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Executives

John Vincic – Vice President-Investor Relations and Corporate Communications

David A. Garofalo – President and Chief Executive Officer

Cashel Meagher – Vice President-South America Business Unit

Brad W. Lantz – Vice President, Manitoba Business Unit.

Analysts

John Hughes – Desjardins Securities

Alec Kodatsky – CIBC

Ralph Profiti – Credit Suisse

Greg Barnes – TD Securities, LLC

David Charles – Dundee Securities

Matthew Murphy – UBS Financial Services Inc.

George Topping – Stifel Nicolaus & Company, Inc.

Oscar Cabrera – Bank of America/Merrill Lynch

Patrick Morton – RBC Capital Markets

Stephen Bonnyman – BMO Capital Markets

Alex Terentiew – Raymond James Ltd.

John Tumazos – John Tumazos Very Independent Research

HudBay Minerals Inc. (HBMFF.PK) Q4 2012 Earnings Call February 21, 2013 10:00 AM ET

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the HudBay Fourth Quarter 2012 Results Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will be given at that time. (Operator Instructions)

I’d like to remind everyone that this conference is being recorded today. And I’d now like to turn the conference over to Mr. John Vincic, Vice President, Investor Relations and Corporate Communication. Please go ahead, sir.

John Vincic

Thank you, operator. Good morning, and welcome to HudBay’s 2012 fourth quarter and full year results conference call. HudBay’s financial results were issued yesterday, and are available on our website, at www.hudbayminerals.com. A corresponding PowerPoint presentation is also available, and we encourage you to refer to it during this call.

Our presenter today is David Garofalo, HudBay’s President and Chief Executive Officer. Accompanying David for the Q&A portion of the call will be David Bryson, our Senior Vice President, and Chief Financial Officer; Alan Hair, our Senior Vice President and Chief Operating Officer; Cashel Meagher, our Vice President, South American Business Unit; and Brad Lantz, our Vice President, Manitoba Business Unit.

Please note, the comments made on today’s call may contain forward-looking information, and this information by its nature is subject to risks and uncertainties. And as such, actual results may differ materially from the views expressed today.

For further information on these risks and uncertainties, please consult the Company’s relevant filings on SEDAR and EDGAR. These documents are also available on our website.

Lastly, please be reminded that currency amounts discussed on today’s call are all in Canadian dollars, unless we indicate otherwise.

And now, I’ll pass the call over to David Garofalo. Dave?

David A. Garofalo

Thanks, John. Good morning, everyone. For the sixth consecutive year, HudBay met its key production targets, and I want to thank our employees in Northern Manitoba for another excellent year, and a safe one. Our focus in 2013 is to continue the construction of three new mines which are projected to provide significant copper, gold and zinc production growth over the next two years as they are brought into production.

Both Lalor and Constancia are long-life assets with expansion potential as demonstrated by our decision to rescale the Lalor and Constancia by 20% to take advantage of a still growing mineral resource.

Fourth quarter of 2012 was our first full quarter of production from the ventilation shaft at Lalor after beginning initial production there in August 2012. We hoisted 58,000 tons of high grade zinc ore during the quarter, and have hoisted over 72,000 tons of ore since August. The ore grades have been consistent with our expectations as we were mining in zinc-rich zones in early years at Lalor with copper and precious metal credits.

We’ve also completed basic engineering on the new Lalor concentrator, and updated our capital cost estimates and scheduled to allow for a rescheduling of the concentrator since our estimate two years ago. The underground mine component of the project remains on time, and on budget.

The development of our Reed copper project is also progressing well. After completing the first portal development round in October 2012, we advanced the underground ramp approximately 224 meters as of February 20, 2013. The project remains on schedule, and we expect initial production by the fourth quarter of this year.

At Constancia, we continue to make significant progress in many areas including exploration outside of the main Pampacancha deposit. We anticipate this will have a positive impact on the grade, and in the overall mine plan in the new Pampacancha feasibility study, which is currently underway.

Total revenue for the fourth quarter of 2012 was $181 million, which decreased compared to the same quarter last year, primarily because of lower sales volume compared to the fourth quarter of 2011; we drew down on unusually high copper concentrate inventory.

For the full year 2012, revenue was $702.6 million. Operating cash flow was $6 million for the fourth quarter of 2012, which represented a decrease compared with the same period in 2011, mainly as a result of lower sales volume, and reduced gold and silver receipts as a result of the precious metals stream transaction.

Fourth quarter of 2012, and the first half of 2013 are expected to represent the trough in our production and financial results. The fourth quarter was the first full quarter under a steamy agreement with Silver Wheaton, and was the first quarter without production from Trout Lake or Chisel North.

As we move through 2013, and we achieve commercial production from the early works at Lalor, we expect to see improved earnings and cash flow to be followed by more substantial growth in 2014, as the Reed project comes online, and we can commission the main shaft at Lalor.

Our cash and cash equivalents decreased by approximately $162 million during the quarter to $1.3 billion as at December 31, 2012, mainly as a result of capital expenditures of $181 million, which were primarily spent on our growth initiatives.

Not only does our operating team meet its targets year-after-year, but it does so in a safe manner. Often safety has been the hallmark of our company for 85 years. Our lost time accident frequency in 2012 was similar to 2011, a historic low for the company and a 40% reduction in the rate compared to the previous three years.

Our fourth quarter 2012 ore production at our Manitoba Business was 20% lower than the prior year, due to the planned permanent closures of the Trout Lake and Chisel North mines in June 2012, and September 2012, respectively; offset partly by the start of production at Lalor and 777 North, which was completed on-time and on-budget and is now in production.

Overall mine operating costs per ton were 13% lower than the prior year, with a closure of the higher cost Trout Lake and Chisel North mines. Unit operating cost for the 777 mine were slightly higher in the fourth quarter compared to the prior year due to higher than usual costs for maintenance and contractors.

In addition the operating cost per ton of ore processed at the Flin Flon and Snow Lake concentrators increased in the fourth quarter 2012 as a result of reduced feed to the Flin Flon concentrator, and costs associated with the new Snow Lake copper circuit in preparations for the ramp-up of Lalor mine production.

The underground mine portion of the Lalor project remains on time, and on budget, and basic engineering of the new Lalor concentrator is complete. Capital expenditures are expected to be approximately $90 million higher than the original concentrator budget of $263 million, bringing Lalor’s total capital construction budget to $794 million.

As of January 31, 2013, we have invested approximately $326 million of the overall budget, and have entered into an additional $93 million in commitments. Bulk changes and improved estimation from completion of basic engineering account for the increase in capital at the new Lalor concentrator.

The scope changes include a 20% increase in the grinding capacity to 5,400 tons per day to better match potential production shaft capacity, which will have a nameplate design capacity of 6,000 tons per day.

As previously disclosed, the current mine plan contemplates an ore production rate of 4,500 tons per day, the new concentrator design also incorporates a longer construction schedule with concentrators start -up in late 2015.

However, first ore production from the main production shaft is still projected to be on schedule in late 2014, at which time the ore will be processed at the Snow Lake and Flin Flon mills and the small amounts stockpiled for the new concentrator upon its commissioning.

By delaying the concentrator construction and leveraging our existing infrastructure in the Snow Lake area, we expect to reduce construction and schedule risk and also be able to defer capital spending in the concentrator until 2014 and 2015 when we expect to see substantially higher operating cash flow with the completion of the Lalor production shaft, as well as completion of the Constancia projects.

Also, we expect that the new Lalor concentrator will have available capacity to rapidly process any stockpiled ore in 2016. We expect to submit the Environmental Act License application for the new concentrator to the Provincial government in the first half of 2013. The new design will incorporate a larger grinding circuit being fed from the surface stockpile.

We will hoist uncrushed ore up the Lalor shaft to be crushed on surface, and then conveyed to the surface stockpile. The stockpile will feed a SAG mill and ball mill combination that has a design capacity of 5,400 tons per day.

The underground project development has continued to advance and our primary focus is to reach the 910 meter shaft station and continue to ramp down to the 955 meter level.

The main production shaft is now sunk to approximately 525 meters, and it’s 53% complete. We expect shaft sinking to be completed in late 2013. Upon completion of sinking, the installation of the seal sets and guides, as well as the head-frame changeover will begin.

We’re also in the process of completing the final engineering work to load up facilities located at the 955-meter level, as well as completing the main pumping installations. We are preparing for construction of the main intake fan systems and the main substations during 2013.

Let’s turn to Constancia, where full-scale construction of the project has now been underway for more than six months of the 27-month construction schedule. We’ve invested approximately US$351 million of our US$1.5 billion capital construction budget on the project through January 31, 2013. And have entered into an additional US$631 million in commitments for the project.

Site activity to-date includes the completion of a 3,500 bed construction camp. The tailings management facility, haul roads and water diversion infrastructure are under construction.

We expect to complete the access roads for heavy haulage in the second quarter of 2013 and the waste rock facilities in the third quarter of 2013. The project site has sustained a higher than normal amount of rainfall during the current rainy season, which has slowed elements of the project progress to-date. We believe the impact on the project schedule is recoverable, and our targets for initial production and full production remain unchanged. The project’s forecasted final cost remain on budget.

We’ve also begun the Pampacancha feasibility study, and we will incorporate further characterization of geo technical and hydro geological information into the study.

Structural steel delivery schedule to begin in May 2013 in the major steel erection for the plant site is expected to begin in June of 2013. We have secured major long lead items including flotation cells, pumps, regrind mills, SAG mills and crushers, and we expect to begin receiving them in March 2013.

The primary crusher mechanical installation is anticipated in the fourth quarter of this year. We’ve also secured the mine fleet with 793F CAT haul trucks scheduled for delivery starting March of this year. Tire procurement is underway with a number of tires purchased and contracts arranged to meet fleet requirements.

We expect the arrival of three Hitachi EX-5600 hydraulic shovels in June, July and December 2013, respectively and to begin pre-stripping activities in late 2013. In addition, we have executed a contract for the construction of the 70 kilometer power transmission line from the Tintaya substation. We’re finalizing negotiations in the power purchase agreement with long-term pricing expected to be consistent with our original expectations.

The principal port operator has provided further assurances that the concentrate shipments will be accommodated, and it is considering the short-term and long-term solutions to best serve the project’s needs.

The relocation of affected families is underway, and the construction of new housing is in progress. We have delivered new homes to 13 families, and the remaining 22 families are scheduled to be relocated in 2013.

Permitting and regulatory efforts remain on schedule with the approval and receipt of the mining permit in December 2012. This approval falls in normal course with the beneficiation concession that was awarded in June of 2012.

The next major permit is the operating permit, which we expect to receive in a normal course upon commissioning of the mine, which is scheduled for early 2015. We also received approval for the early refund of value-added tax on purchases with retroactive effect to December 2012.

Exploration is on going at Constancia with three diamond drills. One drill is focused on Pampacancha infill drilling, while two others are concentrated on Pampacancha West. A total of 16,593 meters were drilled during 2012.

Our objective for the first quarter of 2013 is to drill Pampacancha West, which includes a group of geophysical anomalies located approximately 500 meters west of the Pampacancha deposit.

New drilling has yielded positive results, including drill hole PO-12-142 which intersected 14 meters at 0.85% copper equivalent starting at 11 meters and almost 28 meters at 0.51% copper equivalent starting at 91 meters.

These intersections indicate that magnetite skarn mineralization exists in this western area and exploration of this area will continue to be a priority to understand if the meaningful resource can be delineated.

We also anticipate that recent drilling will have a positive impact on the grade and tonnage at the main Pampacancha deposit. This will enable us to continue to optimize the mine plan with potential to extend higher grades beyond the first five years of production.

Among recent drilling results, infill drill hole PO-12-134 in the southern portion of the resource intersected to 108 meters at 2.62% copper equivalent starting at a depth of 88 meters.

We plan on drilling 3,000 meters in the first quarter of 2013 targeting extensions to the northwest, and west of the Pampacancha resource, and the Pampacancha west mineralization.

We also yielded interesting results from our 2012 drill program at our other promising exploration target Chilloroya South with the presence of some gold mineralization.

Geological modeling for future exploration considerations is ongoing. The geophysical anomaly immediately west of the Constancia pit was not fully tested. Two drill holes failed to pierce a significant fault structure to properly test the geophysical anomaly.

Some porphyry mineralization was encountered near the fault, and further review is required. The opportunity remains to pierce through the faulted structure using a larger and more powerful drill.

At our 70% owned Reed copper project, we’ve invested approximately $26 million of our $72 million capital construction budget to January 31, 2013, and have entered into an additional $21 million commitments for the project.

During the fourth quarter of 2012, we focused on underground ramp development, and the completion of surface infrastructure. The underground ramp has advanced approximately 224 meters as of February 20, 2013.

In December 2012, we submitted the Environmental Act license application for Reed to the Provincial Government, which will allow for the commencement of full production. The project is on schedule, and we expect initial production at Reed Copper project by the fourth quarter of 2013, and full production of approximately 1,300 tons of ore per day by the first quarter of 2014.

In 2013, our contained copper production is expected to decrease suddenly compared to 2012, while contained zinc production and concentrate is expected to increase over 2012 levels, with precious metals production expected to remain essentially unchanged from 2012 levels.

We expect our production rates in all of our key metals to increase more appreciably in 2014 before development projects reach their full production rates in 2015. At that time, production in all of our key metals is expected to increase significantly with 390% growth in copper, 30% growth in zinc, and 115% growth in precious metals compared to 2012.

Our strong balance sheet positions us well to help fund our three key growth projects, advancing development projects while meeting our corporate objectives and maintaining and growing per-share metrics, continues to drive our strategic decision making.

With that operator, we’ll be happy to take questions.

Question-and-Answer Session

Operator

Thank you. Ladies and gentlemen we will now conduct the question-and-answer session. (Operator Instructions) And your first question today will come from the line of John Hughes of Desjardins Securities. Please go ahead.

John Hughes – Desjardins Securities

Well, thank you, operator. Just a couple of quick ones. One, can you give us an idea just David, on the timing of a potential updated mine plan at Lalor and the Pampacancha feasibility study, what kind of timing we’re look at with that?

David A. Garofalo

Sure. I’ll start with Brad on Lalor’s mine plan.

Brad W. Lantz

Well, good morning John, it’s Brad. Yeah, we’ve got a team right now, John, just organized basically just as we speak almost to look at the mine plan for Lalor. So what we like to do is, leverage that success we’ve had with the underground development to date. We are ahead of schedule with the underground workings.

So I would suspect by fall time, for sure, we should have a look at it. And really what we’re doing is, as we all know 2018 was full production capacity for Lalor. So since we are ahead of schedule, we’re going to take a look and see if we can move that up somewhat, and just see if the daily production rates can be improved a little. So I would suspect by fall time, we should have something we’d be announcing.

John Hughes – Desjardins Securities

I see. And just on the target throughput, are you looking versus the 4,500 now to try to get to say 5,000 type of rate? Is that what you think is reasonable?

Brad W. Lantz

I’m not going to give you a number that we’re look at. But really again the concentrator design was a nominal throughput for 45 with the design throughput at 54. So certainly, the shaft isn’t the bottleneck. So it’s just our ability to again pull that resource down, and the ability to fill. So we are looking though at a number greater than 45, yes.

John Hughes – Desjardins Securities

Okay, great. And so it’s just the timing on the feasibility work at Pampacancha?

David A. Garofalo

Cashel?

Cashel Meagher

Yeah. Hi, John. We’re targeting at Q3 of this year, for that to be complete.

John Hughes – Desjardins Securities

Excellent, okay. And last question, just David, on Constancia, can you provide bit of an update just in terms of – are you still looking for a potential partner on the project? Or is that still in the works given how far into development you are?

David A. Garofalo

The objective was to place our concentrates at the best possible terms and in the course of doing so, a couple of potential up tick partners asked us about the potential of bringing in a financial partner at the project level. We’ll do so if we think the valuation is compelling. Otherwise, we’re happy to continue along the course we are. We feel we’re fully capitalized for what we have planned. So, there is no need to do a joint venture unless we thought the valuation was compelling.

John Hughes – Desjardins Securities

Great. Thank you, David. That’s it from me, operator.

Operator

And your next question will come from the line of Alec Kodatsky of CIBC. Please go ahead.

Alec Kodatsky – CIBC

Thanks, good morning everyone. I have a few questions. Just in terms of – question for Brad. Just in terms of the costs in the quarter, just to pick on one of the operations, but at 777, clearly the mining costs were 49 bucks a ton and then you still got the guidance range for $37 to $42. And just curious on your thoughts on how you’re going to be able to get that down and your comfort level there?

Brad W. Lantz

Alec, in the fourth quarter really, we brought on site a contractor to complete some development depth at 777. Really it’s catching up meters that we didn’t get done in 2012. So that was a one-off issue. Certainly, our costs are always higher due to seasonal issues heating obviously. And we did some equipment maintenance issues that have been dealt with since this time. So, again we don’t see that as the model going forward, for sure.

Alec Kodatsky – CIBC

Okay. And just with respect to the concentrator expansion, why now? As far as contemplating the expansion, is there something that you’ve seen on the exploration side that, that sort of led to this or is it just you’ve got to – I guess the development of the mine plan is ahead of schedule or sort of curious on the rationale for choosing this route right now?

David A. Garofalo

Well, when we started the basic engineering a while back on the project, I told the guys that if there are bottlenecks in the Constancia area, this is the time to address it is during the engineering phase rather than build the thing and then have to redo it.

And so it’s much more capital efficient to build in optionality into your concentrator now as opposed to after you build the project out. So, really it’s the completion of the basic engineering that led us to the decision to go ahead and expand the production rate.

Alec Kodatsky – CIBC

Okay. And then with respect to how everything unfolds subsequent, it’s just pretty much as simple as instead of running the feed through the new Lalor concentrator, or just go to Snow Lake and whatever cost consequences that that will have, is that fair to say?

Brad W. Lantz

Short term, that’s correct, Alec. We’ll continue to run the Snow Lake concentrator of which we put the copper circuit in and we’ll move some of the material also to Flin Flon just to optimize the plant on Flin Flon up to full capacity also.

Alec Kodatsky – CIBC

Okay, great. Thanks very much.

Operator

Your next question will come from the line of Ralph Profiti of Credit Suisse. Please go ahead.

Ralph Profiti – Credit Suisse

Good morning. Thanks for taking my question. David, you talked about further assurances at Constancia with regards to the port agreement. Just wondering if there is language in these assurances that there could be possible recourse or the ability to recoup any losses or forgone revenues if there is a material delay?

And I guess my second question is, what is the risk that sales lags production in the early quarters to a material degree starting in say 2015?

David A. Garofalo

I’ll let Cashel handle that first.

Cashel Meagher

Yeah, hi Ralph. Basically, what it is, is the port we’ve been negotiating with has a planned expansion to accommodate some of the large projects that are underway in Peru at the moment, namely Cerro Verde and Las Bambas, that large expansion requires obviously those projects to come on time and to be able to go forward.

The port itself is undergoing its EIA review now and they believe that there will be – I think it’s about Q3, 2015 ready for that port expansion, which is known as peer asset no matter any port.

What we’ve been doing is discussing what is the best method in that interim period for Hudbay to accommodate its earlier production knowing that the current port is more or less thought to be at capacity. We’ve been working closely with the port authorities and we’re finalizing the plans for that. But what I can say is, is that there is a secondary methodology of material handling. It will cost nominally more than what we had planned.

But like I said, for a short period until the full port expansion is complete. So, the port has committed to accommodate us. We’ll have a little more of an operating charge, of course, for that extra material handling. What it is, is essentially using a different warehouse in transporting to the actual shipping warehouse when required.

So if, indeed, the port expansion is delayed, we will probably have to suffer a little higher operating cost on the transport of concentrate, but we will still be assured of transport -- concentrate transport.

Ralph Profiti – Credit Suisse

Are you in a position to quantify that potential impact?

Cashel Meagher

No. Not at the moment. We’re just in the midst of negotiations now. So, with that underway, we don’t have a firm commitment yet on pricing.

Ralph Profiti – Credit Suisse

Got it. Okay. Thank you. And maybe one for you, David, you know, the CapEx plans that have sort of shifted around over the next three years, they seem to be coming in line in terms of spending in years in which you’re going to have more cash flow from operations. So, I guess it begs the question, how are you thinking about your funding management over the next three years?

David Stewart Bryson

Hey Ralph, it’s David Bryson. I think certainly pushing some of the Lalor CapEx out into 2014 and 2015, I think leaves us in a situation where from a sources and uses basis, you know, the additional CapEx that we were investing in the Lalor concentrator is something that really has no impact on our net external funding requirement.

So, we continue to feel quite comfortable in terms of where we’re at on funding. We’re continuing to look at a variety of sort of optimizations around our balance sheet potential equipment leasing, some of the other things that have been discussed. But you know, we’re generally feeling good about our position right now. You know, sort of with the updated Lalor spending curve and with Constancia on track. And so we’re not feeling like we need to rush into anything on a financing basis.

Ralph Profiti – Credit Suisse

Great. That’s it from me. Thanks very much.

Operator

Your next question will come from the line of Greg Barnes of TD Securities. Please go ahead.

Greg Barnes – TD Securities, LLC

Cashel, can you talk about the rain impact on Constancia during Q1 and how far it did put you behind?

Cashel Meagher

Sure, it actually – it is more December. There were about – probably 50% increase in the amount of rain as what was seen over the previous five years. What it did is it impacted the number of good productivity days, of course, we had. And also it impacted some of the reworking. You can – just like a baseball game or a tennis game when it gets rained out we have to over some of the engineered filling and placement material. We have to pull large tarps back and forth over. So there was an impact.

What does it mean against the baseline of our original study and schedule? Well, the way the original schedule was baseline was based on average productivity from our contractors who are well accustomed to working in this year and during these rainy seasons. Mind you, this rainy season has been, we’ve had more rainfalls than other rainy seasons and more intensive rainfall.

What we don’t know is exactly what our productivity increase will be during the dry season. So, we believe, we’ll be in a better position to trend recovery on schedule in June or July. But what can be said is right now, we forecast probably to be behind a couple of months, but we also believe that there is capacity in the dry season to recover that with more efficient use of night shift, and also from the protracted periods we’ve had of little rain, we’ve experienced much higher than the average forecasted recovery or productivity numbers of late. So, we’re optimistic that we’ll recover much of that schedule. But we’ll be in a better position to know, I believe in June or July when we sustain sort of a protracted period of dry season productivity.

Greg Barnes – TD Securities, LLC

Okay, great. Thanks, Cashel. I guess to David Bryson on the dividend situation. Can you just give us a little more clarity on where you stand with potentially having to cut the dividend or not and what measures you could take to avoid doing that?

David A. Garofalo

Sure, Greg. We flagged in our MD&A that we could have some technical issues with our high-yield indenture relative to some of the covenants and there on dividends and restricted payments. I think, it’s worth saying that you know, philosophically, we remain committed to the dividend that we think that it makes sense financially to have, sort of a regular return of – sort of cash flow and income to shareholders that we would want to maintain a dividend over time.

As we sort of look out into 2013 and sort of EBITDA and our earnings generation, it’s possible that the covenants that we have right now could sort of, limit our ability to maintain the dividend at the current level. I think it’s sort of a bit early to speculate in terms of sort of where it might go to if there is a requirement to change the dividend. We are looking at alternatives, including potentially going and approaching the note holders for revisions to the covenants given that I think the company’s ability to sustain the dividend and sort of insure a strong balance sheet isn’t the issue.

It’s more of a technical covenant issue. And I think, sort of regardless, as we look out to the completion of Lalor and Constancia, and getting cash flow and earnings from those projects through 2014 and 2015, our intention would be to grow the dividend in line with growth and free cash flow and ultimately get to a point where our dividend is higher than current levels once that is supported by results financially from the businesses that we’re running at this point in time. So, but it is an issue that we’re going to be addressing over the next quarter or two.

Greg Barnes – TD Securities, LLC

Okay. Thanks, David. I guess the second question, you also noted obviously, you are comfortable with the funding position, but I guess things could change in terms of metal prices or CapEx overruns and you could look at additional sources of funds like streaming transactions or possibly this off-take agreement, how would you rank those options and what you would do in that situation?

David S. Bryson

I’m a bit hesitant because sort of it really depends on the terms that are available, you know to take sort of a joint venture as an example, obviously, sort of the valuation that’s implied in that is pretty critical to you know sort of our views on whether that’s sort of a good strategic move longer-term. I think $100 million to $150 million of equipment leasing is pretty low-hanging fruit, just leveraging the mobile equipment that we’re procuring for Constancia.

That’s sort of one enhancement that we should be able to do quite readily, you know, sort of in the front end of this year. Beyond that, I think we’re going to weigh a variety of alternatives and we don’t sort of have sort of a priority list and that okay, we’ll do this one first and then we’ll do that one and then we’ll do that one. We are going to be pursuing a few options and considering options sort of as they arise. And as Dave said, as we work to finalize the off-take arrangements for Constancia over the course of 2013, continuing to monitor opportunities to leverage that off-take into financing opportunities if they present themselves.

Greg Barnes – TD Securities, LLC

Is it fair to say that additional streaming transactions is not something you would really want to do?

David A. Garofalo

Well, certainly not on Lalor. But there is a gold component at Constancia that we could consider at some point, that’s a lever we could pull it, because it’s a very relatively insignificant component of economics of that project.

Greg Barnes – TD Securities, LLC

Sure.

David A. Garofalo

But it could raise some serious capital. But right now, there is no urgency. We’re sitting on $1.3 billion in cash

Greg Barnes – TD Securities, LLC

Yeah.

David A. Garofalo

We have another 250 to draw on the Silver Wheaton deal now. So, we are well capitalized. It’s really all about driving down our cost of capital and we’ll do so opportunistically.

Greg Barnes – TD Securities, LLC

Yeah, good. Okay. Thanks, Dave.

David S. Bryson

Thanks.

Operator

Your next question will come from the line of David Charles of Dundee Securities. Please go ahead.

David Charles – Dundee Securities

Yes, maybe David or somebody, just a quick question, is there any critical parts that being affected by the rain at Constancia. I’m just wondering if there is any issues that might take you a little bit longer to resolve there?

David A. Garofalo

Cashel?

Cashel Meagher

Yeah. Hi, David. Like I mentioned to Greg earlier, basically we believe there is capacity within the schedule to catch up on some of the earthworks. That is where it would be is – the critical path with the earthworks is the tailings facility and it being ready to receive tailings from the plant.

The plant site itself and the earthworks there haven’t sustained any schedule slip and is on schedule. So, it is simply the earthworks involved with the preparation of the tailings stamp and like I said, we believe we’ll have the resources, the extra resources and the capacity to catch up, but we’ll be in a better position to trend that in June or July.

Operator

Your next question will come from the line of Matt Murphy of UBS. Please go ahead.

Matthew Murphy – UBS Financial Services Inc.

Hi. Just wondering if the new Lalor CapEx estimates still has contingency in it and how much has been used up to date?

Brad W. Lantz

Matt, it’s Brad. Yes, it does have contingency. It is in just a little over 17%. So, still, in Lalors of the day, it’s 52 million.

Matthew Murphy – UBS Financial Services Inc.

Okay, thanks. And then just on Snow Lake, recoveries were a bit lower than guidance. Just wondering, you know, with a few more months under your belt, on the copper portion, how it’s working?

Brad W. Lantz

Certainly, we’ve got a little more time under our belt and it is improving. One of the things that we have found out – we have developed largely the zinc plants from the hanging wall, which has a higher grade zinc component and a much lower copper component.

So, as we start to develop some more towards the footwall, we’re seeing the copperhead grade improve and stabilize a little in the mill. Certainly again, metallurgically reagent use has improved. So, we’re seeing some better results and expect to just keep working away at it Matt as we gain experience with treating this material.

Matthew Murphy – UBS Financial Services Inc.

Okay. Thanks a lot.

Operator

Your next question will come from the line of George Topping of Stifel. Please go ahead.

George Topping – Stifel Nicolaus & Company, Inc.

Yes, hello, everyone. Dave or Brad, could you give us an indication of the change in the Lalor of concentrator. What does it mean for ore production and metal production for 2014 and 2015, how will it change?

Brad W. Lantz

It won’t really change. It’s Brad, George. It won’t change 2013, 2014. 2015, again what it will do for us is we will take some material over in the Flin Flon plant. So we’re going to process some of the Lalor material as we start to hoist up from the main production shaft. And as we mentioned, we’ll stockpile some of that material, which will be fed back through the new concentrator either late 2015 or early 2016.

So, won’t change much of the metal production until later on. We are having a group though again, George, look at the mine plan to see just how we can best optimize that and take advantage of, again, the success we’ve had in that underground development. So, I think we can move ahead some of this production, I’ll say in the 2015, 2016 and 2017 years of the mine plan.

George Topping – Stifel Nicolaus & Company, Inc.

Are you in a stage where you can give us a rough idea of what tonnage you’re expecting to pull from the shaft in 2015?

Brad W. Lantz

Again, I would only be speculating at this point because again, as the group is starting to work on this, just as we speak, I kind of indicated on an earlier caller that by its fall time, we should have a detailed plan that we should be able to roll out, George.

George Topping – Stifel Nicolaus & Company, Inc.

All right, great. And then just one for Cashel was down at Constancia with the remaining 23 families, are there any sign of holdouts or NGO activities?

Cashel Meagher

No sign – sorry, George. No sign of NGO activity. We have – these 13 homes turned over to date. And we have 12 additional homes or relocation packages being completed. So, there are 12 extra under construction. The remaining families, the negotiations are on-going. The full intent is recognized.

There is different details they want to look at. So, it is going a little longer than we hoped. There was a new development though. We recently got finalization of our water balance and the available water on site. And the previous estimate in the feasibility study was somewhat conservative. We actually have a surplus of water now and we have to redesign some of our sediment control drainage ditches and water balancing issues.

So, with that, we’re actually evaluating the possibility of when and how the water impoundment area known as the (inaudible) dam needs to be built in the schedule. We were to start this dry season, which would have been around April or May this year with the thought that we would have that built to impound water for the start-up of the plant. But now, we believe there is an opportunity to review the water balance and see if that is actually needed for the start-up of the plant.

The other use of that water reservoir was as to – it was to increase the base flows from their current status for the local community to utilize, and that was one of the environmental assessment commitments and it was also one of the requirements the community wanted.

So, there is actually some incentive for the local community to aid in the relocation of these few families remaining. So, we’re working all those angles. But we are sort of optimistic right now that the relocation and the current schedule we’re maintaining against won’t be impacted with these sort of protracted negotiations as they’re going out. But what I can say is we haven’t had any sort of NGO impact on our negotiations.

George Topping – Stifel Nicolaus & Company, Inc.

Okay. Good. Then, just finally, in broad terms, Cashel, cost pressure is down in Peru, particularly in labor. Any sign of that ameliorating or lessening with the permitting delays that other companies have had or is it still rampant?

Cashel Meagher

The labor availability itself is – we’ve seen some easing up of that. I think though any easing up we would see in labor costs are being offset by exchange rate now. So, I wouldn’t say there is any relief on the cost front, but we have seen some relief and we have been getting more resumes and so have our contractors.

With that being said, even with some of the delays at the major projects, there are certainly other major projects that are ongoing like Cerro Verde within our region and Las Bambas that are still creating pressure on our labor force. But, so far, our contractors and ourselves have been able to manage with that.

George Topping – Stifel Nicolaus & Company, Inc.

All right. Good. Thank you.

Operator

Your next question comes from the line of Oscar Cabrera of Bank of America/Merrill Lynch. Please go ahead.

Oscar Cabrera – Bank of America/Merrill Lynch

Thanks, operator. Good morning, everyone. So, I just wanted to come back to the question about the covenants. And you know, I believe the one that its sticking point right now is the consolidated debt to EBITDA. Are there any other covenants that would prevent you from continuing your dividend policy?

David S. Bryson

David S. Bryson

Oscar, it’s David Bryson. There is a few different avenues under the high yield indenture to sustain the dividend. And you know, there’s some sort of complexity to it. And I wouldn’t want to sort of – kind of get into sort of an extended discussion of that. But, that ratio is something that conditions the – a particular provision that permits the maintenance of the dividend to current levels.

There are other covenants or provisions in the restricted payments covenant that permit the payment of dividends and again, you know we’re working through those in terms of different avenues for the maintenance of the dividend. But there isn’t sort of any one specific other bright line test that I could point to in order to sort of help provide guidance on that.

Oscar Cabrera – Bank of America/Merrill Lynch

Okay. It’s fair enough. But in terms of consolidated debt, will equipment financing qualify as debt?

David S. Bryson

I think it depends on how the transaction is structured. But it could well be included in indebtedness for that purpose.

Cashel Meagher

Okay. Thank you. And the other thing, you know you outlined your strategy in the MD&A and I think, you know I commend you for that because that’s a real focus for investors right now. After listening to the questions that you’re getting and the fact that you talk about, acquisitions that could be accretive to your NAV and non-transformational mergers, what type of assets are you looking at, can you discuss or give us a sense in terms of geographies or type of acquisitions that you would consider.

David A. Garofalo

Yeah, sure, Oscar. It really hasn’t changed in the two and a half years I’ve been here geographically or geologically. We’re very much focused on about six or seven investment grade countries in the Americas. And we’re focused on porphyry’s and VMS deposits.

And at the stage of development, we are looking really at projects in the pre-feasibility or conceptual stage. We certainly don’t need another construction ready project today, but we will need one in 2015 and we’re looking to tuck something and hopefully in the next year or so that we can work through engineering and optimization over the next couple of years, so we can indeed make an investment case to our Board in 2015 once Lalor and Constancia are built out. So, we are more likely to tuck in an early stage development project we hope in the next little while to perpetuate the growth beyond 2015.

Oscar Cabrera – Bank of America/Merrill Lynch

Okay. Thanks David. That’s helpful. And then lastly just a clarification. In your guidance for 2013, Constancia had a cap expenditure of about $900 million and then the MD&A from yesterday, it’s quoted at $961 million. So I was just wondering what the change was.

David A. Garofalo

Cashel?

Cashel Meagher

Yes. Oscar, basically what it was, is we under-spent some of our CapEx we had assigned to 2012. And so we’ve moved that forward. A lot of that -- a lot of those items are procurement items or procurement package items. And we hadn’t closed off many of those contracts in 2012, so they’ve moved forward simply to 2013 and we’ve added those to the 2013 expected expenditures.

Oscar Cabrera – Bank of America/Merrill Lynch

Great. Thanks very much.

Operator

Your next question will come from the line of Patrick Morton of RBC. Please go ahead.

Patrick Morton – RBC Capital Markets

Hi, guys. Absent getting some relief on the covenant, what type of cut are we talking about? Completely eliminating that dividend or a trim of some sort?

David A. Garofalo

No. That’s not our intention. Our intention is to maintain a dividend. I couldn’t tell you the number off the top of my head. That mean we would have to look at the numbers of the day and what’s available under the existing pots. There are a number of pots, David referred to within the covenant structure of that bond indenture that we can pay dividends. And so if we did cut the dividend, it would be very much a temporary phenomenon because our cash flow increases quite significantly next year with Reed in full year production, Lalor having a fairly good year as well, still up the ventilation shaft. So we are going to be in a much better position to start increasing again in 2014. And our intention and it’s our firm philosophy that we want to increase the dividend as our cash flow increases. And I wouldn’t be adverse to tying it to free cash flow in the future.

Patrick Morton – RBC Capital Markets

Great, thanks. And then on the cost structure at Lalor, given that one-year delay with the concentrator isn’t it safe to say that 2015 now, the cost structure is going to increase substantially? Because of the processing cost?

Brad W. Lantz

We have pushed out the CapEx, Patrick. It’s Brad. So again, the spending in the MDA I think reflects the new – the additional 90 million CapEx in the project, so it certainly does push it out and it will change the OpEx also. We’ll probably be available to see that change when we create our new mine plan by the fall time.

Patrick Morton – RBC Capital Markets

Thanks. And then finally, the power supply agreement. I don’t believe we discussed it on the call. I might have missed it. For Constancia, it seems like that thing has been imminent for awhile. Has there been a delay? And if so, give some color on that?

Brad W. Lantz

Sure, Patrick. Basically what it is we’re in a position here where it is one of the benefits to the delay of many of the projects, a lot of the power suppliers here have had projects in the works to meet the demand in mining.

With that being said and our project still moving ahead and some of the others not, we find ourselves in a buyer’s market. We’re actually negotiating with four power providers and we’ve been able to leverage things out of the market that we would not have thought we were able to.

So that’s what we’re doing is because it is a buyer’s market, we’re insisting on better deals from the power suppliers and we’re just continuing the negotiations as long as we keep getting benefit from it. But I would say we’re narrowing it down now on the negotiations and sort of – that’s the story with it.

Patrick Morton – RBC Capital Markets

Great, thanks, guys.

Operator

Your next question will come from the line of Steve Bonnyman of BMO Capital Markets. Please go ahead.

Stephen Bonnyman – BMO Capital Markets

Yeah, thank you very much. Just two follow-ups. I guess, first on the impact of the delay at Constancia. Is the contract there one volumetric so that, in fact, these delays don’t result in cost overruns? Or is that being picked up in the buffer in the Cap Ex?

David A. Garofalo

If there is an extension to the schedule and we don’t increase our productivity, yeah, it would be – it would come out of contingency. The contract itself for the major earthworks is the unit price and its not a volume.

Stephen Bonnyman – BMO Capital Markets

Okay. And second question, with regard to the Lalor expansion, you’ve now scaled the mill up 20%. Can I assume the fee handling into the mill and all of that has been done with it? And what would be the rough CapEx to, in fact, expand the back-half of the mill now to match what you’ve got in grinding capacity? And why, in fact, not do that now as well?

David A. Garofalo

That’s certainly going to be looked at, Steve. Well, the front-end capacity, obviously I think Dave had mentioned, the shaft has got a design capacity of 6,000 tons per day at an 85% availability. The crushing plant will more than handle an increased feed over 4,500 tons per day, we didn’t want to bottleneck that.

Absolutely grinding capacity is up 20%. So we’ve increased the horsepower by 10% on the motors and both SAG mill and ball mill were increased in size. So most definitely, we’re going to take a look at the back end and more or less. I guess, the critical one would be the tailings line pumps. So we definitely want to look at that.

Stephen Bonnyman – BMO Capital Markets

But the back end of the plant at this point is still designed to run at 4,500.

David A. Garofalo

Yes, it is. It has – the whole plant has a safety factor and safety factor, I’ll say, an over-design capacity. In most cases when you design these at a nominal throughput, there always is an upside on everything. So we just want to review that again with the design consultant.

Stephen Bonnyman – BMO Capital Markets

On the back of the envelope basis, could you throw us a rough number as to what it might cost to bring the back end of the plant up, flotation, thickeners, drilling, pumping, things like that?

David A. Garofalo

I could not – I couldn’t even speculate right now.

Stephen Bonnyman – BMO Capital Markets

Fair enough. Thank you very much.

Operator

(Operator Instructions) Your next question will come from the line of Alex Terentiew of Raymond James. Please go ahead.

Alex Terentiew – Raymond James Ltd.

Hi. Good morning, guys. I just wanted to circle back quickly to the Constancia and the relocation of the family. Does their presence on-site impact your ability to continue development or put it another way, if it does, at what point in time does their presence on-site impact your ability to continue with your schedule?

David A. Garofalo

Basically, right now, we’ve been able to re-sequence works such that there’s been little to no impact. Like I was mentioning earlier with the realization of the new data and the water balance and the excess water there, we’re re-evaluating what would be the drop-dead date for required relocation. But right now, the pressure is off.

As I said before, the previous thought is it would have been sort of an April, May, sort of timeframe. But believe now we can extend that. We just haven’t worked through the whole schedule to know exactly what that date is. Nevertheless, it’s in everybody’s interest to have the relocation done as soon as possible.

Alex Terentiew – Raymond James Ltd.

So you mean you schedule is showing and you expect to have the rest of the families moved in 2013. I mean leaves it open 12 months of the year. Are you confident that that will happen sooner in the year than later? Or just trying to get a bit of color there?

David A. Garofalo

It is sort of a fluid situation. I would like it to happen sooner than later. It’s one of the more difficult and one of the riskier items when constructing mines in Peru as you would see from the disclosure of many of the other projects being constructed here. So we continue to work at it. Certainly our goal is sooner than later but as I said, we believe there’s some capacity within the schedule, sort of to draw it out a little longer, if required.

Alex Terentiew – Raymond James Ltd.

Okay. Next question, just on Pampacancha – of drilling update. A few guys that are still doing quite a bit at Pampacancha and Pampacancha west. I’m just trying to get a sense of how much is step or versus infield and just trying to sense – get a sense of how much bigger this deposit can grow. Obviously the grade is the copper equivalent grade is quite a bit better than the Constancia main. So can you help me out on that?

David A. Garofalo

The original resource of Pampacancha is somewhere around 80 million tons of which we used in the last mine plant 50 million tons of it. We’ve been stepping out somewhere to the west and to the northwest, somewhere between 50 to 150 meters with some of these holes. The infill holes are obviously required for mine planning purposes to really identify and reduce the risk on the optimization such as we know we’re sequencing the pit correctly to bring the high grade forward.

So, we are stepping out on the main Pampacancha pit itself. So, I would say if we were at 50 million tons before and we had 80 million tons in resource, then obviously we can move up the reserve by utilizing some of that resource, and then have the capacity with some of the step out holes there, too. So I expect it to be somewhere in between there.

However, we don’t know what we have yet at Pampacancha West and we’ll know better throughout the year as we continue to drill there. I can’t even speculate what’s there yet. We’ve just begun our exploration efforts. We see that there is a magnetite scarring much like Pampacancha. And so we’ll just continue to drill there and see what type of meaningful resource there is there, and because of its proximity to Pampacancha, we hope in the future that it would become part of the Pampacancha sort of operation.

Alex Terentiew – Raymond James Ltd.

Okay, great. Thanks.

Operator

Your next question will come from the line of John Tumazos of John Tumazos Very Independent Research. Please go ahead.

John Tumazos – John Tumazos Very Independent Research

In the early part of the call, the Q&A, the speakers other than the two David’s weren’t using microphones and were inaudible. Could you repeat the answers of remaining contingency at Lalor and Constancia, please?

Brad W. Lantz

This is Brad. John, at Lalor, there’s contingency of 17.3% and I said 52 million in dollars.

John Tumazos – John Tumazos Very Independent Research

At the concentrator?

Brad W. Lantz

At the concentrator, correct. At the mine, speaking of that, David, I think we do have contingency left at the mines as again we’re holding that back. That’s been unallocated at this point.

John Tumazos – John Tumazos Very Independent Research

And at Constancia, have the rains eaten that up?

Brad W. Lantz

With Constancia, we actually didn’t answer that question. So, that question is first asked. Its about 50% utilized right now.

John Tumazos – John Tumazos Very Independent Research

In dollars how much is that 50%?

David S. Bryson

The original was $US157 million.

John Tumazos – John Tumazos Very Independent Research

So you have about 80 left?

David S. Bryson

Yeah.

John Tumazos – John Tumazos Very Independent Research

Thank you.

Operator

And Mr. Garofalo, there are no further questions at this time. Please continue.

David A. Garofalo

Okay. Well, thanks for your kind attention today. If you have any other questions, please feel free to call us.

Operator

Excellent, thank you. Ladies and gentlemen, this does conclude the conference call for today. We thank you for your participation and you may now disconnect your lines.

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