where otherwise noted) | |||
| Years ended December 31, 2019 and 2018 |
6. Revenue and expenses
(a) Revenue
The Group's revenue by significant product types:
| Year ended December 31, | ||||||
|---|---|---|---|---|---|---|
| 2019 | 2018 | |||||
| Copper | $ | 786,332 | $ | 963,063 | ||
| Zinc | 284,897 | 357,396 | ||||
| Gold | 152,394 | 149,043 | ||||
| Silver | 89,685 | 85,808 | ||||
| Molybdenum | 31,270 | 20,995 | ||||
| Other | 4,760 | 4,726 | ||||
| 1,349,338 | 1,581,031 | |||||
| Variable consideration adjustments ^1^ | (16,295 | ) | (2,655 | ) | ||
| Pricing and volume adjustments ^2^ | (12,123 | ) | (4,101 | ) | ||
| 1,320,920 | 1,574,275 | |||||
| Treatment and refining charges | (83,481 | ) | (101,909 | ) | ||
| $ | 1,237,439 | $ | 1,472,366 | |||
| ^1^See note 18. | ||||||
| ^2^Pricing and volume adjustments represent mark-to-market adjustments on initial estimate of provisionally priced sales, realized and unrealized changes to fair value for non-hedge derivative contracts and adjustments to originally invoiced weights and assays. |
(b) Depreciation and amortization
Depreciation of property, plant and equipment and amortization of intangible assets are reflected in the consolidated income statements as follows:
| Year ended December 31, | ||||
|---|---|---|---|---|
| 2019 | 2018 | |||
| Cost of sales | $ | 344,555 | $ | 332,667 |
| Selling and administrative expenses | 2,079 | 477 | ||
| $ | 346,634 | $ | 333,144 | |
| HUDBAY MINERALS INC. | ||||
| --- | ||||
| Notes to Audited Consolidated Financial Statements | ||||
| (in thousands of US dollars, except where otherwise noted) | ||||
| Years ended December 31, 2019 and 2018 |
(c) Share-based Expense (recoveries) expenses
Share-based Expense (recoveries) expenses are reflected in the consolidated income statements as follows:
| Cash-settled | Total share-based<br>payment expense | ||||||||
|---|---|---|---|---|---|---|---|---|---|
| RSUs | DSUs | ||||||||
| Year ended December 31, 2019 | |||||||||
| Cost of sales | $ | 400 | $ | - | $ | 400 | |||
| Selling and administrative | 928 | 1,157 | 2,085 | ||||||
| Other operating | 229 | - | 229 | ||||||
| $ | 1,557 | $ | 1,157 | $ | 2,714 | ||||
| Year ended December 31, 2018 | |||||||||
| Cost of sales | $ | 160 | $ | - | $ | 160 | |||
| Selling and administrative | (702 | ) | (1,877 | ) | (2,579 | ) | |||
| Other operating | 46 | - | 46 | ||||||
| $ | (496 | ) | $ | (1,877 | ) | $ | (2,373 | ) |
(d) Other operating expenses
| Year ended December 31, | |||||
|---|---|---|---|---|---|
| 2019 | 2018 | ||||
| Write down of UCM receivable (note 5) | $ | 25,978 | $ | - | |
| Regional costs | 3,780 | 4,673 | |||
| Pampacancha delivery obligation | 7,499 | 7,218 | |||
| Pension settlement loss (note 20) | 96 | 2,163 | |||
| Loss on disposal of property,plant & equipment | 4,807 | 7,189 | |||
| Closure cost adjustment | 2,289 | (425 | ) | ||
| Allocation of community costs | 2,216 | - | |||
| Other | 4,451 | (1,747 | ) | ||
| $ | 51,116 | $ | 19,071 |
During the first quarter of 2019, the Group recognized an obligation to deliver additional precious metal credits to Wheaton Precious Metals ("Wheaton") as a result of the Group's expectation that mining at the Pampacancha deposit will not begin until 2020. The obligation is to be paid in four quarterly installments, the first to be paid on March 31, 2020.
A similar obligation was recorded in the first quarter of 2018, as a result of the Pampacancha deposit not being mined in 2018.
The Group realized a loss on the settlement of the sale of a portion of its net pension liability.
| HUDBAY MINERALS INC. |
|---|
| Notes to Audited Consolidated Financial Statements |
| (in thousands of US dollars, except where otherwise noted) |
| Years ended December 31, 2019 and 2018 |
(e) Impairment
During 2019, the Group recorded impairment losses of $322,249 for non-current assets relating to the Arizona cash generating units ("CGU").
| Arizona | |||
|---|---|---|---|
| Pre-tax impairment to: | |||
| Property, plant & equipment (note 12) | 322,249 | ||
| Tax impact - (recovery) | (80,143 | ) | |
| After-tax impairment charge | $ | 242,106 |
On July 31, 2019, the U.S. District Court for the District of Arizona ("Court") issued a ruling in the lawsuits challenging the U.S. Forest Service's issuance of the Final Record of Decision ("FROD") for the Rosemont project in Arizona. The Court ruled to vacate and remand the FROD thereby delaying the expected start of construction of Rosemont. The Court's ruling and the subsequent impact to the Company's market capitalization gave rise to an indicator of impairment. Following an impairment test conducted as of September 30, 2019, it was determined that the recoverable amount of the Arizona CGU was lower than its carrying value, causing the Group to recognize an impairment loss related to these assets. See note 12.
(f) Employee benefits expense
This table presents employee benefit expense recognized in the Group's consolidated income statements, including amounts transferred from inventory upon sale of goods:
| Year ended December 31, | |||||
|---|---|---|---|---|---|
| 2019 | 2018 | ||||
| Current employee benefits | $ | 169,663 | $ | 176,571 | |
| Profit-sharing plan expense | 1,510 | 9,228 | |||
| Share-based payments (notes 6c, 19, 24) | |||||
| Cash-settled restricted share units | 1,557 | (496 | ) | ||
| Cash-settled deferred share units | 1,157 | (1,877 | ) | ||
| Employee share purchase plan | 1,645 | 1,533 | |||
| Post-employee pension benefits | |||||
| Defined benefit plans | 10,643 | 12,295 | |||
| Defined contribution plans | 1,635 | 1,511 | |||
| Past service costs | - | 383 | |||
| Other post-retirement employee benefits | 8,457 | 9,248 | |||
| Termination benefits | 628 | 1,206 | |||
| $ | 196,895 | $ | 209,602 | ||
| HUDBAY MINERALS INC. | |||||
| --- | |||||
| Notes to Audited Consolidated Financial Statements | |||||
| (in thousands of US dollars, except where otherwise noted) | |||||
| Years ended December 31, 2019 and 2018 |
Manitoba has a profit sharing plan required by the collective bargaining agreement whereby 10% of Manitoba's after tax profit (excluding provisions or recoveries for deferred income tax and deferred mining tax) for any given fiscal year will be distributed to all eligible employees in the Flin Flon/Snow Lake operations, with the exception of executive officers and key management personnel.
Peru has a profit sharing plan required by Peruvian law whereby 8% of Peru's taxable income will be distributed to all employees within Peru's operations.
The Group has an employee share purchase plan for executives and other eligible employees where participants may contribute between 1% and 10% of their pre-tax base salary to acquire Hudbay shares. The Group makes a matching contribution of 75% of the participant's contribution.
See note 20 for a description of the Group's pension plans and note 21 for the Group's other employee benefit plans.
(g) Finance income and expenses
| Year ended December 31, | ||||||
|---|---|---|---|---|---|---|
| 2019 | 2018 | |||||
| Finance income | $ | (8,527 | ) | $ | (8,450 | ) |
| Finance expenses | ||||||
| Interest expense on long-term debt | 78,265 | 77,783 | ||||
| Accretion on financial liabilities at amortized cost | 1,222 | 1,244 | ||||
| Finance costs on deferred revenue (note 18) | 69,772 | 64,921 | ||||
| Unwinding of discounts on provisions | 4,392 | 4,684 | ||||
| Withholding taxes | 8,100 | 9,424 | ||||
| Other finance expense | 11,027 | 7,116 | ||||
| 172,778 | 165,172 | |||||
| Interest capitalized | (9,890 | ) | (13,172 | ) | ||
| 162,888 | 152,000 | |||||
| Other finance losses (gains) | ||||||
| Net foreign exchange losses (gains) | 1,388 | (11,067 | ) | |||
| Change in fair value of financial assets<br> and liabilities at fair value through profit or loss: | ||||||
| Hudbay warrants | - | (6,748 | ) | |||
| Embedded derivatives | 3,708 | (1,514 | ) | |||
| Investments | 4,539 | 3,798 | ||||
| 9,635 | (15,531 | ) | ||||
| Net finance expense | $ | 163,996 | $ | 128,019 | ||
| HUDBAY MINERALS INC. | ||||||
| --- | ||||||
| Notes to Audited Consolidated Financial Statements | ||||||
| (in thousands of US dollars, except where otherwise noted) | ||||||
| Years ended December 31, 2019 and 2018 |
Until October 1, 2019, interest expense related to certain long-term debt had been capitalized to the Rosemont project. Following the Court ruling to vacate and remand the FROD for the Rosemont project during the third quarter of 2019, the Group ceased capitalization effective October 1, 2019. The capitalization of this interest expense will resume upon the reinstatement of permits and will continue from that point until commercial production is reached.
Other finance expense relates primarily to fees on the Group's revolving credit facilities and capitalized leases.
| HUDBAY MINERALS INC. |
|---|
| Notes to Audited Consolidated Financial Statements |
| (in thousands of US dollars, except where otherwise noted) |
| Years ended December 31, 2019 and 2018 |
7. Cash and cash equivalents
| Dec. 31, 2019 | Dec. 31, 2018 | |||
|---|---|---|---|---|
| Cash on hand and demand deposits | $ | 396,146 | $ | 515,497 |
| Short-term money market instruments with maturities of<br>of three months or less at acquisition date | - | - | ||
| $ | 396,146 | $ | 515,497 |
8. Trade and other receivables
| Dec. 31, 2019 | Dec. 31, 2018 | |||
|---|---|---|---|---|
| Current | ||||
| Trade receivables | $ | 87,332 | $ | 102,112 |
| Statutory receivables | 16,543 | 12,764 | ||
| Other receivables | 2,119 | 2,277 | ||
| 105,994 | 117,153 | |||
| Non-current | ||||
| Taxes receivable | 17,669 | 17,199 | ||
| Receivable from joint venture partners (note 5) | - | 20,404 | ||
| Other receivables | 1,595 | 1,518 | ||
| 19,264 | 39,121 | |||
| $ | 125,258 | $ | 156,274 | |
| HUDBAY MINERALS INC. | ||||
| --- | ||||
| Notes to Audited Consolidated Financial Statements | ||||
| (in thousands of US dollars, except where otherwise noted) | ||||
| Years ended December 31, 2019 and 2018 |
9. Inventories
| Dec. 31, 2019 | Dec. 31, 2018 | |||
|---|---|---|---|---|
| Current | ||||
| Stockpile | $ | 10,396 | $ | 5,463 |
| Work in progress | 14,420 | 1,762 | ||
| Finished goods | 62,230 | 62,546 | ||
| Materials and supplies | 51,774 | 48,703 | ||
| 138,820 | 118,474 | |||
| Non-current | ||||
| Stockpile | 14,626 | 14,730 | ||
| Materials and supplies | 4,829 | 4,746 | ||
| 19,455 | 19,476 | |||
| $ | 158,275 | $ | 137,950 |
The cost of inventories recognized as an expense, including depreciation, and included in cost of sales amounted to $978,810 for the year ended December 31, 2019 (year ended December 31, 2018 - $975,354).
| HUDBAY MINERALS INC. |
|---|
| Notes to Audited Consolidated Financial Statements |
| (in thousands of US dollars, except where otherwise noted) |
| Years ended December 31, 2019 and 2018 |
10. Other financial assets
| Dec. 31, 2019 | Dec. 31, 2018 | |||
|---|---|---|---|---|
| Current | ||||
| Derivative assets | $ | 1,712 | $ | 6,628 |
| Restricted cash | 337 | 3,738 | ||
| 2,049 | 10,366 | |||
| Non-current | ||||
| Investments at fair value through profit or loss | 11,287 | 15,159 | ||
| $ | 13,336 | $ | 25,525 |
Investments at fair value through profit or loss consist of securities in Canadian metals and mining companies, all of which are publicly traded. The change in investments at fair value through profit or loss is mostly attributed to fluctuations in market price and foreign exchange impact.
11. Intangibles and other assets
Intangibles and other assets of $10,411 includes $5,384 of other assets (December 31, 2018 - nil) and $5,027 of intangibles (December 31, 2018 - $4,162).
Intangibles mainly represent computer software costs.
| Dec. 31, 2019 | Dec. 31, 2018 | |||||
|---|---|---|---|---|---|---|
| Cost | ||||||
| Balance, beginning of year | 18,557 | $ | 19,169 | |||
| Additions | 2,325 | 590 | ||||
| Disposals | (96 | ) | - | |||
| Effects of movement in exchange rates | 752 | (1,202 | ) | |||
| Balance, end of year | 21,538 | 18,557 | ||||
| Accumulated amortization | ||||||
| Balance, beginning of year | 14,395 | 13,594 | ||||
| Additions | 1,606 | 1,793 | ||||
| Disposals | (96 | ) | - | |||
| Effects of movement in exchange rates | 606 | (992 | ) | |||
| Balance, end of year | 16,511 | 14,395 | ||||
| Intangibles, net book value | $ | 5,027 | $ | 4,162 |
Other assets represent the carrying value of certain future community costs. The liability remaining for these agreements is recorded in Other financial liabilities at amortized cost (note 15). Amortization of the carrying amount is recorded in the consolidated income statements within other operating expenses (note 6d).
| HUDBAY MINERALS INC. |
|---|
| Notes to Audited Consolidated Financial Statements |
| (in thousands of US dollars, except where otherwise noted) |
| Years ended December 31, 2019 and 2018 |
12. Property, plant and equipment
| Dec. 31, 2019 | Exploration and evaluation assets | Capital works in progress | Mining properties | Plant and equipment | Plant and equipment- ROU assets | Total | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Balance, Jan. 1, 2019 | $ | 52,206 | $ | 873,781 | $ | 1,998,439 | $ | 2,473,176 | $ | 180,151 | $ | 5,577,753 | |||||
| Additions | 17,016 | 109,372 | - | 33,309 | 22,158 | 181,855 | |||||||||||
| Acquisition (note 5) | - | 91,332 | 3,157 | - | 373 | 94,862 | |||||||||||
| Capitalized stripping and development | - | - | 103,108 | - | - | 103,108 | |||||||||||
| Decommissioning and restoration | - | 41 | 3,314 | 86,053 | - | 89,408 | |||||||||||
| Interest capitalized | - | 9,890 | - | - | - | 9,890 | |||||||||||
| Transfers and other movements | - | (30,000 | ) | 642 | 30,406 | (1,048 | ) | - | |||||||||
| Impairment (note 6e) | - | (322,249 | ) | - | - | - | (322,249 | ) | |||||||||
| Disposals | - | (2,029 | ) | - | (10,747 | ) | (1,533 | ) | (14,309 | ) | |||||||
| Effects of movements in exchange rates | 681 | 1,528 | 41,080 | 38,452 | 1,793 | 83,534 | |||||||||||
| Other | - | 2,208 | (3,157 | ) | 3,103 | 78 | 2,232 | ||||||||||
| Balance, Dec. 31, 2019 | 69,903 | 733,874 | 2,146,583 | 2,653,752 | 201,972 | 5,806,084 | |||||||||||
| Accumulated depreciation | |||||||||||||||||
| Balance, Jan. 1, 2019 | - | - | 780,754 | 872,330 | 89,877 | 1,742,961 | |||||||||||
| Depreciation for the year | - | - | 154,970 | 179,062 | 19,850 | 353,882 | |||||||||||
| Disposals | - | - | - | (6,675 | ) | - | (6,675 | ) | |||||||||
| Effects of movement in exchange rates | - | - | 27,806 | 24,970 | 581 | 53,357 | |||||||||||
| Balance, Dec. 31, 2019 | - | - | 963,530 | 1,069,687 | 110,308 | 2,143,525 | |||||||||||
| Net book value | $ | 69,903 | $ | 733,874 | $ | 1,183,053 | $ | 1,584,065 | $ | 91,664 | $ | 3,662,559 | |||||
| HUDBAY MINERALS INC. | |||||||||||||||||
| --- | |||||||||||||||||
| Notes to Audited Consolidated Financial Statements | |||||||||||||||||
| (in thousands of US dollars, except where otherwise noted) | |||||||||||||||||
| Years ended December 31, 2019 and 2018 | |||||||||||||||||
| Dec. 31, 2018 | Exploration and evaluation assets | Capital works in progress | Mining properties | Plant and equipment | Plant and equipment- ROU assets^1^ | Total | |||||||||||
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
| Balance, Dec. 31, 2017 | $ | 23,010 | $ | 933,531 | $ | 1,975,061 | $ | 2,536,019 | $ | - | $ | 5,467,621 | |||||
| Additions | 9,950 | 88,920 | - | 16,689 | - | 115,559 | |||||||||||
| Acquisitions | 21,654 | - | - | - | - | 21,654 | |||||||||||
| Capitalized stripping and development | - | - | 84,023 | - | - | 84,023 | |||||||||||
| Decommissioning and restoration | - | 15 | 1,711 | 7,272 | - | 8,998 | |||||||||||
| Interest capitalized | - | 13,172 | - | - | - | 13,172 | |||||||||||
| Transfers and other movements | - | (152,781 | ) | 2,132 | 150,649 | - | - | ||||||||||
| Disposals | (1,208 | ) | (4,034 | ) | - | (9,749 | ) | - | (14,991 | ) | |||||||
| Effects of movements in exchange rates | (1,197 | ) | (3,873 | ) | (65,434 | ) | (62,757 | ) | - | (133,261 | ) | ||||||
| Other | (3 | ) | (1,169 | ) | 946 | 224 | - | (2 | ) | ||||||||
| Balance, Dec. 31, 2018 | 52,206 | 873,781 | 1,998,439 | 2,638,347 | - | 5,562,773 | |||||||||||
| IFRS 16 Adjustments^1^ | - | - | - | (165,171 | ) | 180,151 | 14,980 | ||||||||||
| Balance, Jan. 1, 2019 | 52,206 | 873,781 | 1,998,439 | 2,473,176 | 180,151 | 5,577,753 | |||||||||||
| Accumulated depreciation | |||||||||||||||||
| Balance, Dec. 31, 2017 | - | - | 683,183 | 820,205 | - | 1,503,388 | |||||||||||
| Depreciation for the year | - | - | 141,218 | 189,354 | - | 330,572 | |||||||||||
| Disposals | - | - | - | (6,780 | ) | - | (6,780 | ) | |||||||||
| Effects of movement in exchange rates | - | - | (43,469 | ) | (40,211 | ) | - | (83,680 | ) | ||||||||
| Other | - | - | (178 | ) | (361 | ) | - | (539 | ) | ||||||||
| Balance, Dec. 31, 2018 | - | - | 780,754 | 962,207 | - | 1,742,961 | |||||||||||
| IFRS 16 Adjustments^1^<br>^^ | - | - | - | (89,877 | ) | 89,877 | - | ||||||||||
| Balance, Jan. 1, 2019 | - | - | 780,754 | 872,330 | 89,877 | 1,742,961 | |||||||||||
| Net book value, Dec.31, 2018 | 52,206 | 873,781 | 1,217,685 | 1,676,140 | - | 3,819,812 | |||||||||||
| Net book value, Jan.1, 2019 | $ | 52,206 | $ | 873,781 | $ | 1,217,685 | $ | 1,600,846 | $ | 90,274 | $ | 3,834,792 | |||||
| ^1^ IFRS 16 is effective January 1, 2019 for prospective periods. For further information about the adoption of IFRS 16, refer to Note 4. |
Capital works in progress decreased compared to December 31, 2018 as a result of the impairment charge of $322,249 (pre-tax) related to the Arizona CGU (see note 6e), partially offset by fixed asset additions.
For non-financial assets, management examines internal and external indicators of impairment or reversals of impairments on a quarterly basis.
Management identified an increase in market capitalization deficiency as at September 30, 2019 which has been attributed to the Arizona CGU. Management determined that the increase in the market capitalization deficiency was related to a Court issued ruling in the lawsuits challenging the U.S. Forest Service's issuance of the FROD for the Rosemont project in Arizona.
| HUDBAY MINERALS INC. |
|---|
| Notes to Audited Consolidated Financial Statements |
| (in thousands of US dollars, except where otherwise noted) |
| Years ended December 31, 2019 and 2018 |
For the impairment test completed at September 30, 2019, Fair Value Less Cost of Disposal, ("FVLCD") was used to determine the recoverable amount since it is higher than value in use. FVLCD was calculated using discounted after-tax cash flows based on cash flow projections and assumptions in the Group's most current life of mine ("LOM") plans. The fair value measurement in its entirety is categorized as Level 3 based on the degree to which fair value inputs are observable and have a significant effect on the recorded fair value.
LOM plans are based on optimized mine and processing plans and the assessment of capital expenditure requirements of a mine site. LOM plans incorporate management's best estimates of key assumptions which are discount rates, future commodity prices, production based on current estimates of recoverable reserves, future operating and capital costs, value of mineral resources not included in the LOM plan, beginning date of project cash flows incorporating permit related project delays and future foreign exchange rates. As of September 30, 2019, for purposes of the impairment test, initial construction of the Rosemont project was estimated to commence in approximately three years (December 31, 2018 - approximately one year) and cash flows are for periods up to the date that production is expected to cease, which is in 24 years (December 31, 2018 - 22 years).
The discount rate was based on the CGU's weighted average cost of capital, of which the two main components are the cost of equity and the after-tax cost of debt. Cost of equity was calculated based on the capital asset pricing model, incorporating the risk-free rate of return based on the US Government's marketable bond yields as at the valuation date, the Company's beta coefficient adjustment to the market equity risk premium based on the volatility of the Company's return in relation to that of a comparable market portfolio, plus a country risk premium, size premium and company-specific risk factor. Cost of debt was determined by applying an appropriate market indication of the Company's borrowing capabilities and the corporate income tax rate applicable to the Arizona CGU. As at September 30, 2019, a real discount rate of 9.50% (December 31, 2018 - 7.50%) for the Arizona CGU was used to calculate the estimated after-tax discounted future net cash flows, commensurate with its individual estimated level of risk.
Commodity prices used in the impairment assessment were determined by reference to external market participant sources. The key commodity price for this assessment is the price of copper. Where applicable to each of the Group's CGUs, the cash flow calculations were based on estimates of future production levels applying forecasts for metal prices, which included forecasts for long-term prices. As at September 30, 2019, for the Arizona CGU, the cash flow calculations utilized a long-term copper price of $3.10/lb (December 31, 2018 - $3.10/lb), molybdenum long-term prices of $11.00/lb (December 31, 2018 - $11.00/lb) and capital, operating and reclamation costs based on the most current LOM plans. As at September 30, 2019 for the Arizona CGU, a value of $74,969 (December 31, 2018 - $287,900) was utilized to estimate the value of mineral resources not included in the LOM plan.
Expected future cash flows used to determine the FVLCD used in the impairment testing are inherently uncertain and could materially change over time. Should management's estimate of the future not reflect actual events, impairments may be identified. This may have a material effect on the Company's consolidated financial statements. Although it is reasonably possible for a change in key assumptions to occur, the possible effects of a change in any single assumption may not fairly reflect the impact on a CGU's fair value as the assumptions are inextricably linked. For example, a decrease in the assumed price of long-term copper could result in amendments to the mine plans which would partially offset the effect of lower prices. It is difficult to determine how all of these factors would interrelate; however, in deriving a recoverable amount, management believes all of these factors need to be considered.
| HUDBAY MINERALS INC. |
|---|
| Notes to Audited Consolidated Financial Statements |
| (in thousands of US dollars, except where otherwise noted) |
| Years ended December 31, 2019 and 2018 |
As at September 30, 2019, the carrying value of the Arizona CGU exceeded the estimated recoverable amount of $615,368 by $242,106 (after-tax), leading to the impairment charge recorded (Note 6e).
For the Arizona CGU, the following changes in key assumptions, in isolation of each other, would result in the following decreases in FVLCD.
| Decrease in FVLCD as at | ||
|---|---|---|
| Change in key assumption | Sep. 30, 2019 | |
| Decrease of 10% in the average LOM copper prices | $ | 308,148 |
| 1.0 percentage point increase in the real discount rate | 135,733 | |
| One year additional delay in the start of project construction | 76,921 |
13. Trade and other payables
| Dec. 31, 2019 | Dec. 31, 2018 | |||
|---|---|---|---|---|
| Trade payables | $ | 68,742 | $ | 61,395 |
| Accruals and payables | 80,375 | 68,386 | ||
| Accrued interest | 34,603 | 34,662 | ||
| Exploration and evaluation payables | 884 | 185 | ||
| Statutory payables | 7,800 | 7,324 | ||
| $ | 192,404 | $ | 171,952 |
Accruals and payables include operational and capital costs and employee benefit amounts owing.
14. Other liabilities
| Dec. 31, 2019 | Dec. 31, 2018 | |||
|---|---|---|---|---|
| Current | ||||
| Provisions (note 19) | $ | 33,575 | $ | 14,276 |
| Pension liability (note 20) | 12,015 | 11,854 | ||
| Other employee benefits (note 21) | 2,806 | 2,564 | ||
| Unearned revenue | 1,015 | 1,857 | ||
| $ | 49,411 | $ | 30,551 | |
| HUDBAY MINERALS INC. | ||||
| --- | ||||
| Notes to Audited Consolidated Financial Statements | ||||
| (in thousands of US dollars, except where otherwise noted) | ||||
| Years ended December 31, 2019 and 2018 |
15. Other financial liabilities
| Dec. 31, 2019 | Dec. 31, 2018 | |||
|---|---|---|---|---|
| Current | ||||
| Derivative liabilities | $ | 10,295 | $ | 2,634 |
| Other financial liabilities at amortized cost | 8,707 | 2,590 | ||
| Embedded derivatives (note 26c) | 9,074 | 7,201 | ||
| 28,076 | 12,425 | |||
| Non-current | ||||
| Deferred Rosemont acquisition consideration (note 5) | 24,491 | - | ||
| Other financial liabilities at amortized cost | 15,293 | 18,771 | ||
| 39,784 | 18,771 | |||
| $ | 67,860 | $ | 31,196 |
The derivative liabilities include derivative and hedging transactions. Derivative liabilities are carried at their fair value with changes in fair value recorded to the consolidated income statements. The fair value adjustments for hedging type derivatives are recorded in revenue. Fair value adjustments for embedded derivatives are recorded in other finance (gain) loss.
Other financial liabilities at amortized cost relate to agreements with communities near the Constancia operation which allow Hudbay to extract minerals over the useful life of the Constancia operation, carry out exploration and evaluation activities in the area and provide Hudbay with community support to operate in the region.
| HUDBAY MINERALS INC. |
|---|
| Notes to Audited Consolidated Financial Statements |
| (in thousands of US dollars, except where otherwise noted) |
| Years ended December 31, 2019 and 2018 |
16. Lease Liability
| Dec. 31, 2019 | Dec. 31, 2018 | |||||
|---|---|---|---|---|---|---|
| Total minimum lease payments - lease liabilities | $ | 88,096 | $ | 78,174 | ||
| Effect of discounting | (6,149 | ) | (3,939 | ) | ||
| Present value of minimum lease payments | 81,947 | 74,235 | ||||
| Less: current portion | (32,781 | ) | (20,472 | ) | ||
| $ | 49,166 | $ | 53,763 | |||
| Minimum payments under leases: | ||||||
| Less than 12 months | $ | 27,557 | $ | 18,448 | ||
| 13 - 36 months | 48,503 | 40,615 | ||||
| 37 - 60 months | 7,798 | 19,111 | ||||
| More than 60 months | 4,238 | - | ||||
| $ | 88,096 | $ | 78,174 |
The Group has entered into leases for its Peru, Manitoba and Arizona business units which expire between 2020 and 2043. The interest rates on leases which were capitalized have implicit interest rates between 1.95% to 5.13%, per annum. The range of interest rates utilized for discounting varies depending mostly on the Hudbay Group entity acting as lessee and duration of the lease. For certain leases, the Group has the option to purchase the equipment and vehicles leased at the end of the terms of the leases. The Group's obligations under these leases are secured by the lessor's title to the leased assets. The present value of applicable lease payments has been recognized as a ROU asset, which was included as a non-cash addition to property, plant and equipment, and a corresponding amount as a lease liability.
There are no restrictions placed on the Group by entering into these leases.
The following outlines expenses recognized within the Company's consolidated income statement for the periods ended December 31, 2019, relating to leases for which a recognition exemption was applied.
| Year ended<br>Dec. 31, 2019 | ||
|---|---|---|
| Short-term leases | $ | 45,745 |
| Low value leases | 92 | |
| Variable leases | 56,152 | |
| Total | $ | 101,989 |
Payments made for short term, low value and variable leases would mostly be captured as expenses in the consolidated income statements, however, certain amounts may be capitalized to PP&E for the Arizona business unit during its development phase and certain amounts may be reported in inventories given the timing of sales. Variable consideration leases include equipment used for heavy civil works at Constancia.
| HUDBAY MINERALS INC. |
|---|
| Notes to Audited Consolidated Financial Statements |
| (in thousands of US dollars, except where otherwise noted) |
| Years ended December 31, 2019 and 2018 |
17. Long-term debt
Long-term debt is comprised of the following:
| Dec. 31, 2019 | Dec. 31, 2018 | |||||
|---|---|---|---|---|---|---|
| Senior unsecured notes (a) | $ | 991,558 | $ | 989,306 | ||
| Less: Unamortized transaction costs -<br>revolving credit facilities (b) | (6,303 | ) | (8,276 | ) | ||
| $ | 985,255 | $ | 981,030 |
(a) Senior unsecured notes
| Balance, January 1, 2018 | $ | 987,903 |
|---|---|---|
| Change in fair value of embedded derivative (prepayment option) | 316 | |
| Accretion of transaction costs and premiums | 1,087 | |
| Balance, December 31, 2018 | $ | 989,306 |
| Change in fair value of embedded derivative (prepayment option) | 1,079 | |
| Accretion of transaction costs and premiums | 1,173 | |
| Balance, December 31, 2019 | $ | 991,558 |
The $1,000,000 aggregate principal amount of senior notes are comprised of two series: (i) a series of 7.25% senior notes due 2023 in an aggregate principal amount of $400,000 and (ii) a series of 7.625% senior notes due 2025 in an aggregate principal amount of $600,000.
The senior notes are guaranteed on a senior unsecured basis by substantially all of the Company's subsidiaries, other than HudBay (BVI) Inc. and certain excluded subsidiaries, which include the Company's subsidiaries that own an interest in the Rosemont project and any newly formed or acquired subsidiaries that primarily hold or may develop non-producing mineral assets that are in the pre-construction phase of development**.** The Group's revolving credit facilities are secured against substantially all of the Group's assets, other than those associated with the Arizona business unit.
(b) Unamortized transaction costs - revolving credit facilities
| Balance, January 1, 2018 | $ | 8,328 | |
|---|---|---|---|
| Accretion of transaction costs | (1,946 | ) | |
| Transaction costs | 1,894 | ||
| Balance, December 31, 2018 | $ | 8,276 | |
| Accretion of transaction costs | (2,342 | ) | |
| Transaction costs | 369 | ||
| Balance, December 31, 2019 | $ | 6,303 | |
| HUDBAY MINERALS INC. | |||
| --- | |||
| Notes to Audited Consolidated Financial Statements | |||
| (in thousands of US dollars, except where otherwise noted) | |||
| Years ended December 31, 2019 and 2018 |
As at December 31, 2019, the Peru business unit had $40,000 in surety bonds issued to support its reclamation obligations. The Arizona business unit had $8,591 in surety bonds issued to support future reclamation and closure obligations. No cash collateral is required to be posted. The Peru business unit had $43,509 in letters of credit issued under the Peru facility to support its reclamation obligations and the Manitoba business unit had $85,927 in letters of credit issued under the Canada facility to support its reclamation and pension obligations. Given that these letters of credit are issued under the senior credit facilities, no cash collateral is required to be posted. Lastly, the Peru business unit had $45,000 in letters of credit issued with various Peruvian financial institutions.
18. Deferred revenue
On August 8, 2012 and November 4, 2013, the Group entered into precious metals stream transactions with Wheaton whereby the Group has received aggregate deposit payments of $885,000 against delivery of (i) 100% of payable gold and silver from the 777 mine until the end of 2016, and delivery of 50% of payable gold and 100% of payable silver for the remainder of the 777 mine life; and (ii) 100% of payable silver and 50% of payable gold from the Constancia mine.
In addition to the deposit payments, as gold and silver is delivered to Wheaton, the Group receives cash payments equal to the lesser of (i) the market price and (ii) $400 per ounce (for gold) and $5.90 per ounce (for silver), subject to 1% annual escalation after three years, from the inception of the agreement.
The Group recorded the deposits received as deferred revenue and recognizes amounts in revenue as gold and silver are delivered to Wheaton. The Group determines the amortization of deferred revenue to the consolidated income statements on a per unit basis using the estimated total number of gold and silver ounces expected to be delivered to Wheaton over the life of the 777 and Constancia life-of-mine plans. The Group estimates the current portion of deferred revenue based on deliveries anticipated over the next twelve months.
The Group has determined that precious metals stream contracts are subject to variable consideration and contain a significant financing component. As such, the Company recognizes a financing charge at each reporting period and will gross up the deferred revenue balance to recognize the significant financing element that is part of these contracts. The Group's streaming arrangements are secured against the mining properties and other business unit assets associated with the applicable stream.
The Group expects that the remaining performance obligations for the 777 and Constancia streams will be settled by the expiry of their respective stream agreements, which is no earlier than 2036.
| HUDBAY MINERALS INC. |
|---|
| Notes to Audited Consolidated Financial Statements |
| (in thousands of US dollars, except where otherwise noted) |
| Years ended December 31, 2019 and 2018 |
The following table summarizes changes in deferred revenue:
| Balance, January 1, 2018 | $ | 601,930 | |
|---|---|---|---|
| Amortization of deferred revenue | |||
| Liability drawdown | (96,038 | ) | |
| Variable consideration adjustment | 2,656 | ||
| Finance costs | 64,921 | ||
| Effects of changes in foreign exchange | (7,391 | ) | |
| Balance, December 31, 2018 | $ | 566,078 | |
| Amortization of deferred revenue | |||
| Liability drawdown | (92,398 | ) | |
| Variable consideration adjustment | 16,295 | ||
| Finance costs (note 6g) | |||
| Current year additions | 63,725 | ||
| Variable consideration adjustment | 6,047 | ||
| Effects of changes in foreign exchange | 4,009 | ||
| Balance, December 31, 2019 | $ | 563,756 |
Consideration from the Company's stream agreement is considered variable. Gold and silver revenue can be
subject to cumulative adjustments when the number of ounces to be delivered under the contract changes. During the year ended December 31, 2018, and first quarter of 2019, the Company recognized an adjustment to gold and silver revenue and finance costs due to a net increase in the Company's reserve and resource estimates.
Deferred revenue is reflected in the consolidated balance sheets as follows:
| Dec. 31, 2019 | Dec. 31, 2018 | |||
|---|---|---|---|---|
| Current | $ | 86,933 | $ | 86,256 |
| Non-current | 476,823 | 479,822 | ||
| $ | 563,756 | $ | 566,078 | |
| HUDBAY MINERALS INC. | ||||
| --- | ||||
| Notes to Audited Consolidated Financial Statements | ||||
| (in thousands of US dollars, except where otherwise noted) | ||||
| Years ended December 31, 2019 and 2018 |
19. Provisions
| Decommis-sioning, restoration and similar liabilities | Deferred share units (note 24a) | Restricted share units^1^ (note 24a) | Other | Total | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Balance, January 1, 2019 | $ | 202,024 | $ | 4,288 | $ | 12,201 | $ | 411 | $ | 218,924 | |||||
| Net additional provisions made | 68,881 | 1,479 | 2,885 | 2,882 | 76,127 | ||||||||||
| Amounts used | (4,136 | ) | (1,668 | ) | (9,380 | ) | (341 | ) | (15,525 | ) | |||||
| Unwinding of discount (note 6g) | 4,392 | - | - | - | 4,392 | ||||||||||
| Effect of change in discount rate | 23,635 | - | - | - | 23,635 | ||||||||||
| Effect of foreign exchange | 7,320 | 99 | 225 | 4 | 7,648 | ||||||||||
| Effect of change in share price | - | (322 | ) | (454 | ) | - | (776 | ) | |||||||
| Balance, December 31, 2019 | $ | 302,116 | $ | 3,876 | $ | 5,477 | $ | 2,956 | $ | 314,425 |
^1^Certain amounts relating to the Arizona segment are capitalized.
Provisions are reflected in the consolidated balance sheets as follows:
| December 31, 2019 | Decommis-sioning, restoration and similar liabilities | Deferred share units (note 24a) | Restricted share units^1^ (note 24a) | Other | Total | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Current (note 14) | $ | 23,621 | $ | 3,876 | $ | 4,468 | $ | 1,610 | $ | 33,575 | |||||
| Non-current | 278,495 | - | 1,009 | 1,346 | 280,850 | ||||||||||
| $ | 302,116 | $ | 3,876 | $ | 5,477 | $ | 2,956 | $ | 314,425 | ||||||
| Decommis-sioning, restoration and similar liabilities | Deferred share units (note 24a) | Restricted share units^1^ (note 24a) | Other | Total | |||||||||||
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
| Balance, January 1, 2018 | $ | 200,041 | $ | 6,623 | $ | 19,409 | $ | 1,435 | $ | 227,508 | |||||
| Net additional provisions made | 9,031 | 973 | 7,493 | - | 17,497 | ||||||||||
| Amounts used | (188 | ) | - | (6,435 | ) | (770 | ) | (7,393 | ) | ||||||
| Unwinding of discount (note 6g) | 4,684 | - | - | - | 4,684 | ||||||||||
| Effect of change in discount rate | (462 | ) | - | - | - | (462 | ) | ||||||||
| Effect of foreign exchange | (11,082 | ) | (458 | ) | (973 | ) | (74 | ) | (12,587 | ) | |||||
| Effect of change in share price | - | (2,850 | ) | (7,293 | ) | (180 | ) | (10,323 | ) | ||||||
| Balance, December 31, 2018 | $ | 202,024 | $ | 4,288 | $ | 12,201 | $ | 411 | $ | 218,924 |
^1^Certain amounts relating to the Arizona segment are capitalized.
| HUDBAY MINERALS INC. | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Notes to Audited Consolidated Financial Statements | ||||||||||
| (in thousands of US dollars, except where otherwise noted) | ||||||||||
| Years ended December 31, 2019 and 2018 | ||||||||||
| December 31, 2018 | Decommis-sioning, restoration and similar liabilities | Deferred share units (note 24a) | Restricted share units1 (note 24a) | Other | Total | |||||
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
| Current (note 14) | $ | 1,234 | $ | 4,288 | $ | 8,412 | $ | 342 | $ | 14,276 |
| Non-current | 200,790 | - | 3,789 | 69 | 204,648 | |||||
| $ | 202,024 | $ | 4,288 | $ | 12,201 | $ | 411 | $ | 218,924 |
Decommissioning, restoration and similar liabilities are remeasured at each reporting date to reflect changes in discount rates, which can significantly affect the liabilities.
Decommissioning, restoration and similar liabilities
The Group's decommissioning, restoration and similar liabilities relate to the rehabilitation and closure of currently operating mines and metallurgical plants, development-phase properties and closed properties. The amount of the provision has been recorded based on estimates and assumptions that management believes are reasonable; however, actual decommissioning and restoration costs may differ from expectations.
During 2019, additional provisions were recognized as a result of higher estimates for closure activities of tailings facilities at the Manitoba operations to ensure compliance with higher industry-wide standards for tailings management safety and, to a lesser extent, increased mine activity footprints and the resulting higher disturbance at the Constancia operation.
During the year ended December 31, 2018 additional provisions were recognized as a result of increased mine activity footprints and the resulting higher disturbance at the Constancia operation.
The Group's decommissioning and restoration liabilities relate mainly to its Manitoba operations. Management anticipates that the assets in Flin Flon will be placed on care and maintenance once mining activities are completed at 777 mine in order to maintain optionality for restart should a new mine be found in the Flin Flon area. The majority of closure activities will occur once all mining activities in Manitoba are completed, which is currently anticipated in 2028. These provisions also reflect estimated post-closure cash flows that extend to 2100 for ongoing monitoring and water treatment requirements. Management anticipates most decommissioning and restoration activities for the Constancia operation will occur from 2035 to 2070, which include ongoing monitoring and water treatment requirements.
These estimates have been discounted to their present value at rates ranging from 1.59% to 2.39% per annum (2018 - 1.80% to 3.02%), using pre-tax risk-free interest rates that reflect the estimated maturity of each specific liability.
20. Pension obligations
The Group maintains non-contributory and contributory defined benefit pension plans for certain of its employees.
| HUDBAY MINERALS INC. |
|---|
| Notes to Audited Consolidated Financial Statements |
| (in thousands of US dollars, except where otherwise noted) |
| Years ended December 31, 2019 and 2018 |
The Group uses a December 31 measurement date for all of its plans. For the Group's significant plans, the most recent actuarial valuations filed for funding purposes were performed during 2019 using data as at December 31, 2018. For these plans, the next actuarial valuation required for funding purposes will be performed during 2020 using data as at December 31, 2019.
During the year ended December 31, 2018, an annuity purchase transaction was entered into in which the defined benefit obligations associated with certain defined benefit plan members were assumed by a third party insurer in exchange for a lump sum payment of $120,018 from plan assets.
Movements in the present value of the defined benefit obligation in the current and previous years were as follows:
| Year ended | ||||||
|---|---|---|---|---|---|---|
| Dec. 31, 2019 | Dec. 31, 2018 | |||||
| Opening defined benefit obligation: | $ | 211,512 | $ | 383,054 | ||
| Current service costs | 9,880 | 11,032 | ||||
| Past service cost related to the new collective bargaining agreement | - | 383 | ||||
| Interest cost | 7,156 | 12,009 | ||||
| Benefits paid from plan | (16,745 | ) | (29,499 | ) | ||
| Benefits paid from employer | (934 | ) | (1,998 | ) | ||
| Participant contributions | 64 | 98 | ||||
| Effects of movements in exchange rates | 10,814 | (32,015 | ) | |||
| Remeasurement actuarial (gains)/losses: | ||||||
| Arising from changes in demographic assumptions | - | - | ||||
| Arising from changes in financial assumptions | 30,455 | (11,585 | ) | |||
| Arising from experience adjustments | (2,258 | ) | (2,112 | ) | ||
| Settlement payments from plan assets | (6,307 | ) | (120,018 | ) | ||
| Loss on settlement (note 6d) | 96 | 2,163 | ||||
| Closing defined benefit obligation | $ | 243,733 | $ | 211,512 |
The defined benefit obligation closing balance, by member group, is as follows:
| Dec. 31, 2019 | Dec. 31, 2018 | |||
|---|---|---|---|---|
| Active members | $ | 231,959 | $ | 200,591 |
| Deferred members | 1,555 | 723 | ||
| Retired members | 10,219 | 10,198 | ||
| Closing defined benefit obligation | $ | 243,733 | $ | 211,512 |
| HUDBAY MINERALS INC. | ||||
| --- | ||||
| Notes to Audited Consolidated Financial Statements | ||||
| (in thousands of US dollars, except where otherwise noted) | ||||
| Years ended December 31, 2019 and 2018 |
Movements in the fair value of the pension plan assets in the current and previous years were as follows:
| Year ended | ||||||
|---|---|---|---|---|---|---|
| Dec. 31, 2019 | Dec. 31, 2018 | |||||
| Opening fair value of plan assets: | $ | 175,795 | $ | 341,432 | ||
| Interest income | 6,170 | 11,033 | ||||
| Remeasurements losses: | ||||||
| Return on plan assets (excluding amounts included in net interest expense) | 21,460 | (15,296 | ) | |||
| Contributions from the employer | 11,952 | 17,020 | ||||
| Employer direct benefit payments | 934 | 1,998 | ||||
| Contributions from plan participants | 64 | 98 | ||||
| Benefit payment from employer | (934 | ) | (1,998 | ) | ||
| Administrative expenses paid from plan assets | (82 | ) | (83 | ) | ||
| Benefits paid | (16,745 | ) | (29,499 | ) | ||
| Settlement payments from plan assets | (6,307 | ) | (120,018 | ) | ||
| Effects of changes in foreign exchange rates | 9,812 | (28,892 | ) | |||
| Closing fair value of plan assets | $ | 202,119 | $ | 175,795 |
The amount included in the consolidated balance sheets arising from the entity's obligation in respect of its defined benefit plans is as follows:
| Dec. 31, 2019 | Dec. 31, 2018 | |||||
|---|---|---|---|---|---|---|
| Present value of funded defined benefit obligation | $ | 224,364 | $ | 195,283 | ||
| Fair value of plan assets | (202,119 | ) | (175,795 | ) | ||
| Present value of unfunded defined benefit obligation | 19,369 | 16,229 | ||||
| Net liability arising from defined benefit obligation | $ | 41,614 | $ | 35,717 |
Reflected in the consolidated balance sheets as follows:
| Dec. 31, 2019 | Dec. 31, 2018 | |||
|---|---|---|---|---|
| Pension obligation - current (note 14) | $ | 12,015 | $ | 11,854 |
| Pension obligation - non-current | 29,599 | 23,863 | ||
| Total pension obligation | $ | 41,614 | $ | 35,717 |
| HUDBAY MINERALS INC. | ||||
| --- | ||||
| Notes to Audited Consolidated Financial Statements | ||||
| (in thousands of US dollars, except where otherwise noted) | ||||
| Years ended December 31, 2019 and 2018 |
Pension expense is as follows:
| Dec. 31, 2019 | Dec. 31, 2018 | |||
|---|---|---|---|---|
| Service costs: | ||||
| Current service cost | $ | 9,880 | $ | 11,032 |
| Past service cost | - | 383 | ||
| Loss on settlement (note 6d) | 96 | 2,163 | ||
| Total service cost | 9,976 | 13,578 | ||
| Net interest expense | 986 | 976 | ||
| Administration cost | 82 | 83 | ||
| Defined benefit pension expense | $ | 11,044 | $ | 14,637 |
| Defined contribution pension expense | $ | 1,639 | $ | 1,469 |
Remeasurement on the net defined benefit liability:
| Dec. 31, 2019 | Dec. 31, 2018 | |||||
|---|---|---|---|---|---|---|
| (Return)/loss on plan assets (excluding amounts included in net interest expense) | $ | (21,460 | ) | $ | 15,296 | |
| Actuarial gains arising from changes in demographic assumptions | - | - | ||||
| Actuarial losses/(gains) arising from changes in financial assumptions | 29,609 | (11,585 | ) | |||
| Actuarial gains arising from experience adjustments | (2,258 | ) | (2,112 | ) | ||
| Defined benefit loss/(gain) related to remeasurement | $ | 5,891 | $ | 1,599 | ||
| Total pension cost | $ | 18,574 | $ | 17,705 |
Pension amounts recognized include those directly related to production of inventory; such amounts are recognized initially as costs of inventory and are expensed in the consolidated income statements within cost of sales upon sale of the inventory.
The current service cost, the interest cost and administration cost for the year are included in the employee benefits expense. The remeasurement of the net defined benefit liability is included in OCI.
| HUDBAY MINERALS INC. |
|---|
| Notes to Audited Consolidated Financial Statements |
| (in thousands of US dollars, except where otherwise noted) |
| Years ended December 31, 2019 and 2018 |
The defined benefit pension plans typically expose the Group to actuarial risks such as: investment risk, interest rate risk, longevity risk and salary risk.
| Investment risk | The present value of the liabilities for the defined benefit plans is calculated using a discount rate determined by reference to high quality corporate bond yields; if the return on plan assets is below this rate, it will create a plan deficit. The Group's primary quantitative investment objectives are maximization of the long term real rate of return, subject to an acceptable degree of investment risk and preservation of principal. Risk tolerance is established through consideration of several factors including past performance, current market condition and the funded status of the plan. |
|---|---|
| Interest risk | A decrease in the bond interest rate will increase the pension plan liabilities; however, this will be partially offset by an increase in the return on the plan's debt investments |
| Longevity risk | The present value of the defined benefit plans liabilities is calculated by reference to the best estimate of the mortality of plan participants both during and after their employment. An increase in the life expectancy of the plan participants will increase the pension plans liabilities. |
| Salary risk | The present value of the defined benefit plans liabilities for some of the pension plans is calculated by reference to the future salaries of plan participants. As such, an increase in the salary of the plan participants will increase the plans' liabilities. |
The principal assumptions used for the purposes of the actuarial valuations were as follows:
| 2019 | 2018 | |
|---|---|---|
| Defined benefit cost: | ||
| Discount rate - benefit obligations | 3.73 % | 3.45 % |
| Discount rate - service cost | 3.75 % | 3.50 % |
| Expected rate of salary increase^1^ | 2.75 % | 2.75 % |
| Average longevity at retirement age for current pensioners (years)^2^ : | ||
| Males | 21.1 | 21.0 |
| Females | 23.9 | 23.7 |
| Defined benefit obligation: | ||
| Discount rate | 3.08 % | 3.73 % |
| Expected rate of salary increase^1^ | 2.75 % | 2.75 % |
| Average longevity at retirement age for current pensioners (years)^2^ : | ||
| Males | 21.2 | 21.1 |
| Females | 23.9 | 23.9 |
| Average longevity at retirement age for current employees (future pensioners) (years)^2^ : | ||
| Males | 23.0 | 23.0 |
| Females | 25.6 | 25.6 |
| ^1^ Plus merit and promotional scale based on member's age | ||
| ^2^ CPM2014 Priv with CPM-B projection scale. | ||
| HUDBAY MINERALS INC. | ||
| --- | ||
| Notes to Audited Consolidated Financial Statements | ||
| (in thousands of US dollars, except where otherwise noted) | ||
| Years ended December 31, 2019 and 2018 |
The Group reviews the assumptions used to measure pension costs (including the discount rate) on an annual basis. Economic and market conditions at the measurement date affect these assumptions from year to year. In determining the discount rate, the Group considers the duration of the pension plan liabilities.
Significant actuarial assumptions for the determination of the defined benefit obligation are discount rate, expected salary increase and mortality. The sensitivity analysis below has been determined based on reasonably possible changes of the respective assumptions occurring at the end of the reporting periods, while holding other assumptions constant:
If the discount rate is 50 basis points higher (lower), the defined benefit obligation would decrease by $21,290 (increase by $24,435).
If the expected salary growth increases (decreases) by 1%, the defined benefit obligation would increase by $3,476 (decrease $3,125).
If the life expectancy increases (decreases) by one year for both men and women, the defined benefit obligation would increase by $2,386 (decrease by $2,446).
The sensitivity analysis presented above may not be representative of the actual change in the defined benefit obligation as it is unlikely that the change in assumptions would occur in isolation of one another as some of the assumptions may be correlated.
Furthermore, in presenting the above sensitivity analysis, the present value of the defined benefit obligation has been calculated using the projected unit credit method at the end of the reporting period, which is the same as that applied in calculating the defined benefit obligation liability recognised in the consolidated balance sheets.
The Group's main pension plans are registered federally with the Office of the Superintendent of Financial Institution and with the Canada Revenue Agency. The registered pension plans are governed in accordance with the Pension Benefits Standards Act and the Income Tax Act. The sponsor contributes the amount needed to maintain adequate funding as dictated by the prevailing regulations.
Expected employer contribution to the pension plans for the fiscal year ending December 31, 2020 is $12,070.
The average duration of the pension obligation at December 31, 2019 is 19.3 years (2018 - 17.3 years). This number can be broken down as follows:
Active members: 19.7 years (2018: 17.6 years)
Deferred members: 22.0 years (2018: 14.0 years)
Retired members: 10.5 years (2018: 10.4 years)
Asset-Liability-Matching studies are performed periodically to analyse the investment policies in terms of risk and-return profiles.
The actual return on plan assets in 2019 was 15.1% (2018: negative 2.6%).
The pension plans do not invest directly in either securities or property/real estate of the Group.
| HUDBAY MINERALS INC. |
|---|
| Notes to Audited Consolidated Financial Statements |
| (in thousands of US dollars, except where otherwise noted) |
| Years ended December 31, 2019 and 2018 |
With the exception of fixed income investments, the plan assets are actively managed by investment managers, with the goal of attaining returns that potentially outperform passively managed investments. Within appropriate limits, the actual composition of the invested funds may vary from the prescribed investment mix.
The following is a summary of the fair value classification levels for investment:
| December 31, 2019 | Level 1 | Level 2 | Level 3 | Total | ||||
|---|---|---|---|---|---|---|---|---|
| Investments: | ||||||||
| Money market instruments | $ | 1,588 | $ | - | $ | - | $ | 1,588 |
| Pooled equity funds | 76,680 | - | - | 76,680 | ||||
| Pooled fixed income funds | - | 103,646 | - | 103,646 | ||||
| Alternative investment funds | - | 19,438 | - | 19,438 | ||||
| Balanced funds | - | 767 | - | 767 | ||||
| $ | 78,268 | $ | 123,851 | $ | - | $ | 202,119 | |
| December 31, 2018 | Level 1 | Level 2 | Level 3 | Total | ||||
| --- | --- | --- | --- | --- | --- | --- | --- | --- |
| Investments: | ||||||||
| Money market instruments | $ | 3,072 | $ | - | $ | - | $ | 3,072 |
| Pooled equity funds | 53,329 | - | - | 53,329 | ||||
| Pooled fixed income funds | - | 91,854 | - | 91,854 | ||||
| Alternative investment funds | - | 26,871 | - | 26,871 | ||||
| Balanced funds | - | 669 | - | 669 | ||||
| $ | 56,401 | $ | 119,394 | $ | - | $ | 175,795 | |
| HUDBAY MINERALS INC. | ||||||||
| --- | ||||||||
| Notes to Audited Consolidated Financial Statements | ||||||||
| (in thousands of US dollars, except where otherwise noted) | ||||||||
| Years ended December 31, 2019 and 2018 |
21. Other employee benefits
The Group sponsors both other long-term employee benefit plans and non-pension post-employment benefits plans and uses a December 31 measurement date. These obligations relate mainly to commitments for post-retirement health benefits. Information about the Group's post-employment and other long-term employee benefits is as follows:
Movements in the present value of the defined benefit obligation in the current and previous years were:
| Year ended | ||||||
|---|---|---|---|---|---|---|
| Dec. 31, 2019 | Dec. 31, 2018 | |||||
| Opening defined benefit obligation | $ | 93,528 | $ | 107,829 | ||
| Current service cost^1^ | 3,060 | 3,455 | ||||
| Past service cost | - | 255 | ||||
| Interest cost | 3,600 | 3,683 | ||||
| Effects of movements in exchange rates | 4,864 | (8,587 | ) | |||
| Remeasurement actuarial (gains)/losses: | ||||||
| Arising from changes in demographic assumptions | - | (9,996 | ) | |||
| Arising from changes in financial assumptions | 14,094 | 2,809 | ||||
| Arising from experience adjustments | 87 | (3,472 | ) | |||
| Benefits paid | (2,537 | ) | (2,448 | ) | ||
| Closing defined benefit obligation | $ | 116,696 | $ | 93,528 |
^1^Includes remeasurement of other long term employee benefits
The defined benefit obligation closing balance, by group member, is as follows:
| Dec. 31, 2019 | Dec. 31, 2018 | |||
|---|---|---|---|---|
| Active members | $ | 60,801 | $ | 47,249 |
| Inactive members | 55,895 | 46,279 | ||
| Closing defined benefit obligation | $ | 116,696 | $ | 93,528 |
Movements in the fair value of defined benefit amounts in the current and previous years were as follows:
| HUDBAY MINERALS INC. | ||||||
|---|---|---|---|---|---|---|
| Notes to Audited Consolidated Financial Statements | ||||||
| (in thousands of US dollars, except where otherwise noted) | ||||||
| Years ended December 31, 2019 and 2018 | ||||||
| Dec. 31, 2019 | Dec. 31, 2018 | |||||
| --- | --- | --- | --- | --- | --- | --- |
| Employer contributions | $ | 2,537 | $ | 2,448 | ||
| Benefits paid | (2,537 | ) | (2,448 | ) | ||
| Closing fair value of assets | $ | - | $ | - |
The non-pension employee benefit plan obligations are unfunded.
| HUDBAY MINERALS INC. |
|---|
| Notes to Audited Consolidated Financial Statements |
| (in thousands of US dollars, except where otherwise noted) |
| Years ended December 31, 2019 and 2018 |
Reconciliation of assets and liabilities recognized in the consolidated balance sheets:
| Dec. 31, 2019 | Dec. 31, 2018 | |||
|---|---|---|---|---|
| Unfunded benefit obligation | $ | 116,696 | $ | 93,528 |
| Vacation accrual and other - non-current | 2,888 | 2,664 | ||
| Net liability | $ | 119,584 | $ | 96,192 |
Reflected in the consolidated balance sheets as follows:
| Dec. 31, 2019 | Dec. 31, 2018 | |||
|---|---|---|---|---|
| Other employee benefits liability - current (note 14) | $ | 2,806 | $ | 2,564 |
| Other employee benefits liability - non-current | 116,778 | 93,628 | ||
| Net liability | $ | 119,584 | $ | 96,192 |
Other employee future benefit expense includes the following
| Dec. 31, 2019 | Dec. 31, 2018 | |||
|---|---|---|---|---|
| Current service cost ^1^ | $ | 3,060 | $ | 3,710 |
| Net interest cost | 3,600 | 3,683 | ||
| Components recognized in consolidated income statements | $ | 6,660 | $ | 7,393 |
^1^ Includes remeasurement of other long term employee benefit
| Dec. 31, 2019 | Dec. 31, 2018 | ||||
|---|---|---|---|---|---|
| Remeasurement on the net defined benefit liability: | |||||
| Actuarial (gains)/losses arising from changes in demographic assumptions | $ | - | $ | (9,996 | ) |
| Actuarial (gains)/losses arising from changes in financial assumptions | 14,094 | 2,809 | |||
| Actuarial gains arising from changes experience adjustments | 87 | (3,472 | ) | ||
| Components recognized in statements of comprehensive income<br> **** | $ | 14,181 | $ | (10,659 | ) |
| Total other employee future benefit cost | $ | 20,841 | $ | (3,266 | ) |
| --- | --- | --- | --- | --- | --- |
Other employee benefit amounts recognized include those directly related to production of inventory; such
amounts are recognized initially as costs of inventory and are expensed in the consolidated income
statements within cost of sales upon sale of the inventory.
| HUDBAY MINERALS INC. | ||
|---|---|---|
| Notes to Audited Consolidated Financial Statements | ||
| (in thousands of US dollars, except where otherwise noted) | ||
| Years ended December 31, 2019 and 2018 | ||
| Dec. 31, 2019 | Dec. 31, 2018 | |
| --- | --- | --- |
| Defined benefit cost: | ||
| Discount rate | 3.88 % | 3.64 % |
| Initial weighted average health care trend rate | 5.74 % | 5.97 % |
| Ultimate weighted average health care trend rate | 4.00 % | 4.00 % |
| Average longevity at retirement age for current pensioners (years)^1^: | ||
| Males | 21.1 | 21.0 |
| Females | 23.9 | 23.7 |
| Dec. 31, 2019 | Dec. 31, 2018 | |
| --- | --- | --- |
| Defined benefit obligation: | ||
| Discount rate | 3.17 % | 3.88 % |
| Initial weighted average health care trend rate | 5.68 % | 5.74 % |
| Ultimate weighted average health care trend rate | 4.00 % | 4.00 % |
| Average longevity at retirement age for current pensioners (years)^1^: | ||
| Males | 21.2 | 21.1 |
| Females | 23.9 | 23.9 |
| Average longevity at retirement age for current employees (future pensioners) (years)^1^: | ||
| Males | 23.1 | 23.0 |
| Females | 25.6 | 25.6 |
^1^CPM2014 Priv with CPM-B projection scale
The Group reviews the assumptions used to measure other employee benefit costs (including the discount rate) on an annual basis.
The other employee benefit costs typically expose the Group to actuarial risks such as: interest rate risk, health care cost inflation risk and longevity risk.
| Interest risk | A decrease in the bond interest rate will increase the plan liabilities. |
|---|---|
| Health care cost inflation risk | The majority of the plan's benefit obligations are linked to health care cost inflation and higher inflation will lead to higher liabilities. |
| Longevity risk | The majority of the plans' benefit liability is calculated by reference to the best estimate of the mortality of plan participants both during and after their employment. An increase in the life expectancy of the plan participants will increase the plans liabilities. This is particularly significant for benefits subject to health care cost inflation where increases in inflation result in higher sensitivity to changes in life expectancy. |
| HUDBAY MINERALS INC. | |
| --- | |
| Notes to Audited Consolidated Financial Statements | |
| (in thousands of US dollars, except where otherwise noted) | |
| Years ended December 31, 2019 and 2018 |
The sensitivity analyses below have been determined based on reasonably possible changes of the respective assumptions occurring at the end of the reporting period, while holding other assumptions constant:
If the discount rate is 50 basis points higher (lower), the defined benefit obligation would decrease by $10,259 (increase by $11,831).
If the health care cost assumption increases (decreases) by 1%, the defined benefit obligation would increase by $24,123 (decrease by $18,581).
If the life expectancy increases (decreases) by one year for both men and women, the defined benefit obligations would increase by $4,556 (decrease by $4,498).
The average duration of the non-pension post employment obligation at December 31, 2019 is 19.6 years (2018: 18.6 years).
This number can be broken down as follows:
Active members: 24.9 years (2018: 23.7 years)
Inactive members: 13.9 years (2018: 13.4 years)
| HUDBAY MINERALS INC. |
|---|
| Notes to Audited Consolidated Financial Statements |
| (in thousands of US dollars, except where otherwise noted) |
| Years ended December 31, 2019 and 2018 |
22. Income and mining taxes
(a) Tax expense:
The tax expense (recoveries) is applicable as follows:
| Year ended December 31, | ||||||
|---|---|---|---|---|---|---|
| 2019 | 2018 | |||||
| Current: | ||||||
| Income taxes | ||||||
| Canada | $ | 11,196 | $ | 5,251 | ||
| Peru | 13,723 | 19,103 | ||||
| Mining taxes | ||||||
| Canada | 341 | 9,085 | ||||
| Peru | 4,379 | 11,030 | ||||
| Adjustments in respect of prior years | 6,273 | 707 | ||||
| 35,912 | 45,176 | |||||
| Deferred: | ||||||
| Income taxes (recoveries) - origination, revaluation <br>and/or and reversal of temporary differences | ||||||
| Canada | (59,082 | ) | 25,811 | |||
| Peru | (6,280 | ) | 10,780 | |||
| United States | (68,106 | ) | 3,170 | |||
| Mining taxes (recoveries) - origination, revaluation and/or <br>reversal of temporary difference | ||||||
| Canada | (10,266 | ) | 414 | |||
| Peru | (1,948 | ) | (621 | ) | ||
| Adjustments in respect of prior years | 817 | 691 | ||||
| (144,865 | ) | 40,245 | ||||
| $ | (108,953 | ) | $ | 85,421 |
Adjustments in respect of prior years refers to amounts changing due to the filing of tax returns and assessments from government authorities.
| HUDBAY MINERALS INC. |
|---|
| Notes to Audited Consolidated Financial Statements |
| (in thousands of US dollars, except where otherwise noted) |
| Years ended December 31, 2019 and 2018 |
(b) Deferred tax assets and liabilities as represented on the consolidated balance sheets:
| Dec. 31, 2019 | Dec. 31, 2018 | |||||
|---|---|---|---|---|---|---|
| Deferred income tax asset | ||||||
| Canada | $ | 69,950 | $ | 15,513 | ||
| Deferred income tax liability | ||||||
| Peru | (191,611 | ) | (196,452 | ) | ||
| United States | (41,607 | ) | (110,861 | ) | ||
| Deferred mining tax asset (liability) | ||||||
| Canada | 5,095 | (5,119 | ) | |||
| Peru | (9,709 | ) | (11,658 | ) | ||
| (237,832 | ) | (324,090 | ) | |||
| Net deferred tax liability balance, end of year | $ | (167,882 | ) | $ | (308,577 | ) |
(c) Changes in deferred tax assets and liabilities:
| Year ended<br>Dec. 31, 2019 | Year ended<br>Dec. 31, 2018 | |||||
|---|---|---|---|---|---|---|
| Net deferred tax liability balance, beginning of year | $ | (308,577 | ) | $ | (277,466 | ) |
| Deferred tax recovery (expense) | 144,865 | (40,245 | ) | |||
| OCI transactions | 1,878 | 520 | ||||
| Foreign currency translation on the deferred tax liability | (6,048 | ) | 8,614 | |||
| Net deferred tax liability balance, end of year | $ | (167,882 | ) | $ | (308,577 | ) |
(d) Reconciliation to statutory tax rate:
As a result of its mining operations, the Group is subject to both income and mining taxes. Generally, most expenditures incurred are deductible in computing income tax, whereas mining tax legislation, although based on a measure of profitability from carrying on mining operations, is more restrictive in respect of the deductions permitted in computing income subject to mining tax. These restrictions include costs unrelated to mining operations as well as deductions for financing expenses, such as interest and royalties. In addition, income unrelated to carrying on mining operations is not subject to mining tax.
| HUDBAY MINERALS INC. |
|---|
| Notes to Audited Consolidated Financial Statements |
| (in thousands of US dollars, except where otherwise noted) |
| Years ended December 31, 2019 and 2018 |
A reconciliation between tax expense and the product of accounting profit multiplied by the Group's statutory income tax rate for the years ended December 31, 2019 and 2018 is as follows:
| Year ended December 31, | ||||||
|---|---|---|---|---|---|---|
| 2019 | 2018 | |||||
| Statutory tax rate | 27.00 % | 27.00 % | ||||
| Tax expense at statutory rate | $ | (122,246 | ) | $ | 46,126 | |
| Effect of: | ||||||
| Deductions related to mining taxes | (1,493 | ) | (5,976 | ) | ||
| Adjusted income taxes | (123,739 | ) | 40,150 | |||
| Mining tax (recovery) expense | (6,674 | ) | 19,214 | |||
| (130,413 | ) | 59,364 | ||||
| Permanent differences related to: | ||||||
| Capital items | 3,270 | (2,903 | ) | |||
| Other income taxes permanent differences | 1,747 | (454 | ) | |||
| Impact of remeasurement on decommissioning liability | (16,265 | ) | 3,898 | |||
| Temporary income tax differences not recognized | 6,219 | 4,449 | ||||
| Non-deductible impairment on UCM receivable | 7,041 | - | ||||
| Withholding tax on dividend | 6,826 | - | ||||
| Impact related to differences in tax rates in foreign operations | 20,338 | 9,594 | ||||
| Impact of changes in statutory tax rates | (259 | ) | 45 | |||
| Foreign exchange on non-monetary items | (6,633 | ) | 11,408 | |||
| Impact related to tax assessment and tax return amendments | (824 | ) | 20 | |||
| Tax (recovery) expense | $ | (108,953 | ) | $ | 85,421 | |
| HUDBAY MINERALS INC. | ||||||
| --- | ||||||
| Notes to Audited Consolidated Financial Statements | ||||||
| (in thousands of US dollars, except where otherwise noted) | ||||||
| Years ended December 31, 2019 and 2018 |
(e) Income tax effect of temporary differences - recognized:
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2019 and 2018 are as follows:
| HUDBAY MINERALS INC. | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Notes to Audited Consolidated Financial Statements | ||||||||||||
| (in thousands of US dollars, except where otherwise noted) | ||||||||||||
| Years ended December 31, 2019 and 2018 | ||||||||||||
| Balance sheet | Income Statement | |||||||||||
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
| Dec.31,<br>2019 | Dec. 31,<br>2018 | Dec.31,<br>2019 | Dec. 31,<br>2018 | |||||||||
| Deferred income tax (liability) asset/expense (recovery) | ||||||||||||
| Property, plant and equipment | $ | (96,841 | ) | $ | (83,407 | ) | $ | 13,434 | $ | (18,646 | ) | |
| Pension obligation | 11,332 | 7,817 | (1,115 | ) | 2,739 | |||||||
| Other employee benefits | 16,837 | 13,488 | (3,349 | ) | 3,254 | |||||||
| Decommissioning and restoration obligation | 41,208 | 7,817 | (33,391 | ) | (2,055 | ) | ||||||
| Non-capital losses | 90,446 | 72,470 | (17,976 | ) | 19,025 | |||||||
| Share issuance and debt costs | 6,540 | 10,896 | 4,361 | 4,807 | ||||||||
| Deferred revenue | (112 | ) | (7,622 | ) | (7,510 | ) | 5,096 | |||||
| Other | 540 | (5,946 | ) | (12,839 | ) | 4,640 | ||||||
| Deferred income tax asset/expense (recovery) | 69,950 | 15,513 | (58,385 | ) | 18,860 | |||||||
| Deferred income tax liability (assets)/(recovery) expense | ||||||||||||
| Property, plant and equipment | 259,145 | 339,037 | (79,892 | ) | 25,456 | |||||||
| Other employee benefits | (80 | ) | 240 | (320 | ) | 48 | ||||||
| Asset retirement obligations | (833 | ) | (918 | ) | 85 | (129 | ) | |||||
| Non-capital losses | (28,643 | ) | (27,374 | ) | (1,269 | ) | 165 | |||||
| Other | 3,629 | (3,672 | ) | 7,302 | (3,439 | ) | ||||||
| Deferred income tax liability/(recovery) expense | 233,218 | 307,313 | (74,094 | ) | 22,101 | |||||||
| Deferred income tax liability/(recovery) expense | $ | (163,268 | ) | $ | (291,800 | ) | $ | (132,479 | ) | $ | 40,961 |
The above reconciling items are disclosed at the tax rates that apply in the jurisdiction where they have arisen. The Other category in the above table includes the effect of foreign exchange fluctuations.
(f) Income tax temporary differences - not recognized:
| HUDBAY MINERALS INC. |
|---|
| Notes to Audited Consolidated Financial Statements |
| (in thousands of US dollars, except where otherwise noted) |
| Years ended December 31, 2019 and 2018 |
The Group has not recognized deferred tax asset in respect of the following deductible income tax temporary differences:
| Dec. 31, 2019 | Dec. 31, 2018 | |||
|---|---|---|---|---|
| Property, plant and equipment | $ | 33,269 | $ | - |
| Capital losses | 159,545 | 200,455 | ||
| Other employee benefits | 68,866 | 77,166 | ||
| Asset retirement obligations | 146,679 | 175,091 | ||
| Non-capital losses | 122,979 | 116,542 | ||
| Temporary differences not recognized | $ | 531,338 | $ | 569,254 |
The deductible temporary differences excluding non-capital losses do not expire under current tax legislation.
The Canadian non-capital losses were incurred between 2006 and 2019 and expire between 2026 and 2039.
The Group incurred United Stated net operating losses between 2004 and 2019 which have a twenty year carry forward period. Peruvian net operating losses were incurred from 2014 to 2016 which have a four year carry forward period.
(g) Mining tax effect of temporary differences:
The tax effects of temporary differences that give rise to significant portions of the deferred mining tax assets and liabilities at December 31, 2019 and December 31, 2018 are as follows:
| Dec. 31, 2019 | Dec. 31, 2018 | |||||
|---|---|---|---|---|---|---|
| Canada | ||||||
| Property, plant and equipment | $ | 5,095 | $ | (5,119 | ) | |
| Dec. 31, 2019 | Dec. 31, 2018 | |||||
| Peru | ||||||
| Property, plant and equipment | $ | (9,710 | ) | $ | (11,658 | ) |
For the year ended December 31, 2019, the Group had unrecognized deferred mining tax assets of approximately $5,361 (December 31, 2018 - $8,469).
(h) Unrecognized taxable temporary differences associated with investments:
There are no taxable temporary differences associated with investments in subsidiaries, associated and joint ventures, for which a deferred tax liability has not been recognized.
(i) Tax receivable/payable:
| HUDBAY MINERALS INC. |
|---|
| Notes to Audited Consolidated Financial Statements |
| (in thousands of US dollars, except where otherwise noted) |
| Years ended December 31, 2019 and 2018 |
The timing of payments results in significant variances in period-to-period comparison of the tax receivable and tax payable balances.
(j) Other disclosure:
The tax rules and regulations applicable to mining companies are highly complex and subject to interpretation. The Group may be subject in the future to a review of its historic income and other tax filings and, in connection with such reviews disputes can arise with the taxing authorities over the interpretation or application of certain tax rules and regulations in respect of the Group's business. These reviews may alter the timing or amount of taxable income or deductions. The amount ultimately reassessed upon resolution of issues raised may differ from the amount accrued.
23. Share capital
(a) Preference shares:
Authorized: Unlimited preference shares without par value
(b) Common shares:
Authorized: Unlimited common shares without par value
Issued and fully paid:
| Year ended<br>Dec. 31, 2019 | Year ended<br>Dec. 31, 2018 | ||||||
|---|---|---|---|---|---|---|---|
| Common shares | Amount | Common shares | Amount | ||||
| Balance, beginning of year | 261,272,151 | $ | 1,777,340 | 261,271,188 | $ | 1,777,409 | |
| Share issue costs, net of tax | - | - | - | (80 | ) | ||
| Warrants exercised | - | - | 963 | 11 | |||
| Balance, end of year | 261,272,151 | $ | 1,777,340 | 261,272,151 | $ | 1,777,340 |
During the year ended December 31, 2019, the Company declared two semi-annual dividends of C$0.01 per share each. The Company paid $1,955 and $1,972 in dividends on March 29, 2019 and September 27, 2019 to shareholders of record as of March 8, 2019 and September 6, 2019.
During the year ended December 31, 2018 , the Company paid $2,026 and $2,019 on March 29, 2018 and September 28, 2018 to shareholders of record as of March 9, 2018 and September 7, 2018, respectively.
The Company declared a semi-annual dividend of C$0.01 per share on February 20, 2020. The dividend will be paid on March 27, 2020 to shareholders of record as of March 10, 2020 and is expected to total C$2,613.
| HUDBAY MINERALS INC. |
|---|
| Notes to Audited Consolidated Financial Statements |
| (in thousands of US dollars, except where otherwise noted) |
| Years ended December 31, 2019 and 2018 |
24. Share-based payment
(a) Cash-settled share-based payments:
The Group has two cash-settled share-based payment plans, as described below.
Deferred Share Units (DSU)
At December 31, 2019, the carrying amount and the intrinsic value of the outstanding liability related to the DSU plan was $3,876 (December 31, 2018 - $4,288) (note 19). The following table outlines information related to DSUs granted, expenses recognized and payments made during the year.
| Year ended | |||||
|---|---|---|---|---|---|
| Dec. 31, 2019 | Dec. 31, 2018 | ||||
| Granted during the year: | |||||
| Number of units | 337,999 | 158,886 | |||
| Weighted average price (C$/unit) | $ | 5.89 | $ | 7.91 | |
| Expenses (gain) recognized during the year^1^ (notes 6c) | $ | 1,157 | $ | (1,877 | ) |
| Payments made during the year (note 19) | $ | 1,668 | $ | - |
^1^This expense relates to the grant of DSUs, as well as mark-to-market adjustments, and is presented within selling and administrative expenses on the consolidated income statements.
Restricted Share Units (RSU)
RSUs granted under the LTEP Plan may be settled in the form of Hudbay common shares or, at the option of Hudbay, the cash equivalent based on the market price of the common shares as of the vesting date. RSUs may also be granted under Hudbay's Share Unit Plan, however; the RSUs granted under the Share Unit Plan may only be settled in cash. Hudbay has historically settled all RSUs in cash. The Company has determined that the appropriate accounting treatment is to classify the RSUs as cash settled transactions.
At December 31, 2019, the carrying amount of the outstanding liability related to the RSU plan was $5,477 (December 31, 2018 - $12,201) (note 19). The following table outlines information related to RSUs granted, expenses recognized and payments made in the year.
| Year ended | ||||||
|---|---|---|---|---|---|---|
| Dec. 31, 2019 | Dec. 31, 2018 | |||||
| Number of units, beginning of year | 3,666,867 | 3,405,713 | ||||
| Number of units granted during the year | 1,080,741 | 1,031,701 | ||||
| Credits for dividends | 7,554 | 9,724 | ||||
| Number of units forfeited during the year | (573,914 | ) | (21,190 | ) | ||
| Number of units vested | (1,957,249 | ) | (759,081 | ) | ||
| Number of units, end of year^1^ | 2,223,999 | 3,666,867 | ||||
| Weighted average price - granted (C$/unit) | $ | 8.98 | $ | 10.33 | ||
| Expenses (gain) recognized during the year^2^ (note 6c) | $ | 1,557 | $ | (496 | ) | |
| Payments made during the year (note 19) | $ | 9,380 | $ | 6,435 | ||
| HUDBAY MINERALS INC. | ||||||
| --- | ||||||
| Notes to Audited Consolidated Financial Statements | ||||||
| (in thousands of US dollars, except where otherwise noted) | ||||||
| Years ended December 31, 2019 and 2018 |
^1^ Includes 616,397 and 1,842,837 units that have vested; however, are unreleased and unpaid as of December 31, 2019 and December 31, 2018, respectively.
^2^This net expense reflects recognition of RSU expense over the service period, as well as mark-to-market adjustments, and is presented mainly within cost of sales and selling and administrative expenses. Certain amounts related to the Arizona segment are capitalized.
(b) Equity-settled share-based payment - stock options:
The Group's stock option plan was approved in June 2005 and amended in May 2008 (the "Plan").
Under the amended Plan, the Group may grant to employees, officers, directors or consultants of the Group or its affiliates options to purchase up to a maximum of 13 million common shares of the Group. As of December 31, 2018, all options had either been exercised, or expired.
No options were granted under the Plan during the years ended December 31, 2019 and December 31, 2018.
The Group estimates expected life of options and expected volatility based on historical data, which may differ from actual outcomes.
| Year ended | Year ended | ||||||
|---|---|---|---|---|---|---|---|
| Dec. 31, 2019 | Dec. 31, 2018 | ||||||
| Number of shares subject to option | Weighted-average exercise price C$ | Number of shares subject to option | Weighted average exercise price C$ | ||||
| Balance, beginning of year | - | $ | - | 523,352 | $ | 15.86 | |
| Forfeited | - | $ | - | - | $ | - | |
| Expired | - | $ | - | (523,352 | ) | $ | 15.86 |
| Balance, end of year | - | $ | - | - | $ | - |
25. Capital management
The Group's definition of capital includes total equity and long-term debt. The Group's long-term debt balance as at December 31, 2019 was $985,255 (December 31, 2018 - $981,030).
The Group's objectives when managing capital are to maintain a strong capital base in order to:
Advance the Group's corporate strategies to create long-term value for its stakeholders; and
Sustain the Group's operations and growth throughout metals and materials cycles
Hudbay monitors its capital and capital structure on an ongoing basis to ensure they are sufficient to achieve the Group's short-term and long-term strategic objectives in a capital intensive industry. The Group faces several risks, including volatile metals prices, access to capital, and risk of delays and cost escalation associated with major capital projects. The Group continually assesses the adequacy of its capital structure to ensure its objectives are met. Hudbay monitors its cash and cash equivalents, which were $396,146 as at December 31, 2019 (2018 - $515,497), together with availability under its committed credit facilities. The Group invests its cash and cash equivalents primarily in Canadian bankers' acceptances, deposits at major Canadian and Peruvian banks, or treasury bills issued by the federal or provincial governments. In addition to the requirement to maintain sufficient cash balances to fund continuing operations, the Group must maintain sufficient cash to fund the interest expense on the long-term debt outstanding (note 17). As part of the Group's capital management activities, the Group monitors interest coverage ratios and leverage ratios.
| HUDBAY MINERALS INC. |
|---|
| Notes to Audited Consolidated Financial Statements |
| (in thousands of US dollars, except where otherwise noted) |
| Years ended December 31, 2019 and 2018 |
26. Financial instruments
(a) Fair value and carrying value of financial instruments:
The following presents the fair value ("FV") and carrying value ("CV") of the Group's financial instruments and non-financial derivatives:
| Dec. 31, 2019 | Dec. 31, 2018 | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| FV | CV | FV | CV | |||||||||
| Financial assets at amortized cost | ||||||||||||
| Cash and cash equivalents ^1^ | $ | 396,146 | $ | 396,146 | $ | 515,497 | $ | 515,497 | ||||
| Restricted cash^1^ | 337 | 337 | 3,738 | 3,738 | ||||||||
| Fair value through profit or loss | ||||||||||||
| Trade and other receivables^1,^ ^2^ | 91,046 | 91,046 | 126,311 | 126,311 | ||||||||
| Non-hedge derivative assets^3^ | 1,712 | 1,712 | 6,628 | 6,628 | ||||||||
| Prepayment option - embedded derivatives^7^ | 2,585 | 2,585 | 3,664 | 3,664 | ||||||||
| Investments at FVTPL^4^ | 11,287 | 11,287 | 15,159 | 15,159 | ||||||||
| Total financial assets | 503,113 | 503,113 | 670,997 | 670,997 | ||||||||
| Financial liabilities at amortized cost | ||||||||||||
| Trade and other payables^1,^ ^2^ | 184,604 | 184,604 | 164,628 | 164,628 | ||||||||
| Deferred Rosemont acquisition consideration^8^ | 24,491 | 24,491 | - | - | ||||||||
| Other financial liabilities^5^ | 21,338 | 24,000 | 17,425 | 21,361 | ||||||||
| Senior unsecured notes^6^ | 1,050,126 | 994,143 | 988,294 | 992,970 | ||||||||
| Fair value through profit or loss | - | - | - | - | ||||||||
| Embedded derivatives^3^ | 9,074 | 9,074 | 7,201 | 7,201 | ||||||||
| Non-hedge derivative liabilities^3^ | 10,295 | 10,295 | 2,634 | 2,634 | ||||||||
| Total financial liabilities | 1,299,928 | 1,246,607 | 1,180,182 | 1,188,794 | ||||||||
| Net financial liability | $ | (796,815 | ) | $ | (743,494 | ) | $ | (509,185 | ) | $ | (517,797 | ) |
| ^1^Cash and cash equivalents, restricted cash, trade and other receivables and trade and other payables are recorded at carrying value, which approximates fair value due to their short-term nature and generally negligible credit losses. | ||||||||||||
| ^2^Excludes tax and other statutory amounts. | ||||||||||||
| ^3^Derivatives are carried at their fair value, which is determined based on internal valuation models that reflect observable forward market commodity prices, currency exchange rates, and discount factors based on market US dollar interest rates adjusted for credit risk. | ||||||||||||
| ^4^All investments are carried at their fair value, which is determined using quoted market bid prices in active markets for listed shares. | ||||||||||||
| ^5^These financial liabilities relate to agreements with communities near the Constancia project in Peru (note 15). Fair values have been determined using a discounted cash flow analysis based on expected cash flows and a credit adjusted discount rate. | ||||||||||||
| ^6^Fair value of the senior unsecured notes (note 17) has been determined using the quoted market price at the year end. | ||||||||||||
| ^7^Fair value of the prepayment option embedded derivative related to the long-term debt (note 17) has been determined using a binomial tree/lattice approach based on the Hull-White single factor interest rate term structure model. | ||||||||||||
| ^8^Discounted value based on a risk adjusted discount rate. | ||||||||||||
| HUDBAY MINERALS INC. | ||||||||||||
| --- | ||||||||||||
| Notes to Audited Consolidated Financial Statements | ||||||||||||
| (in thousands of US dollars, except where otherwise noted) | ||||||||||||
| Years ended December 31, 2019 and 2018 |
Fair value hierarchy
The table below provides an analysis by valuation method of financial instruments that are measured at fair value subsequent to recognition. Levels 1 to 3 are defined based on the degree to which fair value inputs are observable and have a significant effect on the recorded fair value, as follows:
Level 1: Quoted prices in active markets for identical assets or liabilities;
Level 2: Valuation techniques use significant observable inputs, either directly or indirectly, or valuations are based on quoted prices for similar instruments; and
Level 3: Valuation techniques use significant inputs that are not based on observable market data.
| December 31, 2019 | Level 1 | Level 2 | Level 3 | Total | ||||
|---|---|---|---|---|---|---|---|---|
| Financial assets measured at fair value | ||||||||
| Financial assets at FVTPL: | ||||||||
| Non-hedge derivatives | $ | - | $ | 1,712 | $ | - | $ | 1,712 |
| Investments at FVTPL | 11,287 | - | - | 11,287 | ||||
| Prepayment option embedded derivative | - | 2,585 | - | 2,585 | ||||
| $ | 11,287 | $ | 4,297 | $ | - | $ | 15,584 | |
| Financial liabilities measured at fair value | ||||||||
| Financial liabilities at FVTPL: | ||||||||
| Embedded derivatives | $ | - | $ | 9,074 | $ | - | $ | 9,074 |
| Non-hedge derivatives | - | 10,295 | - | 10,295 | ||||
| $ | - | $ | 19,369 | $ | - | $ | 19,369 | |
| December 31, 2018 | Level 1 | Level 2 | Level 3 | Total | ||||
| --- | --- | --- | --- | --- | --- | --- | --- | --- |
| Financial assets measured at fair value | ||||||||
| Financial assets at FVTPL: | ||||||||
| Non-hedge derivatives | $ | - | $ | 6,628 | $ | - | $ | 6,628 |
| Investments at FVTPL | 15,159 | - | - | 15,159 | ||||
| Prepayment option embedded derivative | - | 3,664 | - | 3,664 | ||||
| $ | 15,159 | $ | 10,292 | $ | - | $ | 25,451 | |
| Financial liabilities measured at fair value | ||||||||
| Financial liabilities at FVTPL: | ||||||||
| Embedded derivatives | $ | - | $ | 7,201 | $ | - | $ | 7,201 |
| Non-hedge derivatives | - | 2,634 | - | 2,634 | ||||
| $ | - | $ | 9,835 | $ | - | $ | 9,835 |
The Group's policy is to recognize transfers into and transfers out of fair value hierarchy levels as of the date of the event or change in circumstances that caused the transfer. During the year ended December 31, 2019 and 2018 the Group did not make any transfers.
| HUDBAY MINERALS INC. |
|---|
| Notes to Audited Consolidated Financial Statements |
| (in thousands of US dollars, except where otherwise noted) |
| Years ended December 31, 2019 and 2018 |
(b) Derivatives and hedging:
Copper fixed for floating swaps
Hudbay enters into copper fixed for floating swaps in order to manage the risk associated with provisional pricing terms in copper concentrate sales agreements. As at December 31, 2019, the Group had 30,000 tonnes of net copper swaps outstanding at an effective average price of $2.67/lb and settling across January to April 2020. The aggregate fair value of the transactions at December 31, 2019 was a liability position of $8,362 (December 31, 2018 was an asset position of $4,171).
Non-hedge derivative zinc contracts
Hudbay enters into fixed price sales contracts with zinc customers and, to ensure that the Group continues to receive a floating or unhedged realized zinc price, Hudbay enters into forward zinc purchase contracts that effectively offset the fixed price sales contracts. At December 31, 2019, the Group held contracts for forward zinc purchased of 5,755 tonnes (December 31, 2018 - 2,925 tonnes) that related to forward customer sales of zinc. Prices range from $1.00/lb to $1.15/lb (December 31, 2018 - $1.09/lb to $1.45/lb) and settlement dates extend to December 2020. The aggregate fair value of the transactions at December 31, 2019 was a net liability position of $221 (December 31, 2018 - a net liability position of $177).
(c) Embedded derivatives
Changes in fair value of provisionally priced receivables
The Group records changes in fair value of provisionally priced receivables related to provisional pricing in concentrate purchase, concentrate sale and certain other sale contracts. Under the terms of these contracts, prices are subject to final adjustment at the end of a future period after title transfers based on quoted market prices during the quotation period specified in the contract. The period between provisional pricing and final pricing is typically up to three months.
Changes in fair value of provisionally priced receivables are presented in trade and other receivables when they relate to sales contracts and in trade and other payables when they relate to purchase contracts. At each reporting date, provisionally priced metals are marked-to-market based on the forward market price for the quotation period stipulated in the contract, with changes in fair value recognized in revenue for sales contracts and in cost of sales for purchase concentrate contracts. Cash flows related to changes in fair value of provisionally priced receivables are classified in operating activities.
As at December 31, 2019 and 2018, the Group's net position consisted of contracts awaiting final pricing which are as indicated below:
| HUDBAY MINERALS INC. | ||||
|---|---|---|---|---|
| Notes to Audited Consolidated Financial Statements | ||||
| (in thousands of US dollars, except where otherwise noted) | ||||
| Years ended December 31, 2019 and 2018 | ||||
| Sales awaiting final pricing | Average YTD price (/unit) | |||
| --- | --- | --- | --- | --- |
| Metal in concentrate | Unit | Dec. 31, 2019 | Dec. 31, 2018 | Dec. 31, 2019 |
| Copper | tonnes | 33,102 | 30,519 | 2.80 |
| Zinc | tonnes | - | 199 | - |
| Gold | oz | 16,152 | 15,528 | 1,522 |
| Silver | oz | 124,371 | 96,646 | 17.86 |
All values are in US Dollars.
The aggregate changes in fair value of provisionally priced receivables within the copper and zinc concentrate sales contracts at December 31, 2019, was an asset position of $10,165 (December 31, 2018 - a liability position of $6,351).
Prepayment option embedded derivative
The senior unsecured notes (note 17) contain prepayment options, which represent embedded derivatives that require bifurcation from the host contract. The prepayment options are measured at fair value, with changes in the fair value being recognized as unrealized gains or losses in finance income and expense (note 6g). The fair value of the embedded derivative at December 31, 2019 was an asset of $2,585 (December 31, 2018 - an asset of $3,664).
Pampacancha delivery obligation-embedded derivative
The Group has recognized an obligation to deliver additional precious metal credits to Wheaton as a result of the Pampacancha deposit not being mined until 2020. The fair value of the embedded derivative at December 31, 2019 was a liability of $9,074 (December 31, 2018 - $7,201).
(d) Financial risk management
The Group's financial risk management activities are governed by Board-approved policies addressing risk identification, hedging authorization procedures and limits and reporting. Hudbay's policy objective, when hedging activities are undertaken, is to reduce the volatility of future profit and cash flow within the strategic and economic goals of the Group. The Group from time to time employs derivative financial instruments, including forward and option contracts, to manage risk originating from exposures to commodity price risk, foreign exchange risk and interest rate risk. Significant derivative transactions are approved by the Board of Directors, and hedge accounting is applied when certain criteria have been met. The Group does not use derivative financial instruments for trading or speculation purposes. The following is a discussion of the Group's risk exposures.
(i) Market risk
Market risk is the risk that changes in market prices, including foreign exchange rates, commodity prices, share prices, and interest rates will cause fluctuations in the fair value or future cash flows of a financial instrument.
Foreign currency risk
The Group's primary exposure to foreign currency risk arises from:
| HUDBAY MINERALS INC. |
|---|
| Notes to Audited Consolidated Financial Statements |
| (in thousands of US dollars, except where otherwise noted) |
| Years ended December 31, 2019 and 2018 |
Translation of Canadian dollar denominated costs and, to a lesser extent, Peruvian soles cost into US dollars. Substantially all of the Group's revenue are denominated in US dollars, while the majority of its operating costs are denominated in either the Canadian dollar or Peruvian sol. Generally, with gross profit, appreciation of the US dollar relative to the Canadian dollar will increase the Group's profit.
Translation of foreign currency denominated cash and cash equivalents, trade and other receivables, trade and other payables, as well as other financial liabilities. Appreciation of the US dollar relative to a foreign currency will decrease the net asset value of these balances once they have been translated to US dollars, resulting in foreign currency translation losses on foreign currency denominated assets and gains on foreign currency denominated liabilities.
The Manitoba segment's primary financial instrument foreign currency exposure is on US denominated cash and cash equivalents, trade and other receivables and other financial liabilities. The Peru segment's primary financial instrument foreign currency exposure is on Peruvian soles cash and cash equivalents, trade and other payables and other financial liabilities.
The Group's exposure to foreign currency risk was as follows based on notional financial instruments amounts stated in US equivalent dollars:
| Dec. 31, 2019 | Dec. 31, 2018 | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| CAD^1^ | 2 | PEN^3^ | CAD^1^ | 2 | PEN^3^ | ||||||||||
| Cash and cash equivalent | 8,394 | $ | 21,217 | $ | 7,617 | $ | 11,498 | $ | 29,740 | $ | 13,934 | ||||
| Trade and other receivables | 374 | 56,998 | 25,413 | 711 | 42,056 | 1,272 | |||||||||
| Other financial assets | 11,287 | - | - | 15,159 | - | - | |||||||||
| Trade and other payables | (5,719 | ) | (435 | (22,618 | ) | (5,341 | ) | (3,133 | (19,513 | ) | |||||
| Other financial liabilities | - | - | (24,000 | ) | - | - | (21,361 | ) | |||||||
| 14,336 | $ | 77,780 | $ | (13,588 | ) | $ | 22,027 | $ | 68,663 | $ | (25,668 | ) | |||
| 1 HMI is exposed to foreign currency risk on CAD. | |||||||||||||||
| 2 The Manitoba segment is exposed to foreign currency risk on . | |||||||||||||||
| 3 The Peru segment is exposed to foreign currency risk on PEN. |
All values are in US Dollars.
The following sensitivity analysis for foreign currency risk relates solely to financial instruments and non financial derivatives that were outstanding as at the year end date; each sensitivity calculation assumes all other variables are held constant. This analysis is based on values as at December 31, 2019 and does not reflect the overall effect that changes in market variables would have on the Group's results of operations.
| HUDBAY MINERALS INC. | |||||
|---|---|---|---|---|---|
| Notes to Audited Consolidated Financial Statements | |||||
| (in thousands of US dollars, except where otherwise noted) | |||||
| Years ended December 31, 2019 and 2018 | |||||
| December 31, 2019 | Change of: | Would have changed 2019 after-tax profit by: | |||
| --- | --- | --- | --- | --- | --- |
| USD/CAD exchange rate^1^ | + 10% | $ | 3.4 | million | |
| USD/CAD exchange rate^1^ | - 10% | (4.1 | ) | million | |
| USD/PEN exchange rate^2^ | + 10% | 0.8 | million | ||
| USD/PEN exchange rate^2^ | - 10% | (1.0 | ) | million | |
| December 31, 2018 | Change of: | Would have changed 2018 after-tax profit by: | |||
| USD/CAD exchange rate^1^ | + 10% | $ | 5.0 | million | |
| USD/CAD exchange rate^1^ | - 10% | (6.0 | ) | million | |
| USD/PEN exchange rate^2^ | + 10% | 1.5 | million | ||
| USD/PEN exchange rate^2^ | - 10% | (1.8 | ) | million | |
| ^1^Effect on profit due to foreign currency remeasurements of balances denominated in a currency different from a Hudbay subsidiary's functional currency. | |||||
| ^2^Effect on profit due to foreign currency remeasurement of balances denominated in Peruvian Sol. |
Commodity price risk
Hudbay is exposed to market risk from prices for the commodities the Group produces and sells, such as copper, zinc, gold and silver. From time to time, the Group maintains price protection programs and conducts commodity price risk management through the use of derivative contracts. The following sensitivity analysis for commodity price risk relates solely to financial instruments and non financial derivatives that were outstanding as at the year end date; each sensitivity calculation assumes all other variables are held constant. This analysis is based on values as at December 31, 2019 and does not reflect the overall effect that changes in market variables would have on the Group's results of operations.
| December 31, 2019 | Change of: | Would have changed 2019 after-tax profit by: |
|---|---|---|
| Copper prices ($/lb)^3^ | + 0.30 | (2.0 ) million |
| Copper prices ($/lb)^3^ | - 0.30 | 2.0 million |
| Zinc prices ($/lb)^4^ | + 0.10 | 1.0 million |
| Zinc prices ($/lb)^4^ | - 0.10 | (1.0 ) million |
| December 31, 2018 | Change of: | Would have changed 2018 after-tax profit by: |
| Copper prices ($/lb)^3^ | + 0.30 | (3.1) million |
| Copper prices ($/lb)^3^ | - 0.30 | 3.1 million |
| Zinc prices ($/lb)^4^ | + 0.10 | 0.5 million |
| Zinc prices ($/lb)^4^ | - 0.10 | (0.5) million |
| ^3^ Effect on profit due to embedded provisional pricing derivatives (note 26c) and copper fixed for floating swaps (note 26b). | ||
| ^4^Effect on profit due to embedded provisional pricing derivatives (note 26c) and non-hedge zinc derivatives (note 26b). |
All values are in US Dollars.
Share price risk
Hudbay is exposed to market risk from share prices for the Group's investments in listed Canadian metals and mining companies. These investments are made to foster strategic relationships, in connection with joint venture agreements and for investment purposes. Management monitors the value of these investments for the purposes of determining whether to add or reduce the Group's positions. The following sensitivity analysis for share price risk relates solely to financial instruments that were outstanding as at the year-end date; each sensitivity calculation assumes all other variables are held constant. This analysis is based on values as at December 31, 2019 and does not reflect the overall effect that changes in market variables would have on the Group's finance expenses.
| HUDBAY MINERALS INC. | |||
|---|---|---|---|
| Notes to Audited Consolidated Financial Statements | |||
| (in thousands of US dollars, except where otherwise noted) | |||
| Years ended December 31, 2019 and 2018 | |||
| December 31, 2019 | Change of: | Would have changed 2019 after-tax profit by: | |
| --- | --- | --- | --- |
| Share prices | + 25% | $ | 2.8 million |
| Share prices | - 25% | (2.8 ) million | |
| December 31, 2018 | Change of: | Would have changed 2018 after-tax profit by: | |
| Share prices | + 25% | $ | 3.8 million |
| Share prices | - 25% | (3.8) million |
Interest rate risk
The Group is exposed to the following interest rate risks:
cash flow interest rate risk on its cash and cash equivalents;
fair value interest rate risk on its embedded derivative associated with its Notes; and
interest rate risk on its senior secured revolving credit facilities.
The most material of these risks is the embedded derivative associated with its Notes. This analysis is based on values at December 31, 2019 and does not reflect the overall effect that changes in market variables would have on the group's finance expenses.
| December 31, 2019 | Change of: | Would have changed 2019 after-tax profit by: | |
|---|---|---|---|
| Interest rates | + 2.00% | $ | 2.3 million |
| Interest rates | - 2.00% | (2.6 ) million | |
| December 31, 2018 | Change of: | Would have changed 2018 after-tax profit by: | |
| Interest rates | + 2.00% | $ | (3.3) million |
| Interest rates | - 2.00% | 3.2 million |
Refer to note 7 for information on the Group's cash and cash equivalents.
(ii) Credit risk
Credit risk is the risk of financial loss to the Group if a customer or counterparty to a financial instrument fails to meet its obligations. The Group's maximum exposure to credit risk at the reporting date is represented by the carrying amount, net of any impairment losses recognized, of financial assets and non financial derivative assets recorded on the consolidated balance sheets. Refer to note 26a.
A large portion of the Group's cash and cash equivalents are represented by deposits with major Schedule 1 Canadian banks. Deposits and other investments with Schedule 1 Canadian banks represented 92% of total cash and cash equivalents as at December 31, 2019 (2018 - 74%). The Group's investment policy requires it to comply with a list of approved investment, concentration and maturity limits, as well as credit quality. Credit concentrations in the Group's short term investments are monitored on an ongoing basis.
| HUDBAY MINERALS INC. |
|---|
| Notes to Audited Consolidated Financial Statements |
| (in thousands of US dollars, except where otherwise noted) |
| Years ended December 31, 2019 and 2018 |
Transactions involving derivatives are with counterparties the Group believes to be credit worthy.
Management has a credit policy in place that requires the Group to obtain credit insurance from an investment grade credit insurance provider to mitigate exposure to credit risk in its receivables. At December 31, 2019, approximately 96% of the Group's trade receivables were insured or payable by letters of credit (2018 - 95% were insured or payable by letters of credit). Insured receivables have a credit insurance deductible of 10%. The deductible and any additional exposure to credit risk is monitored and approved on an ongoing basis.
Two customers accounted for approximately 63% of total trade receivables as at December 31, 2019 (2018 - four customers accounted for approximately 78%). Credit risk for these customers is assessed as medium to low risk. As at December 31, 2019, none of the Group's trade receivables was aged more than 30 days (2018 - nil).
(iii) Liquidity risk
Liquidity risk is the risk that the Group will not be able to meet its obligations associated with financial liabilities. Hudbay's objective is to maintain sufficient liquid resources to meet operational and investing requirements.
The following summarizes the contractual undiscounted cash flows of the Group's non-derivative and derivative financial liabilities, including any interest payments, by remaining contractual maturity and financial assets used to manage liquidity risk. The table includes all instruments held at the reporting date for which payments had been contractually agreed at the reporting date. The undiscounted amounts shown are gross amounts, unless the liabilities will be settled net. Amounts in foreign currency are translated at the closing rate at the reporting date. When a counterparty has a choice of when an amount is paid, the liability is allocated to the earliest possible time period.
| HUDBAY MINERALS INC. | ||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Notes to Audited Consolidated Financial Statements | ||||||||||||||||||
| (in thousands of US dollars, except where otherwise noted) | ||||||||||||||||||
| Years ended December 31, 2019 and 2018 | ||||||||||||||||||
| Dec. 31, 2019 | Carrying amount | Contractual cash flows | 12 months or less | 13 - 36 months | 37 - 60 months | More than 60 months | ||||||||||||
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
| Assets used to manage liquidity risk | ||||||||||||||||||
| Cash and cash equivalents | $ | 396,146 | $ | 396,146 | $ | 396,146 | $ | - | $ | - | $ | - | ||||||
| Restricted cash | 337 | 337 | 337 | - | - | - | ||||||||||||
| Trade and other<br>receivables | 91,046 | 91,046 | 89,451 | - | - | 1,595 | ||||||||||||
| Non-hedge derivative assets | 1,712 | 1,712 | 1,712 | - | - | - | ||||||||||||
| $ | 489,241 | $ | 489,241 | $ | 487,646 | $ | - | $ | - | $ | 1,595 | |||||||
| Non-derivative financial liabilities | ||||||||||||||||||
| Trade and other payables, including embedded derivatives | $ | (184,604 | ) | $ | (184,604 | ) | $ | (184,604 | ) | $ | - | $ | - | $ | - | |||
| Other financial<br>liabilities | (24,000 | ) | (33,723 | ) | (6,672 | ) | (4,811 | ) | (4,734 | ) | (17,506 | ) | ||||||
| Deferred Rosemont acquisition consideration | (24,491 | ) | (30,000 | ) | - | (10,000 | ) | (20,000 | ) | - | ||||||||
| Long-term debt, including embedded derivatives | (991,558 | ) | (1,350,540 | ) | (72,165 | ) | (149,500 | ) | (1,128,875 | ) | - | |||||||
| $ | (1,224,653 | ) | $ | (1,598,867 | ) | $ | (263,441 | ) | $ | (164,311 | ) | $ | (1,153,609 | ) | $ | (17,506 | ) | |
| Derivative financial liabilities | ||||||||||||||||||
| Embedded derivative | (9,074 | ) | (9,074 | ) | (9,074 | ) | - | - | - | |||||||||
| Non hedge derivative contracts | (10,295 | ) | (10,295 | ) | (10,295 | ) | - | - | - | |||||||||
| (19,369 | ) | (19,369 | ) | (19,369 | ) | - | - | - | ||||||||||
| Dec. 31, 2018 | Carrying amount | Contractual cash flows | 12 months or less | 13 - 36 months | 37 - 60 months | More than 60 months | ||||||||||||
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
| Assets used to manage liquidity risk | ||||||||||||||||||
| Cash and cash equivalents | $ | 515,497 | $ | 515,497 | $ | 515,497 | $ | - | $ | - | $ | - | ||||||
| Trade and other<br>receivables | 126,311 | 136,913 | 112,258 | 11,440 | 13,215 | - | ||||||||||||
| Non-hedge derivative assets | 6,628 | 6,628 | 6,628 | - | - | - | ||||||||||||
| $ | 648,436 | $ | 659,038 | $ | 634,383 | $ | 11,440 | $ | 13,215 | $ | - | |||||||
| Non-derivative financial liabilities | ||||||||||||||||||
| Trade and other payables, including embedded derivatives | $ | (164,628 | ) | $ | (164,628 | ) | $ | (164,628 | ) | $ | - | $ | - | $ | - | |||
| Other financial<br>liabilities | (21,361 | ) | (31,854 | ) | (3,719 | ) | (4,757 | ) | (3,068 | ) | (20,310 | ) | ||||||
| Long-term debt, including embedded derivatives | (981,030 | ) | (1,439,821 | ) | (79,263 | ) | (156,933 | ) | (535,000 | ) | (668,625 | ) | ||||||
| $ | (1,167,019 | ) | $ | (1,636,303 | ) | $ | (247,610 | ) | $ | (161,690 | ) | $ | (538,068 | ) | $ | (688,935 | ) | |
| Derivative financial liabilities | ||||||||||||||||||
| Non-hedge derivative contracts | (2,634 | ) | (2,634 | ) | (2,634 | ) | - | - | - | |||||||||
| $ | (2,634 | ) | $ | (2,634 | ) | $ | (2,634 | ) | $ | - | $ | - | $ | - | ||||
| HUDBAY MINERALS INC. | ||||||||||||||||||
| --- | ||||||||||||||||||
| Notes to Audited Consolidated Financial Statements | ||||||||||||||||||
| (in thousands of US dollars, except where otherwise noted) | ||||||||||||||||||
| Years ended December 31, 2019 and 2018 |
27. Commitments and contingencies
(a) Non-capitalized lease commitments
The Group has entered into various non-capitalized lease commitments for facilities and equipment. The leases expire in periods ranging from one to three years. There are no restrictions placed on the Group by entering into these leases. Future minimum lease payments under such cancelable leases recognized in operating expenses at December 31 are:
| 2019 | ||
|---|---|---|
| Within one year | $ | 57,860 |
| After one year but not more than five years | 26,395 | |
| More than five years | - | |
| $ | 84,255 |
(b) Capital commitments
As at December 31, 2019, the Group had outstanding capital commitments in Canada of approximately $3,681, of which $1,897 can be terminated, approximately $34,617 in Peru, all of which can be terminated, and approximately $180,440 in Arizona, primarily related to the Rosemont project, of which approximately $89,370 can be terminated by the Group.
(c) Contingent liabilities
Contingent liabilities
The Group is involved in various claims, litigation and other matters arising in the ordinary course and conduct of business. While it is not possible to determine the ultimate outcome of such actions at this time, and inherent uncertainties exist in predicting such outcomes, it is the Group's belief that the ultimate resolution of such actions is not reasonably likely to have a material adverse effect on its consolidated financial position or results of operations. The assessment of contingencies inherently involves the exercise of significant judgment and estimates of the outcome of future events. As a result of the assessment, no significant contingent liabilities have been recorded in these consolidated financial statements.
As part of the streaming agreement with Wheaton for the 777 mine, the Group must repay, with precious metals credits, the legal deposit provided by Wheaton by August 1, 2052, the expiry date of the agreement. If the legal deposit is not fully repaid with precious metals credits related to 777 production by the expiry date, a cash payment for the remaining amount will be due at the expiry date of the agreement. As a result of changes in the remaining 777 mine reserves and lower precious metals prices, there is a possibility that an amount of Wheaton's legal deposit may not be repaid by means of 777 mine's precious metals credits over its expected remaining mine life.
Contingent assets
There were no significant contingent assets to disclose at December 31, 2019 or December 31, 2018.
| HUDBAY MINERALS INC. |
|---|
| Notes to Audited Consolidated Financial Statements |
| (in thousands of US dollars, except where otherwise noted) |
| Years ended December 31, 2019 and 2018 |
28. Related parties
(a) Group companies
The financial statements include the financial statements of the Company and the following significant subsidiaries:
| Beneficial ownership of ultimate controlling party (Hudbay Minerals Inc.) | |||||
|---|---|---|---|---|---|
| Name | Jurisdiction | Business | Entity's Parent | 2019 | 2018 |
| HudBay Marketing & Sales Inc | Canada | Marketing and sales | HMI | 100% | 100% |
| HudBay Peru Inc | British Columbia | Holding company | HMI | 100% | 100% |
| HudBay Peru S.A.C. | Peru | Exploration/development | Peru Inc. | 100% | 100% |
| HudBay (BVI) Inc. | British Virgin Islands | Precious metals sales | Peru Inc. | 100% | 100% |
| Hudbay Arizona Inc. | British Columbia | Holding company | HMI | 100% | 100% |
| Rosemont Copper Company | Arizona | Exploration/development | HudBay Arizona (US) Holding Corporation | 100% | 100% |
Transactions between the Company and its subsidiaries, which are related parties of the Company, have been eliminated on consolidation and are not disclosed in this note.
(b) Compensation of key management personnel
The Group's key management includes members of the Board of Directors, the Group's Chief Executive Officer, the Group's senior vice presidents and vice presidents. Total compensation to key management personnel was as follows:
| 2019 | 2018 | |||
|---|---|---|---|---|
| Short-term employee benefits^1^ | $ | 8,319 | $ | 8,652 |
| Post-employment benefits | 762 | 762 | ||
| Long-term share-based awards | 6,966 | 5,970 | ||
| $ | 16,047 | $ | 15,384 |
^1^Such as salaries and social security contributions, paid annual leave and paid sick leave, profit-sharing and bonuses and nonmonetary benefits (such as medical care, housing, cars and free or subsidized goods or services) for current employees.
| HUDBAY MINERALS INC. |
|---|
| Notes to Audited Consolidated Financial Statements |
| (in thousands of US dollars, except where otherwise noted) |
| Years ended December 31, 2019 and 2018 |
29. Supplementary cash flow information
(a) Change in non-cash working capital:
| Year ended December 31, | ||||||
|---|---|---|---|---|---|---|
| 2019 | 2018 | |||||
| Change in: | ||||||
| Trade and other receivables | $ | 3,252 | $ | 16,198 | ||
| Other financial assets/liabilities | 12,540 | (17,290 | ) | |||
| Inventories | (11,759 | ) | (32 | ) | ||
| Prepaid expenses | (3,484 | ) | (38 | ) | ||
| Trade and other payables | 5,613 | (19,608 | ) | |||
| Provisions and other liabilities | (2,591 | ) | (1,030 | ) | ||
| $ | 3,572 | $ | (21,800 | ) |
The Group has retroactively changed its presentation of changes in taxes payable/receivable in the statements of cash flows to report all changes in taxes payable/receivable within the operating cash flow before changes in non-cash working capital. There is no net impact to cash flows from operating activities. All comparative periods have been revised.
| HUDBAY MINERALS INC. |
|---|
| Notes to Audited Consolidated Financial Statements |
| (in thousands of US dollars, except where otherwise noted) |
| Years ended December 31, 2019 and 2018 |
(b) Non-cash transactions:
During the year ended December 31, 2019, the Group entered into the following non-cash investing and financing activities which are not reflected in the consolidated statements of cash flows:
Remeasurement of the Group's decommissioning and restoration liabilities for the year ended December 31, 2019 led to a net increase in related property, plant and equipment assets of $89,408 (year ended December 31, 2018 - increase of $8,998) mainly from additional provisions recognized as a result of higher estimates for closure activities of tailings facilities at the Manitoba operations to ensure compliance with higher industry-wide standards for tailings management safety and, to a lesser extent, increased mine activity footprints and the resulting higher disturbance at the Constancia operation.
Property, plant and equipment included $22,158 of net additions related to capital additions due to the recognition of ROU assets.
The Group, immediately prior to closing the acquisition, agreed to release UCM from repayment obligations under a Rosemont project loan in exchange for an increase in equity in Rosemont. As a result, the loan receivable balance of $25,978 was written off. The Group recognized the loss on write-off of the loan receivable in the income statement (refer to Note 6d). In addition, in order to recognize previously unfunded contributions to the Rosemont Project due from UCM, the Group recognized an increase to other capital reserves, a component of shareholder's equity.
| HUDBAY MINERALS INC. |
|---|
| Notes to Audited Consolidated Financial Statements |
| (in thousands of US dollars, except where otherwise noted) |
| Years ended December 31, 2019 and 2018 |
30. Segmented information
The Group is an integrated metals producer. When making decisions on expansions, opening or closing mines, as well as day to day operations, management evaluates the profitability of the overall operation of the Group. The Group's main mining operations are located in Manitoba and Saskatchewan (Canada) and Cusco (Peru) and are included in the Manitoba segment and Peru segment, respectively. The Manitoba and Peru segments generate the Group's revenue. The Manitoba segment sells copper concentrate (containing copper, gold and silver), zinc metal and other products. The Peru segment consists of the Group's Constancia operation and sells copper concentrate and molybdenum concentrate. The Group's Arizona segment consists of the Group's Rosemont project in Arizona. Corporate and other activities include the Group's exploration activities in Chile, and Nevada. The exploration entities are not individually significant, as they do not meet the minimum quantitative thresholds. Corporate activities are not considered a segment and are included as a reconciliation to total consolidated results. Accounting policies for each reported segment are the same as the Company. Results from operating activities represents the profit earned by each segment without allocation of corporate costs. This is the measure reported to the chief operating decision-maker, the Group's President and Chief Executive Officer, for the purposes of resource allocation and the assessment of segment performance. Total assets and liabilities do not reflect intercompany balances, which have been eliminated on consolidation.
| Year ended December 31, 2019 | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Manitoba | Peru | Arizona | Corporate and other activities | Total | ||||||||||
| Revenue from external customers | $ | 537,421 | $ | 700,018 | $ | - | $ | - | $ | 1,237,439 | ||||
| Cost of sales | ||||||||||||||
| Mine operating costs | 385,159 | 356,183 | - | - | 741,342 | |||||||||
| Depreciation and amortization | 135,429 | 209,126 | - | - | 344,555 | |||||||||
| Gross profit | 16,833 | 134,709 | - | - | 151,542 | |||||||||
| Selling and administrative expenses | - | - | - | 36,170 | 36,170 | |||||||||
| Exploration and evaluation expenses | 18,476 | 5,804 | - | 6,494 | 30,774 | |||||||||
| Other operating expenses | 8,201 | 14,022 | 28,149 | 744 | 51,116 | |||||||||
| Impairment loss | - | - | 322,249 | - | 322,249 | |||||||||
| Results from operating activities | $ | (9,844 | ) | $ | 114,883 | $ | (350,398 | ) | $ | (43,408 | ) | $ | (288,767 | ) |
| Finance income | (8,527 | ) | ||||||||||||
| Finance expenses | 162,888 | |||||||||||||
| Other finance losses | 9,635 | |||||||||||||
| Loss before tax | (452,763 | ) | ||||||||||||
| Tax recovery | (108,953 | ) | ||||||||||||
| Loss for the year | $ | (343,810 | ) | |||||||||||
| HUDBAY MINERALS INC. | ||||||||||||||
| --- | ||||||||||||||
| Notes to Audited Consolidated Financial Statements | ||||||||||||||
| (in thousands of US dollars, except where otherwise noted) | ||||||||||||||
| Years ended December 31, 2019 and 2018 | ||||||||||||||
| Year ended December 31, 2018 | ||||||||||||||
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | |
| Manitoba | Peru | Arizona | Corporate and other activities | Total | ||||||||||
| Revenue from external customers | $ | 667,322 | $ | 805,044 | $ | - | $ | - | $ | 1,472,366 | ||||
| Cost of sales | ||||||||||||||
| Mine operating costs | 412,760 | 353,199 | - | - | 765,959 | |||||||||
| Depreciation and amortization | 121,515 | 211,152 | - | - | 332,667 | |||||||||
| Gross profit | 133,047 | 240,693 | - | - | 373,740 | |||||||||
| Selling and administrative expenses | - | - | - | 27,243 | 27,243 | |||||||||
| Exploration and evaluation expenses | 12,302 | 5,640 | - | 10,628 | 28,570 | |||||||||
| Other operating expenses | 5,433 | 11,739 | 539 | 1,360 | 19,071 | |||||||||
| Results from operating activities | $ | 115,312 | $ | 223,314 | $ | (539 | ) | $ | (39,231 | ) | $ | 298,856 | ||
| Finance income | (8,450 | ) | ||||||||||||
| Finance expenses | 152,000 | |||||||||||||
| Other finance gain | (15,531 | ) | ||||||||||||
| Profit before tax | 170,837 | |||||||||||||
| Tax expense | 85,421 | |||||||||||||
| Profit for the year | $ | 85,416 | ||||||||||||
| December 31, 2019 | ||||||||||||||
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | |||||
| Manitoba | Peru | Arizona | Corporate and other activities | Total | ||||||||||
| Total assets | 774,800 | $ | 2,556,895 | $ | 700,799 | $ | 423,467 | $ | 4,455,961 | |||||
| Total liabilities | 551,171 | 926,642 | 78,988 | 1,051,037 | 2,607,838 | |||||||||
| Property, plant and equipment1 | 684,679 | 2,253,404 | 691,538 | 32,938 | 3,662,559 | |||||||||
| 1Included in Corporate and Other activities is 27.3 million of property, plant and equipment that is located in Nevada. |
All values are in US Dollars.
| December 31, 2019 | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Manitoba | Peru | Arizona | Corporate and other activities | Total | ||||||
| Additions to property, plant and equipment | $ | 143,418 | $ | 101,717 | $ | 38,923 | $ | 905 | $ | 284,963 |
| December 31, 2018 | ||||||||||
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
| Manitoba | Peru | Arizona | Corporate and other activities | Total | ||||||
| Total assets | $ | 621,253 | $ | 2,751,525 | $ | 896,693 | $ | 416,164 | $ | 4,685,635 |
| Total liabilities | 424,576 | 921,773 | 115,470 | 1,044,960 | 2,506,779 | |||||
| Property, plant and equipment | 572,947 | 2,353,229 | 868,921 | 24,715 | 3,819,812 | |||||
| HUDBAY MINERALS INC. | ||||||||||
| --- | ||||||||||
| Notes to Audited Consolidated Financial Statements | ||||||||||
| (in thousands of US dollars, except where otherwise noted) | ||||||||||
| Years ended December 31, 2019 and 2018 | ||||||||||
| December 31, 2018 | ||||||||||
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
| Manitoba | Peru | Arizona | Corporate and other activities | Total | ||||||
| Additions to property, plant and equipment | $ | 123,896 | $ | 55,818 | $ | 19,846 | $ | 22 | $ | 199,582 |
Geographical Segments
The following tables represent revenue information regarding the Group's geographical segments for the years ended December 31:
| 2019 | 2018 | |||
|---|---|---|---|---|
| Revenue by customer location^1^ | ||||
| Canada | $ | 418,636 | $ | 553,411 |
| United States | 209,382 | 211,681 | ||
| Switzerland | 162,167 | 253,165 | ||
| Germany | 10,731 | 52,530 | ||
| China | 158,795 | 140,440 | ||
| Peru | 110,411 | 65,721 | ||
| Philippines | 71,506 | 84,687 | ||
| United Kingdom | 62,462 | 68,346 | ||
| Other | 33,349 | 42,385 | ||
| $ | 1,237,439 | $ | 1,472,366 |
^1^Presented based on the ultimate destination of the product if known. If the eventual destination of the product sold through traders is not known then revenue is allocated to the location of the customer's business office and not the ultimate destination of the product.
During the year ended December 31, 2019, six customers accounted for approximately 24%, 9%, 9%, 8%, 5% and 5%, respectively, of total revenue during the year. Revenue from these customers has been presented in the Manitoba and Peru operating segments.
During the year ended December 31, 2018, six customers accounted for approximately 26%, 9%, 8%, 7%, 5% and 5%, respectively, of total revenue during the year. Revenue from these customers has been presented in the Manitoba and Peru operating segments.
Hudbay Minerals Inc.: Exhibit 99.2 - Filed by newsfilecorp.com
Management's Discussion and Analysis of
Results of Operations and Financial Condition
For the year ended
December 31, 2019
February 20, 2020
| TABLE OF CONTENTS | Page |
|---|---|
| Introduction | 1 |
| Our Business | 1 |
| Strategy | 2 |
| Summary | 3 |
| Key Financial Results | 6 |
| Key Production Results | 7 |
| Recent Developments | 9 |
| Constancia Operations Review | 12 |
| Manitoba Operations Review | 15 |
| Outlook | 22 |
| Financial Review | 30 |
| Liquidity and Capital Resources | 38 |
| Financial Risk Management | 42 |
| Trend Analysis and Quarterly Review | 45 |
| Non-IFRS Financial Performance Measures | 47 |
| Accounting Changes | 60 |
| Critical Accounting Judgments and Estimates | 60 |
| Disclosure Controls and Procedures and Internal Control over Financial Reporting | 62 |
| Notes to Reader | 63 |
INTRODUCTION
This Management's Discussion and Analysis ("MD&A") dated February 20, 2020 is intended to supplement Hudbay Minerals Inc.'s audited consolidated financial statements and related notes for the year ended December 31, 2019 and 2018 (the "consolidated financial statements"). The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards ("IFRS") as issued by the International Accounting Standards Board ("IASB").
References to "Hudbay", the "Company", "we", "us", "our" or similar terms refer to Hudbay Minerals Inc. and its direct and indirect subsidiaries as at December 31, 2019.
Readers should be aware that:
This MD&A contains certain "forward-looking statements" and "forward-looking information" (collectively, "forward-looking information") that are subject to risk factors set out in a cautionary note contained in our MD&A.
This MD&A has been prepared in accordance with the requirements of the securities laws in effect in Canada, which may differ materially from the requirements of United States securities laws applicable to US issuers.
We use a number of non-IFRS financial performance measures in our MD&A.
The technical and scientific information in this MD&A has been approved by qualified persons based on a variety of assumptions and estimates.
For a discussion of each of the above matters, readers are urged to review the "Notes to Reader" discussion beginning on page 56 of this MD&A.
Additional information regarding Hudbay, including the risks related to our business and those that are reasonably likely to affect our financial statements in the future, is contained in our continuous disclosure materials, including our most recent Annual Information Form ("AIF"), consolidated financial statements and Management Information Circular available on SEDAR at www.sedar.com and on EDGAR at www.sec.gov.
As of January 1, 2019 we have adopted IFRS 16, Leases ("IFRS 16"). The Company applied this amendment prospectively. A reconciliation from the December 31, 2018 previously reported balances to the revised January 1, 2019 opening balances is disclosed in Note 4(b) of the consolidated financial statements.
All amounts are in US dollars unless otherwise noted.
OUR BUSINESS
We are a diversified mining company primarily producing copper concentrate (containing copper, gold, and silver) and zinc metal. Directly and through our subsidiaries, we own three polymetallic mines, four ore concentrators and a zinc production facility in northern Manitoba and Saskatchewan (Canada) and Cusco (Peru), and copper projects in Arizona and Nevada (United States). Our growth strategy is focused on the exploration, development, operation and optimization of properties we already control, as well as other mineral assets we may acquire that fit our strategic criteria. Our vision is to be a responsible, top-tier operator of long-life, low-cost mines in the Americas. We are governed by the Canada Business Corporations Act and our shares are listed under the symbol "HBM" on the Toronto Stock Exchange, New York Stock Exchange and Bolsa de Valores de Lima.
STRATEGY
Our mission is to create sustainable value through acquisition, development and operation of high quality, long life deposits with exploration potential in jurisdictions that support responsible mining, and to see the regions and communities in which we operate benefit from our presence.
We believe that the greatest opportunities for shareholder value creation in the mining industry are in the discovery and successful development of new mineral deposits, and through highly efficient low-cost operations to profitably extract ore from those deposits. We also believe that our successful development, ramp-up and operation of the Constancia open-pit mine in Peru, along with our long history of underground mining and full life-cycle experience in northern Manitoba provide us with a competitive advantage in these respects relative to other mining companies of similar scale.
Over the past decade, we have built a world-class asset base by employing a consistent long-term growth strategy. We intend to sustainably grow Hudbay through exploration and development of our robust project pipeline, as well as through the acquisition of other properties that fit our stringent strategic criteria. Furthermore, we continuously work to generate strong free cash flow and optimize the value of our producing asset portfolio through exploration, and efficient and safe operations.
To ensure that any capital allocation or acquisition we undertake creates sustainable value for stakeholders, we have established a number of criteria for evaluating mineral property opportunities. These include the following:
Geography: Potential acquisitions should be located in jurisdictions that support responsible mining activity and have acceptable levels of political and social risk. Given our current scale and geographic footprint, our current geographic focus is on select investment grade countries in the Americas, with strong rule of law and respect for human rights consistent with our long-standing focus on environmental, social and governance ("ESG") principles;
Commodity: Among the metals we produce, we believe copper has the best long-term supply/demand fundamentals and the greatest opportunities for sustained risk-adjusted returns. While our primary focus is on copper, we appreciate the polymetallic nature of deposits and, in particular, the counter-cyclical nature of gold production in our portfolio;
Quality: We are focused on adding long-life, low-cost assets to our existing portfolio of high quality assets. Long life assets can capture peak pricing of multiple commodity price cycles and low cost assets can generate free cash flow even through the trough of price cycles;
Potential: We consider the full spectrum of acquisition and investment opportunities from early-stage exploration to producing assets, but they must meet our stringent risk-adjusted criteria for growth and value creation. Regardless of the stage of development, we look for mineral assets that we believe offer significant incremental potential for exploration, development and optimization beyond the stated resources and mine plan;
Process: Through a robust due diligence and capital allocation process, we develop a clear understanding of how we can create value from the investment or the acquired property through the application of our technical, social, operational and project execution expertise, as well as through the provision of necessary financial capacity and other operational optimization opportunities;
Operatorship: We believe real value is created through leading efficient project development and operations. Hudbay's leadership team is well positioned to drive value and deliver effective capital allocation with our proven track record of successful project development and operational excellence.
Financial: Investments and acquisitions should be accretive to Hudbay on a per share basis. Given that our strategic focus includes the capital allocation to non-producing assets at various stages of development, when evaluating accretion, we will consider measures such as internal rate of return ("IRR"), return on invested capital ("ROIC"), net asset value per share and the contained value of reserves and resources per share.
Our key objectives for 2020 are to:
Maintain our industry-leading low-cost business to continue to generate positive cash flow;
Update and upgrade the reserve and resource estimate for the Snow Lake operations including our 100% owned Lalor, Pen, Wim, and New Britannia properties, and advance plans for the refurbishment of the New Britannia mill;
Maintain Constancia targeted recoveries and throughput, while identifying areas of upside through continuous improvement initiatives;
Secure surface rights, permits and community agreements to commence the development of the Pampacancha satellite deposit;
Test promising gold exploration targets near Lalor and plan near-term copper exploration programs in Peru and Nevada; and,
Continue to evaluate exploration and acquisition opportunities that meet our criteria described above and pursue those opportunities that create sustainable value for the Company and our stakeholders.
SUMMARY
- Achieved 2019 production and unit cost guidance in Peru and Manitoba; strong performance at the Lalor and 777 mines resulted in zinc production exceeding the top end of the guidance range.
- Constancia achieved record mill throughput and copper recoveries in 2019.
Lalor and 777 increased mine output by 22% and 15%, respectively, year-over-year.
Cash generated from operating activities decreased to $98.7 million in the fourth quarter of 2019 from $137.3 million in the same quarter of 2018, while operating cash flow before change in non-cash working capital decreased to $69.1 million in the fourth quarter from $104.3 million in the same quarter of 2018.
Cash and cash equivalents of $396.1 million as at December 31, 2019 was relatively unchanged during the quarter and positions us well for executing future growth initiatives.
2020 production guidance of 107,500^1^ tonnes of copper and 172,500^1^ ounces of precious metals with copper and precious metals production expected to grow by 18%^1^ and 67%^1^, respectively, by 2022.
Reached a community agreement to acquire Pampacancha surface rights.
The New Britannia gold mill refurbishment remains on track to be completed before the end of 2021, which is expected to increase Lalor's annual gold production to approximately 140,000 ounces starting in 2022.
Hudbay's Manitoba operations received the Towards Sustainable Mining Leadership Award in 2019.
Summary of Fourth Quarter Results
Cash generated from operating activities decreased to $98.7 million in the fourth quarter of 2019 from $137.3 million in the same quarter of 2018. Operating cash flow before change in non-cash working capital was $69.1 million during the fourth quarter of 2019, reflecting a decrease of $35.1 million compared to the fourth quarter of 2018. The decrease in operating cash flow is primarily the result of lower realized base metal prices and base metal sales volumes compared to the fourth quarter of 2018.
Copper-equivalent production in the fourth quarter of 2019 decreased by 2% compared to the same period in 2018 primarily as a result of lower copper grades and lower ore production in Peru, offset by higher ore production in Manitoba.
Net loss and loss per share in the fourth quarter of 2019 were $1.5 million and $0.01, respectively, compared to a net loss and loss per share of $3.5 million and $0.01, respectively, in the fourth quarter of 2018.
Net loss and loss per share in the fourth quarter of 2019 were affected by, among other things, the following items:
| (in $ millions, except per share amounts) | Pre-tax gain (loss) | After-tax gain (loss) | Per share gain (loss) | |||
|---|---|---|---|---|---|---|
| Mark-to-market adjustments | (9.0 | ) | (6.6 | ) | (0.03 | ) |
| Non-cash deferred tax adjustments | - | 30.4 | 0.12 |
In the fourth quarter of 2019, consolidated cash cost per pound of copper produced, net of by-product credits^2^, was $1.23, an increase compared to $0.94 in the same period last year. This increase was a result of lower copper and precious metals production and lower realized zinc prices, leading to lower by-product credits. Incorporating sustaining capital, capitalized exploration, royalties, selling, administrative and regional costs, consolidated all-in sustaining cash cost per pound of copper produced, net of by-product credits^2^, in the fourth quarter of 2019 was $2.55, which increased from $1.80 in the same period last year, driven mainly by increased sustaining capital expenditures and the same factors noted above affecting consolidated cash costs.
Summary of Full Year Results
Cash generated from operating activities decreased to $310.9 million in 2019 from $479.6 million in 2018. Operating cash flow before change in non-cash working capital decreased to $307.3 million from $501.4 million in 2018. The decrease is the result of lower copper sales volumes and lower margins mainly from lower realized base metal prices.
Net loss and loss per share for 2019 were $343.8 million and $1.32, respectively. This compares to a net profit and earnings per share of $85.4 million and $0.33, respectively, in 2018. The decline in profitability follows mainly from an after-tax, non-cash impairment charge of $242.1 million recorded in the third quarter of 2019 following the U.S. District Court for the District of Arizona ("Court") decision on July 31, 2019 to vacate and remand the U.S. Forest Service's issuance of the Final Record of Decision ("FROD") for the Rosemont project in Arizona. In addition, gross margins declined due to pressure on base metal prices throughout most of the year. Cash costs per pound of copper produced, net of by-product credits, were 21% higher, mainly as a result of lower copper production.
On a consolidated basis, our copper and precious metals production met 2019 guidance and production of zinc and molybdenum exceeded 2019 guidance ranges. Production of copper benefited from increased throughput and recoveries at Constancia despite expected lower planned grades. Strong zinc production was a result of Lalor achieving its ramp up to 4,500 tonnes per day and the 777 mine implementing operational improvements. Combined unit costs in both Peru and Manitoba were within 2019 guidance ranges. Total capital expenditures were above 2019 guidance due primarily to increased sustaining capital expenditures related to mining equipment that is now accounted for as a capitalized lease under IFRS.
^1^ Year-over-year forecast changes assume the mid-point of the respective guidance range is achieved.
^2^Cash cost, all-in sustaining cash cost per pound of copper produced, net of by-product credits, and net debt are non-IFRS financial performance measures with no standardized definition under IFRS. For further information and a detailed reconciliation, please see the discussion under the "Non-IFRS Financial Reporting Measures" section of this MD&A.
KEY FINANCIAL RESULTS
| Financial Condition | Dec. 31, 2018 |
|---|---|
| (in thousands) | |
| Cash and cash equivalents | 515,497 |
| Total long-term debt | 981,030 |
| Net debt1 | 465,533 |
| Working capital | 445,228 |
| Total assets | 4,685,635 |
| Equity | 2,178,856 |
| 1 Net debt is a non-IFRS financial performance measure with no standardized definition under IFRS. For further information and a detailed reconciliation, please see discussion under the "Non-IFRS Financial Reporting Measures" section of this MD&A. |
All values are in US Dollars.
| Financial Performance | Three months ended | Year ended | |||||
|---|---|---|---|---|---|---|---|
| (in $ thousands, except per share amounts) | Dec. 31, 2019 | Dec. 31, 2018 | Dec. 31, 2019 | Dec. 31, 2018 | |||
| Revenue | 324,485 | 351,773 | 1,237,439 | 1,472,366 | |||
| Cost of sales | 298,852 | 276,547 | 1,085,897 | 1,098,626 | |||
| (Loss) profit before tax | (42,352 | ) | 17,650 | (452,763 | ) | 170,837 | |
| (Loss) profit | (1,455 | ) | (3,510 | ) | (343,810 | ) | 85,416 |
| Basic and diluted (loss) earnings per share | (0.01 | ) | (0.01 | ) | (1.32 | ) | 0.33 |
| Operating cash flow before change in non-cash working<br>capital | 69,141 | 104,264 | 307,284 | 501,352 |
KEY PRODUCTION RESULTS
| Three months ended | Three months ended | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Dec. 31, 2018 | ||||||||||||||
| Manitoba | Total | Peru | Manitoba | Total | ||||||||||
| Contained metal in concentrate produced ^1^ | ||||||||||||||
| Copper | tonnes | 26,659 | 5,763 | 32,422 | 30,834 | 6,404 | 37,238 | |||||||
| Gold | oz | 5,007 | 27,705 | 32,712 | 7,522 | 20,529 | 28,051 | |||||||
| Silver | oz | 631,774 | 298,363 | 930,137 | 750,747 | 263,937 | 1,014,684 | |||||||
| Zinc | tonnes | - | 30,592 | 30,592 | - | 27,408 | 27,408 | |||||||
| Molybdenum | tonnes | 372 | - | 372 | 329 | - | 329 | |||||||
| Payable metal sold | ||||||||||||||
| Copper | tonnes | 28,430 | 5,285 | 33,715 | 31,252 | 5,098 | 36,350 | |||||||
| Gold | oz | 4,824 | 25,520 | 30,344 | 7,262 | 18,599 | 25,861 | |||||||
| Silver | oz | 666,839 | 242,584 | 909,423 | 672,756 | 236,744 | 909,500 | |||||||
| Zinc ^2^ | tonnes | - | 28,001 | 28,001 | - | 31,134 | 31,134 | |||||||
| Molybdenum | tonnes | 199 | - | 199 | 447 | - | 447 | |||||||
| Cash cost ^3^ | /lb | 1.66 | (0.76 | ) | 1.23 | 1.31 | (0.87 | ) | 0.94 | |||||
| Sustaining cash cost ^3^ | /lb | 2.47 | 2.33 | 1.66 | 1.76 | |||||||||
| All-in sustaining cash cost^3^ | /lb | 2.55 | 1.80 |
All values are in US Dollars.
| Year ended | Year ended | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Dec. 31, 2018 | ||||||||||||
| Manitoba | Peru | Manitoba | Total | |||||||||
| Contained metal in concentrate produced ^1^ | ||||||||||||
| Copper | tonnes | 113,825 | 23,354 | 122,178 | 32,372 | 154,550 | ||||||
| Gold | oz | 19,723 | 94,969 | 24,189 | 95,693 | 119,882 | ||||||
| Silver | oz | 2,504,769 | 1,080,561 | 2,729,859 | 1,224,610 | 3,954,469 | ||||||
| Zinc | tonnes | - | 119,106 | - | 115,588 | 115,588 | ||||||
| Molybdenum | tonnes | 1,272 | - | 904 | - | 904 | ||||||
| Payable metal sold | ||||||||||||
| Copper | tonnes | 106,184 | 22,335 | 116,449 | 31,474 | 147,923 | ||||||
| Gold | oz | 18,956 | 90,043 | 20,420 | 92,677 | 113,097 | ||||||
| Silver | oz | 2,452,496 | 1,000,430 | 2,255,700 | 1,116,653 | 3,372,353 | ||||||
| Zinc ^2^ | tonnes | - | 104,319 | - | 115,723 | 115,723 | ||||||
| Molybdenum | tonnes | 1,186 | - | 819 | - | 819 | ||||||
| Cash cost ^3^ | /lb | 1.41 | (0.18 | ) | 1.36 | (0.64 | ) | 0.94 | ||||
| Sustaining cash cost ^3^ | /lb | 1.90 | 2.63 | 1.59 | 1.18 | |||||||
| All-in sustaining cash cost^3^ | /lb | 1.60 | ||||||||||
| ^1^ Metal reported in concentrate is prior to deductions associated with smelter contract terms. | ||||||||||||
| ^2^ Includes refined zinc metal sold and payable zinc in concentrate sold. | ||||||||||||
| ^3^ Cash cost, sustaining cash cost and all-in sustaining cash cost per pound of copper produced, net of by-product credits are non-IFRS financial performance measures with no standardized definition under IFRS. For further information and a detailed reconciliation, please see the discussion under the "Non-IFRS Financial Reporting Measures" section of this MD&A. |
All values are in US Dollars.
RECENT DEVELOPMENTS
Leadership Announcements
After assisting with the Chair transition and the CEO search, Alan Hibben is stepping down as a Director. Mr. Hibben joined the Board in 2009 and served as Chair from 2017 to 2019. The Board thanks Mr. Hibben for his dedicated service as a Director and former Chair of the company.
On January 22, 2020, Peter Kukielski was appointed as Hudbay's President and CEO. Mr. Kukielski had been serving as Interim President and CEO since July 2019. Mr. Kukielski has more than 30 years of extensive global experience in the base metals, precious metals and bulk materials sectors.
David Bryson, Hudbay's Senior Vice President and Chief Financial Officer, is retiring from the Company, effective March 31, 2020, to pursue family and personal commitments. A search for a new CFO is underway, and Eugene Lei, currently Hudbay's Senior Vice President, Corporate Development and Strategy, will act as Interim CFO until the search process is concluded, after which he is expected to return to focusing on his current responsibilities. As a member of the executive committee, Mr. Lei has been working closely with Mr. Bryson on financial matters over the last several years, and they will continue to work closely together with Mr. Kukielski through this period to provide continuity and support a seamless transition. The Board and management team are grateful for Mr. Bryson's 11 years of service as Hudbay's CFO and wish him well on his future personal endeavors.
Execution of Pampacancha Surface Rights Agreement
On February 18, 2020, we announced that the community of Chilloroya formally approved a surface rights agreement with the Company for the Pampacancha satellite deposit located near the Constancia mine in Peru. With the completion of this agreement, we expect to be mining ore from the deposit in late 2020. The Company expects growth capital expenditures associated with project development and acquiring the surface rights for Pampacancha to be approximately $70 million in 2020. In accordance with Peru's Consulta Previa law, additional consultation between the Peruvian government and the local community is required before we can begin development activities. Some additional capital costs remain outstanding in recognition of current uses of the land by certain community members and the Company intends to enter into agreements to address these matters prior to commencing mining activities. With the community's endorsement of the agreement, we believe these processes will be concluded in the first half of 2020.
Logistics Update
We are closely monitoring the development of the Covid-19 coronavirus outbreak in China, but at this time there has been no impact on the timing of copper concentrate sales to customers in China or elsewhere. In Canada, recent protests involving blockades of CN rail service have affected shipments of zinc metal and copper concentrate from our Manitoba operations, and may result in elevated inventories in the first quarter of 2020.
Towards Sustainable Mining Leadership Award
Our Manitoba operations received the Mining Association of Canada's Towards Sustainable Mining ("TSM") Leadership Award for meeting or exceeding a Level A ranking in their results across all of the six areas of performance. The performance areas are aboriginal and community outreach, crisis management, safety and health, tailings management, biodiversity conservation management, and energy use and greenhouse gas emissions management. Hudbay is extremely proud of this achievement as it further demonstrates the Company's commitment and successful track record of strong environmental, social and governance performance.
Rosemont Litigation Update
On July 31, 2019, the Court issued a ruling in two of the lawsuits challenging the U.S. Forest Service's issuance of the FROD for the Rosemont project in Arizona. The Court ruled to vacate and remand the FROD thereby delaying the expected start of construction of Rosemont. In December of 2019, Hudbay and the U.S. Department of Justice each filed a notice of appeal in respect of the Court's decision to the U.S. Ninth Circuit Court of Appeals.
On February 10, 2020, the Court issued a ruling in the third lawsuit challenging the U.S. Forest Service's issuance of the FROD for the Rosemont mine. In this lawsuit, the plaintiffs challenged the Biological Opinion that was issued by the U.S. Fish and Wildlife Service and relied on by the U.S. Forest Service as part of the permitting process. The Court ruled to remand certain aspects of the U.S. Fish and Wildlife Service's analysis and findings related to the Biological Opinion back to the agencies for further review. While this ruling did not come as a surprise to Hudbay in light of the Court's previous ruling on the FROD for Rosemont, the Company believes remanding these issues is unnecessary as the federal agencies' research and studies concluded that the potential impacts to endangered species would comply with the regulations. Hudbay is reviewing the decision and will continue following the direction of the government agencies through the permitting process.
Other Key Strategic Initiatives
New Britannia mill refurbishment activities are progressing in line with the development schedule laid out in the February 2019 mine plan. Detailed engineering is on track to be completed in the first quarter of 2020 and environmental permits are expected in the second quarter of 2020. Construction activities are expected to commence mid-2020 and continue until the third quarter of 2021, with plant commissioning and ramp-up during the fourth quarter of 2021. Once the New Britannia mill is commissioned, average annual gold production from Snow Lake is expected to be approximately 140,000 ounces during the first five years at a sustaining cash cost, net of by-product credits, of approximately $450 per ounce of gold.
Exploration activities in the Snow Lake region continue to progress, including exploration and engineering studies at the Lalor in-mine exploration targets and other 100%-owned deposits in the region, with results expected to be incorporated in the annual mineral reserve and resource estimate in March 2020. The Company is also continuing drilling activities on the recently discovered 1901 Deposit, which contains an initial inferred resource of 2.1 million tonnes at 9.67% zinc, as announced in August 2019. Drilling on the 1901 Deposit continues to test the size of the deposit and to confirm the presence of gold and copper-gold mineralization, with the intention to publish an initial inferred resource estimate on the gold mineralization and upgrade the zinc mineral resource estimate to a higher confidence category in 2020.
In the fourth quarter of 2019, the Company acquired a prospective package of patented and unpatented mining claims contiguous to its Mason project near Yerington, Nevada. The land package, known as the Mason Valley properties, is an exploration stage project that includes past producing mines and has the potential to provide additional mineral resources to Hudbay's Mason project.
We have also entered into an option agreement to acquire an 80% interest in the Gray Hills unpatented mining claims in Lyon County, Nevada, located approximately 25 kilometres southeast of the Mason project, as part of its land consolidation in the Yerington district.
Dividend Declared
A semi-annual dividend of C$0.01 per share was declared on February 20, 2020. The dividend will be paid out on March 27, 2020 to shareholders of record as of March 10, 2020.
CONSTANCIA OPERATIONS REVIEW
| Three months ended | Year ended | Guidance | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Dec. 31, 2018 | Dec. 31, 2019 | Dec. 31, 2018 | Annual | |||||||||
| 2019 | 2020 | |||||||||||
| Ore mined ^1^ | tonnes | 8,049,063 | 7,329,423 | 33,308,369 | 34,372,156 | |||||||
| Copper | % | 0.41 | 0.47 | 0.43 | 0.49 | |||||||
| Gold | g/tonne | 0.04 | 0.05 | 0.04 | 0.05 | |||||||
| Silver | g/tonne | 3.87 | 4.16 | 3.76 | 4.15 | |||||||
| Ore milled | tonnes | 7,474,136 | 7,657,943 | 31,387,281 | 31,282,610 | |||||||
| Copper | % | 0.42 | 0.48 | 0.42 | 0.47 | |||||||
| Gold | g/tonne | 0.04 | 0.06 | 0.04 | 0.05 | |||||||
| Silver | g/tonne | 3.86 | 4.26 | 3.64 | 4.08 | |||||||
| Copper concentrate | tonnes | 114,201 | 131,076 | 487,772 | 512,984 | |||||||
| Concentrate grade | % Cu | 23.34 | 23.52 | 23.34 | 23.82 | |||||||
| Copper recovery | % | 85.6 | 84.8 | 85.7 | 82.6 | |||||||
| Gold recovery | % | 50.0 | 48.5 | 48.1 | 47.4 | |||||||
| Silver recovery | % | 68.2 | 71.6 | 68.2 | 66.5 | |||||||
| Combined unit operating costs^2,3^ | /tonne | 10.20 | 9.88 | 9.50 | 9.44 | 7.90 - 9.70 | 8.30 - 10.25 | |||||
| ^1^ Reported tonnes and grade for ore mined are estimates based on mine plan assumptions and may not reconcile fully to ore milled. | ||||||||||||
| ^2^^^Reflects combined mine, mill and general and administrative ("G&A") costs per tonne of ore milled. Reflects the deduction of expected capitalized stripping costs. | ||||||||||||
| ^3^ Combined unit costs is a non-IFRS financial performance measure with no standardized definition under IFRS. For further information and a detailed reconciliation, please see the discussion under the "Non-IFRS Financial Reporting Measures" section of this MD&A. |
All values are in US Dollars.
Ore mined at our Constancia mine during the fourth quarter of 2019 was 10% higher compared to the same period in 2018, which was partially offset by stockpiling of lower grade ore in line with the mine plan. Milled copper grades in the fourth quarter were approximately 13% lower than the same period in 2018 as lower grade phases continue to be mined, in line with the mine plan. Mill throughput in the fourth quarter of 2019 was 2% lower compared to the same period in 2018 to comply with full year permit limitations.
Copper and gold recoveries in the fourth quarter of 2019 improved by 1% and 3%, respectively, compared to the same period in 2018. While recoveries of individual metals vary from quarter to quarter depending on the complexity and grade of the ore feed, we are seeing consistent results from ongoing recovery optimization initiatives. Highlights of the initiatives include the continued integration of an automated, advanced process control system and the installation of enhanced classification and flotation equipment in the grinding and bulk flotation circuits.
Combined mine, mill and G&A unit operating costs in the fourth quarter of 2019 were higher than the same period in 2018, reflecting lower ore throughput and higher mine and plant costs, partially offset by higher capitalized stripping costs.
| Contained metal in<br>concentrate produced | Three months ended | Year ended | Guidance | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Dec. 31, 2019 | Dec. 31, 2018 | Dec. 31, 2019 | Dec. 31, 2018 | Annual | |||||||||
| 2019 | 2020 | ||||||||||||
| Copper | tonnes | 26,659 | 30,834 | 113,825 | 122,178 | 100,000 - 125,000 | 80,000 - 95,000 | ||||||
| Gold | oz | 5,007 | 7,522 | 19,723 | 24,189 | ||||||||
| Silver | oz | 631,774 | 750,747 | 2,504,769 | 2,729,859 | ||||||||
| Molybdenum | tonnes | 372 | 329 | 1,272 | 904 | 1,100 - 1,200 | 1,300 - 1,600 | ||||||
| Precious metals^1^ | oz | 14,033 | 18,247 | 55,506 | 63,187 | 45,000 - 55,000 | 45,000 - 55,000 | ||||||
| ^1^ Precious metals production includes gold and silver production on a gold-equivalent basis. For 2018 and 2019, silver is converted to gold at a ratio of 70:1. For 2020 guidance, silver is converted to gold at a ratio of 89:1. |
In the fourth quarter of 2019 production of copper was lower than the same period in 2018, mainly due to lower copper grade mined and milled, as per the mine plan, partially offset by higher mill throughput and copper recoveries as discussed above. Production of gold and silver during the fourth quarter of 2019 was similarly lower than the same period in 2018 due to lower grades in line with the mine plan. Molybdenum production was higher compared to the same period in 2018 due to higher head grades. Year-over-year production variances in 2019 were driven by the same factors as the fourth quarter variances versus prior year.
Full year production of copper was within 2019 guidance ranges, while precious metals and molybdenum production exceeded the guidance ranges.
Peru Cash Cost and Sustaining Cash Cost
| Three months ended | Year ended | |||||||
|---|---|---|---|---|---|---|---|---|
| Dec. 31, 2018 | Dec. 31, 2019 | Dec. 31, 2018 | ||||||
| Cash cost per pound of copper produced, net of by-product credits^1^ | /lb | 1.66 | 1.31 | 1.41 | 1.36 | |||
| Sustaining cash cost per pound of copper produced, net of by-product credits^1^ | /lb | 2.47 | 1.66 | 1.90 | 1.59 | |||
| ^1^Cash cost and sustaining cash costs per pound of copper produced, net of by-product credits, are not recognized under IFRS. For more detail on these non-IFRS financial performance measures, please see the discussion under the "Non-IFRS Financial Performance Measures" section of this MD&A. |
All values are in US Dollars.
Cash cost per pound of copper produced, net of by-product credits, for the three months and year ended December 31, 2019 were $1.66 and $1.41, respectively. This represents an increase of 27% and 4%, respectively, from the same period in 2018 primarily due to lower copper production, in line with the mine plan, higher combined operating costs, partially offset by lower treatment and refining charges.
Sustaining cash costs per pound of copper produced, net of by-product credits, for the three months and year ended December 31, 2019 were $2.47 and $1.90, respectively. This represents an increase of 49% and 19%, respectively, from the same periods in 2018 primarily due to higher sustaining costs in heavy civil works and capitalized stripping costs, as well as timing of payments on long-term community agreements and leases.
Metal Sold
| Three months ended | Year ended | ||||||||
|---|---|---|---|---|---|---|---|---|---|
| Dec. 31, 2019 | Dec. 31, 2018 | Dec. 31, 2019 | Dec. 31, 2018 | ||||||
| Payable metal in concentrate | |||||||||
| Copper | tonnes | 28,430 | 31,252 | 106,184 | 116,449 | ||||
| Gold | oz | 4,824 | 7,262 | 18,956 | 20,420 | ||||
| Silver | oz | 666,839 | 672,756 | 2,452,496 | 2,255,700 | ||||
| Molybdenum | tonnes | 199 | 447 | 1,186 | 819 |
Copper concentrate inventory levels in Peru returned to normal levels in the fourth quarter of 2019 following disruptions in the third quarter of 2019 related to protests against the granting of a permit for another company's mining project.
MANITOBA OPERATIONS REVIEW
Mines
| Three months ended | Year ended | ||||||||
|---|---|---|---|---|---|---|---|---|---|
| Dec. 31, 2019 | Dec. 31, 2018 | Dec. 31, 2019 | Dec. 31, 2018 | ||||||
| 777 | |||||||||
| Ore | tonnes | 269,342 | 244,613 | 1,109,782 | 966,567 | ||||
| Copper | % | 1.17 | 1.76 | 1.37 | 1.47 | ||||
| Zinc | % | 3.33 | 3.46 | 3.22 | 4.43 | ||||
| Gold | g/tonne | 1.52 | 1.61 | 1.61 | 1.83 | ||||
| Silver | g/tonne | 18.52 | 24.37 | 18.67 | 28.34 | ||||
| Lalor | |||||||||
| Ore | tonnes | 390,140 | 317,616 | 1,536,780 | 1,260,241 | ||||
| Copper | % | 0.80 | 0.82 | 0.75 | 0.74 | ||||
| Zinc | % | 6.20 | 6.80 | 6.36 | 6.25 | ||||
| Gold | g/tonne | 2.63 | 2.09 | 2.16 | 2.19 | ||||
| Silver | g/tonne | 28.38 | 24.66 | 25.51 | 25.39 | ||||
| Reed^1^ | |||||||||
| Ore | tonnes | - | - | - | 326,363 | ||||
| Copper | % | - | - | - | 3.35 | ||||
| Zinc | % | - | - | - | 0.90 | ||||
| Gold | g/tonne | - | - | - | 0.77 | ||||
| Silver | g/tonne | - | - | - | 9.08 | ||||
| Total Mines | |||||||||
| Ore | tonnes | 659,482 | 562,229 | 2,646,562 | 2,553,171 | ||||
| Copper | % | 0.95 | 1.23 | 1.01 | 1.35 | ||||
| Zinc | % | 5.03 | 5.35 | 5.04 | 4.87 | ||||
| Gold | g/tonne | 2.18 | 1.88 | 1.93 | 1.87 | ||||
| Silver | g/tonne | 24.35 | 24.53 | 22.64 | 24.42 | ||||
| ^1^ Mining activities at Reed were completed in August 2018. Comparable 2018 numbers include 100% of Reed mine production. Hudbay purchased 30% of the Reed ore production from its joint venture partner on market-based terms. | |||||||||
| Unit Operating Costs^1,2^ | Three months ended | Year ended | |||||||
| --- | --- | --- | --- | --- | --- | --- | --- | --- | |
| Dec. 31, 2018 | Dec. 31, 2019 | Dec. 31, 2018 | |||||||
| Mines | |||||||||
| 777 | C/tonne | 82.35 | 87.29 | 79.02 | 80.59 | ||||
| Lalor | C/tonne | 99.90 | 110.98 | 104.42 | 94.73 | ||||
| Reed | C/tonne | - | - | - | 72.62 | ||||
| Total Mines | C/tonne | 92.73 | 100.67 | 93.77 | 87.11 | ||||
| ^1^ Reflects costs per tonne of ore mined. | |||||||||
| ^2^Unit costs is a non-IFRS financial performance measure with no standardized definition under IFRS. For further information and a detailed reconciliation, please see the discussion under the "Non-IFRS Financial Reporting Measures" section of this MD&A. |
All values are in US Dollars.
Ore mined at our Manitoba operations during the fourth quarter of 2019 increased by 17% compared to the same period in 2018 due to higher production volumes at both 777 and Lalor.
Overall, copper, zinc, and silver grades were 23%, 6%, and 1%, lower, respectively, in the fourth quarter of 2019 compared to the same period of 2018 while gold grades were 16% higher. Metal grade variances are due to planned stope sequencing based on life of mine production schedules at 777 and Lalor. Higher gold grades at Lalor were due to mining of gold enriched base metal stopes in the fourth quarter of 2019.
Ore mined at 777 in the fourth quarter of 2019 increased by 10%, compared to the same period last year. The higher production is attributable to implementation of management systems designed to improve mobile equipment availability and key performance indicators for drilling, blasting and backfilling processes. Unit operating costs for 777 decreased by 6% for the fourth quarter of 2019 when compared to the same period in 2018 due to higher production volumes.
Ore mined at Lalor in the fourth quarter of 2019 increased by 23% compared to the same period last year. The higher production is attributable to a number of initiatives implemented as part of the production ramp up to 4,500 tonnes per day, including mine design changes, contract strategies, asset integrity and work management programs. Unit operating costs for Lalor for the fourth quarter of 2019 decreased by 10% compared to the same period in 2018 due to higher production volumes.
Total ore mined at our Manitoba operations during the full year was 4% higher than 2018 due to higher production volumes at both 777 and Lalor, partially offset by the closure of the Reed mine in August 2018. Copper and silver grades were 25% and 7% lower, respectively, compared to 2018. Zinc and gold grades were both 3% higher in 2019 compared to 2018. Total mine unit costs were 8% higher than in 2018 due to spending associated with the ramp up to 4,500 tonnes per day at Lalor, which were partially offset by lower costs at 777.
Processing Facilities
| Three months ended | Year ended | ||||||||
|---|---|---|---|---|---|---|---|---|---|
| Dec. 31, 2019 | Dec. 31, 2018 | Dec. 31, 2019 | Dec. 31, 2018 | ||||||
| Flin Flon Concentrator | |||||||||
| Ore | tonnes | 374,529 | 259,569 | 1,362,006 | 1,423,744 | ||||
| Copper | % | 1.11 | 1.73 | 1.27 | 1.90 | ||||
| Zinc | % | 4.05 | 3.55 | 3.78 | 3.71 | ||||
| Gold | g/tonne | 1.75 | 1.62 | 1.72 | 1.63 | ||||
| Silver | g/tonne | 20.56 | 24.79 | 19.84 | 23.48 | ||||
| Copper concentrate | tonnes | 15,640 | 16,618 | 65,508 | 107,972 | ||||
| Concentrate grade | % Cu | 23.18 | 24.42 | 23.27 | 23.11 | ||||
| Zinc concentrate | tonnes | 25,482 | 15,510 | 86,329 | 89,289 | ||||
| Concentrate grade | % Zn | 51.09 | 49.75 | 50.92 | 49.74 | ||||
| Copper recovery | % | 86.9 | 90.4 | 88.0 | 92.3 | ||||
| Zinc recovery | % | 85.8 | 83.7 | 85.5 | 84.2 | ||||
| Gold recovery | % | 56.1 | 62.8 | 59.4 | 64.5 | ||||
| Silver recovery | % | 49.2 | 54.8 | 50.8 | 60.2 | ||||
| Contained metal in concentrate produced | |||||||||
| Copper | tonnes | 3,625 | 4,059 | 15,241 | 24,947 | ||||
| Zinc | tonnes | 13,018 | 7,717 | 43,962 | 44,415 | ||||
| Precious metals^1^ | oz | 13,573 | 10,116 | 51,012 | 57,227 | ||||
| Stall Concentrator | |||||||||
| Ore | tonnes | 310,622 | 313,995 | 1,290,300 | 1,201,466 | ||||
| Copper | % | 0.80 | 0.84 | 0.73 | 0.72 | ||||
| Zinc | % | 6.24 | 6.83 | 6.39 | 6.38 | ||||
| Gold | g/tonne | 2.60 | 2.09 | 2.13 | 2.15 | ||||
| Silver | g/tonne | 28.12 | 24.58 | 25.48 | 25.27 | ||||
| Copper concentrate | tonnes | 10,930 | 11,498 | 40,856 | 37,047 | ||||
| Concentrate grade | % Cu | 19.56 | 20.39 | 19.86 | 20.04 | ||||
| Zinc concentrate | tonnes | 35,173 | 38,296 | 147,227 | 139,268 | ||||
| Concentrate grade | % Zn | 49.96 | 51.42 | 51.04 | 51.10 | ||||
| Copper recovery | % | 85.9 | 88.6 | 85.9 | 85.7 | ||||
| Zinc recovery | % | 90.7 | 91.9 | 91.1 | 92.8 | ||||
| Gold recovery | % | 61.1 | 57.1 | 56.8 | 57.6 | ||||
| Silver recovery | % | 62.9 | 60.7 | 60.4 | 59.2 | ||||
| Contained metal in concentrate produced | |||||||||
| Copper | tonnes | 2,138 | 2,345 | 8,113 | 7,425 | ||||
| Zinc | tonnes | 17,574 | 19,691 | 75,144 | 71,173 | ||||
| Precious metals^1^ | oz | 18,394 | 14,184 | 59,394 | 55,961 | ||||
| ^1^ Precious metals production includes gold and silver production on a gold-equivalent basis. Silver is converted to gold at a ratio of 70:1. |
| Unit Operating Costs^1^ | Three months ended | Year ended | Guidance | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Dec. 31, 2018 | Dec. 31, 2019 | Dec. 31, 2018 | Annual | |||||||||
| 2019 | 2020 | |||||||||||
| Concentrators | ||||||||||||
| Flin Flon | C/tonne | 22.90 | 35.13 | 22.91 | 25.29 | |||||||
| Stall | C/tonne | 29.31 | 27.23 | 26.47 | 26.71 | |||||||
| Combined mine/mill unit operating costs^2,3^ | ||||||||||||
| Manitoba | C/tonne | 128 | 143 | 134 | 130 | 115 - 135 | 130 - 140 | |||||
| ^1^ Reflects costs per tonne of milled ore. | ||||||||||||
| ^2^Reflects combined mine, mill and G&A costs per tonne of milled ore. Comparable 2018 numbers include the cost of ore purchased from our joint venture partner at Reed mine. | ||||||||||||
| ^3^Combined unit costs is a non-IFRS financial performance measure with no standardized definition under IFRS. For further information and a detailed reconciliation, please see the discussion under the "Non-IFRS Financial Reporting Measures" section of this MD&A. |
All values are in US Dollars.
Ore processed in Flin Flon in the fourth quarter of 2019 was 44% higher than the same period of 2018 due to increased production from the 777 mine and mine feed from Lalor. Copper, gold and silver recoveries in the fourth quarter of 2019 were 4%, 11%, and 10% lower, respectively, compared with the same period in 2018 due to lower copper head grades. Unit operating costs at the Flin Flon concentrator were 35% lower in the fourth quarter of 2019 compared to the same period in 2018 due to higher plant throughput.
Ore processed in 2019 in Flin Flon was 4% lower than in 2018 due to the Reed mine closure, partially offset by increased production from the 777 mine. Copper, gold and silver recoveries for the full year declined as a result of lower copper head grades. Full year operating costs at the Flin Flon concentrator were 9% lower in 2019 due to higher plant efficiencies.
The Stall concentrator ore throughput for the fourth quarter was in line with the same period in 2018. Copper and zinc recoveries in the fourth quarter of 2019 were 3% and 1% lower, respectively, compared with the same period in 2018 due to the head grades milled. Gold and silver recoveries in the fourth quarter of 2019 were 7% and 4% higher, respectively, compared with the same period in 2018. Unit operating costs were 8% higher in the fourth quarter of 2019 compared to the same period in 2018 due to higher costs in the grinding circuit. Ore processed for the full year in 2019 at Stall was 7% higher than 2018 due to ongoing operational and maintenance improvements. Full year unit operating costs at the Stall concentrator were also in line with the prior year.
Manitoba combined mine, mill and G&A unit operating costs in the fourth quarter of 2019 were 10% lower than in the same period in 2018 mainly due to Lalor's ramp up, with fourth quarter unit costs well below the levels reported in the first half of 2019.
| Manitoba contained metal in concentrate produced^1,2^ | Three months ended | Year ended | Guidance | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Dec. 31, 2019 | Dec. 31, 2018 | Dec. 31, 2019 | Dec. 31, 2018 | Annual | |||||||||
| 2019 | 2020 | ||||||||||||
| Copper | tonnes | 5,763 | 6,404 | 23,354 | 32,372 | 22,000 - 25,000 | 18,000 - 22,000 | ||||||
| Gold | oz | 27,705 | 20,529 | 94,969 | 95,693 | ||||||||
| Silver | oz | 298,363 | 263,937 | 1,080,561 | 1,224,610 | ||||||||
| Zinc | tonnes | 30,592 | 27,408 | 119,106 | 115,588 | 100,000 - 115,000 | 105,000 - 125,000 | ||||||
| Precious metals^3^ | oz | 31,967 | 24,300 | 110,406 | 113,188 | 105,000 - 125,000 | 110,000 - 135,000 | ||||||
| ^1^Includes 100% of Reed mine production. | |||||||||||||
| ^2^Metal reported in concentrate is prior to deductions associated with smelter terms. | |||||||||||||
| ^3^Precious metals production includes gold and silver production on a gold-equivalent basis. For 2018 and 2019, silver is converted to gold at a ratio of 70:1. For 2020 guidance, silver is converted to gold at a ratio of 89:1. |
In the fourth quarter of 2019, copper production was 10% lower compared to the same period in 2018 due to the lower copper head grades at 777, partially offset by increased production at 777 and Lalor. Gold, silver, and zinc production increased by 35%, 13%, and 12%, respectively, in the fourth quarter of 2019. Annual guidance for all metals was achieved, with zinc production exceeding the upper range of guidance.
*Mining activities in Reed were completed in August 2018
Zinc Plant
| Zinc Production | Three months ended | Year ended | Guidance | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Dec. 31, 2019 | Dec. 31, 2018 | Dec. 31, 2019 | Dec. 31, 2018 | Annual | |||||||||
| 2019 | 2020 | ||||||||||||
| Zinc Concentrate Treated | |||||||||||||
| Domestic | tonnes | 58,884 | 59,838 | 217,484 | 220,960 | ||||||||
| Refined Metal Produced | |||||||||||||
| Domestic | tonnes | 27,816 | 26,885 | 103,340 | 102,053 | 95,000 - 105,000 | 100,000 - 112,000 | ||||||
| Unit Operating Costs | Three months ended | Year ended | Guidance | ||||||||||
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | |
| Dec. 31, 2018 | Dec. 31, 2019 | Dec. 31, 2018 | Annual | ||||||||||
| 2019 | 2020 | ||||||||||||
| Zinc Plant ^1,2^ | C/lb | 0.48 | 0.49 | 0.49 | 0.50 | 0.47 - 0.55 | 0.45 - 0.52 | ||||||
| ^1^ Zinc unit operating costs include G&A costs. | |||||||||||||
| ^2^ Zinc unit costs is a non-IFRS financial performance measure with no standardized definition under IFRS. For further information and a detailed reconciliation, please see the discussion under the "Non-IFRS Financial Reporting Measures" section of this MD&A. |
All values are in US Dollars.
Production of cast zinc in the fourth quarter of 2019 and full year was higher than the same periods in 2018 and full year production was within our annual guidance range. Operating costs per pound of zinc metal produced in the fourth quarter of 2019 and full year were in line with the same periods in 2018 and full year operating costs were within our annual guidance range.
Manitoba Cash Cost and Sustaining Cash Cost
| Three months ended | Year ended | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Dec. 31, 2018 | Dec. 31, 2019 | Dec. 31, 2018 | ||||||||||
| Cost per pound of copper produced | ||||||||||||
| Cash cost per pound of copper produced, net of by-product credits ^1^ | /lb | (0.76 | ) | (0.87 | ) | (0.18 | ) | (0.64 | ) | |||
| Sustaining cash cost per pound of copper produced, net of by-product credits ^1^ | /lb | 2.33 | 1.76 | 2.63 | 1.18 | |||||||
| Cost per pound of zinc produced | ||||||||||||
| Cash cost per pound of zinc produced, net of by-product credits ^1^ | /lb | 0.43 | 0.75 | 0.53 | 0.46 | |||||||
| Sustaining cash cost per pound of zinc produced, net of by-product credits ^1^ | /lb | 1.01 | 1.36 | 1.08 | 0.97 | |||||||
| ^1^ Cash cost and sustaining cash cost per pound of copper & zinc produced, net of by-product credits, are not recognized under IFRS. For more detail on this non-IFRS financial performance measure, please see the discussion under the "Non-IFRS Financial Performance Measures" section of this MD&A. |
All values are in US Dollars.
Cash cost per pound of copper produced, net of by-product credits, for the three and twelve months ended December 31, 2019 were negative $0.76 and negative $0.18, respectively. These costs were higher compared to the same period in 2018, primarily as a result of higher mining costs and lower by-product credits, partially offset by lower treatment and refining costs.
Sustaining cash cost per pound of copper produced, net of by-product credits, for the three and twelve months ended December 31, 2019 were $2.33 and $2.63, respectively. These costs were higher compared to the same period in 2018, primarily due to higher cash costs and higher sustaining capital expenditures.
Cash cost and sustaining cash cost per pound of zinc produced, net of by-product credits, in the fourth quarter of 2019 were lower than the same period last year as a result of higher by-product revenue and lower treatment refining costs, partially offset by higher mining costs and higher sustaining capital expenditures.
Metal Sold
| Three months ended | Year ended | ||||||||
|---|---|---|---|---|---|---|---|---|---|
| Dec. 31, 2019 | Dec. 31, <br>2018 | Dec. 31, 2019 | Dec. 31, <br>2018 | ||||||
| Payable metal in concentrate | |||||||||
| Copper | tonnes | 5,285 | 5,098 | 22,335 | 31,474 | ||||
| Gold | oz | 25,520 | 18,599 | 90,043 | 92,677 | ||||
| Silver | oz | 242,584 | 236,744 | 1,000,430 | 1,116,653 | ||||
| Zinc | tonnes | - | 5,259 | - | 12,593 | ||||
| Refined zinc | tonnes | 28,001 | 25,875 | 104,346 | 103,130 |
OUTLOOK
This outlook includes forward-looking information about our operations and financial expectations based on our expectations and outlook as of February 20, 2020. This outlook, including expected results and targets, is subject to various risks, uncertainties and assumptions, which may impact future performance and our achievement of the results and targets discussed in this section. For additional information on forward-looking information, refer to the "Forward-Looking Information" section of this MD&A. We may update our outlook depending on changes in metals prices and other factors. In addition to this section, refer to the "Operations Review" and "Financial Review" sections for additional details on our outlook for 2020. For information on our sensitivity to metals prices, refer below to the "Commodity Markets" and "Sensitivity Analysis" sections of this MD&A.
Material Assumptions
Our annual production and operating cost guidance, along with our annual capital and exploration expenditure forecasts and three-year production outlook are discussed in detail below.
Production Guidance
| Contained Metal in Concentrate^1^ | 2020 Guidance | Year ended<br>Dec. 31, 2019 | 2019 Guidance | |
|---|---|---|---|---|
| Manitoba | ||||
| Copper | tonnes | 18,000 - 22,000 | 23,354 | 22,000 - 25,000 |
| Zinc | tonnes | 105,000 - 125,000 | 119,106 | 100,000 - 115,000 |
| Precious metals^2^ | oz | 110,000 - 135,000 | 110,406 | 105,000 - 125,000 |
| Peru | ||||
| Copper | tonnes | 80,000 - 95,000 | 113,825 | 100,000 - 125,000 |
| Precious metals^2^ | oz | 45,000 - 55,000 | 55,506 | 45,000 - 55,000 |
| Molybdenum | tonnes | 1,300 - 1,600 | 1,272 | 1,100 - 1,200 |
| Total | ||||
| Copper | tonnes | 98,000 - 117,000 | 137,179 | 122,000 - 150,000 |
| Zinc | tonnes | 105,000 - 125,000 | 119,106 | 100,000 - 115,000 |
| Precious metals^2^ | oz | 155,000 - 190,000 | 165,912 | 150,000 - 180,000 |
| Molybdenum | tonnes | 1,300 - 1,600 | 1,272 | 1,100 - 1,200 |
| ^1^ Metal reported in concentrate is prior to refining losses or deductions associated with smelter terms. | ||||
| ^2^ Precious metals production includes gold and silver production on a gold-equivalent basis. For 2019, silver was converted to gold at a ratio of 70:1. For 2020 guidance, silver is converted to gold at a ratio of 89:1. |
On a consolidated basis, our copper and precious metals production met 2019 guidance and production of zinc and molybdenum exceeded 2019 guidance ranges. Production of copper benefited from increased throughput and recoveries at Constancia despite expected lower grades year-over-year. Zinc production increased over 2018 levels despite lower zinc grades at both Lalor and 777 as Lalor completed its ramp up to 4,500 tonnes per day and the 777 mine implemented operational improvements.
| 3-Year Production Outlook<br>Contained Metal in Concentrate^1^ | 2020 Guidance | 2021 Guidance | 2022 Guidance | |
|---|---|---|---|---|
| Manitoba^2^ | ||||
| Copper | tonnes | 18,000 - 22,000 | 19,000 - 23,000 | 13,000 - 15,000 |
| Zinc | tonnes | 105,000 - 125,000 | 115,000 - 140,000 | 75,000 - 90,000 |
| Precious metals^3^ | oz | 110,000 - 135,000 | 110,000 - 135,000 | 150,000 - 190,000 |
| Peru | ||||
| Copper | tonnes | 80,000 - 95,000 | 80,000 - 100,000 | 100,000 - 125,000 |
| Precious metals^3^ | oz | 45,000 - 55,000 | 85,000 - 100,000 | 105,000 - 130,000 |
| Molybdenum | tonnes | 1,300 - 1,600 | 1,000 - 1,200 | 1,500 - 1,800 |
| Total | ||||
| Copper | tonnes | 98,000 - 117,000 | 99,000 - 123,000 | 113,000 - 140,000 |
| Zinc | tonnes | 105,000 - 125,000 | 115,000 - 140,000 | 75,000 - 90,000 |
| Precious metals^3^ | oz | 155,000 - 190,000 | 195,000 - 235,000 | 255,000 - 320,000 |
| Molybdenum | tonnes | 1,300 - 1,600 | 1,000 - 1,200 | 1,500 - 1,800 |
| ^1^ Metal reported in concentrate is prior to refining losses or deductions associated with smelter terms. | ||||
| ^2^ Manitoba production guidance assumes the 777 mine is depleted in the second quarter of 2022, resulting in lower copper and zinc production after its closure. | ||||
| ^3^ Precious metals production includes gold and silver production on a gold-equivalent basis. Silver is converted to gold at a ratio of 89:1. |
In 2020, consolidated production of copper contained in concentrate is forecast to decrease by approximately 22%^1^ compared to 2019 production, primarily due to planned lower copper grades at Constancia, in line with the mine plan. However, with the addition of the higher-grade Pampacancha satellite deposit in Peru, total copper production is expected to increase by 18%^1^ from 2020 to 2022.
Production of zinc contained in concentrate in 2020 is forecast to be strong with the 2020 guidance range slightly higher than the range in 2019. That trend is expected to continue into 2021 with Lalor maintaining steady production at 4,500 tonnes per day and the Company continuing to maximize the output from the 777 mine as it nears the end of its mine life in the second quarter of 2022.
Consolidated production of precious metals contained in concentrate in 2020 is forecast to increase by approximately 4%^1^ compared to 2019 production, primarily due to higher precious metals production at Lalor from the planned mining of approximately 90,000 tonnes from the gold zones in 2020 as part of stope sequencing in preparation for the restart of the New Britannia gold mill. By 2022, consolidated precious metals production is expected to increase by 67%^1^ following the restart of the New Britannia gold mill in Manitoba and the addition of the Pampacancha high-grade satellite deposit in Peru.
^________________________________________1^ Year-over-year forecast changes assume the mid-point of the respective guidance range is achieved.
24
Capital Expenditure Guidance
| Capital Expenditures1(in millions) | Year ended<br>Dec. 31, 2019 | 2019 Guidance |
|---|---|---|
| Sustaining capital | ||
| Manitoba2 | 126.3 | 100.0 |
| Peru3 | 84.9 | 95.0 |
| Total sustaining capital | 211.2 | 195.0 |
| Growth capital | ||
| Manitoba | 14.1 | 10.0 |
| Peru4 | 2.1 | 45.0 |
| Arizona5 | 36.4 | 40.0 |
| Total growth capital | 52.6 | 95.0 |
| Capitalized exploration | 15.7 | 15.0 |
| Total capital expenditures | 279.5 | 305.0 |
| 1 Excludes capitalized costs not considered to be sustaining or growth capital expenditures. | ||
| 2 Manitoba sustaining capital expenditures for the year ended December 31, 2019 include a new capitalized release related to sustaining capital expenditures of 14.3 million not included in 2019 annual guidance. Excluded from sustaining capital is the anticipated 20 million expected to be spent on improvements to the legacy Flin Flon tailings facilities, as described below. | ||
| 3 Includes capitalized stripping costs. | ||
| 4 Peru growth capital expenditures of 45.0 million in 2019 related to expected expenditures for developing the Pampacancha deposit and acquiring surface rights, which has been deferred to 2020. 2020 expected growth capital expenditures include costs associated with project development and acquiring the surface rights. Some additional capital costs remain outstanding in recognition of current uses of land and the Company intends to enter into agreements to address these matters prior to commencing mining activities. | ||
| 5 Arizona spending includes capitalized costs associated with the Rosemont and Mason projects. Rosemont's 2019 guidance was revised to include 20 million of project costs and 20 million of non-project costs as announced on November 11, 2019. |
All values are in US Dollars.
Total planned sustaining capital expenditures in 2020 are expected to slightly decrease from 2019 levels due to lower spending in Manitoba, offset by higher planned spending in Peru primarily related to higher capitalized stripping costs. In Manitoba, we continue to implement improvements on the legacy Flin Flon tailings impoundment area, in line with higher industry-wide standards for tailings dam safety following the failure of other tailings dams in recent years. This spending is expected to be approximately $20 million per year from 2020 to 2022, but these expenditures will not impact sustaining capital expenditures since they are associated with the updated decommissioning and restoration liability, and therefore, will be accounted for as a drawdown of the liability.
Manitoba growth capital spending of $80 million relates to a significant portion of the New Britannia mill refurbishment costs as construction activities are on track to commence in the second quarter of 2020. The New Britannia mill refurbishment costs are expected to total approximately $115 million over 2020 and 2021, higher than the original estimate of approximately $95 million primarily due to the introduction of new instruments expected to further improve mill efficiency, as well as labour cost inflation and some cost escalation on equipment. The capital investment in the New Britannia mill offers high returns and a short payback period, based on current reserves at Lalor. Once the New Britannia gold mill is in operation by 2022, gold is expected to account for over 60% of revenues at Lalor with annual gold production expected to grow to approximately 140,000 ounces at a sustaining cash cost of approximately $450 per ounce over the first five years.
Peru growth capital of $70 million includes initial expenditures for developing the Pampacancha deposit and acquiring surface rights from the local community, but excludes the costs associated with recognizing the current uses of the land by certain community members, which are subject to pending agreements with those individuals. Our patient approach to community negotiations has proven successful, demonstrating our strong relationships with the neighbouring communities and positioning us well to unlock future value on our other regional growth targets in Peru. Arizona spending of $20 million is intended to support ongoing matters on the Rosemont project and advance preliminary economic studies at the Mason project in Nevada.
Exploration Guidance
| Exploration Expenditures(in millions) | Year ended | ||||
|---|---|---|---|---|---|
| Dec. 31, 2019 | 2019 Guidance | ||||
| Peru | 17.1 | 20.0 | |||
| Manitoba | 22.9 | 10.0 | |||
| Generative and other | 6.5 | 10.0 | |||
| Total exploration expenditures | 46.5 | 40.0 | |||
| Capitalized spending | ) | (15.7 | ) | (15.0 | ) |
| Total exploration expense | 30.8 | 25.0 |
All values are in US Dollars.
Our exploration portfolio of owned or optioned mineral properties consists of approximately 850,000 hectares across Canada, Peru, the United States and Chile. Our 2020 exploration budget of $25 million, which includes option payments, will be focused on exploration near existing processing infrastructure in Peru and Manitoba.
In Peru, we continue permitting, community relations and technical activities required to access and conduct drilling activities on properties near Constancia. In 2020, drilling activities will be focused on the Llaguen greenfield project located 56 kilometres northeast of the city of Trujillo, in northern Peru, and on the Quehuincha North skarn target located approximately 11 kilometres from the Constancia mill, where we have recently obtained a drilling permit and have an exploration agreement in place with the local community. At Lalor, we expect to conduct additional underground drilling, continuing efforts to convert existing mineral resources to reserves and to identify additional gold resources at underground targets. In addition, surface drilling planned for 2020 in Manitoba will aim to confirm an initial mineral resource estimate for the gold and copper-gold mineralization intersected in 2019 at the 1901 Deposit.
Unit Operating Cost Guidance
| Combined Mine/Mill Unit Operating Cost^1,2^ | 2020 Guidance | Year ended<br>Dec. 31, 2019 | 2019 Guidance | |
|---|---|---|---|---|
| Manitoba | C$/tonne | 130 - 140 | 134 | 115 - 135 |
| Peru | $/tonne | 8.30 - 10.25 | 9.50 | 7.90 - 9.70 |
| ^1^ Reflects combined mine, mill and G&A costs per tonne of milled ore. Peru costs reflect the deduction of expected capitalized stripping costs. | ||||
| ^2^ Combined unit costs are non-IFRS financial performance measures with no standardized definition under IFRS. For further information and a detailed reconciliation, please see the discussion under the "Non-IFRS Financial Reporting Measures" section of this MD&A. |
Combined unit costs for Manitoba in 2020 are forecast to be similar to 2019 levels as Lalor's costs have normalized after the ramp up to 4,500 tonnes per day. Combined unit costs for Peru in 2020 are also expected to be similar to 2019 levels as the plant continues to operate at full capacity.
| Flin Flon Zinc Plant Guidance | 2020 Guidance | Year ended<br>Dec. 31, 2019 | 2019 Guidance | |
|---|---|---|---|---|
| Zinc metal produced | tonnes | 100,000 - 112,000 | 103,340 | 95,000 - 105,000 |
| Unit operating costs^1^ | C$/lb | 0.45 - 0.52 | 0.49 | 0.47 - 0.55 |
| ^1^ Unit costs are non-IFRS financial performance measures with no standardized definition under IFRS. For further information and a detailed reconciliation, please see the discussion under the "Non-IFRS Financial Reporting Measures" section of this MD&A. |
Metal production in any particular quarter may vary from the implied annual guidance rate based on variations in grades and recoveries due to the areas mined in that quarter, the timing of planned maintenance, and other factors. Mining and processing costs in any particular quarter can also vary from the annual guidance rate above based on a variety of factors, including the scheduling of maintenance events and seasonal heating requirements, particularly in Manitoba. In Peru, the semi-annual mill maintenance shutdowns at Constancia typically occur during the second and fourth quarters each year. In Manitoba, we expect to perform maintenance on the Stall concentrator during the second quarter of 2020 and on the Lalor mine hoist facilities in the third quarter of 2020.
Commodity Markets
Our 2020 operational and financial performance will be influenced by a number of factors. At the macro-level, the general performance of the Chinese, North American and global economies will influence the demand for our products. The realized prices we achieve in the commodity markets significantly affect our financial performance. Our general expectations regarding metals prices and foreign exchange rates are included below and in the "Sensitivity Analysis" section of this MD&A.
In addition to our production, financial performance is directly affected by a number of factors, including metals prices, foreign exchange rates, and input costs, including energy prices. Average prices for copper and zinc declined significantly in 2019 from 2018 as concerns about the trade dispute between the U.S. and China, and the resulting drag on Chinese economic growth, outweighed reasonable supportive fundamentals in the physical copper and zinc markets.
We have developed the following market analysis from various information sources including analyst and industry experts.
Copper
In 2019, the London Metal Exchange ("LME") copper price averaged $2.72 per pound ("/lb"), with prices ranging between $2.51/lb and $2.98/lb. For the second year in a row, copper refined metal markets remained relatively balanced although additions to the smelting and refining capacity during 2019 pushed the annual benchmark for treatment and refining charges to a cyclical low of $62.62 per tonne for 2020. After a rally in copper prices following the December 2019 announcement of a phase 1 trade agreement between the United States and China, copper prices dropped approximately 12% to the $2.50/lb - $2.60/lb range in January due to the uncertainty and economic disruption caused by the Covid-19 coronavirus ("coronavirus") outbreak in China.
Global refined copper markets were initially forecast to remain relatively balanced in 2020 with most market participants projecting prices to average between $2.75/lb and $3.00/lb. The coronavirus outbreak in China will reduce both smelter and refinery utilization and copper fabrication plant production and increase spot concentrate treatment and refining charges in the first quarter of 2020 but once the Chinese workforce returns to work and industrial production returns to normal, copper prices are expected to recover.
Over the longer term there are several macro economic trends which are expected to increase the demand for copper. The drive towards the goals of greater renewable energy (wind, hydro, solar) and carbon neutrality in the world's economy are expected to result in stronger demand for copper because the structural changes necessary to deliver on these goals are very copper intensive. In addition, the adoption of carbon taxes and associated trade tariffs are projected to dramatically increase the production cost of aluminium and its selling price relative to copper because copper has a much smaller carbon footprint per pound of production. As all metal producers are increasingly forced to pay a price for their carbon emissions, the resultant decline in the copper/aluminium price ratio should make copper relatively more competitive in many applications which will drive substitution from aluminium to copper and increase copper demand.
Strong future demand for copper will necessitate the development of new mines from the world's existing inventory of undeveloped deposits which are inherently higher cost than those mines currently in production due to their lower grades, higher strip ratios and higher development costs. The end result should be a prolonged period of higher copper prices.
Zinc
In 2019, the LME zinc price averaged $1.16/lb, with prices ranging from $1.00/lb to $1.37/lb. The zinc metal market has been in a structural deficit for the past several years and this trend continued in 2019 when demand outstripped supply by approximately 0.5 million tonnes.
For the next several years, the zinc metal market is anticipated to be in relative balance and with zinc metal inventories at historically low levels after many years of supply versus demand deficits. Zinc prices over the next few years are expected to be supported in the range of $1.00/lb - $1.20/lb. As has been the case with all commodities, the coronavirus outbreak in China caused a dramatic drop in the price of zinc in early 2020 but most observers expect prices to rebound once the situation in China normalized.
The recent annual surpluses in zinc concentrate production over smelter demand are expected to persist well in 2022. This smelter bottleneck propelled zinc concentrate treatment charges for annual contracts to $245 per tonne in 2019 and is expected to push 2020 treatment charges close to $300 per tonne.
Sensitivity Analysis
The following table displays the estimated impact of changes in metals prices and foreign exchange rates on our 2020 net profit, earnings per share and operating cash flow, assuming that our operational performance is consistent with our guidance for 2020^2^.The effects of a given change in an assumption are isolated.
| Change of 10% | Impact on | Impact on | Impact on Operating CF | |
|---|---|---|---|---|
| represented by: | Profit | EPS^1^ | before WC changes | |
| Metals Prices | ||||
| Copper price2 | +/- US$0.28/lb | +/- US$40M | +/- 0.15 | +/- US$62M |
| Zinc price | +/- US$0.11/lb | +/- US$12M | +/- 0.04 | +/- US$27M |
| Gold price3 | +/- US$150/oz | +/- US$7M | +/- 0.03 | +/- US$15M |
| Exchange Rates 4 | ||||
| C/US | +/- 0.13 | +/- US$25M | +/- 0.09 | +/- US$32M |
| 1 Based on 261.3 million common shares outstanding as at December 31, 2019. | ||||
| 2 Quotational period hedging program neutralizes provisional pricing adjustments. | ||||
| 3 Gold price sensitivity also includes an impact of a +/- 10% change in the silver price (2020 assumption: 16.00/oz of silver). | ||||
| 4 Change in profit from operational performance only, does not include change in profit arising from translation of balance sheet accounts. |
All values are in US Dollars.
^2^Year-over-year forecasted changes to unit costs assume the mid-point of the respective guidance range is achieved.
FINANCIAL REVIEW
Financial Results
In the fourth quarter of 2019, we recorded a net loss of $1.5 million compared to a loss of $3.5 million for the same period in 2018, an increase in profit of $2.0 million.
For the full year in 2019, we recorded a net loss of $343.8 million compared to a profit of $85.4 million in the same period in 2018, a decrease in profit of $429.2 million.
The following table provides further details on these variances:
| (in $ millions) | Three months ended<br>December 31, 2019 | ||||
|---|---|---|---|---|---|
| Year ended<br>December 31, 2019 | |||||
| (Decrease) increase in components of profit or loss: | |||||
| Revenues | (27.3 | ) | (235.0 | ) | |
| Cost of sales | |||||
| Mine operating costs | (10.6 | ) | 24.6 | ||
| Depreciation and amortization | (11.7 | ) | (11.9 | ) | |
| Selling and administrative expenses | 3.0 | (8.9 | ) | ||
| Other operating expenses | 1.9 | (32.0 | ) | ||
| Impairment | - | (322.2 | ) | ||
| Net finance expense | (11.6 | ) | (36.0 | ) | |
| Other | (3.7 | ) | (2.2 | ) | |
| Tax | 62.0 | 194.4 | |||
| (Decrease) increase in profit for the period | 2.0 | (429.2 | ) |
Revenue
Revenue for the fourth quarter of 2019 was $324.5 million, $27.3 million lower than the same period in 2018, primarily as a result of lower metal prices and sales volumes for copper and zinc.
Full year revenue in 2019 was $1,237.4 million, $235.0 million lower than 2018, due to the same reasons as described for the quarterly variance above.
| (in $ millions) | Three months ended<br>December 31, 2019 | Year ended<br>December 31, 2019 |
|---|---|---|
| Metals prices^1^ | ||
| Lower copper prices | (6.1) | (63.2) |
| Lower zinc prices | (5.2) | (34.9) |
| (Lower) higher gold prices | (1.5) | 6.3 |
| Higher silver prices | 3.3 | 2.0 |
| Sales volumes | ||
| Lower copper sales volumes | (15.6) | (120.1) |
| Lower zinc sales volumes | (8.7) | (34.9) |
| Higher (lower) gold sales volumes | 7.4 | (5.3) |
| Higher silver sales volumes | - | 2.6 |
| Other | ||
| (Lower) higher derivative mark-to-market gains | (0.6) | 0.7 |
| Molybdenum and other volume and pricing differences | (9.3) | 7.2 |
| Variable consideration adjustments | 2.8 | (13.7) |
| Effect of lower treatment and refining charges | 6.2 | 18.3 |
| Decrease in revenue in 2019 compared to 2018 | (27.3) | (235.0) |
| ^1^ See discussion below for further information regarding metals prices. |
Our revenue by significant product type is summarized below:
| Three months ended | Year ended | |||||||
|---|---|---|---|---|---|---|---|---|
| (in $ millions) | Dec. 31, 2019 | Dec. 31, 2018 | Dec. 31, 2019 | Dec. 31, 2018 | ||||
| Copper | 201.7 | 225.9 | 786.3 | 963.1 | ||||
| Zinc | 72.1 | 86.5 | 284.9 | 357.4 | ||||
| Gold | 45.1 | 33.4 | 152.4 | 149.0 | ||||
| Silver | 24.5 | 21.4 | 89.7 | 85.8 | ||||
| Molybdenum | 4.7 | 11.9 | 31.3 | 21.0 | ||||
| Other metals | 1.3 | 1.4 | 4.8 | 4.7 | ||||
| Gross revenue | 349.4 | 380.5 | 1,349.4 | 1,581.0 | ||||
| Variable consideration adjustments | - | (2.8 | ) | (16.3 | ) | (2.6 | ) | |
| Pricing and volume adjustments^1^ | (3.7 | ) | 1.5 | (12.1 | ) | (4.1 | ) | |
| Treatment and refining charges | (21.2 | ) | (27.4 | ) | (83.6 | ) | (101.9 | ) |
| Revenue | 324.5 | 351.8 | 1,237.4 | 1,472.4 | ||||
| ^1^Pricing and volume adjustments represents mark-to-market adjustments on provisionally prices sales, realized and unrealized changes to fair value for non-hedge derivative contracts and adjustments to originally invoiced weights and assays. |
For further detail on variable consideration adjustments, refer to note 18 of our consolidated financial statements.
Realized sales prices
This measure is intended to enable management and investors to understand the average realized price of metals sold to third parties in each reporting period. The average realized price per unit sold does not have any standardized meaning prescribed by IFRS, is unlikely to be comparable to similar measures presented by other issuers, and should not be considered in isolation or a substitute for measures of performance prepared in accordance with IFRS.
For sales of copper, gold and silver we may enter into non-hedge derivatives ("QP hedges") which are intended to manage the provisional pricing risk arising from quotational period terms in concentrate sales agreements. The QP hedges are not removed from the calculation of realized prices. We expect that gains and losses on QP hedges will offset provisional pricing adjustments on concentrate sales contracts.
Our realized prices for the fourth quarter and full year in 2019 and 2018, respectively, are summarized below:
| Realized prices^1^ for the | LME YTD<br>2019^2^ | Realized prices^1^ for the | |||||
|---|---|---|---|---|---|---|---|
| Year ended | |||||||
| LME QTD<br>2019^2^ | Dec. 31, 2019 | Dec. 31, 2018 | Dec. 31, 2019 | Dec. 31, 2018 | |||
| Prices | |||||||
| Copper | 2.67 | 2.69 | 2.77 | 2.72 | 2.73 | 2.93 | |
| Zinc3 | 1.08 | 1.17 | 1.25 | 1.16 | 1.24 | 1.39 | |
| Gold4 | 1,490 | 1,554 | 1,439 | 1,359 | |||
| Silver4 | 27.19 | 22.50 | 25.64 | 25.52 | |||
| Molybdenum5 | 6.37 | 12.17 | 11.03 | 12.06 | |||
| 1 Realized prices exclude refining and treatment charges and are on the sale of finished metal or metal in concentrate. Realized prices include the effect of provisional pricing adjustments on prior period sales. | |||||||
| 2 London Metal Exchange average for copper and zinc prices. | |||||||
| 3 This amount includes a realized sales price of 1.27 and 1.41 for cast zinc metal and 1.19 and 1.25 for zinc concentrate sold for the three and twelve months ended December 31, 2018, respectively. Zinc realized prices include premiums paid by customers for delivery of refined zinc metal, but exclude unrealized gains and losses related to non-hedge derivative contracts that are included in zinc revenues. | |||||||
| 4 Sales of gold and silver from our 777 and Constancia mines are subject to our precious metals stream agreement with Wheaton Precious Metals, pursuant to which we recognize deferred revenue for precious metals deliveries and also receive cash payments. Stream sales are included within realized prices and their respective deferred revenue and cash payment rates can be found on page 30. | |||||||
| 5 Realized prices for molybdenum for the three months ended December 31, 2019 were low due to unfavourable provisional pricing adjustments from prior quarter's sales quantities that were significantly larger than the fourth quarter's sales quantity. |
All values are in US Dollars.
The following table provides a reconciliation of average realized price per unit sold, by metal, to revenues as shown in the consolidated financial statements.
| Three months ended December 31, 2019 | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (in $ millions) ^1^ | Copper | Zinc | Gold | Silver | Molybdenum | Other | Total | |||||
| Revenue per financial statements | 201.7 | 72.1 | 45.1 | 24.5 | 4.7 | 1.3 | 349.4 | |||||
| Pricing and volume adjustments^2^ | (1.7 | ) | (0.4 | ) | 0.1 | 0.2 | (1.9 | ) | - | (3.7 | ) | |
| Derivative mark-to-market^3^ | - | 0.3 | - | - | - | - | 0.3 | |||||
| Revenue, excluding mark-to-market on non-QP hedges | 200.0 | 72.0 | 45.2 | 24.7 | 2.8 | 1.3 | 346.0 | |||||
| Payable metal in concentrate sold^4^ | 33,715 | 28,001 | 30,344 | 909,423 | 199 | - | - | |||||
| Realized price^5^ | 5,930 | 2,573 | 1,490 | 27.19 | 14,046 | - | - | |||||
| Realized price ^6^ | 2.69 | 1.17 | - | - | 6.37 | - | - | |||||
| Twelve Months Ended December 31, 2019 | ||||||||||||
| (in $ millions) ^1^ | Copper | Zinc | Gold | Silver | Molybdenum | Other | Total | |||||
| Revenue per financial statements | 786.3 | 284.9 | 152.4 | 89.7 | 31.3 | 4.8 | 1,349.4 | |||||
| Pricing and volume adjustments^2^ | (12.9 | ) | (0.1 | ) | 4.5 | (1.2 | ) | (2.4 | ) | - | (12.1 | ) |
| Derivative mark-to-market^3^ | - | - | - | - | - | - | - | |||||
| Revenue, excluding mark-to-market on non-QP hedges | 773.4 | 284.8 | 156.9 | 88.5 | 28.9 | 4.8 | 1,337.3 | |||||
| Payable metal in concentrate sold^4^ | 128,519 | 104,319 | 108,999 | 3,452,926 | 1,186 | |||||||
| Realized price^5^ | 6,018 | 2,730 | 1,439 | 25.64 | 24,312 | |||||||
| Realized price ^6^ | 2.73 | 1.24 | - | - | 11.03 | |||||||
| Three months ended December 31, 2018 | ||||||||||||
| (in $ millions) ^1^ | Copper | Zinc | Gold | Silver | Molybdenum | Other | Total | |||||
| Revenue per financial statements | 225.9 | 86.5 | 33.4 | 21.4 | 11.9 | 1.4 | 380.5 | |||||
| Pricing and volume adjustments^2^ | (4.2 | ) | (0.3 | ) | 6.8 | (0.9 | ) | 0.1 | - | 1.5 | ||
| Derivative mark-to-market^3^ | - | (0.3 | ) | - | - | - | - | (0.3 | ) | |||
| Revenue, excluding mark-to-market on non-QP hedges | 221.7 | 85.9 | 40.2 | 20.5 | 12.0 | 1.4 | 381.7 | |||||
| Payable metal in concentrate sold^4^ | 36,350 | 31,134 | 25,861 | 909,500 | 447 | - | - | |||||
| Realized price^5^ | 6,098 | 2,760 | 1,554 | 22.50 | 26,833 | - | - | |||||
| Realized price ^6^ | 2.77 | 1.25 | - | - | 12.17 | - | - | |||||
| Year ended December 31, 2018 | ||||||||||||
| (in $ millions) ^1^ | Copper | Zinc | Gold | Silver | Molybdenum | Other | Total | |||||
| Revenue per financial statements | 963.1 | 357.4 | 149.0 | 85.8 | 21.0 | 4.7 | 1,581.0 | |||||
| Pricing and volume adjustments^2^ | (6.4 | ) | (3.5 | ) | 4.7 | 0.3 | 0.8 | - | (4.1 | ) | ||
| Derivative mark-to-market^3^ | - | 0.7 | - | - | - | - | 0.7 | |||||
| Revenue, excluding mark-to-market on non-QP hedges | 956.7 | 354.6 | 153.7 | 86.1 | 21.8 | 4.7 | 1,577.6 | |||||
| Payable metal in concentrate sold^4^ | 147,923 | 115,723 | 113,097 | 3,372,353 | 819 | - | - | |||||
| Realized price^5^ | 6,468 | 3,065 | 1,359 | 25.52 | 26,592 | - | - | |||||
| Realized price ^6^ | 2.93 | 1.39 | - | - | 12.06 | - | - |
^1^ Average realized price per unit sold may not calculate based on amounts presented in this table due to rounding.
^2^Pricing and volume adjustments represents mark-to-market adjustments on provisionally priced sales, realized and unrealized changes to fair value for non-hedge derivative contracts and adjustments to originally invoiced weights and assays.
^3^Derivative mark-to-market excludes mark-to-market on QP hedges.
^4^Copper and zinc shown in metric tonnes and gold and silver shown in ounces.
^5^Realized price for copper, zinc and molybdenum in $/metric tonne and realized price for gold and silver in $/oz.
^6^Realized price for copper, zinc and molybdenum in $/lb.
The price, quantity and mix of metals sold, affect our revenue, operating cash flow and profit. Revenue from metals sales can vary from quarter to quarter due to production levels, shipping volumes and transfer of risk and title to customers.
Stream Sales
The following table shows stream sales included within realized prices and their respective deferred revenue and cash payment rates:
| Three months ended | Year ended | ||||||
|---|---|---|---|---|---|---|---|
| Dec. 31, 2019 | Dec. 31, 2019 | ||||||
| Manitoba | Peru | Manitoba | Peru | ||||
| Gold | 4,160 | 3,103 | 17,740 | 11,750 | |||
| Silver | 61,487 | 671,742 | 355,468 | 2,405,554 | |||
| Gold deferred revenue drawdown rate1,2 | 1,183 | 948 | 1,177 | 948 | |||
| Gold cash rate3 | 420 | 404 | 418 | 402 | |||
| Silver deferred revenue drawdown rate1,2 | 22.63 | 21.77 | 22.51 | 21.77 | |||
| Silver cash rate3 | 6.20 | 5.96 | 6.17 | 5.93 | |||
| Three months ended | Year ended | ||||||
| Dec. 31, 2018 | |||||||
| Peru | Manitoba | Peru | |||||
| Gold | 4,353 | 3,645 | 19,217 | 12,044 | |||
| Silver | 129,268 | 628,936 | 515,183 | 2,180,098 | |||
| Gold deferred revenue drawdown rate1 | 1,241 | 967 | 1,262 | 967 | |||
| Gold cash rate 3 | 416 | 400 | 414 | 400 | |||
| Silver deferred revenue drawdown rate1 | 24.22 | 21.79 | 24.54 | 21.79 | |||
| Silver cash rate 3 | 6.14 | 5.90 | 6.11 | 5.90 | |||
| 1 For the three months ended December 31, 2019 deferred revenue amortization is recorded in Manitoba at C1,589/oz and C30.40/oz for gold and silver (December 31, 2018 - C1,635/oz and C31.88/oz for gold and silver), respectively, and converted to US dollars at the exchange rate in effect at the time of revenue recognition. | |||||||
| 2 Deferred revenue drawdown rates for gold and silver do not include variable consideration adjustments. | |||||||
| 3 The gold and silver cash rate for Manitoba increased by 1% from 400/oz and 5.90/oz effective August 1, 2015. Subsequently every year, on August 1, the cash rate will increase by 1% compounded. The weighted average cash rate is disclosed. |
All values are in US Dollars.
Cost of Sales
Our detailed cost of sales is summarized as follows:
| (in thousands) | Three months ended | Year ended | ||||
|---|---|---|---|---|---|---|
| Dec. 31, 2019 | Dec. 31, 2018 | Dec. 31, 2019 | Dec. 31, 2018 | |||
| Peru | ||||||
| Mining | 18,533 | 21,721 | 82,417 | 91,324 | ||
| Milling | 43,860 | 39,590 | 159,913 | 150,016 | ||
| Changes in product inventory | 7,410 | 3,453 | (3,313 | ) | (4,141 | ) |
| Depreciation and amortization | 56,938 | 52,510 | 209,126 | 211,152 | ||
| G&A | 15,074 | 15,057 | 57,426 | 56,358 | ||
| Freight, royalties and other charges | 17,273 | 16,905 | 59,740 | 59,642 | ||
| Total Peru cost of sales | 159,088 | 149,236 | 565,309 | 564,351 | ||
| Manitoba | ||||||
| Mining | 46,335 | 42,825 | 186,972 | 165,108 | ||
| Milling | 13,396 | 13,372 | 49,269 | 52,544 | ||
| Zinc plant | 19,464 | 18,837 | 72,259 | 73,008 | ||
| Purchased ore and concentrate (before inventory changes) | - | - | - | 20,804 | ||
| Changes in product inventory | 3,267 | 2,935 | (4,413 | ) | 11,395 | |
| Depreciation and amortization | 37,007 | 29,733 | 135,429 | 121,515 | ||
| G&A | 11,500 | 9,392 | 47,119 | 46,139 | ||
| Freight, royalties and other charges | 8,795 | 10,217 | 33,953 | 43,762 | ||
| Total Manitoba cost of sales | 139,764 | 127,311 | 520,588 | 534,275 | ||
| Cost of sales | 298,852 | 276,547 | 1,085,897 | 1,098,626 |
Total cost of sales for the fourth quarter of 2019 was $298.9 million, reflecting an increase of $22.3 million from the fourth quarter of 2018. Cost of sales related to Peru increased for the fourth quarter of 2019 compared to the same period of 2018 by $9.9 million. The increase is primarily the result of an increase in milling costs, depreciation and product inventory changes in the fourth quarter of 2019. In Manitoba, cost of sales increased by $12.5 million compared to the fourth quarter of 2018 primarily as a result of higher mining costs, depreciation, and G&A expenses associated with higher mining activities.
For details on unit operating costs refer to the respective tables in the "Operations Review" section of this MD&A.
For the fourth quarter of 2019, other significant variances in expenses from operations, compared to the same period in 2018, include the following:
- Selling and administrative expenses decreased by $3.0 million compared to the same period in 2018. This decrease was mainly due to lower administration costs and lower stock compensation charges as a result of the relative impact of the revaluation of previously issued share units.
- Other operating expenses decreased by $1.9 million compared to the fourth quarter of 2018 primarily as a result of a non-cash charge of $2.2 million related to a pension de-risking transaction we recorded in the fourth quarter of 2018.
- Net finance expense increased by $11.6 million compared to the same period in 2018 principally as a result of losses recorded for our embedded derivatives, as well as higher costs due to the cessation of capitalizing interest costs as of October 1, 2019 on the Rosemont project.
For the full year 2019, other significant variances in expenses from operations, compared to 2018, include the following:
Selling and administrative expenses increased by $8.9 million compared to 2018. This increase was due mainly to costs associated with the proxy contest earlier in the year and higher depreciation charges related to the requirement to depreciate certain corporate administrative assets under the new leasing standard effective January 1, 2019.
Other operating expenses increased by $32.0 million primarily as a result of the write down of the receivable from United Copper & Moly LLC ("UCM") for $26.0 million in the second quarter of 2019 as part of the acquisition of the remaining interest in the Rosemont copper project, as well as losses on disposition of certain fixed assets, changes in closure cost estimates related to Manitoba's non-operating mines and certain allocated costs pertaining to community agreements in Peru.
Impairment losses increased by $322.2 million as a result of the impairment charge recorded in the third quarter of 2019 relating to the Arizona business unit.
- Finance expenses increased by $10.9 million primarily due to an increase in non-cash financing charges for our precious metals steam contracts in 2019. This charge was the result of the deferred revenue adjustments for the 777 stream arrangement driven by an increase in 777's reserve and resource estimates. The increase is also due to the cessation of capitalizing certain interest costs associated with the Rosemont project as of October 1, 2019.
Other finance loss increased by $25.2 million as a result of:
increased foreign exchange losses of $12.5 million when compared to the same period last year, related to foreign exchange rate movements impacting certain monetary assets in the Manitoba business unit;
net losses on our embedded derivatives and investments recognized at fair value through profit or loss which increased by $6.0 million when compared to the same period last year; and,
mark-to-market gains on warrants, which expired in July 2018, were $6.7 million in 2018, compared to nil in the corresponding period of 2019.
Tax Expense (Recovery)
For the three months and year ended December 31, 2019, tax expense decreased by $62.0 million and $194.4 million compared to the same period in 2018. The following table provides further details:
| Three months ended | Year ended | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Dec. 31, 2019 | Dec. 31, 2018 | Dec. 31, 2019 | Dec. 31, 2018 | |||||||
| (in thousands) | ||||||||||
| Deferred tax expense (recovery) - income tax 1 | (48,476 | ) | $ | 12,577 | $ | (132,479 | ) | $ | 40,961 | |
| Deferred tax expense (recovery) - mining tax 1 | (12,498 | ) | 326 | (12,386 | ) | (716 | ) | |||
| Total deferred tax expense (recovery) | (60,974 | ) | 12,903 | (144,865 | ) | 40,245 | ||||
| Current tax expense - income tax | 19,067 | 5,122 | 30,201 | 25,245 | ||||||
| Current tax (recovery) expense - mining tax | 1,010 | 3,135 | 5,711 | 19,931 | ||||||
| Total current tax expense | 20,077 | 8,257 | 35,912 | 45,176 | ||||||
| Tax (recovery) expense | (40,897 | ) | $ | 21,160 | $ | (108,953 | ) | $ | 85,421 | |
| 1 Deferred tax expense (recovery) represents our draw down/increase of non-cash deferred income and mining tax assets/liabilities. |
All values are in US Dollars.
Income Tax Expense
Applying the estimated Canadian statutory income tax rate of 27.0% to our loss before taxes of $452.8 million for the full year in 2019 would have resulted in a tax recovery of approximately $122.2 million; however, we recorded an income tax recovery of $102.3 million. The significant items causing our effective income tax rate to be different than the 27.0% estimated Canadian statutory income tax rate include:
Certain previously unrecognized deductible temporary differences with respect to Manitoba, mostly relating to decommissioning and restoration liabilities, were recognized in the current year as we have determined that it is probable that we will realize the recovery of these deferred tax assets through the reversals of taxable temporary differences and future projected taxable profit of the Manitoba operations. This resulted in a decrease in deferred tax expense of approximately $16.3 million;
Certain deductible temporary differences with respect to our foreign operations are recorded using an income tax rate other than the Canadian statutory income tax rate of 27%, resulting in an increased in deferred tax expense of $20.3 million;
The write down of the UCM receivable of $26.0 million is not deductible for local income tax purposes and therefore results in an increase in deferred tax expense of approximately $7.0 million; and
An intercompany dividend payment being subject to withholding tax that is classified as current income tax of $6.8 million.
Applying the estimated Canadian statutory income tax rate of 27.0% to our income before taxes of $170.8 million for the full year in 2018 would have resulted in a tax expense of approximately $46.1 million; however, we recorded an income tax expense of $66.2 million. The significant items causing our effective income tax rate to be different than the 27.0% estimated Canadian statutory income tax rate include:
Certain temporary differences with respect to our foreign operations are recorded using an income tax rate other than the Canadian statutory income tax of 27.0%, resulting in an increase in deferred tax expense of $9.6 million; and,
Increase in deferred tax expense of approximately $11.4 million since certain Canadian non-monetary assets are recognized at historical cost while the tax bases of the assets change as exchange rates fluctuate, which creates a taxable temporary difference.
Mining Tax Expense
Applying the estimated Manitoba mining tax rate of 10.0% to our loss before taxes of $452.8 million for 2019 would have resulted in a tax recovery of approximately $45.3 million and we recorded a mining tax recovery of $6.7 million. Effective mining tax rates can vary significantly based on the composition of our earnings and the expected amount of mining taxable profits. Corporate costs and other costs not related to mining operations are not deductible in computing mining profits. A brief description of how mining taxes are calculated in our various business units is discussed below.
Manitoba
The Province of Manitoba imposes mining tax on profit related to the sale of mineral products mined in the Province of Manitoba (mining taxable profit) at the following rates:
10% of total mining taxable profit if mining profit is C$50 million or less;
15% of total mining taxable profit if mining profits are between C$55 million and C$100 million; and
17% of total mining taxable profit if mining profits exceed C$105 million.
We estimate that the tax rate that will be applicable when temporary differences reverse will be approximately 10.0%.
Peru
The Peruvian government imposes two parallel mining tax regimes, the Special Mining Tax and the Modified Royalty, on companies' operating mining income on a sliding scale, with progressive rates ranging from 2.0% to 8.4% and 1.0% to 12.0%, respectively. Based on financial forecasts, we have recorded a deferred tax liability as at December 31, 2019, at the tax rate we expect to apply when temporary differences reverse.
LIQUIDITY AND CAPITAL RESOURCES
Senior Secured Revolving Credit Facilities and Surety Bonds
We have two revolving credit facilities (the "Credit Facilities") for our Canadian and Peruvian businesses, with combined total availability of $550 million and substantially similar terms and conditions. As at December 31, 2019, between our Credit Facilities we have drawn $129.4 million in letters of credit, leaving total undrawn availability of $420.6 million. As at December 31, 2019, we were in compliance with our covenants under the Credit Facilities.
The Credit Facilities were amended on February 12, 2020 primarily to revise the financial maintenance covenants. The amended covenants will provide us with additional flexibility during the development of the New Britannia and Pampacancha projects. The revised covenants are as follows:
- Maintaining net total debt to EBITDA of less than:
▪ 4.50 from January 1, 2020 to March 31, 2021;
▪ 4.00 from April 1, 2021 to December 31, 2021; and,
▪ 3.50 from January 1, 2022 to maturity.
- Maintaining an interest coverage ratio of greater than:
▪ 2.75 from April 1, 2020 to December 31, 2020; and,
▪ 3.00 from January 1, 2021 to maturity.
As at December 31, 2019, the Arizona business unit had $8.6 million in surety bonds and the Peru business unit had $40.0 million in surety bonds, issued to support future reclamation and closure obligations. The Peru business unit also had $45.0 in letters of credit issued with various Peruvian financial institutions.
No cash collateral is required to be posted.
Financial Condition
Financial Condition as at December 31, 2019 compared to December 31, 2018
Cash and cash equivalents decreased by $119.4 million year-over-year to $396.1 million as at December 31, 2019. This decrease was mainly a result of $259.2 million of funding for capital investments primarily at our Peru and Manitoba operations, interest payments and financing activities of $137.8 million and our acquisition of the remaining interest in the Rosemont project for $45.0 million. This decrease was partially offset by cash flow from operating activities of $310.9 million. We hold the majority of our cash and cash equivalents in low-risk, liquid investments with major Canadian and Peruvian financial institutions.
Working capital decreased by $173.9 million to $271.3 million from December 31, 2018 to December 31, 2019, primarily due to the decrease in our cash and cash equivalents position by $119.4 million, as well as an increase in our current liabilities of $64.6 million due to higher trade payables, planned reclamation spending related to Manitoba tailings management and higher derivative liabilities.
Cash Flows
The following table summarizes our cash flows for the three months and year ended December 31, 2019 and December 31, 2018:
| (in $ thousands) | Three months ended | Year ended | ||||||
|---|---|---|---|---|---|---|---|---|
| Dec. 31, 2019 | Dec. 31, <br>2018 | Dec. 31, 2019 | Dec. 31, <br>2018 | |||||
| Operating cash flow before changes in non-cash<br>working capital | 69,141 | 104,264 | 307,284 | 501,352 | ||||
| Change in non-cash working capital | 29,524 | 33,060 | 3,572 | (21,800 | ) | |||
| Cash generated from operating activities | 98,665 | 137,324 | 310,856 | 479,552 | ||||
| Cash (used in) generated by investing activities | (86,689 | ) | (73,762 | ) | (292,370 | ) | (202,136 | ) |
| Cash (used in) generated by financing activities | (14,386 | ) | (9,592 | ) | (137,778 | ) | (120,354 | ) |
| Effect of movement in exchange rates on cash and cash equivalents | 118 | 1,664 | (59 | ) | 1,936 | |||
| (Decrease) increase in cash and cash equivalents | (2,292 | ) | 55,634 | (119,351 | ) | 158,998 |
Cash Flow from Operating Activities
Cash generated from operating activities was $98.7 million during the fourth quarter of 2019, a decrease of $38.7 million compared with the same period last year. Operating cash flow before change in non-cash working capital was $69.1 million during the fourth quarter of 2019, reflecting a decrease of $35.1 million compared to the fourth quarter of 2018. The decrease in operating cash flow is the result of lower realized prices and lower sales volumes of copper and zinc when compared to the fourth quarter of 2018.
Cash generated from operating activities for the full year was $310.9 million in 2019, a decrease of $168.7 million compared to 2018. Operating cash flow before changes in non-cash working capital for the full year was $307.3 million in 2019, a decrease of $194.1 million compared to 2018. The decrease in operating cash flow is primarily due to the same reasons described above for the quarter over quarter change.
Cash Flow from Investing and Financing Activities
During the fourth quarter of 2019, we used $101.1 million in investing and financing activities, primarily driven by $88.7 million of capital expenditures, capitalized lease payments of $9.1 million and net financing fees paid of $5.3 million.
For the full year in 2019, we used $430.1 million of cash in investing and financing activities, primarily driven by $259.2 million of capital expenditures, interest payments of $74.8 million, $44.7 million paid for the acquisition of the remaining interest in the Rosemont project, capitalized lease payments of $33.0 million and net financing fees paid of $26.1 million.
Capital Expenditures
The following summarizes accrued and cash additions to capital assets for the periods indicated:
| Year ended | Guidance | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Dec. 31, 2018 | Dec. 31, 2019 | Dec. 31, 2018 | Annual^1^ | ||||||||
| (in millions) | 2019 | 2020 | |||||||||
| Manitoba sustaining capital expenditures 2 | 31.9 | 126.3 | 104.4 | 100.0 | 100.0 | ||||||
| Peru sustaining capital expenditures 3 | 12.2 | 84.9 | 40.0 | 95.0 | 100.0 | ||||||
| Total sustaining capital expenditures | 44.1 | 211.2 | 144.4 | 195.0 | 200.0 | ||||||
| Arizona capitalized costs 4 | 5.1 | 36.4 | 19.7 | 40.0 | 20.0 | ||||||
| Peru growth capitalized expenditures 5 | 0.3 | 2.1 | 2.3 | 45.0 | 70.0 | ||||||
| Manitoba growth capitalized expenditures | 0.2 | 14.1 | 18.1 | 10.0 | 80.0 | ||||||
| Other capitalized costs 6 | 16.3 | 91.9 | 12.3 | ||||||||
| Capitalized exploration | 10.2 | 15.7 | 11.7 | 15.0 | 15.0 | ||||||
| Capitalized interest | 3.3 | 9.9 | 13.2 | ||||||||
| Total other capitalized costs | 35.4 | 170.1 | 77.3 | ||||||||
| Total capital additions | 79.5 | 381.3 | 221.7 | ||||||||
| Reconciliation to cash capital additions: | |||||||||||
| Decommissioning and restoration obligation | ) | (15.4 | ) | (89.4 | ) | (9.0 | ) | ||||
| Capitalized interest | (3.3 | ) | (9.9 | ) | (13.2 | ) | |||||
| Right-of-use asset additions | ) | - | (22.2 | ) | - | ||||||
| Changes in capital accruals and other | (3.4 | ) | (0.6 | ) | (8.6 | ) | |||||
| Total cash capital additions | 57.4 | 259.2 | 190.9 | ||||||||
| 1 Sustaining capital expenditure guidance excludes capitalized interest. | |||||||||||
| 2 Manitoba sustaining capital expenditures for the twelve months ended December 31, 2019 include a new capitalized lease related to sustaining capital expenditures of 14.3 million not included in annual guidance. | |||||||||||
| 3 Peru sustaining capital expenditures includes capitalized stripping costs. | |||||||||||
| 4 Initial guidance of 20.0 million in 2019. | |||||||||||
| 5 Peru growth capital expenditures of 45.0 million in 2019 related to expenditures for developing the Pampacancha deposit and acquiring surface rights, which has been deferred to 2020. | |||||||||||
| 6 Other capitalized costs include decommissioning and restoration adjustments. |
All values are in US Dollars.
Sustaining capital expenditures in Manitoba for the fourth quarter ended December 31, 2019 were $30.0 million, a decrease of $1.9 million compared to the same period in 2018. Sustaining capital expenditures for Manitoba for the year ended December 31, 2019 were $126.3 million, an increase of $21.9 million compared to the same periods in 2018. This increase in Manitoba sustaining capital expenditures compared to the last year was due to negotiated amendments to a contract with an existing Lalor mine contractor as the contractor's equipment is now accounted for as a capitalized lease under IFRS, resulting in additional reported sustaining capital expenditures of $14.3 million, as well as higher sustaining capital expenditures for Snow Lake.
Sustaining capital expenditures in Peru for the fourth quarter and year ended December 31, 2019 were $31.4 million and $84.9 million, respectively, which is an increase of $19.2 million and $44.9 million respectively, from the same periods in 2018. The increase in Peru sustaining capital expenditures compared to the same periods last year was the mainly due to timing of mine equipment repair overhauls, deferred stripping and plant projects partially offset by tailings management construction.
During 2019, the increase in the other capitalized costs line item to $91.9 million was mostly due to additional provisions recognized for higher estimated decommissioning and restoration activities at the Manitoba operations. These costs mainly relate to work required to enhance the factor of safety associated with our legacy Flin Flon tailings impoundment area in line with higher industry-wide standards for tailings dam safety that are being implemented following the failure of other tailings dams in recent years. Construction work to implement these improvements is underway, and will involve spending of approximately $20 million per year from 2020 to 2022. For accounting purposes, as these expenditures are associated with the decommissioning and restoration liability, they will be accounted for as a drawdown of the liability and will not directly impact either operating costs or reported capital expenditures. These expenditures are expected to be reflected in cash generated from operating activities in the consolidated statements of cash flows.
As disclosed in March 2019, the Board approved a $122 million early works program for Rosemont in addition to the $20 million of initial guidance for Arizona capitalized costs. As a result of the Court's ruling issued on July 31, 2019, we suspended most of the early works activities and reduced 2019 guidance for Rosemont spending to $40 million in aggregate.
Consolidated sustaining capital expenditures in 2019 were above the upper range of the full year guidance due mainly to the accounting impact of negotiated amendments to a contract with an existing Lalor mine contractor as described above.
Capital Commitments
As at December 31, 2019, we had outstanding capital commitments in Canada of approximately $3.7 million of which $1.9 million can be terminated, approximately $34.6 million in Peru primarily related to exploration option agreements, all of which can be terminated, and approximately $180.4 million in Arizona, primarily related to our Rosemont project, of which approximately $89.4 million can be terminated.
Contractual Obligations
The following table summarizes our significant contractual obligations as at December 31, 2019:
| Less than<br>12 months | 13 - 36<br>months | 37 - 60<br>months | More than<br>60 months | ||
|---|---|---|---|---|---|
| Payment Schedule (in $ millions) | Total | ||||
| Long-term debt obligations^1^ | 1,366.0 | 79.7 | 157.4 | 506.0 | 622.9 |
| Lease obligations | 172.3 | 85.4 | 74.9 | 7.8 | 4.2 |
| Purchase obligation - capital commitments | 218.7 | 16.2 | 51.6 | 5.6 | 145.3 |
| Purchase obligation - other commitments^2^ | 644.7 | 249.8 | 212.6 | 128.5 | 53.8 |
| Pension and other employee future benefits obligations^3^ | 158.3 | 15.1 | 35.8 | 7.2 | 100.2 |
| Decommissioning and restoration obligations^4^ | 272.7 | 23.8 | 42.1 | 13.2 | 193.6 |
| Total | 2,832.7 | 470.0 | 574.4 | 668.3 | 1,120.0 |
| ^1^Long-term debt obligations include scheduled interest payments, as well as principal repayments. | |||||
| ^2^Primarily made up of long-term agreements with operational suppliers, obligations for power purchase, concentrate handling, fleet and port services, as well as deferred consideration arising from the acquisition of Rosemont's minority interest. | |||||
| ^3^Discounted. | |||||
| ^4^ Before inflation. |
In addition to the contractual obligations included in the above payment schedule, we also have the following commitments which impact our financial position:
A profit-sharing plan with most Manitoba employees;
A profit-sharing plan with all Peru employees;
Wheaton Precious Metals precious metals stream agreements for the 777 mine and Constancia mines;
A net smelter returns royalty agreement related to the 777 mine; and,
Various royalty agreements related to the Constancia mine.
Liquidity
As at December 31, 2019, we had $396.1 million in cash and cash equivalents, as well as $420.6 million in undrawn availability under our Credit Facilities. We expect that our current liquidity and future cash flows will be sufficient to meet our obligations in the coming year.
Outstanding Share Data
As of February 19, 2020, there were 261,272,151 common shares of Hudbay issued and outstanding.
FINANCIAL RISK MANAGEMENT
From time to time, we maintain price protection programs and conduct commodity price risk management to reduce risk through the use of financial instruments.
Base Metals Price Strategic Risk Management
Our strategic objective is to provide our investors with exposure to base metals prices, unless a reason exists to implement a hedging arrangement. In the normal course, we typically consider base metal price hedging:
In conjunction with a major capital commitment to a growth opportunity for which operating cash flow is a key funding source;
To ensure the viability of a shorter life and/or higher cost mine;
To manage the risk associated with provisional pricing terms in concentrate purchase and sale agreements;
To offset fixed price zinc sales contracts with customers.
During 2019, we entered into copper hedging transactions intended to manage the risk associated with provisional pricing terms in concentrate sales agreements.
As at December 31, 2019, we had 30,000 tonnes of copper fixed for floating swaps outstanding at an average fixed receivable price of $2.67/lb associated with provisional pricing risk in concentrate sales agreements. These swaps settle across January to April 2020.
To provide a service to customers who purchase zinc from our plants and require known future prices, we enter into fixed price sales contracts. To ensure that we continue to receive a floating or unhedged realized zinc price, we enter into forward zinc purchase contracts that effectively offset the fixed price sales contracts with our customers.
From time to time, we enter into gold and silver forward sales contracts to hedge the commodity price risk associated with the future settlement of provisionally priced deliveries. We are generally obligated to deliver gold and silver to Wheaton prior to the determination of final settlement prices. These forward sales contracts are entered into at the time we deliver gold and silver to Wheaton, and are intended to mitigate the risk of subsequent adverse gold and silver price changes. Gains and losses resulting from the settlement of these derivatives are recorded directly to revenue, as the forward sales contracts do not achieve hedge accounting, and the associated cash flows are classified in operating activities. Our swap agreements are with counterparties we believe to be creditworthy and do not require us to provide collateral.
Interest Rate and Foreign Exchange Risk Management
To the extent that we incur indebtedness at variable interest rates to fund our growth objectives, we may enter into interest rate hedging arrangements to manage our exposure to short-term interest rates. To the extent that we make commitments to capital expenditures denominated in foreign currencies, we may enter into foreign exchange forwards or acquire foreign currency outright, which may result in foreign exchange gains or losses in our consolidated income statements.
At December 31, 2019, approximately $373.9 million of our cash and cash equivalents was held in US dollars, approximately $13.3 million of our cash and cash equivalents was held in Canadian dollars, and approximately $8.9 million of our cash and cash equivalents was held in Peruvian soles.
TREND ANALYSIS AND QUARTERLY REVIEW
The following table sets forth selected consolidated financial information for each of our eight most recently completed quarters:
| 2019 | 2018 | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (in $ millions) | Q4 | Q3 | Q2 | Q1 | Q4 | Q3 | Q2 | Q1 | |||||
| Revenue | 324.5 | 291.3 | 329.4 | 292.3 | 351.8 | 362.6 | 371.3 | 386.7 | |||||
| Gross margin | 25.6 | 31.0 | 43.1 | 51.8 | 75.2 | 85.3 | 92.5 | 120.8 | |||||
| Profit (loss) before tax | (42.4 | ) | (348.4 | ) | (43.9 | ) | (18.1 | ) | 17.7 | 30.3 | 49.8 | 73.1 | |
| (Loss) profit | (1.5 | ) | (274.8 | ) | (54.1 | ) | (13.4 | ) | (3.5 | ) | 22.8 | 24.7 | 41.4 |
| (Loss) earnings per share: | |||||||||||||
| Basic and Diluted | (0.01 | ) | (1.05 | ) | (0.21 | ) | (0.05 | ) | (0.01 | ) | 0.09 | 0.09 | 0.16 |
| Operating cash flow^1^ | 69.1 | 71.2 | 81.3 | 85.7 | 104.3 | 122.9 | 134.0 | 140.2 | |||||
| ^1^Operating cash flow before changes in non-cash working capital |
After peaking in the first half of 2018, copper and zinc prices have gradually declined through the second half of 2018 and calendar 2019. This has combined with a trend towards lower copper grades in the Constancia mine plan and the closure of the Reed copper mine in August 2018 to result in lower revenues and gross margin, although the lower Constancia grades have been partially offset by higher mill throughput and recoveries. Earnings in the third quarter of 2019 also included an after-tax impairment charge of $242.1 million, net of tax for the Arizona business unit as a result of the Court's decision related to the Rosemont project permits. Earnings in the second quarter of 2019 were impacted by a write down of $26.0 million related to the UCM receivable which was exchanged for higher ownership in the Rosemont project prior to purchasing the remaining interest from UCM on April 25, 2019. In the first quarter of 2019, pre-tax revenue and finance expenses were negatively impacted by a $22.3 million charge due to a deferred revenue adjustment arising from higher reserves and resources. In addition, in the first quarter of 2019, an additional delivery obligation of $7.5 million was recognized related to the expectation that mining of the Pampacancha deposit will not begin until 2020.
The following table sets forth selected consolidated financial information for each of the three most recently completed years:
| (in $ millions, except for earnings (loss) per share and dividends declared per share) | 2019 | 2018 | 2017<br>(Restated) | |
|---|---|---|---|---|
| Revenue | 1,237.4 | 1,472.4 | 1,402.3 | |
| Gross Margin | 151.5 | 373.7 | 409.1 | |
| Profit (loss) before tax | (452.8 | ) | 170.8 | 172.9 |
| Profit (loss) | (343.8 | ) | 85.4 | 139.7 |
| Earnings (loss) per share: | ||||
| Basic and diluted | (1.32 | ) | 0.33 | 0.57 |
| Total assets | 4,456.0 | 4,685.6 | 4,728.0 | |
| Operating cash flow^1^ | 307.3 | 501.4 | 569.9 | |
| Total non-current financial liabilities^2^ | 1,074.2 | 1,053.6 | 1,066.6 | |
| Dividends declared per share - C$^3^ | 0.02 | 0.02 | 0.02 | |
| ^1^ Operating cash flow before change in non-cash working capital. | ||||
| ^2^Total long-term financial liabilities include non-current portions of net long-term debt, other financial liabilities and finance lease obligations. | ||||
| ^3^Dividend paid during March and September of each year. |
In 2019, realized prices for copper and zinc decreased by 7% and 11%, respectively, compared to prices in 2018. Realized prices for gold increased by 6% compared to prices in 2018. Mill throughput at Constancia reached annual record levels, contributing to higher milling costs, however milled grades dropped in accordance with the mine plan and these factors drove the overall reduction in operating cash flow before changes in non-cash working capital. Revenues decreased by 16% due to lower metals prices and sales volumes for copper and zinc. Profit before tax decreased by $623.6 million mainly due to a $322.2 million impairment charge recorded in the third quarter of 2019 relating to the Arizona business unit, as well as a write down of the receivable from UCM for $26.0 million in the second quarter of 2019.
In 2018, realized prices for copper and gold rose by 4% and 7%, respectively, compared to prices in 2017. Comparable prices for other metals resulted in relatively consistent revenues, year-over-year. Mill throughput at Constancia reached annual record levels, contributing to higher milling costs, and was the primary driver for the overall reduction in operating cash flow before changes in non-cash working capital. Revenues rose by 5%, despite lower sales volumes for copper, gold and zinc, and profit before tax remained consistent with prior year, although operating costs rose due to the aforementioned higher production costs.
In addition to the items noted above which impacted gross margin, net profit (loss) was impacted by the following items:
| Year | Significant non-recurring items affecting net income | Before tax net income impact (in millions) | After tax net income impact (in millions) |
|---|---|---|---|
| 2017 | Non-cash deferred tax adjustments | - | 45.4 |
| 2018 | Non-cash deferred tax adjustments | - | (21.7 |
| 2019 | Non-cash deferred tax adjustments | - | 16.3 |
| 2019 | Write-down on UCM receivable | (26.0 | (26.0 |
| 2019 | Rosemont impairment | (322.2 | (242.1 |
All values are in US Dollars.
NON-IFRS FINANCIAL PERFORMANCE MEASURES
Net debt is shown because it is a performance measure used by the Company to assess our financial position. Cash cost, sustaining and all-in sustaining cash cost per pound of copper produced are shown because we believe they help investors and management assess the performance of our operations, including the margin generated by the operations and the Company. Cash cost and sustaining cash cost per pound of zinc produced are shown because we believe they help investors and management assess the performance of our Manitoba operations. These measures do not have a meaning prescribed by IFRS and are therefore unlikely to be comparable to similar measures presented by other issuers. These measures should not be considered in isolation or as a substitute for measures prepared in accordance with IFRS and are not necessarily indicative of operating profit or cash flow from operations as determined under IFRS. Other companies may calculate these measures differently.
Net Debt
The following table presents our calculation of net debt as at December 31, 2019 and December 31, 2018:
| (in $ thousands) | Dec. 31, 2019 | Dec. 31,<br>2018 | ||
|---|---|---|---|---|
| Total long-term debt, as per IFRS financial statements | 985,255 | 981,030 | ||
| Cash and cash equivalents, as per IFRS financial statements | (396,146 | ) | (515,497 | ) |
| Net debt | 589,109 | 465,533 |
Cash Cost, Sustaining and All-in Sustaining Cash Cost (Copper Basis)
Cash cost per pound of copper produced ("cash cost") is a non-IFRS measure that management uses as a key performance indicator to assess the performance of our operations. Our calculation designates copper as our primary metal of production as it has been the largest component of revenues. The calculation is presented in four manners:
Cash cost, before by-product credits - **** This measure is gross of by-product revenues and is a function of the efforts and costs incurred to mine and process all ore mined. However, the measure divides this aggregate cost over only pounds of copper produced, our primary metal of production. This measure is generally less volatile from period to period, as it is not affected by changes in the price received for by-product metals. It is, however, significantly affected by the relative mix of copper concentrate and finished zinc production, where the sale of the zinc will occur later, and an increase in production of zinc metal will tend to result in an increase in cash cost under this measure.
Cash cost, net of by-product credits - In order to calculate the net cost to produce and sell copper, the net of by-product credits measure subtracts the revenues realized from the sale of the metals other than copper. The by-product revenues from zinc, gold, and silver are significant and are integral to the economics of our operations. The economics that support our decision to produce and sell copper would be different if we did not receive revenues from the other significant metals being extracted and processed. This measure provides management and investors with an indication of the minimum copper price consistent with positive operating cash flow and operating margins, assuming realized by-product metal prices are consistent with those prevailing during the reporting period. It also serves as an important operating statistic that management and investors utilize to measure our operating performance versus that of our competitors. However, it is important to understand that if by-product metal prices decline alongside copper prices, the cash cost net of by-product credits would increase, requiring a higher copper price than that reported to maintain positive cash flows and operating margins.
Sustaining cash cost, net of by-product credits - This measure is an extension of cash cost that includes cash sustaining capital expenditures, including payments on capitalized leases, capitalized sustaining exploration, net smelter returns royalties, payments on long term community agreements, as well as accretion and amortization for expected decommissioning activities for producing assets. It does not include corporate selling and administrative expenses. It provides a more fulsome measurement of the cost of sustaining production than cash cost, which is focused on operating costs only.
- All-in sustaining cash cost, net of by-product credits - This measure is an extension of sustaining cash cost that includes corporate G&A, regional costs, accretion and amortization for community agreements relating to current operations, and accretion and amortization for expected decommissioning activities for non-producing assets. Due to the inclusion of corporate selling and administrative expenses, all-in sustaining cash cost is presented on a consolidated basis only.
The tables below present a detailed build-up of cash cost and sustaining cash cost, net of by-product credits, by business unit in addition to consolidated all-in sustaining cash cost, net of by-product credits, and reconciliations between cash cost, net of by-product credits, to the most comparable IFRS measures of cost of sales for the three months and year ended December 31, 2019 and 2018. Cash cost, net of by-product credits may not calculate exactly based on amounts presented in the tables below due to rounding.
| Consolidated | Three months ended | Year ended | ||||||
|---|---|---|---|---|---|---|---|---|
| Net pounds of copper produced | ||||||||
| (in thousands) | Dec. 31, 2019 | Dec. 31, 2018 | Dec. 31, 2019 | Dec. 31, 2018 | ||||
| Peru | 58,773 | 67,977 | 250,940 | 269,357 | ||||
| Manitoba | 12,705 | 14,118 | 51,487 | 71,368 | ||||
| Net pounds of copper produced | 71,478 | 82,095 | 302,427 | 340,725 | ||||
| Consolidated | Three months ended | Year ended | ||||||
| --- | --- | --- | --- | --- | --- | --- | --- | --- |
| Dec. 31, 2019 | Dec. 31, 2018 | Dec. 31, 2019 | Dec. 31, 2018 | |||||
| Cash cost per pound of copper produced | 000s | /lb | 000s | /lb | 000s | /lb | 000s | /lb |
| Cash cost, before by-product credits | 209,597 | 2.93 | 211,023 | 2.57 | 816,115 | 2.70 | 844,441 | 2.48 |
| By-product credits, net of deferred revenue | (121,847 | (1.70 | (134,200 | (1.63 | (471,386 | (1.56 | (524,193 | (1.54 |
| Cash cost, net of by-product credits | 87,750 | 1.23 | 76,823 | 0.94 | 344,729 | 1.14 | 320,248 | 0.94 |
All values are in US Dollars.
| Consolidated | Year ended | ||||||
|---|---|---|---|---|---|---|---|
| Dec. 31, 2018 | Dec. 31, 2019 | Dec. 31, 2018 | |||||
| Supplementary cash cost information | /lb 1 | 000s | /lb 1 | 000s | /lb 1 | 000s | /lb 1 |
| By-product credits: | |||||||
| Zinc | 1.00 | 86,264 | 1.05 | 284,766 | 0.94 | 353,971 | 1.04 |
| Gold 3 | 0.63 | 36,397 | 0.44 | 143,448 | 0.47 | 151,452 | 0.44 |
| Silver 3 | 0.35 | 21,432 | 0.26 | 85,681 | 0.28 | 85,616 | 0.25 |
| Molybdenum & other | 0.06 | 13,367 | 0.16 | 33,594 | 0.11 | 26,536 | 0.08 |
| Total by-product credits | 2.04 | 157,460 | 1.92 | 547,489 | 1.81 | 617,575 | 1.81 |
| Less: deferred revenue 3 | (0.33 | (23,260 | (0.28 | (76,103 | (0.25 | (93,382 | (0.27 |
| Total by-product credits, net of deferred revenue | 1.70 | 134,200 | 1.63 | 471,386 | 1.56 | 524,193 | 1.54 |
| Reconciliation to IFRS: | |||||||
| Cash cost, net of by-product credits | 76,823 | 344,729 | 320,248 | ||||
| By-product credits | 157,460 | 547,489 | 617,575 | ||||
| Change in deferred revenues | (23,260 | (76,103 | (93,382 | ||||
| Treatment and refining charges | (27,352 | (83,481 | (101,909 | ||||
| Share-based payment | 180 | 400 | 160 | ||||
| Inventory adjustments | (32 | 2,272 | (234 | ||||
| Change in product inventory | 6,388 | (7,726 | 7,254 | ||||
| Royalties | 4,097 | 13,762 | 16,247 | ||||
| Depreciation and amortization2 | 82,243 | 344,555 | 332,667 | ||||
| Cost of sales4 | 276,547 | 1,085,897 | 1,098,626 | ||||
| 1 Per pound of copper produced. | |||||||
| 2 Depreciation is based on concentrate sold. | |||||||
| 3 Twelve months ended December 31, 2019 gold and silver by-product credits and deferred revenue both reflect the 16.3 million revenue adjustment primarily associated with the increase in reserves and resources at the 777 mine. | |||||||
| 4 As per IFRS financial statements. |
All values are in US Dollars.
| Peru | Three months ended | Year ended | ||
|---|---|---|---|---|
| (in thousands) | Dec. 31, 2019 | Dec. 31, 2018 | Dec. 31, 2019 | Dec. 31, 2018 |
| Net pounds of copper produced^1^ | 58,773 | 67,977 | 250,940 | 269,357 |
| ^1^ | Contained copper in concentrate. | |||
| --- | --- |
| Peru | Three months ended | Year ended | ||||||
|---|---|---|---|---|---|---|---|---|
| Dec. 31, 2019 | Dec. 31, 2018 | Dec. 31, 2019 | Dec. 31, 2018 | |||||
| Cash cost per pound of copper produced | 000s | /lb | 000s | /lb | 000s | /lb | 000s | /lb |
| Mining | 18,533 | 0.32 | 21,721 | 0.32 | 82,417 | 0.33 | 91,324 | 0.34 |
| Milling | 43,860 | 0.75 | 39,590 | 0.58 | 159,913 | 0.64 | 150,016 | 0.56 |
| G&A | 15,147 | 0.26 | 15,036 | 0.22 | 56,847 | 0.23 | 56,533 | 0.21 |
| Onsite costs | 77,540 | 1.32 | 76,347 | 1.12 | 299,177 | 1.19 | 297,873 | 1.11 |
| Treatment & refining | 15,361 | 0.26 | 19,050 | 0.28 | 59,809 | 0.24 | 65,937 | 0.24 |
| Freight & other | 15,121 | 0.26 | 14,919 | 0.22 | 53,016 | 0.21 | 51,840 | 0.19 |
| Cash cost, before by-product credits | 108,022 | 1.84 | 110,316 | 1.62 | 412,002 | 1.64 | 415,650 | 1.54 |
| By-product credits, net of deferred revenue | (10,583 | (0.18 | (21,169 | (0.31 | (58,053 | (0.23 | (49,587 | (0.18 |
| Cash cost, net of by-product credits | 97,439 | 1.66 | 89,147 | 1.31 | 353,949 | 1.41 | 366,063 | 1.36 |
All values are in US Dollars.
| Peru | Three months ended | Year ended | ||||||
|---|---|---|---|---|---|---|---|---|
| Dec. 31, 2019 | Dec. 31, 2018 | Dec. 31, 2019 | Dec. 31, 2018 | |||||
| Supplementary cash cost information | 000s | /lb 1 | 000s | /lb 1 | 000s | /lb 1 | 000s | /lb 1 |
| By-product credits: | ||||||||
| Gold | 5,782 | 0.10 | 8,588 | 0.13 | 24,398 | 0.10 | 24,156 | 0.09 |
| Silver | 19,576 | 0.33 | 15,320 | 0.23 | 69,802 | 0.28 | 60,138 | 0.22 |
| Molybdenum | 2,791 | 0.05 | 11,990 | 0.18 | 28,835 | 0.11 | 21,791 | 0.08 |
| Total by-product credits | 28,149 | 0.48 | 35,898 | 0.53 | 123,035 | 0.49 | 106,085 | 0.39 |
| Less: deferred revenue | (17,566 | (0.30 | (14,729 | (0.22 | (64,982 | (0.26 | (56,498 | (0.21 |
| Total by-product credits, net of deferred revenue | 10,583 | 0.18 | 21,169 | 0.31 | 58,053 | 0.23 | 49,587 | 0.18 |
| Reconciliation to IFRS: | ||||||||
| Cash cost, net of by-product credits | 97,439 | 89,147 | 353,949 | 366,063 | ||||
| By-product credits | 28,149 | 35,898 | 123,035 | 106,085 | ||||
| Change in deferred revenues | (17,566 | (14,729 | (64,982 | (56,498 | ||||
| Treatment and refining charges | (15,361 | (19,050 | (59,809 | (65,937 | ||||
| Inventory adjustments | (100 | (32 | 504 | (234 | ||||
| Share-based payment | 27 | 53 | 75 | 59 | ||||
| Change in product inventory | 7,410 | 3,453 | (3,313 | (4,141 | ||||
| Royalties | 2,152 | 1,986 | 6,724 | 7,802 | ||||
| Depreciation and amortization^2^ | 56,938 | 52,510 | 209,126 | 211,152 | ||||
| Cost of sales^3^ | 159,088 | 149,236 | 565,309 | 564,351 | ||||
| ^1^Per pound of copper produced. | ||||||||
| ^2^Depreciation is based on concentrate sold. | ||||||||
| ^3^ As per IFRS financial statements. |
All values are in US Dollars.
| Manitoba | Three months ended | Year ended | ||||||
|---|---|---|---|---|---|---|---|---|
| (in thousands) | Dec. 31, 2019 | Dec. 31, 2018 | Dec. 31, 2019 | Dec. 31, 2018 | ||||
| Net pounds of copper produced^1^ | 12,705 | 14,118 | 51,487 | 71,368 | ||||
| ^1^Contained copper in concentrate. | ||||||||
| Manitoba | Three months ended | Year ended | ||||||
| --- | --- | --- | --- | --- | --- | --- | --- | --- |
| Dec. 31, 2019 | Dec. 31, 2018 | Dec. 31, 2019 | Dec. 31, 2018 | |||||
| Cash cost per pound of copper produced | 000s | /lb | 000s | /lb | 000s | /lb | 000s | /lb |
| Mining | 46,335 | 3.65 | 42,825 | 3.03 | 186,972 | 3.63 | 165,108 | 2.31 |
| Milling | 13,396 | 1.05 | 13,372 | 0.95 | 49,269 | 0.96 | 52,544 | 0.74 |
| Refining (zinc) | 19,464 | 1.53 | 18,837 | 1.33 | 72,259 | 1.40 | 73,008 | 1.02 |
| G&A | 9,551 | 0.75 | 9,265 | 0.66 | 45,026 | 0.87 | 46,038 | 0.65 |
| Purchased ore and zinc concentrates | - | - | - | - | - | - | 20,804 | 0.29 |
| Onsite costs | 88,746 | 6.98 | 84,299 | 5.97 | 353,526 | 6.87 | 357,502 | 5.01 |
| Treatment & refining | 5,815 | 0.46 | 8,302 | 0.59 | 23,672 | 0.46 | 35,972 | 0.50 |
| Freight & other | 7,014 | 0.55 | 8,106 | 0.57 | 26,915 | 0.52 | 35,317 | 0.49 |
| Cash cost, before by-product credits | 101,575 | 7.99 | 100,707 | 7.13 | 404,113 | 7.85 | 428,791 | 6.01 |
| By-product credits, net of deferred revenue | (111,264 | (8.76 | (113,031 | (8.01 | (413,333 | (8.03 | (474,606 | (6.65 |
| Cash cost, net of by-product credits | (9,689 | (0.76 | (12,324 | (0.87 | (9,220 | (0.18 | (45,815 | (0.64 |
All values are in US Dollars.
| Manitoba | Three months ended | Year ended | ||||||
|---|---|---|---|---|---|---|---|---|
| Dec. 31, 2019 | Dec. 31, 2018 | Dec. 31, 2019 | Dec. 31, 2018 | |||||
| Supplementary cash cost information | 000s | /lb 1 | 000s | /lb 1 | 000s | /lb 1 | 000s | /lb 1 |
| By-product credits: | ||||||||
| Zinc | 71,732 | 5.65 | 86,264 | 6.11 | 284,766 | 5.53 | 353,971 | 4.96 |
| Gold | 39,432 | 3.10 | 27,809 | 1.97 | 119,050 | 2.31 | 127,296 | 1.78 |
| Silver | 5,147 | 0.41 | 6,112 | 0.43 | 15,879 | 0.31 | 25,478 | 0.36 |
| Other | 1,266 | 0.10 | 1,377 | 0.10 | 4,759 | 0.09 | 4,745 | 0.07 |
| Total by-product credits | 117,577 | 9.25 | 121,562 | 8.61 | 424,454 | 8.24 | 511,490 | 7.17 |
| Less: deferred revenue | (6,313 | (0.50 | (8,531 | (0.60 | (11,121 | (0.22 | (36,884 | (0.52 |
| Total by-product credits, net of deferred revenue | 111,264 | 8.76 | 113,031 | 8.01 | 413,333 | 8.03 | 474,606 | 6.65 |
| Reconciliation to IFRS: | ||||||||
| Cash cost, net of by-product credits | (9,689 | (12,324 | (9,220 | (45,815 | ||||
| By-product credits | 117,577 | 121,562 | 424,454 | 511,490 | ||||
| Change in deferred revenues | (6,313 | (8,531 | (11,121 | (36,884 | ||||
| Treatment and refining charges | (5,815 | (8,302 | (23,672 | (35,972 | ||||
| Inventory adjustments | 1,768 | - | 1,768 | - | ||||
| Share-based payment | 181 | 127 | 325 | 101 | ||||
| Change in product inventory | 3,267 | 2,935 | (4,413 | 11,395 | ||||
| Royalties | 1,781 | 2,111 | 7,038 | 8,445 | ||||
| Depreciation and amortization^2^ | 37,007 | 29,733 | 135,429 | 121,515 | ||||
| Cost of sales^3^ | 139,764 | 127,311 | 520,588 | 534,275 | ||||
| ^1^ Per pound of copper produced. | ||||||||
| ^2^Depreciation is based on concentrate sold. | ||||||||
| ^3^ As per IFRS financial statements. |
All values are in US Dollars.
| Consolidated | Three months ended | Year ended | ||||||
|---|---|---|---|---|---|---|---|---|
| Dec. 31, 2019 | Dec. 31, 2018 | Dec. 31, 2019 | Dec. 31, 2018 | |||||
| All-in sustaining cash cost per pound of copper produced | $000s | $/lb | $000s | $/lb | $000s | $/lb | $000s | $/lb |
| Cash cost, net of by-product credits | 87,750 | 1.23 | 76,823 | 0.94 | 344,729 | 1.14 | 320,248 | 0.94 |
| Cash sustaining capital expenditures | 74,362 | 1.04 | 48,313 | 0.59 | 241,461 | 0.80 | 164,578 | 0.48 |
| Capitalized exploration^1^ | 8,807 | 0.12 | 8,698 | 0.11 | 12,391 | 0.04 | 10,222 | 0.03 |
| Royalties | 3,933 | 0.06 | 4,097 | 0.05 | 13,762 | 0.05 | 16,247 | 0.05 |
| Sustaining cash cost, net of by-product credits | 174,852 | 2.45 | 137,931 | 1.68 | 612,343 | 2.03 | 511,295 | 1.50 |
| Corporate selling and administrative expenses & regional costs | 6,702 | 0.09 | 9,600 | 0.12 | 39,950 | 0.13 | 31,916 | 0.09 |
| Accretion and amortization of decommissioning and community agreements^2^ | 677 | 0.01 | 88 | 0.00 | 2,521 | 0.01 | 308 | 0.00 |
| All-in sustaining cash cost, net of by-product credits | 182,231 | 2.55 | 147,619 | 1.80 | 654,814 | 2.17 | 543,519 | 1.60 |
| ^1^Only includes exploration costs incurred for locations near existing mines. | ||||||||
| ^2^ Includes accretion and amortization of decommissioning relating to non-productive sites, and accretion and amortization of current community agreements. | ||||||||
| Peru | Three months ended | Year ended | ||||||
| --- | --- | --- | --- | --- | --- | --- | --- | --- |
| Dec. 31, 2019 | Dec. 31, 2018 | Dec. 31, 2019 | Dec. 31, 2018 | |||||
| Sustaining cash cost per pound of copper produced | $000s | $/lb | $000s | $/lb | $000s | $/lb | $000s | $/lb |
| Cash cost, net of by-product credits | 97,439 | 1.66 | 89,147 | 1.31 | 353,949 | 1.41 | 366,063 | 1.36 |
| Cash sustaining capital expenditures | 37,676 | 0.64 | 13,394 | 0.20 | 108,420 | 0.43 | 44,664 | 0.17 |
| Capitalized exploration | 8,000 | 0.14 | 8,500 | 0.13 | 8,000 | 0.03 | 8,500 | 0.03 |
| Royalties | 2,152 | 0.04 | 1,986 | 0.03 | 6,724 | 0.03 | 7,802 | 0.03 |
| Sustaining cash cost per pound of copper produced | 145,267 | 2.47 | 113,027 | 1.66 | 477,093 | 1.90 | 427,029 | 1.59 |
| Manitoba | Three months ended | Year ended | ||||||
| --- | --- | --- | --- | --- | --- | --- | --- | --- |
| Dec. 31, 2019 | Dec. 31, 2018 | Dec. 31, 2019 | Dec. 31, 2018 | |||||
| Sustaining cash cost per pound of copper produced | 000s | /lb | 000s | /lb | 000s | /lb | 000s | /lb |
| Cash cost, net of by-product credits | (9,689 | (0.76 | (12,324 | (0.87 | (9,220 | (0.18 | (45,815 | (0.64 |
| Cash sustaining capital expenditures | 36,686 | 2.89 | 34,919 | 2.47 | 133,041 | 2.58 | 119,914 | 1.68 |
| Capitalized exploration | 807 | 0.06 | 198 | 0.01 | 4,391 | 0.09 | 1,722 | 0.02 |
| Royalties | 1,781 | 0.14 | 2,111 | 0.15 | 7,038 | 0.14 | 8,445 | 0.12 |
| Sustaining cash cost per pound of copper produced | 29,585 | 2.33 | 24,904 | 1.76 | 135,250 | 2.63 | 84,266 | 1.18 |
All values are in US Dollars.
Zinc Cash Cost and Zinc Sustaining Cash Cost
Cash cost per pound of zinc produced ("zinc cash cost") is a non-IFRS measure that management uses as a key performance indicator to assess the performance of our Manitoba operations. This alternative cash cost calculation designates zinc as the primary metal of production as it is the largest component of revenues for our Manitoba business unit and should therefore be less volatile over time than Manitoba cash cost per pound of copper. The calculation is presented in three manners:
Zinc cash cost, before by-product credits - **** This measure is gross of by-product revenues and is a function of the efforts and costs incurred to mine and process all ore mined. However, the measure divides this aggregate cost over only pounds of zinc produced, our primary metal of production. This measure is generally less volatile from period to period, as it is not affected by changes in the price received for by-product metals. It is, however, significantly affected by the relative mix of copper concentrate and finished zinc production, where the sale of the copper will occur later, and an increase in production of copper metal will tend to result in an increase in zinc cash cost under this measure.
Zinc cash cost, net of by-product credits - In order to calculate the net cost to produce and sell zinc, the net of by-product credits measure subtracts the revenues realized from the sale of the metals other than zinc. The by-product revenues from copper, gold, and silver are significant and are integral to the economics of our Manitoba operation. The economics that support our decision to produce and sell zinc would be different if we did not receive revenues from the other significant metals being extracted and processed. This measure provides management and investors with an indication of the minimum zinc price consistent with positive operating cash flow and operating margins, assuming realized by-product metal prices are consistent with those prevailing during the reporting period. It also serves as an important operating statistic that management and investors utilize to measure our operating performance at our Manitoba operation versus that of our competitors. However, it is important to understand that if by-product metal prices decline alongside zinc prices, the zinc cash cost net of by-product credits would increase, requiring a higher zinc price than that reported to maintain positive cash flows and operating margins.
Zinc sustaining cash cost, net of by-product credits - This measure is an extension of zinc cash cost that includes cash sustaining capital expenditures, capitalized exploration and net smelter returns royalties. It does not include corporate selling and administrative expenses. It provides a more fulsome measurement of the cost of sustaining production than zinc cash cost, which is focused on operating costs only.
The tables below present a detailed build-up of zinc cash cost and zinc sustaining cash cost, net of by-product credits, for the Manitoba business unit, and reconciliations between zinc cash cost, net of by-product credits, to the most comparable IFRS measures of cost of sales for the three and nine months ended December 31, 2019 and 2018. Zinc cash cost, net of by-product credits, may not calculate exactly based on amounts presented in the tables below due to rounding.
| Manitoba | Three months ended | Year ended | ||
|---|---|---|---|---|
| (in thousands) | Dec. 31, 2019 | Dec. 31, 2018 | Dec. 31, 2019 | Dec. 31, 2018 |
| Net pounds of zinc produced^1^ | 67,444 | 60,425 | 262,583 | 254,828 |
| ^1^ Contained zinc in concentrate. |
| Manitoba | Three months ended | Year ended | ||||||
|---|---|---|---|---|---|---|---|---|
| Dec. 31, 2019 | Dec. 31, 2018 | Dec. 31, 2019 | Dec. 31, 2018 | |||||
| Cash cost per pound of zinc produced | 000s | /lb | 000s | /lb | 000s | /lb | 000s | /lb |
| Cash cost, before by-product credits^1^ | 101,575 | 1.51 | 100,707 | 1.67 | 404,113 | 1.54 | 428,791 | 1.69 |
| By-product credits | (72,517 | (1.08 | (55,460 | (0.92 | (265,205 | (1.01 | (312,438 | (1.23 |
| Zinc cash cost, net of by-product credits | 29,058 | 0.43 | 45,247 | 0.75 | 138,908 | 0.53 | 116,353 | 0.46 |
| ^1^For additional detail on cash cost, before by-product credits please see page 46 of this MD&A. |
All values are in US Dollars.
| Manitoba | Three months ended | Year ended | ||||||
|---|---|---|---|---|---|---|---|---|
| Dec. 31, 2019 | Dec. 31, 2018 | Dec. 31, 2019 | Dec. 31, 2018 | |||||
| Supplementary cash cost information | 000s | /lb 1 | 000s | /lb 1 | 000s | /lb 1 | 000s | /lb 1 |
| By-product credits: | ||||||||
| Copper | 32,985 | 0.49 | 28,693 | 0.47 | 136,638 | 0.52 | 191,803 | 0.75 |
| Gold | 39,432 | 0.58 | 27,809 | 0.46 | 119,050 | 0.45 | 127,296 | 0.50 |
| Silver | 5,147 | 0.08 | 6,112 | 0.10 | 15,879 | 0.06 | 25,478 | 0.10 |
| Other | 1,266 | 0.02 | 1,377 | 0.02 | 4,759 | 0.02 | 4,745 | 0.02 |
| Total by-product credits | 78,830 | 1.17 | 63,991 | 1.06 | 276,326 | 1.05 | 349,322 | 1.37 |
| Less: deferred revenue | (6,313 | (0.09 | (8,531 | (0.14 | (11,121 | (0.04 | (36,884 | (0.14 |
| Total by-product credits, net of deferred revenue | 72,517 | 1.08 | 55,460 | 0.92 | 265,205 | 1.01 | 312,438 | 1.23 |
| Reconciliation to IFRS: | ||||||||
| Cash cost, net of by-product credits | 29,058 | 45,247 | 138,908 | 116,353 | ||||
| By-product credits | 78,830 | 63,991 | 276,326 | 349,322 | ||||
| Change in deferred revenues | (6,313 | (8,531 | (11,121 | (36,884 | ||||
| Treatment and refining charges | (5,815 | (8,302 | (23,672 | (35,972 | ||||
| Share-based payment | 181 | 127 | 325 | 101 | ||||
| Inventory adjustments | 1,768 | - | 1,768 | - | ||||
| Change in product inventory | 3,267 | 2,935 | (4,413 | 11,395 | ||||
| Royalties | 1,781 | 2,111 | 7,038 | 8,445 | ||||
| Depreciation and amortization^2^ | 37,007 | 29,733 | 135,429 | 121,515 | ||||
| Cost of sales^3^ | 139,764 | 127,311 | 520,588 | 534,275 | ||||
| ^1^ Per pound of zinc produced. | ||||||||
| ^2^Depreciation is based on concentrate sold. | ||||||||
| ^3^ As per IFRS financial statements. |
All values are in US Dollars.
| Manitoba | Three months ended | Year ended | ||||||
|---|---|---|---|---|---|---|---|---|
| Dec. 31, 2019 | Dec. 31, 2018 | Dec. 31, 2019 | Dec. 31, 2018 | |||||
| Sustaining cash cost per pound of zinc produced | $000s | $/lb | $000s | $/lb | $000s | $/lb | $000s | $/lb |
| Zinc cash cost, net of by-product credits | 29,058 | 0.43 | 45,247 | 0.75 | 138,908 | 0.53 | 116,353 | 0.46 |
| Cash sustaining capital expenditures | 36,686 | 0.54 | 34,919 | 0.58 | 133,041 | 0.51 | 119,914 | 0.47 |
| Capitalized exploration | 807 | 0.01 | 198 | - | 4,391 | 0.02 | 1,722 | 0.01 |
| Royalties | 1,781 | 0.03 | 2,111 | 0.03 | 7,038 | 0.03 | 8,445 | 0.03 |
| Sustaining cash cost per pound of zinc produced | 68,332 | 1.01 | 82,475 | 1.36 | 283,378 | 1.08 | 246,434 | 0.97 |
Combined Unit Cost & Zinc Plant Unit Cost Reconciliation
Combined unit cost ("unit cost") and zinc plant unit cost is a non-IFRS measure that management uses as a key performance indicator to assess the performance of our mining and milling operations. Combined unit cost and zinc plant unit cost are calculated by dividing the cost of sales by mill throughput and refined zinc metal produced, respectively. This measure is utilized by management and investors to assess our cost structure and margins and compare it to similar information provided by other companies in our industry. Unlike cash cost, this measure is not impacted by variability in by-product commodity prices since there are no by-product deductions; costs associated with profit-sharing and similar costs are excluded because of their correlation to external metal prices. In addition, the unit costs are reported in the functional currency of the operation which minimizes the impact of foreign currency fluctuations. In all, the unit cost measures provide an alternative perspective on operating cost performance with minimal impact from external market prices.
The tables below present a detailed combined unit cost and zinc plant unit costs for the Manitoba business unit and combined unit cost for the Peru business unit, and reconciliations between these measures to the most comparable IFRS measures of cost of sales for the three and nine months ended December 31, 2019 and 2018.
| Peru | Three months ended | Year ended | ||||||
|---|---|---|---|---|---|---|---|---|
| (in thousands except unit cost per tonne) | Dec. 31, 2019 | Dec. 31, 2018 | Dec. 31, 2019 | Dec. 31, 2018 | ||||
| Combined unit cost per tonne processed | ||||||||
| Mining | 18,533 | 21,721 | 82,417 | 91,324 | ||||
| Milling | 43,860 | 39,590 | 159,913 | 150,016 | ||||
| G&A ^1^ | 15,147 | 15,036 | 56,847 | 56,533 | ||||
| Other G&A ^2^ | (1,339 | ) | (692 | ) | (1,051 | ) | (2,521 | ) |
| Unit cost | 76,201 | 75,655 | 298,126 | 295,352 | ||||
| Tonnes ore milled | 7,474 | 7,658 | 31,387 | 31,283 | ||||
| Combined unit cost per tonne | 10.20 | 9.88 | 9.50 | 9.44 | ||||
| Reconciliation to IFRS: | ||||||||
| Unit cost | 76,201 | 75,655 | 298,126 | 295,352 | ||||
| Freight & other | 15,121 | 14,919 | 53,016 | 51,840 | ||||
| Other G&A | 1,339 | 692 | 1,051 | 2,521 | ||||
| Share-based payment | 27 | 53 | 75 | 59 | ||||
| Inventory adjustments | (100 | ) | (32 | ) | 504 | (234 | ) | |
| Change in product inventory | 7,410 | 3,453 | (3,313 | ) | (4,141 | ) | ||
| Royalties | 2,152 | 1,986 | 6,724 | 7,802 | ||||
| Depreciation and amortization | 56,938 | 52,510 | 209,126 | 211,152 | ||||
| Cost of sales^3^ | 159,088 | 149,236 | 565,309 | 564,351 | ||||
| ^1^ G&A as per cash cost reconciliation above. | ||||||||
| ^2^ Other G&A primarily includes profit sharing costs. | ||||||||
| ^3^ As per IFRS financial statements. |
| Manitoba | Three months ended | Year ended | ||||||
|---|---|---|---|---|---|---|---|---|
| (in thousands except tonnes ore milled and unit cost per tonne) | Dec. 31, 2019 | Dec. 31, 2018 | Dec. 31, 2019 | Dec. 31, 2018 | ||||
| Combined unit cost per tonne processed | ||||||||
| Mining | 46,335 | 42,825 | 186,972 | 165,108 | ||||
| Milling | 13,396 | 13,372 | 49,269 | 52,544 | ||||
| G&A ^1^ | 9,551 | 9,265 | 45,026 | 46,038 | ||||
| Less: G&A allocated to zinc metal production | (2,966 | ) | (3,003 | ) | (12,507 | ) | (13,525 | ) |
| Less: Other G&A related to profit sharing costs | - | (306 | ) | (85 | ) | (6,263 | ) | |
| Purchased ore and zinc concentrates | - | - | - | 20,804 | ||||
| Unit cost | 66,316 | 62,153 | 268,675 | 264,706 | ||||
| USD/CAD implicit exchange rate | 1.32 | 1.32 | 1.33 | 1.29 | ||||
| Unit cost - C$ | 87,528 | 81,894 | 356,562 | 342,361 | ||||
| Tonnes ore milled | 685,151 | 573,564 | 2,652,306 | 2,625,210 | ||||
| Combined unit cost per tonne - C$ | 128 | 143 | 134 | 130 | ||||
| Reconciliation to IFRS: | ||||||||
| Unit cost | 66,316 | 62,153 | 268,675 | 264,706 | ||||
| Freight & other | 7,014 | 8,106 | 26,915 | 35,317 | ||||
| Refined (zinc) | 19,464 | 18,837 | 72,259 | 73,008 | ||||
| G&A allocated to zinc metal production | 2,966 | 3,003 | 12,507 | 13,525 | ||||
| Other G&A related to profit sharing | - | 306 | 85 | 6,263 | ||||
| Share-based payment | 181 | 127 | 325 | 101 | ||||
| Inventory adjustments | 1,768 | - | 1,768 | - | ||||
| Change in product inventory | 3,267 | 2,935 | (4,413 | ) | 11,395 | |||
| Royalties | 1,781 | 2,111 | 7,038 | 8,445 | ||||
| Depreciation and amortization | 37,007 | 29,733 | 135,429 | 121,515 | ||||
| Cost of sales^2^ | 139,764 | 127,311 | 520,588 | 534,275 | ||||
| ^1^ G&A as per cash cost reconciliation above. | ||||||||
| ^2^ As per IFRS financial statements. |
| Manitoba | Three months ended | Year ended | ||||||
|---|---|---|---|---|---|---|---|---|
| (in thousands except zinc plant unit cost per pound) | Dec. 31, 2019 | Dec. 31, 2018 | Dec. 31, 2019 | Dec. 31, 2018 | ||||
| Zinc plant unit cost | ||||||||
| Zinc plant costs | 19,464 | 18,837 | 72,259 | 73,008 | ||||
| G&A ^1^ | 9,551 | 9,265 | 45,026 | 46,038 | ||||
| Less: G&A allocated to other areas | (6,585 | ) | (5,956 | ) | (32,434 | ) | (26,250 | ) |
| Less: Other G&A related to profit sharing | - | (306 | ) | (85 | ) | (6,263 | ) | |
| Zinc plant unit cost | 22,430 | 21,840 | 84,766 | 86,533 | ||||
| USD/CAD implicit exchange rate | 1.32 | 1.33 | 1.33 | 1.30 | ||||
| Zinc plant unit cost - C$ | 29,608 | 29,080 | 112,447 | 112,226 | ||||
| Refined metal produced (in pounds) | 61,324 | 59,271 | 227,828 | 224,988 | ||||
| Zinc plant unit cost per pound - C$ | 0.48 | 0.49 | 0.49 | 0.50 | ||||
| Reconciliation to IFRS: | ||||||||
| Zinc plant unit cost | 22,430 | 21,840 | 84,766 | 86,533 | ||||
| Freight & other | 7,014 | 8,106 | 26,915 | 35,317 | ||||
| Mining | 46,335 | 42,825 | 186,972 | 165,108 | ||||
| Milling | 13,396 | 13,372 | 49,269 | 52,544 | ||||
| Purchased ore and zinc concentrates | - | - | - | 20,804 | ||||
| G&A allocated to other areas | 6,585 | 5,956 | 32,434 | 26,250 | ||||
| Other G&A related to profit sharing | - | 306 | 85 | 6,263 | ||||
| Share-based payment | 181 | 127 | 325 | 101 | ||||
| Inventory adjustments | 1,768 | - | 1,768 | - | ||||
| Change in product inventory | 3,267 | 2,935 | (4,413 | ) | 11,395 | |||
| Royalties | 1,781 | 2,111 | 7,038 | 8,445 | ||||
| Depreciation and amortization | 37,007 | 29,733 | 135,429 | 121,515 | ||||
| Cost of sales^2^ | 139,764 | 127,311 | 520,588 | 534,275 | ||||
| ^1^ G&A as per cash cost reconciliation above. | ||||||||
| ^2^ As per IFRS financial statements. |
ACCOUNTING CHANGES
New standards and interpretations not yet adopted
For information on new standards and interpretations not yet adopted, refer to note 4 of our audited consolidated financial statements for the year ended December 31, 2019.
CRITICAL ACCOUNTING JUDGEMENTS AND ESTIMATES
The preparation of the consolidated financial statements in conformity with IFRS requires us to make judgements, estimates and assumptions that affect the application of accounting policies, reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and reported amounts of revenue and expenses during the reporting period. Actual results may differ from these estimates.
We review these estimates and underlying assumptions on an ongoing basis based on our experience and other factors, including expectations of future events that we believe to be reasonable under the circumstances. Revisions to accounting estimates are recognized in the period in which the estimates are revised and in any future periods affected. Certain accounting estimates and judgements have been identified as being "critical" to the presentation of our financial condition and results of operations because they require us to make subjective and/or complex judgments about matters that are inherently uncertain; or there is a reasonable likelihood that materially different amounts could be reported under different conditions or using different assumptions and estimates.
The following are significant judgements and estimates impacting the consolidated financial statements:
Judgements and estimates that affect multiple areas of the consolidated financial statements:
Mineral reserves and resources which form the basis of life of mine plans which are utilized in impairment testing, timing of payments related to decommissioning obligations and depreciation of capital assets. We estimate our ore reserves and mineral resources based on information compiled by qualified persons as defined in accordance with NI 43-101;
Identification of a business combination and acquisition method accounting;
IFRS 15 - Revenue - adoption for stream transactions
Determination of functional currency;
Income and mining taxes, including estimates of future taxable profit which impacts the ability to realize deferred tax assets on our balance sheet; and
In respect of the outcome of uncertain future events as it concerns recognizing contingent liabilities.
Judgements and estimates that relate mainly to assets (these judgements may also affect other areas of the consolidated financial statements):
Property, plant and equipment:
Cost allocations for mine development;
Mining properties expenditures capitalized;
Classification of supply costs as related to capital development or inventory acquisition;
Determining when exploration and evaluation assets should be transferred to capital works in progress within property, plant and equipment;
Determination of when an asset or group of assets is in the condition and location to be ready for use as intended by management for the purposes of commencing depreciation;
Componentization;
Assessment of impairment, including determination of cash generating units and assessing for indicators of impairment;
Recoverability of exploration and evaluation assets, including determination of cash generating units and assessing for indications of impairment;
Determining whether assets meet criteria for classification as held for sale;
Units of production depreciation;
Plant and equipment estimated useful lives and residual values;
Capitalized stripping costs; and
Finite life intangible assets.
Impairment (and reversal of impairment) of non-financial assets:
Future production levels and timing;
Operating and capital costs;
Future commodity prices;
Foreign exchange rates; and
Risk adjusted discount rates.
Valuation of acquired assets; and
In process inventory quantities, inventory cost allocations and inventory valuation.
Judgements and estimates that relate mainly to liabilities (these judgements may also affect other areas of the consolidated financial statements):
Determining the accounting classification of the precious metals stream deposit;
Determination of deferred revenue per unit related to the precious metals stream transactions and determination of current portion of deferred revenue, which is based on timing of future sales, and adjustments of the expected conversion of resource to reserves;
Pensions and other employee benefits;
Decommissioning, restoration and similar liabilities including estimated future costs and timing of spending;
Contingent liabilities; and
Capital commitments.
Estimates that relate mainly to the consolidated income statements:
Assaying used to determine revenues and recoverability of inventories.
For more information on judgements and estimates, refer to note 2 of our consolidated financial statements for the year ended December 31, 2019.
DISCLOSURE CONTROLS AND PROCEDURES AND INTERNAL CONTROL OVER FINANCIAL REPORTING
Disclosure controls and procedures ("DC&P")
Management is responsible for establishing and maintaining adequate DC&P. As of December 31, 2019, we have evaluated the effectiveness of the design and operation of our DC&P in accordance with requirements of National Instrument 52-109 of the Canadian Securities Commission ("NI 52-109") and the Sarbanes Oxley Act of 2002 (as adopted by the US Securities and Exchange Commission). Our Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO") supervised and participated in this evaluation.
As of December 31, 2019, based on management's evaluation, our CEO and CFO concluded that our DC&P were effective to ensure that information required to be disclosed by us in reports we file or submit is recorded, processed, summarized and reported within the time periods specified in securities legislation and is accumulated and communicated to our management, including our CEO and CFO, to allow timely decisions regarding required disclosure.
Internal control over financial reporting ("ICFR")
Management is responsible for establishing and maintaining adequate ICFR. Under the supervision and with the participation of our management, including our CEO and CFO, we evaluated the effectiveness of our ICFR based upon the Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on management's evaluation, our CEO and CFO concluded that our ICFR was effective as of December 31, 2019. The Company's internal control over financial reporting as of December 31, 2019 has been audited by Deloitte LLP, Independent Registered Public Accounting Firm who also audited the Company's consolidated financial statements for the year ended December 31, 2019. Deloitte LLP expressed an unqualified opinion on the Company's internal control over financial reporting.
Changes in ICFR
We did not make any changes to ICFR during the year ended December 31, 2019 that materially affected, or are reasonably likely to materially affect, our ICFR.
Inherent limitations of controls and procedures
All internal control systems, no matter how well designed, have inherent limitations. As a result, even systems determined to be effective may not prevent or detect misstatements on a timely basis, as systems can provide only reasonable assurance that the objectives of the control system are met. In addition, projections of any evaluation of the effectiveness of ICFR to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may change.
NOTES TO READER
Forward-Looking Information
This MD&A contains forward-looking information within the meaning of applicable Canadian and United States securities legislation. All information contained in this MD&A, other than statements of current and historical fact, is forward-looking information. Often, but not always, forward-looking information can be identified by the use of words such as "plans", "expects", "budget", "guidance", "scheduled", "estimates", "forecasts", "strategy", "target", "intends", "objective", "goal", "understands", "anticipates" and "believes" (and variations of these or similar words) and statements that certain actions, events or results "may", "could", "would", "should", "might" "occur" or "be achieved" or "will be taken" (and variations of these or similar expressions). All of the forward-looking information in this MD&A is qualified by this cautionary note.
Forward-looking information includes, but is not limited to, production, cost and capital and exploration expenditure guidance, anticipated production at our mines and processing facilities, expectations regarding the timing of mining activities at the Pampacancha deposit, the anticipated timing, cost and benefits of developing the Rosemont project and the outcome of litigation challenging Rosemont's permits, expectations regarding the appointment of a permanent CFO, expectations regarding the impact of the Covid-19 coronavirus outbreak and CN rail blockades on our operations and financial performance, expectations regarding the Lalor gold strategy, including the refurbishment of the New Britannia mill, and the possibility of optimizing the value of our gold resources in Manitoba, the future potential of the 1901 deposit, including the possibility of identifying additional gold resources, the possibility of converting inferred mineral resource estimates to higher confidence categories, the potential and our anticipated plans for advancing our mining properties surrounding Constancia and the Mason project, anticipated mine plans, anticipated metals prices and the anticipated sensitivity of our financial performance to metals prices, events that may affect our operations and development projects, anticipated cash flows from operations and related liquidity requirements, the anticipated effect of external factors on revenue, such as commodity prices, estimation of mineral reserves and resources, mine life projections, reclamation costs, economic outlook, government regulation of mining operations, and business and acquisition strategies. Forward-looking information is not, and cannot be, a guarantee of future results or events. Forward-looking information is based on, among other things, opinions, assumptions, estimates and analyses that, while considered reasonable by us at the date the forward-looking information is provided, inherently are subject to significant risks, uncertainties, contingencies and other factors that may cause actual results and events to be materially different from those expressed or implied by the forward-looking information.
The material factors or assumptions that we identified and were applied by us in drawing conclusions or making forecasts or projections set out in the forward-looking information include, but are not limited to:
the timing of development and production activities on the Pampacancha deposit;
the timing of the Consulta Previa and permitting process for mining the Pampacancha deposit;
the timing for reaching additional agreements with individual community members and no significant unanticipated delays to the development of Pampacancha;
the successful completion of the New Britannia project on budget and on schedule;
the successful outcome of the Rosemont litigation;
the success of mining, processing, exploration and development activities;
the scheduled maintenance and availability of our processing facilities;
the accuracy of geological, mining and metallurgical estimates;
anticipated metals prices and the costs of production;
the supply and demand for metals we produce;
the supply and availability of all forms of energy and fuels at reasonable prices;
no significant unanticipated operational or technical difficulties;
the execution of our business and growth strategies, including the success of our strategic investments and initiatives;
the availability of additional financing, if needed;
the ability to complete project targets on time and on budget and other events that may affect our ability to develop our projects;
the timing and receipt of various regulatory and governmental approvals;
the availability of personnel for our exploration, development and operational projects and ongoing employee relations;
maintaining good relations with the communities in which we operate, including the neighbouring Indigenous communities;
no significant unanticipated challenges with stakeholders at our various projects;
no significant unanticipated events or changes relating to regulatory, environmental, health and safety matters;
no contests over title to our properties, including as a result of rights or claimed rights of Indigenous peoples or challenges to the validity of our unpatented mining claims;
the timing and possible outcome of pending litigation and no significant unanticipated litigation;
certain tax matters, including, but not limited to current tax laws and regulations and the refund of certain value added taxes from the Canadian and Peruvian governments; and
no significant and continuing adverse changes in general economic conditions or conditions in the financial markets (including commodity prices and foreign exchange rates).
The risks, uncertainties, contingencies and other factors that may cause actual results to differ materially from those expressed or implied by the forward-looking information may include, but are not limited to, risks generally associated with the mining industry, such as economic factors (including future commodity prices, currency fluctuations, energy prices and general cost escalation), uncertainties related to the development and operation of our projects (including risks associated with the litigation affecting the Rosemont project), risks related to the U.S. district court's recent decisions to set aside the U.S. Forest Service's FROD and the Biological Opinion for Rosemont and related appeals and other legal challenges, risks related to the new Lalor mine plan, including the schedule and cost for the refurbishment of the New Britannia mill and the ability to convert inferred mineral resource estimates to higher confidence categories, risks related to the schedule for mining the Pampacancha deposit (including risks associated with the Consulta Previa process, risks associated with reaching additional agreements with individual community members and risks associated with the rainy season in Peru and the impact of any schedule delays), dependence on key personnel and employee and union relations, risks related to political or social unrest or change, risks in respect of Indigenous and community relations, rights and title claims, operational risks and hazards, including the cost of maintaining and upgrading the Company's tailings management facilities and any unanticipated environmental, industrial and geological events, the inability to insure against all risks, failure of plant, equipment, processes, transportation and other infrastructure to operate as anticipated, compliance with government and environmental regulations, including permitting requirements and anti-bribery legislation, depletion of our reserves, volatile financial markets that may affect our ability to obtain additional financing on acceptable terms, the failure to obtain required approvals or clearances from government authorities on a timely basis, uncertainties related to the geology, continuity, grade and estimates of mineral reserves and resources, and the potential for variations in grade and recovery rates, uncertain costs of reclamation activities, our ability to comply with our pension and other post-retirement obligations, our ability to abide by the covenants in our debt instruments and other material contracts, tax refunds, hedging transactions, as well as the risks discussed under the heading "Risk Factors" in our most recent Annual Information Form.
Should one or more risk, uncertainty, contingency or other factor materialize or should any factor or assumption prove incorrect, actual results could vary materially from those expressed or implied in the forward-looking information. Accordingly, you should not place undue reliance on forward-looking information. We do not assume any obligation to update or revise any forward-looking information after the date of this MD&A or to explain any material difference between subsequent actual events and any forward-looking information, except as required by applicable law.
Note to United States Investors
This MD&A has been prepared in accordance with the requirements of the securities laws in effect in Canada, which may differ materially from the requirements of United States securities laws applicable to U.S. issuers.
Qualified Person
The technical and scientific information in this MD&A related to the Constancia mine and Rosemont project has been approved by Cashel Meagher, P. Geo, our Senior Vice President and Chief Operating Officer. The technical and scientific information related to our other material mineral projects contained in this MD&A has been approved by Olivier Tavchandjian, P. Geo, our Vice President, Exploration and Geology. Messrs. Meagher and Tavchandjian are qualified persons pursuant to NI 43-101. For a description of the key assumptions, parameters and methods used to estimate mineral reserves and resources at Hudbay's material properties, as well as data verification procedures and a general discussion of the extent to which the estimates of scientific and technical information may be affected by any known environmental, permitting, legal title, taxation, sociopolitical, marketing or other relevant factors, please see the technical reports for our material properties as filed by us on SEDAR at www.sedar.com.
Hudbay Minerals Inc.: Exhibit 99.3 - Filed by newsfilecorp.com
Hudbay Announces Fourth Quarter and Full Year 2019 Results and Provides Annual Guidance
- Achieved 2019 production and unit cost guidance in Peru and Manitoba; strong performance at the Lalor and 777 mines resulted in zinc production exceeding the top end of the guidance range
- Constancia achieved record mill throughput and copper recoveries in 2019
- Lalor and 777 increased mine output by 22% and 15%, respectively, year-over-year
- Cash generated from operating activities was $98.7 million in the fourth quarter of 2019, an increase from the third quarter of 2019
- Cash and cash equivalents of $396.1 million as at December 31, 2019 was relatively unchanged during the quarter and positions the company well for executing future growth initiatives
- 2020 production guidance of 107,500^[i]^ tonnes of copper and 172,500^i^ ounces of precious metals with copper and precious metals production expected to grow by 18%^i^ and 67%^i^, respectively, by 2022
- Reached a community agreement to acquire Pampacancha surface rights
- The New Britannia gold mill refurbishment remains on track to be completed before the end of 2021, which is expected to increase Lalor's annual gold production to approximately 140,000 ounces starting in 2022
- Hudbay's Manitoba operations received the Towards Sustainable Mining Leadership Award in 2019
Toronto, Ontario, February 20, 2020 - Hudbay Minerals Inc. ("Hudbay" or the "company") (TSX, NYSE:HBM) today released its fourth quarter and full year 2019 financial results and annual production and cost guidance. All amounts are in U.S. dollars, unless otherwise noted.
"We delivered solid operating results in the fourth quarter as a result of our focus on maintaining steady mine performance while continuing to implement various process improvement initiatives across the business," said Peter Kukielski, President and Chief Executive Officer. "We are on-track to deliver our next phase of growth, including mining the high-grade Pampacancha satellite deposit in Peru in 2020 and completing the refurbishment of the New Britannia gold mill in Manitoba by 2022. Both projects are low capital intensity, high return brownfield projects with short paybacks on our invested capital. We are proud of our ESG and operating achievements in 2019, as well as our successful track record of achieving annual copper production guidance for the past five years. We look forward to delivering significant near-term copper and gold production growth as we execute on our strategic plan."
Summary of Fourth Quarter Results
Consolidated copper production in the fourth quarter of 2019 was 32,422 tonnes, a decrease from the third quarter of 2019 primarily as a result of lower planned production in Peru due to the regularly scheduled mill maintenance shut-down and normal quarter-to-quarter variance in copper grades. Consolidated zinc production was higher in the fourth quarter compared to the third quarter of 2019 due to higher zinc grades in Manitoba. Copper sales volumes increased in the fourth quarter as copper concentrate inventory levels in Peru returned to normal levels, while zinc sales volumes were lower as a result of the one-week Canadian National Railway strike during the quarter.
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In the fourth quarter of 2019, consolidated cash cost per pound of copper produced, net of by-product credits^[ii]^, was $1.23, an increase compared to $0.98 in the third quarter due to lower copper production and lower zinc by-product revenue, partially offset by higher precious metals by-product revenue. Incorporating cash sustaining capital, capitalized exploration, royalties, selling, administrative and regional costs, consolidated all-in sustaining cash cost per pound of copper produced, net of by-product credits^ii^, in the fourth quarter of 2019 was $2.55, which increased from $1.98 in the third quarter, driven mainly by increased sustaining capital expenditures and the same factors noted above affecting consolidated cash costs.
Net loss and loss per share in the fourth quarter of 2019 were $1.5 million and $0.01, respectively. Net loss and loss per share in the fourth quarter of 2019 were affected by, among other things, the following items:
| **** | Pre-tax gain (loss) | After-tax gain (loss) | Per share gain (loss) |
|---|---|---|---|
| ($ millions) | ($ millions) | ($/share) | |
| Mark-to-market adjustments | (9.0) | (6.6) | (0.03) |
| Non-cash deferred tax adjustments | - | 30.4 | 0.12 |
Cash generated from operating activities increased to $98.7 million in the fourth quarter of 2019 from $43.5 million in the third quarter of 2019. Operating cash flow before change in non-cash working capital was $69.1 million during the fourth quarter of 2019, relatively unchanged from the third quarter. The increase in cash generated from operating activities is primarily the result of the reduction of excess inventories and other working capital changes during the quarter.
| Consolidated Financial Performance | Three Months Ended | |||
|---|---|---|---|---|
| ($000s except per share amounts) | Dec. 31, 2019 | Sep. 30, 2019 | Dec. 31, 2018 | |
| Revenue | 324,485 | 291,282 | 351,773 | |
| Cost of sales | 298,852 | 260,327 | 276,547 | |
| Earnings (loss) before tax | (42,352) | (348,367) | 17,650 | |
| Earnings (loss) | (1,455) | (274,796) | (3,510) | |
| Basic and diluted earnings (loss) per share | (0.01) | (1.05) | (0.01) | |
| Operating cash flow before change in non-cash working capital | 69,141 | 71,204 | 104,264 | |
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| Consolidated Operational Performance | ****** | Three Months Ended | ||
| --- | --- | --- | --- | --- |
| ****** | Dec. 31, 2019 | Sep. 30, 2019 | Dec. 31, 2018 | |
| Contained metal in concentrate produced^1^ | **** | |||
| Copper | tonnes | 32,422 | 36,422 | 37,238 |
| Gold | ounces | 32,712 | 28,319 | 28,051 |
| Silver | ounces | 930,137 | 924,191 | 1,014,684 |
| Zinc | tonnes | 30,592 | 28,639 | 27,408 |
| Molybdenum | tonnes | 372 | 262 | 329 |
| Precious metals^2^ | ounces | 46,000 | 41,522 | 42,546 |
| Payable metal in concentrate sold | **** | |||
| Copper | tonnes | 33,715 | 29,916 | 36,350 |
| Gold | ounces | 30,344 | 25,488 | 25,861 |
| Silver | ounces | 909,423 | 756,296 | 909,500 |
| Zinc^3^ | tonnes | 28,001 | 29,140 | 31,134 |
| Molybdenum | tonnes | 199 | 334 | 447 |
| Precious metals^2^ | ounces | 43,336 | 36,292 | 38,854 |
| Cash cost^4^ | $/lb | 1.23 | 0.98 | 0.94 |
| All-in sustaining cash cost^4^ | $/lb | 2.55 | 1.98 | 1.80 |
^1^ Metal reported in concentrate is prior to deductions associated with smelter contract terms.
^2^ Precious metals production includes gold and silver production on a gold-equivalent basis. Silver is converted to gold at a ratio of 70:1.
^3^Includes refined zinc metal sold and payable zinc in concentrate sold.
^4^ Cash cost and all-in sustaining cash cost per pound of copper produced, net of by-product credits, are non-IFRS financial performance measures with no standardized definition under IFRS. For further information, please see the "Non-IFRS Financial Reporting Measures" section of this news release.
Summary of Full Year Results
On a consolidated basis, Hudbay's copper and precious metals production met 2019 guidance and production of zinc and molybdenum exceeded 2019 guidance ranges. Production of copper benefited from increased throughput and recoveries at Constancia despite expected lower planned grades. Strong zinc production was a result of Lalor achieving its ramp up to 4,500 tonnes per day and the 777 mine implementing operational improvements. Combined unit costs in both Peru and Manitoba were within 2019 guidance ranges. Total capital expenditures were above 2019 guidance due primarily to increased sustaining capital expenditures related to mining equipment that is now accounted for as a capitalized lease under IFRS.
Consolidated cash cost per pound of copper produced, net of by-product credits, was $1.14 in 2019, an increase compared to $0.94 in 2018 primarily due to lower copper production from planned lower grades at Constancia and the closure of the Reed mine in Manitoba in August 2018. Incorporating cash sustaining capital, capitalized exploration, royalties, selling, administrative and regional costs, consolidated all-in sustaining cash cost per pound of copper produced, net of by-product credits, in 2019 was $2.17, which increased from $1.60 in 2018, driven mainly by increased sustaining capital expenditures and the same factors noted above affecting consolidated cash costs.
Cash generated from operating activities decreased to $310.9 million in 2019 from $479.6 million in 2018. Operating cash flow before change in non-cash working capital decreased to $307.3 million from $501.4 million in 2018. The decrease is the result of lower copper sales volumes and lower margins mainly from lower realized base metal prices.
Cash and cash equivalents decreased by $119.4 million year-over-year to $396.1 million as at December 31, 2019. This decrease was mainly a result of $259.2 million of funding for capital investments, interest payments and financing activities of $137.8 million and the acquisition of the remaining interest in the Rosemont project for $45.0 million. This decrease was partially offset by cash flow from operating activities of $310.9 million.
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| Consolidated Financial Performance | Year Ended | ||
| --- | --- | --- | |
| ($000s except per share amounts) | Dec. 31, 2019 | Dec. 31, 2018 | |
| Revenue | 1,237,439 | 1,472,366 | |
| Cost of sales | 1,085,897 | 1,098,626 | |
| Profit (loss) before tax | (452,763) | 170,837 | |
| Profit (loss) | (343,810) | 85,416 | |
| Basic and diluted earnings (loss) per share | (1.32) | 0.33 | |
| Operating cash flow before change in non-cash working capital | 307,284 | 501,352 | |
| Consolidated Operational Performance | ****** | Year Ended | |
| --- | --- | --- | --- |
| ****** | Dec. 31, 2019 | Dec. 31, 2018 | |
| Contained metal in concentrate produced^1^ | **** | ||
| Copper | tonnes | 137,179 | 154,550 |
| Gold | ounces | 114,692 | 119,882 |
| Silver | ounces | 3,585,330 | 3,954,469 |
| Zinc | tonnes | 119,106 | 115,588 |
| Molybdenum | tonnes | 1,272 | 904 |
| Precious metals^2^ | ounces | 165,911 | 176,374 |
| Payable metal in concentrate sold | **** | ||
| Copper | tonnes | 128,519 | 147,923 |
| Gold | ounces | 108,999 | 113,097 |
| Silver | ounces | 3,452,926 | 3,372,353 |
| Zinc^3^ | tonnes | 104,319 | 115,723 |
| Molybdenum | tonnes | 1,186 | 819 |
| Precious metals^2^ | ounces | 158,327 | 161,273 |
| Cash cost^4^ | $/lb | 1.14 | 0.94 |
| All-in sustaining cash cost^4^ | $/lb | 2.17 | 1.60 |
^1^ Metal reported in concentrate is prior to deductions associated with smelter contract terms.
^2^Precious metals production includes gold and silver production on a gold-equivalent basis. Silver is converted to gold at a ratio of 70:1.
^3^Includes refined zinc metal sold and payable zinc in concentrate sold.
^4^Cash cost and all-in sustaining cash cost per pound of copper produced, net of by-product credits, are non-IFRS financial performance measures with no standardized definition under IFRS. For further information, please see the "Non-IFRS Financial Reporting Measures" section of this news release.
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Peru Operations Review
| Peru Operations | Three Months Ended | Year Ended | |||||
|---|---|---|---|---|---|---|---|
| ****** | Dec. 31, 2019 | Sep. 30, 2019 | Dec. 31, 2018 | Dec. 31, 2019 | Dec. 31, 2018 | ||
| Ore mined^1^ | tonnes | 8,049,063 | 8,413,367 | 7,329,423 | 33,308,369 | 34,372,156 | |
| Copper | % | 0.41 | 0.44 | 0.47 | 0.43 | 0.49 | |
| Gold | g/tonne | 0.04 | 0.05 | 0.05 | 0.04 | 0.05 | |
| Silver | g/tonne | 3.87 | 3.93 | 4.16 | 3.76 | 4.15 | |
| Ore milled | tonnes | 7,474,136 | 8,240,344 | 7,657,943 | 31,387,281 | 31,282,610 | |
| Copper | % | 0.42 | 0.44 | 0.48 | 0.42 | 0.47 | |
| Gold | g/tonne | 0.04 | 0.04 | 0.06 | 0.04 | 0.05 | |
| Silver | g/tonne | 3.86 | 3.76 | 4.26 | 3.64 | 4.08 | |
| Copper recovery | % | 85.6 | 86.0 | 84.8 | 85.7 | 82.6 | |
| Gold recovery | % | 50.0 | 48.3 | 48.5 | 48.1 | 47.4 | |
| Silver recovery | % | 68.2 | 68.9 | 71.6 | 68.2 | 66.5 | |
| Contained metal in concentrate | **** | **** | |||||
| Copper | tonnes | 26,659 | 31,091 | 30,834 | 113,825 | 122,178 | |
| Gold | ounces | 5,007 | 5,565 | 7,522 | 19,723 | 24,189 | |
| Silver | ounces | 631,774 | 686,258 | 750,747 | 2,504,769 | 2,729,859 | |
| Molybdenum | tonnes | 372 | 262 | 329 | 1,272 | 904 | |
| Precious metals^2^ | ounces | 14,033 | 15,369 | 18,247 | 55,506 | 63,187 | |
| Payable metal sold | **** | **** | |||||
| Copper | tonnes | 28,430 | 25,314 | 31,252 | 106,184 | 116,449 | |
| Gold | ounces | 4,824 | 3,858 | 7,262 | 18,956 | 20,420 | |
| Silver | ounces | 666,839 | 529,139 | 672,756 | 2,452,496 | 2,255,700 | |
| Molybdenum | tonnes | 199 | 334 | 447 | 1,186 | 819 | |
| Combined unit operating cost^3^^,4^ | $/tonne | 10.20 | 8.63 | 9.88 | 9.50 | 9.44 | |
| Cash cost^4^ | $/lb | 1.66 | 1.26 | 1.31 | 1.41 | 1.36 | |
| Sustaining cash cost^4^ | $/lb | 2.47 | 1.75 | 1.66 | 1.90 | 1.59 |
^1^ Reported tonnes and grade for ore mined are estimates based on mine plan assumptions and may not reconcile fully to ore milled.
^2^Precious metals production includes gold and silver production on a gold-equivalent basis. Silver converted to gold at a ratio of 70:1.
^3^Reflects combined mine, mill and general and administrative ("G&A") costs per tonne of ore milled. Reflects the deduction of expected capitalized stripping costs.
^4^ Combined unit cost, cash cost and sustaining cash cost are non-IFRS financial performance measures with no standardized definition under IFRS. For further information, please see the "Non-IFRS Financial Reporting Measures" section of this news release.
Constancia achieved record mill throughput and record copper recoveries in 2019 as a result of several metallurgical initiatives, and full year copper recoveries exceeded the levels anticipated in the National Instrument ("NI") 43-101 technical report issued in March 2018.
During the quarter, the Constancia mine produced 26,659 tonnes of copper, 14,033 ounces of precious metals and 372 tonnes of molybdenum. Production results were lower than the third quarter of 2019 primarily as a result of lower throughput as the mine reached full-year mill throughput limits imposed by its operating permits. Year-over-year copper production decreased as copper grades declined in line with the mine plan, partially offset by higher throughput and copper recoveries. Full year production of copper was within 2019 guidance ranges, while precious metals and molybdenum production exceeded the guidance ranges.
Mill throughput in the fourth quarter of 2019 was lower compared to the third quarter of 2019, which was a record throughput quarter. Mill throughput was lower in the fourth quarter primarily due to the scheduled semi-annual maintenance shutdown as well as a requirement to comply with full year permit limitations on throughput. Milled copper grades in the fourth quarter were slightly lower than the third quarter, in line with the mine plan.
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Copper recoveries in the fourth quarter of 2019 were consistent with the third quarter levels as a result of the sustained metallurgical improvements implemented throughout the year. While recoveries vary from quarter to quarter depending on the complexity and grade of the ore feed, the company is seeing results from ongoing recovery optimization initiatives. These results are demonstrated through the year-over-year increase in copper recoveries to 85.7% in 2019 from 82.6% in 2018. Highlights of the initiatives include the continued integration of an automated, advanced process control system and the installation of enhanced classification and flotation equipment in the grinding and bulk flotation circuits.
Combined mine, mill and G&A unit operating costs in the fourth quarter were higher than the third quarter of 2019, reflecting correspondingly lower ore throughput and higher maintenance costs due to the planned plant shutdown. Full year 2019 combined unit costs for Constancia were similar to 2018 levels and were in line with 2019 guidance expectations.
Peru cash cost per pound of copper produced, net of by-product credits, in the fourth quarter of 2019 was $1.66, 32% higher than in the third quarter due to lower copper production, in line with the mine plan, higher operating costs and lower by-product credits. Peru sustaining cash cost per pound of copper produced, net of by-product credits^ii^, was $2.47 in the fourth quarter of 2019. This represents a 41% increase from the third quarter due to the same factors that affected cash costs as well as higher sustaining costs in heavy civil works and capitalized stripping costs, and timing of payments on long-term community agreements and leases.
Peru cash cost per pound of copper produced, net of by-product credits, for the full year 2019 was $1.41, 4% higher than the full year 2018 primarily due to lower copper production, in line with the mine plan, offset by higher by-product credits. Peru sustaining cash cost per pound of copper produced, net of by-product credits, was $1.90 for the full year 2019. This represents a 19% increase from 2018 due to the same factors that affected sustaining cash costs in the fourth quarter.
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Manitoba Operations Review
| Manitoba Operations | Three Months Ended | Year Ended | ||||
|---|---|---|---|---|---|---|
| ****** | Dec. 31, 2019 | Sep. 30, 2019 | Dec. 31, 2018 | Dec. 31, 2019 | Dec. 31, 2018 | |
| 777 ore mined | tonnes | 269,342 | 273,319 | 244,613 | 1,109,782 | 966,567 |
| Copper | % | 1.17 | 1.33 | 1.76 | 1.37 | 1.47 |
| Zinc | % | 3.33 | 3.01 | 3.46 | 3.22 | 4.43 |
| Gold | g/tonne | 1.52 | 1.63 | 1.61 | 1.61 | 1.83 |
| Silver | g/tonne | 18.52 | 15.42 | 24.37 | 18.67 | 28.34 |
| Lalor ore mined | tonnes | 390,140 | 346,456 | 317,616 | 1,536,780 | 1,260,241 |
| Copper | % | 0.80 | 0.68 | 0.82 | 0.75 | 0.74 |
| Zinc | % | 6.20 | 6.16 | 6.80 | 6.36 | 6.25 |
| Gold | g/tonne | 2.63 | 2.21 | 2.09 | 2.16 | 2.19 |
| Silver | g/tonne | 28.38 | 25.56 | 24.66 | 25.51 | 25.39 |
| Flin Flon Concentrator: | **** | **** | ||||
| Ore milled | tonnes | 374,529 | 331,216 | 259,569 | 1,362,006 | 1,423,744 |
| Copper | % | 1.11 | 1.22 | 1.73 | 1.27 | 1.90 |
| Zinc | % | 4.05 | 3.64 | 3.55 | 3.78 | 3.71 |
| Gold | g/tonne | 1.75 | 1.74 | 1.62 | 1.72 | 1.63 |
| Silver | g/tonne | 20.56 | 17.36 | 24.79 | 19.84 | 23.48 |
| Copper recovery | % | 86.9 | 89.1 | 90.4 | 88.0 | 92.3 |
| Zinc recovery | % | 85.8 | 86.7 | 83.7 | 85.5 | 84.2 |
| Gold recovery | % | 56.1 | 59.1 | 62.8 | 59.4 | 64.5 |
| Silver recovery | % | 49.2 | 48.7 | 54.8 | 50.8 | 60.2 |
| Stall Concentrator: | **** | **** | ||||
| Ore milled | tonnes | 310,622 | 318,539 | 313,995 | 1,290,300 | 1,201,466 |
| Copper | % | 0.80 | 0.64 | 0.84 | 0.73 | 0.72 |
| Zinc | % | 6.24 | 6.22 | 6.83 | 6.39 | 6.38 |
| Gold | g/tonne | 2.60 | 2.12 | 2.09 | 2.13 | 2.15 |
| Silver | g/tonne | 28.12 | 25.16 | 24.58 | 25.48 | 25.27 |
| Copper recovery | % | 85.9 | 84.4 | 88.6 | 85.9 | 85.7 |
| Zinc recovery | % | 90.7 | 91.8 | 91.9 | 91.1 | 92.8 |
| Gold recovery | % | 61.1 | 54.3 | 57.1 | 56.8 | 57.6 |
| Silver recovery | % | 62.9 | 57.4 | 60.7 | 60.4 | 59.2 |
| Total contained metal in concentrate | ||||||
| Copper | tonnes | 5,763 | 5,331 | 6,404 | 23,354 | 32,372 |
| Zinc | tonnes | 30,592 | 28,639 | 27,408 | 119,106 | 115,588 |
| Gold | ounces | 27,705 | 22,754 | 20,529 | 94,969 | 95,693 |
| Silver | ounces | 298,363 | 237,933 | 263,937 | 1,080,561 | 1,224,610 |
| Precious metals^1^ | ounces | 31,967 | 26,153 | 24,300 | 110,406 | 113,188 |
| Total payable metal sold | **** | **** | ||||
| Copper | tonnes | 5,285 | 4,602 | 5,098 | 22,335 | 31,474 |
| Zinc^2^ | tonnes | 28,001 | 29,140 | 31,134 | 104,346 | 115,723 |
| Gold | ounces | 25,520 | 21,630 | 18,599 | 90,043 | 92,677 |
| Silver | ounces | 242,584 | 227,157 | 236,744 | 1,000,430 | 1,116,653 |
| Combined unit operating cost^3,4^ | C$/tonne | 128 | 130 | 143 | 134 | 130 |
| Cash cost^4^ | $/lb | (0.76) | (0.68) | (0.87) | (0.18) | (0.64) |
| Sustaining cash cost^4^ | $/lb | 2.33 | 2.77 | 1.76 | 2.63 | 1.18 |
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| 2020 No. 4 |
^1^ Precious metals production includes gold and silver production on a gold-equivalent basis. Silver converted to gold at a ratio of 70:1. ^2^ Includes refined zinc metal sold and payable zinc in concentrate sold. ^3^ Reflects combined mine, mill and G&A costs per tonne of ore milled. 2018 numbers include the cost of ore purchased from the joint venture partner at the Reed mine. ^4^Combined unit cost, cash cost and sustaining cash cost are non-IFRS financial performance measures with no standardized definition under IFRS. For further information, please see the "Non-IFRS Financial Reporting Measures" section of this news release.
The Manitoba operations benefitted from strong performance from both the 777 and Lalor mines in 2019. Lalor successfully achieved the ramp up to 4,500 tonnes per day in early 2019 and 777 successfully implemented efficiency initiatives focused on maximizing the output from the mine.
During the quarter, the Manitoba operations produced 30,592 tonnes of zinc, 5,763 tonnes of copper and 31,967 ounces of precious metals. Production results were higher than the third quarter of 2019 primarily due to higher tonnes and grades at Lalor. Year-over-year copper production decreased due to the closure of the Reed mine in August 2018, while zinc production increased due to the Lalor mine's ramp up. Full year production of zinc exceeded 2019 guidance ranges, while copper and precious metals production were within 2019 guidance ranges.
Ore mined at the Manitoba operations during the fourth quarter of 2019 increased by 6% compared to the third quarter of 2019 due to higher production volumes at Lalor. Overall zinc, gold and silver grades were higher compared to the third quarter of 2019, while copper grades were lower, due to planned stope sequencing based on life of mine production schedules at 777 and Lalor. Higher gold grades at Lalor were due to mining of gold enriched base metal stopes in the fourth quarter of 2019.
Ore mined at the Manitoba operations for the full year 2019 increased by 4% over 2018 levels due to higher production volumes at both 777 and Lalor, partially offset by the closure of the Reed mine. The 15% year-over-year increase in ore mined at 777 is attributable to implementation of management systems designed to improve mobile equipment availability and key performance indicators for drilling, blasting and backfilling processes. The 22% year-over-year increase in ore mined at Lalor is attributable to a number of initiatives implemented as part of the production ramp up to 4,500 tonnes per day, including mine design changes, contract strategies, asset integrity and work management programs.
Ore processed in Flin Flon in the fourth quarter of 2019 was 13% higher than the third quarter of 2019 as a result of increased ore feed trucked from Lalor. Ore processed at the Stall concentrator was marginally lower than the third quarter of 2019. Ore processed in Flin Flon for the full year 2019 was 4% lower than in 2018 due to the Reed mine closure, partially offset by increased production from the 777 mine. Ore processed at the Stall concentrator was 7% higher in 2019 versus 2018 due to ongoing operational and maintenance improvements. Full year operating costs at the Flin Flon and Stall concentrators were 9% and 1% lower, respectively, in 2019 compared to 2018 primarily due to higher plant efficiencies.
Manitoba combined mine, mill and G&A unit operating costs in the fourth quarter of 2019 were 2% lower than in the third quarter of 2019 mainly due to unit costs trending lower following Lalor's ramp up, with third and fourth quarter unit costs well below the levels reported in the first half of 2019. Manitoba combined unit costs for the full year 2019 were in line with the annual guidance range.
Manitoba cash cost per pound of copper produced, net of by-product credits, in the fourth quarter of 2019 was negative $0.76. These costs were lower compared to the third quarter of 2019, primarily as a result of higher copper production and higher by-product revenue. Manitoba sustaining cash cost per pound of copper produced, net of by-product credits, in the fourth quarter of 2019 was $2.33, which was 14% lower than the third quarter due to lower capitalized exploration partially offset by increased capital development expenditures at Lalor, in addition to the same factors that affected cash costs.
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Manitoba cash cost per pound of copper produced, net of by-product credits, for the full year 2019 was negative $0.18. These costs were higher compared to the full year 2018, primarily as a result of higher mining costs and lower copper production. Manitoba sustaining cash cost per pound of copper produced, net of by-product credits, for the full year 2019 was $2.63, which was higher compared to the full year 2018 due to higher sustaining capital expenditures, in addition to the same factors that affected cash costs.
Annual Guidance
Hudbay's annual production and operating cost guidance, along with its annual capital and exploration expenditure forecasts and three-year production outlook are discussed in detail below.
Production Guidance
| Contained Metal in Concentrate^1^ | 2020 Guidance | Year Ended<br>Dec. 31, 2019 | 2019 Guidance | |
|---|---|---|---|---|
| Manitoba | ||||
| Copper | tonnes | 18,000 - 22,000 | 23,354 | 22,000 - 25,000 |
| Zinc | tonnes | 105,000 - 125,000 | 119,106 | 100,000 - 115,000 |
| Precious metals^2^ | oz | 110,000 - 135,000 | 110,406 | 105,000 - 125,000 |
| Peru | ||||
| Copper | tonnes | 80,000 - 95,000 | 113,825 | 100,000 - 125,000 |
| Precious metals^2^ | oz | 45,000 - 55,000 | 55,506 | 45,000 - 55,000 |
| Molybdenum | tonnes | 1,300 - 1,600 | 1,272 | 1,100 - 1,200 |
| Total | ||||
| Copper | tonnes | 98,000 - 117,000 | 137,179 | 122,000 - 150,000 |
| Zinc | tonnes | 105,000 - 125,000 | 119,106 | 100,000 - 115,000 |
| Precious metals^2^ | oz | 155,000 - 190,000 | 165,912 | 150,000 - 180,000 |
| Molybdenum | tonnes | 1,300 - 1,600 | 1,272 | 1,100 - 1,200 |
| ^1^ Metal reported in concentrate is prior to refining losses or deductions associated with smelter terms.<br><br> <br>^2^ Precious metals production includes gold and silver production on a gold-equivalent basis. For 2019, silver was converted to gold at a ratio of 70:1. For 2020 guidance, silver is converted to gold at a ratio of 89:1. |
In 2020, consolidated production of copper contained in concentrate is forecast to decrease by approximately 22%^i^ compared to 2019 production, primarily due to planned lower copper grades at Constancia in line with the mine plan. However, with the addition of the higher-grade Pampacancha satellite deposit in Peru, total copper production is expected to increase by 18%^i^ from 2020 to 2022.
Production of zinc contained in concentrate in 2020 is forecast to be strong with the 2020 guidance range slightly higher than the range in 2019. That trend is expected to continue into 2021 with Lalor maintaining steady production at 4,500 tonnes per day and the company continuing to maximize the output from the 777 mine as it nears the end of its mine life in the second quarter of 2022.
Consolidated production of precious metals contained in concentrate in 2020 is forecast to increase by approximately 4%^i^ compared to 2019 production, primarily due to higher precious metals production at Lalor from the planned mining of approximately 90,000 tonnes from the gold zones in 2020 as part of stope sequencing in preparation for the restart of the New Britannia gold mill. By 2022, consolidated precious metals production is expected to increase by 67%^i^ following the restart of the New Britannia gold mill in Manitoba and the addition of the Pampacancha high-grade satellite deposit in Peru.
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| 3-Year Production Outlook<br><br> <br>Contained Metal in Concentrate^1^ | 2020 Guidance | 2021 Guidance | 2022 Guidance | |
| --- | --- | --- | --- | --- |
| Manitoba^2^ | ||||
| Copper | tonnes | 18,000 - 22,000 | 19,000 - 23,000 | 13,000 - 15,000 |
| Zinc | tonnes | 105,000 - 125,000 | 115,000 - 140,000 | 75,000 - 90,000 |
| Precious metals^3^ | oz | 110,000 - 135,000 | 110,000 - 135,000 | 150,000 - 190,000 |
| Peru | ||||
| Copper | tonnes | 80,000 - 95,000 | 80,000 - 100,000 | 100,000 - 125,000 |
| Precious metals^3^ | oz | 45,000 - 55,000 | 85,000 - 100,000 | 105,000 - 130,000 |
| Molybdenum | tonnes | 1,300 - 1,600 | 1,000 - 1,200 | 1,500 - 1,800 |
| Total | ||||
| Copper | tonnes | 98,000 - 117,000 | 99,000 - 123,000 | 113,000 - 140,000 |
| Zinc | tonnes | 105,000 - 125,000 | 115,000 - 140,000 | 75,000 - 90,000 |
| Precious metals^3^ | oz | 155,000 - 190,000 | 195,000 - 235,000 | 255,000 - 320,000 |
| Molybdenum | tonnes | 1,300 - 1,600 | 1,000 - 1,200 | 1,500 - 1,800 |
| ^1^Metal reported in concentrate is prior to refining losses or deductions associated with smelter terms.<br><br> <br>^2^ Manitoba production guidance assumes the 777 mine is depleted in the second quarter of 2022, resulting in lower copper and zinc production after its closure.<br><br> <br>^3^ Precious metals production includes gold and silver production on a gold-equivalent basis. Silver is converted to gold at a ratio of 89:1. |
Capital Expenditure Guidance
| Capital Expenditures1<br> (in millions) | Year Ended<br><br> <br>Dec. 31, 2019 | 2019 Guidance |
|---|---|---|
| Sustaining capital | **** | **** |
| Manitoba2 | 126.3 | 100.0 |
| Peru3 | 84.9 | 95.0 |
| Total sustaining capital | 211.2 | 195.0 |
| Growth capital | ||
| Manitoba | 14.1 | 10.0 |
| Peru4 | 2.1 | 45.0 |
| Arizona5 | 36.4 | 40.0 |
| Total growth capital | 52.6 | 95.0 |
| Capitalized exploration | 15.7 | 15.0 |
| Total capital expenditures | 279.5 | 305.0 |
| 1 Excludes capitalized costs not considered to be sustaining or growth capital expenditures.<br> 2 Manitoba sustaining capital expenditures for the year ended December 31, 2019 include a new capitalized lease related to sustaining capital expenditures of 14.3 million not included in 2019 annual guidance. Excluded from sustaining capital is the anticipated 20 million expected to be spent on improvements to the legacy Flin Flon tailings facilities, as described below.3 Includes capitalized stripping costs.4 Peru growth capital expenditures of 45.0 million in 2019 related to expected expenditures for developing the Pampacancha deposit and acquiring surface rights, which has been deferred to 2020. 2020 expected growth capital expenditures include costs associated with project development and acquiring the surface rights. Some additional capital costs remain outstanding in recognition of current uses of land and the company intends to enter into agreements to address these matters prior to commencing mining activities.<br> 5 Arizona spending includes capitalized costs associated with the Rosemont and Mason projects. Rosemont's 2019 guidance was revised to include 20 million of project costs and 20 million of non-project costs as announced on November 11, 2019. |
All values are in US Dollars.
Total planned sustaining capital expenditures in 2020 are expected to slightly decrease from 2019 levels due to lower spending in Manitoba offset by higher planned spending in Peru primarily related to higher capitalized stripping costs. In Manitoba, Hudbay continues to implement improvements on the legacy Flin Flon tailings impoundment area, in line with higher industry-wide standards for tailings dam safety following the failure of other tailings dams in recent years. This spending is expected to be approximately $20 million per year from 2020 to 2022, but these expenditures will not impact sustaining capital expenditures since they are associated with the updated decommissioning and restoration liability, and therefore, will be accounted for as a drawdown of the liability.
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Manitoba growth capital spending of $80 million relates to a significant portion of the New Britannia mill refurbishment costs as construction activities are on track to commence in the second quarter of 2020. The New Britannia mill refurbishment costs are expected to total approximately $115 million over 2020 and 2021, higher than the original estimate of approximately $95 million primarily due to the introduction of new instruments expected to further improve mill efficiency, as well as labour cost inflation and some cost escalation on equipment. The capital investment in the New Britannia mill offers high returns and a short payback period, based on current reserves at Lalor. Once the New Britannia gold mill is in operation by 2022, gold is expected to account for over 60% of revenues at Lalor with annual gold production expected to grow to approximately 140,000 ounces at a sustaining cash cost of approximately $450 per ounce over the first five years.
Peru growth capital of $70 million includes initial expenditures for developing the Pampacancha deposit and acquiring surface rights from the local community, but excludes the costs associated with recognizing the current uses of the land by certain community members, which are subject to pending agreements with those individuals. Hudbay's patient approach to community negotiations has proven successful, demonstrating Hudbay's strong relationships with the neighbouring communities and positioning the company well to unlock future value on its other regional growth targets in Peru. Arizona spending of $20 million is intended to support ongoing matters on the Rosemont project and advance preliminary economic studies at the Mason project in Nevada.
Exploration Guidance
| Exploration Expenditures<br><br> <br>(in $ millions) | 2020 Guidance | Year Ended<br><br> <br>Dec. 31, 2019 | 2019 Guidance |
|---|---|---|---|
| Peru | 15.0 | 17.1 | 20.0 |
| Manitoba | 10.0 | 22.9 | 10.0 |
| Generative and other | 0.0 | 6.5 | 10.0 |
| Total exploration expenditures | 25.0 | 46.5 | 40.0 |
| Capitalized spending | (15.0) | (15.7) | (15.0) |
| Total exploration expense | 10.0 | 30.8 | 25.0 |
Hudbay's exploration portfolio of owned or optioned mineral properties consists of approximately 850,000 hectares across Canada, Peru, the United States and Chile. Hudbay's 2020 exploration budget of $25 million, which includes option payments, will be focused on exploration near existing processing infrastructure in Peru and Manitoba.
In Peru, Hudbay continues permitting, community relations and technical activities required to access and conduct drilling activities on properties near Constancia. In 2020, drilling activities will be focused on the Llaguen greenfield project located 56 kilometres northeast of the city of Trujillo, in northern Peru, and on the Quehuincha North skarn target located approximately 11 kilometres from the Constancia mill, where Hudbay has recently obtained a drilling permit and has an exploration agreement in place with the local community. At Lalor, the company expects to conduct additional underground drilling, continuing efforts to convert existing mineral resources to reserves and to identify additional gold resources at underground targets. In addition, surface drilling planned for 2020 in Manitoba will aim to confirm an initial mineral resource estimate for the gold and copper-gold mineralization intersected in 2019 at the 1901 Deposit.
Unit Operating Cost Guidance
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| Combined Mine/Mill Unit Operating Cost^1^^,2^ | 2020 Guidance | Year Ended<br>Dec. 31, 2019 | 2019 Guidance | |
| --- | --- | --- | --- | --- |
| Manitoba | C$/tonne | 130 - 140 | 134 | 115 - 135 |
| Peru | $/tonne | 8.30 - 10.25 | 9.50 | 7.90 - 9.70 |
| ^1^Reflects combined mine, mill and G&A costs per tonne of milled ore. Peru costs reflect the deduction of expected capitalized stripping costs.<br><br> <br>^2^ Combined unit costs are non-IFRS financial performance measures with no standardized definition under IFRS. For further information, please see the "Non-IFRS Financial Reporting Measures" section of this news release. |
Combined unit costs for Manitoba in 2020 are forecast to be similar to 2019 levels as Lalor's costs have normalized after the ramp up to 4,500 tonnes per day. Combined unit costs for Peru in 2020 are also expected to be similar to 2019 levels as the plant continues to operate at full capacity.
| Flin Flon Zinc Plant Guidance | 2020 Guidance | Year Ended<br><br> <br>Dec. 31, 2019 | 2019 Guidance | |
|---|---|---|---|---|
| Zinc metal produced | tonnes | 100,000 - 112,000 | 103,340 | 95,000 - 105,000 |
| Unit operating costs^1^ | C$/lb | 0.45 - 0.52 | 0.49 | 0.47 - 0.55 |
^1^ Unit costs are non-IFRS financial performance measures with no standardized definition under IFRS. For further information, please see the "Non-IFRS Financial Reporting Measures" section of this news release.
Metal production in any particular quarter may vary from the implied annual guidance rate based on variations in grades and recoveries due to the areas mined in that quarter, the timing of planned maintenance, and other factors. Mining and processing costs in any particular quarter can also vary from the annual guidance rate above based on a variety of factors, including the scheduling of maintenance events and seasonal heating requirements, particularly in Manitoba. In Peru, the semi-annual mill maintenance shutdowns at Constancia typically occur during the second and fourth quarters each year. In Manitoba, the company expects to perform maintenance on the Stall concentrator during the second quarter of 2020 and on the Lalor mine hoist facilities in the third quarter of 2020.
Leadership Announcements
After assisting with the Chair transition and the CEO search, Alan Hibben is stepping down as a Director. Mr. Hibben joined the Board in 2009 and served as Chair from 2017 to 2019. The Board thanks Mr. Hibben for his dedicated service as a Director and former Chair of the company.
On January 22, 2020, Peter Kukielski was appointed as Hudbay's President and CEO. Mr. Kukielski had been serving as Interim President and CEO since July 2019. Mr. Kukielski has more than 30 years of extensive global experience in the base metals, precious metals and bulk materials sectors.
The company also announces that David Bryson, Hudbay's Senior Vice President and Chief Financial Officer, is retiring from the company, effective March 31, 2020, to pursue family and personal commitments. A search for a new CFO is underway, and Eugene Lei, currently Hudbay's Senior Vice President, Corporate Development and Strategy, will act as Interim CFO until the search process is concluded, after which he is expected to return to focusing on his current responsibilities. As a member of the executive committee, Mr. Lei has been working closely with Mr. Bryson on financial matters over the last several years, and they will continue to work closely together with Mr. Kukielski through this period to provide continuity and support a seamless transition. The Board and management team are grateful for Mr. Bryson's 11 years of service as Hudbay's CFO and wish him well on his future personal endeavors.
Execution of Pampacancha Surface Rights Agreement
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On February 18, 2020, Hudbay announced that the community of Chilloroya formally approved a surface rights agreement with the company for the Pampacancha satellite deposit located near the Constancia mine in Peru. With the completion of this agreement, the company expects to be mining ore from the deposit in late 2020. The company expects growth capital expenditures associated with project development and acquiring the surface rights for Pampacancha to be approximately $70 million in 2020. In accordance with Peru's Consulta Previa law, additional consultation between the Peruvian government and the local community is required before Hudbay can begin development activities. Some additional capital costs remain outstanding in recognition of current uses of the land by certain community members and the company intends to enter into agreements to address these matters prior to commencing mining activities. With the community's endorsement of the agreement, the company believes these processes will be concluded in the first half of 2020.
Logistics Update
Hudbay is closely monitoring the development of the Covid-19 coronavirus outbreak in China, but at this time there has been no impact on the timing of copper concentrate sales to customers in China or elsewhere. In Canada, recent protests involving blockades of CN rail service have affected shipments of zinc metal and copper concentrate from the Manitoba operations, and may result in elevated inventories in the first quarter of 2020.
Towards Sustainable Mining Leadership Award
Hudbay's Manitoba operations received the Mining Association of Canada's Towards Sustainable Mining ("TSM") Leadership Award for meeting or exceeding a Level A ranking in their results across all of the six areas of performance. The performance areas are aboriginal and community outreach, crisis management, safety and health, tailings management, biodiversity conservation management, and energy use and greenhouse gas emissions management. Hudbay is extremely proud of this achievement as it further demonstrates the company's commitment and successful track record of strong environmental, social and governance performance.
Rosemont Litigation Update
On July 31, 2019, the U.S. District Court for the District of Arizona ("Court") issued a ruling in two of the lawsuits challenging the U.S. Forest Service's issuance of the Final Record of Decision ("FROD") for the Rosemont project in Arizona. The Court ruled to vacate and remand the FROD thereby delaying the expected start of construction of Rosemont. In December of 2019, Hudbay and the U.S. Department of Justice each filed a notice of appeal in respect of the Court's decision to the U.S. Ninth Circuit Court of Appeals.
On February 10, 2020, the Court issued a ruling in the third lawsuit challenging the U.S. Forest Service's issuance of the FROD for the Rosemont mine. In this lawsuit, the plaintiffs challenged the Biological Opinion that was issued by the U.S. Fish and Wildlife Service and relied on by the U.S. Forest Service as part of the permitting process. The Court ruled to remand certain aspects of the U.S. Fish and Wildlife Service's analysis and findings related to the Biological Opinion back to the agencies for further review. While this ruling did not come as a surprise to Hudbay in light of the Court's previous ruling on the FROD for Rosemont, the company believes remanding these issues is unnecessary as the federal agencies' research and studies concluded that the potential impacts to endangered species would comply with the regulations. Hudbay is reviewing the decision and will continue following the direction of the government agencies through the permitting process.
Other Key Strategic Initiatives
New Britannia mill refurbishment activities are progressing in line with the development schedule laid out in the February 2019 mine plan. Detailed engineering is on track to be completed in the first quarter of 2020 and environmental permits are expected in the second quarter of 2020. Construction activities are expected to commence mid-2020 and continue until the third quarter of 2021, with plant commissioning and ramp-up during the fourth quarter of 2021. Once the New Britannia mill is commissioned, average annual gold production from Snow Lake is expected to be approximately 140,000 ounces during the first five years at a sustaining cash cost, net of by-product credits, of approximately $450 per ounce of gold.
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Exploration activities in the Snow Lake region continue to progress, including exploration and engineering studies at the Lalor in-mine exploration targets and other 100%-owned deposits in the region, with results expected to be incorporated in the annual mineral reserve and resource estimate in March 2020. The company is also continuing drilling activities on the recently discovered 1901 Deposit, which contains an initial inferred resource of 2.1 million tonnes at 9.67% zinc, as announced in August 2019. Drilling on the 1901 Deposit continues to test the size of the deposit and to confirm the presence of gold and copper-gold mineralization, with the intention to publish an initial inferred resource estimate on the gold mineralization and upgrade the zinc mineral resource estimate to a higher confidence category in 2020.
In the fourth quarter of 2019, the company acquired a prospective package of patented and unpatented mining claims contiguous to its Mason project near Yerington, Nevada. The land package, known as the Mason Valley properties, is an exploration stage project that includes past producing mines and has the potential to provide additional mineral resources to Hudbay's Mason project.
Hudbay has also entered into an option agreement to acquire an 80% interest in the Gray Hills unpatented mining claims in Lyon County, Nevada, located approximately 25 kilometres southeast of the Mason project, as part of its land consolidation in the Yerington district.
Dividend Declared
A semi-annual dividend of C$0.01 per share was declared on February 20, 2020. The dividend will be paid out on March 27, 2020 to shareholders of record as of March 10, 2020.
Non-IFRS Financial Performance Measures
Cash cost, sustaining and all-in sustaining cash cost per pound of copper produced are shown because the company believes they help investors and management assess the performance of its operations, including the margin generated by the operations and the company. Combined unit operating cost and zinc plant unit cost are shown because the measures are used by the company as a key performance indicator to assess the performance of its mining and processing operations. These measures do not have a meaning prescribed by IFRS and are therefore unlikely to be comparable to similar measures presented by other issuers. These measures should not be considered in isolation or as a substitute for measures prepared in accordance with IFRS and are not necessarily indicative of operating profit or cash flow from operations as determined under IFRS. Other companies may calculate these measures differently. For further details on these measures, including reconciliations to the most comparable IFRS measures, please refer to page 42 of Hudbay's management's discussion and analysis for the three and twelve months ended December 31, 2019 available on SEDAR at www.sedar.com.
Website Links
Hudbay:
www.hudbay.com
Management's Discussion and Analysis:
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http://www.hudbayminerals.com/files/doc_financials/2019/Q4/MDA194.pdf
Financial Statements:
http://www.hudbayminerals.com/files/doc_financials/2019/Q4/FS194.pdf
Conference Call and Webcast
| Date: | Friday, February 21, 2020 |
|---|---|
| Time: | 9:00 a.m. ET |
| Webcast: | http://services.choruscall.ca/links/hudbay20200221.html |
| Dial in: | 1-416-915-3239 or 1-800-319-4610 |
Qualified Person
The technical and scientific information in this news release related to the Constancia mine and Rosemont project has been approved by Cashel Meagher, P. Geo, Hudbay's Senior Vice President and Chief Operating Officer. The technical and scientific information related to the company's other material mineral projects contained in this news release has been approved by Olivier Tavchandjian, P. Geo, Hudbay's Vice-President Exploration and Geology. Messrs. Meagher and Tavchandjian are qualified persons pursuant to NI 43-101. For a description of the key assumptions, parameters and methods used to estimate mineral reserves and resources at Hudbay's material properties, as well as data verification procedures and a general discussion of the extent to which the estimates of scientific and technical information may be affected by any known environmental, permitting, legal title, taxation, sociopolitical, marketing or other relevant factors, please see the technical reports for the company's material properties as filed by Hudbay on SEDAR at www.sedar.com.
Forward-Looking Information
This news release contains forward-looking information within the meaning of applicable Canadian and United States securities legislation. All information contained in this news release, other than statements of current and historical fact, is forward-looking information. Often, but not always, forward-looking information can be identified by the use of words such as "plans", "expects", "budget", "guidance", "scheduled", "estimates", "forecasts", "strategy", "target", "intends", "objective", "goal", "understands", "anticipates" and "believes" (and variations of these or similar words) and statements that certain actions, events or results "may", "could", "would", "should", "might" "occur" or "be achieved" or "will be taken" (and variations of these or similar expressions). All of the forward-looking information in this news release is qualified by this cautionary note.
Forward-looking information includes, but is not limited to, production, cost and capital and exploration expenditure guidance, anticipated production at the company's mines and processing facilities, expectations regarding the timing of mining activities at the Pampacancha deposit, the anticipated timing, cost and benefits of developing the Rosemont project and the outcome of litigation challenging Rosemont's permits, expectations regarding the appointment of a permanent CFO, expectations regarding the impact of the Covid-19 coronavirus outbreak and CN rail blockades on the company's operations and financial performance, expectations regarding the Lalor gold strategy, including the refurbishment of the New Britannia mill, and the possibility of optimizing the value of the gold resources in Manitoba, the future potential of the 1901 deposit, including the possibility of identifying additional gold resources, the possibility of converting inferred mineral resource estimates to higher confidence categories, the potential and the company's anticipated plans for advancing its mining properties surrounding Constancia and the Mason project, anticipated mine plans, anticipated metals prices and the anticipated sensitivity of the company's financial performance to metals prices, events that may affect the operations and development projects, anticipated cash flows from operations and related liquidity requirements, the anticipated effect of external factors on revenue, such as commodity prices, estimation of mineral reserves and resources, mine life projections, reclamation costs, economic outlook, government regulation of mining operations, and business and acquisition strategies. Forward-looking information is not, and cannot be, a guarantee of future results or events. Forward-looking information is based on, among other things, opinions, assumptions, estimates and analyses that, while considered reasonable by the company at the date the forward-looking information is provided, inherently are subject to significant risks, uncertainties, contingencies and other factors that may cause actual results and events to be materially different from those expressed or implied by the forward-looking information.
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The material factors or assumptions that Hudbay identified and were applied by the company in drawing conclusions or making forecasts or projections set out in the forward-looking information include, but are not limited to:
• the timing of development and production activities on the Pampacancha deposit;
• the timing of the Consulta Previa and permitting process for mining the Pampacancha deposit;
• the timing for reaching additional agreements with individual community members and no significant unanticipated delays to the development of Pampacancha;
• the successful completion of the New Britannia project on budget and on schedule;
• the successful outcome of the Rosemont litigation;
• the success of mining, processing, exploration and development activities;
• the scheduled maintenance and availability of the company's processing facilities;
• the accuracy of geological, mining and metallurgical estimates;
• anticipated metals prices and the costs of production;
• the supply and demand for metals the company produces;
• the supply and availability of all forms of energy and fuels at reasonable prices;
• no significant unanticipated operational or technical difficulties;
• the execution of the company's business and growth strategies, including the success of its strategic investments and initiatives;
• the availability of additional financing, if needed;
• the ability to complete project targets on time and on budget and other events that may affect the company's ability to develop its projects;
• the timing and receipt of various regulatory and governmental approvals;
• the availability of personnel for the exploration, development and operational projects and ongoing employee relations;
• maintaining good relations with the communities in which the company operates, including the neighbouring Indigenous communities;
• no significant unanticipated challenges with stakeholders at the company's various projects;
• no significant unanticipated events or changes relating to regulatory, environmental, health and safety matters;
• no contests over title to the company's properties, including as a result of rights or claimed rights of Indigenous peoples or challenges to the validity of the company's unpatented mining claims;
• the timing and possible outcome of pending litigation and no significant unanticipated litigation;
• certain tax matters, including, but not limited to current tax laws and regulations and the refund of certain value added taxes from the Canadian and Peruvian governments; and
• no significant and continuing adverse changes in general economic conditions or conditions in the financial markets (including commodity prices and foreign exchange rates).
The risks, uncertainties, contingencies and other factors that may cause actual results to differ materially from those expressed or implied by the forward-looking information may include, but are not limited to, risks generally associated with the mining industry, such as economic factors (including future commodity prices, currency fluctuations, energy prices and general cost escalation), uncertainties related to the development and operation of the company's projects (including risks associated with the litigation affecting the Rosemont project), risks related to the U.S. district court's recent decisions to set aside the U.S. Forest Service's FROD and the Biological Opinion for Rosemont and related appeals and other legal challenges, risks related to the new Lalor mine plan, including the schedule and cost for the refurbishment of the New Britannia mill and the ability to convert inferred mineral resource estimates to higher confidence categories, risks related to the schedule for mining the Pampacancha deposit (including risks associated with the Consulta Previa process, risks associated with reaching additional agreements with individual community members and risks associated with the rainy season in Peru, and the impact of any schedule delays), dependence on key personnel and employee and union relations, risks related to political or social unrest or change, risks in respect of Indigenous and community relations, rights and title claims, operational risks and hazards, including the cost of maintaining and upgrading the company's tailings management facilities and any unanticipated environmental, industrial and geological events, the inability to insure against all risks, failure of plant, equipment, processes, transportation and other infrastructure to operate as anticipated, compliance with government and environmental regulations, including permitting requirements and anti-bribery legislation, depletion of the company's reserves, volatile financial markets that may affect the company's ability to obtain additional financing on acceptable terms, the failure to obtain required approvals or clearances from government authorities on a timely basis, uncertainties related to the geology, continuity, grade and estimates of mineral reserves and resources, and the potential for variations in grade and recovery rates, uncertain costs of reclamation activities, the company's ability to comply with its pension and other post-retirement obligations, the company's ability to abide by the covenants in its debt instruments and other material contracts, tax refunds, hedging transactions, as well as the risks discussed under the heading "Risk Factors" in the company's most recent Annual Information Form.
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| 2020 No. 4 |
Should one or more risk, uncertainty, contingency or other factor materialize or should any factor or assumption prove incorrect, actual results could vary materially from those expressed or implied in the forward-looking information. Accordingly, you should not place undue reliance on forward-looking information. The company does not assume any obligation to update or revise any forward-looking information after the date of this news release or to explain any material difference between subsequent actual events and any forward-looking information, except as required by applicable law.
Note to United States Investors
This news release has been prepared in accordance with the requirements of the securities laws in effect in Canada, which may differ materially from the requirements of United States securities laws applicable to U.S. issuers.
About Hudbay
Hudbay (TSX, NYSE: HBM) is a diversified mining company primarily producing copper concentrate (containing copper, gold and silver) and zinc metal. Directly and through its subsidiaries, Hudbay owns three polymetallic mines, four ore concentrators and a zinc production facility in northern Manitoba and Saskatchewan (Canada) and Cusco (Peru), and copper projects in Arizona and Nevada (United States). The company's growth strategy is focused on the exploration, development, operation and optimization of properties it already controls, as well as other mineral assets it may acquire that fit its strategic criteria. Hudbay's vision is to be a responsible, top-tier operator of long-life, low-cost mines in the Americas. Hudbay's mission is to create sustainable value through the acquisition, development and operation of high-quality, long-life deposits with exploration potential in jurisdictions that support responsible mining, and to see the regions and communities in which the company operates benefit from its presence. The company is governed by the Canada Business Corporations Act and its shares are listed under the symbol "HBM" on the Toronto Stock Exchange, New York Stock Exchange and Bolsa de Valores de Lima. Further information about Hudbay can be found on www.hudbay.com.
For further information, please contact:
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| 2020 No. 4 |
Candace Brûlé
Director, Investor Relations
(416) 814-4387
^______________________________________[i]^ Assuming the mid-point of the respective guidance range. ^[ii]^ Cash cost, sustaining and all-in sustaining cash cost per pound of copper produced, net of by-product credits, are non-IFRS financial performance measures with no standardized definition under IFRS. For further information, please see the "Non-IFRS Financial Reporting Measures" section of this news release.
Hudbay Minerals Inc.: Exhibit 99.4 - Filed by newsfilecorp.com
HUDBAY MINERALS INC.
(the “Company”)
CODE OF BUSINESS CONDUCT AND ETHICS
INTRODUCTION
This Code of Business Conduct and Ethics (“Code”) sets out basic principles to guide all directors, officers and employees of the Company or any of its subsidiaries or affiliates^1^(collectively, the “HB Group”) and all other persons acting on behalf of the HB Group (collectively, with the directors, officers and employees of the HB Group, “HB Personnel”) in the ethical conduct of business. All HB Personnel are responsible for upholding high standards of honest and ethical behavior and must seek to avoid even the appearance of improper behavior. If a law conflicts with a policy in this Code, HB Personnel must comply with the law.
The HB Group is committed to conducting business honestly, ethically and in compliance with the laws of the jurisdictions in which it operates and owns assets, and expects its suppliers and service providers to act in the same manner. Operating our company openly, fairly and with integrity, and insisting that others who act on our behalf do the same, is the proper way to run our business and the right way to treat our stakeholders.
The values of dignity and respect, caring, openness, and trustworthiness, which support the Company’s mission and vision, are the foundation of a strong culture of integrity. The HB Group is also strongly committed to creating a safe workplace, free from harassment, bullying and discrimination. Our internal and external stakeholders expect that all HB Personnel not only meet the standards required by applicable law and regulations but also make decisions based on the higher standards of conduct consistent with the Company’s values and the principles of this Code and related Company policies.
HB Personnel who violate the standards in this Code will be subject to disciplinary action, which could include the termination of their employment or other relationship with the HB Group.
The Code sets out basic principles and does not cover every issue that may arise in the conduct of the Company's activities. The Code is also not a substitute for good judgment.
If you are in doubt about what is the right thing to do, think first and ask yourself whether you or the Company may be embarrassed or suffer harm as a result of your actions. If you are still unsure or believe that a situation may violate or lead to a violation of this Code, follow the guidelines described below under “Compliance Procedures” and, where appropriate, the reporting process described in the Company’s Whistleblower Policy.
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| 1 | A company is a subsidiary of another company if it is controlled, directly or indirectly, by that other company (through one or more intermediaries or otherwise). A company is an affiliate of another company if either one of them is the subsidiary of the other company or if both are subsidiaries of the same company or if each of them is controlled by the same person or company. |
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PURPOSE
The purpose of the Code is to:
∙ Promote honest, respectful, and ethical conduct of all HB Personnel and promote the HB Group’s longstanding culture of integrity and accountability;
∙ Promote avoidance of conflicts of interest between personal interests of HB Personnel and professional interests of the HB Group, and provide guidance in the ethical handling of actual or apparent conflicts of interest;
∙ Prohibit inappropriate conduct of HB Personnel that may put at risk the integrity of the HB Group or undermine the trust which the Company has earned from its stakeholders;
∙ Promote full, fair, accurate, timely and understandable disclosure in the HB Group’s documents submitted to or filed with securities regulators, and in its other public communications;
∙ Ensure compliance with applicable laws, rules and regulations;
∙ Promote the prompt internal reporting to an appropriate person of violations of this Code, including, through the use of the HB Group’s confidential ‘whistleblower’ service.
SPECIAL RESPONSIBILITIES OF LEADERS
Directors and officers of the Company and HB Personnel which the Company has entrusted with the management of a team of employees shall personally set the example for integrity through their high character and actions and must create and sustain an open environment in which every employee feels comfortable raising concerns.
LEGAL COMPLIANCE
Compliance with Laws, Rules and Regulations (including Insider Trading Laws and Timely Disclosure)
HB Personnel are expected to comply in good faith at all times with all applicable laws, rules and regulations and behave in an ethical manner in Canada and in every country where the Company operates its businesses.
HB Personnel are required to comply with the Company’s Timely Disclosure, Confidentiality and Insider Trading Policy and all other policies and procedures applicable to them that are adopted by the Company from time to time.
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HB Personnel must cooperate fully with Company officers in the preparation of documents to be filed with the securities regulatory authorities and all other publicly disclosed materials to ensure those persons are aware in a timely manner of all information that is required to be disclosed. HB Personnel should also cooperate fully with the independent auditors in their audits and in assisting in the preparation of financial disclosure.
HB Personnel must seek guidance from a supervisor, or as necessary, the Company's Legal department when in doubt if a situation may lead to a violation of applicable laws or regulations.
THIRD PARTY RELATIONSHIPS
Conflict of Interest
HB Personnel are required to act with honesty, integrity and in the best interests of the Company, and to avoid any relationship or activity that might create, or appear to create, a conflict between their personal interests and the interests of the HB Group.
HB Personnel have a duty to disclose personal or financial actions that may interfere or have the potential of interfering with their allegiance to the Company.
“Conflicts of interest” arise where an individual’s private interests interfere in any way with the interests of the HB Group. A conflict of interest can arise when HB Personnel take actions or have interests that may interfere with the performance of their work for the HB Group objectively, giving priority to the HB Group’s professional interests over their personal interests, or interests of a third party. HB Personnel shall perform the responsibilities of their positions on the basis of what is in the best interests of the HB Group, free from the influence of personal considerations and third party relationships.
A conflict may arise, for example, if an individual takes an action or has an interest that makes it difficult for that individual to fulfill his or her responsibilities to the Company or if such individual receives an improper personal benefit as a result of the individual's position at the Company. For more clarity, no activity of HB Personnel at work or at home should harm the Company's reputation or good name.
Conflicts of interest may not always be clear-cut. Even when nothing wrong is intended, the perception of a conflict between personal interests and those of the Company may have negative effects. If you have a question, you should consult with your supervisor, department head, or the Head of the Legal group. Any HB Personnel who become aware of a conflict or potential or apparent conflict should bring it to the attention of their supervisor, department head or Head of the Legal group and consult the procedures described below under “Compliance Procedures”.
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Gifts, Entertainment and Hospitality
Business gifts and entertainment are customary courtesies designed to build goodwill and constructive relationships among business partners. However, a problem may arise when these courtesies compromise, or appear to compromise, the HB Group’s ability to make fair and objective business decisions or to gain an unfair advantage.
HB Personnel or their immediate families shall not use their position with the HB Group to solicit any cash, gifts or free services from any HB Group customer, supplier or contractor for their or their immediate family’s or friend’s personal benefit. Gifts or entertainment from others should not be accepted if they could be reasonably considered to be extravagant for the employee, officer or director who receives it, or otherwise improperly influence the HB Group’s business relationship with or create an obligation to a customer, supplier or contractor. In no circumstance will it be acceptable for HB Personnel to accept a cash gift, regardless of the amount.
Similarly, no HB Personnel should ever offer, give or provide any gift, entertainment or hospitality unless it is not a cash gift, is consistent with customary business practices, is not excessive in value, cannot be construed as a bribe or payoff, and does not violate any applicable laws. Strict rules apply when the HB Group does business with governmental agencies and officials, as discussed in more detail below.
In general, nominal gifts such as pens, caps, shirts and mugs are acceptable. Invitations to social, cultural or sporting events may be accepted if the cost is reasonable and your attendance serves a customary business purpose such as networking. More extravagant or costly invitations should only be accepted in consultation with your manager, and when in doubt, the Company’s Legal Department.
Payments to Government Personnel
All HB Personnel must comply with all laws prohibiting improper payments to government officials, including the Corruption of Foreign Public Officials Act (Canada) (the “CFPOA”) and the Foreign Corrupt Practices Act (US) (the “FCPA”). These Acts prohibit, among other things, offering, promising or giving (or authorizing any of those activities) anything of value, directly or indirectly, to a foreign government official, official of a political party or political candidate, or to any official of any public international organization to influence any of their acts or decisions or to obtain or retain business or secure any other improper advantage.
Similarly, other governments have laws regarding business gifts that may be accepted by government personnel. The promise, offer or delivery to an official or employee of various governments of a gift, favour or other gratuity in violation of these laws would not only violate Company policy but could also be a criminal offense. It is important for HB Personnel to consult with the Company’s Legal Department whenever they believe they may be embarking on conduct that may raise potential issues under applicable anti-corruption laws.
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HB Personnel must also ensure that any agents, consultants, or other intermediaries engaged by HB understand and comply with the CFPOA and FCPA, and no third party should be engaged by the Company if the third party engages in, or is suspected of engaging in, bribes, kickbacks, improper payments, or any other conduct that may violate the CFPOA or FCPA. HB Personnel should consult with the Company’s Legal Department when agents, consultants, or other intermediaries may interact with foreign government officials.
Penalties for violations of the FCPA are severe and may include fines against an individual of up to US$250,000 for each violation and fines against the Company of up to US$2 million. The financial consequences of an FCPA violation can escalate significantly through ‘disgorgement of profits’ and other penalty enhancers.
In the event that payments are made to third parties on behalf of governmental entities for legitimate purposes, HB Personnel should closely monitor such payments for fair valuation of the payments compared to the goods or services being provided to reduce the risk of kickbacks from the third-party suppliers to the applicable governmental personnel. HB Personnel should ensure that any such payments are properly recorded in the applicable business entity’s books and records, including documentation of the specific deliverables received. HB Personnel may not make or authorize cash or cash equivalent (e.g., check) reimbursements or payments of any kind to individual government officials without prior written authorization from the Company’s Legal Department.
Laws of certain countries in respect of anti-bribery and corruption do not limit the restriction on bribery and improper gifts and payments to government officials and, accordingly, any bribe, or improper gift or payment to any third party with the intent to obtain an improper advantage or to retain business is prohibited.
Facilitation payments are unofficial payments (as opposed to legitimate and official fees and taxes) made to an individual for the purpose of securing or accelerating the performance of a service or a routine government action to which the person or company paying is already entitled. These types of payments are prohibited.
There are narrow exceptions to the provisions of the FCPA. Because the legality of payments to government officials in particular situations is hard to determine, HB Personnel must consult with the Company’s Legal Department before making any such payments to avoid potential liability or even the appearance of impropriety. Any HB Personnel who has reason to believe that either the CFPOA or FCPA has been violated should report such conduct as discussed below and in the Company’s Whistleblower Policy.
Government Relations and Political Contributions; Influencing Testimony
HB Personnel may participate in the political process as private citizens. HB Personnel may not work on behalf of a candidate’s campaign while at work or use the HB Group’s facilities for that purpose. It is important to separate personal political activity from the HB Group’s interests, in order to comply with applicable laws relating to lobbying or attempting to influence government officials.
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All HB Personnel are prohibited from making political contributions on behalf of any member of the HB Group to any political candidate, party, organization or other political entity at all levels of government without the prior written approval of the Company’s Chief Executive Officer.
In addition, HB Personnel are strictly prohibited from attempting to influence any person’s testimony in any manner whatsoever in courts of justice or any administrative tribunals or other government bodies.
Directorship
HB Personnel shall not act as directors or officers of any other corporate entity or organization, public or private, without the prior written approval of the Chair, in the case of members of Hudbay’s Board of Directors, or the Chief Executive Officer, in the case of all other HB Personnel. Directorships or officerships with such entities will not be authorized if they are considered to be contrary to the interest of the HB Group. HB Personnel may, however, act as directors or officers of charitable organizations whose purposes do not conflict with the HB Group’s interests, and such directorship/officership will not otherwise interfere with the due performance of the their work.
INFORMATION AND RECORDS
Confidential and Proprietary Information and Trade Secrets
HB Personnel may be exposed to certain information that is considered confidential by the HB Group or entrusted to the HB Group by persons with whom the HB Group does business. HB Personnel shall not disclose such confidential information to persons outside the HB Group, including family members, and should share it only with other HB Personnel who have a “need to know” unless the disclosure is specifically authorized by the Chief Executive Officer or Head of the Legal group.
Financial Reporting and Records
The HB Group requires honest and accurate recording and reporting of information to make responsible business decisions. The HB Group’s accounting records are relied upon to produce reports for our management, directors, shareholders, governmental agencies and persons with whom the HB Group does business. All of the HB Group’s financial statements and the books, records and accounts on which they are based must appropriately reflect the HB Group’s activities and conform to applicable legal and accounting requirements and to the HB Group’s system of internal controls. Unrecorded or “off the books” funds or assets should not be maintained unless required by applicable law or regulation.
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The U.S. FCPA’s accounting and internal-controls (“books-and-records”) provisions, which require accurate and transparent accounting records and internal accounting controls sufficient to prevent improper payments, apply to the Company and to other companies in which the Company may be considered to have a controlling interest. These accounting, transparency, and internal-controls requirements are viewed by FCPA enforcers as bases for strict liability for any improper payment regardless of whether any knowledge of impropriety can be established regarding the Company.
Accordingly, companies within the HB Group must implement internal accounting controls based upon sound accounting principles and maintain and provide to the Company, upon request, accurate documentation regarding all transactions.
All HB Personnel have a responsibility, within the scope of their positions, to ensure that the HB Group’s accounting records do not contain any false or intentionally misleading entries. The HB Group does not permit intentional misclassification of transactions as to accounts, departments or accounting records. All transactions must be supported by accurate documentation in reasonable detail and recorded in the proper accounts and in the proper accounting period.
Business records and communications often become public through legal or regulatory proceedings or the media. HB Personnel should avoid exaggeration, derogatory remarks, guesswork or inappropriate characterizations that can be misunderstood. This requirement applies equally to communications of all kinds, including internal and external e-mail, informal notes, internal memos, and formal reports.
Record Retention
The HB Group maintains all records in accordance with laws, rules and regulations regarding retention of business records. The HB Group prohibits the unauthorized destruction of or tampering with any records, whether written or in electronic form, where the HB Group is required by laws, rules or regulations to maintain such records or where it has reason to know of a threatened or pending government investigation or litigation relating to such records.
COMPANY ASSETS
Use of Company Property
All HB Personnel should endeavor to protect the HB Group’s assets and ensure their efficient use. The HB Group’s assets (such as funds, products or proprietary information) may be used only for legitimate business purposes. Theft, carelessness, and waste have a direct impact on the HB Group’s profitability. Any suspected incident of fraud or theft should be reported immediately to your department head or the head of the Legal group for investigation. Any employee theft or fraud will result in immediate termination of the responsible employee. In such circumstances, management reserves the right to seek criminal prosecution or pursue civil charges where appropriate based on the nature of the offending behavior.
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Supervisors may not require employees to work on the supervisor’s personal affairs, nor may employees be required to perform personal services, except where inherent in the nature of their position or included in their employment description.
Information Technology
The HB Group’s information technology systems, including computers, e-mail, intranet and internet access, telephones and voice mail are the property of the HB Group and are to be used primarily for business purposes in compliance with the Company’s Information Technology Policy.
Electronic documents and messages (including voice-mail, e-mail and SMS) sent, received, created or modified by HB Personnel are considered HB Group property and HB Personnel should recognize that they are not “personal” or “private”. Unless prohibited by law, the Company reserves the right to access and disclose (both internally and externally) electronic documents and messages, as well as, to specify, configure and restrict its electronic systems as necessary for its business purposes. HB Personnel should use good judgment and not access, send messages or store any information that they would not want to be seen or heard by others.
WORKPLACE AND BUSINESS
PRACTICES
A Nondiscriminatory and Harassment-Free Workplace
The HB Group fosters a work environment in which all individuals are treated with respect and dignity. The HB Group is an equal opportunity employer and does not discriminate against HB Personnel or potential employees, officers or directors on the basis of race, color, religion, sex, national origin, age, sexual orientation or disability or any other category protected by applicable laws The HB Group is committed to actions and policies to assure fair employment and will not tolerate discrimination by HB Personnel.
The HB Group will not tolerate harassment or bullying of HB Personnel, customers or suppliers in any form.
Sexual Harassment
Sexual harassment is illegal and all HB Personnel are prohibited from engaging in any form of sexually harassing behavior. Sexual harassment means unwelcome sexual conduct, either visual, verbal or physical, and may include, but is not limited to, unwanted sexual advances; unwanted touching and suggestive touching, language of a sexual nature, telling sexual jokes, innuendoes, suggestions, suggestive looks and displaying sexually suggestive visual materials.
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Personal Relationships
Romantic relationships between employees in a direct or indirect reporting relationship could give rise to a conflict of interest because personal considerations in respect of a romantic partner could take precedence over objective treatment of that person as a colleague. In any event, such personal relationships can also cause discomfort among other employees in the workplace and the perception that the romantic partner is being treated more favourably because of the relationship. Therefore, romantic relationships between HB Personnel in a direct or indirect reporting relationship are not permitted.
Substance Abuse
The HB Group is committed to maintaining a safe and healthy work environment free of substance abuse. HB Personnel are expected to perform their responsibilities in a professional manner and, to the degree that job performance or judgment may be hindered, be free from the effects of drugs and/or alcohol.
Workplace Violence
The workplace must be free from violent behavior. Threatening, intimidating or aggressive behavior, as well as bullying, subjecting to ridicule or other similar behavior toward fellow employees or others in the workplace will not be tolerated.
Employment of Family Members
Employment of more than one family member at an HB Group office or other premises is permissible provided that the hiring of a family member must be approved by the head of the applicable business unit or the Chief Operating Officer. The employment of a family member or any other personal relationship between HB Personnel must not create a situation where there is preferential treatment or that might improperly influence sound, objective business decisions in compliance with applicable Company policies and internal controls. For purposes of this paragraph, “family member” means an individual’s spouse, parent, child, sibling, mother- or father-in- law, brother- or sister-in-law and anyone who shares the individual’s home.
Health and Safety
The HB Group is committed to providing a healthy and safe workplace in compliance with applicable laws. HB Personnel must be aware of the safety issues and policies that affect their job, other HB Personnel and the community in general.
Environment
The Company is committed to protecting the environment and undertakes to do business in an environmentally responsible and sustainable manner. HB Personnel must observe all environmental laws and Company policies that apply to them and their business unit.
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Fair Business Practices
All HB Personnel must engage in fair and competitive business practices which are compliance with applicable anti-trust and competition law in the jurisdictions in which we do business.
Human Rights Policy
The Company has adopted a Human Rights Policy that sets forth the HB Group’s commitment to protecting human rights through ethical business practices, fair labour practices, community participation, and security measures that respect human rights.
WAIVERS OF THE CODE
Any waiver of this Code for directors or members of senior management (Vice President and above) may be made only by the Board of Directors (or a committee of the Board of Directors to whom that authority has been delegated) and will be disclosed promptly^2^if required by law or stock exchange regulation, including the filing of a material change report describing the date of waiver, the parties involved, the reasons of the Board of Directors for approving the waiver or not sanctioning the respective departure and any measures taken by the Board of Directors to address the situation. Waivers for other HB Personnel may be provided by the Chief Executive Officer.
REPORTING ANY ILLEGAL OR UNETHICAL
BEHAVIOR
HB Personnel are encouraged to talk to their supervisors, department head or other appropriate personnel about observed illegal or unethical behavior and about the best course of action in a particular situation. It is the policy of the HB Group not to allow retaliation for reports of misconduct by others made in good faith. It is, at the same time, unacceptable to file a report knowing that it is false. All HB Personnel are expected to cooperate in internal investigations of misconduct.
Procedures for the confidential and anonymous reporting of complaints concerning accounting, internal accounting control and auditing matters are provided in the Company’s Whistleblower Policy.
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2 The Canadian Securities Administrators consider that conduct of directors or executive officers that constitutes a material departure from the Code, whether or not sanctioned by the Board of Directors, will likely constitute a “material change” (which would require the Company to issue a press release forthwith and to file a material change report within ten days of the change).
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COMPLIANCE PROCEDURES
HB Personnel must endeavour to ensure prompt and consistent action against violations of this Code. As situations that arise may not be clear cut the following steps provide an approach to new situations that may raise issues associated:
∙ Make sure you have all the facts. In order to reach the right solutions, we must be as fully informed as possible.
∙ Ask yourself: What specifically am I being asked to do and does it seem unethical or improper? Are my actions likely to cause embarrassment to me or the Company? Use your judgment and common sense if something seems unethical or improper, it probably is. Think before acting.
∙ Discuss the problem with your supervisor, department head or Head of the Legal group.
∙ You may report ethical violations in confidence and without fear of retaliation. If your situation requires that your identity be kept secret, your anonymity will be protected. The HB Group does not permit retaliation of any kind against employees for good faith reports of ethical violations.
∙ Always ask first, act later: If you are unsure of what to do in any situation, seek guidance before you act.
APPLICABLE LAW
The provisions of this Code of Business Conduct and Ethics will be modified, as and to the extent necessary, to comply with applicable laws, regulations or policies imposed by the various jurisdictions in which the HB Group and HB Personnel operate.
As in effect December 2019