HudBay Minerals' CEO Discusses Q1 2013 Results - Earnings Call Transcript

May. 4.13 | About: Hudbay Minerals (HBM)

HudBay Minerals Inc. (NYSE:HBM)

Q1 2013 Earnings Call

May 2, 2013 10:00 a.m. ET

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

Alan T. C. Hair B.Sc. - Senior Vice President and Chief Operating Officer

David Bryson - Senior Vice President, and Chief Financial Officer

Analysts

David Charles - Dundee Capital Markets

Ralph Profiti - Credit Suisse

Greg Barnes - TD Securities

Patrick Morton - RBC Capital Markets

Cliff Hale-Sanders - Cormark Securities

Oscar Cabrera - Bank of America Merrill Lynch

Pierre Vaillancourt - Macquarie Capital Markets

Alex Terentieu - Raymond James

John Tumazos - John Tumazos Very Independent Research

George Topping - Stifel Nicolaus

David Charles - Dundee Capital Markets

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the HudBay First Quarter 2013 Results Conference Call. At this time, all participants are in a listen-only mode. Following the presentation we will conduct a question-and-answer session. Instructions will be provided at that time. (Operator Instructions). I would like to remind everyone that this conference is being recorded today May 2, 2013.

I will now like to turn the conference over to Mr. John Vincic, Vice President, Investor Relations and Corporate Communications. Please go ahead, sir.

John Vincic

Thank you, operator. Good morning, and welcome to HudBay’s 2013 first quarter 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 that comments made on today’s call may contain forward-looking information, and this information by its nature is subject to risks and uncertainties and as such, actual results may differ materially from the views expressed today. For further information on these risks and uncertainties, please consult the Company’s relevant filings 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 Garofalo

Thanks, John. Good morning, everyone. Since July 2010 our management team’s primary objective has been to fill our development pipeline with projects that would provide the company growth on a per share basis across all our key metals. As we near the halfway point of 2013, we are well on our way toward achieving that objective. This year our top priority is project execution. We are focused squarely on the construction of three new mines which are expected to provide significant copper, gold and zinc production growth over the next two years as they are brought into production.

After achieving initial production via the ventilation shaft at Lalor in the second quarter of last year, which was accomplished on time and on budget, we achieved another major milestone to the project by delcairing commercial production for the first phase of the project effective April 1, 2013. Initial producton at Lalor starting contiributing to profit at that time.

The development of the Reed copper project is also progressing well. This past March we were able to start hauling waste from underground with haul trucks, which is expected to reduce cycle time and improve the rate of ramp development. The project remains on schedule and we expect initial production by the fourth quarter of 2013.

At Constancia, we completed approximately one quarter of the project’s development and secured the mine fleet with 18 haul trucks with delivery schedule between June and August of 2013 -- next year and our permitting regulatory efforts remain on schedule.

I’ll discuss our project developments in greater detail in a moment, but let me first turn to our financial results for the quarter. Total revenue for the first quarter of 2013 was approximately $120 million, which decreased compared to the same quarter of last year, primarily because of lower sales volume due to the plant closures of Trout Lake and Chisel North mines in 2012 and lower metals prices compared to the first quarter of last year.

Operating cash flow was approximately $12 million, which represented a decrease of $30 million compared to last year, mainly as a result of lower sales volumes, lower realized prices and reduced gold and silver cash receipts within the quarter as a result of the precious metals stream transaction in 2012.

Now that we have achieved commercial production for the first phase of Lalor, we expect to see sequentially improved earnings and cash flow in the second half of 2013 to be followed by more substantial growth in 2014 as the Reed project comes online and we commission the main shaft at Lalor.

Our cash and cash equivalents decreased by approximately $287 million during the quarter of $1.1 billion as at March 31, 2013. This decrease was mainly driven by spending of approximately $201 million in capital expenditures primarily at Lalor and Constancia.

Our first quarter 2013 oil production in Manitoba was 16% lower than the prior year's first quarter due to the planned permanent closures of Trout Lake and Chisel North, partially offset by production at Lalor. Overall mine operating costs per ton were 6% lower than the prior year's quarter with the closure of the higher-cost Trout Lake and Chisel North mines, partially offset by higher operating costs per ton of ore at the 777 mine.

Operating costs per ton of ore at 777 in the first quarter of 2013 were 21% higher, compared to the same period last year, primarily due to increased contractor costs and additional ground support requirements. Additional contractor work was required at 777 in the past two quarters due to issues with equipment availability in the fall of 2012 that reduced operating development rates. Equipment availability has returned to normal levels. Operating development progress is sufficient to support normal mining rates, and contractors are no longer assigned to operating development work. We expect full year unit operating costs at 777 are expected to be in line with guidance of $38 to $42 per ton.

Overall, we had a solid quarter for production and not withstanding some higher than usual operating costs in the quarter. We expect to achieve full year production and unit operating cost guidance.

At Lalor, we’ve invested approximately $338 million of the overall $794 million budget to March 31, 2013 and have entered into an additional $84 million in commitments. During the first quarter, we hoisted 82,000 tons of ore from the ventilation shaft at Lalor at a copper grade of 0.57% and a zinc grade of 9.94%. We’re in the process of completing the final engineering work at Lalor facilities located at the 955 meter level as well as the main pumping installations. We are also preparing for construction of the main intake vent systems and the main substations, which is scheduled to be completed in the fourth quarter of 2013.

Environment Act License application for the new concentrator is expected to be submitted to the Manitoba government this quarter. The new design will incorporate a larger grinding circuit being fed from the surface stockpile. We’ll hoist uncrushed ore up the main production 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 design capacity of 5,400 tons per day to accommodate this large and growing deposit.

Underground project development continues to advance at Lalor. Our focus is to complete the 910 meter shaft station in the second quarter of 2013 and to continue to ramp to the 955 meter level, which we expect to reach by the end of the third quarter of 2013. We are developing ore and waste handling systems as well as the dewatering areas on the 910 and 955 meter levels.

As of April 26, 2013 the main production shaft was sunk to approximately 710 meters or about 72% complete. We expect shaft sinking to be completed in late 2013. Upon completion of the sinking, the installation of the steel sets and guides as well as the head frame changeover will begin. Ore production is expected to transition from the ventilation shaft to the main production shaft by the fourth quarter of 2014, subject to the receipt of required regulatory permits.

At Constancia, our 100% owned development project in Peru, we’ve incurred approximately US$480 million of our US$1.5 billion capital construction budget to March 31, 2013. We have also entered into additional US$534 million in commitments for the project. Having now spent and committed approximately two thirds of our construction budget, we’ve used an estimated one half of the original U.S $157 million contingency amount to date. A large part of the contingency consumed within the area of civil works where we carry the largest percentage contingency of all the major projects’ expenditure items. Our target is for initial production in late 2014 and full production in the second quarter of 2015 remain unchanged.

Approximately one quarter of Constancia development has been completed, in adding to securing the mine fleet with 18 haul trucks scheduled for delivery between June of this year and August of next. Tire procurement is underway with a number of tires purchased and contracts arranged to meet fleet requirements. We expect the arrival of the three hydraulic shovels in August, September of this year and January of next year, respectively, and to begin pre-stripping activities late in 2013.

Civil earth works for the process plant area are approximately 70% complete and remain on schedule. As you can see from the folders on Slide 11 of the Company PowerPoint presentation, the principal foundations for the ball and SAG mills are poured and complete. Forms are being erected for the reclaim tunnels and crusher foundation. While progress on the tailings management facility was affected by the unusually high rainfall in the first quarter, we believe the impact on project schedule is recoverable. Targeted productivity numbers were not seasonally adjusted and we’re already experiencing periods of higher than average productivity now that the rain has abated. We believe with continuous productivity data that by the end of the second quarter we’ll be in a good position to properly predict the earth productivity and the rate of makeup for the schedule for the remainder of the project.

Land access for the power transmission line is being arranged and the negotiation of the power purchase agreement is well advanced. The principal port operator has provided assurances that the concentrate shipments will be accommodated, and HudBay is considering 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. HudBay has delivered new homes to 14 families. An additional 10 homes are in the process of being turned over. The remaining 22 families are scheduled to be relocated later this year.

Permitting and regulatory efforts remain on schedule. The next major permit is the operating permit, which we expect to receive in the normal course upon commissioning of the mine which is scheduled for early 2015.

At our 70% owned Reed copper project, we’ve invested approximately $37 million out of the $72 million capital construction budget to March 31, 2013 and have entered into an additional $13 million in commitments for the project. During the first quarter in 2012, we focused on advancing the underground ramp and sinking the escape and ventilation raises from surface. After completing the first portal development round in October 2012, the underground ramp had advanced approximately 363 meters as of the end of the quarter. In March, we were able to start hauling waste from underground via haul trucks, which is expected to reduce cycle times and improve the rate of ramp development. We expect initial production at Reed by the fourth quarter of 2013 and full production of approximately 1,300 tons of ore per day by the first quarter of 2014.

By closing two higher cost mines, we’re developing three new projects that are lower cost. We’re transitioning towards becoming a company with lower cost and longer life assets. We expect our reduction rates in all of our key mills to increase more appreciably in 2014 before our development projects reach capacity in 2015. At that time production in all of our key mills is expected to increase significantly.

Our strong balance sheet positions us well to help fund our three key growth projects. While we are well positioned to fund our capital program, we’re also in the process of optimizing our balance sheet by arranging additional liquidity, including equipment financing for our $150 million mobile fleet in Constancia and are considering a number of other financing sources who can provide additional financial flexibility. I should add we also have over $50 million in taxes recoverable over the course of 2013 due to Lalor’s new mine status and early recovery of value added tax in Peru.

During the quarter, we announced the increase in our copper equivalent proven and probable reserves measured and indicated resources and inferred resources over the past year by 12%, 115% and 32% respectively. It was the third consecutive years we grew our metal reserves and resources per share. By doing so we’ve been able to provide our shareholders with increasing leverage to commodity exposure on a per share basis.

Much of this growth was attributed to Constancia and the higher grade Pampacancha deposits in Peru. As we continue our Peru exploration program and begin to explore from underground at our Lalor project, we are hopeful we will continue to increase reserves and resources going forward.

Thanks for your time today and we’d be please to take questions. Operator?

Question-and-Answer Session

Operator

Ladies and gentlemen, (operator Instructions) And your first question come from the line of David Charles from Dundee Capital Markets. Please go ahead.

David Charles - Dundee Capital Markets

Maybe if you could, the first question has to do with Constancia. I'm just wondering now that the rain is over, can you give us some color as to the productivity as you entered into the dry season? And maybe as a second part of that, given the little bit of delays that you've had with the tailing facility, can you outline the mitigation plans that you have to overcome those delays going forward?

Alan Hair

Hi David. It’s Alan Hair here. I’ll take that question. I think as we’ve said already that we anticipate the productivity to improve as we get into the dry season, but we want to get a couple of months under our belt before we reforecast. Initial indications are favorable. We’re now working through day and night shifts and based on our current expectation we believe we can still stick to the baseline schedule.

David Charles - Dundee Capital Markets

Could you maybe outline if you have any possibility to mitigate some of the delays by doing other things, let's say?

Alan Hair

Well, as I think Dave said earlier, the productivity numbers are based on annual averages. So obviously we’d expect things to be lowest during the rainy season and we do expect to see or we are starting to see improved productivity already as things start to dry out. As anybody who’s been following the media down in Peru would have that seen that it wasn't abnormally wet, wet season. There was severe flooding reported in Arequipa and Cusco and we don’t anticipate that being seen again over the course of the project. So right now we think we’ve got enough steps in place to gain the cash up and get back on schedule, but we can’t say that absolutely until we’ve actually proven on the ground.

David Charles - Dundee Capital Markets

The second question then maybe for David or David Bryson. Given the drop in gold recently, you were looking to possibly reach out and do another precious metal stream. I'm just wondering, does the drop in the gold price have a big impact on let’s say the cost of capital there or your ability to raise that capital?

David Garofalo

Well, we’re process of having those discussions now. So it would be premature to say, but I would say the market’s certainly become more bifurcated in terms of precious metals streaming opportunities. I think the juniors who don’t have the track record of the permits or the financing are finding it very difficult to track that financing, but established producers I still think are seeing a fairly competitive environment because there’s still quite a bit of capital to allocate from the streaming companies.

David Charles - Dundee Capital Markets

So at this point in time you think that that will go forward, you should be able to execute on that plan?

David Garofalo

Yeah. We’re certainly pursuing that, yes. And I would say we’re in the middle of that process is how I would characterize it, but we hope to have some clarity on that over the course of the next few months.

Operator

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

Ralph Profiti - Credit Suisse

The Las Bambas potential sale is a relatively new topic of discussion in the market. And just wondering the potential for that asset to change hands, how that may affect Constancia timing? Could it on the one side make things easier or on the other side create a regulatory and permitting bottleneck as that drawn out process of potential sale could lead into issues like that? Thank you.

Alan Hair

Hi Ralph. It’s Alan Hair again. I’ll still take that question. To be perfectly honest, we don’t really see much impact say with the sale of Las Bambas. Constancia our capital cost estimates and project delivery approaches was based very much on a standalone. We weren’t relying on any synergies with the extractor. We do still hope potentially to gain some of those synergies, but those would be for the additional benefit of the project. It wouldn’t change anything that we’ve already got budgeted. We’ve already secured space at the port on an interim basis. The one thing that could be impacted by Las Bambas is the expansion of the port in Matarani, but as I say given that we’ve secured interim arrangements at the port that shouldn’t affect us either. And to be honest, I think Las Bambas is far enough advanced because there are no real permitting or regulatory requirements that in any way could reflect back in the Constancia project.

Operator

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

Greg Barnes - TD Securities

Just back to the port issue, Alan. I think David mentioned something about short-term and long-term solutions to meet the project's needs. Are you looking at moving which port you're using to export the concentrate?

Alan Hair

No, far from it. Basically nothing has changed than we’ve advised in previous conference calls. We have an interim arrangement agreed with the port of Matarani involves some double handing. But we’re currently still negotiating commercial terms. I don’t want to talk too much about it. But the costs will certainly be in line with the expectations that we had in our earlier financial models. So to be perfectly frank, we don’t really see the port has been an issue.

Greg Barnes - TD Securities

Just a second follow-up question more on 777. In the news release you mentioned ground support being one of the issues in terms of the higher costs this past quarter. What was that related to?

Alan Hair

Well, maybe in this case you could be getting sick of my voice. I’ll actually hand you over to Brad Lantz to maybe give a bit more color on that.

Brad Lantz

Hi Greg. It’s Brad. Really just a ground supported just some additional shock reading at some of the areas that we had to go back and just do some of the pillar and some of the abutment areas. So again we don’t see that as being something that’s a long term cost, but just has been done over the quarter.

Operator

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

Patrick Morton - RBC Capital Markets

It looks like during the quarter you didn't increase your total spend and allocated for capital at Constancia. Of the 500 some odd million remaining there, what if anything is there that's a key item that you're looking to get done sooner or later?

Alan Hair

Patrick, it’s Alan Hair again. We’re at the stage where we’re in negotiations with finalizing the structural mechanical piping package. That’s going to be one of the big packages to be lit. But mainly we’re well advanced I said we’re over 25% through the project, but well advanced on plant construction and earthworks. So really it’s just selecting the structural mechanical piping packages for the plants is the main things that we’ve got going forward.

Patrick Morton - RBC Capital Markets

And remind me, I might have already missed that, the level of completion of detailed engineering.

Alan Hair

Maybe I’d throw that one over to Cashel. Have you got an up to date number there, Cashel?

Cashel Meagher

Yeah. We’re in and around above 75% right now of up to date final engineering complete.

Patrick Morton - RBC Capital Markets

Final one. The other options for financing that you've talked about in the past like equipment financing or off-take deals, any update on that stuff?

David Bryson

Hey Patrick, it’s David. We’re continuing to move forward on a number of fronts. The equipment financing process is going well and we have a mandate in place for that. We’re continuing to look at a few different options for leveraging the uptake from Constancia into financing opportunities. And I think some of the opportunities with the streaming we talked about earlier on the call. So we still see things going well on a number of fronts for financing.

Operator

Your next question comes from the line of Cliff Hale-Sanders from Cormark Securities. Please go ahead

Cliff Hale-Sanders - Cormark Securities

Most of my questions have been answered, but just one or I guess two dovetailed together on 777. To meet your guidance for the year, relative to what we saw in Q1, what sort of order of magnitude do you realistically expect cost to drop to in terms of Q2, Q3? And obviously also the grade pick up that would be required in the stopeing sequences to meet your annual numbers? If you could give us a little color on that, that'd be useful.

Alan Hair

Hi Cliff. It’s Alan Hair. I think if you want that level of color it might be best to pass it over to Brad to give you some detail there.

Brad Lantz

Hi Cliff. Really I guess with the cost side the contractor had been doing some operating development for us in the first quarter which obviously does increase our operating costs. There’s a side effect of some of the footage we didn’t get in 2012. The contractor now is actually driving the ramp at depth. So we don’t expect to see any real increase in operating costs over the next few quarters as again I think when we looked up the forecast I think we’re in good shape that way. So I’m guessing again our costs will run anywhere from around the 35 to 42 in the next part of the year. Grades, some of the grades -- one of the things just to be aware when we are reporting 777, it is combined with 777 North. 777 North during the quarter was roughly about 8% of our tonnage of which we are mining some obviously lower grade than we would from the 77 ore body. So when we look at the forecast it certainly looks like we’ll be in line with guidance.

David Garofalo

I think the other point I’d add Cliff is just we do typically see seasonality with the operating costs in 777 with higher costs in the first and fourth quarters just given colder weather and heating requirements to come up with that. So I think seeing lower costs in the middle quarters of the year is something that we do have some confidence in.

Operator

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

Oscar Cabrera - Bank of America Merrill Lynch

Just wanted to see if you guys could give us an update on the relocation of the families. I see in your presentation that you said you delivered new homes to 14 families, but how is the overall picture looking and what's the expectation? Are you still expecting to have everyone out of the project boundaries by the end of this year?

Alan Hair

Hi Oscar. This is Alan Hair here. Yes, the target is actually to have the relocation complete by the third quarter of this year. That obviously involves relocating not only homes but the associated agricultural infrastructure and things. So there’s quite a bit of work to be done. Maybe Cashel you could provide a little bit more color?

Cashel Meagher

Yeah. Hi Oscar. We more or less have quite a few of the homes built, about 25 of them now. And so we have like Dave mentioned about 10 more that need to be handed over. There’s always minor observations and reviews with those pending. We have some nine families we’re in ongoing negotiations with. So that’s more or less the criticality is understanding and negotiating those packages from which they need. But as we said third quarter till the end of the year is where we’re pushing our schedule then for relocation. The agricultural area that we’re providing within the new land there. (Inaudible) is going extremely well. We’ve increased the rate of construction there by employing a larger contractor. So we’re making good headway there. So we’ll keep it up to date and it is a critical issue that we’re monitoring and we’re also putting much resources against.

Oscar Cabrera - Bank of America Merrill Lynch

And then if I may just go back to Ralph's question. My understanding is that Las Bambas pipeline to the coast, after obtaining a permit, that was taken back by the government. I just want to hear from you guys if you have found any difficulties at all with the government in terms of permits? It doesn't sound like it, but if you can just provide color around that please?

Alan Hair

Okay Oscar, it’s Alan Hair again. I’d say no far from it that I think as we’ve advised over these calls over the last few quarters. We’ve pretty much received our permits when we anticipated receiving them. So I don’t think that we’d get any real negative comments there at all.

David Garofalo

Oscar, you said that Xstrata -- did you say Xstrata lost its permit for its pipeline?

Oscar Cabrera - Bank of America Merrill Lynch

That's my understanding.

David Garofalo

Maybe Cashel you can provide a little insight. That’s not what we’ve heard at all.

Cashel Meagher

My understanding is Xstrata as part of EIA does have the concentrated pipeline still in it. I believe they’re always looking at the opportunity to optimize that and it is normal course within Peru to do what the EIA modifications because quite often some of these EIA’s are done under feasibility. But some trade off studies aren’t done due to the protracted length sometime of this permitting. And when they do these tradeoff studies sometimes they evaluate other optionality. And one of the optionalities that maybe Xstrata was looking at was ultimately trucking instead of pipeline. I don’t know where that process is right now, but our understanding is they do still retain more or less the pipeline option and they’re working towards maybe some other tradeoff studies. But you’d have to ask them exactly what’s going on.

Oscar Cabrera - Bank of America Merrill Lynch

I know they talked about like a truck every five minutes. That’s helpful, thanks. And then lastly, on capital -- a question on capital allocation. You increased your shareholding in Augusta Resources recently. I just want to hear your thoughts on how you're viewing the dividend payment that is coming with regards to where you are with alternative financing. Can you just outline your priorities in terms of the second half of the year? Are we to expect to see alternatives in financing and therefore the dividend doesn't need to get cut? How are you seeing this, please?

David Garofalo

I just want to say we wouldn’t raise money to pay dividends. Dividends need to be paid out of the current cash flows and clearly the cash flows have diminished year over year for a variety of reasons. We’ve shut down two mines. We’ve seen metal prices drop. We put a precious metals stream on 777. So that’s reduced our ability to pay the dividend. We do intend to declare a dividend in the second half of the year. It will be likely at a reduced level as we said earlier in the year. That’s not news. Irrespective of what the high yield indenture says. So that’s entirely a function of cash flow from operations. When we take stakes in junior companies, we do so with a view of making a long term investment. That comes out of our capital and our balance sheet. And projects like Rosemont are attractive to us. There’s a number of others. We own about a dozen stakes in juniors and this is precisely the time we should be making those long term investments when everybody in the market is exiting those stories. We can pick up some very good assets to help perpetuate our growth profile beyond the construction of Lalor and Constancia.

Operator

Your next question comes from the line of Pierre Vaillancourt from Macquarie. Please go ahead

Pierre Vaillancourt - Macquarie Capital Markets

Not to belabor a point, but I just wanted to maybe get a little more clarity on financing, just dollar amounts roughly. You're talking about the streaming and the equipment loan and other options. Just maybe give us a sense of how much we're talking about here?

David Bryson

To start with the streaming Pierre, when we entered into the silver stream on Constancia, the value of that was just under $300 million for 100% of the silver. When you look at the net present value of the gold, it’s about the same as the silver. So if we were to do say half the gold at Constancia, then all else equal, then you’d imagine proceeds of about half of what was done on the silver stream. Obviously there’s a bunch of factors that are going to go into it, including where the external environment is at. So I don’t think that -- so we won’t speculate much more on that at this stage. On the equipment financing, we’ve got about $150 million to invest in the mobile fleet at Constancia. I think at this point our expectation is that we can raise debt financing for most of that.

There’s probably going to be some degree of haircuts just to ensure that the security package for the window on that is appropriate. But we’re looking at opportunities to maximize the proceeds we’re able to raise from that. And then beyond that in terms of other off take linked opportunities I think there’s a few things that we’re looking at that I’d rather not speculate in terms of what we might be able to do on that front. But I think between gold streaming, equipment financing, some of the working capital opportunities we have. And we’ve said the company’s cash flow that we expect as Reed and Lalor ramp up aren’t included in the sources and uses that we talked about as well.

Pierre Vaillancourt - Macquarie Capital Markets

Okay, that’s helpful. But am I right to assume then that a minimum $300 million is what you're targeting and possibly another amount beyond that up to, I don’t know, maybe 400 or something when you talk about other off-take linked opportunities, does that …

David Bryson

Yeah. That’s certainly in line with what we’re working towards, Pierre.

Pierre Vaillancourt - Macquarie Capital Markets

Okay, that’s great. While I have you there, David, your effective income tax rate 61.2% in the quarter, how does that play out for the rest of the year?

David Bryson

Well I think as we’ve said in the past, when we’re running at a relatively low rate of net income, the effectively non-deductible expenditures that we make in the U.S, Columbia and Chile for the time being Peru all act to increase our effective tax rate. And for the last quarter, this quarter, while we’re in this trough of production and net earnings, we’ll continue to see high effective tax rates as we move towards full production at Lalor and Reed and then certainly as we get to ramp up at Constancia. We should see the effect of tax rates trend back down much closer to the marginal statutory rates that are applicable to our various operations as those non-deductible expenditures start to get dwarfed by the net income generation from the underlying operations.

Pierre Vaillancourt - Macquarie Capital Markets

So based on what you're seeing for the rest of the year, how does that -- just a rough guide, how do you see that playing out?

David Bryson

I think certainly for the balance of this year I’d expect to see the effective tax rate stay well north of 50%, but again it’s going to depend quarter to quarter on the composition of income. But we’d certainly be happy to have an offline chat with you just in terms of better understanding the components of that and how to model that a little more accurately.

Operator

Your next question comes from the line of Alex Terentieu from Raymond James. Please go ahead

Alex Terentieu - Raymond James

I just have one question outstanding on Constancia. I don't recall seeing any exploration update for the project in the news. So can you remind me what your exploration plans are for the project this year and timing on any resource updates?

David Garofalo

That would be a good one for Cashel to handle.

Cashel Meagher

Hi Alex. We did have a budget of about $8 million earmarked for this year, but we began that with the view of drilling with two or three drills. We commandeered in the first quarter some of the drills to go over and do some necessary geotechnical work. So we got a little over 3,000 meters drilled. We were testing at Pampacancha West. We did publish earlier I think some results from there. We did also complete some infill drilling at the Pampacancha pit itself to tighten up the drilling such that we could get more into the measured and more into the indicated. The result of that is we’ve included that for a collection of metallurgical samples and for testing of these metallurgical samples. The resource model itself has been remodeled. I would say that the results of this and the feasibility work and the metallurgical work is due out in the third quarter of this year. As far as the exploration goes, if there's something material we’ve disclosed it. Otherwise it’s due course testing different targets throughout the area. We are getting some good results I would say in Pampacancha West which is about 500 meters of Pampacancha proposed pit. And so that’s ongoing right now. I think I believe we’re down to two drills on site right now, one on geotechnical and one on exploration.

Operator

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

John Tumazos - John Tumazos Very Independent Research

Could you give us an up-to-date on the $0.99 cash cost in the long-term Constancia mine plan? Just reviewing the cost metrics, diesel, exchange rates, byproduct credit prices and whether there are any variations subsequently.

Alan Hair

It’s Alan Hair. That’s quite a lot to cover off there. Maybe Cashel you might want to give us some color?

Cashel Meagher

Yeah. The long range out of the technical report remains static. We haven’t changed the feasibility on the technical report. The only time that would change is with the inclusion of the Pampacancha resource and reserve updates which would come in the third quarter of this year. We’ll refresh the outlook there if there’s a material change in it. But right now all the assumptions and all the derivations to derive that are a part of the technical report and the details are therein. I don’t have them in the back of my head, but the assumed metal price is obviously one of the key factors.

David Garofalo

I think in terms of some of the key inputs, John, diesel, Peruvian diesel prices are relatively stable relative to world oil prices. So we’re not seeing a bunch of variants there certainly in terms of the byproduct credits, mulling prices have been under pressure recently. But they’re not a huge component of revenue mix. The silver is obviously subject to the stream. Gold again it’s there, but not a huge component of the revenue mix for the projects. And then other than that, you get some labor costs and we are seeing some of the other projects in Peru starting to get deferred and put on the table. We are finding it easier to secure labor and hopefully we’ll see a damping of some of the inflationary pressures on labor costs in Peru going forward.

Cashel Meagher

Some of the other variables, John like power; also port costs are in line with our expectations in our feasibility work as well.

Operator

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

George Topping - Stifel Nicolaus

I hope I didn’t miss this, but as part of the financing considerations, have you given any more thought to bringing a partner for Constancia back to the front burner?

David Garofalo

George, that remains one of the options that we’re considering in connection with leveraging the off take from Constancia. But I think we’re -- that’s on the table. Some other options that we’re considering are on the table, but we don’t have anything concrete that we’d want to be able to talk about at this point in time.

George Topping - Stifel Nicolaus

Can you comment whether you've had CAs signed in that regard?

David Garofalo

Yes, a number of them.

George Topping - Stifel Nicolaus

On a brighter note, are you seeing any sign of cost deflation that might give you a benefit on the Lalor construction, the concentrator part?

Alan Hair

Yes George, it’s Alan here. I think it’s fair to say both on Constancia and our Canadian projects that we are starting to see costs abate. Certainly cost pressures are diminishing very notably on the project of human resource and labor front. So we actually think it’s a very good time to be building projects.

George Topping - Stifel Nicolaus

Is it going to be meaningful in the end, do you think or really just a rounding error?

Alan Hair

It’s too early to say, but certainly obviously the big concern for a little while has been on capital costs blowouts and things. So certainly those pressures have eased completely and as you say there might be some room for opportunity now.

George Topping - Stifel Nicolaus

And maybe another one for you, Alan. As the Reed Lake, improving the rate of ramp development, does that bring forward to the start of Q4 or even earlier for first production from Reed Lake?

Alan Hair

Well, really Reed Lake depends on getting all the families in place to move into field production, George. So I think we’re still sticking with the original target of beginning in Q4 there.

George Topping - Stifel Nicolaus

As far as its initial production by the fourth quarter. So it’s and then commercial it looks like in the first quarter.

Alan Hair

Yeah.

Operator

(Operator Instructions). Your next question comes from the line of David Charles from Dundee Capital Markets. Please go ahead.

David Charles - Dundee Capital Markets

Maybe just one final question for me anyway. David Garofalo, you did mention $150 million in recoverable taxes. Can you describe when you think they might come into play in terms of the income statement? Is that something that's out there for the future or is that something that could impact taxes this year?

David Garofalo

Actually it must have been my Italian accent. I said 50, not 150. But I’ll let David Bryson give you a bit more detail of that.

David Bryson

What most of that David there relates to a tax refund that we have coming to us associated with getting the Lalor new mine status. So you might us recall us mentioning that mid last year. And once we file our 2012 tax returns with the Canada Revenue Agency, we should see about a $40 million refund on our 2012 taxes come back to us. It depends on how long it’s going to take them to process that. So currently we’re thinking probably Q4, maybe Q3. But we’ll certainly see that come back. And then we also have an early recovery regime in place for Peruvian value added tax. So those amounts have built up and we’re just getting the paperwork completed so that we can start to recover that on a more timely basis from the Peruvian government. So that amount also makes a smaller contribution, but most of it is the Lalor new mine status which we should see by the end of the year.

Operator

And gentlemen, there are no further questions at this time. I would like to hand the call back to David Garofalo. Please go ahead sir.

David Garofalo

Okay. Thank you very much operator and thank you all for your kind attention today. We’ll talk to you soon.

Operator

Ladies and gentlemen, this concludes the conference call for today. Thank you for participating. Please disconnect your lines.

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