Earnings Call Transcript - HBM Q3 2021

Operator, Operator

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Hudbay Minerals, Inc. Third Quarter 2021 Results Conference Call. At this time, all participants are in listen-only mode. Following the presentation, we will conduct a question-and-answer session. I would like to remind everyone that this conference call is being recorded today, November 4, 2021, at 8:30 a.m. Eastern Time. I will now turn the conference over to Candace Brûlé, Director of Investor Relations. Please go ahead.

Candace Brûlé, Director of Investor Relations

Thank you, Operator. Good morning. And welcome to Hudbay’s 2021 third quarter results conference call. Hudbay’s financial results were issued yesterday and are available on our website. A corresponding PowerPoint Presentation is available, and we encourage you to refer to it during this call. Our presenter today is Peter Kukielski, Hudbay’s President and Chief Executive Officer. Accompanying Peter for the Q&A portion of the call will be Steve Douglas, our Senior Vice President and Chief Financial Officer; Cashel Meagher, our Senior Vice President and Chief Operating Officer; and Eugene Lei, our Senior Vice President, Corporate Development and Strategy. Please note that comments made on today’s call may contain forward-looking information. For further information on these risks and uncertainties, please consult the company’s relevant filings on SEDAR and EDGAR. These documents are also available on our website. As a reminder, all amounts discussed on today’s call are in U.S. dollars unless otherwise noted. And now, I will pass the call over to Peter Kukielski. Peter?

Peter Kukielski, President and CEO

Thanks very much, Candace, and good morning, everyone. Thanks very much for joining us today. Our performance in the third quarter demonstrates our continued focus on execution and delivery in 2021. We had the first full quarter of production at the Pampacancha satellite pit in Peru, and we started to see the benefits of higher gold from the newly refurbished New Britannia mill in Manitoba. This led to record gold production for Hudbay this quarter. We also successfully commissioned the new copper flotation circuit at New Britannia in October, marking the completion of our recent investment program into two high return growth projects. With Pampacancha and New Britannia now in operation, we are on the cusp of achieving significantly increased cash flows for many years to come. This is at a time when the commodity markets remain strong, including a robust outlook for copper due to a lack of long-term copper mine supply, coupled with the growing demand for copper to support global decarbonization efforts. In the presentation today, I will speak to the highlights from our third quarter results, discuss the progress we have made in our growth projects in more detail, including exploration success at our Copper World Project in Arizona, and I will recap the many near-term catalysts at Hudbay. Third quarter consolidated copper production was 23,200 tonnes, generally in line with the second quarter of 2021. This was because slightly lower copper production in Peru was offset by higher copper production in Manitoba. Consolidated gold production in the quarter was 53,900 ounces, a record for Hudbay and a 35% increase from the second quarter due to higher gold grades from Pampacancha, record gold recoveries in Peru, and significantly higher gold grades at Lalor. Zinc production in the quarter decreased by 3%, while silver production increased by 11% versus the second quarter. 2021 production guidance for key metals contained in concentrate and doré has been reaffirmed. Consolidated cash cost per pound of copper produced was $0.62 in the third quarter, a 26% decrease from the second quarter as operating costs were generally lower. Sustaining cash costs decreased by 12% to $1.97 in the third quarter, primarily due to the same factors affecting cash cost, as well as slightly lower sustaining capital expenditures. We continue to expect consolidated cash costs and sustaining cash costs to be within our annual guidance ranges for 2021. Cash generated from operating activities increased to approximately $140 million in the third quarter, compared to $96 million in the second quarter. Operating cash flows before change in non-cash working capital declined to $104 million during the third quarter, primarily because of lower base metal sales volumes and lower realized copper and precious metals prices, partially offset by higher precious metal sales volumes. Third quarter adjusted net earnings were $38 million or $0.15 per share after normalizing for an impairment due to an updated Flin Flon closure plan and Flin Flon restructuring charges. Adjusted EBITDA was $119 million lower than the second quarter of 2021, primarily due to the same factors affecting operating cash flow. As of September 30, 2021, our available liquidity included $297 million in cash and equivalents, a slight increase compared to the second quarter. This was because cash generated from operations was offset by $89 million in sustaining capital and investments in the New Britannia projects, as well as $34 million of interest paid on our bonds. In October, our liquidity position was further enhanced through the successful renegotiation of our credit facilities to increase available borrowings from $400 million to $450 million, while extending the maturity to October 2025. We eliminated certain financial covenants, while amending others to increase our financial flexibility, and we reduced the effective interest rate. Moving to slide four, you will find a summary of the quarterly operating results from our Peru business units. Constancia produced 18,000 tonnes of copper, 17,500 ounces of gold, 521,000 ounces of silver, and 282 tonnes of molybdenum. While copper production was 5% lower than the second quarter due to a planned semi-annual mill maintenance shutdown in July, gold and silver production increased by 72% and 11%, respectively. This was due to significantly higher gold and silver head grades from Pampacancha and significantly higher gold recoveries, which led to record quarterly gold production in Peru. As noted last quarter, molybdenum production is a smaller part of our business and we expect it to fall slightly below the 2021 guidance range, but in line with the recently published mine plan for Constancia. We expect the production of all key metals in Peru to be in line with the 2021 full year guidance ranges. Ore mined during the third quarter decreased by 8% from the second quarter of 2021, as mining levels were optimized for mill throughputs. Ramp up of mining activity at Pampacancha has increased steadily since first production in April 2021. Ore milled during the second quarter was 6% lower than the previous quarter due to the scheduled mill maintenance shutdown. Mill grades for copper were slightly lower than the second quarter but were in line with the mine plan. Mill grades for gold and silver were 57% and 36% higher, respectively, than the second quarter due to significantly higher precious metal head grades from Pampacancha. As mentioned, Peru achieved record gold recoveries in the third quarter, significantly above the second quarter, mainly due to higher ore grades from Pampacancha. Meanwhile, copper recoveries increased due to lower levels of contaminants. Silver recoveries decreased as a result of lower than expected recoverable silver values in the earlier more oxidized ores from Pampacancha. Recent metallurgical test work indicates that Pampacancha silver recoveries are expected to increase to targeted levels in 2022. Combined unit operating costs in the third quarter were higher than the second quarter, primarily due to higher milling costs and fewer tonnes milled due to the scheduled mill maintenance program during the quarter. Costs have been generally higher in 2021 as a result of the higher ore hardness, higher steel prices affecting grinding media costs, higher fuel prices impacting hauling costs, and COVID-19 related expenditures. COVID-related costs in Peru were approximately $5 million in the third quarter and are expected to continue at a similar run rate into the fourth quarter. Excluding these COVID-related costs, unit operating costs in the third quarter were $10.93 per ton. We expect Peru unit operating costs to be near the top end of the guidance range this year after adjusting for unbudgeted COVID-related costs. Peru’s cash costs in the third quarter were $1.26 per pound, a 32% improvement over the prior quarter. The significant reduction was due to higher byproduct credits and lower operating costs, partially offset by lower copper production. Similarly, Peru’s sustaining cash costs decreased to $2.51 per pound, a 14% reduction from the second quarter due to the same factors affecting cash costs, offset by higher sustaining capital expenditures. Turning to slide five on Pampacancha, as mentioned, first production at Pampacancha was achieved in early April 2021. Ramp up of mining activities has progressed well and in line with the recently published mine plan for Constancia operations. Compared to the last quarter, total Pampacancha ore mined increased by 109% to 2.1 million tonnes this quarter. As you saw on the previous slide, the higher gold grades at Pampacancha have led to higher gold recoveries. Activities continue to advance as planned with grades and tonnes reconciling well against the mine plan, achieving the expected increase in gold grades in 2021 and on track for achieving higher copper grades in 2022 in line with recent company guidance. Pampacancha is expected to contribute to an overall increase in Constancia’s copper production to above 100,000 tonnes per year. This together with an increase in annual gold production is expected to significantly reduce Constancia’s average cash costs to approximately $1.15 per pound over the next several years. Now moving to the next slide on Manitoba, we have started to see the benefits from the commencement of gold production at the New Britannia mill during the third quarter. Production of copper, gold, and silver increased during the quarter compared to the last quarter, while production of zinc decreased. The operations produced approximately 5,200 tonnes of copper, 36,700 ounces of gold, 242,000 ounces of silver, and 20,800 tonnes of zinc. We continue to expect the production of all metals contained in concentrate and doré in Manitoba to be in line with the 2021 full-year guidance ranges. Mining operations at Lalor have started to consistently produce and separate the gold and copper-gold ores as feed for the New Britannia mill. At the end of the third quarter, approximately 35,000 tonnes of ore were stockpiled as feed for the New Britannia mill, a decrease of approximately 12,000 tonnes from the end of the second quarter. The 777 mine is now within nine months of closure, and the focus continues to be on mining out the remaining reserves by completing the necessary ground rehabilitation in order to access old workings and remnant stopes. Total ore mined at the Manitoba operations was higher this quarter than the second quarter due to higher production rates at Lalor. Copper and gold grades were higher compared to the previous quarter, mainly due to increased mining of gold and copper-gold stopes at Lalor, in line with the mine plan. Mined zinc grades were lower than the previous quarter as mining of the gold zones at Lalor were prioritized during the quarter. During the third quarter, the New Britannia mill processed 41,827 tonnes of high gold content ore and produced 404 ounces of gold in doré. The mill poured its first doré bar on August 11th. The gold and silver recoveries are expected to increase in the fourth quarter after the ramp-up of the mill during the third quarter. Ore processed at the Stall concentrator and New Britannia mill during the quarter was 29% higher than the second quarter. Combined Stall and New Britannia recoveries during the third quarter of 2021 were higher for zinc and lower for copper, gold, and silver versus the previous quarter, but were consistent with expectations as the third quarter was a partial ramp-up period for the New Britannia mill. Operations at the Flin Flon concentrator during the third quarter were constrained by ore feed availability from 777, and as such, ore processed decreased by 22% compared to the second quarter. Recoveries of copper, gold, and silver at the Flin Flon concentrator during the third quarter were higher than the previous quarter, mainly due to higher copper head grades from the 777 mine, consistent with the metallurgical model. Manitoba combined unit operating costs slightly declined in the quarter compared to the second quarter. We expect Manitoba unit operating costs in 2021 to be in line with the annual guidance range. Manitoba’s cash cost per pound of copper produced was negative $1.64, higher than the second quarter primarily due to lower by-product credits, partially offset by lower onsite costs. Sustaining cash cost was $0.75, compared to $0.36 in the second quarter, primarily due to the same reasons affecting cash costs, offset by lower sustaining capital expenditures. On August 11, 2021, gold production commenced at the New Britannia mill following refurbishment, commissioning, and start-up activities completed earlier in the summer. First gold production was achieved in line with the timelines assumed in recent guidance and ahead of the original schedule to produce first gold before the end of 2021. The construction of a new copper flotation facility was completed in October, followed by a brief commissioning period completed ahead of schedule. The copper facility consists of an innovative and first-of-its-kind flotation circuit based entirely on Jameson cells, a modern pneumatic flotation design that offers a compact layout, low-cost process, and flexible flowsheet. First production of copper concentrate was achieved in October and ramp-up of the copper circuit is now underway. We expect to achieve the targeted 1,500 tonnes per day design capacity at New Britannia in the fourth quarter of 2021. We have been very pleased with the construction of the new copper flotation facility. This is yet another example of our core expertise in successful project development and delivery. We completed construction of this new copper flotation project ahead of schedule with what we believe to be a record-setting commissioning and ramp-up period. Annual gold production from Lalor and the Snow Lake operations is expected to increase over 180,000 ounces at an average cash cost and sustaining cash costs net of by-product credits of $412 per ounce of gold and $788 per ounce of gold, respectively, during the first six full years of New Britannia’s operation. As part of the ongoing efforts to update our Flin Flon closure plan, a comprehensive update completed in the third quarter of 2021 resulted in a $144 million increase to the decommissioning and restoration provision. This increase is largely attributable to longer dated water treatment and monitoring obligations, along with cost inflation for other remediation activities. The higher water management costs are primarily a result of the addition of 22 years to the post-closure water management period, which after applying a very low discount rate represents a significant portion of the increase. The total estimated Flin Flon environmental obligations are $322 million on an undiscounted basis, of which approximately 25% is expected to occur in the next 15 years in connection with the closure of the Flin Flon operations, while approximately 75% relates to longer dated closure and environmental costs around the time of Snow Lake’s closure in 2037 based on current reserves. As part of the engineering we have done to update the Flin Flon closure plan, we have identified the opportunity to reprocess tailings at our Flin Flon Tailings Impoundment System. Tailings from processing activities in Flin Flon have been deposited in this area for over 90 years through several commodity price cycles. Technology has come a long way over these 90 years, and we are in the early stages of technical evaluation and confirmatory drilling to support the completion of a scoping study in 2022. But we are excited about this opportunity, as it could utilize the Flin Flon concentrator with modifications after the closure of the 777 mine, creating operating and economic benefits to the Flin Flon community. It could also provide the opportunity to redesign the closure plans, increase metal production, defer certain closure costs, and reduce the environmental footprint of the tailings area. On slide nine, we discussed the continued exploration success at our Copper World Project in Arizona. In September, we released the results from drilling completed at Copper World between January and June of 2021. The drill program totaled over 91,000 feet and intersected additional high-grade copper sulfide and oxide mineralization on our wholly-owned private land. The mineralization is within 7 kilometers of the Rosemont copper project and is located closer to surface than Rosemont. Recently, we increased our private land package, which together with patented mining claims now totals approximately 4,500 acres to support an operation entirely on private land. The 2021 drilling program identified three new deposits for a total of seven deposits at Copper World, covering a combined 7 kilometers with mineralized occurrences. The three new deposits are called Bolsa, South Limb, and North Limb. The program also confirmed and increased the confidence in the size and quality of the existing Copper World, Broad Top Butte, Peach, and Elgin deposits. There remains the potential for continuity between the Bolsa discovery and the Rosemont deposit as highlighted by three new holes drilled on the western edge of Rosemont, which intersected high-grade copper mineralization similar to the mineralization intersected at Bolsa. There remains a 1,500-foot gap in drilling coverage between these three holes and the Bolsa discovery, and we are developing plans to test this unexplored area. We expect to complete an initial mineral resource estimate for the seven deposits at Copper World before the end of 2021. These mineral resource estimates will form the basis for a PEA expected to be released in the first half of 2022. Mineralogical studies and metallurgical testing programs are underway, and the preliminary results are expected to be incorporated into the PEA. Lastly, on Copper World, in October, we received approval from the Arizona State Mine Inspector for our Mined Land Reclamation Plan. This approval represents the first step in the state-level permitting process for a private land operation. Slide 10 provides highlights of the exciting exploration initiatives underway in each of our regions. In Peru, ongoing evaluation of the underground potential at Constancia Norte supports plans for additional drilling activities in the fourth quarter of 2021. The drilling is expected to confirm continuity and test extensions, which together with the results from an underground scoping study, are expected to be incorporated into the annual mineral reserve and resource update for Constancia in March 2022. We continue to progress discussions with the community of Uchucarcco on the Maria Reyna and Caballito properties, both of which are located within 10 kilometers of Constancia. Drilling continues at the Llaguen copper porphyry target located in Northern Peru, near the City of Trujillo and in close proximity to existing infrastructure. The initial confirmatory phase of the drill program is expected to total 6,000 meters in 14 holes with two drill rigs presently turning at site. Five holes totaling 2,795 meters have been completed with all holes intersecting mineralization. Pending positive results from this initial drilling phase, a second phase aimed at defining an initial inferred mineral resource for Llaguen would follow in the second quarter of 2022 after the rainy season. In Manitoba, our regional exploration efforts in the Snow Lake area continue, following on the success from the 2021 winter drill program in the Chisel Basin where the copper-gold rich feeder of the 1901 deposit was discovered and high-grade zinc and gold mineralization was confirmed through infill and extension drilling. A 2022 drill program is planned for 1901 to test the down-plunge extensions of the copper-gold rich feeder zone. Our 2021 summer program included regional surface mapping and ground geophysical surveys to delineate our higher priority drill targets for 2022. One of the more promising targets was identified from a borehole survey immediately north of Lalor and is expected to be drill tested in early 2022, both from surface and from underground. Ongoing infill drilling continues at Lalor, where we have had a strong track record of converting inferred resources to reserves in the past. The results are expected to be incorporated into the annual mineral reserve and resource estimates to be published at the end of March 2022. On slide 11, I wanted to reiterate the point that with our major brownfield investment programs now behind us, we are entering a period of significant production and cash flow growth at Hudbay. The higher copper grades of Pampacancha are expected to contribute to a 46% increase in our copper production by 2024. Similarly, the higher gold grades from New Britannia and Pampacancha are expected to increase our consolidated gold production by over 150% by 2024. This translates to a three-fold increase in our annual EBITDA, and we believe our attractive portfolio of development and exploration opportunities will further add to this growth. I will conclude the presentation on slide 12, summarizing the many catalysts that we have coming up in the near-term. In Manitoba, we are on track for commercial production at the new copper flotation circuit before the end of the year. We will also continue our work on preparing for the ramp-up to 5,300 tonnes per day at Lalor and advancing the recovery improvement program at the Stall mill. As I mentioned previously, we will incorporate the results from drilling in the Snow Lake region into our annual mineral reserve and resource update next year. We will advance our plans towards completing the scoping study on the Flin Flon tailings reprocessing opportunity in 2022. In Peru, drilling continues at Llaguen with a potential to initiate a second phase aimed at defining an initial mineral resource estimate in 2022. We are hopeful that we will achieve an exploration agreement with the community of Uchucarcco on exciting greenfield properties to the north of Constancia. In Arizona, we are advancing our wholly-owned Copper World discovery and plans for an operation entirely on private land. We are also awaiting a decision at the U.S. Ninth Circuit Court of Appeals relating to the Rosemont federal permits before the end of 2021. We are a disciplined copper-focused growth company and we look forward to delivering on these catalysts in the near- and long-term while remaining vigilant for other opportunities that match our strategic criteria to create value for all of our stakeholders. And with that, we are pleased to take your questions.

Operator, Operator

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

Orest Wowkodaw, Analyst

Hi, good morning. Peter, I'm interested in the potential reprocessing of tailings opportunity in Manitoba. Can you provide more details on what you're considering and the scale of this initiative? You have 100 years of tailings in Manitoba, which I assume contains a significant amount of metal. With the plan to maximize the Flin Flon concentrator's capacity, I'm curious about the capital expenditures involved in this project.

Peter Kukielski, President and CEO

Good morning, Orest, and thank you for your question. We view this as a substantial opportunity because it not only potentially reduces our long-term asset retirement obligations by minimizing the amount of water we need to treat, but it could also lead to increased metal production. We have been depositing metal into those tailings for the past 90 years using less advanced technology, so there is a considerable amount of metal present. However, we still need to complete the necessary work ahead of us. First, we must drill the tailings while they are frozen to conduct an analysis and determine the optimal flowsheet for the concentrator, including the required size for the concentrate. I’m not entirely certain about the specifics, so I will hand it over to Cashel for more insights.

Cashel Meagher, Senior Vice President and COO

Sure. Thanks, Peter. Yeah, Orest, there are a number of things to consider. We are in the early days. We are working through our scoping studies on this. As Peter mentioned, one of the critical aspects is to understand what the mineral inventory is, as you sort of know that we have been putting tailings into those lakes for 90 years and we are well above the lake. It’s one of the reasons that we have long-term liabilities with the closure, and so it got us to thinking. There are a lot of tailings reprocessed for precious metals, but also technology has changed in mineral processing, and there are high-intensity grinding mills and these various things that we can add to them and modify our Flin Flon concentrator. So when we speak about throughput and the possibility, it’s different than what would be a normal run of mine, because obviously, the introduced material would be of a different size and so the combination circuit would be somewhat different. So too would be the treatment for the flotation and maybe any sort of leaching that’s required for the gold. So we are working through all of those things. But we do believe that we will get payable metals set of copper, zinc, gold, and silver. We are very excited about this because of the prospects it presents to us. For reconsolidating the tailings liability itself, whether we get options to put the sulphide portion back into subaqueous or we can isolate them into separate cells to really reduce or limit the amount of acid runoff in the future. I think it’s a good, very good ESG project. It’s one of those things I am very proud to talk to my daughter about. We are working on that we are going to leave the place better than we found it, and we are very excited about it. And I think it’s just one of those things. Stay tuned, stay patient. But we are very positive that this will be a great project and it will be an asset to Hudbay.

Peter Kukielski, President and CEO

I would also add that this is sort of a coming of age of our technical bench strength that we really are starting to utilize the bench strength that we have in the team. I have always said that we sort of punch above our weight for the company of our size. So, we are really pleased about that.

Orest Wowkodaw, Analyst

So, thanks for that color. Is it fair to say though, this is fairly low capital intensity?

Cashel Meagher, Senior Vice President and COO

Yeah. There are a number of things to figure out. As you can well imagine, working on tailings you got to think about the stability and so we have to understand the sequencing. We have to understand what is available to us because some of those tailings are built out of tailings, some of the dams and those types of things. So, yes, the idea that this is a brownfields environment. The idea that much of this doesn’t require obviously crushing, it’s just a combination circuit. The idea that we have installed capacity that’s on a conventional mine of running 6,000 to 7,000 tons a day mill, minor modifications. I would say for what the mineral inventory would be, it would be less capital required than what a normal mine would take. Because it would be essentially open-cast mining. We have to think about that mining method, all of those sorts of things, but definitely cheaper than underground mining.

Peter Kukielski, President and CEO

So, in general, to answer your question is yes. We think so, but that’s a work to be done.

Orest Wowkodaw, Analyst

Okay. Thank you. And just a quick follow-up on Manitoba. I know you reaffirmed your 2021 guidance but zinc really seems like it’s tracking fairly below the guidance. I am just wondering if you are anticipating some kind of a really strong fourth quarter to perhaps make the low end of guidance or just wondering why that guidance hasn’t changed.

Cashel Meagher, Senior Vice President and COO

What it is you can well imagine you are limited in the type of sequencing you can do when you are mining out the final throes of a mine like 777 and as Peter said, we have sort of nine months of production, and it is very well planned out. We don’t have the flexibility we had at Lalor. We used to have a 777 where we could jump the sequence and get to other stopes. So, there are a couple of stopes that are high-grade zinc, and they were scheduled to come out in the third quarter, but they got delayed by a month or month and a half. So, they are going to come out in the fourth quarter and they will be impactful to get us all back on range from the low end of guidance on zinc.

Orest Wowkodaw, Analyst

Thank you.

Operator, Operator

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

Jackie Przybylowski, Analyst

Thank you very much. I have a list of questions, but I will train narrowed down to a couple. Maybe Peter, if we could get an update from you about what’s happening in Arizona, specifically Rosemont. I know you guys have said for the last year and a half or so, that we are expecting a decision from the ninth Circuit Court of Appeals. Sorry, this year by year-end given we are in November, is that still the case?

Peter Kukielski, President and CEO

Hi, Jackie. Thanks for that. I think that is actually the case; we don’t know definitively, but when we look at the number of cases that remain with decisions pending, that list has reduced down to, I think, some five cases and we anticipate that they will probably get through them by the end of the year. That’s why we expect this to be done in 2021. But, we have no real visibility into that.

Jackie Przybylowski, Analyst

Okay. We will wait and see, and obviously you are working in the mid-term on Copper World and I noticed there is a comment about a — I think it’s a permanent something sort of reclamation plan that’s been accepted. Can you talk about how the permitting process for Copper World is going and what is still outstanding?

Peter Kukielski, President and CEO

Sure. So, there are effectively three permits required at the state level for Copper World. The first permit is the mines land reclamation plan, which is effectively the preliminary design for the mine, which is provided in order to determine the bonding requirements of reclamation. So, we submitted that plan to the State of Arizona, and it was approved in October. So, that basically set the bonding requirements. Then, there are two further state level permits that are required. One is the aquifer protection plan, and the other one is the air quality plan. So, those remain to be submitted to the state. But of course, we would complete technical work ahead of submitting those, but the first one was required in order to kick things off.

Jackie Przybylowski, Analyst

Right. And maybe one, just really quick one, building on a question about tailings. I know you guys have a long history of mining. Is there other opportunities outside of Flin Flon to do the same? Does Snow Lake — like I am taking of the Chisel and some of those other old mines, is there similar opportunity maybe there in the future as well?

Cashel Meagher, Senior Vice President and COO

Hi, Jackie. Cashel here. Absolutely. And one of the unique things about the Chisel camp is when you look at the tenure of gold and silver in its against BMS camps around the world, it’s well known to have the highest amount of gold and silver. So certainly, if we are successful at utilizing the on-care and maintenance Flin Flon mill, we had the opportunity to use that first, it will be applicable to Snow Lake and we will also in parallel, we will be looking at those opportunities over the next couple of years. So, if we look at the tails grade of two, we assume that the gold grade is probably higher. I would say in the tails in the Snow Lake region than it was in the Flin Flon tail. So that would add more economic value for us and more impetus for us to look at that very closely. Good question.

Jackie Przybylowski, Analyst

Thanks. That’s great. I mean obviously you need to mill capacity there but that’s great to hear. And I apologize for the noise. Thank you very much. That’s all my questions.

Peter Kukielski, President and CEO

Thanks Jackie.

Operator, Operator

Our next question comes from Bryce Adams of CIBC Capital Markets. Please go ahead.

Bryce Adams, Analyst

Yes. Good morning. Thanks for taking my questions. First up, a question on the exploration agreements for Maria Reyna and Caballito. Those are still in the presentation as 2021 events. Is that realistic at this time or is it more of a 2022 event and possibly even a 2023 deliverable?

Peter Kukielski, President and CEO

Hi, Bryce. Look, we have a very good relationship with the community of Uchucarcco. We are actively in discussions with that community. But as you can imagine, based on our experience at Pampacancha with the Caballito community, these things take time. We are driving towards securing an agreement with the community of Uchucarcco by the end of this year, but we can by no means say definitively that that will occur. So, you are quite right that could be a 2022 milestone. But, we are pretty confident that it will not drag beyond that; in fact, our anticipation is that it will be earlier in 2022 than later, and we are driving towards this year, but as you suggest this year is driving towards a close.

Bryce Adams, Analyst

Okay. Thanks. That’s useful. Second question from me is on the Flin Flon closure reassessment. The first part of the question is on the timing of the DRO. Is that something that could have been held back and included in Q4 year-end financials. And then regarding the Flin Flon tailings reprocessing, you indicated the scoping studies coming next year when that’s delivered. Do you then revalue the closure liabilities or that evaluation is done every five years and every five years only?

Peter Kukielski, President and CEO

So the first part of your question, Bryce, is it could we have sort of held this back until later. I think our obligations with respect to disclosure would prevent us from doing that. And we always intend to be transparent with the market in any case. So, even if we could have, we probably would not have. In fact, I would say we would definitively would not have. With respect to the changing of the longer-term retirement obligations resulting from a study related to tailings reprocessing, I think we would certainly make the market you and the market aware of the opportunity, but we are only required every five years to update our obligations. So, I think it will be a combination of the two. We would disclose what it looks like, but we would ultimately update the plan after five years.

Cashel Meagher, Senior Vice President and COO

Yeah. Maybe I can just add to that. While that is certainly what the regulatory authorities in Saskatchewan would require every five years, we would also be under the obligation of submitting a new mine plan. And when you submit a new mine plan, you submit a new closure plan. So, we would get the opportunity also to recast the closure plan, which we believe will be much more optimal and much more beneficial to Hudbay with the recast closure plan. And that would just be with the timing of whenever we get to sort of a feasibility level on this reprocessing of tails, which could be as late as five years, which is 2025 or could be earlier; it’s just the progress we make on the project.

Steve Douglas, Senior Vice President and CFO

Peter, if I could add, maybe from the finance perspective, I think it’s important to remember that it’s our obligation; it’s always frankly what we do is to consistently in quarterly look at these obligations and reassess them in the context of everything we know, both good and bad. I think the first question Peter you answered it correctly; the answer was, we had our best estimate at the point in time. Regardless of when that was, we accrued accordingly. So, I think the bigger question is you guys are absolutely right. But obviously our job is to deal with the firmly in the actual things that we know and be once we get a better perspective on the potential for this tailings reprocessing we can reevaluate the context of the overall project. But, for the time being, we know what we know and we accrue as such the chips fall where they are.

Bryce Adams, Analyst

Okay. Perfect. Thanks. So that’s it from me. Keep well everyone.

Cashel Meagher, Senior Vice President and COO

Thank you, Bryce.

Operator, Operator

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

Lawson Winder, Analyst

Hi. Thank you for the update. Good morning. I wanted to start off by just asking about Rosemont. So just to get an idea of how you are thinking about the case now. So regardless of outcome whether Hudbay wins and then it’s successfully appeals to the Supreme Court or may lose it. I am just curious, what is the benefit to Hudbay to continue fighting the case when a private land solution seems to be an appealing option at this point, a very different option?

Peter Kukielski, President and CEO

Good morning, Lawson. Looks like that is a very good question, and it’s more of an industry question. We believe that if there was to be a negative decision on Rosemont that it would be worth appealing because that negative decision has a very, very significant impact on copper mining in the United States in general. And so from an industry perspective, we believe that we would be supported by many, many other players in pursuing an appeal, but that pursuing an appeal does not prevent us as you suggest from continuing with Copper World and on a private land option. So, we would likely move forward with both in parallel.

Lawson Winder, Analyst

Yes. That’s great. Thanks for clarifying that. And then just to I guess touch back on some topics that have already been discussed. So on Copper World, very nice to see the mine reclamation plan approved, the color on the next two permits required is great. If you maybe just a little bit of detail though on the timing around those next two permits. So, what level of study do you need before you can submit for the aquifer air quality approval, and what do you suspect the timeline would be on submitting for those and that actually getting them? Thanks.

Cashel Meagher, Senior Vice President and COO

Lawson. Cashel here. Look, we are into sort of new territory on our private land, sort of west of the ridge. We can utilize some of the baseline work that was done previously, obviously at Rosemont, but we are adding to that; we are doing that in parallel with our normal geological and engineering work that we require to be able to submit a mine plan. But to be able to calculate the impact on the aquifer, to be able to calculate the impact on an air quality permit, what is required is a mine plan at sort of a feasibility level that you sort of convince you are bringing that forward. So it’s going to be a couple of years yet before we have definitively advanced those things, and having those things in advance of a feasibility study, there is not a huge benefit because the feasibility study is contrary to what those two permits might allow you to do. It’s sort of you need one with the other, and so, I think what it would be safe to say is over the next couple of years, this story will mature and so too will be advancements to the seeking these permits with the additional baselining and studies that we are doing now.

Peter Kukielski, President and CEO

I think I’d also add to that, Lawson, that as once we have completed the sort of the feasibility work and submit those permits, we would proceed in any case with the engineering because it would be based on the level of confidence that we have, and that would allow sort of time to execute permitting activities and engineering work pre-construction.

Lawson Winder, Analyst

Okay. That’s great. And then just finally on Maria Reyna and Caballito. I am not sure if you are comfortable doing this, but I think it might be helpful just to have a little detail on kind of what the issues are, that are being discussed now in this sort of final stages of the discussion. For example, with Pampacancha when it came down to it, there are sort of like just a handful of hold-outs that we are using the land energy came down to getting their sign off. Is it similar to that?

Peter Kukielski, President and CEO

I would say it’s much simpler than that, because remember that at Pampacancha we were talking to a community about an exploitation or extraction agreement and that these guys have very, very solid advice. They know that that’s where the revenue is derived from. In the case of an exploration agreement and in other revenue derived from that is only opportunity; these guys are fully aware of that. So what the discussion is now just relates to reaching agreement on numbers. And as always, we start far apart, and we eventually move closer and closer and closer, and that occurs over a number of iterations, and so the question really is how long will those iterations take; that remains to be seen. But, we are fully engaged with them, and there are no issues outstanding other than really aligning around what the number is.

Lawson Winder, Analyst

Okay. That’s fantastic. And then on the exploitation permit. Is it the case that once you have the exploration permit, I mean could you theoretically move directly into the discussions and exploitation, or is there some sort of like cooling off period that’s required? Thanks.

Peter Kukielski, President and CEO

No. Because they would need to drill the resource and understand what the resource might look like, and that we would need to follow all the traditional methodologies associated with the mine planning and full feasibility, etc. So it would be a fairly significant pause.

Operator, Operator

Thank you. Our next question comes from Stefan Yano of Cormark Securities. Please go ahead.

Stefan Yano, Analyst

Thanks very much guys. Just curious, I mean, if you are going down the path of at least thinking about tailings reprocessing in Flin Flon, does that potentially open the door to, also maybe think about bringing in additional ore feeds from the district that may bolster the grade of a tailings-focused operation?

Cashel Meagher, Senior Vice President and COO

Hi. Cashel, here. Look, it’s what we will put through the mill is whatever has the highest NSR to Hudbay, in the highest margin to Hudbay. I suspect knowing satellite deposits that are within the vicinity of Hudbay. The reason we are shutting down our mill now is because there is no anchor feed for the Flin Flon. Would the tailings present an opportunity for that? Absolutely. And then we would have to evaluate the incremental value of any satellite deposits over just digging up more tailings and we have to be presented with those opportunities or options at the time.

Stefan Yano, Analyst

Got it. That’s helpful. And then maybe just for my own clarification or just a little bit of housekeeping. You just mentioned that during the quarter that the mining levels were optimized for the mill throughput. Just I want to make sure I am clear on that, was that when you talk about optimizing for the mill throughput was that a reflection of the downtime this quarter for the preventive maintenance, or are you starting to maybe see some potential bottlenecks that can just go through the system?

Peter Kukielski, President and CEO

Actually, what it was is under the pandemic were sort of on a restricted work schedule and also restrictive on the number of people we bring to site, just to limit our vulnerability to COVID. What it’s done is we have had to sort of modify some of our deferred stripping, and so when we say we are optimizing the mine feed to the mill, what we are doing is sometimes we have to sacrifice some of our previously optimized stockpiling strategies and/or our deferred stripping strategies on the fly to be able to keep the mill full with the complement of the workforce, should we be short for a week here or a week there, and what it’s done is it just modified what that sequencing is, and that’s what that optimization refers to.

Stefan Yano, Analyst

Okay. Got it. That’s great. Thanks very much, guys.

Operator, Operator

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

Dalton Baretto, Analyst

Thanks, Operator. Good morning, Peter and team. I want to start by asking about Copper World. We have talked a lot about the permitting process from a regulatory perspective and how simple the state-level process is relative to federal and so on, but processes aside, Rosemont attracted a fair bit of NGO and other attention. I am just wondering how are you thinking about Copper World from a social license perspective?

Peter Kukielski, President and CEO

Good morning, Dalton. That’s a great question. I think that it’s fair to say that we have the benefit of hindsight here. And, so we know what the key issues are with respect to the approaches that have been taken on Rosemont. The overriding simplification, of course, is that this is on private land and if you take a look at the press that Copper World has received to date, you will see in general that it is reasonable press. There are both pros and cons, but what absolutely sticks out is our right to mine on our private land and that right is held is pretty sacrosanct. So, we have every intention of engaging with any and all stakeholders, who is interested in discussions that would help us to move this forward positively, and I think we know we have a much better sense of how to do that than might have been the case with the predecessor company when we purchased Rosemont. So, I think Andre and his team are following a very, very fulsome engagement process. They are talking openly with whoever wants to talk to us. But, I think the big differentiating factor here is that we will be mining on our private land, but we will be absolutely respecting the need to ensure that this mine is built to the highest standards of environmental and social integrity.

Dalton Baretto, Analyst

Okay. That’s great, Peter. Maybe switching gears a little bit. I want to ask about capital allocation, but there’s really two parts to this question. The first part is on new bread and kind of the gold mine they are up in Manitoba. You had mentioned in the past that you would relook at how that fits in the portfolio, once the mill is ramped up, and we are almost there now. Just wondering if I can get your updated thoughts on that.

Peter Kukielski, President and CEO

Sure. Again a great question because we now sort of moving towards the tail end of what I always refer to as daylighting value in Manitoba, and as you know, I have said in the past that once we have daylight of the value, we of course would be open to entertaining options around it. However, what turns out is that Manitoba appears to be the gift that keeps on giving and what’s really happening is that as we execute against our strategy, we keep on uncovering new opportunities. And so, now with the new opportunities ahead of us related to the improvement of recoveries at Stall, potential expansion of production through New Brit, expansion of production at Lalor itself, and the additional assets that are satellites complemented or supplemented by now, what is a very potentially attractive tailings reprocessing program. We are reluctant to just give that away without any value. On the other hand, if somebody wanted to come and pay us full value for the camp, we would absolutely be prepared to consider it, noting as I have always said that we don’t really want to be a single mine operating company. So there are all of these things that we need to consider. But we think we are on the cusp of a sort of the second, both third innings with respect to value creation that Flin Flon and we are going to pursue that until an alternative that manifests itself.

Dalton Baretto, Analyst

Okay. Great. And then just maybe part B of that question, your balance sheet is in really great shape now, you are generating tons of cash, and any meaningful capital on Copper World at least a few years away. How are you thinking about M&A and then given what your shares, how do your shares perform this year? Are you considering any form of a buyback at all?

Peter Kukielski, President and CEO

Look, I think, I mean I will let Steve comment in more detail, but I think that it certainly is part of our ambition and long-term goal to sort of sustainably return capital to our shareholders over the course of the cycle. But in the meanwhile, and there are a lot of competing investment priorities, but at the same time returning value to our shareholders is always top of mind. So, as you say it is top of world is a little bit dated, at least is a little bit further out, although there will be expenditures in the interim that need to be addressed. We have got the Stall mill recovery program. We potentially have some other project work in Manitoba. So, I think we would contemplate share buybacks or other forms of capital returns in the interim if it makes sense, but it needs to compete against the opportunities that have.

Steve Douglas, Senior Vice President and CFO

No, I think you are right, Peter. We had seen. It’s easy to be tempered by short-term disconnects between our perception of our own value and obviously the market. But I think you are right when you play out the kind of the runway ahead of us does have a lot of significant capital opportunities, a lot of them which have very long term promising return levels. So, for me, I think the course remains somewhat unchanged. We are at that inflection point where we have completed two major brownfield projects in the form of Pampacancha and I don’t see any bread, who we are starting, both of which are starting to bear fruit. We will start to generate additional capital in recognizing in this business a year or two years is to think about high really when we start to contemplate kind of dollars we would be spending and the optionality that we have. So, I think it’s always come out on us, and this is something that is a constant tension between whether or not we in fact invest for the longer term or perhaps potentially take advantage of those disconnects, demonstrate the people who believe in our business, and I think for us right now remains focused on conversion of those opportunities into cash, and then exploring the opportunities thereafter.

Dalton Baretto, Analyst

Okay. And just Peter, your thoughts on the acquisitions now.

Peter Kukielski, President and CEO

Of course. So I think we have been always been pretty clear about that. We have always said that we would like to add a third operating asset to the portfolio from a risk reduction perspective, but also from a diversification perspective. So, we do continue to look for another operating asset to add to the portfolio, but I think you know as well as most, that those are few and far between. But, we will continue to be creative in how we think about this, but at the same time, we will continue to be very disciplined. But we would have to add another operating asset to the portfolio, but we will exercise discipline.

Dalton Baretto, Analyst

That’s great. That’s all from me guys. Thank you.

Peter Kukielski, President and CEO

Thanks Dalton.

Operator, Operator

Our next question comes from Pierre Vaillancourt of Haywood. Please go ahead.

Pierre Vaillancourt, Analyst

Hi, Peter. Could you comment on the blockaded with the tuck and more generally just how these communities are acting now? Are they being more empowered, as a result of the new government and what can we expect to come out of this and just how your discussions with the government and progressing and what impact on a broader sense that might have on operations?

Peter Kukielski, President and CEO

Good morning, Pierre, and thank you for that. Look, there is no doubt that there has been a period of heightened social tension in Peru as the country continues to experience the impacts of the pandemic and some communities may feel empowered by the radical speakers from different actors. This has not been limited by any stretch of the imagination to Constancia, and we have heard of recent projects, the Antamina, Antapaccay, and at Afamaya gold mine and of course at Las Bambas. I do think that the key here is engagement with our communities, as well as educational contact with government entities, either at a cabinet level or at a congress level to make sure that people are educated with respect to what we are doing for our communities. This sort of tones down the level of protest. But maybe before we wrap up on the question, I will ask Cashel to provide a little bit of historical perspective from his time in Peru and how he sees that relating to the current environment.

Cashel Meagher, Senior Vice President and COO

Earlier this week, I saw a news article about Newmont Yanacocha being interrupted, but I mistakenly didn't check the date and thought it was a recent event after the N’Djamena incident. It turned out to be from October 2011, following homologation when Dan a culture was interrupted, affecting a stream of 1.5 million ounces a year. I initially thought they wouldn't face such issues anymore. While the current situation involves a different party and process, the sentiment remains similar, especially with the left-leaning administration. Many locals might see themselves represented and hopeful for some form of justice. It's important to acknowledge that mining companies drive development in rural areas, which has been evident over the past decade. I am optimistic that this will occur again, despite the unique circumstances and path it may take. The people of Peru have seen through the pandemic that mining generates significant revenue, which promotes progress in remote areas where the government has less reach. I believe we have encountered similar situations before, and I am hopeful that positive outcomes will emerge as reason prevails.

Peter Kukielski, President and CEO

Here, I would just wrap it up by saying is, look, we continue to have the objective that the communities in our mining region benefit from our presence and Javier Del Rio, and our team in Peru, continue to maintain dialog and discussions at every different level including at the district and regional levels in Peru. But also, as I said earlier, at the cabinets and congressional levels. So to be clear, these protests that we are experiencing, although they are impactful, the impact has not been material on our operations at Constancia and frankly we think we will get through them. I think we have a period of volatility ahead of us, but as cash says we think we will get through them.

Operator, Operator

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

Candace Brûlé, Director of Investor Relations

Thank you, Operator, and thank you, everyone, for participating today. This concludes the call. If you have any further questions feel free to reach out to our Investor Relations team. Thanks and have a great day.