Earnings Call Transcript - HBM Q3 2022

Operator, Operator

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Hudbay Minerals Inc. Third Quarter 2022 Results Conference Call. I would like to remind everyone that this conference call is being recorded today, November 03, 2022, at 8:30 A.M. Eastern Time. I would now turn the conference over to Candace Brule, Vice President, Investor Relations. Please go ahead.

Candace Brule, Vice President, Investor Relations

Thank you, operator. Good morning, and welcome to Hudbay's 2022 third quarter results conference call. Hudbay's financial results were issued yesterday and are available on our website at www.hudbay.com. A corresponding PowerPoint presentation is available, and we encourage you to refer to it during this call. Our presenter is Peter Kukielski, Hudbay's President and Chief Executive Officer; Accompanying Peter for the call will be Eugene Lee, our Senior Vice President and Chief Financial Officer; and André Lauzon, our Senior Vice President and Chief Operating Officer. Please note that comments made on today's call may contain forward-looking information, and this information, by its nature, is subject to risks and uncertainties, and as such, actual results may differ materially from the views expressed today. For further information on these risks and uncertainties, please consult the company's relevant filings. These documents are also available on our website. As a reminder, all amounts discussed on today's call are in U.S. dollars unless otherwise noted. And now I'll pass the call over to Peter Kukielski. Peter?

Peter Kukielski, President and CEO

Thank you, Candace. Good morning, everyone, and thank you for joining us. Before we jump into quarterly results, I'd like to congratulate Eugene Lee, who was recently appointed Senior Vice President and Chief Financial Officer. Eugene has a 10-year history with Hudbay progressing through a number of increasingly senior roles and executive responsibilities and is highly regarded within the industry. He has over 20 years of global mining investment banking, finance and corporate development experience, and his transition into the CFO role has been seamless. With Eugene in the CFO role and André in the COO role, I believe we have the right leadership team dynamics in place to continue to execute our exciting growth strategy while remaining committed to deleveraging and disciplined capital allocation. Now in conjunction with our announcement of Eugene's assumption of the CFO role, I'm going to depart from tradition and have both Eugene and André Lauzon, our COO, talk to some of the key themes. With our commitment to deleveraging and disciplined capital allocation in mind, 2022 has presented us with a period of higher input prices and decline in copper prices, resulting in industry margins being significantly reduced. While Hudbay benefits from our consolidated cash costs being positioned in the first quartile of the global cash cost curve, our focus continues to be on cash flow, and we will touch on the steps we've taken to navigate this challenging environment. But first, let me speak to our quarterly results beginning on Slide 3. I'd characterize our third quarter results as a period of strong performance in our Peru operations and a period of transition in our Manitoba operations after the planned closure of the 777 mine in June 2022. Our consolidated copper production in the third quarter was 24.5k tonnes, a 5% decrease compared to the second quarter due to the closure of 777, but partially offset by higher copper grades in Peru. Consolidated gold production was 53.2k ounces, a 9% decrease due to the closure of 777 and slightly lower gold grades in Peru, but partially offset by significantly higher grades at Lalor and higher recoveries in Snow Lake in Peru. Consolidated zinc production was 9.8k tonnes lower than the prior quarter due to 777's closure and one-off production interruptions in Snow Lake during the quarter. We anticipate stronger production in the fourth quarter and have reaffirmed our 2022 production guidance for all metals. Consolidated cash costs decreased to $0.58 per pound of copper from $0.65 in the second quarter. This significant improvement was primarily a result of lower on-site costs in Manitoba, partially offset by higher on-site costs in Peru, higher treatment and refining charges, higher freight costs and lower consolidated copper production with the closure of 777. Consolidated sustaining cash costs were $1.91 per pound in the third quarter compared to $1.87 in the prior quarter. This slight increase was due to higher sustaining capital expenditures, partially offset by lower cash costs and lower royalties. Both measures are tracking well with respect to the 2022 guidance ranges, and we are reaffirming our full year consolidated copper cash cost guidance of $0.60 to $1.05 per pound and sustaining copper cash cost guidance of $1.60 to $2.25 per pound. Consolidated all-in sustaining cash costs increased to $2.16 in the third quarter from $1.93 in the second quarter due to higher corporate selling and administrative expenses and accretion and amortization of decommissioning and community agreements. Operating cash flow before change in noncash working capital was $82 million during the third quarter, reflecting a decrease from the second quarter. This decrease was primarily the result of lower zinc sales volumes, lower realized prices for all metals and inflationary pressures on mine operating costs. Third quarter adjusted net loss per share was $0.05 after adjusting for a noncash gain related to the revaluation of the environmental provision and a revaluation gain on the gold prepayment liability among other items. Third quarter adjusted EBITDA was $99 million, a decrease compared to the prior quarter's $141 million. This was as a result of the same factors affecting cash flow as discussed. We exited the quarter with $286 million in cash, an increase of $28 million during the quarter as well as undrawn availability of nearly $370 million under our revolving credit facilities. Turning to Slide 4. Our Peru operations benefited from higher copper grades and higher molybdenum recoveries, partially offset by lower throughput due to a planned semiannual mill maintenance program during the third quarter. We produced approximately 22,000 tonnes of copper, 13,000 ounces of gold, 564,000 ounces of silver and 437 tonnes of molybdenum. Production of copper and molybdenum was higher than the second quarter, while production of gold and silver was lower primarily due to slightly lower precious metal grades. We have seen successive quarterly increases in production this year in Peru. And as previously disclosed, we expect that trend to continue into the fourth quarter with the benefit of significantly higher grades from Pampacancha. As such, full year production of all metals remains on track to achieve guidance ranges for 2022. Total ore mined increased quarter-over-quarter due to higher amounts of ore mined from Pampacancha. The Constancia mill performed well during the third quarter with all mill nearly unchanged from the second quarter despite the planned maintenance shutdown. Milled copper grades increased quarter-over-quarter due to better-than-planned grades from Constancia. Third quarter combined unit operating costs in Peru were 9% higher than the second quarter, primarily due to continued inflationary pressures on fuel, consumables and energy costs. Hudbay expects to complete a four-day mill shutdown at Constancia in November 2022 to advance maintenance activities that were originally planned for the first quarter of 2023. As a result of ongoing inflationary cost pressures and the additional mill maintenance in the fourth quarter, full year unit operating costs in Peru are expected to be near the top end of the 2022 guidance range. Peru's cash cost in the third quarter declined by 8% to $1.68 per pound of copper. This improvement over the second quarter was primarily due to higher by-product credits and higher copper production. Copper cash costs are expected to continue to decline in the fourth quarter with higher anticipated copper production and contributions from precious metal byproduct credits. However, full year cash costs in Peru are expected to exceed the upper end of the 2022 guidance range by approximately 5%, primarily due to the inflationary cost environment. Peru's sustaining cash cost declined by 6% compared to the second quarter, mainly due to the same factors affecting cash costs, offset by slightly higher sustaining capital expenditures and royalties. Moving to Slide 5. We will discuss our Manitoba operations. During the third quarter, the Manitoba operations produced over 40,000 ounces of gold, almost 10,000 tons of zinc, approximately 2,000 tonnes of copper and 153,000 ounces of silver. Production of all metals was lower than the second quarter, primarily due to the 777 closure. We saw successive quarterly gold production increases out of Snow Lake this year, and that trend continued into the third quarter with an 8% quarter-over-quarter improvement. This was due to higher Lalor gold grades and increased gold recoveries at both Stall and New Britannia. Full year production of all metals in Manitoba is on track to achieve guidance ranges for 2022. After 18 years of steady production in the 777 and Flin Flon, the final reserves were depleted in June and the mine was decommissioned in early August. The Flin Flon mill was safely placed on long-term care and maintenance during the third quarter. Closure activities in Flin Flon, including the zinc plant, were substantially completed in the quarter with most of our employees and equipment of value transitioning to the Snow Lake operations to support Lalor's ramp-up to 5,300 tonnes per day in early 2023. This was a key focus area for the Snow Lake operations during the quarter as the integration of the Flin Flon employees and equipment will allow us to ultimately transition away from the use of contractors. Lalor's ore production was impacted by an underground Scooptram fire as well as a two-day Manitoba hydro power outage during the quarter. Once production activities resumed following the power outage, priority was placed on mining the higher-value copper-gold ore to maintain throughput at New Britannia. In addition, Lalor completed a scheduled maintenance program at the end of the third quarter and into the beginning of the fourth quarter to replace surface ore shoots and complete other pre-winter maintenance activities. Lalor's ore production is expected to return to 4,650 tonnes per day in the fourth quarter and is on track to ramp up to 5,300 tonnes per day in early 2023. Ore mined at Lalor decreased by 16% in the third quarter due to the noted transition and production interruptions impacting operations. Mined gold, zinc and copper grades were 23%, 7% and 1% higher, respectively, compared to the second quarter. The ore processed at the Snow Lake Mills was lower quarter-over-quarter to match the ore feed from Lalor. Ore recoveries were consistent with the metallurgical model for the head grades delivered. The New Britannia mill achieved consistent production in the third quarter, averaging approximately 1,440 tonnes per day. Metal recoveries have now stabilized near targeted levels. Additional improvement initiatives will continue to be advanced in the upcoming quarters with a focus on reducing reagents and grinding media consumption that has contributed to higher operating costs than planned. These initiatives require minimal capital expenditures and will further improve overall metal recoveries and copper concentrate grades. Manitoba combined unit operating costs significantly increased compared to the second quarter as we transition to the stand-alone cost structure of Lalor. Unit operating costs were also impacted by higher contractor costs during the transition period, higher costs at New Britannia and continued inflationary cost pressures and lower tonnage with production interruptions. Costs are expected to decline in the fourth quarter, but due to continued inflationary pressures, we expect the full year combined unit costs in Manitoba to exceed the upper end of the guidance range by approximately 5%. Gold cash costs in the second quarter were $216 per ounce higher than the second quarter, primarily due to lower byproduct credits as gold revenue continues to increase and become the largest contributor to total Manitoba revenue. Cash costs were also impacted by higher treatment and refining charges, partially offset by lower on-site and zinc refining cost due to the closure of 777 and the zinc plant. Year-to-date gold cash cost of $136 per ounce continues to track well below the 2022 guidance range. And as such, we reiterate the guidance range for the full year. Our current focus at Copper World is to derisk the project through the completion of pre-feasibility activities, state-level permitting and the bulk sampling program in 2023 as discussed on Slide 6. The pre-feasibility study is expected to include conversion of the remaining inferred mineral resources to measured and indicated. It will also optimize the layout and sequencing of the processing facilities, including concentrate leach technology, trade-offs and timing, in addition to evaluating other upside opportunities. The process plant pre-feasibility level engineering is 85% complete and geotechnical and hydrogeological site investigation activities have been completed. Pre-feasibility engineering, design and metallurgical test activities are on track to be completed before the end of 2022 with the results expected to be published in the study in the first half of 2023. Copper World requires state and local permits for Phase 1. We submitted an Aquifer Protection Permit application to the Arizona Department of Environmental Quality in September. And in October, we submitted the application for an Air Quality Permit to the ADEQ. We expect to receive these two remaining state permits by mid-2023. The other key state permit, the Mined Land Reclamation Plan, was received in July 2022. Upon receipt of the state permits for Phase 1, Hudbay expects to conduct a bulk sampling program to continue to derisk the project by testing grade continuity, variable cutoff effectiveness and metallurgical strategies in high-grade near-surface areas of the Peach-Elgin and West pits. We have revisited the timing of a definitive feasibility study for Copper World in light of the current price environment, but it is important to note that nothing has changed with respect to our view that this project is a robust, high-quality copper project that will be developed in the medium term. And our efforts to derisk the project over the next 12 to 18 months will only add value to Copper World and prepare it for the definitive feasibility stage. Turning to Slide 8. We recently executed the surface rights exploration agreement with the community over Chicago that allows for exploration of the Maria Reyna and Caballito properties. Hudbay owns the mineral rights to these properties that are located within trucking distance of the Constancia processing facility, and we completed geophysical surveys in the area that indicate large-scale potential at Maria Reyna and Caballito. Shortly after the community exploration agreement was completed, we commenced baseline environmental and archaeological activities to advance the permitting process to allow for drilling the properties in the future. Our geological team commenced surface investigation activities and field evidence confirms that both Caballito and Maria Reyna host sulfide and oxide-rich copper mineralization in skarns, hydrothermal breccias and large porphyry intrusive bodies. Similar to Pampacancha, Caballito was located about 5 kilometers from Constancia and includes an old open pit mine that was operated by Mitsui until the early 1990s. United States Geological Survey from 1990 estimated a total resource of 91 million tonnes at 2.3% copper for the open pit mine. We have collected hand samples in the old Mitsui pit, which confirmed the mineralization is both copper oxides and sulfides rich with extensive occurrence of chalcopyrite and bornite. Maria Reyna is approximately 10 kilometers from Constancia and hosts three types of mineralization, skarn, hydrothermal breccia, and porphyry with magnetite and garnet skarns and hydrothermal breccias having the potential to host high-grade zones. Artisanal mining activity is present in these high-grade areas, and the local operators reported producing an average grade between 2% and 6% copper in their small-scale selective mining activities. And now André will speak to our Llaguen mineral resource update and recent drilling at our Flin Flon Tailings. André?

André Lauzon, Senior Vice President and COO

Thanks, Peter. Yesterday, we provided a detailed exploration update with our quarterly results, which included the announcement of an initial mineral resource for our Llaguen property seen on Slide 9. Llaguen is a copper-molybdenum porphyry deposit located in the La Libertad region in Northwestern Peru. The project is 100% owned by Hudbay and is favorably located near the city of Trujillo, close proximity to existing infrastructure, water and power supply. A bit of background, we optioned the property from Vale in 2017 and have since leveraged our Peru community relations expertise to complete an exploration agreement with the local community. We conducted geological mapping, geochemical sampling and completed a 28-hole confirmation drill program in 2021 and 2022. The initial resource estimate was developed based on this drill program, combined with a 23-hole historical drill program completed by Vale from 2006 to 2008. The mineralization in most cases starts from surface with a low strip ratio of 0.9, and the initial mineral resource estimate is at a higher level of geological confidence than we expected at this stage due to the continuous nature of the mineralization. The resource estimate includes 271 million tonnes of indicated at 0.42 copper equivalent and 83 million tonnes of inferred at 0.3% copper equivalent. The global resource contains a higher grade portion at the center of the deposit, which starts from service. The high-grade resource includes 113 million tonnes of an indicated 0.6% copper equivalent. We have initiated preliminary technical studies at Llaguen, including metallurgical test work as well as geotechnical and hydrological studies, which are expected to be incorporated into a preliminary economic assessment at a later date. The mineralization at Llaguen remains open to the northeast, northwest, and at depth as well as several untested geophysical targets exist in the region, which could add to the mineral resource estimate in the future. The last slide in our exploration update is on Slide 10. Our 2022 exploration efforts in Manitoba has been focused on completing ongoing infilling drilling at Lalor in 1901, as well as confirmatory drilling Flin Flon Tailings. This facility holds in excess of 100 million tonnes of tailings that have been deposited over a span of 90 years. The results from recent drilling indicate higher zinc, copper and silver grades than reported from our historical mill records, and we also confirmed the historical gold grade. Given these results, we plan to complete metallurgical test work on the Flin Flon Tailings to assess metallurgical recoveries. Our Anderson Tails facility in Snow Lake also contains significant amounts of gold deposited over many years. Given our enhanced gold processing capacity in Snow Lake, we intend to evaluate a similar opportunity to reprocess the Anderson Tailings. And now I'll pass it over to Eugene Lee.

Eugene Lee, Senior Vice President and CFO

Thanks, André. Moving to Slide 11. The short-term pullback in copper prices has only enhanced our long-term conviction for copper. Head grade is declining, and we haven't seen any new copper projects being sanctioned. It is clear that global mine supply will be unable to meet demand from global decarbonization initiatives. For these reasons, we believe that the long-term supply and demand fundamentals for copper remain strong. However, in the short term, we have all been faced with higher input prices, coupled with the recent decline in copper prices, significantly squeezing margins. While we do benefit from having our mines positioned in the first quartile of the cost curve, we have focused our efforts on maximizing operating efficiencies and implementing discretionary cost reductions in this challenging environment. In light of this, we have taken several steps to reduce discretionary spending by $30 million for the remainder of 2022 and are targeting more than $50 million in discretionary spending cuts as part of our 2023 budgeting process as we focus on generating free cash flow. In Arizona, we are reducing our 2022 exploration, evaluation and growth spending by $10 million. As Peter mentioned, we are also delaying the expected timing for a Copper World definitive feasibility study to 2024, which will reduce Arizona growth expenditures in 2023. We will prioritize the completion of that pre-feasibility study and state-level permits next year, which will allow us to begin our joint venture efforts. The planned bulk sample program will derisk the project and kick off our feasibility work without further spending on drilling and detailed engineering in 2023. In Manitoba, we are deferring plans for early development of the 1901 deposit, resulting in a savings of $5 million of gross spending in 2022 and additional amounts that were previously planned to be accelerated into 2023. These deferrals do not impact our ability to achieve the 2026 start date as laid out in our current mine plan, which contemplates the first spend at 1901 in 2024. In Peru, we are evaluating low capital alternatives to installing a public crusher saving $22 million of growth capital next year. Furthermore, we are deferring $15 million of 2022 gross spending in Peru and Manitoba relating to the mill recovery improvement programs and other capital projects. These high-return recovery projects remain on track for completion in 2023 with their capital spending profile to smooth over the next six to 12 months. We are also rationalizing our noncore asset portfolio with the divestiture of the 100% interest in our Lordsburg property in New Mexico, which was acquired through the Mason acquisition in 2018. And yesterday, we completed the sale of our equity interest in Fireweed, which we received in 2018 in exchange for the sale of our Tom and Jason properties in the Yukon. We have reinvigorated our focus on deleveraging and disciplined capital allocation to unlock value in our pipeline, as shown on Slide 12. After completing our recent brownfield investment program in the first quarter, we are now entering a period of significant free cash flow over the next few years. To that end, we've improved our net debt position by $71 million to $897 million at the end of the third quarter. We also repaid 38% of the gold prepay liability during 2022 year-to-date, and the remaining $80 million will be repaid by the end of next year. As part of our disciplined capital allocation approach, we have introduced a three prerequisite plan, which I'm calling the 3-P plan for greenlighting Copper World. This 3-P plan includes specific targets and milestones that will need to be achieved prior to making an investment decision in this project. The first prerequisite is permits. We need to receive all state-level permits required for Phase 1. The second is a plan. This includes the completion of the definitive feasibility study with an internal rate of return greater than 15%. And third, most importantly, is a prudent financial strategy. This multifaceted strategy contemplates a committed minority joint venture partner, a renegotiated pressure stream agreements, a net debt-to-EBITDA ratio of less than 1.2x, a minimum cash balance of $600 million, and limited nonrecourse project level debt of up to $500 million. This 3-P plan will ensure Hudbay will be in the best position to move the Copper World project forward with the lowest cost of capital and highest risk-adjusted return on investment. Based on current estimated timelines, we think the earliest we will be in a position to prudently sanction Copper World would be late 2024. Copper World will ultimately be evaluated against other competing investment opportunities as part of our robust capital allocation process to ensure we're delivering the highest returns for our shareholders. Now back to Peter.

Peter Kukielski, President and CEO

Thank you, Gene. Concluding on Slide 13 and reiterating what Eugene said earlier on our continued view of strong long-term fundamentals for copper, we believe we are well positioned to reap the rewards from the strong copper outlook with our high-quality copper growth pipeline. We have the highest near-term free cash flow growth and the highest leverage to copper among our mid-tier base metal producers, and we have successfully increased our copper equivalent resources per share by more than 2.5x over the past 10 years. For these reasons, we believe Hudbay is uniquely positioned to offer attractive copper production growth and long-term optionality for shareholders. And with that, we're happy to take your questions.

Operator, Operator

Thank you. Our first question comes from Jackie Przybylowski of BMO Capital Markets. Please go ahead.

Jackie Przybylowski, Analyst

Thanks very much for taking my call. And congrats on the quarter. And I guess, congrats to the new appointees. I know it's been a while now, but congratulations to Eugene and André. I guess I wanted to ask, maybe it's for you, Gene or maybe for Peter, a question about the statement in the MD&A about reducing discretionary spending and shoring up the balance sheet. I understand the need to do that and that definitely seems prudent to do that. But how do you do that at the same time as moving forward your exploration projects, whether it's Copper World exploration or Llaguen or elsewhere. Where do you see the priorities for your spending?

Peter Kukielski, President and CEO

Thanks, Jackie, and thanks for those kind words, too. I think it's all a matter, as you say, of reprioritization. So no matter what we do, we do want to still continue to move forward with our strategic objectives of growth in copper. But let me ask you, Gene to talk a little bit more directly to the specifics of your question.

Eugene Lee, Senior Vice President and CFO

Hi Jackie. The focus on deleveraging and generating free cash flow benefits itself in many ways. The first is we want to continue to invest in those opportunities. And like the brownfield ones that we completed that generate, we'll call it near-term cash flow. So to that end, we are completing the stall recovery program over the course of the next six to 12 months. But what we've done with that is we smooth some of the spending to allow us to fund it in a way that reduces strain on the balance sheet based on the current copper environment. Similarly, our focus on Copper World is to spend on the PFS and to get the project ready for bulk sampling. We think that, that's the highest return. Doing a bunch of feasibility level drilling and completing the definitive feasibility study in the next six months doesn't really generate a lot of returns for us. So again, it's just reprioritizing where the capital goes for the maximum benefit without losing schedule. As I said before, for Copper World, we see the earliest sanctioning of that being late 2024. So there's really no need to do the feasibility study in '23 if we're prudently allocating capital and can put that money to Stall or any of the other projects within our pipeline that generate near-term cash flow.

André Lauzon, Senior Vice President and COO

I would also add, in addition to that, Jackie, that as soon as we have access to start drilling at the satellites at Maria Reyna and Caballito, we're going to drill regardless of whether we've appropriated the money in the next six or twelve months or whatever. So we are pushing as hard as we can to get drilling permits in Peru so that we can start that work because for those on the line who aren't aware of these satellites, they are potentially the future of the company. They are incredibly exciting, and we will do whatever needs to be done to expose their value.

Peter Kukielski, President and CEO

That's good. That's an excellent point to add. And that drilling is more important than drilling out the feasibility drilling for Copper World. So again, we're preparing the company to make those decisions in the best possible way.

Jackie Przybylowski, Analyst

That's really helpful. I have a follow-up question for André regarding the tailings reprocessing work in Manitoba. I'm curious if the priorities have shifted between the tailings reprocessing at 777 and the Snow Lake area. You mentioned that there’s excess mill capacity at Snow Lake now. Does that mean Snow Lake moves up in priority since 777 has closed? There may not be as large a workforce there anymore, so are you shifting focus, or is the Flin Flon area still the priority for that project?

André Lauzon, Senior Vice President and COO

Thanks for the question, Jackie. It's an interesting one. Right now, we're taking a careful approach with the Flin Flon Tails. We've completed the initial drilling, and the next step is to develop a flow sheet from metallurgical testing. We have many opportunities in Manitoba, not just the Flin Flon Tails. Anderson Tails is also quite exciting, and we will evaluate both through our thorough capital allocation process. As you mentioned, we're already recovering gold from the Lalor mine. Any further enhancements that improve gold recovery in Manitoba are on the table. We're currently exploring additional gold opportunities at the Stall mill, which could complement the Anderson Tails. The future of Lalor, which remains open at depth, will benefit from these improvements. If we prioritize resources, we haven't deprioritized anything, but we're not aggressively fast-tracking it. Anderson definitely aligns with our current operations, and we will advance that where it makes sense to fast-track alongside the mine life of Lalor.

Jackie Przybylowski, Analyst

Thanks, André. That’s all the questions I have. Thanks very much, guys.

Operator, Operator

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

Orest Wowkodaw, Analyst

Hi, good morning. I wanted to get some color on the cost situation in Manitoba. We saw a pretty big jump up in cost per tonne there to $2.35 a tonne in Q3. I realize it's a transition quarter with the 777 workforce moving over. But can you give us a sense of how quickly those costs per tonne may decline, assuming that inflationary pressures just stay the same?

Peter Kukielski, President and CEO

Thanks, Orest. Look, I'll provide a couple of comments and then maybe ask Eugene and André to add a little bit more color. But we expected the unit cost to increase in the second half as a result of removing the lower cost 777 from the calculation. Also, we've been experiencing continued increases in the prices and materials and consumables such as fuel, reagents, grinding media and contractor costs that I mentioned earlier. Also, the third quarter was a period of transition for Manitoba, and we were focused on training the Flin Flon workforce for their new positions in Snow Lake, and this transition process takes time and additional contractors were acquired during the period to onboard our Flin Flon employees. So we'll continue to see lower contractor costs in fourth quarter and in 2023 as contractors are released and we have a fully trained workforce. I guess the third element was that in the third quarter, we were impacted by one-off production interruptions, which we don't expect to occur going forward. So fourth quarter unit costs should be lower than Q3, and we should trend towards those lower costs going into the new year. André, would you add any more to that?

André Lauzon, Senior Vice President and COO

The transition is progressing well, although it is slightly slower than anticipated. As Peter mentioned, while training our team from Flin Flon, we had contract resources assisting with the transition. We had over 200 contract resources supporting us during this time. However, we've experienced more turnover than expected, as some individuals moved from Flin Flon to Snow Lake and chose to pursue other opportunities, which has slowed our progress. As Peter indicated, this is a one-time issue during the transition. We plan to have around 25 to 50 contractors by December, and we will definitely see a decrease in numbers. Our main focus has been on New Britannia and increasing gold recoveries, which have been quite successful, and we are pleased with the results. Now, we are concentrating on reducing costs. Over the last month, we've realized that we've been putting too much emphasis on gold recovery, and we are now scaling that back, which will significantly lower costs at New Britannia in terms of reagent consumption and disposal. We expect to see benefits moving forward. This situation in Manitoba is not a long-term concern; it’s a result of the transition, adjustments needed during ramp-up, and recent unexpected events such as the power outage and fire. We anticipate improved costs in the fourth quarter and beyond.

Orest Wowkodaw, Analyst

Okay. Following up on Jackie's question, your release mentions $50 million in identified savings for next year. I understand it's budgeting season and you haven't issued guidance yet, but can you provide an estimate of the year-over-year decline we might expect in total CapEx next year compared to the $340 million figure this year? Will it likely be below $300 million or not by much?

André Lauzon, Senior Vice President and COO

We're currently in the budgeting process, and we've identified 50. We've experienced some inflationary pressures. We plan to announce the most capital-efficient strategy possible early in the new year. However, we are carefully reviewing every dollar across all business lines.

Operator, Operator

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

Greg Barnes, Analyst

Yes, thank you. Eugene and Peter appreciate the efforts to cut discretionary spending. However, it appears that some of these cuts are targeting projects intended to enhance recovery and efficiency at the mills. Are you concerned that this may introduce risks by hindering those efficiencies and negatively affecting the mine plans and production recoveries?

Peter Kukielski, President and CEO

Thanks, Greg. Look, I don't think so. For example, we said that we were going to not do look at the pebble crush alternative next year. But at the same time, while not doing that, we're still going to look at the potential to reject pebble to prioritize higher grade ore and tonnes in the mill. So it's not like we are taking stuff out to put ourselves at risk. We're just trying to do stuff better. Eugene or André, any further comments?

Eugene Lee, Senior Vice President and CFO

None of these cuts impact the mine plans that we have for the next two years. And that's actually a focus, and we're looking at capital spending and the spread between needs and wants and make the allocation appropriately.

André Lauzon, Senior Vice President and COO

The Stall project is progressing as quickly as possible in terms of metallurgical improvements. Any adjustments are not due to our choice but rather due to supply chain challenges. The decision to move the maintenance shutdown in Peru to this quarter in November affects the second shutdown planned for next year. This change opens the door for potentially earlier commissioning of the copper recovery project in Constancia, as it now aligns better with the installation of finalized pumps that were initially scheduled for later in the year. We are focusing on finding improvements, such as with the pebble crusher, where we've determined that it's not necessary, which fits our variable cutoff strategy. Regarding the drilling in Copper World, we initially anticipated issues in securing drillers due to a tight market, but that situation has changed. We are now pacing our drilling to match our schedule needs, ensuring we are prudent with our contracts at this stage.

Greg Barnes, Analyst

Okay. Great. Thank you. And just a secondary question on Llaguen. It looks like an interesting little project. Does that fit within your pipeline of development projects or some of the strategy looking to move that forward?

Peter Kukielski, President and CEO

Greg, I would say it fits into the pipeline similarly to how Mason does. It is a large project with potentially significant economics surrounding it, but it is a longer-term project. We will approach it carefully, spending very little on it initially. I think the next step is likely a Preliminary Economic Assessment to evaluate its potential. There is a possibility that we may be able to conduct advance work in collaboration with another party. Overall, it occupies a similar space in Peru as Mason does in the U.S.

Operator, Operator

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

Lawson Winder, Analyst

Good morning, Peter, Eugene and André. It's nice to hear from you all and definitely reiterate the congratulations to you, Eugene. I wanted to ask about Copper World and just with the benefit of additional time to spend on the various studies. Do you continue to believe that the ore will be optimally processed using a sulfide leach approach first, but then one that uses no pressure and heat? And how is the CapEx kind of developing relative to the PEA? Thanks very much.

Peter Kukielski, President and CEO

Thanks, Lawson. Look, I will take a first stab and then I'll ask André to expand a little bit. What we said, I guess what I said in my opening remarks was that we're progressing the pre-feasibility study looking at a variety of options and also looking at the timing of various options and the sort of the modular nature of those options, as well as trade-offs of the various technologies themselves. We think that the sulfide leaching process is approximately a $400 million sort of plug-and-play module. We'll make the decision during the course of pre-feasibility whether that is now or whether that is later and we'll also make the decision whether in fact, we go with atmospheric leach or whether we go with a medium pressure or whatever similar to what Flin Flon is using in Arizona. The PFS will take those things into consideration. When we come out of that, we'll have made much better decisions, and we had been able to take better decisions and also take a look at the optionality of the various modules, whether they get plugged in now or later. Anything further you would add to that, André?

André Lauzon, Senior Vice President and COO

Regarding the cost question, we are evaluating various sulfide leach scenarios, including high temperature, medium temperature, and others. At this point, we see that they are largely comparable, so choosing one over another doesn't significantly affect capital expenditures. We believe that atmospheric leaching allows for a gradual and modular approach. We can start with a small trial that represents only a fraction of the final capacity to ensure it meets our expectations, while larger capital expenditures, such as high-pressure leaching, require a commitment to a specific size from the outset. As mentioned, we have flexibility and aren't required to make immediate decisions, which will be detailed in the pre-feasibility study. Our primary objective remains to leach sulfides and produce finished copper in the U.S., aligning with stakeholder interests, especially considering the anticipated demand for copper in the near future.

Lawson Winder, Analyst

Yes, the approach you are taking makes a lot of sense. If I understand you correctly, it seems you're considering a traditional smelter approach, at least in the early years while you develop the sulfide lease technology. Is that a fair interpretation?

André Lauzon, Senior Vice President and COO

Well, except for developing the technology. So we don't develop technologies. The technology is already developed and proven. But from a risk-based process, we can go at it in a step-wise manner where we feel test it, feel comfortable and where the cost isn't that large. We can take a measured approach from traditional, sending it to a smelter while trialing the leach at a smaller scale to go one way or we can look to the high-pressure medium temperature ones, which we're very familiar with from Flin Flon. We're looking for that options.

Lawson Winder, Analyst

That's great commentary, André. Thank you very much. And then just one final question from me. With the Las Bambas community disruptions, obviously, it's had a pretty significant impact on operations there, but we've heard very little from Hudbay. So would it be fair to conclude that there's been little to no disruptions on Constancia operations, particularly with respect to the shared road access, at least year-to-date?

Peter Kukielski, President and CEO

Lawson, it is reasonable to conclude that the recent blockades have not affected us since they are located uphill, in the opposite direction from our operations. The blockades that are more relevant to us are further down the road. The latest blockade was not directed at us but rather aimed at the government, and since it was downhill from us, we experienced no impact. The only consequence was a temporary buildup of concentrate, which we resolved when the situation improved. Additionally, we recently partnered with local communities to establish a co-op trucking enterprise, allowing the community to transport approximately 30% of our concentrate to the port, which has been very beneficial in managing these situations. Overall, we have experienced no impact.

Lawson Winder, Analyst

Thank you very much.

Peter Kukielski, President and CEO

Welcome.

Operator, Operator

Our next question comes from Ralph Profiti of Eight Capital. Please go ahead.

Ralph Profiti, Analyst

Thank you, operator. Peter and Eugene, could I ask about the $500 million of nonrecourse project level debt? Should I consider this as the maximum amount that banks were willing to provide during your initial discussions, or is it more of a voluntary limit based on Hudbay's comfort level?

Eugene Lee, Senior Vice President and CFO

Hi Ralph, it's actually Hudbay's comfort level. And so what I would envision is that the project level debt be the last piece of financing and be sort of allow us to overfund the potential build of it. We want to kind of build this project in the most prudent financial structure given what we've seen with CapEx builds recently. So we don't want to layer on too much debt, particularly at the front. It would be kind of the last piece of financing. We think that approximately 25% debt financing would be a very prudent structure for us. There's more than $500 million available to us. We're choosing to limit it to $500 million of nonrecourse project-level debt.

Ralph Profiti, Analyst

Yes. Understood. Okay. Thank you. And congratulations to you and André.

Eugene Lee, Senior Vice President and CFO

Thank you.

Operator, Operator

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

Candace Brule, Vice President, Investor Relations

Thank you, operator, and thank you, everyone, for joining today. If you have any further questions, please feel free to reach out to the Investor Relations team. You may now disconnect your lines.