Hudbay Minerals (TSX: HBM: NYSE: HBM) swung to a net loss in the first quarter of $27.2 million, or 15¢ per share, compared to a profit of $1.9 million, or 1¢ per share, in the first quarter of 2013, mainly due to a temporary build-up of inventory. The company is poised for stronger financial results in the second half of the year, however, and despite the quarter’s headline numbers, Hudbay reported a number of achievements, particularly in the company’s Manitoba business unit.
Commercial production at the base-metal producer’s 70%-owned Reed mine near Flin Flon got underway in the first quarter — ahead of guidance and $6 million under budget. Initially Hudbay had estimated capital construction costs would run to $72 million, but they came in at $66 million. Reed is the twenty-eighth mine the company has developed in the Flin Flon greenstone belt in its 85-year history.
In the three months ended March 31, Reed averaged 792 tonnes per day, or 60% of its full production tonnage of 1,300 tonnes per day. According to VMS Ventures (TSXV: VMS; US-OTC: VMSTF), which owns 30% of the mine, Reed produced 71,200 tonnes at a 1.92% copper grade and a 2.14% zinc grade from ore development and longhole stope mining. The high-grade copper mine is expected to average 17,000 tonnes of copper production in concentrate a year over a five-year mine life.
“With the achievement of production at Reed in the first quarter we have started 2014 on the right foot,” David Garofalo, the company’s president and CEO, told analysts and investors on a conference call.
First-quarter ore production at Hudbay’s Manitoba business unit was 19% higher than in the first quarter of 2013 as a result of a full quarter of production at Reed and at its Lalor mine, 210 km east of Flin Flon in the Chisel basin.
Hudbay is on budget and schedule to double production rates at its Lalor underground mine once the main shaft is commissioned in July 2014, and double production capacity to 2,700 tonnes per day at its Snow Lake concentrator. Hudbay excavated the production shaft at its wholly owned Lalor mine in the first quarter, and continued underground project development. The company expects to finish surface construction in late 2014 and noted the project recently received its Environment Act licence, which will permit full production via the main shaft.
Lalor is 3 km north of Hudbay’s past-producing Chisel North underground zinc mine, and is the second-largest metal deposit in the Flin Flon greenstone belt, the company says. Hudbay further describes Lalor as the largest pre-development deposit discovered in the Flin Flon–Snow Lake region. The asset has a 20-year mine life.
Meanwhile at its flagship, 100%-owned 777 zinc–copper mine — which has been in commercial production since 2004 and is expected to operate until 2021 — copper-concentrate production rebounded late in the first quarter after Hudbay rehabilitated the mine.
The rehabilitation limited the availability of concentrate for shipping, while extreme cold weather in the quarter also affected rail service from Manitoba. (The company reported that cash flow from operations, net earnings and cash cost per lb. copper were negatively affected by unsold copper, which was 29% of quantity produced in the quarter; and precious metals, at 44% of quantity produced in the quarter.)
The good news is that Hudbay posted lower operating costs per tonne of ore mined at 777 and Lalor. At 777, operating costs per tonne of ore mined in the first quarter were 12% lower than in the same period in 2013, largely because the company cut contractor costs. At Lalor, operating costs per tonne of ore mined improved by the same percentage when compared to the fourth quarter of 2013, after replacing contract workers with permanent employees.
Operating costs per tonne of ore processed at the Flin Flon and Snow Lake concentrators also fell. Due to an increase in production from Reed, operating costs per tonne of ore processed at the Flin Flon concentrator fell 9% year-on-year, while operating costs per tonne of ore processed at the Snow Lake concentrator dropped 20% year-on-year, due to increased ore throughput as the Lalor mine ramped up production.
Outside Manitoba, Hudbay reported that by the end of March it had finished 71% of the construction at its 100%-owned Constancia copper porphyry project in the Andes of southeastern Peru. The mine is on track for first production in the fourth quarter of 2014, with commercial production targeted in the second quarter of 2015. A revised capital-cost estimate has put the price tag for Constancia at US$1.71 billion. As of March 31, Hudbay had spent US$1.2 billion in costs and entered into another US$200 million in commitments.
Garofalo noted on the conference call that the company is on the brink of delivering growth in production, earnings and cash flow in the second half of 2014, as it nears the end of its $2.2-billion effort to build three mines.
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