UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 6-K

REPORT OF FOREIGN PRIVATE ISSUER
PURSUANT TO RULE 13A-16 OR 15D-16 OF
THE SECURITIES EXCHANGE ACT OF 1934

For the month of June 2020

Commission File Number: 001-34244

HUDBAY MINERALS INC.
(Translation of registrant’s name into English)

25 York Street, Suite 800
Toronto, Ontario
M5J 2V5, Canada
(Address of principal executive offices)

Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F.

Form 20-F [   ]                    Form 40-F [X]

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1): [   ]

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7): [   ]

Indicate by check mark whether the registrant by furnishing the information contained in this Form is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.

Yes [   ]                     No [X]

If “Yes” is marked, indicate below the file number assigned to the registrant in connection with Rule 12g3-2(b): 82- _____________________________


EXPLANATORY NOTE

On August 11, 2020, Hudbay Minerals Inc. (“Hudbay”) filed on the Canadian Securities Administrators’ System for Electronic Document Analysis and Retrieval (SEDAR) website at www.sedar.com the following documents: (1) Unaudited Condensed Consolidated Interim Financial Statements for the period ended June 30, 2020, (2) Management's Discussion and Analysis for the period ended June 30, 2020, (3) Form 52-109F2 Certification of Interim Filings Full Certificate - CEO, (4) Form 52-109F2 Certification of Interim Filings Full Certificate - CFO, (5) News Release dated August 11, 2020.

Copies of the filings are attached to this Form 6-K and incorporated herein by reference, as follows:

2


SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

  HUDBAY MINERALS INC.
  (registrant)
     
  By: /s/ Patrick Donnelly
  Name: Patrick Donnelly
  Title: Vice President and General Counsel

Date: August 12, 2020

3


EXHIBIT INDEX

The following exhibits are furnished as part of this Form 6-K:

Exhibit   Description
   
99.1   Unaudited Condensed Consolidated Interim Financial Statements for the period ended June 30, 2020
99.2   Management's Discussion and Analysis for the period ended June 30, 2020
99.3   Form 52-109F2 Certification of Interim Filings Full Certificate - CEO
99.4   Form 52-109F2 Certification of Interim Filings Full Certificate - CFO
99.5   News Release dated August 11, 2020

4


Hudbay Minerals Inc.: Exhibit 99.1 - Filed by newsfilecorp.com

 

 

Unaudited Condensed Consolidated Interim Financial Statements

(In US dollars)

HUDBAY MINERALS INC.

For the three and six months ended June 30, 2020 and 2019


HUDBAY MINERALS INC.

Condensed Consolidated Interim Balance Sheets
(Unaudited and in thousands of US dollars)

 

      Jun. 30,     Dec. 31,  
  Note   2020     2019  
Assets              
Current assets              
Cash and cash equivalents   $ 391,136   $ 396,146  
Trade and other receivables 6   106,120     105,994  
Inventories 7   143,002     138,820  
Prepaid expenses and other current assets     10,057     12,737  
Other financial assets 8   2,174     2,049  
Taxes receivable     9,214     7,289  
      661,703     663,035  
Receivables 6   18,249     19,264  
Inventories 7   21,479     19,455  
Other financial assets 8   11,369     11,287  
Intangibles and other assets 9   22,168     10,411  
Property, plant and equipment 10   3,679,926     3,662,559  
Deferred tax assets 18b   83,998     75,046  
    $ 4,498,892   $ 4,461,057  
Liabilities              
Current liabilities              
Trade and other payables   $ 163,654   $ 192,404  
Taxes payable     577     2,146  
Other liabilities 11   49,159     49,411  
Other financial liabilities 12   80,563     28,076  
Lease liabilities 13   32,243     32,781  
Deferred revenue 15   74,835     86,933  
      401,031     391,751  
Other financial liabilities 12   183,673     39,784  
Lease liabilities 13   39,031     49,166  
Long-term debt 14   988,418     985,255  
Deferred revenue 15   493,366     476,823  
Provisions 16   326,839     280,850  
Pension obligations 17   20,092     29,599  
Other employee benefits 17   119,529     116,778  
Deferred tax liabilities 18b   220,610     242,928  
      2,792,589     2,612,934  
Equity              
Share capital 19b   1,777,340     1,777,340  
Reserves     (36,231 )   (24,250 )
Retained earnings     (34,806 )   95,033  
      1,706,303     1,848,123  
    $ 4,498,892   $ 4,461,057  
Commitments (note 22)  


HUDBAY MINERALS INC.

Condensed Consolidated Interim Income Statements
(Unaudited and in thousands of US dollars)

 

  Note   Three months ended
June 30,
    Six months ended
June 30,
 
  2020     2019     2020     2019  
Revenue 5a $ 208,913   $ 329,414   $ 454,020   $ 621,672  
Cost of sales                          
Mine operating costs     140,760     195,077     321,419     358,393  
Depreciation and amortization 5b   80,807     91,194     167,246     168,325  
      221,567     286,271     488,665     526,718  
Gross (loss) profit     (12,654 )   43,143     (34,645 )   94,954  
Selling and administrative expenses     10,713     10,422     15,816     25,323  
Exploration and evaluation expenses     2,192     7,935     7,965     13,343  
Other expenses 5d   1,276     28,909     6,768     40,606  
Results from operating activities     (26,835 )   (4,123 )   (65,194 )   15,682  
Net interest expense on long term debt 5e   19,729     16,265     39,364     32,499  
Accretion on streaming arrangements 5e   15,732     15,915     32,031     37,884  
Change in fair value of financial instruments 5e   4,656     3,533     10,900     (1,859 )
Other net finance costs 5e   7,652     4,095     8,567     9,202  
Net finance expense     47,769     39,808     90,862     77,726  
                           
Loss before tax     (74,604 )   (43,931 )   (156,056 )   (62,044))  
Tax (recovery) expense 18a   (22,703 )   10,214     (28,021 )   5,518  
Loss for the period   $ (51,901 ) $ (54,145 ) $ (128,035 ) $ (67,562 )
                           
Loss per share                          
Basic and diluted   $ (0.20 ) $ (0.21 ) $ (0.49 ) $ (0.26 )
                           
Weighted average number of common shares outstanding:                          
Basic and diluted 20   261,272,151     261,272,151     261,272,151     261,272,151  


HUDBAY MINERALS INC.

Condensed Consolidated Interim Statements of Cash Flows
(Unaudited and in thousands of US dollars)

 

  Note   Three months ended
June 30,
    Six months ended
June 30,
 
  2020     2019
(Note 23a)
    2020     2019
(Note 23a)
 
Cash generated from operating activities:                          
Loss for the period   $ (51,901 ) $ (54,145 ) $ (128,035 ) $ (67,562 )
Tax (recovery) expense 18a   (22,703 )   10,214     (28,021 )   5,518  
Items not affecting cash:                          
Depreciation and amortization 5b   81,230     91,739     168,087     169,422  
Share-based compensation expenses (recoveries) 5c   3,597     (1,875 )   885     3,468  
Net interest expense on long term debt 5e   19,729     16,265     39,364     32,499  
Accretion on streaming arrangements 5e   15,732     15,915     32,031     37,884  
Change in fair value of financial instruments 5e   4,656     3,533     10,900     (1,859 )
Other net finance costs 5e   7,652     4,095     8,567     9,202  
Inventory (recoveries) writedowns 7   (8,154 )   -     2,221     -  
Amortization of deferred revenue 15   (13,904 )   (21,297 )   (23,664 )   (30,809 )
Pension and other employee benefit payments, net of accruals     1,750     903     3,934     1,746  
Decommissioning and restoration payments     (3,193 )   -     (6,129 )   -  
Write down of UCM receivable 5d   -     25,978     -     25,978  
Other 1     (1,650 )   (3,983 )   (2,679     (3,878 )
Taxes paid     (3,384 )   (6,083 )   (6,052 )   (14,668 )
Operating cash flow before change in non-cash working capital     29,457     81,259     71,409     166,941  
Change in non-cash working capital 23a   1,911     25,750     (30,954 )   1,767  
      31,368     107,009     40,455     168,708  
Cash used in investing activities:                          
Acquisition of property, plant and equipment     (47,751 )   (50,028 )   (98,836 )   (92,311 )
Acquisition of subsidiary, net of cash acquired     -     (44,688 )   -     (44,688  
Change in restricted cash     -     1,637     -     2,374  
Net interest received     342     2,198     1,480     4,481  
      (47,409 )   (90,881 )   (97,356 )   (130,144 )
Cash used in financing activities:                        
Interest paid on long-term debt     -     -     (37,375 )   (37,375 )
Financing costs     (4,441 )   (4,709 )   (8,177 )   (10,183 )
Lease payments     (8,192 )   (7,380 )   (17,209 )   (14,829 )
Gold prepayment proceeds 12   115,005     -     115,005     -  
Dividends paid 19b   -     -     (1,804 )   (1,955 )
      102,372     (12,089 )   50,440     (64,342 )
Effect of movement in exchange rates on cash and cash equivalents     (1,192 )   (379 )   1,451     (192 )
Net increase (decrease) in cash and cash equivalents     85,139     3,660     (5,010 )   (25,970 )
Cash and cash equivalents, beginning of the period     305,997     485,867     396,146     515,497  
Cash and cash equivalents, end of the period   $ 391,136   $ 489,527   $ 391,136   $ 489,527  
1 Includes disbursements for share based compensation, restructuring, realized foreign exchange gains and losses and Pampacancha delivery obligation payments.  
For supplemental information, see note 23.  


HUDBAY MINERALS INC.

Condensed Consolidated Interim Statements of Comprehensive Loss
(Unaudited and in thousands of US dollars)

 

    Three months ended
June 30,
    Six months ended
June 30,
 
    2020     2019     2020     2019  
Loss for the period $ (51,901 ) $ (54,145 ) $ (128,035 ) $ (67,562 )
                         
Other comprehensive income (loss):                        
Item that will be reclassified subsequently to profit or loss:                        
Recognized directly in equity:                        
Net exchange gain (loss) on translation of foreign currency balances   9,534     3,690     (10,586 )   7,458  
    9,534     3,690     (10,586 )   7,458  
                         
Items that will not be reclassified subsequently to profit or loss:                        
Recognized directly in equity:                        
Gold prepayment revaluation loss (note 12)   (480 )   -     (480 )   -  
Tax effect   129     -     129     -  
Remeasurement - actuarial loss   (31,594 )   (5,625 )   (98 )   (11,341 )
Tax effect   1,940     (75 )   (1,344 )   (715 )
    (30,005 )   (5,700 )   (1,793 )   (12,056 )
Other comprehensive loss net of tax, for the period   (20,471 )   (2,010 )   (12,379 )   (4,598 )
Total comprehensive loss for the period $ (72,372 ) $ (56,155 ) $ (140,414 ) $ (72,160 )


HUDBAY MINERALS INC.

Condensed Consolidated Interim Statements of Changes in Equity
(Unaudited and in thousands of US dollars)

 

    Share capital
(note 19)
    Other capital reserves     Foreign currency translation reserve     Remeasurement reserve     Retained earnings   Total equity  
Balance, January 1, 2019 $ 1,777,340   $ 28,837   $ (11,819 ) $ (58,272 ) $ 442,770   $ 2,178,856  
Loss   -     -     -     -     (67,562 ) (67,562)  
Other comprehensive income (loss)   -     -     7,458     (12,056))     -   (4,598 )
Total comprehensive income (loss)   -     -     7,458     (12,056 )   (67,562 ) (72,160)  
Dilution of Partner's investor in Rosemont         25,978                     25,978  
Contributions by and distributions to owners:                                  
Dividends (note 19b)   -     -     -     -     (1,955 ) (1,955)  
Total contributions by and distributions to owners   -     -     -     -     (1,955 ) (1,955)  
Balance, June 30, 2019 $ 1,777,340   $ 54,815   $ (4,361 ) $ (70,328 ) $ 373,253   $ 2,130,719  
Loss   -     -     -     -     (276,248 ) (276,248)  
Other comprehensive income (loss)   -     -     1,762     (6,138 )   -   (4,376 )
Total comprehensive income (loss)   -     -     1,762     (6,138 )   (276,248 ) (280,624)  
Contributions by and distributions to owners:                                  
Dividends   -     -     -     -     (1,972 ) (1,972)  
Total contributions by and distributions to owners   -     -     -     -     (1,972 ) (1,972)  
Balance, December 31, 2019 $ 1,777,340   $ 54,815   $ (2,599 ) $ (76,466 ) $ 95,033   $ 1,848,123  


HUDBAY MINERALS INC.

Condensed Consolidated Interim Statements of Changes in Equity
(Unaudited and in thousands of US dollars)

 

    Share capital
(note 19)
  Other capital reserves     Foreign currency translation reserve     Remeasurement reserve     Retained earnings     Total equity  
Balance, January 1, 2020 $ 1,777,340   $ 54,815   $ (2,599 ) $ (76,466 ) $ 95,033   $ 1,848,123  
Loss   -   -     -     -     (128,035 )   (128,035 )
Other comprehensive loss   -   -     (10,586 )   (1,793 )   -     (12,379 )
Total comprehensive loss   -   -     (10,586 )   (1,793 )   (128,035 )   (140,414 )
Contributions by and distributions to owners:                                  
Dividends (note 19b)   -   -     -     -     (1,804 )   (1,804 )
Stock options (note 5c)   -   398     -     -     -     398  
Total contributions by and distributions
to owners
  -   398     -     -     (1,804 )   (1,406 )
Balance, June 30, 2020 $ 1,777,340   $ 55,213   $ (13,185 ) $ (78,259 ) $ (34,806 ) $ 1,706,303  


HUDBAY MINERALS INC.

Notes to Unaudited Condensed Consolidated Interim Financial Statements
(in thousands of US dollars, except where otherwise noted)
For the three and six months ended June 30, 2020 and 2019

 

1. Reporting entity

On January 1, 2017, Hudbay Minerals Inc. amalgamated under the Canada Business Corporations Act with its subsidiaries Hudson Bay Mining and Smelting Co., Limited and Hudson Bay Exploration and Development Company Limited to form Hudbay Minerals Inc. ("HMI" or the "Company"). The address of the Company's principal executive office is 25 York Street, Suite 800, Toronto, Ontario. The unaudited condensed consolidated interim financial statements ("interim financial statements") of the Company for the three and six months ended June 30, 2020 and 2019 represent the financial position and the financial performance of the Company and its subsidiaries (together referred to as the "Group" or "Hudbay" and individually as "Group entities").

Wholly owned subsidiaries as at June 30, 2020 include HudBay Marketing & Sales Inc. ("HMS"), HudBay Peru Inc., HudBay Peru S.A.C. ("Hudbay Peru"), HudBay (BVI) Inc., Hudbay Arizona Inc, Rosemont Copper Company ("Rosemont") and Mason Resources (US) Inc ("Mason").

Hudbay is an integrated mining company primarily producing copper concentrate (containing copper, gold and silver), molybdenum concentrate and zinc metal. With assets in North and South America, the Group is focused on the discovery, production and marketing of base and precious metals. Directly and through its subsidiaries, Hudbay owns three polymetallic mines, four ore concentrators and a zinc production facility in northern Manitoba and Saskatchewan (Canada) and Cusco (Peru) and copper projects in Arizona and Nevada (United States). The Group also has equity investments in a number of junior exploration companies. The Company is governed by the Canada Business Corporations Act and its shares are listed under the symbol "HBM" on the Toronto Stock Exchange, New York Stock Exchange and Bolsa de Valores de Lima.

2. Basis of preparation

(a)  Statement of compliance:

These interim financial statements have been prepared in accordance with IAS 34, Interim Financial Reporting as issued by the International Accounting Standards Board ("IASB") and do not include all of the information required for full annual financial statements by International Financial Reporting Standards ("IFRS").

These interim financial statements should be read in conjunction with the Company's audited consolidated financial statements for the year ended December 31, 2019 which includes information necessary or useful to understanding the Company's business and financial statement presentation. In particular, the Company's significant accounting policies are presented as note 3 in the audited consolidated financial statements for the year ended December 31, 2019 and have been consistently applied in the preparation of these interim financial statements.

The Board of Directors approved these interim financial statements on August 11, 2020.

7


HUDBAY MINERALS INC.

Notes to Unaudited Condensed Consolidated Interim Financial Statements
(in thousands of US dollars, except where otherwise noted)
For the three and six months ended June 30, 2020 and 2019

 

(b)  COVID-19 estimation uncertainty:

At the end of 2019, a novel strain of coronavirus ("COVID-19") was reported in China. The COVID-19 outbreak has developed rapidly in 2020, with a significant number of infections around the world, including regions the Group operates in. On March 11, 2020, the World Health Organization declared the COVID-19 outbreak a global pandemic. During the first half of 2020 containment measures have resulted in decreased economic activity, which has adversely affected the broader global economy.

The resulting impacts on global commerce have been and continue to be far-reaching. To date there has been volatility in stock markets, commodities and foreign exchange markets, restrictions on the conduct of business in many jurisdictions and the global movement of people and some goods have become restricted.

To date, the Group has experienced production below initial estimated levels and reduced revenue as a result of a temporary suspension of operations at its Constancia mine from March 19, 2020 to May 17, 2020, in accordance with government-ordered shut down of non-essential businesses. The Company has evaluated the potential impacts arising from COVID-19 on all aspects of its business.

(c)  Use of judgements and estimates:

The preparation of the interim financial statements in conformity with IFRS requires the Group to make judgements, estimates and assumptions, in applying accounting policies that affect reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the interim financial statements, as well as reported amounts of revenue and expenses during the reporting period. Actual results may differ from these judgements, estimates and assumptions. The interim financial statements reflect the judgements and estimates outlined by the Group in its audited consolidated financial statements for the year ended December 31, 2019.

3. Significant accounting policies

These interim financial statements reflect the accounting policies applied by the Group in its audited consolidated financial statements for the year ended December 31, 2019 and comparative periods.


HUDBAY MINERALS INC.

Notes to Unaudited Condensed Consolidated Interim Financial Statements
(in thousands of US dollars, except where otherwise noted)
For the three and six months ended June 30, 2020 and 2019

 

4. New standards

New standards and interpretations adopted

(a)  Amendment to IFRS 3 - Business Combinations

The amendment to IFRS 3 clarifies the definition of a business and includes an optional concentration test to determine whether an acquired set of activities and assets is a business. This amendment is in effect January 1, 2020 and will be treated prospectively. The Group will apply these amendments to future acquisition transactions.

New standards and interpretations not yet adopted

(b)  Amendment to IAS 16 - Property, Plant and Equipment

The amendments to IAS 16 prohibit deducting from the cost of property, plant and equipment and proceeds from selling items produced while bringing that assets to the location and condition necessary for it to be capable of operating in the manner intended by management. Instead, a company will recognize such sales proceeds and related cost in profit or loss.

This amendment is in effect January 1, 2022 with early adoption permitted. The Group has not yet determined the effect of adoption of this amendment on its consolidated financial statements. On adoption, an entity applies the amendments retrospectively only to items of property, plant and equipment that were brought to the location and condition necessary for them to be capable of operating in the manner intended by management on or after the beginning of the earliest period presented in the financial statements in which the entity first applies the amendments.


HUDBAY MINERALS INC.

Notes to Unaudited Condensed Consolidated Interim Financial Statements
(in thousands of US dollars, except where otherwise noted)
For the three and six months ended June 30, 2020 and 2019

 

5. Revenue and expenses

(a) Revenue

The Group's revenue by significant product types:

    Three months ended
June 30,
    Six months ended
June 30,
 
    2020     2019     2020     2019  
Copper $ 88,193     205,341   $ 227,371   $ 407,634  
Zinc   59,020     71,561     122,574     138,767  
Gold   44,020     33,804     86,769     54,710  
Silver   4,960     6,925     11,034     15,314  
Molybdenum   2,332     11,252     11,496     17,584  
Other   955     1,444     1,855     2,510  
    199,480     330,327     461,099     636,519  
Non-cash streaming arrangement items                        
Amortization of deferred revenue - gold   6,321     8,465     10,456     16,043  
Amortization of deferred revenue - silver   7,583     12,832     16,021     31,061  
Amortization of deferred revenue - variable consideration adjustments - prior periods 1   -     -     (2,813 )   (16,295 )
    13,904     21,297     23,664     30,809  
Pricing and volume adjustments 2   6,993     (270 )   (3,583 )   (3,573 )
    220,377     351,354     481,180     663,755  
Treatment and refining charges   (11,464 )   (21,940 )   (27,160 )   (42,083 )
  $ 208,913   $ 329,414   $ 454,020   $ 621,672  
1 See note 15.  
2 Pricing and volume adjustments represent mark-to-market adjustments on initial estimate of provisionally priced sales, realized and unrealized changes to fair value for non-hedge derivative contracts and adjustments to originally invoiced weights and assays.  

(b) Depreciation and amortization

Depreciation of property, plant and equipment and amortization of intangible assets are reflected in the condensed consolidated interim income statements as follows:

    Three months ended
June 30,
  Six months ended
June 30,
 
    2020     2019   2020     2019  
Cost of sales $ 80,807   $ 91,194   $ 167,246   $ 168,325  
Selling and administrative expenses   423     545   841     1,097  
  $ 81,230   $ 91,739   $ 168,087   $ 169,422  


HUDBAY MINERALS INC.

Notes to Unaudited Condensed Consolidated Interim Financial Statements
(in thousands of US dollars, except where otherwise noted)
For the three and six months ended June 30, 2020 and 2019

 

(c) Share-based compensation expenses (recoveries)

Share-based compensation expenses (recoveries) are reflected in the condensed consolidated interim income statements as follows:

    Cash-settled           Total share-based
compensation expense
 
  RSUs     DSUs     PSUs     Stock options  
Three months ended June 30, 2020                          
Cost of sales $ 284   $ -   $ -   $ -   $ 284  
Selling and administrative   949     1,598     284     398     3,229  
Other expenses   84     -     -     -     84  
  $ 1,317   $ 1,598   $ 284   $ 398   $ 3,597  
Six months ended June 30, 2020                          
Cost of sales $ 68   $ -   $ -   $ -   $ 68  
Selling and administrative   70     65     284     398     817  
Other expenses   -     -     -     -     -  
  $ 138   $ 65   $ 284   $ 398   $ 885  
Three months ended June 30, 2019                          
Cost of sales $ (62 ) $ -   $ -   $ -   $ (62 )
Selling and administrative   (306 )   (1,477 )   -     -     (1,783 )
Other expenses   (30 )   -     -     -     (30 )
  $ (398 ) $ (1,477 ) $ -   $ -   $ (1,875 )
Six months ended June 30, 2019                          
Cost of sales $ 365   $ -   $ -   $ -   $ 365  
Selling and administrative   1,886     996     -     -     2,882  
Other expenses   221     -     -     -     221  
  $ 2,472   $ 996   $ -   $ -   $ 3,468  

During the six months ended June 30, 2020, the Company granted 1,581,385 stock options (six months ended June 30, 2019 - nil). For further details on stock options, see note 19c.

(d) Other expenses

    Three months ended
June 30,
    Six months ended
June 30,
 
    2020     2019     2020     2019  
Regional costs $ 895   $ 724   $ 1,780   $ 1,940  
Write down of UCM receivable   -     25,978     -     25,978  
Pampacancha delivery obligation   -     -     -     7,499  
Loss on disposals   457     -     2,857     -  
Allocation of community costs   752     -     1,480     -  
Other   (828 )   2,207     651     5,189  
  $ 1,276   $ 28,909   $ 6,768   $ 40,606  


HUDBAY MINERALS INC.

Notes to Unaudited Condensed Consolidated Interim Financial Statements
(in thousands of US dollars, except where otherwise noted)
For the three and six months ended June 30, 2020 and 2019

 

During the first quarter of 2019, the Group recognized an obligation to deliver additional precious metal credits to Wheaton Precious Metals ("Wheaton") as a result of the Group's expectation that mining at the Pampacancha deposit will not begin until after 2020. The obligation is to be paid in four quarterly installments, with the two first payments having been paid in March and June 2020.

(e) Net finance expenses

    Three months ended
June 30,
    Six months ended
June 30,
 
    2020     2019     2020     2019  
Net interest expense on long-term debt                        
Interest expense on long-term debt $ 19,729   $ 19,562   $ 39,364   $ 39,091  
Interest capitalized   -     (3,297 )   -     (6,592 )
    19,729     16,265     39,364     32,499  
Accretion on streaming arrangements (note 15)                        
Current year additions   15,732     15,915     31,071     31,837  
Variable consideration adjustments - prior periods   -     -     960     6,047  
    15,732     15,915     32,031     37,884  
Change in fair value of financial assets and liabilities at fair value through profit or loss                        
Embedded derivatives   1,200     894     4,071     (3,707 )
Gold prepayment liability (note 12)   7,572     -     7,572     -  
Investments   (4,116 )   2,639     (743 )   1,848  
    4,656     3,533     10,900     (1,859 )
Other net finance costs                        
Net foreign exchange losses (gains)   1,768     921     (3,078 )   1,780  
Accretion on community agreements measured at amortized cost   1,121     294     2,242     594  
Unwinding of discounts on provisions   775     1,113     2,125     2,298  
Withholding taxes   2,137     2,078     4,030     4,268  
Other finance expense   2,183     2,010     4,686     5,161  
Interest income   (332 )   (2,321 )   (1,438 )   (4,899 )
    7,652     4,095     8,567     9,202  
Net finance expense $ 47,769   $ 39,808   $ 90,862   $ 77,726  

Until October 1, 2019, interest expense related to certain long-term debt had been capitalized to the Rosemont project. Following the Court ruling to vacate and remand the U.S. Forest Service's issuance of the Final Record of Decision for the Rosemont project during the third quarter of 2019, the Group ceased capitalization effective October 1, 2019. The capitalization of this interest expense will resume upon the reinstatement of permits and will continue from that point until commercial production is reached.

Other finance expense relates primarily to fees on the Group's revolving credit facilities and capitalized leases.


HUDBAY MINERALS INC.

Notes to Unaudited Condensed Consolidated Interim Financial Statements
(in thousands of US dollars, except where otherwise noted)
For the three and six months ended June 30, 2020 and 2019

 

6. Trade and other receivables

    Jun. 30, 2020     Dec. 31, 2019  
Current            
Trade receivables $ 93,062   $ 87,332  
Statutory receivables   10,615     16,543  
Other receivables   2,443     2,119  
    106,120     105,994  
Non-current            
Taxes receivable   16,729     17,669  
Other receivables   1,520     1,595  
    18,249     19,264  
  $ 124,369   $ 125,258  

7. Inventories

    Jun. 30, 2020     Dec. 31, 2019  
Current            
Stockpile $ 4,487   $ 10,396  
Work in progress   6,606     14,420  
Finished goods   72,903     62,230  
Materials and supplies   59,006     51,774  
    143,002     138,820  
Non-current            
Stockpile   16,367     14,626  
Materials and supplies   5,112     4,829  
    21,479     19,455  
  $ 164,481   $ 158,275  

The cost of inventories recognized as an expense, including depreciation, and included in cost of sales amounted to $187,651 and $416,844 for the three and six months ended June 30, 2020 (three and six months ended June 30, 2019 - $260,639 and $475,153).

As a result of the state of emergency declared by the Peruvian government in response to the COVID-19 pandemic during the first quarter of 2020, Constancia underwent a temporary and orderly suspension of operations. Fixed overhead production costs incurred during the temporary suspension of operations commencing March 19, 2020 through to May 17, 2020 amounted to $31,948 and were recognized directly to cost of sales.

During the three and six months ended June 30, 2020, the Group recognized a recovery of $8,154 and expense of $2,221 in cost of sales related to adjustments of the carrying value of inventories to net realizable value. For inventories sold during the six months ended June 30, 2020, the related amount transferred from inventory to cost of sales was $3,925 less than it would have been had write-downs not been previously recognized. There were no write-downs in the six months ended June 30, 2019.


HUDBAY MINERALS INC.

Notes to Unaudited Condensed Consolidated Interim Financial Statements
(in thousands of US dollars, except where otherwise noted)
For the three and six months ended June 30, 2020 and 2019

 

8. Other financial assets

    Jun. 30, 2020     Dec. 31, 2019  
Current            
Derivative assets $ 1,837   $ 1,712  
Restricted cash   337     337  
    2,174     2,049  
             
Non-current            
Investments at fair value through profit or loss   11,369     11,287  
  $ 13,543   $ 13,336  

Investments at fair value through profit or loss consist of securities in Canadian metals and mining companies, all of which are publicly traded. The change in investments at fair value through profit or loss is mostly attributed to fluctuations in market price and foreign exchange impact.

9. Intangibles and other assets

Intangibles and other assets of $22,168 includes $17,277 of other assets (December 31, 2019 - $5,384) and $4,891 of intangibles (December 31, 2019 - $5,027).

Other assets represent the carrying value of certain future community costs. The liability remaining for these agreements is recorded in other financial liabilities at amortized cost (note 12).  Amortization of the carrying amount is recorded in the condensed consolidated interim income statements within other expenses (note 5d). The increase in other assets during the six months ended June 30, 2020 primarily relates to amendments to the original agreements with communities for the Constancia operation which allow Hudbay to extract minerals over the useful life of the Constancia operation.

Intangibles mainly represent computer software costs.


HUDBAY MINERALS INC.

Notes to Unaudited Condensed Consolidated Interim Financial Statements
(in thousands of US dollars, except where otherwise noted)
For the three and six months ended June 30, 2020 and 2019

 

10. Property, plant and equipment

Jun. 30, 2020   Cost   Accumulated depreciation and amortization     Carrying amount  
Exploration and evaluation assets $ 69,236   $ -   $ 69,236  
Capital works in progress   801,591   -     801,591  
Mining properties   2,154,599   (998,603 )   1,155,996  
Plant and equipment   2,706,878   (1,139,652 )   1,567,226  
Plant and equipment-ROU Assets1   206,123     (120,246 )   85,877  
  $ 5,938,427   $ (2,258,501 ) $ 3,679,926  
                 
Dec. 31, 2019   Cost   Accumulated depreciation and amortization     Carrying amount  
Exploration and evaluation assets $ 69,903   $ -   $ 69,903  
Capital works in progress   733,874   -     733,874  
Mining properties   2,146,583   (963,530 )   1,183,053  
Plant and equipment   2,653,752   (1,069,687 )   1,584,065  
Plant and equipment-ROU Assets1   201,972   (110,308 )   91,664  
  $ 5,806,084   $ (2,143,525 ) $ 3,662,559  
1 Includes $5,143 of capital works in progress - ROU assets (cost) that relate to the Arizona and Manitoba Business units (December 31, 2019 - $4,481)  

For the six months ended June 30, 2020, the increase in property, plant and equipment (cost) of $132,343 was mainly caused by fixed asset and construction in progress asset additions of $166,674 and increases in decommissioning and restoration assets of $58,449 (producing assets) as a result of lower discount rates, partially offset by the effects of movements in exchange rates of $87,336.

11. Other liabilities

    Jun. 30, 2020     Dec. 31, 2019  
Current            
Provisions (note 16) $ 29,525   $ 33,575  
Pension liability   13,878     12,015  
Other employee benefits   3,355     2,806  
Unearned revenue   2,401     1,015  
  $ 49,159   $ 49,411  


HUDBAY MINERALS INC.

Notes to Unaudited Condensed Consolidated Interim Financial Statements
(in thousands of US dollars, except where otherwise noted)
For the three and six months ended June 30, 2020 and 2019

 

12. Other financial liabilities

    Jun. 30, 2020     Dec. 31, 2019  
Current            
Derivative liabilities $ 9,217   $ 10,295  
Embedded derivatives (note 21c)   5,633     9,074  
Other financial liabilities at amortized cost   65,713     8,707  
    80,563     28,076  
             
Non-current            
Deferred Rosemont acquisition consideration   25,215     24,491  
Gold prepayment liability   123,057     -  
Other financial liabilities at amortized cost   35,401     15,293  
    183,673     39,784  
  $ 264,236   $ 67,860  

The derivative liabilities include derivative and hedging transactions. Derivative liabilities are carried at their fair value with changes in fair value recorded to the condensed consolidated interim income statements. The fair value adjustments for hedging type derivatives are recorded in revenue. Fair value adjustments for embedded derivatives are recorded within net finance expense.

On May 7, 2020, the Company entered into an agreement and received $115,005 in exchange for the delivery of 79,954 gold ounces starting January 2022 and ending in December 2023, which were valued at gold forward curve prices averaging $1,682 per ounce at the time of the transaction. The agreement has been assessed as a financial liability that has been designated as fair value through profit or loss within change in fair value of financial instruments, with a component of the fair value related to the fluctuation in the Company's own credit risk being recorded to other comprehensive income. The fair value adjustment recorded in profit or loss and other comprehensive income for the three months ended June 30, 2020 were losses of $7,572 and $480, respectively.

Other financial liabilities at amortized cost relate to agreements with communities near the Constancia operation which allow Hudbay to extract minerals over the useful life of the Constancia operation, carry out exploration and evaluation activities in the area and provide Hudbay with community support to operate in the region. The increase in other financial liabilities at amortized cost during the six months ended June 30, 2020 primarily relates to changes in estimated community payments arising from the execution of the Pampacancha surface rights agreement.


HUDBAY MINERALS INC.

Notes to Unaudited Condensed Consolidated Interim Financial Statements
(in thousands of US dollars, except where otherwise noted)
For the three and six months ended June 30, 2020 and 2019

 

The following table summarizes changes in other financial liabilities at amortized cost:

Balance, January 1, 2019 $ 21,361  
Net additions   7,369  
Disbursements   (6,351 )
Accretion   1,222  
Effects of changes in foreign exchange   399  
Balance, December 31, 2019 $ 24,000  
Net additions   85,630  
Disbursements   (7,647 )
Accretion   2,242  
Effects of changes in foreign exchange   (3,111 )
Balance, June 30, 2020 $ 101,114  

13. Lease Liability

    Jun. 30, 2020     Dec. 31, 2019  
Total minimum lease payments - lease liabilities $ 75,673   $ 88,096  
Effect of discounting   (4,399 )   (6,149 )
Present value of minimum lease payments   71,274     81,947  
Less: current portion   (32,243 )   (32,781 )
  $ 39,031   $ 49,166  
             
Minimum payments under leases:            
Less than 12 months $ 33,875   $ 27,557  
13 - 36 months   35,713     48,503  
37 - 60 months   2,839     7,798  
More than 60 months   3,246     4,238  
  $ 75,673   $ 88,096  

The Group has entered into leases for its Peru, Manitoba and Arizona business units which expire between 2020 and 2043. The interest rates on leases which were capitalized have implicit interest rates between 1.95% to 5.13%, per annum. The range of interest rates utilized for discounting varies depending mostly on the Hudbay Group entity acting as lessee and duration of the lease. For certain leases, the Group has the option to purchase the equipment and vehicles leased at the end of the terms of the leases. The Group's obligations under these leases are secured by the lessor's title to the leased assets. The present value of applicable lease payments has been recognized as a ROU asset, which was included as a non-cash addition to property, plant and equipment, and a corresponding amount as a lease liability.

There are no restrictions placed on the Group by entering into these leases.

The following outlines expenses recognized within the Company's condensed consolidated interim income statements for the periods ended June 30, 2020, relating to leases for which a recognition exemption was applied.


HUDBAY MINERALS INC.

Notes to Unaudited Condensed Consolidated Interim Financial Statements
(in thousands of US dollars, except where otherwise noted)
For the three and six months ended June 30, 2020 and 2019

 

    Three months ended
June 30,
    Six months ended
June 30,
 
    2020     2019     2020     2019  
Short-term leases $ 8,158   $ 10,409   $ 20,854   $ 22,150  
Low value leases   44     31     124     69  
Variable leases   11,835     18,985     22,366     31,004  
Total $ 20,037   $ 29,425   $ 43,344   $ 53,223  

Payments made for short term, low value and variable leases would mostly be captured as expenses in the condensed consolidated interim income statements, however, certain amounts may be capitalized to PP&E for the Arizona business unit during its development phase and certain amounts may be reported in inventories given the timing of sales. Variable consideration leases include equipment used for heavy civil works at Constancia.

14. Long-term debt

Long-term debt is comprised of the following:

    Jun. 30, 2020     Dec. 31, 2019  
Senior unsecured notes (a) $ 994,764   $ 991,558  
Less: Unamortized transaction costs -
revolving credit facilities (b)
  (6,346 )   (6,303 )
  $ 988,418   $ 985,255  

(a) Senior unsecured notes

Balance, January 1, 2019 $ 989,306  
Change in fair value of embedded derivative (prepayment option)   1,079  
Accretion of transaction costs and premiums   1,173  
Balance, December 31, 2019 $ 991,558  
Change in fair value of embedded derivative (prepayment option)   2,585  
Accretion of transaction costs and premiums   621  
Balance, June 30, 2020 $ 994,764  

The $1,000,000 aggregate principal amount of senior notes are comprised of two series: (i) a series of 7.25% senior notes due 2023 in an aggregate principal amount of $400,000 and (ii) a series of 7.625% senior notes due 2025 in an aggregate principal amount of $600,000.

The senior notes are guaranteed on a senior unsecured basis by substantially all of the Company's subsidiaries, other than HudBay (BVI) Inc. and certain excluded subsidiaries, which include the Company's subsidiaries that own an interest in the Rosemont project and any newly formed or acquired subsidiaries that primarily hold or may develop non-producing mineral assets that are in the pre-construction phase of development. The Group's revolving credit facilities are secured against substantially all of the Group's assets, other than those associated with the Arizona business unit.


HUDBAY MINERALS INC.

Notes to Unaudited Condensed Consolidated Interim Financial Statements
(in thousands of US dollars, except where otherwise noted)
For the three and six months ended June 30, 2020 and 2019

 

(b) Unamortized transaction costs - revolving credit facilities

Balance, January 1, 2019 $ 8,276  
Accretion of transaction costs   (2,342 )
Transaction costs   369  
Balance, December 31, 2019 $ 6,303  
Accretion of transaction costs   (1,368 )
Transaction costs   1,411  
Balance, June 30, 2020 $ 6,346  

As at June 30, 2020, the Peru business unit had $24,795 in letters of credit issued under the Peru revolving credit facility to support its reclamation obligations and the Manitoba business unit had $82,221 in letters of credit issued under the Canada revolving credit facility to support its reclamation and pension obligations.

Surety bonds

The Arizona business unit had $8,591 in surety bonds and the Peru business unit had $20,000 in surety bonds, issued to support future reclamation and closure obligations. No cash collateral is required to be posted under these surety bonds.

Other letters of credit

The Peru business unit had $45,000 in letters of credit issued with various Peruvian financial institutions. No cash collateral is required to be posted under these letters of credit.

15. Deferred revenue

On August 8, 2012 and November 4, 2013, the Group entered into precious metals stream transactions with Wheaton whereby the Group has received aggregate deposit payments of $455,100 against delivery of (i) 100% of payable gold and silver from the 777 mine until the end of 2016, and delivery of 50% of payable gold and 100% of payable silver for the remainder of the 777 mine life; and aggregate deposit payments of $429,900 against the delivery of (ii) 100% of payable silver and 50% of payable gold from the Constancia mine.

In addition to the aggregate deposit payments of $885,000, as gold and silver is delivered under the stream agreements, the Group receives cash payments equal to the lesser of (i) the market price and (ii) $400 per ounce (for gold) and $5.90 per ounce (for silver), subject to 1% annual escalation after three years, from the inception of the agreement.


HUDBAY MINERALS INC.

Notes to Unaudited Condensed Consolidated Interim Financial Statements
(in thousands of US dollars, except where otherwise noted)
For the three and six months ended June 30, 2020 and 2019

 

The Group recorded the deposits received as deferred revenue and recognizes amounts in revenue as gold and silver are delivered under the stream agreements. The Group determines the amortization of deferred revenue to the condensed consolidated interim income statements on a per unit basis using the estimated total number of gold and silver ounces expected to be delivered under the stream agreements over the life of the 777 and Constancia life-of-mine plans. For the six months ended June 30, 2020 the drawdown rates for the 777 stream agreement for gold and silver were $1,131 and $21.43 per ounce, respectively (year ended December 31, 2019 - $1,177 and $22.51 per ounce, respectively). For the six months ended June 30, 2020 the drawdown rates for the Constancia stream agreement for gold and silver were $976 and $21.52 per ounce, respectively (year ended December 31, 2019 - $948 and $21.77 per ounce, respectively). The Group estimates the current portion of deferred revenue based on deliveries anticipated over the next twelve months.

The Group has determined that precious metals stream contracts are subject to variable consideration and contain a significant financing component. As such, the Company recognizes a financing charge at each reporting period and will gross up the deferred revenue balance to recognize the significant financing element that is part of these contracts. The Group's streaming arrangements are secured against the mining properties and other business unit assets associated with the applicable stream.

The Group expects that the remaining performance obligations for the 777 and Constancia streams will be settled by the expiry of their respective stream agreements, which is no earlier than 2036.

As part of the streaming agreement for the 777 mine, the Group must repay, with precious metals credits, the legal deposit provided by August 1, 2052, the expiry date of the agreement. If the legal deposit is not fully repaid with precious metals credits from 777 production by the expiry date, a cash payment for the remaining amount will be due at the expiry date of the agreement. As a result of changes in the remaining 777 mine reserves and resources there is a possibility that an amount of the legal deposit may not be repaid by means of 777 mine's precious metals credits over its expected remaining mine life. As at June 30, 2020, this prepayment amount does not meet the definition of a financial liability. The Group incorporates the possibility of repayment as part of its assessment of variable consideration in recognizing the amount of deferred revenue to recognize in income.

The following table summarizes changes in deferred revenue:

Balance, January 1, 2019 $ 566,078  
Amortization of deferred revenue      
Liability drawdown   (92,398 )
Variable consideration adjustments - prior periods   16,295  
Accretion on streaming arrangements      
Current year additions   63,725  
Variable consideration adjustments - prior periods   6,047  
Effects of changes in foreign exchange   4,009  
Balance, December 31, 2019 $ 563,756  
Amortization of deferred revenue      
Liability drawdown   (26,477 )
Variable consideration adjustments - prior periods   2,813  
Accretion on streaming arrangements (note 5e)      
Current year additions   31,071  
Variable consideration adjustments - prior periods   960  
Effects of changes in foreign exchange   (3,922 )
Balance, June 30, 2020 $ 568,201  


HUDBAY MINERALS INC.

Notes to Unaudited Condensed Consolidated Interim Financial Statements
(in thousands of US dollars, except where otherwise noted)
For the three and six months ended June 30, 2020 and 2019

 

Consideration from the Company's stream agreement is considered variable. Gold and silver revenue can be

subject to cumulative adjustments when the number of ounces to be delivered under the contract changes. As a result of changes in the Company's reserve and resource estimate in the first quarter of 2020, the amortization rate by which deferred revenue is drawn down into income is adjusted and, as required, a current period catch up adjustment is made for all prior period stream revenues since the stream agreement inception date. This variable consideration adjustment resulted in a revenue reversal of $2,813 and finance expense of $960 (December 31, 2019 - revenue reversal of $16,295 and additional finance expense $6,047).

During the year ended December 31, 2019, and first quarter of 2020, the Company recognized an adjustment to gold and silver revenue and finance costs due to a net increase in the Company's reserve and resource estimates.

Deferred revenue is reflected in the condensed consolidated interim balance sheets as follows:

    Jun. 30, 2020     Dec. 31, 2019  
Current $ 74,835   $ 86,933  
Non-current   493,366     476,823  
  $ 568,201   $ 563,756  


HUDBAY MINERALS INC.

Notes to Unaudited Condensed Consolidated Interim Financial Statements
(in thousands of US dollars, except where otherwise noted)
For the three and six months ended June 30, 2020 and 2019

 

16. Provisions

Reflected in the condensed consolidated interim balance sheets as follows:

Jun. 30, 2020   Decommissioning, restoration and similar liabilities     Deferred share units     Restricted share units     Performance share units     Other     Total
Current (note 11) $ 23,865   $ 3,290   $ 1,541   $ -   $ 829   $ 29,525  
Non-current   323,811     -     1,397     287     1,344     326,839
  $ 347,676   $ 3,290   $ 2,938   $ 287   $ 2,173   $ 356,364  
                                   
Dec. 31, 2019   Decommissioning, restoration and similar liabilities     Deferred share units     Restricted share units     Performance share units     Other     Total
Current (note 11) $ 23,621   $ 3,876   $ 4,468   $ -   $ 1,610   $ 33,575  
Non-current   278,495     -     1,009     -     1,346     280,850
  $ 302,116   $ 3,876   $ 5,477   $ -   $ 2,956   $ 314,425  

Decommissioning, restoration and similar liabilities are remeasured at each reporting date to reflect changes in discount rates, exchange rates, and timing and extent of cash outflows which can significantly affect the liabilities.

Decommissioning, restoration and similar liabilities have been discounted to their present value at rates ranging from 0.18% to 1.41% per annum (2019 - 1.59% to 2.39%), using pre-tax risk-free interest rates that reflect the estimated maturity of each specific liability.

During the six months ended June 30, 2020, the liabilities increased by $45,560. This was mainly the result of lower discount rates, compared to December 31, 2019, associated with discounting the provisions, increasing the liabilities by $59,200, which was partially offset by a weaker Canadian dollar impacting the liabilities of the Manitoba segment by $9,487 and payments of $6,129.


HUDBAY MINERALS INC.

Notes to Unaudited Condensed Consolidated Interim Financial Statements
(in thousands of US dollars, except where otherwise noted)
For the three and six months ended June 30, 2020 and 2019

 

17. Pension and other employee benefits

Pension obligations

The Group uses a December 31 measurement date for all of its plans. As at June 30, 2020, the discount rate applied to the most recent actuarial valuation decreased to 2.77% compared to the December 31, 2019 discount rate of 3.08%, reflecting lower corporate bond yields utilized for discounting pension liabilities. The decrease in the discount rate has resulted in an increase in the defined benefit pension obligation which was offset by changes in plan assets.

Other employee benefits

The Group sponsors both other long-term employee benefit plans and non-pension post-employment benefits plans and uses a December 31 measurement date. As at June 30, 2020, the discount rate applied to the most recent actuarial valuation decreased to 2.95% compared to the December 31, 2019 discount rate of 3.17%, reflecting lower corporate bond yields utilized for discounting other employee benefit liabilities. The decrease in the discount rate has resulted in an increase in the long-term employee benefit plans and non-pension post-employment benefit plans obligation.

18. Income and mining taxes

(a) Tax recoveries:

The tax expense (recoveries) is applicable as follows:

    Three months ended
June 30,
    Six months ended
June 30,
 
    2020     2019     2020     2019  
Current:                        
Income taxes $ 687   $ (1,417 ) $ 700   $ 5,656  
Mining taxes   -     7,190     (17 )   5,855  
Adjustments in respect of prior years   -     423     (349 )   (642 )
    687     6,196     334     10,869  
Deferred:                        
Income tax recoveries - origination, revaluation and/or
  reversal of temporary differences
  (23,722 )   8,598     (27,911 )   (3,573 )
Mining tax (recoveries) expenses - origination, revaluation
  and/or reversal of temporary difference
  332     (5,168 )   (830 )   (2,159 )
Adjustments in respect of prior years   -     588     386     381  
    (23,390 )   4,018     (28,355 )   (5,351 )
  $ (22,703 ) $ 10,214   $ (28,021 ) $ 5,518  

Adjustments in respect of prior years refers to amounts changing due to the filing of tax returns and assessments from government authorities.


HUDBAY MINERALS INC.

Notes to Unaudited Condensed Consolidated Interim Financial Statements
(in thousands of US dollars, except where otherwise noted)
For the three and six months ended June 30, 2020 and 2019

 

(b) Deferred tax assets and liabilities as represented on the condensed consolidated interim balance sheets:

    Jun. 30, 2020     Dec. 31, 2019  
Deferred income tax asset $ 78,733   $ 69,950  
Deferred mining tax asset   5,265     5,096  
    83,998     75,046  
             
Deferred income tax liability   (211,305 )   (233,218 )
Deferred mining tax liability   (9,305 )   (9,710 )
    (220,610 )   (242,928 )
Net deferred tax liability balance, end of period $ (136,612 ) $ (167,882 )

The Group has retroactively changed its presentation of deferred tax assets and liabilities to separate out the Canadian mining tax assets and liabilities, which has the effect of changing the prior reported balances of deferred tax assets and deferred tax liabilities. There is no net impact to cash flows or net deferred tax liabilities.

(c) Changes in deferred tax assets and liabilities:

    Six months ended
June 30, 2020
    Year ended
Dec. 31, 2019
 
Net deferred tax liability balance, beginning of year $ (167,882 ) $ (308,577 )
Deferred tax recovery   28,355     144,865  
OCI transactions   (1,215 )   1,878  
Foreign currency translation on the deferred tax liability   4,130     (6,048 )
Net deferred tax liability balance, end of period $ (136,612 ) $ (167,882 )


HUDBAY MINERALS INC.

Notes to Unaudited Condensed Consolidated Interim Financial Statements
(in thousands of US dollars, except where otherwise noted)
For the three and six months ended June 30, 2020 and 2019

 

19. Share capital

(a) Preference shares:

Authorized: Unlimited preference shares without par value

(b) Common shares:

Authorized: Unlimited common shares without par value

Issued and fully paid:

    Six months ended
June 30, 2020
    Year ended
Dec. 31, 2019
 
    Common shares     Amount     Common shares     Amount  
Beginning and end of period   261,272,151   $ 1,777,340     261,272,151   $ 1,777,340  

During the six months ended June 30, 2020, the Company paid $1,804 in dividends on March 27, 2020 to shareholders of record as of March 10, 2020. During the six months ended June 30, 2019, the Company paid $1,955 in dividends on March 29, 2019 to shareholders of record as of March 8, 2019.

(c) Equity-settled share-based compensation - stock options:

The Group may grant options to employees, officers, directors or consultants of the Group or its affiliates to purchase common shares of the Group.

During the six months ended June 30, 2020, the Company granted 1,581,385 stock options (six months ended June 30, 2019 - nil). The following table presents the weighted average fair value assumptions used in the Black-Scholes valuation of these options:

For options granted during the six months ended:   June 30, 2020  
Weighted average share price at grant date (CAD) $ 3.77  
Risk-free rate   0.41%  
Expected dividend yield   0.5%  
Expected stock price volatility (based on historical volatility)   60.1%  
Expected life of option (months)   80  
Weighted average per share fair value of stock options granted (CAD) $ 2.02  

There are no stock options outstanding that are exercisable as at June 30, 2020.


HUDBAY MINERALS INC.

Notes to Unaudited Condensed Consolidated Interim Financial Statements
(in thousands of US dollars, except where otherwise noted)
For the three and six months ended June 30, 2020 and 2019

 

20. Earnings per share

    Three months ended
June 30,
    Six months ended
June 30,
 
    2020     2019     2020     2019  
Basic and diluted weighted average common shares outstanding   261,272,151     261,272,151     261,272,151     261,272,151  

The determination of the diluted weighted-average number of common shares excludes the impact of 1,581,385, stock options that were anti-dilutive for the three and six months ended June 30, 2020 (three and six months ended June 30, 2019 - nil).

For periods where Hudbay records a loss, the Group calculates diluted loss per share using the basic weighted average number of shares. If the diluted weighted average number of shares were used, the result would be a reduction in the loss, which would be anti-dilutive. For the three and six months ended June 30, 2020 and 2019, the Group calculated diluted loss per share using 261,272,151 common shares.


HUDBAY MINERALS INC.

Notes to Unaudited Condensed Consolidated Interim Financial Statements
(in thousands of US dollars, except where otherwise noted)
For the three and six months ended June 30, 2020 and 2019

 

21. Financial instruments

(a) Fair value and carrying value of financial instruments:

The following presents the fair value ("FV") and carrying value ("CV") of the Group's financial instruments and non-financial derivatives:

    Jun. 30, 2020     Dec. 31, 2019  
    FV     CV     FV     CV  
Financial assets at amortized cost                        
Cash and cash equivalents 1 $ 391,136   $ 391,136   $ 396,146   $ 396,146  
Restricted cash1   337     337     337     337  
Fair value through profit or loss                        
Trade and other receivables1, 2   97,025     97,025     91,046     91,046  
Non-hedge derivative assets3   1,837     1,837     1,712     1,712  
Prepayment option - embedded derivatives7   -     -     2,585     2,585  
Investments at FVTPL4   11,369     11,369     11,287     11,287  
Total financial assets   501,704     501,704     503,113     503,113  
Financial liabilities at amortized cost                        
Trade and other payables1, 2   152,331     152,331     184,604     184,604  
Deferred Rosemont acquisition consideration8   25,215     25,215     24,491     24,491  
Other financial liabilities5   90,380     101,114     21,338     24,000  
Senior unsecured notes6   966,906     994,764     1,050,126     994,143  
Fair value through profit or loss                        
Embedded derivatives3   5,633     5,633     9,074     9,074  
Gold prepayment liability9   123,057     123,057     -     -  
Non-hedge derivative liabilities3   9,217     9,217     10,295     10,295  
Total financial liabilities   1,372,739     1,411,331     1,299,928     1,246,607  
Net financial liability $ (871,035 ) $ (909,627 ) $ (796,815 ) $ (743,494 )
1 Cash and cash equivalents, restricted cash, trade and other receivables and trade and other payables are recorded at carrying value, which approximates fair value due to their short-term nature and generally negligible credit losses.  
2 Excludes tax and other statutory amounts.  
3 Derivatives are carried at their fair value, which is determined based on internal valuation models that reflect observable forward market commodity prices, currency exchange rates, and discount factors based on market US dollar interest rates adjusted for credit risk.  
4 All investments are carried at their fair value, which is determined using quoted market bid prices in active markets for listed shares.  
5 These financial liabilities relate to agreements with communities near the Constancia project in Peru (note 12). Fair values have been determined using a discounted cash flow analysis based on expected cash flows and a credit adjusted discount rate.  
6 Fair value of the senior unsecured notes (note 14) has been determined using the quoted market price at the period end.  
7 Fair value of the prepayment option embedded derivative related to the long-term debt (note 14) has been determined using a binomial tree/lattice approach based on the Hull-White single factor interest rate term structure model.  
8 Discounted value based on a risk adjusted discount rate.  
9 The gold prepayment liability (note 12) is designated as fair value through profit or loss under the fair value option.  Gains and losses related to the Company's own credit risk have been recorded at fair value through other comprehensive income. The fair value adjustment recorded in other comprehensive income for the six months ended June 30, 2020 was a loss of $480.  


HUDBAY MINERALS INC.

Notes to Unaudited Condensed Consolidated Interim Financial Statements
(in thousands of US dollars, except where otherwise noted)
For the three and six months ended June 30, 2020 and 2019

 

Fair value hierarchy

The table below provides an analysis by valuation method of financial instruments that are measured at fair value subsequent to recognition. Levels 1 to 3 are defined based on the degree to which fair value inputs are observable and have a significant effect on the recorded fair value, as follows:

-  Level 1: Quoted prices in active markets for identical assets or liabilities;

-  Level 2: Valuation techniques use significant observable inputs, either directly or indirectly, or valuations are based on quoted prices for similar instruments; and,

-  Level 3: Valuation techniques use significant inputs that are not based on observable market data.

June 30, 2020   Level 1     Level 2     Level 3     Total  
Financial assets measured at fair value                        
Financial assets at FVTPL:                        
Non-hedge derivatives $ -   $ 1,837   $ -   $ 1,837  
Investments at FVTPL   11,369     -     -     11,369  
  $ 11,369   $ 1,837   $ -   $ 13,206  
Financial liabilities measured at fair value                        
Financial liabilities at FVTPL:                        
Embedded derivatives $ -   $ 5,633   $ -   $ 5,633  
Non-hedge derivatives   -     9,217     -     9,217  
Gold prepayment liability1   -     123,057     -     123,057  
  $ -   $ 137,907   $ -   $ 137,907  
1The gold prepayment liability (note 12) is designated as fair value through profit or loss under the fair value option.  Gains and losses related to the Company's own credit risk have been recorded at fair value through other comprehensive income. The fair value adjustment recorded in other comprehensive income for the six months ended June 30, 2020 was a loss of $480.  

December 31, 2019   Level 1     Level 2     Level 3     Total  
Financial assets measured at fair value                        
Financial assets at FVTPL:                        
Non-hedge derivatives $ -   $ 1,712   $ -   $ 1,712  
Investments at FVTPL   11,287     -     -     11,287  
Prepayment option embedded derivative   -     2,585     -     2,585  
  $ 11,287   $ 4,297   $ -   $ 15,584  
Financial liabilities measured at fair value                        
Financial liabilities at FVTPL:                        
Embedded derivatives $ -   $ 9,074   $ -   $ 9,074  
Non-hedge derivatives   -     10,295     -     10,295  
  $ -   $ 19,369   $ -   $ 19,369  

The Group's policy is to recognize transfers into and transfers out of fair value hierarchy levels as of the date of the event or change in circumstances that caused the transfer. During the three and six months ended June 30, 2020 and 2019 the Group did not make any transfers.


HUDBAY MINERALS INC.

Notes to Unaudited Condensed Consolidated Interim Financial Statements
(in thousands of US dollars, except where otherwise noted)
For the three and six months ended June 30, 2020 and 2019

 

(b) Derivatives and hedging:

Copper fixed for floating swaps

Hudbay enters into copper fixed for floating swaps in order to manage the risk associated with provisional pricing terms in copper concentrate sales agreements. As at June 30, 2020, the Group had 17,650 tonnes of net copper swaps outstanding at an effective average price of $2.55/lb and settling across July to December 2020. As at December 31, 2019, the Group had 30,000 tonnes of net copper swaps outstanding at an effective average price of $2.67/lb and settling across January to April 2020. The aggregate fair value of the transactions at June 30, 2020 was a liability of $6,808 (December 31, 2019 was a liability position of $8,362).

Transactions involving derivatives are with large multi-national financial institutions that the Group believes to be credit worthy.

Non-hedge derivative zinc contracts

Hudbay enters into fixed price sales contracts with zinc customers and, to ensure that the Group continues to receive a floating or unhedged realized zinc price, Hudbay enters into forward zinc purchase contracts that effectively offset the fixed price sales contracts. At June 30, 2020, the Group held contracts for forward zinc purchased of 6,179 tonnes (December 31, 2019 - 5,755 tonnes) that related to forward customer sales of zinc. Prices range from $0.85/lb to $1.08/lb (December 31, 2019 - $1.00/lb to $1.15/lb) and settlement dates extend to January 2021. The aggregate fair value of the transactions at June 30, 2020 was a net liability position of $572 (December 31, 2019 - a net liability position of $221).

(c) Embedded derivatives

Changes in fair value of provisionally priced receivables

The Group records changes in fair value of provisionally priced receivables related to provisional pricing in concentrate purchase, concentrate sale and certain other sale contracts. Under the terms of these contracts, prices are subject to final adjustment at the end of a future period after title transfers based on quoted market prices during the quotation period specified in the contract. The period between provisional pricing and final pricing is typically up to three months.

Changes in fair value of provisionally priced receivables are presented in trade and other receivables when they relate to sales contracts and in trade and other payables when they relate to purchase contracts. At each reporting date, provisionally priced metals are marked-to-market based on the forward market price for the quotation period stipulated in the contract, with changes in fair value recognized in revenue for sales contracts and in cost of sales for purchase concentrate contracts. Cash flows related to changes in fair value of provisionally priced receivables are classified in operating activities.


HUDBAY MINERALS INC.

Notes to Unaudited Condensed Consolidated Interim Financial Statements
(in thousands of US dollars, except where otherwise noted)
For the three and six months ended June 30, 2020 and 2019

 

As at June 30, 2020 and 2019, the Group's net position consisted of contracts awaiting final pricing which are as indicated below:

      Sales awaiting final pricing     Average YTD price ($/unit)  
Metal in concentrate Unit   Jun. 30, 2020     Dec. 31, 2019     Jun. 30, 2020     Dec. 31, 2019  
Copper tonnes   16,980     33,102     2.72     2.80  
Zinc tonnes   -     -     -     -  
Gold oz   20,192     16,152     1,797     1,522  
Silver oz   153,766     124,371     18.57     17.86  
                           

The aggregate changes in fair value of provisionally priced receivables within the copper and zinc concentrate sales contracts at June 30, 2020, was an asset position of $8,922 (December 31, 2019 - an asset position of $10,165).

Prepayment option embedded derivative

The senior unsecured notes (note 14) contain prepayment options, which represent embedded derivatives that require bifurcation from the host contract. The prepayment options are measured at fair value, with changes in the fair value being recognized as change in fair value of financial instruments (note 5e). The fair value of the embedded derivative at June 30, 2020 was nil (December 31, 2019 - an asset of $2,585).

Pampacancha delivery obligation-embedded derivative

The Group has recognized an obligation to deliver additional precious metal credits to Wheaton as a result of the Pampacancha deposit not being mined until after 2020 (note 12). The fair value of the embedded derivative at June 30, 2020 was a liability of $5,633 (December 31, 2019 - a liability of $9,074).

(d)  Other financial liabilities

Gold prepayment liability

The gold prepayment liability (note 12) requires settlement by physical delivery of gold ounces or equivalent gold credits. The fair value of the embedded derivative at June 30, 2020 was a liability of $123,057 (December 31, 2019 - nil).


HUDBAY MINERALS INC.

Notes to Unaudited Condensed Consolidated Interim Financial Statements
(in thousands of US dollars, except where otherwise noted)
For the three and six months ended June 30, 2020 and 2019

 

22. Commitments and contingencies

Capital commitments

As at June 30, 2020, the Group had outstanding capital commitments in Canada of approximately $45,027 of which $43,866 can be terminated, approximately $36,409 in Peru, all of which can be terminated, and approximately $178,649 in Arizona, primarily related to the Rosemont project, of which approximately $87,745 can be terminated by the Group.

23. Supplementary cash flow information

(a) Change in non-cash working capital:

    Three months ended
June 30,
    Six months ended
June 30,
 
    2020     2019     2020     2019  
Change in:                        
Trade and other receivables $ (18,821 ) $ 36,505   $ (5,735 ) $ 28,979  
Other financial assets/liabilities   21,705     (11,612 )   (1,153 )   (958 )
Inventories   (515 )   1,816     (7,799 )   (18,225 )
Prepaid expenses   1,400     (3,679 )   2,362     (5,186 )
Trade and other payables   (5,492 )   1,780     (22,327 )   (4,030 )
Provisions and other liabilities   3,634     940     3,698     1,187  
  $ 1,911   $ 25,750   $ (30,954 ) $ 1,767  

The Group has retroactively changed its presentation of changes in taxes payable/receivable in the statements of cash flows to report all changes in taxes payable/receivable within the operating cash flow before changes in non-cash working capital. There is no net impact to cash flows from operating activities. All comparative periods have been revised.

(b) Non-cash transactions:

During the six months ended June 30, 2020, the Group entered into the following non-cash investing and financing activities which are not reflected in the consolidated statements of cash flows:

-  Remeasurement of the Group's decommissioning and restoration liabilities for the six months ended June 30, 2020 led to a net increase in related property, plant and equipment assets of $58,449 (six months ended June 30, 2019 - increase of $26,491) related to lower discount rates associated with remeasurement of the liabilities.

-  Property, plant and equipment included $7,067 (six months ended June 30, 2019 - $4,618) of capital additions related to the recognition of ROU assets.


HUDBAY MINERALS INC.

Notes to Unaudited Condensed Consolidated Interim Financial Statements
(in thousands of US dollars, except where otherwise noted)
For the three and six months ended June 30, 2020 and 2019

 

24. Segmented information

Corporate and other activities include the Group's exploration activities in Chile, Canada and the State of Nevada. These exploration entities are not individually significant, as they do not meet the minimum quantitative thresholds for standalone segment disclosure. Corporate and other activities are not considered a segment and are included as a reconciliation to total consolidated results.

Three months ended June 30, 2020  
    Manitoba     Peru     Arizona     Corporate and other activities     Total  
Revenue from external customers $ 155,280   $ 53,633   $ -   $ -   $ 208,913  
Cost of sales                              
Mine operating costs   99,238     41,522     -     -     140,760  
Depreciation and amortization   47,655     33,152     -     -     80,807  
Gross profit (loss)   8,387     (21,041 )   -     -     (12,654 )
Selling and administrative expenses   -     -     -     10,713     10,713  
Exploration and evaluation   1,148     972     -     72     2,192  
Other expenses   (703 )   1,515     48     416     1,276  
Results from operating activities $ 7,942   $ (23,528 ) $ (48 ) $ (11,201 ) $ (26,835 )
Net interest expense on long term debt     19,729  
Accretion on streaming arrangements     15,732  
Change in fair value of financial instruments     4,656  
Other net finance costs     7,652  
Loss before tax     (74,604 )
Tax recovery     (22,703 )
Loss for the period   $ (51,901 )


HUDBAY MINERALS INC.

Notes to Unaudited Condensed Consolidated Interim Financial Statements
(in thousands of US dollars, except where otherwise noted)
For the three and six months ended June 30, 2020 and 2019

 

Three months ended June 30, 2019  
    Manitoba     Peru     Arizona     Corporate and other activities     Total  
Revenue from external customers $ 152,561   $ 176,853   $ -   $ -   $ 329,414  
Cost of sales                              
Mine operating costs   100,426     94,651     -     -     195,077  
Depreciation and amortization   35,558     55,636     -     -     91,194  
Gross profit   16,577     26,566     -     -     43,143  
Selling and administrative expenses   -     -     -     10,422     10,422  
Exploration and evaluation   4,142     1,655     -     2,138     7,935  
Other expenses   545     923     27,332     109     28,909  
Results from operating activities $ 11,890   $ 23,988   $ (27,332 ) $ (12,669 ) $ (4,123 )
Net interest expense on long term debt     16,265  
Accretion on streaming arrangements     15,915  
Change in fair value of financial instruments     3,533  
Other net finance costs     4,095  
Loss before tax     (43,931 )
Tax expense     10,214  
Loss for the period   $ (54,145 )

Six months ended June 30, 2020  
    Manitoba     Peru     Arizona     Corporate and other activities     Total  
Revenue from external customers $ 279,113   $ 174,907   $ -   $ -   $ 454,020  
Cost of sales                              
Mine operating costs   193,082     128,337     -     -     321,419  
Depreciation and amortization   86,852     80,394     -     -     167,246  
Gross loss   (821 )   (33,824 )   -     -     (34,645 )
Selling and administrative expenses   -     -     -     15,816     15,816  
Exploration and evaluation   4,994     2,716     -     255     7,965  
Other expenses   2,675     2,979     158     956     6,768  
Results from operating activities   (8,490 )   (39,519 )   (158 )   (17,027 )   (65,194 )
Net interest expense on long term debt     39,364  
Accretion on streaming arrangements     32,031  
Change in fair value of financial instruments     10,900  
Other net finance costs     8,567  
Loss before tax     (156,056 )
Tax recovery     (28,021 )
Loss for the period                         $ (128,035  


HUDBAY MINERALS INC.

Notes to Unaudited Condensed Consolidated Interim Financial Statements
(in thousands of US dollars, except where otherwise noted)
For the three and six months ended June 30, 2020 and 2019

 

Six months ended June 30, 2019  
    Manitoba     Peru     Arizona     Corporate and other activities     Total  
Revenue from external customers $ 259,693   $ 361,979   $ -   $ -   $ 621,672  
Cost of sales                              
Mine operating costs   185,547     172,846     -     -     358,393  
Depreciation and amortization   63,372     104,953     -     -     168,325  
Gross profit   10,774     84,180     -     -     94,954  
Selling and administrative expenses   -     -     -     25,323     25,323  
Exploration and evaluation   7,966     2,547     -     2,830     13,343  
Other expenses   2,731     9,638     27,957     280     40,606  
Results from operating activities   77     71,995     (27,957 )   (28,433 )   15,682  
Net interest expense on long term debt     32,499  
Accretion on streaming arrangements     37,884  
Change in fair value of financial instruments     (1,859 )
Other net finance costs     9,202  
Loss before tax     (62,044 )
Tax expense     5,518  
Loss for the period                         $ (67,562 )

June 30, 2020  
    Manitoba     Peru     Arizona     Corporate and other activities     Total  
Total assets $ 799,173   $ 2,508,841   $ 708,600   $ 482,278   $ 4,498,892  
Total liabilities   569,812     974,746     77,284     1,170,747     2,792,589  
Property, plant and equipment1   664,946     2,282,909     699,877     32,194     3,679,926  
1 Included in Corporate and other activities are $27,306 of property, plant and equipment that is located in Nevada.  

December 31, 2019  
    Manitoba     Peru     Arizona     Corporate and other activities     Total  
Total assets $ 779,896   $ 2,556,895   $ 700,799   $ 423,467   $ 4,461,057  
Total liabilities   556,267     926,642     78,988     1,051,037     2,612,934  
Property, plant and equipment1   684,679     2,253,404     691,538     32,938     3,662,559  
1 Included in Corporate and other activities are $27,273 of property, plant and equipment that is located in Nevada.  


HUDBAY MINERALS INC.

Notes to Unaudited Condensed Consolidated Interim Financial Statements
(in thousands of US dollars, except where otherwise noted)
For the three and six months ended June 30, 2020 and 2019

 

25. Events after the reporting period

 Amendments to Credit Facilities

In the second quarter of 2020, the Company entered into discussions with the syndicate of banks in its revolving credit facilities (the "Credit Facilities") to restructure the facilities. On August 7, 2020, each of the banks in the syndicate received credit approval to amend the Credit Facilities and the transaction is expected to close by the end of August.

On closing, the total size of the Credit Facilities will decrease from $550.0 million to $400.0 million to reflect the Company's business requirements until June 2022 when the Credit Facilities mature.



Hudbay Minerals Inc.: Exhibit 99.2 - Filed by newsfilecorp.com

 

 

Management's Discussion and Analysis of

Results of Operations and Financial Condition

For the three and six months ended

June 30, 2020

August 11, 2020


 

TABLE OF CONTENTS Page

 
Introduction 1
Our Business 1
Summary 2
Key Financial Results 5
Key Production Results 6
Recent Developments 7
Constancia Operations Review 13
Manitoba Operations Review 17
Outlook 24
Financial Review 25
Liquidity and Capital Resources 33
Financial Risk Management 38
Trend Analysis and Quarterly Review 39
Non-IFRS Financial Performance Measures 41
Accounting Changes and Critical Estimates 56
Changes in Internal Control over Financial Reporting 57
Notes to Reader 57


INTRODUCTION

This Management's Discussion and Analysis ("MD&A") dated August 11, 2020 is intended to supplement Hudbay Minerals Inc.'s unaudited condensed consolidated interim financial statements and related notes for the three and six months ended June 30, 2020 and 2019 (the "consolidated interim financial statements"). The consolidated interim financial statements have been prepared in accordance with International Financial Reporting Standards ("IFRS"), including International Accounting Standard 34, Interim Financial Reporting, as issued by the International Accounting Standards Board ("IASB").

References to "Hudbay", the "Company", "we", "us", "our" or similar terms refer to Hudbay Minerals Inc. and its direct and indirect subsidiaries as at June 30, 2020.

Readers should be aware that:

-  This MD&A contains certain "forward-looking statements" and "forward-looking information" (collectively, "forward-looking information") that are subject to risk factors set out in a cautionary note contained in our MD&A.

-  This MD&A includes an updated discussion of the risks associated with the COVID-19 pandemic and its effect on our operations, financial condition, projects and prospects, and supplements the discussion of these risks in our most recent Annual Information Form ("AIF").

-  This MD&A has been prepared in accordance with the requirements of the securities laws in effect in Canada, which may differ materially from the requirements of United States securities laws applicable to US issuers.

-  We use a number of non-IFRS financial performance measures in our MD&A.

-  The technical and scientific information in this MD&A has been approved by qualified persons based on a variety of assumptions and estimates.

For a discussion of each of the above matters, readers are urged to review the "Notes to Reader" discussion beginning on page 57 of this MD&A and to carefully review the risks associated with the COVID-19 pandemic that are discussed throughout this MD&A.

Additional information regarding Hudbay, including the risks related to our business and those that are reasonably likely to affect our financial statements in the future, is contained in our continuous disclosure materials, including our most recent AIF, consolidated interim financial statements and Management Information Circular available on SEDAR at www.sedar.com and on EDGAR at www.sec.gov.

All amounts are in US dollars unless otherwise noted.

OUR BUSINESS

We are a diversified mining company primarily producing copper concentrate (containing copper, gold, and silver) and zinc metal. Directly and through our subsidiaries, we own three polymetallic mines, four ore concentrators and a zinc production facility in northern Manitoba and Saskatchewan (Canada) and Cusco (Peru), and copper projects in Arizona and Nevada (United States). Our growth strategy is focused on the exploration, development, operation and optimization of properties we already control, as well as other mineral assets we may acquire that fit our strategic criteria. Our vision is to be a responsible, top-tier operator of long-life, low-cost mines in the Americas. We are governed by the Canada Business Corporations Act and our shares are listed under the symbol "HBM" on the Toronto Stock Exchange, New York Stock Exchange and Bolsa de Valores de Lima.


SUMMARY

Second Quarter Results Boosted by Strong Manitoba Operations

-  Strong production and cost performance from the Manitoba operations during the quarter; an increase in production of all metals over the first quarter and record gold production driven by increasing Lalor gold grades and record gold recoveries at Stall.

-  Successfully achieved efficient restart of operations at Constancia in mid-May with increased government-supported COVID-19 health and safety protocols in place.

-  Second quarter net loss was $51.9 million or $0.20 per share. Second quarter adjusted net loss1 per share was $0.15 and adjusted EBITDA1 was $49.1 million, after adjusting for the impact of the Peru temporary suspension costs and a partial reversal of the Peru inventory write-down from last quarter.

-  Operating cash flow before change in non-cash working capital decreased to $29.5 million in the second quarter of 2020 from $81.3 million in the same quarter of 2019 due to lower production at Constancia and lower realized base metal prices offset by higher realized gold prices and higher gold sales in Manitoba.

-  Cash and cash equivalents increased during the second quarter to $391.1 million as at June 30, 2020 as a result of the previously announced $115.0 million gold prepay transaction and cash generated from operations, partially offset by capital investments on the New Britannia refurbishment project.

On Track to Achieve Manitoba Guidance; Updated Peru Guidance

-  Owing to the outstanding performance from the Manitoba operations in the first half of 2020, and the ability to achieve safe and continuous operations despite COVID-19 operating challenges, we are on track to meet all Manitoba production and cost guidance for 2020.

-  COVID-19 in Peru had a significant impact on our business in the second quarter and continues to be a risk we are actively managing. A government declared state of emergency in mid-March required the suspension of operations at Constancia for a period of eight weeks. The Constancia mill resumed full operation on May 18 processing stockpiled ore, and mining activities returned to normal levels in early July under a successful phased restart plan.

-  Updated 2020 Peru production guidance of 65,000 to 75,000 tonnes of copper and 25,000 to 35,000 ounces of precious metals reflects the Constancia suspension period and the expected start of mining at Pampacancha in early 2021.

Executing on Growth Initiatives

-  Fully-funded New Britannia gold mill refurbishment project remains on schedule and within budget, with detailed engineering approximately 90% complete and construction activities approximately 25% complete.

-  Early mining of the gold zone at Lalor is well-underway, which is expected to result in gold production of 74,000 ounces in 2020 and 102,000 ounces in 2021. This is in preparation for the restart of the New Britannia gold mill, which is expected to increase annual gold production from Lalor to over 150,000 ounces by 2022.

-  Successfully advanced Pampacancha with individual land-user agreements in place covering approximately two-thirds of the land, and land clearing activities are underway.

-  Filed initial briefs with the U.S. Court of Appeals for the Ninth Circuit in June to advance the appeal of the July 2019 Rosemont court decision, which revoked the U.S. Forest Service's issuance of the Final Record of Decision for Rosemont.

-  Restructured revolving credit facilities in the wake of COVID-19 to right-size the facilities and further enhance our financial flexibility during the development of the New Britannia and Pampacancha projects.

-  Updated National Instrument ("NI") 43-101 resource estimate for the 1901 deposit near Lalor includes a larger base metal resource estimate and a new gold-rich inferred resource estimate of 500,000 tonnes grading 6.8 grams per tonne of gold.


Summary of Second Quarter Results

Cash generated from operating activities in the second quarter of 2020 decreased to $31.4 million compared to $107.0 million in the same quarter of 2019. Operating cash flow before change in non-cash working capital was $29.5 million during the second quarter of 2020, reflecting a decrease of $51.8 million compared to the same period of 2019. The decrease in operating cash flow is primarily the result of lower realized base metal prices as well as lower Constancia production and sales due to the temporary suspension of mine operations. This decrease was partially offset by higher gold production and sales in Manitoba as well as higher realized gold prices.

Copper-equivalent production in the second quarter of 2020 decreased by 21% compared to the same period in 2019 primarily as a result of lower ore production from Constancia due to the eight-week suspension of operations commencing mid-March 2020 following a government declared state of emergency as well as lower Constancia copper grades. However, copper-equivalent production in Manitoba increased by 9% in the second quarter over the same quarter in 2019 primarily due to a 25% increase in gold production as sustained results from the Stall mill gold recovery improvement initiatives are achieved.

Net loss and loss per share in the second quarter of 2020 were $51.9 million and $0.20, respectively, compared to a net loss and loss per share of $54.1 million and $0.21, respectively, in the second quarter of 2019. Second quarter earnings were negatively impacted by lower base metal prices, lower sales volumes due to the temporary suspension of Constancia mine operations and lower Constancia grades. In addition, the temporary suspension at Constancia resulted in fixed overhead production costs of $25.6 million during the second quarter and $31.9 million year-to-date that would normally be capitalized to inventories and property, plant, and equipment, to be immediately expensed as part of our cost of sales. This was partially offset by a $8.2 million reversal of a Peru inventory write-down due to rising copper prices in the second quarter. The below table provides a summary of COVID-19 related charges at Constancia and where each item is classified in our consolidated interim financial statements.

Financial statement category

COVID-19 related cost description

Three months ended

June 30, 2020

Six months ended

June 30, 2020

(in $ thousands)

 

 

 

Cost of sales

 

 

 

Mine operating costs

 Fixed overhead production costs

 Medical testing

 Safety equipment

 Additional transportation and accommodation costs for social distancing

 

12.4

 

15.8

 

Depreciation and amortization

•   Straight line equipment

    depreciation during suspension of

    operations

13.2

 

16.1

 

Total COVID-19 related costs1

 

25.6

 

31.9

 

1 These charges are not included in our calculation of adjusted net loss and adjusted EBITDA. Adjusted net loss and adjusted EBITDA are non-IFRS financial performance measures with no standardized definition under IFRS. For further information and a detailed reconciliation, please see the discussion under the "Non-IFRS Financial Reporting Measures" section of this MD&A.

After adjusting for the temporary suspension costs in Peru and the reversal of the Peru inventory write-down, among other items, adjusted net loss1 and adjusted EBITDA1 in the second quarter of 2020 were $39.7 million, or $0.15 per share, and $49.1 million, respectively. This compares to an adjusted net loss and adjusted EBITDA of $8.1 million, or $0.03 per share, and $95.9 million, respectively, in the same period of 2019. The increase in adjusted net loss and decrease in adjusted EBITDA was primarily due to the same factors noted above.

On a budgeted sales volume basis, if operations at Constancia were maintained during the eight-weeks in which production was suspended, this would have resulted in approximately $108.0 million of incremental revenue and generated approximately $42.4 million of incremental year-to-date pre-tax earnings, assuming closing second quarter commodity prices. These amounts would have improved our current year-to-date reported revenue of $454.0 million and pre-tax loss of $156.1 million.


In the second quarter of 2020, consolidated cash cost per pound of copper produced, net of by-product credits1, was $0.64, compared to $1.27 in the same period last year. Given the significant reduction in Constancia production in the second quarter, this measure is more heavily impacted by our Manitoba production which contains meaningful zinc and precious metal by-product revenue components, and this is not indicative of future consolidated cash costs. The overall decrease in this measure was a result of declines in Peru production costs in the second quarter exceeding a more muted decline in by-product credit revenues, due to the significant Manitoba by-product revenue component remaining unchanged compared to the same period in 2019. Incorporating sustaining capital, capitalized exploration, royalties, selling, administrative and regional costs, consolidated all-in sustaining cash cost per pound of copper produced, net of by-product credits1, in the second quarter of 2020 was $2.26, which decreased from $2.30 in the same period last year, driven mainly by same factors noted above.

*Reflects Constancia temporary shutdown in April and May.


1 Adjusted net loss and adjusted net loss per share, adjusted EBITDA, cash cost, all-in sustaining cash cost per pound of copper produced, net of by-product credits, and net debt are non-IFRS financial performance measures with no standardized definition under IFRS. For further information and a detailed reconciliation, please see the discussion under the "Non-IFRS Financial Reporting Measures" section of this MD&A.


KEY FINANCIAL RESULTS

Financial Condition

Jun. 30, 2020

Dec. 31, 2019

(in $ thousands)

Cash and cash equivalents

391,136

396,146

Total long-term debt

988,418

985,255

Net debt1

597,282

589,109

Working capital

260,672

271,284

Total assets

4,498,892

4,461,057

Equity

1,706,303

1,848,123

1 Net debt is a non-IFRS financial performance measure with no standardized definition under IFRS. For further information and a detailed reconciliation, please see discussion under the "Non-IFRS Financial Reporting Measures" section of this MD&A.


Financial Performance

Three months ended

Six months ended

(in $ thousands, except per share amounts)

Jun. 30, 2020

 

Jun. 30, 2019

Jun. 30, 2020

 

Jun. 30, 2019

Revenue

208,913

 

329,414

454,020

 

621,672

Cost of sales

221,567

 

286,271

488,665

 

526,718

Loss before tax

(74,604

)

 

(43,931

)

(156,056

)

 

(62,044

)

Loss

(51,901

)

 

(54,145

)

(128,035

)

 

(67,562

)

Basic and diluted loss per share

(0.20

)

 

(0.21

)

(0.49

)

 

(0.26

)

Adjusted loss per share1

(0.15

)

 

(0.03

)

(0.30

)

 

-

 

Operating cash flow before change in non-cash working capital2

29.5

 

81.3

71.4

 

166.9

Adjusted EBITDA1,2

49.1

 

 

95.9

 

104.1

 

 

200.0

 

1 Adjusted loss per share and adjusted EBITDA are non-IFRS financial performance measures with no standardized definition under IFRS. For further information and a detailed reconciliation, please see discussion under the "Non-IFRS Financial Reporting Measures" section of this MD&A.

2 In millions.



KEY PRODUCTION RESULTS

 

Three months ended

 

Three months ended

Jun. 30, 2020

 

Jun. 30, 2019

Peru

Manitoba

Total

 

Peru

Manitoba

Total

Contained metal in concentrate produced 1

 

 

 

 

 

 

Copper

 

tonnes

11,504

6,522

18,026

 

24,232

6,131

30,363

 

Gold

 

oz

2,311

30,303

32,614

 

3,794

24,305

28,099

 

Silver

 

oz

253,687

327,130

580,817

 

551,807

260,000

811,807

 

Zinc

 

tonnes

-

 

31,222

31,222

 

-

 

31,838

31,838

 

Molybdenum

 

tonnes

124

 

-

 

124

 

 

334

-

 

334

 

Payable metal sold

 

 

 

 

 

 

 

Copper

 

tonnes

9,023

6,928

15,951

 

25,778

7,393

33,171

 

Gold

 

oz

1,317

29,273

30,590

 

4,056

26,482

30,538

 

Silver

 

oz

242,519

299,266

 

541,785

 

504,259

300,042

804,301

 

Zinc 2

 

tonnes

-

 

27,604

 

27,604

 

 

-

 

24,224

24,224

 

Molybdenum

 

tonnes

120

 

-

 

120

 

419

 

-

 

419

 

 

 

 

 

 

 

 

 

 

 

Cash cost 3

 

$/lb

1.56

(1.00)

0.64

 

1.63

(0.15)

1.27

Sustaining cash cost 3

 

$/lb

2.09

1.67

 

 

2.11

2.19

 

All-in sustaining cash cost3

 

$/lb

 

 

2.26

 

 

 

2.30

                               

 

Six months ended

 

Six months ended

Jun. 30, 2020

 

Jun. 30, 2019

Peru

Manitoba

Total

 

Peru

Manitoba

Total

Contained metal in concentrate produced 1

 

 

 

 

 

 

Copper

 

tonnes

30,793

 

11,867

 

42,660

 

 

56,075

 

12,260

 

68,335

 

Gold

 

oz

5,373

 

57,596

 

62,969

 

 

9,151

 

44,510

 

53,661

 

Silver

 

oz

714,989

 

633,520

 

1,348,509

 

 

1,186,737

 

544,265

 

1,731,002

 

Zinc

 

tonnes

-

 

61,717

 

61,717

 

 

-

 

59,875

 

59,875

 

Molybdenum

 

tonnes

478

 

-

 

478

 

 

638

 

-

 

638

 

Payable metal sold

 

 

 

 

 

 

 

Copper

 

tonnes

28,270

 

11,753

 

40,023

 

 

52,440

 

12,448

 

64,888

 

Gold

 

oz

3,936

 

53,229

 

57,165

 

 

10,274

 

42,893

 

53,167

 

Silver

 

oz

604,110

 

513,597

 

1,117,707

 

 

1,256,518

 

530,689

 

1,787,207

 

Zinc 2

 

tonnes

-

 

54,396

 

54,396

 

 

-

 

47,178

 

47,178

 

Molybdenum

 

tonnes

551

 

-

 

551

 

 

653

 

-

 

653

 

 

 

 

 

 

 

 

 

 

 

Cash cost 3

 

$/lb

1.61

 

(0.68

)

0.97

 

 

1.38

 

0.31

 

1.19

 

Sustaining cash cost 3

 

$/lb

2.11

 

2.21

 

 

 

1.71

 

2.69

 

 

All-in sustaining cash cost3

 

$/lb

 

 

2.34

 

 

 

 

2.07

 

1 Metal reported in concentrate is prior to deductions associated with smelter contract terms.

2 Includes refined zinc metal sold.

3 Cash cost, sustaining cash cost and all-in sustaining cash cost per pound of copper produced, net of by-product credits are non-IFRS financial performance measures with no standardized definition under IFRS. For further information and a detailed reconciliation, please see the discussion under the "Non-IFRS Financial Reporting Measures" section of this MD&A.



RECENT DEVELOPMENTS

COVID-19 Business Update

Amidst the COVID-19 pandemic, our business response plan continued to be executed throughout the quarter, building off our crisis response protocols to establish business practices to carry us through this ongoing public health situation. We remain focused on the health and safety of our workforce, their families and the communities in which we operate. Addressing the pandemic is a collective effort and we continue to actively engage with our industry associations to understand developing practices and with local stakeholders and public health authorities to ensure effective implementation of our business response plans. We closely monitor the evolution of the pandemic in each of our regions and are continuously reviewing and adapting our procedures based on the latest local situation.

Each of our business units has developed effective site-specific measures to identify and limit COVID-19 exposure and transmission and maintain a safe environment for our workers and our communities. Site-specific measures include testing of incoming workers prior to their travel to site, pre-screening protocols, quarantine periods for incoming workers, workplace physical distancing protocols, and adjustment of work rotation schedules. These measures continue to evolve as the status of the pandemic changes in each of our operating regions and our measures are adapted to the regional health authorities' latest restrictions and guidelines.

We believe the most important way we can support the communities in which we operate is to manage safe operations that provide income for local employees, businesses, and communities. In addition to our efforts to maintain safe operations, we have been supporting public health efforts and providing COVID-19 relief funding, supplies and services to our neighbouring communities. Each region has different emergency needs at this critical time. In Peru, we have donated medical equipment and supplies to the regional hospitals and have delivered food to nearby communities in need. In Manitoba, we have donated to charities that provide various forms of support to families in need.

Resumption of Operations at Constancia

On May 14, following an eight-week suspension of Constancia operations due to a government declared state of emergency, Hudbay received approval of our restart protocols from Peru's Ministry of Energy and Mines. On May 18, 2020, the Constancia processing facilities resumed full production. During the Constancia mine suspension period, a smaller workforce was maintained at the site to oversee critical aspects of the operation and pro-actively prepare detailed mine reopening plans, which helped facilitate the quick and efficient restart of operations. In an effort to ensure a steady ramp-up while minimizing the number of workers at site, the restart plan followed a two-phased approach. The initial phase utilized stockpiled ore to fill the mill for the first six weeks. This was followed by a ramp-up of mining activities, commencing the last week of June with a full ramp up to normal levels in early July.

The situation in Peru, however, remains fluid. The state of emergency, first declared by the government in response to the COVID-19 pandemic on March 15, has since been extended to August 31, 2020 and there remains a risk of further disruptions to mining operations. We are actively monitoring the situation and any potential future impact on Constancia's operations.

Annual Guidance Update

On May 14, 2020, we suspended our previously issued 2020 annual guidance for our Peru operations due to the temporary suspension of operations at Constancia and the ongoing uncertainty surrounding the COVID-19 pandemic. Following a full resumption of Constancia milling activities in mid-May and mining activities in early July, we have reissued updated 2020 annual guidance for our Peru business unit.

Our updated annual production and operating cost guidance, along with our annual capital and exploration expenditure forecasts are presented below. These forecasts incorporate the impact of regularly scheduled maintenance at our operations, including semi-annual mill maintenance at Constancia and planned maintenance on the Lalor hoist facilities during the third quarter. Our updated Peru guidance assumes we are able to continue to safely operate for the remainder of the year while adhering to our existing health protocols and those required by the Peruvian government. Our Manitoba guidance remains unchanged from previously disclosed expectations.



Revised 2020 Guidance Summary

Peru

Manitoba

Total

 

 

 

 

Contained Metal in Concentrate1

 

 

 

Copper

tonnes

65,000 - 75,000

18,000 - 22,000

83,000 - 97,000

Zinc

tonnes

 

105,000 - 125,000

105,000 - 125,000

Precious metals2

oz

25,000 - 35,000

110,000 - 135,000

135,000 - 170,000

Molybdenum

tonnes

1,100 - 1,300

 

1,100 - 1,300

 

 

 

 

Combined Unit Operating Cost3

$/tonne

$8.30 - $10.00

C$130 - 140

 

 

 

 

 

 

Capital Expenditures4

 

 

 

 

Sustaining capital

millions

80.0

100.0

180.0

Growth capital

millions

70.0 5

80.0

170.0 6

 

 

 

 

 

Exploration Expenditures

millions

15.0

10.0

25.0 7

 

 

 

 

 

1 Metal reported in concentrate is prior to refining losses or deductions associated with smelter terms.

2 Precious metals production includes gold and silver production on a gold-equivalent basis, and silver is converted to gold at a ratio of 89:1.

3 Reflects combined mine, mill and G&A costs per tonne of milled ore. Peru costs reflect the deduction of expected capitalized stripping costs. Combined unit costs are non-IFRS financial performance measures with no standardized definition under IFRS. For further information, please see the discussion under the "Non-IFRS Financial Reporting Measures" section of this MD&A.

4 Excludes capital costs not considered to be sustaining or growth capital expenditures.

5 Peru growth capital expenditures include costs associated with project development and acquiring surface rights. Additional costs remain outstanding in recognition of current uses of land and the company is currently entering into agreements to address these matters.

6 Includes $20.0 million of capitalized Arizona spending associated with the Rosemont and Mason projects.

7 Includes $15.0 million of capitalized exploration resulting in total exploration expense of $10.0 million.

The revised production guidance for Peru reflects a reduction of approximately 15,000 to 20,000 tonnes of copper and 20,000 ounces of precious metals compared to the original guidance issued earlier this year, with molybdenum production only modestly affected. This reduction reflects the lost production during the eight-week temporary suspension at Constancia, in addition to revised mine plans for the remainder of the year and the resulting deferral of some higher-grade ore into 2021. The precious metals production guidance also reflects the revised expected Pampacancha production start date of early 2021, compared to the second half of 2020 previously, due to the Peruvian government declared state of emergency and the resulting impact on the Consulta Previa consultation process.

Peru sustaining capital of $80.0 million reflects the deferral of approximately $20.0 million into 2021 due to the resequencing of capital activities, such as tailings and capitalized stripping, as a result of the temporary mine suspension. The revised unit cost guidance in Peru reflects lower mining costs during the gradual ramp-up of mining activities in the second quarter of 2020. There was no change to exploration expenditure guidance.

Peru growth capital of $70.0 million is unchanged from previous guidance and includes initial expenditures for developing the Pampacancha deposit, acquiring surface rights from the local community, but excludes the costs associated with recognizing the current uses of the land by certain community members. We have made significant progress with completing these individual land-user agreements, with agreements covering approximately two-thirds of the property completed to-date and the remaining agreements expected to be completed during the third quarter of 2020. As of June 30, 2020, approximately one-third of the land has been vacated and turned over to Hudbay. We intend to update our Peru growth capital guidance for these remaining costs once all of the individual land-user agreements are completed.

Credit Facility Amendment

In the second quarter of 2020, in the wake of the COVID-19 pandemic, we entered into discussions with the syndicate of banks in our revolving credit facilities (the "Credit Facilities") to restructure the facilities in order to provide Hudbay with enhanced flexibility during the development of the New Britannia and Pampacancha projects. Each of the banks in the syndicate has received credit approval to amend the Credit Facilities on the proposed terms and the transaction is expected to close by the end of August.


As a result of the amendment, total available borrowings under the Credit Facilities will be $400.0 million to reflect our anticipated business requirements until June 2022 when the Credit Facilities mature. The revised covenants include maintaining a net debt to EBITDA ratio of less than 5.25:1 and an interest coverage ratio of greater than 2.50:1 until the end of 2021. Refer to the Liquidity and Capital Resources section for additional information.

Snow Lake Development and Exploration Update

New Britannia Refurbishment Activities Underway

The New Britannia refurbishment project remains on schedule and on budget. In May, we broke ground at the New Britannia site with the start of construction of the foundation for the new copper flotation building. Construction of the pipeline between the New Britannia and Stall mills continues as planned. Detailed engineering is approximately 90% complete and construction activities are approximately 25% complete to-date. Refurbishment activities are on track for completion in August 2021, with plant commissioning and ramp-up expected during the second half of 2021. Through our expertise in project development and the advancement of the detailed engineering work, we have identified the potential to produce gold from the New Britannia mill earlier than expected in 2021. We are exploring this early gold opportunity and expect to provide an update in the third quarter of 2020.

We are continuing with our plan to mine approximately 90,000 tonnes from the gold zone in 2020 as part of stope sequencing in preparation for the restart of the New Britannia gold mill. Gold production from Lalor is expected to be 74,000 ounces in 2020 and 102,000 ounces in 2021, as per the March 30, 2020 mine plan. Upon completion of the New Britannia mill refurbishment, average annual gold production from Lalor is expected to increase to over 150,000 ounces at cash costs and sustaining cash costs, net of by-product credits, of approximately $480 and $655 per ounce, respectively, during the first eight years.

1901 Deposit Updated Resource Estimate

Since its discovery in February 2019, drilling has continued to define the extent and geometry of the 1901 deposit. After announcing an initial inferred resource estimate for the two zinc-rich lenses in August 2019, the focus of the infill drill program conducted during the winter of 2020 was two-fold: to upgrade the classification of a significant portion of the inferred resources reported in August 2019, and to define an initial inferred resource estimate for the gold mineralization that had been intersected around the two zinc-rich lenses.

The 1901 deposit is located half-way between the former Chisel North mine and the Lalor mine, less than 1,000 metres from an active underground ramp at a depth ranging from 550 to 650 metres and within 15 kilometres trucking distance of both the Stall base metal concentrator and the New Britannia gold mill. The property is 100% owned by the Company, free of any royalties or streams. The mineralization is similar to Lalor with zinc-rich volcanogenic massive sulphide lenses containing high-grade gold zones and indication of a copper-gold rich feeder zone. The mineralization occurs along the hanging wall contact of the stratigraphic horizon hosting the Chisel North deposit.

The updated resource estimates for the 1901 deposit, as of July 20, 2020, are provided in the table below:



1901 Deposit

Mineral Resource Estimates1,2,3,4,5

Tonnes
(millions)

Zn Grade
(%)

Au Grade
(g/t)

Ag Grade
(g/t)

Cu Grade
(%)

Base Metal Zone

 

Measured

1.0

6.79

2.2

29.9

0.43

Indicated

1.1

10.07

1.5

32.9

0.30

Total Measured and Indicated

2.1

8.52

1.8

31.5

0.36

Inferred

0.4

7.11

1.8

24.4

0.79

Gold Zone

 

Inferred

0.5

0.53

6.8

36.0

0.78

1 CIM definitions were followed for the estimation of mineral resources. Mineral resources that are not mineral reserves do not have demonstrated economic viability.

2 Mineral resources are reported within an economic envelope defined by a mineral stope optimization algorithm assuming a selective mining method.

3 Long-term metal prices of $1,500/oz gold, $18.00/oz silver, $3.00/lb copper and $1.09/lb zinc were used for the estimation of the mineral resources.

4 Metal recovery estimates are based on the assumption that the base metal mineralization would be processed at the Stall concentrator and would present a similar performance to those experienced historically for the Chisel and Lalor zinc-rich lenses. The gold mineralization is assumed to be processed at the New Britannia concentrator, which is currently being refurbished.

5 Specific gravity measurements using industry standard techniques were completed on all assayed intervals.

High resource conversion - The upgraded base metal measured and indicated resource estimates at the 1901 deposit are equivalent to 100% of the initial tonnage of the 2019 base metal inferred resources reported in our most recent AIF, with a 12% lower zinc grade and more than double the gold grade. While the 2020 infill drilling only covered approximately two-thirds of the footprint of the 2019 mineral resource estimates, it has evidenced a larger zinc-rich resource with significant gold, silver and copper content. There remains an additional 400 thousand tonnes of base metal inferred resource estimates with attractive zinc, copper and gold content which has the potential to be upgraded to higher categories with further drilling.

Significant gold content - The 2020 drilling program was also successful in defining a new gold-rich inferred resource estimate of 500 thousand tonnes at a gold grade of 6.8 grams per tonne. Total gold resources have significantly increased with 122 thousand ounces in measured and indicated and 137 thousand ounces in inferred, compared to a total of 58 thousand inferred ounces previously, which continues to demonstrate the gold potential of the Snow Lake camp.

Conservative resource estimation method - The methodology followed to estimate mineral resources at the 1901 deposit is identical to the approach used for the Lalor mine (please refer to the NI 43-101 Technical Report for Lalor dated March 28, 2019 for more details) and constrains the resource within a stope optimization envelope that is expected to lead to a high mineral resource to mineral reserve conversion factor.

1901 Deposit Exploration Potential

There remains further opportunity to convert additional inferred material to the measured and indicated categories and to extend the resource in the northern and eastern parts of the deposit. We expect to complete a drill program in early 2021 with a focus on expanding and upgrading the 1901 resource estimate. We have also identified additional favourable exploration drill targets located between the 1901 deposit and the Lalor mine that remain to be tested.

In addition, recent drilling has identified several high-grade copper-gold zones that have not been included in the current resource estimate due to limited drilling density. Highlights of these copper-gold intersections are summarized in the table below:



Hole ID

From

To

Intercept

True Width1

Au

Ag

Cu

Zn

(m)

(m)

(m)

(m)

(g/t)

(g/t)

(%)

(%)

CH1925

623.4

626.3

2.9

2.8

6.5

29.1

4.64

1.39

CH1955

655.0

658.0

3.0

2.9

2.4

10.4

2.37

0.02

CH1956

674.0

677.0

3.0

2.9

4.0

41.5

2.17

0.76

CH1979

679.7

685.8

6.0

5.8

4.1

22.3

3.18

0.16

CH1989

696.0

699.0

3.0

2.8

7.5

24.9

3.53

1.10

CH11012

736.0

742.2

6.2

-

0.9

19.9

4.80

0.18

CH12012

657.0

661.0

4.0

-

1.5

7.6

1.22

0.04

CH12032

693.5

695.0

1.5

-

6.1

21.8

5.08

0.06

Note: all grade values are uncut, and assay results are density and length weighted.

1 True width is estimated based on drill angle and intercept geometry of mineralization.

2 Historical drill holes. True widths cannot be estimated at this stage given the uncertainties of the mineralization geometry.


Hole ID

From (m)

To (m)

Azimuth at Intercept

Dip at Intercept

Easting

Northing

Elevation

Easting

Northing

Elevation

CH1925

427,188

6,078,908

-294

427,188

6,078,907

-297

229

-75

CH1955

427,128

6,078,932

-322

427,127

6,078,931

-325

216

-74

CH1956

427,095

6,078,798

-339

427,095

6,078,797

-342

217

-73

CH1979

427,118

6,078,926

-346

427,116

6,078,925

-352

247

-73

CH1989

427,087

6,078,875

-349

427,086

6,078,874

-351

238

-69

CH1101

427,471

6,078,922

-399

427,471

6,078,921

-402

162

-72

CH1201

427,266

6,078,917

-312

427,265

6,078,916

-316

215

-72

CH1203

427,201

6,079,084

-365

427,200

6,079,084

-367

251

-73

Snow Lake Expansion Potential

The updated resource estimate for the 1901 deposit was planned as part of phase three of our Snow Lake gold strategy. There remain opportunities for extension and additional conversion of mineral resource estimates at the 1901 deposit and we are engaged in engineering activities to develop a viable mine plan for the 1901 deposit that could supplement production from Lalor to take advantage of the future processing capacity of our mills in the Snow Lake region.

We are also examining the potential to optimize both the Stall and New Britannia mills, which could create further value for the 1901 deposit and the Snow Lake operations. At the Stall mill, we are initiating studies to increase gold and copper recoveries. We will also be completing studies to potentially expand the New Britannia mill capacity beyond the currently planned 1,500 tonnes per day. We expect to complete these studies in the first half of 2021 as we execute the third phase of our Snow Lake gold strategy.

Constancia Regional Exploration

Our consistent approach to community negotiations has proved successful, demonstrating our strong relationships with the neighbouring communities near Constancia and positioning us well to unlock future value on our other regional growth targets in Peru. After reaching an exploration agreement with the Quehuincha community in early 2019 and subsequently completing the Consulta Previa process, we are on track to commence our planned drill program in the fall of 2020 to test a high-grade skarn target on the Quehuincha North property.


We are also continuing the follow-up drilling program on the previously disclosed Constancia North intersections to test a possible extension of copper porphyry and high-grade skarn mineralization occurring within 300 metres of the edge of the current Constancia pit. We expect to have the results from this drilling program in the third quarter of 2020.

Appointment of Chief Financial Officer

On June 11, 2020, Steve Douglas was appointed as Hudbay's Senior Vice President and Chief Financial Officer effective June 30, 2020. Mr. Douglas is highly regarded and brings over 25 years of resource industry and senior finance leadership experience to our executive team.

Appeal of Unprecedented Rosemont Court Decision

On June 22, 2020 we announced the filing of the Company's initial brief with the U.S. Court of Appeals for the Ninth Circuit in relation to the U.S. District Court for the District of Arizona's ("District Court") decision in July 2019, which revoked the U.S. Forest Service's ("Forest Service") issuance of the Final Record of Decision ("FROD") for the Rosemont project in Arizona. The filing of the Company's brief follows the U.S. federal government's initial brief which was filed on June 15, 2020 by the U.S. Department of Justice on behalf of the federal agencies involved in issuing the FROD. The FROD was issued in June 2017 after a thorough process involving 17 co-operating agencies at various levels of government.

The briefs explain how both the Company and the government believe that the District Court misinterpreted federal mining laws and Forest Service regulations as they apply to Rosemont. Both briefs assert that current law broadly authorizes mining-related activities, such as ore processing and tailings storage, to be conducted on open Forest Service lands. The District Court's determination that the Forest Service's mining regulations do not apply to mining activities unless those activities are conducted entirely on valid mining claims, and hence above ore bodies, is contrary to plain language reading of the general mining law, as well as Forest Service regulations, which explicitly allow for mining-related activity to occur on lands not covered by any mining claim.

On June 29, 2020, further briefs were filed by industry groups in support of Hudbay and the U.S. government's appeal. These industry groups include the National Mining Association, the American Exploration and Mining Association, and the Southern Arizona Business Coalition.

Dividend Declared

A semi-annual dividend of C$0.01 per share was declared on August 11, 2020. The dividend will be paid on September 25, 2020 to shareholders of record as of September 4, 2020.

BlackNorth Initiative

Hudbay's President and Chief Executive Officer, Peter Kukielski, recently joined other senior executives from Canadian public companies in a pledge to take action to end systemic racism and create opportunities for all of those in the underrepresented BIPOC (Black, Indigenous and People of Colour) community. The pledge is part of the BlackNorth Initiative and the recently formed Canadian Council of Business Leaders Against Anti-Black Systemic Racism. The BlackNorth Initiative aligns with our values of dignity and respect, caring, openness and trustworthiness that are inherent in our corporate culture and in our decision-making and actions. Our community engagement efforts are focused around creating opportunities for all members of the communities in which we operate. Through the BlackNorth Initiative, we intend to expand our efforts to help end systemic racism.


CONSTANCIA OPERATIONS REVIEW

 

 

Three months ended

 

Six months ended

 

Guidance

 

Jun. 30, 2020

 

Jun. 30, 2019

 

Jun. 30, 2020

 

Jun. 30, 2019

 

Annual

 

2020 1

Ore mined 2

tonnes

 

2,775,286

 

8,211,166

 

9,760,498

 

16,845,939

 

 

Copper

%

 

0.34

 

0.39

 

0.34

 

0.43

 

 

Gold

g/tonne

 

0.04

 

0.04

 

0.03

 

0.04

 

 

Silver

g/tonne

 

2.90

 

3.68

 

3.04

 

3.61

 

 

Molybdenum

 

%

 

0.02

 

0.01

 

0.02

 

0.01

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ore milled

tonnes

 

4,355,482

 

7,679,739

 

11,074,949

 

15,672,801

 

 

Copper

%

 

0.34

 

0.37

 

0.34

 

0.42

 

 

Gold

g/tonne

 

0.04

 

0.04

 

0.03

 

0.04

 

 

Silver

g/tonne

 

3.04

 

3.40

 

3.09

 

3.47

 

 

Molybdenum

%

 

0.01

 

0.02

 

0.01

 

0.01

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Copper concentrate

tonnes

 

51,331

 

103,796

 

135,346

 

238,519

 

 

Concentrate grade

% Cu

 

22.41

 

23.35

 

22.75

 

23.51

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Copper recovery

%

 

76.6

 

84.7

 

81.3

 

85.6

 

 

Gold recovery

%

 

43.4

 

41.3

 

47.0

 

47.1

 

 

Silver recovery

%

 

59.6

 

65.7

 

64.9

 

67.9

 

 

Molybdenum recovery

%

 

19.9

 

28.9

 

29.2

 

27.9

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Combined unit operating costs3,4

$/tonne

 

7.77

 

10.39

 

8.70

 

9.62

 

8.30 - 10.00

1 Updated Peru guidance issued August 11, 2020.

2 Reported tonnes and grade for ore mined are estimates based on mine plan assumptions and may not reconcile fully to ore milled.

3 Reflects combined mine, mill and general and administrative ("G&A") costs per tonne of ore milled. Reflects the deduction of expected capitalized stripping costs.

4 Combined unit costs is a non-IFRS financial performance measure with no standardized definition under IFRS. For further information and a detailed reconciliation, please see the discussion under the "Non-IFRS Financial Reporting Measures" section of this MD&A.

Following the government-mandated mid-March suspension of operations at Constancia, the mine remained closed for approximately eight weeks and resumed operations in mid-May, achieving normal mill throughput levels on May 18, within 48 hours after restart, and continued at these levels for the remainder of the second quarter. The initial six weeks following restart focused on milling activities while processing stockpile ore. This was followed by a ramp-up of mining activities commencing the last week of June with a full ramp-up to normal levels in early July. Enhanced health and safety measures were implemented upon the re-start of operations and remain in place as we continue to monitor the local impacts of the COVID-19 pandemic.

Ore milled at our Constancia mine during the second quarter of 2020 was 43% lower compared to the same period in 2019 due to the temporary shutdown of Constancia. Milled copper grades in the second quarter were approximately 8% lower than the same period in 2019 as mainly lower grade stockpile ore was processed during the quarter. Copper recoveries in the second quarter of 2020 decreased by 10% compared to the same period in 2019 due to processing of mainly lower grade stockpiled ore.

Combined mine, mill and G&A unit operating costs in the second quarter of 2020 were 25% lower than the same period in 2019, primarily due to lower operating costs as a result of constrained activity during the state of emergency, and significantly reduced mining costs during the quarter. We also deferred a second quarter planned plant maintenance shutdown from May to the third quarter, as a result of completing proactive plant maintenance during the eight-week temporary suspension.


Year-to-date production variances were affected by the same factors as the second quarter variances versus prior year.

Contained metal in concentrate produced

Three months ended

 

Six months ended

 

Guidance

Jun. 30,
2020

 

Jun. 30,
2019

 

Jun. 30,
2020

 

Jun. 30,
2019

 

Annual

 

2020 1

Copper

tonnes

11,504

 

24,232

 

30,793

 

56,075

 

65,000 - 75,000

Gold

oz

2,311

 

3,794

 

5,373

 

9,151

 

 

Silver

oz

253,687

 

551,807

 

714,989

 

1,186,737

 

 

Molybdenum

tonnes

124

 

334

 

478

 

638

 

1,100- 1,300

Precious metals2

oz

5,161

 

11,677

 

13,406

 

26,104

 

25,000 - 35,000

1 Updated Peru guidance issued August 11, 2020.

2 Precious metals production includes gold and silver production on a gold-equivalent basis. For 2019, silver is converted to gold at a ratio of 70:1. For 2020, silver is converted to gold at a ratio of 89:1.

In the second quarter of 2020 production of copper, gold and silver were 53%, 39%, and 54% lower, respectively, than the same period in 2019, as the temporary mine suspension and generally lower grades resulted in reduced production during the quarter. Production in the second half of the quarter, following the resumption of operations, was consistent with volumes from the same period in 2019. For the first half of 2020, production of copper, gold and silver were 45%, 41%, and 40% lower, respectively, compared to the first half of 2019 for the same reasons as the second quarter variances. Molybdenum production was similarly affected.

Peru's updated 2020 production guidance has been revised to reflect the lost production during the eight-week temporary suspension at Constancia, in addition to revised mine plans for the remainder of the year and the resulting deferral of some higher-grade ore into 2021. Our updated guidance assumes we will be able to continue to safely operate for the remainder of the year while adhering to our existing health protocols and those required by the Peruvian government.

*Reflects Constancia temporary shutdown in April and May.


Peru Cash Cost and Sustaining Cash Cost

 

 

Three months ended

 

Six months ended

 

Jun. 30, 2020

 

Jun. 30, 2019

 

Jun. 30, 2020

 

Jun. 30, 2019

Cash cost per pound of copper produced, net of by-product credits1

$/lb

 

1.56

 

1.63

 

1.61

 

1.38

Sustaining cash cost per pound of copper produced, net of by-product credits1

$/lb

 

2.09

 

2.11

 

2.11

 

1.71

1 Cash cost and sustaining cash costs per pound of copper produced, net of by-product credits, are not recognized under IFRS. For more detail on these non-IFRS financial performance measures, please see the discussion under the "Non-IFRS Financial Performance Measures" section of this MD&A.

Cash cost per pound of copper produced, net of by-product credits, for the three and six months ended June 30, 2020 were $1.56 and $1.61, respectively. Cash cost remained relatively consistent quarter over quarter, however, increased 17% on a year-to-date basis. The overall increase is primarily due to lower copper production as a result of the temporary shutdown and lower copper grades and recoveries, as well as lower by-product credits, partially offset by lower combined operating costs.

Sustaining cash cost per pound of copper produced, net of by-product credits, remained consistent quarter over quarter; however, increased by 23% on a year-to-date basis. The overall increase is primarily due to the same factors noted above affecting cash costs partially offset by lower sustaining capital due to a curtailment of activity during the eight-week shutdown.


Metal Sold

 

 

Three months ended

 

Six months ended

 

Jun. 30, 2020

 

Jun. 30, 2019

 

Jun. 30, 2020

 

Jun. 30, 2019

Payable metal in concentrate

 

 

 

 

 

 

 

 

 

Copper

tonnes

 

9,023

 

25,778

 

 

28,270

 

52,440

Gold

oz

 

1,317

 

4,056

 

3,936

 

10,274

Silver

oz

 

242,519

 

504,259

 

604,110

 

1,256,518

Molybdenum

tonnes

 

120

 

419

 

 

551

 

653

Quantities of payable metal sold for the three and six months ended June 30, 2020 were lower than the same period in 2019 primarily for the same reasons that affected contained metal production. In addition, the lag in timing of sales following the restart of operations on May 18 resulted in a marginal increase in concentrate inventory during the current quarter compared to a reduction of concentrate inventory in the same quarter last year.


MANITOBA OPERATIONS REVIEW

Mines

 

 

Three months ended

 

Six months ended

 

Jun. 30, 2020

 

Jun. 30, 2019

 

Jun. 30, 2020

 

Jun. 30, 2019

Lalor

 

 

 

 

 

 

 

 

 

Ore

tonnes

 

407,408

 

411,701

 

828,926

 

800,184

Copper

%

 

0.77

 

0.73

 

0.73

 

0.75

Zinc

%

 

6.05

 

6.34

 

5.73

 

6.51

Gold

g/tonne

 

2.64

 

2.12

 

2.46

 

1.90

Silver

g/tonne

 

28.40

 

22.32

 

27.27

 

24.09

777

 

 

 

 

 

 

 

 

Ore

tonnes

 

281,890

 

288,599

 

561,815

 

567,121

Copper

%

 

1.72

 

1.34

 

1.45

 

1.49

Zinc

%

 

4.13

 

3.37

 

4.12

 

3.28

Gold

g/tonne

 

1.91

 

1.60

 

1.87

 

1.65

Silver

g/tonne

 

25.73

 

18.92

 

24.80

 

20.31

Total Mines

 

 

 

 

 

 

 

 

 

Ore

tonnes

 

689,298

 

700,300

 

1,390,741

 

1,367,305

Copper

%

 

1.16

 

0.98

 

1.02

 

1.06

Zinc

%

 

5.26

 

5.12

 

5.08

 

5.17

Gold

g/tonne

 

2.34

 

1.90

 

2.22

 

1.80

Silver

g/tonne

 

27.31

 

20.92

 

26.27

 

22.52


Unit Operating Costs1,2

 

Three months ended

 

Six months ended

 

Jun. 30, 2020

 

Jun. 30, 2019

 

Jun. 30, 2020

 

Jun. 30, 2019

Mines

 

 

 

 

 

 

 

 

 

Lalor

C$/tonne

 

96.66

 

113.18

 

94.88

 

107.60

777

C$/tonne

 

80.55

 

77.12

 

77.39

 

76.59

Total Mines

C$/tonne

 

90.07

 

98.32

 

87.82

 

94.74

1 Reflects costs per tonne of ore mined.

 

 

 

 

 

 

 

 

 

2 Unit costs is a non-IFRS financial performance measure with no standardized definition under IFRS. For further information and a detailed reconciliation, please see the discussion under the "Non-IFRS Financial Reporting Measures" section of this MD&A.



The Manitoba business unit had solid operating performance across the mines, mills and zinc plant during the second quarter. In response to the COVID-19 pandemic, we have worked collaboratively with our health and safety committees and the local health units with a focus on keeping our employees and communities safe by implementing a number of layered workplace controls. As a result, the second quarter Manitoba operating results were largely unaffected by the COVID-19 pandemic and are on track to achieve annual production and cost guidance.

Operational performance during the second quarter at both Lalor and 777 was strong, with ore production generally in line and grades largely exceeding the same period in 2019. The enhanced precious metal production from Lalor, driven by improved gold and silver grades is a result of prioritizing resources within the higher value portions of the base metal lenses. Development in the gold rich lenses 25 and 27 advanced ahead of schedule, and production from these areas is expected ahead of the New Britannia mill restart as Lalor transitions to a gold mine. Higher 777 ore grades during the second quarter of 2020 were expected and consistent with the mine plan which included the mining of higher-grade copper stopes during the quarter. As a result, both second quarter and year-to-date gold and silver grades mined in Manitoba increased significantly, while base metal grades were consistent with the same comparative periods in 2019.

Total unit operating costs for the second quarter of 2020 decreased by 8% compared to the same period in 2019 mainly due to lower operating costs at Lalor. Year-to-date total unit operating costs in Manitoba similarly decreased by 7% for the same reason.


Processing Facilities

 

 

Three months ended

 

Six months ended

 

Jun. 30, 2020

 

Jun. 30, 2019

 

Jun. 30, 2020

 

Jun. 30, 2019

Stall Concentrator

 

 

 

 

 

 

 

 

 

Ore

tonnes

 

334,601

 

339,616

 

704,388

 

661,139

Copper

%

 

0.76

 

0.71

 

0.73

 

0.74

Zinc

%

 

6.16

 

6.36

 

5.75

 

6.55

Gold

g/tonne

 

2.70

 

2.08

 

2.48

 

1.92

Silver

g/tonne

 

28.72

 

22.03

 

27.44

 

24.39

 

 

 

 

 

 

 

 

 

 

Copper concentrate

tonnes

 

11,312

 

9,886

 

22,950

 

20,998

Concentrate grade

% Cu

 

19.51

 

20.79

 

19.41

 

20.21

 

 

 

 

 

 

 

 

 

 

Zinc concentrate

tonnes

 

37,267

 

38,122

 

73,397

 

76,615

Concentrate grade

% Zn

 

51.13

 

51.70

 

50.72

 

51.42

 

 

 

 

 

 

 

 

 

 

Copper recovery

%

 

86.6

 

85.6

 

86.5

 

86.4

Zinc recovery

%

 

92.4

 

91.2

 

91.9

 

91.0

Gold recovery

%

 

62.3

 

52.5

 

61.6

 

55.4

Silver recovery

%

 

62.1

 

56.5

 

61.6

 

60.6

 

 

 

 

 

 

 

 

 

 

Contained metal in concentrate produced

 

 

 

 

 

 

Copper

tonnes

 

2,208

 

2,056

 

4,455

 

4,242

Zinc

tonnes

 

19,057

 

19,710

 

37,225

 

39,393

Precious metals1

oz

 

20,252

 

13,857

 

38,928

 

27,090

 

 

 

 

 

 

 

 

 

 

Flin Flon Concentrator

 

 

 

 

 

 

 

 

 

Ore

tonnes

 

324,906

 

367,017

 

657,495

 

656,261

Copper

%

 

1.52

 

1.26

 

1.31

 

1.39

Zinc

%

 

4.41

 

3.84

 

4.39

 

3.69

Gold

g/tonne

 

1.99

 

1.71

 

1.94

 

1.69

Silver

g/tonne

 

25.56

 

19.82

 

24.93

 

20.68

 

 

 

 

 

 

 

 

 

 

Copper concentrate

tonnes

 

19,120

 

18,081

 

32,642

 

34,825

Concentrate grade

% Cu

 

22.56

 

22.54

 

22.70

 

23.02

 

 

 

 

 

 

 

 

 

 

Zinc concentrate

tonnes

 

24,192

 

23,455

 

48,564

 

40,365

Concentrate grade

% Zn

 

50.28

 

51.71

 

50.43

 

50.74

 

 

 

 

 

 

 

 

 

 

Copper recovery

%

 

87.3

 

88.0

 

85.9

 

88.0

Zinc recovery

%

 

84.9

 

86.0

 

84.9

 

84.7

Gold recovery

%

 

58.6

 

61.3

 

56.1

 

61.5

Silver recovery

%

 

50.7

 

53.0

 

47.6

 

52.7

 

 

 

 

 

 

 

 

 

 

Contained metal in concentrate produced

 

 

 

 

 

 

Copper

tonnes

 

4,314

 

4,075

 

7,412

 

8,016

Zinc

tonnes

 

12,165

 

12,128

 

24,492

 

20,482

Precious metals1

oz

 

13,727

 

14,162

 

25,786

 

25,195

1 Precious metals production includes gold and silver production on a gold-equivalent basis.  For 2019, silver is converted to gold at a ratio of 70:1. For 2020, silver is converted to gold at a ratio of 89:1.




Unit Operating Costs1

 

Three months ended

 

Six months ended

 

Guidance

 

Jun. 30, 2020

 

Jun. 30, 2019

 

Jun. 30, 2020

 

Jun. 30, 2019

 

Annual

 

2020

Concentrators

 

 

 

 

 

 

 

 

 

 

 

Stall

C$/tonne

 

24.20

 

24.61

 

23.24

 

25.18

 

 

Flin Flon

C$/tonne

 

23.97

 

20.67

 

22.85

 

22.90

 

 

Combined mine/mill unit operating costs 2,3

 

 

 

 

 

 

 

 

Manitoba

C$/tonne

 

135

 

135

 

131

 

140

 

130 - 140

1 Reflects costs per tonne of milled ore.

 

2 Reflects combined mine, mill and G&A costs per tonne of milled ore.

3 Combined unit costs is a non-IFRS financial performance measure with no standardized definition under IFRS. For further information and a detailed reconciliation, please see the discussion under the "Non-IFRS Financial Reporting Measures" section of this MD&A.

At the Stall concentrator, ore processed during the second quarter of 2020 was generally consistent with the same period in 2019, despite a planned two-week outage on one of the grinding lines for capital upgrades. Gold and silver recoveries during the quarter increased by 19% and 10%, respectively, compared to the same period in 2019 due to a combination of improved ore characteristics and numerous operational improvement projects implemented at the Stall mill. Ore processed in the Flin Flon concentrator in the second quarter of 2020 decreased by 11% compared to the same period in 2019 due to less Lalor ore required to be processed in Flin Flon as a result of higher throughput at the Stall mill. Furthermore, operational optimization between the 777 mine and the Flin Flon mill, which provides input feed for paste backfill to the mine, led to lower milling activity and a corresponding increase of the ore stockpile at quarter end.  Metal recoveries at the Flin Flon concentrator during the second quarter of 2020 decreased slightly compared with the same period in 2019, which was in line with metallurgical models.

Unit operating costs at Stall decreased slightly in the second quarter of 2020 compared to the same period in 2019, whereas unit operating costs at Flin Flon were 16% higher over the same period because of reduced ore throughput.  Manitoba combined mine, mill and G&A unit operating costs in the second quarter of 2020 remained unchanged compared to the same period in 2019.

Year-to-date ore processed at Stall increased by 7% as a result of several continuous improvement initiatives and higher ore availability from the Lalor mine. Year-to-date ore processed at the Flin Flon mill remained largely unchanged from the same period in 2019.

Year-to-date combined mine, mill and G&A unit operating costs were 6% lower as the mines and mills delivered consistent results with less production disruptions.

Manitoba contained metal in concentrate produced1

Three months ended

 

Six months ended

 

Guidance

Jun. 30, 2020

 

Jun. 30, 2019

 

Jun. 30, 2020

 

Jun. 30, 2019

 

Annual

 

2020

Copper

tonnes

6,522

 

6,131

 

11,867

 

12,260

 

18,000 - 22,000

Gold

oz

30,303

 

24,305

 

57,596

 

44,510

 

 

Silver

oz

327,130

 

260,000

 

633,520

 

544,265

 

 

Zinc

tonnes

31,222

 

31,838

 

61,717

 

59,875

 

105,000 - 125,000

 

 

 

 

 

 

 

 

 

 

 

Precious metals2

oz

33,979

 

28,019

 

64,714

 

52,285

 

110,000 - 135,000

1 Metal reported in concentrate is prior to deductions associated with smelter terms.

3 Precious metals production includes gold and silver production on a gold-equivalent basis. For 2019, silver is converted to gold at a ratio of 70:1. For 2020, silver is converted to gold at a ratio of 89:1.

In the second quarter of 2020, copper, gold and silver production was 6%, 25%, and 26% higher compared to the same period in 2019 due to higher head grades and higher gold and silver recoveries. Zinc production declined by 2%, in the second quarter of 2020. Year-to-date, gold, silver and zinc production increased by 29%, 16% and 3%, respectively, due to higher throughput and higher gold and silver head grades. Year-to-date copper production decreased by 3% as head grades decreased.


Manitoba production of all metals and combined unit operating costs are expected to be within guidance ranges for the full year 2020.

Zinc Plant

Zinc Production

 

Three months ended

 

Six months ended

 

Guidance

 

Jun. 30, 2020

 

Jun. 30, 2019

 

Jun. 30, 2020

 

Jun. 30, 2019

 

Annual

 

2020

Zinc Concentrate Treated

 

 

 

 

 

 

 

 

Domestic

tonnes

 

63,350

 

57,929

 

124,701

 

108,023

 

 

Refined Metal Produced

 

 

 

 

 

 

 

 

 

 

Domestic

tonnes

 

27,535

 

27,486

 

56,001

 

51,205

 

100,000 - 112,000


Unit Operating Costs

 

Three months ended

 

Six months ended

 

Guidance

 

Jun. 30, 2020

 

Jun. 30, 2019

 

Jun. 30, 2020

 

Jun. 30, 2019

 

Annual

 

2020

Zinc Plant 1,2

C$/lb

 

0.45

 

0.44

 

0.47

 

0.48

 

0.45 - 0.52

1 Zinc unit operating costs include G&A costs.

 

2 Zinc unit costs is a non-IFRS financial performance measure with no standardized definition under IFRS. For further information and a detailed reconciliation, please see the discussion under the "Non-IFRS Financial Reporting Measures" section of this MD&A.

Production of cast zinc in the second quarter of 2020 is comparable to the same period in 2019 while operating costs per pound of zinc metal produced remained consistent over the same periods. Year-to-date refined metal zinc production increased by 9% compared to the first half of 2019.

Full year production of cast zinc and zinc plant unit operating cost are expected to be within guidance ranges for the full year 2020.


Manitoba Cash Cost and Sustaining Cash Cost

 

 

Three months ended

 

Six months ended

 

Jun. 30, 2020

 

Jun. 30, 2019

 

Jun. 30, 2020

 

Jun. 30, 2019

Cost per pound of copper produced

 

 

 

 

 

 

 

 

 

Cash cost per pound of copper produced, net of by-product credits 1

$/lb

 

(1.00

)

 

(0.15

)

 

(0.68

)

 

0.31

Sustaining cash cost per pound of copper produced, net of by-product credits 1

$/lb

 

1.67

 

 

2.19

 

 

2.21

 

 

2.69

 

 

 

 

 

 

 

 

 

 

 

Cost per pound of zinc produced

 

 

 

 

 

 

 

 

 

Cash cost per pound of zinc produced, net of by-product credits 1

$/lb

 

0.05

 

 

0.38

 

 

0.28

 

 

0.52

 

Sustaining cash cost per pound of zinc produced, net of by-product credits 1

$/lb

 

0.61

 

 

0.83

 

 

0.83

 

 

1.01

 

1 Cash cost and sustaining cash cost per pound of copper & zinc produced, net of by-product credits, are not recognized under IFRS. For more detail on this non-IFRS financial performance measure, please see the discussion under the "Non-IFRS Financial Performance Measures" section of this MD&A.

Cash cost per pound of copper produced, net of by-product credits, in the second quarter of 2020 was negative $1.00. These costs were lower compared to the same period in 2019, primarily as a result of lower mining costs, higher by-product credits and higher copper production.

Sustaining cash cost per pound of copper produced, net of by-product credits, in the second quarter of 2020 was $1.67. These costs were lower compared to the same period in 2019, primarily due to the reasons listed above slightly offset by increased sustaining capital expenditures.

Cash cost and sustaining cash cost per pound of zinc produced, net of by-product credits, in the second quarter of 2020 were lower than the same period last year as a result of significantly higher by-product credits and lower mining costs, partially offset by lower zinc production and higher sustaining capital expenditures.

Cash cost and sustaining cash cost per pound of zinc produced, net of by-product credits, were lower in the first half of 2020 compared to the same period in 2019 due to increased zinc production, significantly higher by-product credits and lower mining costs, partially offset by higher sustaining capital expenditures.



Metal Sold

 

 

Three months ended

 

Six months ended

 

Jun. 30, 2020

 

Jun. 30, 2019

 

Jun. 30, 2020

 

Jun. 30, 2019

Payable metal in concentrate

 

 

 

 

 

 

 

 

 

Copper

tonnes

 

6,928

 

7,393

 

11,753

 

12,448

Gold

oz

 

29,273

 

26,482

 

53,229

 

42,893

Silver

oz

 

299,266

 

300,042

 

513,597

 

530,689

Zinc

tonnes

 

-

 

 

-

 

 

-

 

 

-

 

Refined zinc

tonnes

 

27,604

 

24,224

 

54,396

 

47,178



OUTLOOK

This outlook includes forward-looking information about the markets for the commodities we produce. For additional information on forward-looking information, refer to the "Forward-Looking Information" section of this MD&A. We may update our outlook depending on changes in metals prices and other factors. In addition to this section, refer to the "Operations Review" and "Financial Review" sections for additional details on our outlook for 2020.

Commodity Markets

In March 2020, the World Health Organization declared the COVID-19 outbreak a global pandemic. The current and future impacts on global commerce are anticipated to be far-reaching. To date, there has been significant volatility in stock markets, commodities and foreign exchange markets, restrictions on the conduct of business in many jurisdictions and the global movement of people and some goods have become restricted. Containment measures have resulted in significantly decreased economic activity in the second quarter of 2020, which has adversely affected the broader global economy.

Our 2020 operational and financial performance will be influenced by a number of factors. At the macro-level, the impact of COVID-19 and the general performance of the Chinese, North American and global economies will influence future demand for our products. The realized prices we achieve in the commodity markets significantly affect our financial performance. To date, we have experienced production below estimated levels and reduced revenue.

Copper and zinc prices declined by 20% or more in response to the COVID-19 pandemic, reaching lows in March of $2.08 per pound and $0.83 per pound, respectively. Since that time, liquidity injections by central banks and government stimulus in all parts of the globe, combined with actual and projected supply disruptions in copper and zinc mining operations, have seen prices of both metals rebound dramatically with copper hitting fresh 2020 highs in the $2.90 range in July.  Gold prices have also been very volatile, initially dropping approximately $200 per ounce in response to the global asset sell off in March before fears of future inflation stemming from the response of central banks and governments to COVID-19 drove prices to all-time record levels above $2,000/oz in early August.

We remain confident in the longer-term outlook for the commodities we produce; however, there is significant ongoing short to medium-term uncertainty surrounding COVID-19 and the extent and duration of the impacts that it may have on demand and prices for the commodities we produce, on our suppliers, on our employees and on global financial markets. As a result, our financial results may remain volatile as COVID-19 continues to affect production, operating costs and the prices we receive for our products.


FINANCIAL REVIEW

Financial Results

In the second quarter of 2020, we recorded a net loss of $51.9 million compared to a loss of $54.1 million for the same period in 2019, representing a marginal increase in earnings of $2.2 million. Year-to date in 2020, we recorded a net loss of $128.0 million compared to a loss of $67.5 million in the same period in 2019, a decrease in profit of $60.5 million.

The following table provides further details on these variances:

(in $ millions)

Three months ended
June 30, 2020

Six months ended
June 30, 2020

 

 

(Decrease) increase in components of profit or loss:

 

 

 

Revenues

(120.5

)

(167.7

)

 

Cost of sales

 

 

 

Mine operating costs

54.3

 

37.0

 

 

Depreciation and amortization

10.4

 

1.1

 

 

Selling and administrative expenses

(0.3

)

9.5

 

 

Write down of UCM receivable

26.0

 

26.0

 

 

Net finance expense

(8.0

)

(13.1

)

 

Other

7.3

 

13.2

 

 

Tax

33.0

 

33.5

 

 

Increase (decrease) in profit for the period

2.2

 

(60.5

)

 

Revenue

Revenue for the second quarter of 2020 was $208.9 million, $120.5 million or 37% lower than the same period in 2019, primarily as a result of significantly lower sales volumes in Peru as a result of an eight-week shutdown at Constancia through to May 18. The lag in concentrate shipments resulted in Peru's first shipment for the quarter occurring in June. Revenues from Manitoba during the quarter were also lower compared to the same period in 2019, due to lower realized base metal prices, partially offset by higher realized gold prices and higher zinc sales volumes.

Year-to-date revenue in 2020 was $454.0 million, $167.7 million or 27% lower than the same period in 2019 largely due to the same reasons as the quarterly variance, partially offset by a variable consideration adjustment on our stream revenue.



(in $ millions)

Three months ended
June 30, 2020

Six months ended
June 30, 2020

 

 

 

Metals prices1

 

 

Lower copper prices

(7.4)

(23.7)

Lower zinc prices

(24.0)

(38.6)

Higher gold prices

10.0

20.1

Lower silver prices

(0.1)

(1.0)

Sales volumes

 

 

Lower copper sales volumes

(105.5)

(154.0)

Higher zinc sales volumes

10.1

21.2

Higher gold sales volumes

0.1

5.6

Lower silver sales volumes

(6.5)

(16.7)

Other

 

 

Change in derivative mark-to-market on zinc

2.4

(0.7)

Molybdenum and other volume and pricing differences

(10.0)

(8.3)

Variable consideration adjustments

-

 

13.5

Effect of lower treatment and refining charges

10.4

14.9

Decrease in revenue in 2020 compared to 2019

(120.5)

(167.7)

1 See discussion below for further information regarding metals prices.

 

 

Our revenue by significant product type is summarized below:

 

Three months ended

 

Six months ended

(in $ millions)

Jun. 30, 2020

Jun. 30, 2019

 

Jun. 30, 2020

 

Jun. 30, 2019

Copper

88.2

 

205.3

 

 

227.4

 

 

407.6

 

Zinc

59.0

 

71.6

 

 

122.6

 

 

138.8

 

Gold

44.0

 

33.8

 

 

86.8

 

 

54.8

 

Silver

5.0

 

7.0

 

 

11.0

 

 

15.3

 

Molybdenum

2.3

 

11.2

 

 

11.5

 

 

17.6

 

Other metals

1.0

 

1.4

 

 

1.8

 

 

2.5

 

Revenue from contracts

199.5

330.3

 

461.1

 

636.6

Amortization of deferred revenue - gold

6.3

 

8.5

 

 

10.5

 

 

16.0

Amortization of deferred revenue - silver

7.6

 

12.8

 

 

16.0

 

 

31.1

Amortization of deferred revenue - variable consideration adjustments - prior periods

-

 

-

 

 

(2.8

)

 

(16.3)

Pricing and volume adjustments1

7.0

 

(0.3)

 

(3.6

)

 

(3.6)

Treatment and refining charges

(11.5

)

(21.9)

 

(27.2

)

 

(42.1)

Revenue

208.9

329.4

 

454.0

 

621.7

1 Pricing and volume adjustments represents mark-to-market adjustments on provisionally prices sales, realized and unrealized changes to fair value for non-hedge derivative contracts and adjustments to originally invoiced weights and assays.

For further detail on variable consideration adjustments, refer to note 15 of our consolidated interim financial statements.


Realized sales prices

This measure is intended to enable management and investors to understand the average realized price of metals sold to third parties in each reporting period. The average realized price per unit sold does not have any standardized meaning prescribed by IFRS, is unlikely to be comparable to similar measures presented by other issuers and should not be considered in isolation or a substitute for measures of performance prepared in accordance with IFRS.

For sales of copper, gold and silver we may enter into non-hedge derivatives ("QP hedges") which are intended to manage the provisional pricing risk arising from quotational period terms in concentrate sales agreements. The QP hedges are not removed from the calculation of realized prices. We expect that gains and losses on QP hedges will offset provisional pricing adjustments on concentrate sales contracts.

Our realized prices for the second quarter in 2020 and 2019, respectively, are summarized below:

 

Realized prices1 for the

LME YTD

20202

 

Realized prices1 for the

Three months ended

 

Six months ended

 

LME QTD

20202

Jun. 30, 2020

Jun. 30, 2019

 

Jun. 30, 2020

 

Jun. 30, 2019

Prices

 

 

 

 

 

 

 

 

 

Copper

$/lb

2.42

2.57

 

2.78

2.49

 

2.54

 

 

2.81

Zinc3

$/lb

0.89

0.96

 

1.35

0.93

 

1.01

 

 

1.33

Gold4

$/oz

 

1,771

 

1,441

 

 

1,752

 

 

1,401

Silver4

$/oz

 

24.19

 

24.60

 

 

 

24.21

 

 

25.00

 

1 Realized prices exclude refining and treatment charges and are on the sale of finished metal or metal in concentrate. Realized prices include the effect of provisional pricing adjustments on prior period sales.

2 London Metal Exchange average for copper and zinc prices.

3 All sales for the three and six months ended June 30, 2020 and 2019 were cast zinc metal. Zinc realized prices include premiums paid by customers for delivery of refined zinc metal, but exclude unrealized gains and losses related to non-hedge derivative contracts that are included in zinc revenues.

4 Sales of gold and silver from our 777 and Constancia mines are subject to our precious metals stream agreement with Wheaton Precious Metals, pursuant to which we recognize deferred revenue for precious metals deliveries and also receive cash payments. Stream sales are included within realized prices and their respective deferred revenue and cash payment rates can be found on page 30.


The following table provides a reconciliation of average realized price per unit sold, by metal, to revenues as shown in the consolidated interim financial statements.

Three months ended June 30, 2020

(in $ millions) 1

Copper

Zinc

Gold

Silver

Molybdenum

Other

Total

Revenue per financial statements2

88.2

 

59.0

 

50.3

 

12.6

 

2.3

 

1.0

 

213.4

 

Pricing and volume adjustments3

2.1

 

1.1

 

3.8

 

0.6

 

(0.6

)

-

 

7.0

 

Derivative mark-to-market4

-

 

(1.8

)

-

 

-

 

-

 

-

 

(1.8

)

Revenue, excluding mark-to-market on non-QP hedges

90.3

 

58.3

 

54.1

 

13.2

 

1.7

 

1.0

 

218.6

 

Payable metal in concentrate sold 5

15,951

 

27,604

 

30,590

 

541,785

 

120

 

-

 

-

 

Realized price 6

5,670

 

2,111

 

1,771

 

24.19

 

-

 

-

 

-

 

Realized price 7

2.57

 

0.96

 

-

 

-

 

-

 

-

 

-

 

Six months ended June 30, 2020

(in $ millions) 1

Copper

Zinc

Gold

Silver

Molybdenum

Other

Total

Revenue per financial statements2

227.4

 

122.6

 

97.3

 

27.0

 

11.5

 

1.8

 

487.6

 

Pricing and volume adjustments3

(3.2

)

(2.0

)

2.9

 

-

 

(1.3

)

-

 

(3.6

)

Derivative mark-to-market4

-

 

0.4

 

-

 

-

 

-

 

-

 

0.4

 

Revenue, excluding mark-to-market on non-QP hedges

224.2

 

121.0

 

100.2

 

27.0

 

10.2

 

1.8

 

484.4

 

Payable metal in concentrate sold 5

40,023

 

54,396

 

57,165

 

1,117,707

 

551

 

-

 

-

 

Realized price 6

5,601

 

2,225

 

1,752

 

24.21

 

-

 

-

 

-

 

Realized price 7

2.54

 

1.01

 

-

 

-

 

-

 

-

 

-

 

Three months ended June 30, 2019

(in $ millions) 1

Copper

Zinc

Gold

Silver

Molybdenum

Other

Total

Revenue per financial statements2

205.3

 

71.6

 

42.3

 

19.8

 

11.2

 

1.4

 

351.6

 

Pricing and volume adjustments3

(2.1

)

-

 

1.7

 

-

 

0.1

 

-

 

(0.3

)

Derivative mark-to-market4

-

 

0.6

 

-

 

-

 

-

 

-

 

0.6

 

Revenue, excluding mark-to-market on non-QP hedges

203.2

 

72.2

 

44.0

 

19.8

 

11.3

 

1.4

 

351.9

 

Payable metal in concentrate sold 5

33,171

 

24,224

 

30,538

 

804,301

 

419

 

-

 

-

 

Realized price 6

6,128

 

2,981

 

1,441

 

24.60

 

-

 

-

 

-

 

Realized price 7

2.78

 

1.35

 

-

 

-

 

-

 

-

 

-

 

Six months ended June 30, 2019

(in $ millions) 1

Copper

Zinc

Gold

Silver

Molybdenum

Other

Total

Revenue per financial statements2

407.6

 

138.8

 

70.8

 

46.4

 

17.6

 

2.5

 

683.7

 

Pricing and volume adjustments3

(5.7

)

(0.1

)

3.7

 

(1.7

)

0.2

 

-

 

(3.6

)

Derivative mark-to-market4

-

 

(0.3

)

-

 

-

 

-

 

-

 

(0.3

)

Revenue, excluding mark-to-market on non-QP hedges

401.9

 

138.4

 

74.5

 

44.7

 

17.8

 

2.5

 

679.8

 

Payable metal in concentrate sold 5

64,888

 

47,178

 

53,167

 

1,787,207

 

653

 

-

 

-

 

Realized price 6

6,194

 

2,933

 

1,401

 

25.00

 

-

 

-

 

-

 

Realized price 7

2.81

 

1.33

 

-

 

-

 

-

 

-

 

-

 

1  Average realized price per unit sold may not calculate based on amounts presented in this table due to rounding.

2 Gold and silver includes amortization of deferred revenue.

3 Pricing and volume adjustments represents mark-to-market adjustments on provisionally priced sales, realized and unrealized changes to fair value for non-hedge derivative contracts and adjustments to originally invoiced weights and assays.

4 Derivative mark-to-market excludes mark-to-market on QP hedges.

5 Copper and zinc shown in metric tonnes and gold and silver shown in ounces.

6 Realized price for copper, zinc and molybdenum in $/metric tonne and realized price for gold and silver in $/oz.

7 Realized price for copper, zinc and molybdenum in $/lb.



The price, quantity and mix of metals sold, affect our revenue, operating cash flow and profit. Revenue from metals sales can vary from quarter to quarter due to production levels, shipping volumes and transfer of risk and title to customers.

Stream Sales

The following table shows stream sales included within realized prices and their respective deferred revenue and cash payment rates:

 

 

Three months ended

Six months ended

 

 

Jun. 30, 2020

Jun. 30, 2020

 

 

Manitoba

Peru

Manitoba

Peru

Gold

oz

4,783

1,019

7,222

2,345

Silver

oz

100,042

253,996

141,443

603,618

 

 

 

 

 

 

Gold deferred revenue drawdown rate1,2

$/oz

1,114

976

1,131

976

Gold cash rate3

$/oz

420

404

420

404

Total gold stream realized price

$/oz

1,534

1,380

1,551

1,380

 

 

 

 

 

 

Silver deferred revenue drawdown rate1,2

$/oz

21.16

21.52

21.43

21.52

Silver cash rate3

$/oz

6.20

5.96

6.20

5.96

Total silver stream realized price

$/oz

27.36

27.48

27.63

27.48

 

 

 

 

 

 

Three months ended

Six months ended

Jun. 30, 2019

Jun. 30, 2019

Manitoba

Peru

Manitoba

Peru

Gold

oz

5,294

2,404

8,908

5,910

Silver

oz

108,667

477,927

208,100

1,212,452

 

 

 

 

 

 

Gold deferred revenue drawdown rate1,2

$/oz

1,168

948

1,172

948

Gold cash rate 3

$/oz

416

400

416

400

Total gold stream realized price

$/oz

1,584

1,348

1,588

1,348

 

 

 

 

 

 

Silver deferred revenue drawdown rate1,2

$/oz

22.34

21.77

22.42

21.77

Silver cash rate 3

$/oz

6.14

5.90

6.14

5.90

Total silver stream realized price

$/oz

28.48

27.67

28.56

27.67

1 For the three and six months ended June 30, 2020 deferred revenue amortization is recorded in Manitoba at C$1,556/oz and C$29.58/oz for gold and silver (June 30, 2019 - C$1,562/oz and C$29.89/oz for gold and silver), respectively, and converted to US dollars at the exchange rate in effect at the time of revenue recognition.

2 Deferred revenue drawdown rates for gold and silver do not include variable consideration adjustments.

3 The gold and silver cash rate for Manitoba increased by 1% from $400/oz and $5.90/oz effective August 1, 2015. Subsequently every year, on August 1, the cash rate will increase by 1% compounded. The weighted average cash rate is disclosed. The gold and silver cash rate for Peru increased by 1% from $400/oz and $5.90/oz effective July 1, 2019. Subsequently every year, on July 1, the cash rate will increase by 1% compounded. The weighted average cash rate is disclosed.



Cost of Sales

Our detailed cost of sales is summarized as follows:

(in thousands)

Three months ended

 

Six months ended

 

Jun. 30, 2020

 

Jun. 30, 2019

 

Jun. 30, 2020

 

Jun. 30, 2019

 

Peru

 

 

 

 

 

 

 

 

Mining

7,595

 

 

21,725

 

 

27,537

 

 

45,611

 

 

Milling

18,703

 

 

42,953

 

 

52,041

 

 

77,989

 

 

Changes in product inventory

(1,916

)

 

1,680

 

 

(2,159

)

 

(5,647

)

 

Depreciation and amortization

33,152

 

 

55,636

 

 

80,394

 

 

104,953

 

 

G&A

7,542

 

 

14,458

 

 

16,226

 

 

26,984

 

 

Overhead costs related to suspension of activities (cash)

12,358

 

 

-

 

 

15,810

 

 

-

 

 

Inventory write down/(reversal)

(8,155

)

 

219

 

 

2,221

 

 

219

 

 

Freight, royalties and other charges

5,395

 

 

13,616

 

 

16,661

 

 

27,690

 

 

Total Peru cost of sales

74,674

 

 

150,287

 

 

208,731

 

 

277,799

 

 

Manitoba

 

 

 

 

 

 

 

 

Mining

44,820

 

 

51,466

 

 

89,487

 

 

97,112

 

 

Milling

11,466

 

 

11,918

 

 

23,009

 

 

23,755

 

 

Zinc plant

16,617

 

 

17,213

 

 

35,559

 

 

34,244

 

 

Changes in product inventory

5,916

 

 

(1,107

)

 

2,620

 

 

(10,996

)

 

Depreciation and amortization

47,655

 

 

35,558

 

 

86,852

 

 

63,372

 

 

G&A

11,277

 

 

10,786

 

 

25,209

 

 

24,067

 

 

Freight, royalties and other charges

9,142

 

 

10,150

 

 

17,198

 

 

17,365

 

 

Total Manitoba cost of sales

146,893

 

 

135,984

 

 

279,934

 

 

248,919

 

 

Cost of sales

221,567

 

 

286,271

 

 

488,665

 

 

526,718

 

 

Total cost of sales for the second quarter of 2020 was $221.6 million, reflecting a decrease of $64.7 million from the second quarter of 2019. Cost of sales related to Peru decreased for the second quarter of 2020 compared to the same period of 2019 by $75.6 million. The decrease is primarily the result of less overall mining, milling, general and administrative costs, and units-of-production depreciation due to the temporary suspension of operations at Constancia, as well as a $25.6 million fixed overhead charge (cash: $12.4 million, non-cash: $13.2 million included in depreciation) that ordinarily would have been capitalized to inventories and property, plant, and equipment.  There was also a reversal of a prior period inventory write-down in Peru of $8.2 million to reflect higher realizable inventory values resulting from an increase in copper prices. In Manitoba, cost of sales increased by $10.9 million compared to the second quarter of 2019 primarily as a result of higher depreciation costs from an increase to our decommissioning and restoration obligation and as well as a drawdown of inventory during the quarter.

Year-to-date, cost of sales was $488.7 million, which was $38.1 million less than the same period in 2019. The temporary suspension of operations at Constancia for eight weeks due to the government declared state of emergency resulted in an adjustment to cost of sales by $31.9 million of fixed overhead costs (cash: $15.8 million, non-cash: $16.1 million included in depreciation) that would ordinarily have been capitalized to inventories and property, plant, and equipment. These direct charges were offset by lower mining, milling, general and administrative, and freight and units-of-production depreciation costs resulting from lower production.

For details on unit operating costs refer to the respective tables in the "Operations Review" section of this MD&A.


For the second quarter of 2020, other significant variances in expenses from operations, compared to the same period in 2019, include the following:

-  Other expenses decreased by $27.6 million compared to the second quarter of 2019 primarily due to the write down of a joint venture receivable related to the purchase of the remaining interest in the Rosemont development project from prior year of $26.0 million whereas no comparable charge was recorded in the current quarter.

For 2020 year-to-date, other significant variances in expenses from operations, compared to 2019, include the following:

-  Selling and administrative expense decreased by $9.5 million compared to the same period in 2019. This decrease was mainly due to lower stock-based compensation charges as a result of the relative impact of the revaluation of previously issued share units to lower share prices and a general reduction in consulting, travel and legal overhead costs.

-  Other expenses decreased by $33.8 million due to the write down of a joint venture receivable from prior year of $26.0 million as well as the recognition of a delivery obligation related to the Pampacancha deposit from prior year of $7.5 million, neither of which reoccurred in the current year.

Net finance expense

(in $ thousands)

 

Three months ended

 

Six months ended

 

Jun. 30, 2020

Jun. 30, 2019

 

Jun. 30, 2020

Jun. 30, 2019

 

 

 

 

 

 

 

Finance costs - accrued or payable:

 

 

 

 

 

 

Interest expense on long-term debt

 

19,729

 

19,562

 

 

39,364

 

39,091

 

Withholding taxes

 

2,137

 

2,078

 

 

4,030

 

4,268

 

Other accrued/payable costs (income)1

 

1,851

 

(311

)

 

3,248

 

262

 

Total finance costs - accrued or payable

 

23,717

 

21,329

 

 

46,642

 

43,621

 

 

 

 

 

 

 

 

Finance costs - non-cash:

 

 

 

 

 

 

Accretion on streaming agreements2

 

15,732

 

15,915

 

 

32,031

 

37,884

 

Interest capitalized

 

-

 

(3,297

)

 

-

 

(6,592

)

Change in fair value of financial assets and liabilities at fair value through profit or loss

 

4,656

 

3,533

 

 

10,900

 

(1,859

)

Other non-cash costs3

 

3,664

 

2,328

 

 

1,289

 

4,672

 

Total finance costs - non-cash

 

24,052

 

18,479

 

 

44,220

 

34,105

 

Net finance expense

 

47,769

 

39,808

 

 

90,862

 

77,726

 

1 Includes interest income and other finance expense.

2 Includes variable consideration adjustment (prior periods).

3 Includes accretion on community agreements, unwinding of discount on provisions, and net foreign exchange losses (gains).

Compared to the three months ended June 30, 2019, net finance expense increased by $8.0 million.  Accrued finance costs increased by $2.4 million due to lower interest income earned on our cash balances. Non-cash finance costs increased by $5.6 million primarily as a result of $7.6 million in losses recorded on the revaluation of our gold prepayment liability, partially offset by $4.1 million in gains on our investments measured through profit or loss consisting of securities in Canadian metals and mining companies. In addition, we recorded $3.3 million in interest charges, as we no longer capitalize interest costs on the Rosemont project effective of October 1, 2019, due to its delay in development.


On a year-to-date basis, net finance expense increased by $13.1 million compared to the same period in 2019 mainly for the reasons as described above and due to higher losses from the non-cash revaluation of certain embedded derivatives measured through profit or loss. Offsetting this increase is a reduction in non-cash accretion expense on our stream arrangements by $5.9 million from the same period in 2019 due to a reduction in the variable consideration adjustment compared to a similar adjustment recorded in the first half of 2019.

Tax Recovery

For the three and six months ended June 30, 2020, tax recovery increased by $33.0 million and $33.5 million, respectively, compared to the same period in 2019. The following table provides further details:

 

Three months ended

 

Six months ended

Jun. 30, 2020

Jun. 30, 2019

 

Jun. 30, 2020

 

Jun. 30, 2019

(in $ thousands)

 

 

Deferred tax recovery - income tax 1

(23,722

)

9,358

 

 

(27,525

)

 

(3,020

)

Deferred tax (recovery) expense - mining tax 1

332

 

(5,340)

 

(830

)

 

(2,331)

Total deferred tax recovery

(23,390

)

4,018

 

(28,355

)

 

(5,351

)

Current tax (recovery) expense - income tax

687

 

(1,417)

 

351

 

4,591

Current tax recovery - mining tax

-

 

7,613

 

(17

)

 

6,278

Total current tax (recovery) expense

687

 

6,196

 

334

 

10,869

Tax recovery

(22,703

)

10,214

 

 

(28,021

)

 

5,518

 

1 Deferred tax (recovery) expense represents our draw down/increase of non-cash deferred income and mining tax assets/liabilities.

Income Tax Recovery

Applying the estimated Canadian statutory income tax rate of 27.0% to our loss before taxes of $156.1 million for the year-to-date period in 2020 would have resulted in a tax recovery of approximately $42.1 million; however, we recorded an income tax recovery of $27.2 million. The significant items causing our effective income tax rate to be different than the 27.0% estimated Canadian statutory income tax rate include:

-  Decrease in the deferred tax recovery of approximately $8.5 million as certain non-monetary assets are recognized at historical cost while the tax bases of the assets change as the exchange rates fluctuates, which creates taxable temporary differences.

-  Certain deductible temporary differences mostly with respect to Peru, and mostly relating to the decommissioning and restoration liabilities, were not recognized as we have determined that it is not probable that we will realize the recovery of these deferred tax assets based on the timing of the reversals of the deductible temporary differences and the future projected taxable profit of the Peruvian operations.  This has resulted in deferred tax expense of $8.0 million.

-  Certain deductible temporary differences with respect to our foreign operations are recorded using an income tax rate other than the Canadian statutory income tax rate of 27%, resulting in a deferred tax recovery of $2.4 million.


Mining Tax Recovery

Applying the estimated Manitoba mining tax rate of 10.0% to our loss before taxes of $156.1 million for the year-to-date period in 2020 would have resulted in a tax recovery of approximately $15.6 million; however, we recorded a mining tax recovery of $0.8 million. Effective mining tax rates can vary significantly based on the composition of our earnings and the expected amount of mining taxable profits. Corporate costs and other costs not related to mining operations are not deductible in computing mining profits. A brief description of how mining taxes are calculated in our various business units is discussed below.

Manitoba

The Province of Manitoba imposes mining tax on profit related to the sale of mineral products mined in the Province of Manitoba (mining taxable profit) at the following rates:

-  10% of total mining taxable profit if mining profit is C$50 million or less;

-  15% of total mining taxable profit if mining profits are between C$55 million and C$100 million; and

-  17% of total mining taxable profit if mining profits exceed C$105 million.

We estimate that the tax rate that will be applicable when temporary differences reverse will be approximately 10.0%.

Peru

The Peruvian government imposes two parallel mining tax regimes, the Special Mining Tax and the Modified Royalty, on companies' operating mining income on a sliding scale, with progressive rates ranging from 2.0% to 8.4% and 1.0% to 12.0%, respectively. Based on financial forecasts, we have recorded a deferred tax liability as at June 30, 2020, at the tax rate we expect to apply when temporary differences reverse.

LIQUIDITY AND CAPITAL RESOURCES

In the second quarter of 2020, in the wake of the COVID-19 pandemic, we entered into discussions with the syndicate of banks in our revolving Credit Facilities to restructure the facilities in order to right-size the facilities and provide Hudbay with enhanced flexibility during the development of the New Britannia and Pampacancha projects. Each of the banks in the syndicate has received credit approval to amend the Credit Facilities on the proposed terms and the transaction is expected to close by the end of August.

As a result of the amendment, the total size of the Credit Facilities will decrease from $550.0 million to $400.0 million to reflect our anticipated business requirements until June 2022 when the Credit Facilities mature. The revised covenants are as follows:

-  Maintaining net debt to EBITDA ratio of less than:

 5.25:1 from September 30, 2020 to December 31, 2021; and,

 3.50:1 from January 1, 2022 to maturity.

-  Maintaining an interest coverage ratio of greater than:

 2.50:1 from September 30, 2020 to December 31, 2021; and,

 3.00:1 from January 1, 2022 to maturity.

-  Maintaining a minimum liquidity greater than $50 million to December 31, 2021.

The EBITDA calculation for the purposes of the covenants may differ from the non-IFRS measure of adjusted EBITDA shown in this MD&A. As at June 30, 2020, our liquidity includes $391.1 million in cash and cash equivalents as well as undrawn availability under our Credit Facilities. As at June 30, 2020, we were in compliance with our covenants under the Credit Facilities and we have drawn $107.0 million in letters of credit under the Credit Facilities.


As at June 30, 2020, the Arizona business unit had $8.6 million in surety bonds and the Peru business unit had $20.0 million in surety bonds, issued to support future reclamation and closure obligations. The Peru business unit also had $45.0 million in letters of credit issued with various Peruvian financial institutions. No cash collateral is required to be posted under these letters of credit or surety bonds.

Financial Condition

Financial Condition as at June 30, 2020 compared to December 31, 2019

Cash and cash equivalents decreased by $5.0 million during the first half of the year to $391.1 million as at June 30, 2020. This decrease was mainly the result of $98.8 million of capital investments primarily at our Peru and Manitoba operations, and interest payments and other leasing and financing cost payments of $37.4 million and $25.4 million, respectively. This decrease was partially offset by $115.0 million of proceeds from the gold prepay transaction and cash flow from operating activities of $40.5 million. We hold the majority of our cash and cash equivalents in low-risk, liquid investments with major Canadian and Peruvian financial institutions.

Working capital decreased by $10.6 million to $260.7 million from December 31, 2019 to June 30, 2020, primarily due to an increase in our other current financial liabilities by $52.5 million arising mainly from the execution of the Pampacancha surface rights agreement and other community agreements, partially offset by a decrease of accounts payable by $28.8 million due to reduced accruals from lower operating activity at Constancia, and a reduction of the current portion of deferred revenue by $12.1 million based on changes in expected future stream deliveries.

Cash Flows

The following table summarizes our cash flows for the three and six months ended June 30, 2020 and June 30, 2019:

(in $ thousands)

 

Three months ended

 

Six months ended

 

Jun. 30, 2020

 

Jun. 30, 2019

 

Jun. 30, 2020

 

Jun. 30, 2019

Operating cash flow before changes in non-cash

working capital

 

29,457

 

81,259

 

71,409

 

166,941

Change in non-cash working capital

 

1,911

 

25,750

 

(30,954)

 

1,767

Cash generated from operating activities

 

31,368

 

107,009

 

40,455

 

168,708

Cash (used in) generated by investing activities

 

(47,409)

 

(90,881)

 

(97,356)

 

(130,144)

Cash generated by (used in) financing activities

 

102,372

 

(12,089)

 

50,440

 

(64,342)

Effect of movement in exchange rates on cash and cash equivalents

 

(1,192)

 

(379

)

 

1,451

 

(192)

Increase (decrease) in cash and cash equivalents

 

85,139

 

3,660

 

(5,010)

 

(25,970)

Cash Flow from Operating Activities

Cash generated from operating activities was $31.4 million during the second quarter of 2020, a decrease of $75.6 million compared with the same period in 2019. Operating cash flow before change in non-cash working capital was $29.5 million during the second quarter of 2020, reflecting a decrease of $51.8 million compared to the second quarter of 2019. The decrease in operating cash flow is primarily the result of lower copper sale volumes due to the temporary shutdown of the Constancia operations during the quarter and lower realized base metal prices compared to the second quarter of 2019.

Year-to-date cash generated from operating activities was $40.5 million, representing a decrease of $128.3 million compared to the same period in 2019. Operating cash flow before change in non-cash working capital was $71.4 million during the first half of 2020, compared to $166.9 million during the same period in 2019. The year-to-date decrease in operating cash flow is due to the same factors described above for the quarter-over-quarter variance.


Cash Flow from Investing and Financing Activities

During the second quarter of 2020, we generated $55.0 million in investing and financing activities, primarily driven by $115.0 million of proceeds received from the gold prepay, offset by $47.8 million of capital expenditures, capitalized lease payments of $8.2 million, and finance costs paid of $4.4 million.

Year-to-date, we used $46.9 million in investing and financing activities, composed primarily of $98.8 million of capital expenditures, interest payments of $37.4 million, capitalized lease payments of $17.2 million and net finance fees of $8.2 million, partially offset by $115.0 million of proceeds received from the gold prepayment transaction.

Capital Expenditures

The following summarizes accrued and cash additions to capital assets for the periods indicated:

 

Three months ended

Six months ended

Guidance

Jun. 30, 2020

Jun. 30, 2019

Jun. 30, 2020

Jun. 30, 2019

Annual

(in $ millions)

2020 1

Manitoba sustaining capital expenditures

27.2

 

27.1

 

51.0

 

51.2

 

100.0

Peru sustaining capital expenditures 2

6.6

 

18.1

 

19.2

 

28.5

 

80.0

Total sustaining capital expenditures

33.8

 

45.2

70.2

79.7

180.0

Arizona capitalized costs

4.6

 

8.8

7.7

13.4

20.0

Peru growth capitalized expenditures

-

 

0.3

70.2

0.6

70.0

Manitoba growth capitalized expenditures

11.0

 

3.1

 

14.7

3.2

80.0

Other capitalized costs 3

17.0

 

12.2

 

60.2

 

23.1

 

 

Capitalized exploration

0.9

 

1.1

 

2.3

 

2.0

 

15.0

Capitalized interest

-

 

3.3

 

-

 

6.6

 

 

Total other capitalized costs

33.5

 

28.8

155.1

48.9

 

Total capital additions

67.3

 

74.0

225.3

128.6

 

Reconciliation to cash capital additions:

 

 

 

 

 

Decommissioning and restoration obligation

(16.7

)

(11.8

)

(58.4

)

(26.5

)

 

Capitalized interest

-

 

(3.3

)

-

 

(6.6

)

 

Right-of-use asset additions

(4.8

)

(2.1

)

(7.1

)

(4.6

)

 

Change in community agreement accruals

6.5

 

-

 

(62.3

)

-

 

 

Change in capital accruals and other

(4.5

)

(6.8

)

1.3

 

1.4

 

 

Total cash capital additions

47.8

 

50.0

98.8

92.3

 

1 Reflects Manitoba guidance issued February 20, 2020 and updated Peru guidance issued August 11, 2020.

2 Peru sustaining capital expenditures includes capitalized stripping costs.

3 Other capitalized costs include decommissioning and restoration adjustments.

Sustaining capital expenditures in Manitoba for the three and six months ended June 30, 2020 were $27.2 million and $51.0 million respectively, representing an increase of $0.1 million and a decrease of $0.2 million compared to the same period in 2019. Expenditures remain consistent period over period as we continue capital development projects at Lalor.

Sustaining capital expenditures in Peru for the three and six months ended June 30, 2020 were $6.6 million and $19.2 million respectively, representing decreases of $11.5 million and $9.3 million from the same period in 2019. The decrease in Peru sustaining capital expenditures compared to the same period last year was mainly due to the temporary suspension of operations at Constancia. Expenditures for the current quarter mostly related to deferred mine equipment overhauls and plant recovery improvement projects.

Year-to-date Peru growth capital of $70.2 million includes the recognition of future spending obligations arising from the execution of the surface rights agreement with the local community and agreements related to current uses of the land by certain community members. Significant progress has been made with the agreements in recognition of current land uses and as of June 30, 2020, over one-third of the land has been vacated. The majority of expenditures under these agreements is expected to be paid during the third quarter of 2020.


Year-to-date Manitoba growth capital of $14.7 million includes spending for the New Britannia refurbishment project which formally broke ground in May 2020 with the start of construction of the foundation for the new copper flotation building.

Other capitalized costs for the three and six months ended June 30, 2020 were $17.0 million and $60.2 million, respectively, and relate primarily to the remeasurement of previously recognized decommissioning and restoration liabilities at our Peru and Manitoba operations as a result of declining discount rates during the first half of 2020.

Capital Commitments

As at June 30, 2020, we had outstanding capital commitments in Canada of approximately $45.0 million of which $43.9 million can be terminated, approximately $36.4 million in Peru primarily related to exploration option agreements, all of which can be terminated, and approximately $178.6 million in Arizona, primarily related to our Rosemont project, of which approximately $87.7 million can be terminated.

Contractual Obligations

The following table summarizes our significant contractual obligations as at June 30, 2020:



 

Less than

12 months

13 - 36

months

37 - 60

months

More than

60 months

Payment Schedule (in $ millions)

Total

Long-term debt obligations1

1,320.6

 

79.2

 

549.9

 

691.5

 

-

 

Gold prepayment obligation3

123.1

 

-

 

93.7

 

29.4

 

-

 

Lease obligations

149.0

 

98.3

 

44.7

 

2.8

 

3.2

 

Purchase obligation - capital commitments

260.0

 

60.4

 

26.1

 

20.9

 

152.6

 

Purchase obligation - other commitments2

705.8

 

320.5

 

218.9

 

132.3

 

34.1

 

Pension and other employee future benefits obligations3

205.6

 

19.6

 

46.5

 

9.3

 

130.2

 

Community agreement obligations

113.4

 

68.4

 

8.9

 

7.2

 

28.9

 

Decommissioning and restoration obligations4

256.9

 

23.8

 

35.3

 

11.0

 

186.8

 

Total

3,134.4

 

670.2

 

1,024.0

 

904.4

 

535.8

 

1 Long-term debt obligations include scheduled interest payments, as well as principal repayments.

2 Primarily made up of long-term agreements with operational suppliers, obligations for power purchase, Pampacancha delivery obligation, concentrate handling, fleet and port services, as well as deferred consideration arising from the acquisition of Rosemont's minority interest.

3 Discounted.

4 Undiscounted before inflation.



In addition to the contractual obligations included in the above payment schedule, we also have the following commitments which impact our financial position:

-  A profit-sharing plan with most Manitoba employees;

-  A profit-sharing plan with all Peru employees;

-  Wheaton precious metals stream agreements for the 777 mine and Constancia mines;

-  A net smelter returns royalty agreement related to the 777 mine; and,

-  Government royalty payments related to the Constancia mine.

Outstanding Share Data

As of August 10, 2020, there were 261,272,151 common shares of Hudbay issued and outstanding. In addition, there were 1,581,385 stock options outstanding.

FINANCIAL RISK MANAGEMENT

Impact of COVID-19

As a result of the COVID-19 global pandemic, we have experienced operational, supply chain, travel, labour and shipping disruptions, and may continue to experience similar disruptions in the future. As a result, our financial results may remain volatile as COVID-19 continues to affect production, operating costs and the prices we receive for our products. The resumption of normal operating activities is highly dependent on the global response and impact of the COVID-19 global pandemic. We expect that our current liquidity together with cash flows from operations will be sufficient to meet our liquidity needs in 2020.

Metals Price Strategic Risk Management

From time to time, we maintain price protection programs and conduct commodity price risk management to reduce risk through the use of financial instruments.

Commodity prices are a key driver of our financial and operational results.  Our strategic objective is to provide our investors with exposure to base metals prices, unless a reason exists to implement a hedging arrangement.

In the normal course, we typically consider base metal price hedging:

-  In conjunction with a major capital commitment to a growth opportunity for which operating cash flow is a key funding source;

-  To ensure the viability of a shorter life and/or higher cost mine;

-  To manage the risk associated with provisional pricing terms in concentrate purchase and sale agreements;

-  To offset fixed price zinc sales contracts with customers.

During the second quarter of 2020, we entered into a gold forward sale and prepay transaction which generated $115.0 million in cash proceeds to pre-fund the full capital budget of the New Britannia gold mill refurbishment. The transaction valued the future gold ounce delivery obligation for 79,954 gold ounces in 2022 and 2023 at forward curve prices averaging approximately $1,682 per ounce. The gold delivery obligation is to be satisfied with a monthly delivery of 3,331 gold ounces over a 24-month period from January 2022 to December 2023.

On an ongoing basis, we typically enter into copper hedging transactions intended to manage the risk associated with provisional pricing terms in concentrate sales agreements.

As at June 30, 2020, we had 17,650 tonnes of copper fixed for floating swaps outstanding at an average fixed receivable price of $2.55/lb associated with provisional pricing risk in concentrate sales agreements. These swaps settle across July to December 2020.


To provide a service to customers who purchase zinc from our plants and require known future prices, we enter into fixed price sales contracts. To ensure that we continue to receive a floating or unhedged realized zinc price, we enter into forward zinc purchase contracts that effectively offset the fixed price sales contracts with our customers.

From time to time, we enter into gold and silver forward sales contracts to hedge the commodity price risk associated with the future settlement of provisionally priced deliveries. We are generally obligated to deliver gold and silver to Wheaton prior to the determination of final settlement prices. These forward sales contracts are entered into at the time we deliver gold and silver to Wheaton and are intended to mitigate the risk of subsequent adverse gold and silver price changes. Gains and losses resulting from the settlement of these derivatives are recorded directly to revenue, as the forward sales contracts do not achieve hedge accounting, and the associated cash flows are classified in operating activities. Our swap agreements are with counterparties we believe to be creditworthy and do not require us to provide collateral.

Interest Rate and Foreign Exchange Risk Management

To the extent that we incur indebtedness at variable interest rates to fund our growth objectives, we may enter into interest rate hedging arrangements to manage our exposure to short-term interest rates. To the extent that we make commitments to capital expenditures denominated in foreign currencies, we may enter into foreign exchange forwards or acquire foreign currency outright, which may result in foreign exchange gains or losses in our consolidated interim income statements.

At June 30, 2020, approximately $359.0 million of our cash and cash equivalents was held in US dollars, approximately $21.0 million of our cash and cash equivalents was held in Canadian dollars, and approximately $11.1 million of our cash and cash equivalents was held in Peruvian soles.

TREND ANALYSIS AND QUARTERLY REVIEW

The following table sets forth selected consolidated financial information for each of our eight most recently completed quarters:

 

 

2020

 

2019

 

2018

 

 

(in $ millions)

 

Q2

Q1

 

Q4

Q3

 

Q2

Q1

 

Q4

Q3

 

 

Revenue

 

208.9

245.1

 

324.5

291.3

 

329.4

292.3

 

351.8

362.6

 

 

Gross margin

 

(12.7)

(22.0)

 

25.6

31.0

 

43.1

51.8

 

75.2

85.3

 

 

(Loss) profit before tax

 

(74.6)

(81.5)

 

(42.4)

(348.4)

 

(43.9)

(18.1)

 

17.7

30.3

 

 

(Loss) profit

 

(51.9)

(76.1)

 

(1.5)

(274.8)

 

(54.1)

(13.4)

 

(3.5)

22.8

 

 

Adjusted net (loss) earnings1

 

(39.7)

(39.4)

 

(24.6)

(23.2)

 

(8.1)

7.3

 

13.3

23.0

 

 

(Loss) earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and Diluted

 

(0.20)

(0.29)

 

(0.01)

(1.05)

 

(0.21)

(0.05)

 

(0.01)

0.09

 

 

Adjusted net (loss) earningsper share

 

(0.15)

(0.15)

 

(0.09)

(0.09)

 

(0.03)

0.03

 

0.05

0.08

 

 

Operating cash flow2

 

29.5

42.0

 

69.1

71.2

 

81.3

85.7

 

104.3

122.9

 

 

Adjusted EBITDA1

 

49.1

55.0

 

82.2

76.2

 

95.9

104.2

 

120.7

130.6

 

 

1 Adjusted net (loss) earnings, adjusted net (loss) earnings per share, and adjusted EBITDA are non-IFRS financial performance measure with no standardized definition under IFRS. For further information and a detailed reconciliation, please see the discussion under the "Non-IFRS Financial Reporting Measures" section of this MD&A.

2 Operating cash flow before changes in non-cash working capital.

The COVID-19 pandemic had a significant impact on our business in the first half of 2020, adversely impacting both production and base metal prices. Due to the temporary suspension of operations at Constancia throughout April and into mid-May 2020, we had lower second quarter production and sales volumes and higher production costs by $25.6 million as a result of the immediate recognition of fixed overhead production costs incurred during the suspension. With the Constancia suspension having commenced mid-March, first quarter sales volumes were less impacted. Despite this, first quarter results reflected $6.3 million of shutdown-related production costs as well as an inventory write-down of $10.4 million triggered by lower copper prices.


In 2019, the lower realized prices for copper and zinc, combined with a trend towards lower copper grades in the Constancia mine plan and the closure of the Reed copper mine in August 2018 resulted in lower revenues and gross margin, despite the lower Constancia grades being partially offset by higher mill throughput and recoveries. Earnings in 2019 were also impacted by an after-tax impairment charge of $242.1 million in the third quarter of 2019 following the U.S. District Court for the District of Arizona's decision related to the Rosemont project permits, as well as a write down of $26.0 million related to the UCM receivable in the second quarter of 2019 which was exchanged for higher ownership in the Rosemont project prior to purchasing the remaining interest from UCM. In the first quarter of 2019, pre-tax revenue and finance expenses were negatively impacted by a $22.3 million charge due to a deferred revenue adjustment arising from higher reserves and resources.


NON-IFRS FINANCIAL PERFORMANCE MEASURES

We have added adjusted net earnings (loss) and adjusted EBITDA to our non-IFRS financial performance measures this quarter. Adjusted net earnings (loss), adjusted net earnings (loss) per share, adjusted EBITDA, net debt, cash cost, sustaining and all-in sustaining cash cost per pound of copper produced, cash cost and sustaining cash cost per pound of zinc produced and combined unit cost and zinc plant unit cost are non-IFRS performance measures. These measures do not have a meaning prescribed by IFRS and are therefore unlikely to be comparable to similar measures presented by other issuers. These measures should not be considered in isolation or as a substitute for measures prepared in accordance with IFRS and are not necessarily indicative of operating profit or cash flow from operations as determined under IFRS. Other companies may calculate these measures differently.

Management believes adjusted net earnings (loss) and adjusted net earnings (loss) per share better reflect the Company's performance for the current period and are better indications of its expected performance in future periods. These measures are used internally by the Company to evaluate the performance of its underlying operations and to assist with its planning and forecasting of future operating results. As such, the Company believes these measures are useful to investors in assessing the Company's underlying performance. We provide adjusted EBITDA to help users analyze our results and to provide additional information about our ongoing cash generating potential in order to assess our capacity to service and repay debt, carry out investments and cover working capital needs. Net debt is shown because it is a performance measure used by the Company to assess our financial position. Cash cost, sustaining and all-in sustaining cash cost per pound of copper produced are shown because we believe they help investors and management assess the performance of our operations, including the margin generated by the operations and the Company. Cash cost and sustaining cash cost per pound of zinc produced are shown because we believe they help investors and management assess the performance of our Manitoba operations. Combined unit cost and zinc plant unit cost is shown because we believe they help investors and management assess our cost structure and margins that are not impacted by variability in by-product commodity prices.

In the first half of 2020, a government-imposed shutdown of non-essential businesses led to a temporary suspension of our Constancia mining operations. As such, fixed overhead production costs incurred during the suspension were directly charged to cost of sales. These costs did not contribute to production of inventory and were therefore excluded from the calculations of adjusted net earnings (loss), adjusted EBITDA and cash costs.

Adjusted Net Earnings (Loss)

Adjusted net earnings (loss) represents net earnings (loss) excluding certain impacts, net of taxes, such as changes in estimates of asset retirement obligations at closed sites, mark-to-market adjustments, impairment charges and reversal of impairment charges, write-down of assets, and foreign exchange (gain) loss. These measures are not necessarily indicative of net earnings (loss) or cash flows as determined under IFRS.

The following table provides a reconciliation of earnings (loss) per the consolidated interim income statements, to adjusted net earnings (loss) for the three and six months ended June 30, 2020 and 2019.



 

Three months ended

 

Six months ended

(in $ millions)

Jun. 30, 2020

Jun. 30, 2019

 

Jun. 30, 2020

 

Jun. 30, 2019

Loss for the period

(51.9

)

(54.1

)

 

(128.0

)

 

(67.6

)

Tax (recovery) expense

(22.7

)

10.2

 

 

(28.0

)

 

5.6

 

Loss before tax

(74.6

)

(43.9

)

 

(156.1

)

 

(62.0

)

Adjusting items:

 

 

 

 

 

 

Mark-to-market adjustments1

8.3

 

1.6

 

 

11.8

 

 

1.6

 

Peru inventory write-down/(reversal of write-down)

(8.2

)

-

 

 

2.2

 

 

-

 

Peru cost of sales direct charge from temporary shutdown

25.6

 

-

 

 

31.9

 

 

-

 

Write down of UCM receivable

-

 

26.0

 

 

-

 

 

26.0

 

Costs associated with proxy contest

-

 

3.0

 

 

-

 

 

3.0

 

Deferred revenue adjustment from increased reserves and resources

-

 

-

 

 

3.8

 

 

22.3

 

Pampacancha delivery obligation

-

 

-

 

 

-

 

 

7.5

 

Foreign exchange gain

1.8

 

0.9

 

 

(3.1

)

 

1.8

 

Adjusted loss before income taxes

(47.1

)

(12.4

)

 

(109.5

)

 

0.2

 

Tax recovery (expense)

22.7

 

(10.2

)

 

28.0

 

 

(5.6

)

Tax impact of adjusting items

(9.9

)

(0.6

)

 

(14.7

)

 

(7.4

)

Non-cash deferred tax adjustments

(5.4

)

15.1

 

 

17.1

 

 

11.9

 

 

 

 

 

 

 

 

Adjusted net loss

(39.7

)

(8.1

)

 

(79.1

)

 

(0.9

)

Adjusted net loss ($/share)

(0.15

)

(0.03

)

 

(0.30

)

 

-

 

Basic weighted average number of common shares outstanding (millions)

261.3

 

261.3

 

 

261.3

 

 

261.3

 

1 Includes changes in fair value of financial assets and liabilities at fair value through profit or loss and share-based compensation expenses.

After adjusting reported net loss for those items not considered representative of the Company's core business or indicative of future operations, the Company had an adjusted net loss in the second quarter 2020 of $39.7 million or $0.15 loss per share.

Adjusted EBITDA

Adjusted EBITDA is profit or loss before net finance expense/income, tax expense/recoveries, depreciation and amortization of property, plant and equipment and deferred revenue, as well as certain other adjustments. We calculate adjusted EBITDA by excluding certain adjustments included within our adjusted net earnings measure which we believe reflects the underlying performance of our core operating activities. The measure also removes the impact of non-cash items and financing costs that are not associated with measuring the underlying performance of our operations. However, our adjusted EBITDA is not the measure defined as EBITDA under our senior notes or revolving credit facilities and may not be comparable with performance measures with the same name reported by other companies. Adjusted EBITDA should not be considered as a substitute for profit or loss or as a better measure of liquidity than operating cash flow, which are calculated in accordance with IFRS. We provide adjusted EBITDA to help users analyze our results and to provide additional information about our ongoing cash generating potential in order to assess our capacity to service and repay debt, carry out investments and cover working capital needs.

The following table presents the reconciliation of earnings (loss) per the consolidated interim income statements, to adjusted EBITDA for the three and six months ended June 30, 2020 and 2019:



 

Three months ended

 

Six months ended

(in $ millions)

Jun. 30, 2020

Jun. 30, 2019

 

Jun. 30, 2020

 

Jun. 30, 2019

Loss for the period

(51.9

)

 

(54.1)

 

(128.0)

 

(67.6)

 

 

 

 

 

 

 

 

 

 

Add back: tax (recovery) expense

(22.7)

 

10.2

 

(28.0)

 

5.6

 

Add back: Net finance expense

47.8

 

39.8

 

90.9

 

77.7

 

Add back: Other expenses

1.3

 

 

28.9

 

 

6.8

 

 

40.6

 

 

Add back: Depreciation and amortization1

80.8

 

 

91.2

 

 

167.2

 

 

168.3

 

 

Less: Amortization of deferred revenue

(13.9

)

 

(21.3

)

 

(23.7

)

 

(30.8

)

 

 

41.4

 

 

94.7

 

 

85.2

 

 

193.8

 

 

Adjusting items (pre-tax):

 

 

 

 

 

 

Peru inventory write-down/(reversal of write-down)

(8.2

)

 

-

 

 

2.2

 

 

-

 

 

Cash portion of Peru cost of sales direct charge from temporary shutdown

12.4

 

 

-

 

 

15.8

 

 

-

 

 

Costs associated with proxy contest

-

 

 

3.0

 

 

-

 

 

3.0

 

 

Share-based compensation expenses (recoveries)2

3.5

 

 

(1.8

)

 

0.9

 

 

3.2

 

 

Adjusted EBITDA

49.1

 

 

95.9

 

 

104.1

 

 

200.0

 

 

1 Includes the non-cash portion of the Peru cost of sales direct charge from the temporary shutdown of $13.2 million and $16.1 million for the three and six months ended June 30, 2020.

2 Share-based compensation expenses (recoveries) reflected in cost of sales and selling and administrative expenses.

 

Net Debt

The following table presents our calculation of net debt as at June 30, 2020 and December 31, 2019:

 

(in $ thousands)

Jun. 30,
2020

 

Dec. 31,
2019

Total long-term debt as per IFRS financial statements

988,418

 

 

985,255

Cash and cash equivalents as per IFRS financial statements

(391,136)

 

(396,146)

Net debt

597,282

 

 

589,109



Cash Cost, Sustaining and All-in Sustaining Cash Cost (Copper Basis)

Cash cost per pound of copper produced ("cash cost") is a non-IFRS measure that management uses as a key performance indicator to assess the performance of our operations. Our calculation designates copper as our primary metal of production as it has been the largest component of revenues. The calculation is presented in four manners:

-  Cash cost, before by-product credits - This measure is gross of by-product revenues and is a function of the efforts and costs incurred to mine and process all ore mined. However, the measure divides this aggregate cost over only pounds of copper produced, our primary metal of production. This measure is generally less volatile from period to period, as it is not affected by changes in the price received for by-product metals. It is, however, significantly affected by the relative mix of copper concentrate and finished zinc production, where the sale of the zinc will occur later, and an increase in production of zinc metal will tend to result in an increase in cash cost under this measure.

-  Cash cost, net of by-product credits - In order to calculate the net cost to produce and sell copper, the net of by-product credits measure subtracts the revenues realized from the sale of the metals other than copper. The by-product revenues from zinc, gold, and silver are significant and are integral to the economics of our operations. The economics that support our decision to produce and sell copper would be different if we did not receive revenues from the other significant metals being extracted and processed. This measure provides management and investors with an indication of the minimum copper price consistent with positive operating cash flow and operating margins, assuming realized by-product metal prices are consistent with those prevailing during the reporting period. It also serves as an important operating statistic that management and investors utilize to measure our operating performance versus that of our competitors. However, it is important to understand that if by-product metal prices decline alongside copper prices, the cash cost net of by-product credits would increase, requiring a higher copper price than that reported to maintain positive cash flows and operating margins.

-  Sustaining cash cost, net of by-product credits - This measure is an extension of cash cost that includes cash sustaining capital expenditures, including payments on capitalized leases, capitalized sustaining exploration, net smelter returns royalties, payments on certain long-term community agreements, as well as accretion and amortization for expected decommissioning activities for producing assets. It does not include corporate selling and administrative expenses. It provides a more fulsome measurement of the cost of sustaining production than cash cost, which is focused on operating costs only.

-  All-in sustaining cash cost, net of by-product credits - This measure is an extension of sustaining cash cost that includes corporate G&A, regional costs, accretion and amortization for community agreements relating to current operations, and accretion for expected decommissioning activities for non-producing assets. Due to the inclusion of corporate selling and administrative expenses, all-in sustaining cash cost is presented on a consolidated basis only.

The tables below present a detailed build-up of cash cost and sustaining cash cost, net of by-product credits, by business unit in addition to consolidated all-in sustaining cash cost, net of by-product credits, and reconciliations between cash cost, net of by-product credits, to the most comparable IFRS measures of cost of sales for the three and six months ended June 30, 2020 and 2019. Cash cost, net of by-product credits may not calculate exactly based on amounts presented in the tables below due to rounding.

Consolidated

 

Three months ended

 

Six months ended

Net pounds of copper produced

 

 

 

 

(in thousands)

 

Jun. 30, 2020

 

Jun. 30, 2019

 

Jun. 30, 2020

 

Jun. 30, 2019

Peru

 

25,361

 

53,423

 

67,888

 

123,624

Manitoba

 

14,379

 

13,517

 

26,162

 

27,029

Net pounds of copper produced

 

39,740

 

66,940

 

94,050

 

150,653




Consolidated

 

Three months ended

 

Six months ended

 

 

Jun. 30, 2020

 

Jun. 30, 2019

 

Jun. 30, 2020

 

Jun. 30, 2019

Cash cost per pound of copper produced

 

$000s

 

$/lb

 

$000s

 

$/lb

 

$000s

 

$/lb

 

$000s

 

$/lb

Cash cost, before by-product credits

 

141,374

 

3.56

 

212,067

 

3.17

 

324,529

 

3.45

 

409,626

 

2.72

By-product credits, net of deferred revenue

 

(116,035)

 

(2.92)

 

(126,795)

 

(1.89)

 

(233,354)

 

(2.48)

 

(231,024)

 

(1.53)

Cash cost, net of by-product credits

 

25,339

 

0.64

 

85,272

 

1.27

 

91,175

 

0.97

 

178,602

 

1.19


Consolidated

 

Three months ended

 

Six months ended

 

 

Jun. 30, 2020

 

Jun. 30, 2019

 

Jun. 30, 2020

 

Jun. 30, 2019

Supplementary cash cost information

 

$000s

 

$/lb 1

 

$000s

 

$/lb 1

 

$000s

 

$/lb 1

 

$000s

 

$/lb 1

By-product credits:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Zinc

 

60,094

 

1.51

 

71,561

 

1.07

 

120,594

 

1.28

 

138,713

 

0.92

Gold 3

 

54,163

 

1.36

 

43,993

 

0.66

 

100,567

 

1.07

 

61,031

 

0.41

Silver 3

 

13,108

 

0.33

 

19,785

 

0.30

 

23,823

 

0.25

 

41,844

 

0.28

Molybdenum & other

 

2,574

 

0.06

 

12,754

 

0.19

 

12,034

 

0.13

 

20,245

 

0.13

Total by-product credits

 

129,939

 

3.27

 

148,093

 

2.21

 

257,018

 

2.73

 

261,833

 

1.74

Less: deferred revenue 3

 

(13,904)

 

(0.35)

 

(21,298)

 

(0.32)

 

(23,664)

 

(0.25)

 

(30,809)

 

(0.20)

Total by-product credits, net of deferred revenue

 

116,035

 

 

2.92

 

126,795

 

1.89

 

233,354

 

2.48

 

231,024

 

1.53

Reconciliation to IFRS:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash cost, net of by-product credits

 

25,339

 

 

 

85,272

 

 

 

91,175

 

 

 

178,602

 

 

By-product credits

 

129,939

 

 

 

148,093

 

 

 

257,018

 

 

 

261,833

 

 

Change in deferred revenues

 

(13,904)

 

 

 

(21,298)

 

 

 

(23,664)

 

 

 

(30,809)

 

 

Treatment and refining charges

 

(11,464)

 

 

 

(21,940)

 

 

 

(27,160)

 

 

 

(42,083)

 

 

Share-based compensation expense

 

284

 

 

 

(62)

 

 

 

68

 

 

 

365

 

 

Inventory adjustments

 

(8,155

)

 

 

 

219

 

 

 

 

2,221

 

 

 

 

219

 

 

Change in product inventory

 

4,000

 

 

 

573

 

 

 

461

 

 

 

(16,643)

 

 

Royalties

 

2,363

 

 

 

4,220

 

 

 

5,490

 

 

 

6,909

 

 

Overhead costs related to suspension of activities (cash)

 

12,358

 

 

 

-

 

 

 

 

15,810

 

 

 

-

 

 

 

Depreciation and amortization2

 

80,807

 

 

 

91,194

 

 

 

167,246

 

 

 

168,325

 

 

Cost of sales4

 

221,567

 

 

 

286,271

 

 

 

488,665

 

 

 

526,718

 

 

1 Per pound of copper produced.

2 Depreciation is based on concentrate sold.

3 Six months ended June 30, 2020 and June 30, 2019 gold and silver by-product credits and deferred revenue both reflect the $2.8 million and $16.3 million revenue adjustment, respectively primarily associated with the increase in reserves and resources at the 777 mine.

4 As per IFRS financial statements.




Peru

 

Three months ended

 

Six months ended

(in thousands)

 

Jun. 30, 2020

 

Jun. 30, 2019

 

Jun. 30, 2020

 

Jun. 30, 2019

Net pounds of copper produced1

 

25,361

 

53,423

 

67,888

 

123,624

1 Contained copper in concentrate.


Peru

 

Three months ended

 

Six months ended

 

 

Jun. 30, 2020

 

Jun. 30, 2019

 

Jun. 30, 2020

 

Jun. 30, 2019

Cash cost per pound of copper produced

 

$000s

 

$/lb

 

$000s

 

$/lb

 

$000s

 

$/lb

 

$000s

 

$/lb

Mining

 

7,595

 

0.30

 

21,725

 

0.41

 

27,537

 

0.41

 

45,611

 

0.37

Milling

 

18,703

 

0.74

 

42,953

 

0.80

 

52,041

 

0.77

 

77,989

 

0.63

G&A

 

7,493

 

0.30

 

14,468

 

0.27

 

16,241

 

0.24

 

26,908

 

0.22

Onsite costs

 

33,791

 

1.33

 

79,146

 

1.48

 

95,819

 

1.41

 

150,508

 

1.22

Treatment & refining

 

5,165

 

0.20

 

14,020

 

0.26

 

15,879

 

0.23

 

29,038

 

0.23

Freight & other

 

4,817

 

0.19

 

11,765

 

0.22

 

14,603

 

0.22

 

24,519

 

0.20

Cash cost, before by-product credits

 

43,773

 

1.73

 

104,931

 

1.96

 

126,301

 

1.86

 

204,065

 

1.65

By-product credits, net of deferred revenue

 

(4,115)

 

(0.17)

 

(17,682)

 

(0.33)

 

(17,311)

 

(0.25)

 

(33,906)

 

(0.27)

Cash cost, net of by-product credits

 

39,658

 

1.56

 

87,249

 

1.63

 

108,990

 

1.61

 

170,159

 

1.38




Peru

 

Three months ended

 

Six months ended

 

 

Jun. 30, 2020

 

Jun. 30, 2019

 

Jun. 30, 2020

 

Jun. 30, 2019

Supplementary cash cost information

 

$000s

 

$/lb 1

 

$000s

 

$/lb 1

 

$000s

 

$/lb 1

 

$000s

 

$/lb 1

By-product credits:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gold

 

2,129

 

0.08

 

5,364

 

0.10

 

7,747

 

0.11

 

13,768

 

0.11

Silver

 

6,827

 

0.27

 

13,692

 

0.26

 

13,818

 

0.20

 

35,873

 

0.29

Molybdenum

 

1,619

 

0.06

 

 

11,310

 

 

0.21

 

10,177

 

0.15

 

17,736

 

0.14

Total by-product credits

 

10,575

 

0.42

 

30,366

 

0.57

 

31,742

 

0.46

 

67,377

 

0.55

Less: deferred revenue

 

(6,460)

 

(0.25)

 

(12,684)

 

(0.24)

 

(14,431)

 

(0.21)

 

(33,471)

 

(0.27)

Total by-product credits, net of deferred revenue

 

4,115

 

0.17

 

17,682

 

0.33

 

17,311

 

0.25

 

33,906

 

0.27

Reconciliation to IFRS:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash cost, net of by-product credits

 

39,658

 

 

 

87,249

 

 

 

108,990

 

 

 

170,159

 

 

By-product credits

 

10,575

 

 

 

30,366

 

 

 

31,742

 

 

 

67,377

 

 

Change in deferred revenues

 

(6,460)

 

 

 

(12,684)

 

 

 

(14,431)

 

 

 

(33,471)

 

 

Treatment and refining charges

 

(5,165)

 

 

 

(14,020)

 

 

 

(15,879)

 

 

 

(29,038)

 

 

Inventory adjustments

 

(8,155)

 

 

 

219

 

 

 

 

2,221

 

 

 

 

219

 

 

Share-based compensation expenses

 

49

 

 

 

(10)

 

 

 

(15)

 

 

 

76

 

 

Change in product inventory

 

(1,916)

 

 

 

1,680

 

 

 

(2,159)

 

 

 

(5,647)

 

 

Royalties

 

578

 

 

 

1,851

 

 

 

2,058

 

 

 

3,171

 

 

Overhead costs related to suspension of activities (cash)

 

12,358

 

 

 

-

 

 

 

 

15,810

 

 

 

-

 

 

 

Depreciation and amortization2

 

33,152

 

 

 

55,636

 

 

 

80,394

 

 

 

104,953

 

 

Cost of sales3

 

74,674

 

 

 

150,287

 

 

 

208,731

 

 

 

277,799

 

 

1 Per pound of copper produced.

2 Depreciation is based on concentrate sold.

3 As per IFRS financial statements.




Manitoba

 

Three months ended

 

Six months ended

(in thousands)

 

Jun. 30, 2020

 

Jun. 30, 2019

 

Jun. 30, 2020

 

Jun. 30, 2019

Net pounds of copper produced1

 

14,379

 

13,517

 

26,162

 

27,029

1 Contained copper in concentrate.


Manitoba

 

Three months ended

 

Six months ended

 

 

Jun. 30, 2020

 

Jun. 30, 2019

 

Jun. 30, 2020

 

Jun. 30, 2019

Cash cost per pound of copper produced

 

$000s

 

$/lb

 

$000s

 

$/lb

 

$000s

 

$/lb

 

$000s

 

$/lb

Mining

 

44,820

 

3.12

 

51,466

 

3.81

 

89,487

 

3.42

 

97,112

 

3.59

Milling

 

11,466

 

0.80

 

11,918

 

0.88

 

23,009

 

0.88

 

23,755

 

0.88

Refining (zinc)

 

16,617

 

1.16

 

17,213

 

1.27

 

35,559

 

1.36

 

34,244

 

1.27

G&A

 

11,042

 

0.77

 

10,838

 

0.80

 

25,126

 

0.96

 

23,778

 

0.88

Onsite costs

 

83,945

 

5.84

 

91,435

 

6.76

 

173,181

 

6.62

 

178,889

 

6.62

Treatment & refining

 

6,299

 

0.44

 

7,920

 

0.59

 

11,281

 

0.43

 

13,045

 

0.48

Freight & other

 

7,357

 

0.51

 

7,781

 

0.58

 

13,766

 

0.53

 

13,627

 

0.50

Cash cost, before by-product credits

 

97,601

 

6.79

 

107,136

 

7.93

 

198,228

 

7.58

 

205,561

 

7.61

By-product credits, net of deferred revenue

 

(111,920)

 

(7.79)

 

(109,113)

 

(8.07)

 

(216,043)

 

(8.26)

 

(197,118)

 

(7.29)

Cash cost, net of by-product credits

 

(14,319)

 

(1.00)

 

(1,977)

 

(0.15)

 

(17,815)

 

(0.68)

 

8,443

 

0.31




Manitoba

 

Three months ended

 

Six months ended

 

 

Jun. 30, 2020

 

Jun. 30, 2019

 

Jun. 30, 2020

 

Jun. 30, 2019

Supplementary cash cost information

 

$000s

 

$/lb 1

 

$000s

 

$/lb 1

 

$000s

 

$/lb 1

 

$000s

 

$/lb 1

By-product credits:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Zinc

 

60,094

 

4.19

 

71,561

 

5.29

 

120,594

 

4.61

 

138,713

 

5.13

Gold

 

52,034

 

3.62

 

38,629

 

2.86

 

92,820

 

3.55

 

47,263

 

1.75

Silver

 

6,281

 

0.44

 

6,093

 

0.45

 

10,005

 

 

0.38

 

 

5,971

 

0.22

Other

 

955

 

0.07

 

1,444

 

0.11

 

1,857

 

0.07

 

2,509

 

0.09

Total by-product credits

 

119,364

 

8.31

 

117,727

 

8.71

 

225,276

 

8.61

 

194,456

 

7.19

Less: deferred revenue

 

(7,444)

 

(0.52)

 

(8,614)

 

(0.64)

 

(9,233)

 

(0.35)

 

2,662

 

0.10

Total by-product credits, net of deferred revenue

 

111,920

 

7.79

 

109,113

 

8.07

 

216,043

 

8.26

 

197,118

 

7.29

Reconciliation to IFRS:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash cost, net of by-product credits

 

(14,319)

 

 

 

(1,977)

 

 

 

(17,815)

 

 

 

8,443

 

 

By-product credits

 

119,364

 

 

 

117,727

 

 

 

225,276

 

 

 

194,456

 

 

Change in deferred revenues

 

(7,444)

 

 

 

(8,614)

 

 

 

(9,233)

 

 

 

2,662

 

 

Treatment and refining charges

 

(6,299)

 

 

 

(7,920)

 

 

 

(11,281)

 

 

 

(13,045)

 

 

Share-based compensation expenses

 

235

 

 

 

(52)

 

 

 

83

 

 

 

289

 

 

Change in product inventory

 

5,916

 

 

 

(1,107)

 

 

 

2,620

 

 

 

(10,996)

 

 

Royalties

 

1,785

 

 

 

2,369

 

 

 

3,432

 

 

 

3,738

 

 

Depreciation and amortization2

 

47,655

 

 

 

35,558

 

 

 

86,852

 

 

 

63,372

 

 

Cost of sales3

 

146,893

 

 

 

135,984

 

 

 

 

279,934

 

 

 

248,919

 

 

 

1 Per pound of copper produced.

 

 

2 Depreciation is based on concentrate sold.

 

 

3 As per IFRS financial statements.




Consolidated

 

Three months ended

 

Six months ended

 

 

Jun. 30, 2020

 

Jun. 30, 2019

 

Jun. 30, 2020

 

Jun. 30, 2019

All-in sustaining cash cost per pound of copper produced

 

$000s

 

$/lb

 

$000s

 

$/lb

 

$000s

 

$/lb

 

$000s

 

$/lb

Cash cost, net of by-product credits

 

25,339

 

0.64

 

 

85,272

 

1.27

 

 

91,175

 

0.97

 

 

178,602

 

1.19

 

Cash sustaining capital expenditures

 

49,467

 

1.24

 

 

51,973

 

0.78

 

 

104,196

 

1.11

 

 

96,983

 

0.64

 

Capitalized exploration1

 

-

 

 

0.00

 

 

1,090

 

 

0.02

 

 

-

 

 

0.00

 

 

1,995

 

 

0.01

 

Royalties

 

2,363

 

0.06

 

 

4,220

 

0.06

 

 

5,490

 

0.06

 

 

6,909

 

0.05

 

Sustaining cash cost, net of by-product credits

 

77,169

 

1.94

 

 

142,555

 

2.13

 

 

200,861

 

2.14

 

 

284,489

 

1.89

 

Corporate selling and administrative expenses & regional costs

 

11,608

 

0.29

 

 

11,146

 

0.17

 

 

17,596

 

0.19

 

 

27,263

 

0.18

 

Accretion and amortization of decommissioning and community agreements2

 

1,049

 

0.03

 

 

60

 

0.00

 

 

1,850

 

0.02

 

 

132

 

0.00

 

All-in sustaining cash cost, net of by-product credits

 

89,826

 

2.26

 

 

153,761

 

2.30

 

 

220,307

 

2.34

 

 

311,884

 

2.07

 

1 Only includes exploration costs incurred for locations near existing mines.

2 Includes accretion of decommissioning relating to non-productive sites, and accretion and amortization of current community agreements.


Peru

 

Three months ended

 

Six months ended

 

 

Jun. 30, 2020

 

Jun. 30, 2019

 

Jun. 30, 2020

 

Jun. 30, 2019

Sustaining cash cost per pound of copper produced

 

$000s

 

$/lb

 

$000s

 

$/lb

 

$000s

 

$/lb

 

$000s

 

$/lb

Cash cost, net of by-product credits

 

39,658

 

1.56

 

 

87,249

 

1.63

 

 

108,990

 

1.61

 

 

170,159

 

1.38

 

Cash sustaining capital expenditures

 

12,855

 

0.51

 

 

23,845

 

0.45

 

 

32,099

 

0.47

 

 

38,540

 

0.31

 

Royalties

 

578

 

0.02

 

 

1,851

 

0.03

 

 

2,058

 

0.03

 

 

3,171

 

0.03

 

Sustaining cash cost per pound of copper produced

 

53,091

 

2.09

 

 

112,945

 

2.11

 

 

143,147

 

2.11

 

 

211,870

 

1.71

 


Manitoba

 

Three months ended

 

Six months ended

 

 

Jun. 30, 2020

 

Jun. 30, 2019

 

Jun. 30, 2020

 

Jun. 30, 2019

Sustaining cash cost per pound of copper produced

 

$000s

 

$/lb

 

$000s

 

$/lb

 

$000s

 

$/lb

 

$000s

 

$/lb

Cash cost, net of by-product credits

 

(14,319

)

 

(1.00

)

 

(1,977

)

 

(0.15

)

 

(17,815

)

 

(0.68

)

 

8,443

 

 

0.31

 

Cash sustaining capital expenditures

 

36,612

 

 

2.55

 

 

28,128

 

 

2.08

 

 

72,097

 

 

2.76

 

 

58,443

 

 

2.16

 

Capitalized exploration

 

-

 

 

0.00

 

 

1,090

 

 

0.08

 

 

-

 

 

0.00

 

 

1,995

 

 

0.07

 

Royalties

 

1,785

 

 

0.12

 

 

2,369

 

 

0.18

 

 

3,432

 

 

0.13

 

 

3,738

 

 

0.14

 

Sustaining cash cost per pound of copper produced

 

24,078

 

 

1.67

 

 

29,610

 

 

2.19

 

 

57,714

 

 

2.21

 

 

72,619

 

 

2.69

 



Zinc Cash Cost and Zinc Sustaining Cash Cost

Cash cost per pound of zinc produced ("zinc cash cost") is a non-IFRS measure that management uses as a key performance indicator to assess the performance of our Manitoba operations. This alternative cash cost calculation designates zinc as the primary metal of production as it is the largest component of revenues for our Manitoba business unit and should therefore be less volatile over time than Manitoba cash cost per pound of copper. The calculation is presented in three manners:

-  Zinc cash cost, before by-product credits - This measure is gross of by-product revenues and is a function of the efforts and costs incurred to mine and process all ore mined. However, the measure divides this aggregate cost over only pounds of zinc produced, our primary metal of production. This measure is generally less volatile from period to period, as it is not affected by changes in the price received for by-product metals. It is, however, significantly affected by the relative mix of copper concentrate and finished zinc production, where the sale of the copper will occur later, and an increase in production of copper metal will tend to result in an increase in zinc cash cost under this measure.

-  Zinc cash cost, net of by-product credits - In order to calculate the net cost to produce and sell zinc, the net of by-product credits measure subtracts the revenues realized from the sale of the metals other than zinc. The by-product revenues from copper, gold, and silver are significant and are integral to the economics of our Manitoba operation. The economics that support our decision to produce and sell zinc would be different if we did not receive revenues from the other significant metals being extracted and processed. This measure provides management and investors with an indication of the minimum zinc price consistent with positive operating cash flow and operating margins, assuming realized by-product metal prices are consistent with those prevailing during the reporting period. It also serves as an important operating statistic that management and investors utilize to measure our operating performance at our Manitoba operation versus that of our competitors. However, it is important to understand that if by-product metal prices decline alongside zinc prices, the zinc cash cost net of by-product credits would increase, requiring a higher zinc price than that reported to maintain positive cash flows and operating margins.

-  Zinc sustaining cash cost, net of by-product credits - This measure is an extension of zinc cash cost that includes cash sustaining capital expenditures, capitalized exploration and net smelter returns royalties. It does not include corporate selling and administrative expenses. It provides a more fulsome measurement of the cost of sustaining production than zinc cash cost, which is focused on operating costs only.

The tables below present a detailed build-up of zinc cash cost and zinc sustaining cash cost, net of by-product credits, for the Manitoba business unit, and reconciliations between zinc cash cost, net of by-product credits, to the most comparable IFRS measures of cost of sales for the three and six months ended June 30, 2020 and 2019. Zinc cash cost, net of by-product credits, may not calculate exactly based on amounts presented in the tables below due to rounding.

Manitoba

 

Three months ended

 

Six months ended

(in thousands)

 

Jun. 30, 2020

 

Jun. 30, 2019

 

Jun. 30, 2020

 

Jun. 30, 2019

Net pounds of zinc produced1

 

68,833

 

70,191

 

136,063

 

132,002

1 Contained zinc in concentrate.

 

 

 

 

 

 

 

 


Manitoba

 

Three months ended

 

Six months ended

 

 

Jun. 30, 2020

 

Jun. 30, 2019

 

Jun. 30, 2020

 

Jun. 30, 2019

Cash cost per pound of zinc produced

 

$000s

 

$/lb

 

$000s

 

$/lb

 

$000s

 

$/lb

 

$000s

 

$/lb

Cash cost, before by-product credits1

 

97,601

 

1.42

 

107,136

 

1.53

 

198,228

 

1.46

 

205,561

 

1.56

By-product credits

 

(94,041

)

 

(1.37

)

 

(80,306

)

 

(1.14

)

 

(160,567

)

 

(1.18

)

 

(136,687

)

 

(1.04

)

Zinc cash cost, net of by-product credits

 

3,560

 

0.05

 

26,830

 

0.38

 

37,661

 

0.28

 

68,874

 

0.52

1 For additional detail on cash cost, before by-product credits please see page 49 of this MD&A.




Manitoba

 

Three months ended

 

Six months ended

 

 

Jun. 30, 2020

 

Jun. 30, 2019

 

Jun. 30, 2020

 

Jun. 30, 2019

Supplementary cash cost information

 

$000s

 

$/lb 1

 

$000s

 

$/lb 1

 

$000s

 

$/lb 1

 

$000s

 

$/lb 1

By-product credits:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Copper

 

42,215

 

 

0.61

 

 

42,754

 

 

0.61

 

 

65,118

 

 

0.48

 

 

78,282

 

 

0.59

 

Gold

 

52,034

 

 

0.76

 

 

38,629

 

 

0.55

 

 

92,820

 

 

0.68

 

 

47,263

 

 

0.36

 

Silver

 

6,281

 

 

0.09

 

 

6,093

 

 

0.09

 

 

10,005

 

 

0.07

 

 

5,971

 

 

0.05

 

Other

 

955

 

 

0.01

 

 

1,444

 

 

0.02

 

 

1,857

 

 

0.01

 

 

2,509

 

 

0.02

 

Total by-product credits

 

101,485

 

 

1.47

 

 

88,920

 

 

1.27

 

 

169,800

 

 

1.25

 

 

134,025

 

 

1.02

 

Less: deferred revenue

 

(7,444

)

 

(0.11

)

 

(8,614

)

 

(0.12

)

 

(9,233

)

 

(0.07

)

 

2,662

 

 

0.02

 

Total by-product credits, net of deferred revenue

 

94,041

 

 

1.37

 

 

80,306

 

 

1.14

 

 

160,567

 

 

1.18

 

 

136,687

 

 

1.04

 

Reconciliation to IFRS:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash cost, net of by-product credits

 

3,560

 

 

 

 

26,830

 

 

 

 

37,661

 

 

 

 

68,874

 

 

 

By-product credits

 

101,485

 

 

 

 

88,920

 

 

 

 

169,800

 

 

 

 

134,025

 

 

 

Change in deferred revenues

 

(7,444

)

 

 

 

(8,614

)

 

 

 

(9,233

)

 

 

 

2,662

 

 

 

Treatment and refining charges

 

(6,299

)

 

 

 

(7,920

)

 

 

 

(11,281

)

 

 

 

(13,045

)

 

 

Share-based compensation expenses

 

235

 

 

 

 

(52

)

 

 

 

83

 

 

 

 

289

 

 

 

Change in product inventory

 

5,916

 

 

 

 

(1,107

)

 

 

 

2,620

 

 

 

 

(10,996

)

 

 

Royalties

 

1,785

 

 

 

 

2,369

 

 

 

 

3,432

 

 

 

 

3,738

 

 

 

Depreciation and amortization2

 

47,655

 

 

 

 

35,558

 

 

 

 

86,852

 

 

 

 

63,372

 

 

 

Cost of sales3

 

146,893

 

 

 

 

135,984

 

 

 

 

279,934

 

 

 

 

248,919

 

 

 

1 Per pound of zinc produced.

2 Depreciation is based on concentrate sold.

3 As per IFRS financial statements.


Manitoba

 

Three months ended

 

Six months ended

 

 

Jun. 30, 2020

 

Jun. 30, 2019

 

Jun. 30, 2020

 

Jun. 30, 2019

Sustaining cash cost per pound of zinc produced

 

$000s

 

$/lb

 

$000s

 

$/lb

 

$000s

 

$/lb

 

$000s

 

$/lb

Zinc cash cost, net of by-product credits

 

3,560

 

0.05

 

 

26,830

 

0.38

 

 

37,661

 

0.28

 

 

68,874

 

0.52

 

Cash sustaining capital expenditures

 

36,612

 

 

0.53

 

 

28,128

 

0.40

 

 

72,097

 

 

0.53

 

 

58,443

 

0.44

 

Capitalized exploration

 

-

 

 

-

 

 

1,090

 

 

0.02

 

 

-

 

 

0.00

 

 

1,995

 

 

0.02

 

Royalties

 

1,785

 

0.03

 

 

2,369

 

0.03

 

 

3,432

 

0.03

 

 

3,738

 

0.03

 

Sustaining cash cost per pound of zinc produced

 

41,957

 

0.61

 

 

58,417

 

0.83

 

 

113,190

 

0.83

 

 

133,051

 

1.01

 



Combined Unit Cost & Zinc Plant Unit Cost Reconciliation

Combined unit cost ("unit cost") and zinc plant unit cost is a non-IFRS measure that management uses as a key performance indicator to assess the performance of our mining and milling operations. Combined unit cost and zinc plant unit cost are calculated by dividing the cost of sales by mill throughput and refined zinc metal produced, respectively. This measure is utilized by management and investors to assess our cost structure and margins and compare it to similar information provided by other companies in our industry. Unlike cash cost, this measure is not impacted by variability in by-product commodity prices since there are no by-product deductions; costs associated with profit-sharing and similar costs are excluded because of their correlation to external metal prices. In addition, the unit costs are reported in the functional currency of the operation which minimizes the impact of foreign currency fluctuations. In all, the unit cost measures provide an alternative perspective on operating cost performance with minimal impact from external market prices. In the first half of 2020, as a result of the temporary suspension of operations in Peru, fixed overhead production costs incurred during the suspension were directly charged to cost of sales. These costs did not contribute to production of inventory and were therefore excluded from the calculation of combined unit costs.

The tables below present a detailed combined unit cost and zinc plant unit costs for the Manitoba business unit and combined unit cost for the Peru business unit, and reconciliations between these measures to the most comparable IFRS measures of cost of sales for the three and six months ended June 30, 2020 and 2019.

Peru

 

Three months ended

 

Six months ended

(in thousands except unit cost per tonne)

 

Jun. 30, 2020

 

Jun. 30, 2019

 

Jun. 30, 2020

 

Jun. 30, 2019

Combined unit cost per tonne processed

 

 

 

 

 

 

 

 

 

 

 

 

 

Mining

 

7,595

 

21,725

 

27,537

 

45,611

Milling

 

18,703

 

42,953

 

52,041

 

77,989

G&A 1

 

7,493

 

14,468

 

16,241

 

26,908

Other G&A 2

 

49

 

 

618

 

 

561

 

 

192

 

Unit cost

 

33,840

 

 

79,764

 

 

96,380

 

 

150,700

 

Tonnes ore milled

 

4,355

 

 

7,680

 

 

11,075

 

 

15,673

 

Combined unit cost per tonne

 

7.77

 

 

10.39

 

 

8.70

 

 

9.62

 

Reconciliation to IFRS:

 

 

 

 

 

 

 

 

Unit cost

 

33,840

 

 

79,764

 

 

96,380

 

 

150,700

 

Freight & other

 

4,817

 

11,765

 

14,603

 

24,519

Other G&A

 

(49)

 

(618)

 

(561)

 

(192)

Share-based compensation expenses

 

49

 

 

(10

)

 

(15

)

 

76

 

Inventory adjustments

 

(8,155

)

 

219

 

 

2,221

 

 

219

 

Change in product inventory

 

(1,916

)

 

1,680

 

 

(2,159

)

 

(5,647

)

Royalties

 

578

 

 

1,851

 

 

2,058

 

 

3,171

 

Overhead costs related to suspension of activities (cash)

 

12,358

 

 

-

 

 

15,810

 

 

-

 

Depreciation and amortization

 

33,152

 

 

55,636

 

 

80,394

 

 

104,953

 

Cost of sales3

 

74,674

 

150,287

 

208,731

 

277,799

1 G&A as per cash cost reconciliation above.

2 Other G&A primarily includes profit sharing costs.

3 As per IFRS financial statements.




Manitoba

 

Three months ended

 

Six months ended

(in thousands except tonnes ore milled and unit cost per tonne)

 

Jun. 30, 2020

 

Jun. 30, 2019

 

Jun. 30, 2020

 

Jun. 30, 2019

Combined unit cost per tonne processed

 

 

 

 

 

 

 

 

 

 

 

 

 

Mining

 

44,820

 

 

51,466

 

 

89,487

 

 

97,112

 

Milling

 

11,466

 

 

11,918

 

 

23,009

 

 

23,755

 

G&A 1

 

11,042

 

 

10,838

 

 

25,126

 

 

23,778

 

Less: G&A allocated to zinc metal production

 

(3,264

)

 

(2,856

)

 

(7,423

)

 

(6,079

)

Unit cost

 

64,064

 

 

71,268

 

 

130,199

 

 

138,468

 

 

 

 

 

 

 

 

 

 

USD/CAD implicit exchange rate

 

1.39

 

 

1.34

 

 

1.37

 

 

1.33

 

Unit cost - C$

 

88,753

 

 

95,342

 

 

178,017

 

 

184,670

 

Tonnes ore milled

 

659,507

 

 

706,633

 

 

1,361,883

 

 

1,317,400

 

Combined unit cost per tonne - C$

 

135

 

 

135

 

 

131

 

 

140

 

Reconciliation to IFRS:

 

 

 

 

 

 

 

 

Unit cost

 

64,064

 

 

71,268

 

 

130,199

 

 

138,468

 

Freight & other

 

7,357

 

 

7,781

 

 

13,766

 

 

13,627

 

Refined (zinc)

 

16,617

 

 

17,213

 

 

35,559

 

 

34,244

 

G&A allocated to zinc metal production

 

3,264

 

 

2,856

 

 

7,423

 

 

6,079

 

Share-based compensation expenses

 

235

 

 

(52

)

 

83

 

 

289

 

Change in product inventory

 

5,916

 

 

(1,107

)

 

2,620

 

 

(10,996

)

Royalties

 

1,785

 

 

2,369

 

 

3,432

 

 

3,738

 

Depreciation and amortization

 

47,655

 

 

35,558

 

 

86,852

 

 

63,372

 

Cost of sales2

 

146,893

 

135,984

 

279,934

 

248,919

1 G&A as per cash cost reconciliation above.

2 As per IFRS financial statements.




Manitoba

 

Three months ended

 

Six months ended

(in thousands except zinc plant unit cost per pound)

 

Jun. 30, 2020

 

Jun. 30, 2019

 

Jun. 30, 2020

 

Jun. 30, 2019

Zinc plant unit cost

 

 

 

 

 

 

 

 

 

 

 

 

 

Zinc plant costs

 

16,617

 

17,213

 

35,559

 

34,244

G&A 1

 

11,042

 

 

10,838

 

 

25,126

 

 

23,778

 

Less: G&A allocated to other areas

 

(7,778

)

 

(7,884

)

 

(17,702

)

 

(17,601

)

Zinc plant unit cost

 

19,881

 

 

20,069

 

 

42,983

 

0

 

40,323

 

 

 

 

 

 

 

 

 

 

USD/CAD implicit exchange rate

 

1.39

 

 

1.34

 

 

1.36

 

 

1.33

 

Zinc plant unit cost - C$

 

27,544

 

 

26,847

 

 

58,454

 

 

53,762

 

Refined metal produced (in pounds)

 

60,704

 

 

60,598

 

 

123,461

 

 

112,890

 

Zinc plant unit cost per pound - C$

 

0.45

 

 

0.44

 

 

0.47

 

 

0.48

 

 

 

 

 

 

 

 

 

 

Reconciliation to IFRS:

 

 

 

 

 

 

 

 

Zinc plant unit cost

 

19,881

 

 

20,069

 

 

42,983

 

 

40,323

 

Freight & other

 

7,357

 

 

7,781

 

 

13,766

 

 

13,627

 

Mining

 

44,820

 

 

51,466

 

 

89,487

 

 

97,112

 

Milling

 

11,466

 

 

11,918

 

 

23,009

 

 

23,755

 

G&A allocated to other areas

 

7,778

 

 

7,884

 

 

17,702

 

 

17,601

 

Share-based compensation expenses

 

235

 

 

(52

)

 

83

 

 

289

 

Change in product inventory

 

5,916

 

 

(1,107

)

 

2,620

 

 

(10,996

)

Royalties

 

1,785

 

 

2,369

 

 

3,432

 

 

3,738

 

Depreciation and amortization

 

47,655

 

 

35,558

 

 

86,852

 

 

63,372

 

Cost of sales2

 

146,893

 

 

135,984

 

 

279,934

 

 

248,919

 

1 G&A as per cash cost reconciliation above.

2 As per IFRS financial statements.

ACCOUNTING CHANGES AND CRITICAL ESTIMATES

New standards and interpretations adopted

For information on new standards and interpretations adopted, refer to note 4 of our June 30, 2020 consolidated interim financial statements.

Estimates and judgements

The preparation of the consolidated interim financial statements in conformity with IFRS requires us to make judgements, estimates and assumptions that affect the application of accounting policies, reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated interim financial statements, and reported amounts of revenue and expenses during the reporting period. Actual results may differ from these estimates.

We review these estimates and underlying assumptions on an ongoing basis based on our experience and other factors, including expectations of future events that we believe to be reasonable under the circumstances. Revisions to accounting estimates are recognized in the period in which the estimates are revised and in any future periods affected. Certain accounting estimates and judgements have been identified as being "critical" to the presentation of our financial condition and results of operations because they require us to make subjective and/or complex judgments about matters that are inherently uncertain; or there is a reasonable likelihood that materially different amounts could be reported under different conditions or using different assumptions and estimates.


For more information on judgements and estimates, refer to note 2 of our June 30, 2020 consolidated interim financial statements.

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

Management is responsible for establishing and maintaining adequate internal control over financial reporting ("ICFR"). ICFR is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with IFRS.

We did not make any changes to ICFR during the three months ended June 30, 2020 that materially affected or are reasonably likely to materially affect our ICFR.

NOTES TO READER

Forward-Looking Information

This MD&A contains forward-looking information within the meaning of applicable Canadian and United States securities legislation. All information contained in this MD&A, other than statements of current and historical fact, is forward-looking information. Often, but not always, forward-looking information can be identified by the use of words such as "plans", "expects", "budget", "guidance", "scheduled", "estimates", "forecasts", "strategy", "target", "intends", "objective", "goal", "understands", "anticipates" and "believes" (and variations of these or similar words) and statements that certain actions, events or results "may", "could", "would", "should", "might" "occur" or "be achieved" or "will be taken" (and variations of these or similar expressions). All of the forward-looking information in this MD&A is qualified by this cautionary note.

Forward-looking information includes, but is not limited to, production, cost and capital and exploration expenditure guidance and potential revisions to such guidance, anticipated production at our mines and processing facilities, expectations regarding the impact of the COVID-19 pandemic on our operations, financial condition and prospects, expectations regarding the closing of the restructured Credit Facilities, expectations regarding the timing of mining activities at the Pampacancha deposit, the anticipated timing, cost and benefits of developing the Rosemont project and the outcome of litigation challenging Rosemont's permits, expectations regarding the Lalor gold strategy, including the refurbishment of the New Britannia mill and the potential of the 1901 deposit, the possibility of converting inferred mineral resource estimates to higher confidence categories, the potential and our anticipated plans for advancing our mining properties surrounding Constancia and the Mason project, anticipated mine plans, anticipated metals prices and the anticipated sensitivity of our financial performance to metals prices, events that may affect our operations and development projects, anticipated cash flows from operations and related liquidity requirements, the anticipated effect of external factors on revenue, such as commodity prices, estimation of mineral reserves and resources, mine life projections, reclamation costs, economic outlook, government regulation of mining operations, and business and acquisition strategies. Forward-looking information is not, and cannot be, a guarantee of future results or events. Forward-looking information is based on, among other things, opinions, assumptions, estimates and analyses that, while considered reasonable by us at the date the forward-looking information is provided, inherently are subject to significant risks, uncertainties, contingencies and other factors that may cause actual results and events to be materially different from those expressed or implied by the forward-looking information.


The material factors or assumptions that we identified and were applied by us in drawing conclusions or making forecasts or projections set out in the forward-looking information include, but are not limited to:

-  our ability to continue to operate safely and at full capacity during the COVID-19 pandemic;

-  no significant interruptions to our operations or significant delays to our development projects in Manitoba and Peru due to the COVID-19 pandemic;

-  the timing of development and production activities on the Pampacancha deposit;

-  the timing of the Consulta Previa and permitting process for mining the Pampacancha deposit;

-  the timing for reaching additional agreements with individual community members and no significant unanticipated delays to the development of Pampacancha;

-  the successful completion of the New Britannia project on budget and on schedule;

-  the successful outcome of the Rosemont litigation;

-  the success of mining, processing, exploration and development activities;

-  the scheduled maintenance and availability of our processing facilities;

-  the accuracy of geological, mining and metallurgical estimates;

-  anticipated metals prices and the costs of production;

-  the supply and demand for metals we produce;

-  the supply and availability of all forms of energy and fuels at reasonable prices;

-  no significant unanticipated operational or technical difficulties;

-  the execution of our business and growth strategies, including the success of our strategic investments and initiatives;

-  the availability of additional financing, if needed;

-  the ability to complete project targets on time and on budget and other events that may affect our ability to develop our projects;

-  the timing and receipt of various regulatory and governmental approvals;

-  the availability of personnel for our exploration, development and operational projects and ongoing employee relations;

-  maintaining good relations with the labour unions that represent certain of our employees in Manitoba and Peru;

-  maintaining good relations with the communities in which we operate, including the neighbouring Indigenous communities;

-  no significant unanticipated challenges with stakeholders at our various projects;

-  no significant unanticipated events or changes relating to regulatory, environmental, health and safety matters;

-  no contests over title to our properties, including as a result of rights or claimed rights of Indigenous peoples or challenges to the validity of our unpatented mining claims;

-  the timing and possible outcome of pending litigation and no significant unanticipated litigation;

-  certain tax matters, including, but not limited to current tax laws and regulations and the refund of certain value added taxes from the Canadian and Peruvian governments; and

-  no significant and continuing adverse changes in general economic conditions or conditions in the financial markets (including commodity prices and foreign exchange rates).

The risks, uncertainties, contingencies and other factors that may cause actual results to differ materially from those expressed or implied by the forward-looking information may include, but are not limited to, risks associated with the COVID-19 pandemic and its effect on our operations, financial condition, projects and prospects, the possibility of a global recession arising from the COVID-19 pandemic and attempts to control it, the political situation in Peru, risks generally associated with the mining industry, such as economic factors (including future commodity prices, currency fluctuations, energy prices and general cost escalation), uncertainties related to the development and operation of our projects (including risks associated with the litigation affecting the Rosemont project), risks related to the U.S. district court's recent decisions to set aside the U.S. Forest Service's FROD and the Biological Opinion for Rosemont and related appeals and other legal challenges, risks related to the new Lalor mine plan, including the schedule for the refurbishment of the New Britannia mill and the ability to convert inferred mineral resource estimates to higher confidence categories, risks related to the schedule for mining the Pampacancha deposit (including risks associated with COVID-19, the Consulta Previa process, risks associated with reaching additional agreements with individual community members and risks associated with the rainy season in Peru and the impact of any schedule delays), dependence on key personnel and employee and union relations, risks related to political or social unrest or change, risks in respect of Indigenous and community relations, rights and title claims, operational risks and hazards, including the cost of maintaining and upgrading the Company's tailings management facilities and any unanticipated environmental, industrial and geological events and developments and the inability to insure against all risks, failure of plant, equipment, processes, transportation and other infrastructure to operate as anticipated, compliance with government and environmental regulations, including permitting requirements and anti-bribery legislation, depletion of our reserves, volatile financial markets that may affect our ability to obtain additional financing on acceptable terms, the failure to obtain required approvals or clearances from government authorities on a timely basis, uncertainties related to the geology, continuity, grade and estimates of mineral reserves and resources, and the potential for variations in grade and recovery rates, uncertain costs of reclamation activities, our ability to comply with our pension and other post-retirement obligations, our ability to abide by the covenants in our debt instruments and other material contracts, tax refunds, hedging transactions, as well as the risks discussed under the heading "Risk Factors" in our most recent Annual Information Form.


Should one or more risk, uncertainty, contingency or other factor materialize or should any factor or assumption prove incorrect, actual results could vary materially from those expressed or implied in the forward-looking information. Accordingly, you should not place undue reliance on forward-looking information. We do not assume any obligation to update or revise any forward-looking information after the date of this MD&A or to explain any material difference between subsequent actual events and any forward-looking information, except as required by applicable law.

Note to United States Investors

This MD&A has been prepared in accordance with the requirements of the securities laws in effect in Canada, which may differ materially from the requirements of United States securities laws applicable to U.S. issuers.

Qualified Person

The technical and scientific information in this MD&A related to the Constancia mine and Rosemont project has been approved by Cashel Meagher, P. Geo, our Senior Vice President and Chief Operating Officer. The technical and scientific information related to our other material mineral projects contained in this MD&A has been approved by Olivier Tavchandjian, P. Geo, our Vice President, Exploration and Geology. Messrs. Meagher and Tavchandjian are qualified persons pursuant to NI 43-101. For a description of the key assumptions, parameters and methods used to estimate mineral reserves and resources at Hudbay's material properties, as well as data verification procedures and a general discussion of the extent to which the estimates of scientific and technical information may be affected by any known environmental, permitting, legal title, taxation, sociopolitical, marketing or other relevant factors, please see the technical reports for our material properties as filed by us on SEDAR at www.sedar.com.  For further information regarding the data verification and quality assurance / quality control procedures used for the estimate of mineral resources at the 1901 deposit, please refer to the procedures used for estimating the mineral resources at the Lalor deposit, as described in the Lalor technical report filed on SEDAR on March 28, 2019.

59


Hudbay Minerals Inc.: Exhibit 99.3 - Filed by newsfilecorp.com

FORM 52-109F2

CERTIFICATION OF INTERIM FILINGS

FULL CERTIFICATE

I, Peter Kukielski, President and Chief Executive Officer of Hudbay Minerals Inc., certify the following:

1. Review: I have reviewed the interim financial report and interim MD&A (together, the “interim filings”) of Hudbay Minerals Inc. (the “issuer”) for the interim period ended June 30, 2020.

2. No misrepresentations: Based on my knowledge, having exercised reasonable diligence, the interim filings do not contain any untrue statement of a material fact or omit to state a material fact required to be stated or that is necessary to make a statement not misleading in light of the circumstances under which it was made, with respect to the period covered by the interim filings.

3. Fair presentation: Based on my knowledge, having exercised reasonable diligence, the interim financial report together with the other financial information included in the interim filings fairly present in all material respects the financial condition, financial performance and cash flows of the issuer, as of the date of and for the periods presented in the interim filings.

4. Responsibility: The issuer’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (DC&P) and internal control over financial reporting (ICFR), as those terms are defined in National Instrument 52-109

Certification of Disclosure in Issuers’ Annual and Interim Filings, for the issuer.

5. Design: Subject to the limitations, if any, described in paragraphs 5.2 and 5.3, the issuer’s other certifying officer(s) and I have, as at the end of the period covered by the interim filings

(a) designed DC&P, or caused it to be designed under our supervision, to provide reasonable assurance that

(i) material information relating to the issuer is made known to us by others, particularly during the period in which the interim filings are being prepared; and

(ii) information required to be disclosed by the issuer in its annual filings, interim filings or other reports filed or submitted by it under securities legislation is recorded, processed, summarized and reported within the time periods specified in securities legislation; and

(b) designed ICFR, or caused it to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with the issuer’s GAAP.

5.1 Control framework: The control framework the issuer’s other certifying officer(s) and I used to design the issuer’s ICFR is the Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

5.2 N/A


5.3 N/A

6. Reporting changes in ICFR: The issuer has disclosed in its interim MD&A any change in the issuer’s ICFR that occurred during the period beginning on April 1, 2020 and ended on June 30, 2020 that has materially affected, or is reasonably likely to materially affect, the issuer’s ICFR.

 

Date: August 11, 2020

(signed) Peter Kukielski

Peter Kukielski

President and Chief Executive Officer


Hudbay Minerals Inc.: Exhibit 99.4 - Filed by newsfilecorp.com

FORM 52-109F2

CERTIFICATION OF INTERIM FILINGS

FULL CERTIFICATE

I, Steve Douglas, Senior Vice President and Chief Financial Officer of Hudbay Minerals Inc., certify the following:

1. Review: I have reviewed the interim financial report and interim MD&A (together, the “interim filings”) of Hudbay Minerals Inc. (the “issuer”) for the interim period ended June 30, 2020.

2. No misrepresentations: Based on my knowledge, having exercised reasonable diligence, the interim filings do not contain any untrue statement of a material fact or omit to state a material fact required to be stated or that is necessary to make a statement not misleading in light of the circumstances under which it was made, with respect to the period covered by the interim filings.

3. Fair presentation: Based on my knowledge, having exercised reasonable diligence, the interim financial report together with the other financial information included in the interim filings fairly present in all material respects the financial condition, financial performance and cash flows of the issuer, as of the date of and for the periods presented in the interim filings.

4. Responsibility: The issuer’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (DC&P) and internal control over financial reporting (ICFR), as those terms are defined in National Instrument 52-109

Certification of Disclosure in Issuers’ Annual and Interim Filings, for the issuer.

5. Design: Subject to the limitations, if any, described in paragraphs 5.2 and 5.3, the issuer’s other certifying officer(s) and I have, as at the end of the period covered by the interim filings

(a) designed DC&P, or caused it to be designed under our supervision, to provide reasonable assurance that

(i) material information relating to the issuer is made known to us by others, particularly during the period in which the interim filings are being prepared; and

(ii) information required to be disclosed by the issuer in its annual filings, interim filings or other reports filed or submitted by it under securities legislation is recorded, processed, summarized and reported within the time periods specified in securities legislation; and

(b) designed ICFR, or caused it to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with the issuer’s GAAP.

5.1 Control framework: The control framework the issuer’s other certifying officer(s) and I used to design the issuer’s ICFR is the Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

5.2 N/A


5.3 N/A

6. Reporting changes in ICFR: The issuer has disclosed in its interim MD&A any change in the issuer’s ICFR that occurred during the period beginning on April 1, 2020 and ended on June 30, 2020 that has materially affected, or is reasonably likely to materially affect, the issuer’s ICFR.

 

Date: August 11, 2020

(signed) Steve Douglas

Steve Douglas

Senior Vice President and Chief Financial Officer


Hudbay Minerals Inc.: Exhibit 99.5 - Filed by newsfilecorp.com

 

Hudbay Announces Second Quarter 2020 Results

Toronto, Ontario, August 11, 2020 - Hudbay Minerals Inc. ("Hudbay" or the "company") (TSX, NYSE:HBM) today released its second quarter 2020 financial results. All amounts are in U.S. dollars, unless otherwise noted.

Second Quarter Results Boosted by Strong Manitoba Operations

On Track to Achieve Manitoba Guidance; Updated Peru Guidance

Executing on Growth Initiatives


TSX, NYSE – HBM
2020 No. 15

   

"We continue to be extremely proud of our team's ability to adapt to the COVID-19 protocols to achieve a safe working environment while remaining focused on delivering strong operational performance," said Peter Kukielski, President and Chief Executive Officer. "Our Manitoba operations continue to impress with record gold production this quarter and a significant increase in revenues over the first quarter. Our Constancia operations in Peru achieved a quick and efficient ramp up in mid-May after having been temporarily suspended due to COVID-19. Now that Constancia is fully operational, we have reissued production and cost guidance for Peru and are continuing to advance Pampacancha, with land clearing activities underway. The New Britannia gold mill refurbishment activities continue on budget and on schedule to increase Lalor's annual gold production to over 150,000 ounces by 2022. We are also pleased to announce an update to the resource estimates for the 1901 deposit which increases the total size of the deposit and demonstrates the gold potential in the Snow Lake camp through significantly increasing the gold content of the base metal zones while adding a new gold-rich zone to the resource estimate."

"We were pleased to further enhance our quarterly financial disclosure through the introduction of adjusted earnings and adjusted EBITDA metrics this quarter," said Steve Douglas, Senior Vice President and Chief Financial Officer. "The strong performance from the Manitoba business this quarter helped offset the reduced contribution from the Peru operations resulting in second quarter adjusted earnings unchanged from first quarter levels, while adjusted EBITDA was only slightly below first quarter levels. Our liquidity remains more than sufficient to pursue our low-risk high-return capital projects, with almost $400 million of cash at the end of the quarter, renewed credit facilities of $400 million and no meaningful debt maturities for two years, coinciding with delivery of our fully-funded growth projects in 2021, which are expected to generate significant free cash flow."

Summary of Second Quarter Results

Consolidated copper production in the second quarter of 2020 was 18,026 tonnes, a 27% decrease from the first quarter of 2020 primarily as a result of the temporary suspension of operations at Constancia until mid-May. Consolidated gold production increased by 7% compared to the first quarter of 2020 due to higher production from Manitoba as a result of higher gold grades and record quarterly gold recoveries at the Stall mill. Consolidated zinc production in the second quarter of 2020 was in line with the first quarter of 2020.

In the second quarter of 2020, consolidated cash cost per pound of copper produced, net of by-product credits, was $0.64, a 47% improvement over the first quarter of 2020. Given the significant reduction in Constancia production in the second quarter, this measure is more heavily impacted by Manitoba production which contains meaningful zinc and gold by-product revenue components, and is not indicative of future consolidated cash costs. Incorporating sustaining capital, capitalized exploration, royalties, selling, administrative and regional costs, consolidated all-in sustaining cash cost per pound of copper produced, net of by-product creditsi, in the second quarter of 2020 was $2.26, which improved from $2.40 in the first quarter of 2020, driven mainly by same factors noted above, and reduced sustaining capital expenditures due to reduced activity from the temporary suspension of operations at Constancia.


TSX, NYSE – HBM
2020 No. 15

   

Cash generated from operating activities in the second quarter of 2020 increased to $31.4 million compared to $9.1 million in the first quarter of 2020. Operating cash flow before change in non-cash working capital was $29.5 million during the second quarter of 2020, reflecting a decrease of $12.5 million compared to the first quarter of 2020. The decrease in operating cash flow is primarily the result of lower Constancia production and sales due to the temporary suspension of mine operations. This decrease was partially offset by higher gold production and sales in Manitoba as well as higher realized gold prices.

Net loss and loss per share in the second quarter of 2020 were $51.9 million and $0.20, respectively, compared to a net loss and loss per share of $76.1 million and $0.29, respectively, in the first quarter of 2020. The increase in earnings quarter-over-quarter was primarily due to higher sales volumes in Manitoba offset by the temporary suspension of Constancia mine operations. In addition, the temporary suspension at Constancia resulted in fixed overhead production costs of $25.6 million during the second quarter, and $31.9 million year-to-date, that would normally be capitalized to inventories and property, plant, and equipment, to be immediately expensed as part of cost of sales. This was partially offset by a $8.2 million reversal of a Peru inventory write-down due to rising copper prices in the second quarter.

After adjusting for the temporary suspension costs in Peru and the reversal of the Peru inventory write-down, among other items, adjusted net lossi and adjusted EBITDAi in the second quarter of 2020 were $39.7 million, or $0.15 per share, and $49.1 million, respectively. This compares to an adjusted net loss and adjusted EBITDA in the first quarter of 2020 of $39.4 million, or $0.15 per share, and $55.0 million, respectively. The higher sales volumes in Manitoba offset the temporary suspension of Constancia resulting in minimal change in the quarter-over-quarter adjusted earnings and a slight decrease in adjusted EBITDA.

On a budgeted sales volume basis, if operations at Constancia were maintained during the eight-weeks in which production was suspended, this would have resulted in approximately $108.0 million of incremental revenue and generated approximately $42.4 million of incremental year-to-date pre-tax earnings, assuming closing second quarter commodity prices. These amounts would have improved the company's current year-to-date reported revenue of $454.0 million and pre-tax loss of $156.1 million.

Financial Condition ($000s)

Jun. 30, 2020

Mar. 31, 2020

Dec. 31, 2019

Cash and cash equivalents

391,136

305,997

396,146

Total long-term debt

988,418

988,074

985,255

Net debt1

597,282

682,077

589,109

Working capital

260,672

193,045

271,284

Total assets

4,498,892

4,366,226

4,461,057

Equity

1,706,303

1,778,277

1,848,123

1 Net debt is a non-IFRS financial performance measure with no standardized definition under IFRS. For further information, please see the "Non-IFRS Financial Reporting Measures" section of this news release.


TSX, NYSE – HBM
2020 No. 15

   

Consolidated Financial Performance

 

Three Months Ended

 

 

Jun. 30, 2020

Mar. 31, 2020

Jun. 30, 2019

Revenue

$000s

208,913

245,105

329,414

Cost of sales

$000s

221,567

267,096

286,271

Earnings (loss) before tax

$000s

(74,604)

(81,452)

(43,931)

Earnings (loss)

$000s

(51,901)

(76,134)

(54,145)

Basic and diluted earnings (loss) per share

$/share

(0.20)

(0.29)

(0.21)

Adjusted earnings (loss) per share1

$/share

(0.15)

(0.15)

(0.03)

Operating cash flow before change in non-cash working capital

$ millions

29.5

42.0

81.3

Adjusted EBITDA1

$ millions

49.1

55.0

95.9

1 Adjusted loss per share and adjusted EBITDA are non-IFRS financial performance measures with no standardized definition under IFRS. For further information, please see the "Non-IFRS Financial Reporting Measures" section of this news release.


Consolidated Operational Performance

 

Three Months Ended

 

 

Jun. 30, 2020

Mar. 31, 2020

Jun. 30, 2019

Contained metal in concentrate produced1

 

 

 

 

Copper

tonnes

18,026

24,635

30,363

Gold

ounces

32,614

30,355

28,099

Silver

ounces

580,817

767,692

811,807

Zinc

tonnes

31,222

30,495

31,838

Molybdenum

tonnes

124

354

334

Precious metals2

ounces

39,140

38,981

39,696

Payable metal in concentrate sold

 

 

 

 

Copper

tonnes

15,951

24,072

33,171

Gold

ounces

30,590

26,574

30,538

Silver

ounces

541,785

575,922

804,301

Zinc3

tonnes

27,604

26,792

24,224

Molybdenum

tonnes

120

431

419

Precious metals2

ounces

36,677

33,045

42,028

Cash cost4

$/lb

0.64

1.21

1.27

All-in sustaining cash cost4

$/lb

2.26

2.40

2.30

1 Metal reported in concentrate is prior to deductions associated with smelter contract terms.

2 Precious metals production includes gold and silver production on a gold-equivalent basis. For 2019, silver is converted to gold at a ratio of 70:1. For 2020, silver is converted to gold at a ratio of 89:1.

3 Includes refined zinc metal sold.

4 Cash cost and all-in sustaining cash cost per pound of copper produced, net of by-product credits, are non-IFRS financial performance measures with no standardized definition under IFRS. For further information, please see the "Non-IFRS Financial Reporting Measures" section of this news release.


TSX, NYSE – HBM
2020 No. 15

   

Peru Operations Review

 

 

Three Months Ended

 

 

Jun. 30, 2020

Mar. 31, 2020

Jun. 30, 2019

Ore mined1

tonnes

2,775,286

6,985,212

8,211,166

Copper

%

0.34

0.34

0.39

Gold

g/tonne

0.04

0.03

0.04

Silver

g/tonne

2.90

3.10

3.68

Molybdenum

%

0.02

0.02

0.01

Ore milled

tonnes

4,355,482

6,719,466

7,679,739

Copper

%

0.34

0.34

0.37

Gold

g/tonne

0.04

0.03

0.04

Silver

g/tonne

3.04

3.13

3.40

Molybdenum

%

0.01

0.02

0.02

Copper recovery

%

76.6

84.3

84.7

Gold recovery

%

43.4

50.2

41.3

Silver recovery

%

59.6

68.2

65.7

Molybdenum recovery

%

19.9

35.0

28.9

Contained metal in concentrate

 

 

 

Copper

tonnes

11,504

19,290

24,232

Gold

ounces

2,311

3,062

3,794

Silver

ounces

253,687

461,302

551,807

Molybdenum

tonnes

124

354

334

Precious metals2

ounces

5,161

8,245

11,677

Payable metal sold

 

 

 

Copper

tonnes

9,023

19,247

25,778

Gold

ounces

1,317

2,618

4,056

Silver

ounces

242,519

361,591

504,259

Molybdenum

tonnes

120

431

419

Combined unit operating cost3,4

$/tonne

7.77

9.31

10.39

Cash cost4

$/lb

1.56

1.63

1.63

Sustaining cash cost4

$/lb

2.09

2.12

2.11

1 Reported tonnes and grade for ore mined are estimates based on mine plan assumptions and may not reconcile fully to ore milled.

2 Precious metals production includes gold and silver production on a gold-equivalent basis. For 2019, silver is converted to gold at a ratio of 70:1. For 2020, silver is converted to gold at a ratio of 89:1.

3 Reflects combined mine, mill and general and administrative ("G&A") costs per tonne of ore milled. Reflects the deduction of expected capitalized stripping costs.

4 Combined unit cost, cash cost and sustaining cash cost are non-IFRS financial performance measures with no standardized definition under IFRS. For further information, please see the "Non-IFRS Financial Reporting Measures" section of this news release.

Following the government mandated mid-March suspension of operations at Constancia, the mine remained closed for approximately eight weeks and resumed operations in mid-May, achieving normal mill throughput levels on May 18, within 48 hours after restart, and continued at these levels for the remainder of the second quarter. The initial six weeks following restart focused on milling activities while processing stockpile ore. This was followed by a ramp-up of mining activities commencing the last week of June with a full ramp-up to normal levels in early July. Enhanced health and safety measures were implemented upon the re-start of operations and remain in place as Hudbay continues to monitor the local impacts of the COVID-19 pandemic.

Peru's updated 2020 production guidance has been revised to reflect the lost production during the eight-week temporary suspension at Constancia, in addition to revised mine plans for the remainder of the year and the resulting deferral of some higher-grade ore into 2021. The updated guidance assumes Hudbay will be able to continue to safely operate for the remainder of the year while adhering to the company's existing health protocols and those required by the Peruvian government. For further information, please see the "Annual Guidance Update" section of this news release.


TSX, NYSE – HBM
2020 No. 15

   

During the quarter, the Constancia mine produced 11,504 tonnes of copper, 5,161 ounces of precious metals and 124 tonnes of molybdenum. Production results were lower than the first quarter of 2020 as a result of the temporary suspension of operations until mid-May and the processing of stockpile ore following the restart of operations.

Ore milled at the Constancia mine during the second quarter of 2020 was 35% lower compared to the first quarter of 2020 primarily due to the temporary suspension of Constancia. However, over the period when the mill was fully operational during the quarter, average daily throughput was above 95,000 tonnes per day. Milled copper grades in the second quarter were flat compared to the first quarter of 2020, but the characteristics of the stockpile ore that was processed negatively impacted copper recoveries.

Combined mine, mill and G&A unit operating costsi in the second quarter of 2020 were 17% lower than the first quarter of 2020, primarily due to lower operating costs as a result of constrained activity during the temporary suspension, and significantly reduced mining costs during the quarter. The company also deferred a second quarter planned plant maintenance shutdown from May to the third quarter, as a result of proactive plant maintenance completed during the eight-week temporary suspension.

Peru's cash cost per pound of copper produced, net of by-product credits, for the three months ended June 30, 2020 was $1.56, lower than the previous quarter due to lower operating costs more than offsetting lower copper production. Peru's sustaining cash costs per pound of copper produced, net of by-product credits, for the three months ended June 30, 2020 also decreased compared to the first quarter primarily as a result of the lower operating costs.


TSX, NYSE – HBM
2020 No. 15

   

Manitoba Operations Review

 

                            Three Months Ended

 

 

 

 

Jun. 30, 2020

Mar. 31, 2020

Jun. 30, 2019

Lalor ore mined

tonnes

 

 

407,408

421,518

411,701

Copper

%

 

 

0.77

0.70

0.73

Zinc

%

 

 

6.05

5.43

6.34

Gold

g/tonne

 

 

2.64

2.27

2.12

Silver

g/tonne

 

 

28.40

26.18

22.32

777 ore mined

tonnes

 

 

281,890

279,925

288,599

Copper

%

 

 

1.72

1.18

1.34

Zinc

%

 

 

4.13

4.11

3.37

Gold

g/tonne

 

 

1.91

1.82

1.60

Silver

g/tonne

 

 

25.73

23.86

18.92

Stall Concentrator:

 

 

 

 

 

Ore milled

tonnes

 

 

334,601

369,787

339,616

Copper

%

 

 

0.76

0.70

0.71

Zinc

%

 

 

6.16

5.38

6.36

Gold

g/tonne

 

 

2.70

2.28

2.08

Silver

g/tonne

 

 

28.72

26.28

22.03

Copper recovery

%

 

 

86.6

86.5

85.6

Zinc recovery

%

 

 

92.4

91.4

91.2

Gold recovery

%

 

 

62.3

60.9

52.5

Silver recovery

%

 

 

62.1

61.1

56.5

Flin Flon Concentrator:

 

 

 

 

 

Ore milled

tonnes

 

 

324,906

332,589

367,017

Copper

%

 

 

1.52

1.11

1.26

Zinc

%

 

 

4.41

4.36

3.84

Gold

g/tonne

 

 

1.99

1.88

1.71

Silver

g/tonne

 

 

25.56

24.33

19.82

Copper recovery

%

 

 

87.3

84.1

88.0

Zinc recovery

%

 

 

84.9

85.0

86.0

Gold recovery

%

 

 

58.6

53.5

61.3

Silver recovery

%

 

 

50.7

44.3

53.0

Total contained metal in concentrate

 

 

 

Copper

tonnes

 

 

6,522

5,345

6,131

Zinc

tonnes

 

 

31,222

30,495

31,838

Gold

ounces

 

 

30,303

27,293

24,305

Silver

ounces

 

 

327,130

306,390

260,000

Precious metals1

ounces

 

 

33,979

30,736

28,019

Total payable metal sold

 

 

 

 

 

Copper

tonnes

 

 

6,928

4,852

7,393

Zinc2

tonnes

 

 

27,604

26,792

24,224

Gold

ounces

 

 

29,273

23,956

26,482

Silver

ounces

 

 

299,266

214,331

300,042

Combined unit operating cost3,4

C$/tonne

 

 

135

127

135

Cash cost4

$/lb

 

 

(1.00)

(0.30)

(0.15)

Sustaining cash cost4

$/lb

 

 

1.67

2.85

2.19



TSX, NYSE – HBM
2020 No. 15

   

1 Precious metals production includes gold and silver production on a gold-equivalent basis. For 2019, silver is converted to gold at a ratio of 70:1. For 2020, silver is converted to gold at a ratio of 89:1.

2 Includes refined zinc metal sold and payable zinc in concentrate sold.

3 Reflects combined mine, mill and G&A costs per tonne of ore milled.

4 Combined unit cost, cash cost and sustaining cash cost are non-IFRS financial performance measures with no standardized definition under IFRS. For further information, please see the "Non-IFRS Financial Reporting Measures" section of this news release.

The Manitoba business unit had solid operating performance across the mines, mills and zinc plant during the second quarter. In response to the COVID-19 pandemic, Hudbay has worked collaboratively with its health and safety committees and the local health units with a focus on keeping employees and communities safe by implementing a number of layered workplace controls. As a result, the second quarter Manitoba operating results were largely unaffected by the COVID-19 pandemic and are on track to achieve annual production and cost guidance.

The Manitoba operations achieved higher quarterly production levels in the second quarter of 2020 compared to the first quarter. Production during the quarter included 31,222 tonnes of zinc, 6,522 tonnes of copper and 33,979 ounces of precious metals. The enhanced precious metal production from Lalor, driven by improved gold and silver grades is a result of prioritizing resources within the higher value portions of the base metal lenses. Development in the gold rich lenses 25 and 27 advanced ahead of schedule, and production from these areas is expected ahead of the New Britannia mill restart as Lalor transitions to a gold mine. Higher 777 ore grades during the second quarter of 2020 were expected and consistent with the mine plan which included the mining of higher-grade copper stopes during the quarter. As a result, grades of all metals increased over first quarter levels.

At the Stall concentrator, ore processed during the second quarter of 2020 was lower than the first quarter as a result of a planned two-week outage on one of the grinding lines for capital upgrades. Gold and silver recoveries continued to increase at Stall during the quarter due to a combination of improved ore characteristics and ongoing operational improvement projects implemented at the Stall mill. These sustained improvements can be seen through the year-over-year increase in gold recovery at Stall from 52.5% to 62.3%. Ore processed in the Flin Flon concentrator in the second quarter slightly decreased by 2% compared to the first quarter. Copper and precious metal recoveries at the Flin Flon concentrator during the second quarter of 2020 increased compared with the first quarter as a result of higher grades.

Combined mine, mill and G&A unit operating costs were slightly higher than the first quarter of 2020 but in line with expected guidance ranges.

Manitoba's cash cost per pound of copper produced, net of by-product credits, for the second quarter of 2020 was negative $1.00. These costs were significantly lower compared to the first quarter of 2020 primarily as a result of lower zinc refining and lower G&A costs, and a 22% increase in copper production quarter-over-quarter. Manitoba's sustaining cash cost per pound of copper produced, net of by-product credits, in the second quarter of 2020 was $1.67, significantly lower than $2.85 in the previous quarter, due to the same factors affecting cash costs.


TSX, NYSE – HBM
2020 No. 15

   

COVID-19 Business Update

Amidst the COVID-19 pandemic, Hudbay's business response plan continued to be executed throughout the quarter, building off the company's crisis response protocols to establish business practices to carry it through this ongoing public health situation. Hudbay remains focused on the health and safety of the workforce, their families and the communities in which the company operates. Addressing pandemic issues is a collective effort and the company continues to actively engage with industry associations to understand developing practices and with local stakeholders and public health authorities to ensure effective implementation of its business response plans. Hudbay closely monitors the evolution of the pandemic in each of the regions in which it operates and is continuously reviewing and adapting procedures based on the latest local situation.

Each of Hudbay's business units has developed effective site-specific measures to identify and limit COVID-19 exposure and transmission and maintain a safe environment for workers and surrounding communities. Site-specific measures include testing of incoming workers prior to their travel to site, pre-screening protocols, quarantine periods for incoming workers, workplace physical distancing protocols, and adjustment of work rotation schedules. These measures continue to evolve as the status of the pandemic changes in each of the company's operating regions and the company's measures are adapted to the regional health authorities' latest restrictions and guidelines.

Hudbay believes the most important way the company can support the communities in which it operates is to manage safe operations that provide income for local employees, businesses, and communities. In addition to efforts to maintain safe operations, the company has been supporting public health efforts and providing COVID-19 relief funding, supplies and services to its neighbouring communities. Each region has different emergency needs at this critical time. In Peru, the company has donated medical equipment and supplies to the regional hospitals and has delivered food to nearby communities in need. In Manitoba, Hudbay has donated to charities that provide various forms of support to families in need.

Annual Guidance Update

On May 14, 2020, Hudbay suspended its previously issued 2020 annual guidance for its Peru operations due to the temporary suspension of operations at Constancia and the ongoing uncertainty surrounding the COVID-19 pandemic. Following a full resumption of Constancia milling activities in mid-May and mining activities in early July, the company has reissued updated 2020 annual guidance for its Peru business unit.

The situation in Peru, however, remains fluid. The state of emergency, first declared by the government in response to the COVID-19 pandemic on March 15, has since been extended to August 31, 2020 and there remains a risk of further disruptions to mining operations. The company is actively monitoring the situation and any potential future impact on Constancia's operations.

The updated annual production and operating cost guidance, along with the annual capital and exploration expenditure forecasts are presented below. These forecasts incorporate the impact of regularly scheduled maintenance at our operations, including semi-annual mill maintenance at Constancia and planned maintenance on the Lalor hoist facilities during the third quarter. The updated Peru guidance assumes the company is able to continue to safely operate for the remainder of the year while adhering to the company's existing health protocols and those required by the Peruvian government. Hudbay's Manitoba guidance remains unchanged from previously disclosed expectations.


TSX, NYSE – HBM
2020 No. 15

   

Revised 2020 Guidance Summary

Peru

Manitoba

Total

 

 

 

 

Contained Metal in Concentrate1

 

 

 

Copper

tonnes

65,000 - 75,000

18,000 - 22,000

83,000 - 97,000

Zinc

tonnes

 

105,000 - 125,000

105,000 - 125,000

Precious metals2

oz

25,000 - 35,000

110,000 - 135,000

135,000 - 170,000

Molybdenum

tonnes

1,100 - 1,300

 

1,100 - 1,300

 

 

 

 

Combined Unit Operating Cost3

$/tonne

$8.30 - $10.00

C$130 - 140

 

 

 

 

 

 

Capital Expenditures4

 

 

 

 

Sustaining capital

millions

80.0

100.0

180.0

Growth capital

millions

70.05

80.0

170.06

 

 

 

 

 

Exploration Expenditures

millions

15.0

10.0

25.07

 

 

 

 

 

1 Metal reported in concentrate is prior to refining losses or deductions associated with smelter terms.

2 Precious metals production includes gold and silver production on a gold-equivalent basis, and silver is converted to gold at a ratio of 89:1.

3 Reflects combined mine, mill and G&A costs per tonne of milled ore. Peru costs reflect the deduction of expected capitalized stripping costs. Combined unit costs are non-IFRS financial performance measures with no standardized definition under IFRS. For further information, please see the discussion under the "Non-IFRS Financial Reporting Measures" section of this news release.

4 Excludes capital costs not considered to be sustaining or growth capital expenditures.

5 Peru growth capital expenditures include costs associated with project development and acquiring the surface rights. Additional costs remain outstanding in recognition of current uses of land and the company is currently entering into agreements to address these matters.

6 Includes $20.0 million of capitalized Arizona spending associated with the Rosemont and Mason projects.

7 Includes $15.0 million of capitalized exploration resulting in total exploration expense of $10.0 million.

The revised production guidance for Peru reflects a reduction of approximately 15,000 to 20,000 tonnes of copper and 20,000 ounces of precious metals compared to the original guidance issued earlier this year, with molybdenum production only modestly affected. This reduction reflects the lost production during the eight-week temporary suspension at Constancia, in addition to revised mine plans for the remainder of the year and the resulting deferral of some higher-grade ore into 2021. The precious metals production guidance also reflects the revised expected Pampacancha production start date of early 2021, compared to the second half of 2020 previously, due to the Peruvian government declared state of emergency and the resulting impact on the Consulta Previa consultation process.

Peru sustaining capital of $80.0 million reflects the deferral of approximately $20.0 million into 2021 due to the resequencing of capital activities, such as tailings and capitalized stripping, as a result of the temporary mine suspension. The revised unit cost guidance in Peru reflects lower mining costs during the gradual ramp-up of mining activities in the second quarter of 2020. There was no change to exploration expenditure guidance. 

Peru growth capital of $70.0 million is unchanged from previous guidance and includes initial expenditures for developing the Pampacancha deposit and acquiring surface rights from the local community, but excludes the costs associated with recognizing the current uses of the land by certain community members. Hudbay has made significant progress with completing individual land-user agreements, with agreements covering approximately two-thirds of the property completed to-date and the remaining agreements expected to be completed during the third quarter of 2020. As of June 30, 2020, approximately one-third of the land has been vacated and turned over to Hudbay. The company intends to update its Peru growth capital guidance for these remaining costs once all of the individual land-user agreements are completed.


TSX, NYSE – HBM
2020 No. 15

   

Credit Facility Amendment

In the second quarter of 2020, in the wake of the COVID-19 pandemic, the company entered into discussions with the syndicate of banks in its revolving credit facilities (the "Credit Facilities") to restructure the facilities in order to provide enhanced flexibility during the development of the New Britannia and Pampacancha projects. Each of the banks in the syndicate has received credit approval to amend the Credit Facilities on the proposed terms and the transaction is expected to close by the end of August.

As a result of the amendment, total available borrowings under the Credit Facilities will be $400.0 million to reflect Hudbay's anticipated business requirements until June 2022 when the Credit Facilities mature. The revised covenants include maintaining a net debt to EBITDA ratio of less than 5.25:1 and an interest coverage ratio of greater than 2.50:1 until the end of 2021.

Snow Lake Development and Exploration Update

New Britannia Refurbishment Activities Underway

The New Britannia refurbishment project remains on schedule and on budget. In May, Hudbay broke ground at the New Britannia site with the start of construction of the foundation for the new copper flotation building. Construction of the pipeline between the New Britannia and Stall mills continues as planned. Detailed engineering is approximately 90% complete and construction activities are approximately 25% complete to-date. Refurbishment activities are on track for completion in August 2021, with plant commissioning and ramp-up expected during the second half of 2021. Through the company's expertise in project development and the advancement of the detailed engineering work, Hudbay has identified the potential to produce gold from the New Britannia mill earlier than expected in 2021. The company is exploring this early gold opportunity and expects to provide an update in the third quarter of 2020.

The company continues with its plan to mine approximately 90,000 tonnes from the gold zone in 2020 as part of stope sequencing in preparation for the restart of the New Britannia gold mill. Gold production from Lalor is expected to be 74,000 ounces in 2020 and 102,000 ounces in 2021, as per the March 30, 2020 mine plan. Upon completion of the New Britannia mill refurbishment, average annual gold production from Lalor is expected to increase to over 150,000 ounces at cash costs and sustaining cash costs, net of by-product credits, of approximately $480 and $655 per ounce, respectively, during the first eight years.

1901 Deposit Updated Resource Estimate

Since its discovery in February 2019, drilling has continued to define the extent and geometry of the 1901 deposit. After announcing an initial inferred resource estimate for the two zinc-rich lenses in August 2019, the focus of the infill drill program conducted during the winter of 2020 was two-fold: to upgrade the classification of a significant portion of the inferred resources reported in August 2019, and to define an initial inferred resource estimate for the gold mineralization that had been intersected around the two zinc-rich lenses.

The 1901 deposit is located half-way between the former Chisel North mine and the Lalor mine, less than 1,000 metres from an active underground ramp at a depth ranging from 550 to 650 metres and within 15 kilometres trucking distance of both the Stall base metal concentrator and the New Britannia gold mill (please see Figure 1 at the end of this news release, which outlines the underground location of the 1901 deposit). The property is 100% owned by Hudbay, free of any royalties or streams. The mineralization is similar to Lalor with zinc-rich volcanogenic massive sulphide lenses containing high-grade gold zones and indication of a copper-gold rich feeder zone. The mineralization occurs along the hanging wall contact of the stratigraphic horizon hosting the Chisel North deposit.


TSX, NYSE – HBM
2020 No. 15

   

The updated resource estimates for the 1901 deposit, as of July 20, 2020, are provided in the table below:

1901 Deposit
Mineral Resource Estimates1,2,3,4,5

 

Tonnes
(millions)

Zn Grade (%)

Au Grade (g/t)

Ag Grade (g/t)

Cu Grade
(%)

Base Metal Zone

 

 

  Measured

 

1.0

6.79

2.2

29.9

0.43

  Indicated

 

1.1

10.07

1.5

32.9

0.30

Total Measured and Indicated

 

2.1

8.52

1.8

31.5

0.36

  Inferred

 

0.4

7.11

1.8

24.4

0.79

Gold Zone

 

 

  Inferred

 

0.5

0.53

6.8

36.0

0.78

1 CIM definitions were followed for the estimation of mineral resources. Mineral resources that are not mineral reserves do not have demonstrated economic viability.

2 Mineral resources are reported within an economic envelope defined by a mineral stope optimization algorithm assuming a selective mining method.

3 Long-term metal prices of $1,500/oz gold, $18.00/oz silver, $3.00/lb copper and $1.09/lb zinc were used for the estimation of the mineral resources.

4 Metal recovery estimates are based on the assumption that the base metal mineralization would be processed at Hudbay's Stall concentrator and would present a similar performance to those experienced historically for the Chisel and Lalor zinc-rich lenses. The gold mineralization is assumed to be processed at the New Britannia concentrator, which is currently being refurbished.

5 Specific gravity measurements using industry standard techniques were completed on all assayed intervals.

High resource conversion - The upgraded base metal measured and indicated resource estimates at the 1901 deposit are equivalent to 100% of the initial tonnage of the 2019 base metal inferred resources reported in Hudbay's most recent Annual Information Form, with a 12% lower zinc grade and more than double the gold grade. While the 2020 infill drilling only covered approximately two-thirds of the footprint of the 2019 mineral resource estimates as shown in Figure 2, it has evidenced a larger zinc-rich resource with significant gold, silver and copper content. There remains an additional 400 thousand tonnes of base metal inferred resource estimates with attractive zinc, copper and gold content which has the potential to be upgraded to higher categories with further drilling.

Significant gold content - The 2020 drilling program was also successful in defining a new gold-rich inferred resource estimate of 500 thousand tonnes at a gold grade of 6.8 grams per tonne. Total gold resources have significantly increased with 122 thousand ounces in measured and indicated and 137 thousand ounces in inferred, compared to a total of 58 thousand inferred ounces previously, which continues to demonstrate the gold potential of the Snow Lake camp.

Conservative resource estimation method - The methodology followed to estimate mineral resources at the 1901 deposit is identical to the approach used for the Lalor mine (please refer to the NI 43-101 Technical Report for Lalor dated March 28, 2019 for more details) and constrains the resource within a stope optimization envelope (please refer to Figure 3 for a 3D view of the mineral resource envelope with economic potential) that is expected to lead to a high mineral resource to mineral reserve conversion factor.

1901 Deposit Exploration Potential

There remains further opportunity to convert additional inferred material to the measured and indicated categories and to extend the resource in the northern and eastern parts of the deposit (please refer to Figure 4). Hudbay expects to complete a drill program in early 2021 with a focus on expanding and upgrading the 1901 resource estimate. The company has also identified additional favourable exploration drill targets located between the 1901 deposit and the Lalor mine that remain to be tested.

In addition, recent drilling has identified several high-grade copper-gold zones that have not been included in the current resource estimate due to limited drilling density. Highlights of these copper-gold intersections are summarized in the table below and outlined in Figure 5:


TSX, NYSE – HBM
2020 No. 15

   

Hole ID

From

To

Intercept

True Width1

Au

Ag

Cu

Zn

(m)

(m)

(m)

(m)

(g/t)

(g/t)

(%)

(%)

CH1925

623.4

626.3

2.9

2.8

6.5

29.1

4.64

1.39

CH1955

655.0

658.0

3.0

2.9

2.4

10.4

2.37

0.02

CH1956

674.0

677.0

3.0

2.9

4.0

41.5

2.17

0.76

CH1979

679.7

685.8

6.0

5.8

4.1

22.3

3.18

0.16

CH1989

696.0

699.0

3.0

2.8

7.5

24.9

3.53

1.10

CH11012

736.0

742.2

6.2

-

0.9

19.9

4.80

0.18

CH12012

657.0

661.0

4.0

-

1.5

7.6

1.22

0.04

CH12032

693.5

695.0

1.5

-

6.1

21.8

5.08

0.06

Note: all grade values are uncut, and assay results are density and length weighted.

1 True width is estimated based on drill angle and intercept geometry of mineralization.

2 Historical drill holes. True widths cannot be estimated at this stage given the uncertainties of the mineralization geometry.

Hole ID

From (m)

To (m)

Azimuth at Intercept

Dip at Intercept

Easting

Northing

Elevation

Easting

Northing

Elevation

CH1925

427,188

6,078,908

-294

427,188

6,078,907

-297

229

-75

CH1955

427,128

6,078,932

-322

427,127

6,078,931

-325

216

-74

CH1956

427,095

6,078,798

-339

427,095

6,078,797

-342

217

-73

CH1979

427,118

6,078,926

-346

427,116

6,078,925

-352

247

-73

CH1989

427,087

6,078,875

-349

427,086

6,078,874

-351

238

-69

CH1101

427,471

6,078,922

-399

427,471

6,078,921

-402

162

-72

CH1201

427,266

6,078,917

-312

427,265

6,078,916

-316

215

-72

CH1203

427,201

6,079,084

-365

427,200

6,079,084

-367

251

-73

Snow Lake Expansion Potential

The updated resource estimate for the 1901 deposit was planned as part of phase three of Hudbay's Snow Lake gold strategy. There remain opportunities for extension and additional conversion of mineral resource estimates at the 1901 deposit and the company is engaged in engineering activities to develop a viable mine plan for the 1901 deposit that could supplement production from Lalor to take advantage of the future processing capacity of Hudbay's mills in the Snow Lake region.

Hudbay is also examining the potential to optimize both the Stall and New Britannia mills, which could create further value for the 1901 deposit and the Snow Lake operations. At the Stall mill, the company is initiating studies to increase gold and copper recoveries. The company will also be completing studies as to the potential to expand the New Britannia mill capacity beyond the currently planned 1,500 tonnes per day. Hudbay expects to complete these studies in the first half of 2021 as the company executes the third phase of its Snow Lake gold strategy.


TSX, NYSE – HBM
2020 No. 15

   

Constancia Regional Exploration

Hudbay's consistent approach to community negotiations has proved successful, demonstrating its strong relationships with the neighbouring communities near Constancia and positioning the company well to unlock future value on its other regional growth targets in Peru. After reaching an exploration agreement with the Quehuincha community in early 2019 and subsequently completing the Consulta Previa process, the company is on track to commence its planned drill program in the fall of 2020 to test a high-grade skarn target on the Quehuincha North property.

The company is also continuing the follow-up drilling program on the previously disclosed Constancia North intersections to test a possible extension of copper porphyry and high-grade skarn mineralization occurring within 300 metres of the edge of the current Constancia pit. The company expects to have the results from this drilling program in the third quarter of 2020.

Appointment of Chief Financial Officer

On June 11, 2020, Steve Douglas was appointed as Hudbay's Senior Vice President and Chief Financial Officer effective June 30, 2020. Mr. Douglas is highly regarded and brings over 25 years of resource industry and senior finance leadership experience to Hudbay's executive team.

Appeal of Unprecedented Rosemont Court Decision

On June 22, 2020, Hudbay announced the filing of its initial brief with the U.S. Court of Appeals for the Ninth Circuit in relation to the U.S. District Court for the District of Arizona's ("District Court") decision in July 2019, which revoked the U.S. Forest Service's ("Forest Service") issuance of the Final Record of Decision ("FROD") for the Rosemont project in Arizona. The filing of the company's brief follows the U.S. federal government's initial brief which was filed on June 15, 2020. The FROD was issued in June 2017 after a thorough process involving 17 co-operating agencies at various levels of government.

The briefs explain how both Hudbay and the government believe that the District Court misinterpreted federal mining laws and Forest Service regulations as they apply to Rosemont. Both briefs assert that current law broadly authorizes mining-related activities, such as ore processing and tailings storage, to be conducted on open Forest Service lands. The District Court's determination that the Forest Service's mining regulations do not apply to mining activities unless those activities are conducted entirely on valid mining claims, and hence above ore bodies, is contrary to plain language reading of the general mining law, as well as Forest Service regulations, which explicitly allow for mining-related activity to occur on lands not covered by any mining claim.

On June 29, 2020, further briefs were filed by industry groups in support of Hudbay and the U.S. government's appeal. These industry groups include the National Mining Association, the American Exploration and Mining Association, and the Southern Arizona Business Coalition.

Dividend Declared

A semi-annual dividend of C$0.01 per share was declared on August 11, 2020. The dividend will be paid on September 25, 2020 to shareholders of record as of September 4, 2020.


TSX, NYSE – HBM
2020 No. 15

   

BlackNorth Initiative

Hudbay's President and Chief Executive Officer, Peter Kukielski, recently joined other senior executives from Canadian public companies in a pledge to take action to end systemic racism and create opportunities for all of those in the underrepresented BIPOC (Black, Indigenous and People of Colour) community. The pledge is part of the BlackNorth Initiative and the recently formed Canadian Council of Business Leaders Against Anti-Black Systemic Racism. The BlackNorth Initiative aligns with Hudbay's values of dignity and respect, caring, openness and trustworthiness that are inherent in its corporate culture and in the company's decision-making and actions. The company's community engagement efforts are focused around creating opportunities for all members of the communities in which it operates. Through the BlackNorth Initiative, Hudbay intends to expand its efforts to help end systemic racism.

Non-IFRS Financial Performance Measures

Hudbay has added adjusted net earnings (loss) and adjusted EBITDA to its non-IFRS financial performance measures this quarter. Adjusted net earnings (loss), adjusted net earnings (loss) per share, adjusted EBITDA, net debt, cash cost, sustaining and all-in sustaining cash cost per pound of copper produced, and combined unit cost are non-IFRS performance measures. These measures do not have a meaning prescribed by IFRS and are therefore unlikely to be comparable to similar measures presented by other issuers. These measures should not be considered in isolation or as a substitute for measures prepared in accordance with IFRS and are not necessarily indicative of operating profit or cash flow from operations as determined under IFRS. Other companies may calculate these measures differently.

Hudbay believes adjusted net earnings (loss) and adjusted net earnings (loss) per share better reflect the company's performance for the current period and are better indications of its expected performance in future periods. These measures are used internally by the company to evaluate the performance of its underlying operations and to assist with its planning and forecasting of future operating results. As such, the company believes these measures are useful to investors in assessing the company's underlying performance. The company provides adjusted EBITDA to help users analyze its results and to provide additional information about the company's ongoing cash generating potential in order to assess its capacity to service and repay debt, carry out investments and cover working capital needs. Net debt is shown because it is a performance measure used by the company to assess its financial position. Cash cost, sustaining and all-in sustaining cash cost per pound of copper produced are shown because the company believes they help investors and management assess the performance of its operations, including the margin generated by the operations and the company. Combined unit cost is shown because the company believes it helps investors and management assess the cost structure and margins that are not impacted by variability in by-product commodity prices.

In the first half of 2020, a government-imposed shutdown of non-essential businesses led to a temporary suspension of the Constancia mining operations. As such, fixed overhead production costs incurred during the suspension were directly charged to cost of sales. These costs did not contribute to production of inventory and were therefore excluded from the calculations of adjusted net earnings (loss), adjusted EBITDA and cash costs.

For further details on these measures, including reconciliations to the most comparable IFRS measures, please refer to page 42 of Hudbay's management's discussion and analysis for the three and six months ended June 30, 2020 available on SEDAR at www.sedar.com.


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Website Links

Hudbay:

www.hudbay.com

Management's Discussion and Analysis:

http://www.hudbayminerals.com/files/doc_financials/2020/Q2/MDA202.pdf

Financial Statements:

http://www.hudbayminerals.com/files/doc_financials/2020/Q2/FS202.pdf

Conference Call and Webcast

Date:               

Wednesday, August 12, 2020

   

Time:               

8:30 a.m. ET

   

Webcast:         

http://services.choruscall.ca/links/hudbay20200730.html

 

Dial in:             

1-416-915-3239 or 1-800-319-4610

Qualified Person

The technical and scientific information in this news release related to the Constancia mine and Rosemont project has been approved by Cashel Meagher, P. Geo, Hudbay's Senior Vice President and Chief Operating Officer. The technical and scientific information related to the company's other material mineral projects contained in this news release has been approved by Olivier Tavchandjian, P. Geo, Hudbay's Vice-President Exploration and Geology. Messrs. Meagher and Tavchandjian are qualified persons pursuant to NI 43-101. For a description of the key assumptions, parameters and methods used to estimate mineral reserves and resources at Hudbay's material properties, as well as data verification procedures and a general discussion of the extent to which the estimates of scientific and technical information may be affected by any known environmental, permitting, legal title, taxation, sociopolitical, marketing or other relevant factors, please see the technical reports for the company's material properties as filed by Hudbay on SEDAR at www.sedar.com. For further information regarding the data verification and quality assurance / quality control procedures used for the estimate of mineral resources at the 1901 deposit, please refer to the procedures used for estimating the mineral resources at the Lalor deposit, as described in the Lalor technical report filed on SEDAR on March 28, 2019.

Forward-Looking Information

This news release contains forward-looking information within the meaning of applicable Canadian and United States securities legislation. All information contained in this news release, other than statements of current and historical fact, is forward-looking information. Often, but not always, forward-looking information can be identified by the use of words such as "plans", "expects", "budget", "guidance", "scheduled", "estimates", "forecasts", "strategy", "target", "intends", "objective", "goal", "understands", "anticipates" and "believes" (and variations of these or similar words) and statements that certain actions, events or results "may", "could", "would", "should", "might" "occur" or "be achieved" or "will be taken" (and variations of these or similar expressions). All of the forward-looking information in this news release is qualified by this cautionary note.


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Forward-looking information includes, but is not limited to, production, cost and capital and exploration expenditure guidance and potential revisions to such guidance, anticipated production at Hudbay's mines and processing facilities, expectations regarding the impact of the COVID-19 pandemic on the company's operations, financial condition and prospects, expectations regarding the closing of the company's restructured credit facilities, expectations regarding the timing of mining activities at the Pampacancha deposit, the anticipated timing, cost and benefits of developing the Rosemont project and the outcome of litigation challenging Rosemont's permits, expectations regarding the Lalor gold strategy, including the refurbishment of the New Britannia mill and the potential of the 1901 deposit, the possibility of converting inferred mineral resource estimates to higher confidence categories, the potential and anticipated plans for advancing the mining properties surrounding Constancia and the Mason project, anticipated mine plans, anticipated metals prices and the anticipated sensitivity of the company's financial performance to metals prices, events that may affect its operations and development projects, anticipated cash flows from operations and related liquidity requirements, the anticipated effect of external factors on revenue, such as commodity prices, estimation of mineral reserves and resources, mine life projections, reclamation costs, economic outlook, government regulation of mining operations, and business and acquisition strategies. Forward-looking information is not, and cannot be, a guarantee of future results or events. Forward-looking information is based on, among other things, opinions, assumptions, estimates and analyses that, while considered reasonable by the company at the date the forward-looking information is provided, inherently are subject to significant risks, uncertainties, contingencies and other factors that may cause actual results and events to be materially different from those expressed or implied by the forward-looking information.

The material factors or assumptions that Hudbay identified and were applied by the company in drawing conclusions or making forecasts or projections set out in the forward-looking information include, but are not limited to:

 the ability to continue to operate safely and at full capacity during the COVID-19 pandemic;

 no significant interruptions to the company's operations or significant delays to its development projects in Manitoba and Peru due to the COVID-19 pandemic;

 the timing of development and production activities on the Pampacancha deposit;

 the timing of the Consulta Previa and permitting process for mining the Pampacancha deposit;

 the timing for reaching additional agreements with individual community members and no significant unanticipated delays to the development of Pampacancha;

 the successful completion of the New Britannia project on budget and on schedule;

 the successful outcome of the Rosemont litigation;

 the success of mining, processing, exploration and development activities;

 the scheduled maintenance and availability of the processing facilities;

 the accuracy of geological, mining and metallurgical estimates;

 anticipated metals prices and the costs of production;

 the supply and demand for metals the company produces;

 the supply and availability of all forms of energy and fuels at reasonable prices;

 no significant unanticipated operational or technical difficulties;

 the execution of the company's business and growth strategies, including the success of its strategic investments and initiatives;

 the availability of the revolving credit facilities and additional financing, if needed;

 the ability to complete project targets on time and on budget and other events that may affect the company's ability to develop its projects;

 the timing and receipt of various regulatory and governmental approvals;

 the availability of personnel for the exploration, development and operational projects and ongoing employee relations;

 maintaining good relations with the labour unions that represent certain of the company's employees in Manitoba and Peru;


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 maintaining good relations with the communities in which the company operates, including the neighbouring Indigenous communities;

 no significant unanticipated challenges with stakeholders at Hudbay's various projects;

 no significant unanticipated events or changes relating to regulatory, environmental, health and safety matters;

 no contests over title to the company's properties, including as a result of rights or claimed rights of Indigenous peoples or challenges to the validity of the company's unpatented mining claims;

 the timing and possible outcome of pending litigation and no significant unanticipated litigation;

 certain tax matters, including, but not limited to current tax laws and regulations and the refund of certain value added taxes from the Canadian and Peruvian governments; and

 no significant and continuing adverse changes in general economic conditions or conditions in the financial markets (including commodity prices and foreign exchange rates).

The risks, uncertainties, contingencies and other factors that may cause actual results to differ materially from those expressed or implied by the forward-looking information may include, but are not limited to, risks associated with the COVID-19 pandemic and its effect on Hudbay's operations, financial condition, projects and prospects, the possibility of a global recession arising from the COVID-19 pandemic and attempts to control it, the state of emergency and political situation in Peru and risks associated with the resumption of operations at Constancia, risks associated with the company's access to capital, including the negative impact of low metal prices on credit facility availability, risks generally associated with the mining industry, such as economic factors (including future commodity prices, currency fluctuations, energy prices and general cost escalation), uncertainties related to the development and operation of the company's projects (including risks associated with the litigation affecting the Rosemont project), risks related to the U.S. district court's recent decisions to set aside the U.S. Forest Service's FROD and the Biological Opinion for Rosemont and related appeals and other legal challenges, risks related to the new Lalor mine plan, including the schedule for the refurbishment of the New Britannia mill and the ability to convert inferred mineral resource estimates to higher confidence categories, risks related to the schedule for mining the Pampacancha deposit (including risks associated with COVID-19, the Consulta Previa process, risks associated with reaching additional agreements with individual community members and risks associated with the rainy season in Peru and the impact of any schedule delays), dependence on key personnel and employee and union relations, risks related to political or social unrest or change, risks in respect of Indigenous and community relations, rights and title claims, operational risks and hazards, including the cost of maintaining and upgrading the company's tailings management facilities and any unanticipated environmental, industrial and geological events and developments and the inability to insure against all risks, failure of plant, equipment, processes, transportation and other infrastructure to operate as anticipated, compliance with government and environmental regulations, including permitting requirements and anti-bribery legislation, depletion of reserves, volatile financial markets that may affect the ability to obtain additional financing on acceptable terms, the failure to obtain required approvals or clearances from government authorities on a timely basis, uncertainties related to the geology, continuity, grade and estimates of mineral reserves and resources, and the potential for variations in grade and recovery rates, uncertain costs of reclamation activities, the company's ability to comply with its pension and other post-retirement obligations, the company's ability to abide by the covenants in its debt instruments and other material contracts, tax refunds, hedging transactions, as well as the risks discussed under the heading "Risk Factors" in the company's most recent Annual Information Form.

Should one or more risk, uncertainty, contingency or other factor materialize or should any factor or assumption prove incorrect, actual results could vary materially from those expressed or implied in the forward-looking information. Accordingly, you should not place undue reliance on forward-looking information. Hudbay does not assume any obligation to update or revise any forward-looking information after the date of this news release or to explain any material difference between subsequent actual events and any forward-looking information, except as required by applicable law.


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Note to United States Investors

This news release has been prepared in accordance with the requirements of the securities laws in effect in Canada, which may differ materially from the requirements of United States securities laws applicable to U.S. issuers.

About Hudbay

Hudbay (TSX, NYSE: HBM) is a diversified mining company primarily producing copper concentrate (containing copper, gold and silver) and zinc metal. Directly and through its subsidiaries, Hudbay owns three polymetallic mines, four ore concentrators and a zinc production facility in northern Manitoba and Saskatchewan (Canada) and Cusco (Peru), and copper projects in Arizona and Nevada (United States). The company's growth strategy is focused on the exploration, development, operation and optimization of properties it already controls, as well as other mineral assets it may acquire that fit its strategic criteria. Hudbay's vision is to be a responsible, top-tier operator of long-life, low-cost mines in the Americas. Hudbay's mission is to create sustainable value through the acquisition, development and operation of high-quality, long-life deposits with exploration potential in jurisdictions that support responsible mining, and to see the regions and communities in which the company operates benefit from its presence. The company is governed by the Canada Business Corporations Act and its shares are listed under the symbol "HBM" on the Toronto Stock Exchange, New York Stock Exchange and Bolsa de Valores de Lima. Further information about Hudbay can be found on www.hudbay.com.

For further information, please contact:

Candace Brûlé

Director, Investor Relations

(416) 814-4387
candace.brule@hudbay.com

Figure 1: 1901 Deposit Underground Location

3D view of resource location versus Lalor and Chisel infrastructures


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Figure 2: 1901 Deposit Lenses

The 2020 infill drilling program has confirmed the presence of both zinc-rich and gold-rich lenses

Figure 3: 1901 Deposit Resource Estimate Stope Optimization Envelope

3D view of the stope optimization envelope with economic potential at the 1901 deposit that was used as part of the conservative resource estimation methodology


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Figure 4: 1901 Deposit Remains Open

Plan view showing mineralization remains open to the north (base metal) and to the east (gold and copper-gold) of the 1901 deposit

Figure 5: 1901 Deposit Cu-Au Intersections

Several high-grade copper-gold zones have been intersected and have not been included in the current resource estimate for the 1901 deposit


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1
 Adjusted net loss and adjusted net loss per share, adjusted EBITDA, net debt, unit operating costs, cash cost, sustaining and all-in sustaining cash cost per pound of copper produced, net of by-product credits, are non-IFRS financial performance measures with no standardized definition under IFRS. For further information, please see the "Non-IFRS Financial Reporting Measures" section of this news release.