HudBay Minerals' CEO Discusses Q2 2013 Results - Earnings Call Transcript

| About: Hudbay Minerals (HBM)

HudBay Minerals Inc Ord Shs (NYSE:HBM)

Q2 2013 Earnings Conference Call

August 1, 2013 10:00 AM ET

Executives

David A. Garofalo – President and Chief Executive Officer

David S. Bryson – Senior Vice President and Chief Financial Officer

Alan T. C. Hair – Senior Vice President and Chief Operating Officer

Cashel Meagher – Vice President, South America Business Unit

Brad W. Lantz – Vice President, Manitoba Business Unit

Analysts

Orest Wowkodaw – Scotiabank

Brett Levy – Jefferies & Company

David Charles – Dundee Capital Markets

Oscar Cabrera – Bank of America Merrill Lynch

George Topping – Stifel Nicolaus

Matt Murphy – UBS

Alex Terentieu – Raymond James

Patrick Morton – RBC Capital Markets

Zach Zonir – GMP Securities

John Hughes – De Jardin Securities

Alex Kaduski – CIBC

Operator

Welcome to the HudBay’s Second Quarter 2013 Results Conference Call. At this time, all lines are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session and instructions will be provided at that time. (Operator Instructions) I would like to remind everyone that this conference is being recorded today, Thursday, August 1, 2013.

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

John Vincic

Thank you, operator. Good morning and welcome to HudBay’s 2013 second 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 the following, 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 CEDAR 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’d like to pass the call over to David Garofalo. Dave?

David Garofalo

Thanks John. Good morning everyone. HudBay delivered another safe and productive quarter from our existing operations in Northern Manitoba. In particular, unit cost at 777 settled to historic levels in the second quarter on strong ore production and less contractor activity in operations. Also, Lalor delivered strong ore production grades in the first quarter and its first quarter commercial production.

Lalor unit costs are expected to improve over the balance of 2013 as we achieve steady state production up at temporary hoist in the ventilation rates. We believe this puts us in a good position to achieve annual operating targets for the seventh consecutive year. Both the new Reed mine and main production shaft at Lalor are nearing completion on time and on budget, putting us in a position to deliver meaningful growth in 2014 from Manitoba operations for the first time, since the start up of 777, 10 years ago.

With the construction of the Constancia project in Peru now we are 40% complete and detailed engineering now 90% complete, we believe we have made significant progress in all three of our development projects. However we are disappointed by capital cost increase of approximately 15% at Constancia and we have taken decisive steps to refocus our spending priorities by identifying opportunities to defer approximately one-half of this potential capital increase to Constancia into the production phase by resequencing some non-critical path components of the development plan.

Deferring approximately CAD325 million for the construction of the new Lalor concentrator, by doubling the capacity at the Snow Lake plant for CAD9 million to accommodate ore from the new Lalor shaft by the middle of 2014. And reducing and deferring CAD100 million of discretionary expenditures through the end of 2014 including reductions in dividends and exploration and deferring sustaining capital expenditures. As part of our spending reductions, our Board declared a semi annual dividend of $0.01 per common share payable in September down from the previous level of $0.10 per share.

We expect to be able to maintain this new annual semi dividend, sorry this new semiannual dividend level through the completion of our major capital projects at which time we will reconsider the dividend rate in light of the additional cash flow expected from our new mines.

Project highlights during the second quarter include commercial production for the first phase of the Lalor project, which was declared on April 1, since then underground project development has progressed very well as we completed the 910-meter level for mining and a load-up facility at the 955 meter levels.

The main production shaft has now reached 882 meters in depth and is 90% complete. The Lalor mine project remains on time and on budget. The advancement of the underground ramp at Reed is also progressing well, the project remains on schedule and on budget and we expect initial production by the fourth quarter of 2013.

At Constancia we have now completed 90% of the detailed engineering, more than 40% of the construction and have secured the mine fleet of 18 haul trucks scheduled for delivery between August 2013 and August of next year with some trucks having already arrived in Peru.

I will discuss the development projects in greater detail in a moment but first let me turn to a financial results for the quarter. Total revenue for the second quarter of 2013 was approximately CAD131 million, which decreased compared to the same quarter of last year primarily because of lower sales volumes due to the planned permanent closures of Trout Lake and Chisel North mines last year and lower metals prices compared to the second quarter of 2012.

Operating cash flow for stream deposit and change in non-cash working capital is approximately negative CAD11 million which represented a decrease of approximately CAD77 million compared to last year mainly as a result of lower sales volumes due to the mine closures, low realized prices and reduced gold and silver cash receipts as a result of the Precious Metals Stream transaction that was entered into last August with Silver Wheaton.

During the second quarter 2013, we recorded a loss of CAD52.7 million compared to a loss of CAD29.6 million for the second quarter 2012. The higher loss was a result of lower revenues, partially offset by lower cost of sales including reduced pension expense and lower tax expense.

Non-cash items impacting earnings in the second quarter included a foreign currency translation loss of CAD26.9 million mainly due to the effect of depreciation of the value of the proven (inaudible) we have been holding as a hedge against project cost and deferred tax charges CAD16.2 million due to foreign currency translation of approving tax basis.

With our first quarter commercial production for the first phase of Lalor behind us, we expect to see improved earnings in cash 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, expand milling capacity, the Snow Lake concentrator in the second half of 2014.

Our second quarter 2013 ore production at our Manitoba business unit was 11% lower than the prior second quarter due to the planned permanent closures at of Trout Lake and Chisel North, partially offset by production at Lalor.

Overall, mine operating costs per ton were 17% higher than the prior year’s quarter due to the higher cost initial production from Lalor mine and increased cost of 777 Mine which include higher cost production from 777 North expansion.

777 mine unit cost returned to recent historical levels due to strong ore production and lower contractor cost and operations when compared to the first quarter of 2013. Our full year production in operating cost guidance remains unchanged. At our 100% on Lalor project Northern Manitoba we’ve invested approximately CAD365 million of the overall CAD794 million capital budget to June 30, 2013.

And I’ve entered into an additional CAD63 million in commitments as I mentioned earlier, we intend to invest CAD9 million at the existing Snow Lake concentrator, refurbish existing equipment and facilities to double production capacity to approximately 2700 tons per day.

This investment is expected to enable the deferral with the construction of the new Lalor concentrator and the planned expenditure of approximately CAD325 million at the overall CAD794 million Lalor capital cost.

The increase in production capacity at Snow Lake is expected to be completed by Mid 2014, when the production shaft at Lalor is being commissioned. Together with our Flin Flon plant, we believe we will have sufficient processing capacity for all of Lalor’s planned mine production until the end of 2016, when we expect to have the new Lalor concentrator online.

During the quarter we submitted permit applications for the new concentrator to the Manitoba and Federal governments. We intend to continue the engineering and optimization work for the new concentrator. Initial production Lalor continues to meet our expectations as we hoisted nearly 107,000 tons of ore from the ventilation shaft at Lalor has increased at 10.34% the copper grades of 0.83% during the quarter.

Underground project development continued in the second quarter with the completion of the 910 meter level and loader facility at the 955 meter level. We began work on the number one ore path and settling cones. We have also opened up the first long-haul open stope at Lalor.

As of July 30, 2013 the main production shaft have been sunk to approximately 882 meters and 90% completion. We expect shaft sinking to be completed in late 2013 upon completion of 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, the main production shaft by the second half of 2014 subject to receive required regulatory permits. The excellent performance by our own workforce at Lalor in advancing underground development is expected to put us in a position to initiate drilling of the Copper-Gold zone from underground for the first time in 2014.

This will be approximately one year ahead of schedule and will allow us to restart an exploration storage that has been dormant for the last few years while we’ve been building the Lalor mine and gaining the necessary access for deeper exploration.

The team at Lalor has done a remarkable job and we will commend all of them for their efforts to date. We also continue to demonstrate our strong safety track record at Lalor with 621 days to date without loss-time accident. At our 70% on Reed copper project, we have invested approximately CAD47 million of our CAD72 million capital construction budget to June 30, 2013 and have entered into an additional CAD10 million of commitments for the project.

We continue to make good progress on the underground rapidly which has advanced to approximately 890 meters as of June 30, 2013. We also continue to demonstrate our strong safety track record at Reed with nearly 500 days to date without a loss-time accident. We expect initial production in Reed by the fourth quarter of 2013 and full production of approximately 1300 tons of ore per day by the first quarter of 2014.

At Constancia our 100% owned development project approved, we have incurred approximately US $658 billion of cost for June 30, 2013. We have also entered into additional US 55 million of commitments for the project. With 90% of the detailed engineering now completed at Constancia work is underway on a definitive reestimation of project capital costs.

Preliminary results from this work indicate that capital costs will increase by approximately 15% of which one half will be invested during the construction phase and the balance would be deferred to the production phase. We have identified our opportunities to re-sequence certain non-critical components of the project development into the production phase including the sequencing of (inaudible) management facility construction, road upgrades and ancillary facilities.

The preliminary cost estimates is based on the previously disclosed projects schedule with initial production in late 2014 and full production in the second quarter of 2015. Additional contingency represents approximately 40% of the increase in the cost estimates. The most significant element of expected cost escalation relates to heavy civil earth works, which were affected by higher than estimated volumes and material to be moved, other geo-technical issues and lower wet weather productivity.

This preliminary re-estimation was only recently completed and we are assessing the impact as we continue to evaluate opportunities to optimize the projects and its economics. Overall Constancia project – progress is over 40% complete in addition to securing the mine fleet with 18 haul trucks, tire procurement has begun with contracts arranged to meet fleet requirements and one hydraulic shovel has arrived in Peru. Civil earth works for the process plant area are essentially complete as are the principal foundations for the Ball and SAG mills.

Road work necessary for transportation of large components has been completed and the and the mill shells have arrived at site. Progress on the Tailings management facility in Peru following the commencement of the dry season in April. We continue to pursue definitive arrangements for port access and power supply.

Detailed engineering for the transmission line at the substation is complete. We have delivered new homes to 23 of the 36 families in accordance with our life-of-mine community agreements and the relocation of these families is in progress. We've also received the mining permit, beneficiation concession and approval for the early refund of value added tax on purchases with retroactive effect to December 2012. Notwithstanding the recent cost pressures at Constancia, we have made substantial progress and significantly derisked the project since the start of construction.

We further enhanced our balance sheet during the quarter by rising US$280 million of new growth capital through the issuance of long-term unsecured notes and a long-term equipment financing facility. We also received an additional US$125 million deposit under the Silver Wheaton precious metals stream agreement.

Our available liquidity at June 30 was CAD1.5 billion, including CAD1.1 billion in cash. These amounts do not include anticipated cash flow from operations, were also pursuing additional financing opportunities including in additional streaming transaction and debt financing related to copper concentrate out-take from Constancia.

As a shareholder in this Company, I appreciate the importance of growing per share exposure to metal prices and ultimately, metals production, earnings and cash flows, by successfully executing on our mine construction plans.

That when we hit bumps in the road, as we unquestionably have with Constancias capital expenditure escalation, it is equally important to find efficiencies in our existing business, manage the timing of our growth expenditures and find capital from services other than our shareholders, to keep our share count low and deliver per share value growth that we committed to deliver.

We have raised over CAD1.5 billion in the last year to fund our growth without issuing one share and we will continue to pursue other non-dilutive, lower cost of capital funds to maintain a strong balance sheet.

Im very fortunate to have inherited and expanded a very accomplished operating and mine-building team in Manitoba and Peru over the last three years that has a necessary experience, not only to successfully build new mines, but to ably tackle the risks that are inherent in mine development.

Over 86 years, our employees have done their work safely, with respect for our communities and the environment, and with high regard for the capital provided by our shareholders, and a keen eye on generating strong returns on that investment. Thank you to all of our employees and contacts for efforts over the last quarter and year-to-date.

With that operator, well take questions.

Question-and-Answer Session

Operator

Thank you. Ladies and gentlemen, we will now conduct a question-and-answer session. (Operator Instructions) Your first question today will come from the line of Orest Wowkodaw of Scotiabank. Please go ahead.

Orest Wowkodaw – Scotiabank

Hi, good morning. A couple of questions, the first one with Constancia; David, can you give us a sense of what your confidence level is in terms of the timing of completing construction and startup? And how much slack is there still in the schedule to meet your year end 2014 timeline?

David A. Garofalo

Ill hand it to Alan Hair, our COO.

Alan T. C. Hair

Hi, Orest. We said in the last conference call that we had to assess the dry weather productivities and take a view on where we were with the progress on the heavy civil earthworks, and weve had that theory to assess those productivities. And thats why were happy that we can stick with the schedule as previously disclosed. So were confident that we should be looking for first ore in the latter end of 2014 and full production by the middle of 2015.

Orest Wowkodaw – Scotiabank

So at this point, youre not seeing any slippage in the timeline?

David A. Garofalo

Were still in online. Now with the revised productivity numbers, we program them through to another wet season and were happy we can stick with that schedule.

Orest Wowkodaw – Scotiabank

Okay. In terms of the balance sheet, what do you have in terms of target for a minimum cash balance that you want to run with, given all the spending going on?

David S. Bryson

Hey, Orest, its David Bryson. I think we want to have a minimum cash balance, I think in the CAD100 million range with some additional liquidity cushion available over and above that.

Orest Wowkodaw – Scotiabank

Okay, perfect. And just finally, in terms of delaying the Lalor concentrator, can you remind us if that has an impact on the recoveries, whether youre running of the ore through the Snow Lake concentrator versus a new Lalor concentrator? Unidentified Company Representative We dont believe it should have an impact on recoveries.

David A. Garofalo

We dont believe it should have an impact on recoveries.

Orest Wowkodaw – Scotiabank

And thats apply to all about?

David A. Garofalo

Yes.

Orest Wowkodaw – Scotiabank

Okay. Thank you very much.

Operator

Your next question will come from the line of Brett Levy of Jefferies. Please go ahead.

Brett Levy – Jefferies & Company

Hey, guys. Can you talk about sort of this size and timing of additional streaming or Constancia financing that youll be seeking?

David S. Bryson

Sure. Hey, Brett, its David Bryson.

Brett Levy – Jefferies & Company

Hey, David.

David S. Bryson

We are continuing to look at potential opportunities for streaming a portion of the gold at Constancia. And we think that sort of proceeds in the sort of mid CAD100 million ranges are achievable from that. And weve also indicated that we are looking at opportunities for standby liquidity in connection with some of the copper concentrate off-take from Constancia.

Weve received several proposals from off-takers who are very interested in the copper concentrate off-take and are looking to I get something set up there, probably in the CAD100 million range available liquidity as we worked towards the completion and ramp up on Constancia.

Brett Levy – Jefferies & Company

Now, you also have the ability to do some borrowing down there at the Constancia level. Is that something youre also looking at?

David S. Bryson

Well, I think between the previously announced equipment financing that were doing with Caterpillar plus some of the off-take financing. That was not fully utilize the baskets that we might have available, but we think that would be sufficient for the time being.

Brett Levy – Jefferies & Company

And then after you guys, assuming you hit all your marks, you reach full production in 2Q 2015 at Constancia. Would you guys revisit the Lalor project?

David A. Garofalo

Yeah, the intention is to essentially defer Lalor by about a year and have it available, the new concentrator available by the end of 2016. Thats the current timeline.

Brett Levy – Jefferies & Company

Got it. Thanks very much guys.

David A. Garofalo

Thanks.

Operator

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

David Charles – Dundee Capital Markets

My question was on the productivity in the dry season and its already been answered. Thank you.

Operator

Your next question will come from the line of Oscar Cabrera of Merrill Lynch. Please go ahead.

Oscar Cabrera – Bank of America Merrill Lynch

Thanks, operator. Good morning, everyone. Just wanted to see if we could get more color on a statement you had on Constancia civil earthworks, where youre saying that you have to move more material and there were other geo-technical issues? Can you describe what these were?

Alan T. C. Hair

Hi, Oscar. Its Alan Hair, here. Theres actually quite a long list of items here. We obviously had mentioned the poor wet weather productivity and the impact to Constancia, like double handling of materials, things out of sequence and additional settlement control requirements because of unusually heavy rainfall.

In terms of quantities and material that relates in a number of different areas, but specifically around the amount of [Flin Flon] and I understood the material that has to be removed to allow, firstly the construction of bulk storage dam itself and then to a lesser extent, the tailings management facility, and also some issues associated with the anticipated qualities of certain construction materials from burrow pits onsite, which required us to either bring material from further distances or to the quarry of it. So theres a variety of different factors there.

Theres also been a number of technically driven changes as weve understood and nailed down the water balance. This is what allows us too, for example push out part of west tailings management facility into the sustaining portion of the project because we will have sufficient capacity and then newly arranged plan on these tailings facility.

We also made a design switch on the dam itself from modified center line to center line and a few other technical recommendations from a peer review panel throughout the process. And then there were specific items like we discovered, once we had excavated on the planned site, for example that there was going to be an issue with some resonant frequencies to required further excavation and then sufficient on mass concrete. So theres quite along shopping list of heavy civil and geo-technical items that resulted in this impact.

Oscar Cabrera – Bank of America Merrill Lynch

Any cause for concern in terms of just within the ore? Do you think that youll have any issues with the grades as you start to mine the deposit or is this just simply on the construction side?

David A. Garofalo

No, Im talking about as clearly its been on the heavy civil construction site and in terms of the mine plant where we count. Its a very well defined ore body that weve got and theres been lots of work done in the mine planning and sequencing that.

Oscar Cabrera – Bank of America Merrill Lynch

Got it, and thats very helpful. Thank you. And then on Lalor, we had talked about cost reduction while the concentrator was in place. Could you give us an idea of what your expectations are now with this 12 month delay? What should we expect in terms of the cost of concentrating for 2015 and 2016?

David A. Garofalo

Ill actually pass it to Brad and he can give some more exact numbers.

Brad W. Lantz

Hi, Oscar. Its Brad Lantz. What were looking at, Oscar, is when we really going to refurbish the existing mills and really just bring that concentrator back to the capacity level that it was built to. So I estimate it was CAD16 tons of process. And then again you have to had on concentrate haul. One of the things with all our Snow Lake mill numbers is we do include our concentrate haul at Flin Flon, which adds roughly about CAD10 of ton.

Oscar Cabrera – Bank of America Merrill Lynch

Its all in 26, around 26?

Brad W. Lantz

Correct.

Oscar Cabrera – Bank of America Merrill Lynch

And is there a period of a ramp up where we see higher cost of (inaudible) and then going down to 26 or its 26 in average?

Brad W. Lantz

I would call that in average, I would certainly will be a bit of commissioning period as weve refurbishing and get ready to go here. The schedule has the summer of 2014. So matches upgrade well with the production shaft from Lalor, so Id think the commissioning period should be within the 30 day period.

David A. Garofalo

So Oscar, that should allows to increase obviously the mine production in earlier than we anticipated that. We will have the shaft available for the middle of 2014 and should have the additional milling capacity to allow us to mill more material and anticipate it previously in 2014.

Oscar Cabrera – Bank of America Merrill Lynch

Great. And then lastly, Im not sure if youll be able to comment on your off-take agreement. I know David mentioned around CAD100 million, but what sort of terms or any color you could provide on that would be helpful? Thanks.

David A. Garofalo

I think its a bit preliminary at this point sort of our thinking around that just sort of given the other initiatives that we taken into arrange sort of what I call permanent funding for our growth projects to set it up sort of standby funding thats available if we need it that not something that were required to drawn and having place for a extended period of time.

So I dont want to get into sort of too much detail on the specific terms. Wed expect that it would sort of have borrowing cost inline with the options that were seeing kind of sort of LIBOR plus 500 range is probably in the area that were looking at and sort of repayment that would be sort of link that some degree to concentrate production in Constancia. It give the opportunity to tie the financing to the out-take agreement that we entered into.

Oscar Cabrera – Bank of America Merrill Lynch

Okay, great. Well, thats great, David, thank you.

Operator

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

George Topping – Stifel Nicolaus

Great, thanks. Hello, everyone. Alan, maybe you could give us an indication of what production you're expecting from Lalor in 2014 if the shaft comes in a little bit earlier as you'd expect?

Alan T. C. Hair

We had initially had about just over half a million tons scheduled for 2014 itself. We haven't quite finalized the numbers obviously this is based on estimated shaft commissioning. Brad can maybe give bit of a range.

Brad W. Lantz

Yeah, I think on top of Alan like it was closer to the 600,000 ton mark, but there is obviously lots of opportunity George and we have a team right now in Snow Lake that's working on that plan up to the five year plan. So almost I would say is there is certainly opportunity I think to improve on the numbers that we’ve disclosed today, but later in 2013 we should initialize our five year plan.

George Topping – Stifel Nicolaus

Okay, fair enough. On Reed, are you expecting any meaningful contribution in Q4 In terms of copper from that or is there going to be right late at the end of the year?

Brad W. Lantz

It looks like it will be distributed fairly evenly through the quarter; we are looking at slightly less than plan so we are going to average between 10,000 and 15,000 tons per month in the last quarter.

George Topping – Stifel Nicolaus

Okay and then on 777, still mining a little bit below the reserve grades there. When do you expect to see those grades increase and get through sequencing?

Brad W. Lantz

We should have a pickup in the second half, we did have just to add some color to that, we did have some difficulty with the paste backfill in fact at a point we were working on clearing the – they were obstructed both of them for a period of about 30 days. So we are delivering pace back underground now and with that we – but this did disrupt the mining schedule and certainly the second quarter, so that paste backfill has been going underground since mid June. So we will get back on sequence here. So we do expect those grades to turn around a little adroit in the second half.

George Topping – Stifel Nicolaus

I guess that's it, thank you.

Operator

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

Matt Murphy – UBS

Hi, did I hear correctly that the expanded Snow Lake processing cost is – you're thinking is around $16 a ton?

David S. Bryson

That's correct.

Matt Murphy – UBS

I think was that similar to what you were expecting for a new concentrator at Lalor?

David S. Bryson

I think it was very close in that range Mathew. Bearing in mind that there is an additional $10 a ton of haulage in order to tie it to costs that are comparable to what we reported in unit cost for concentrators.

Matt Murphy – UBS

Right, okay. I'm just wondering, is there any I mean, assuming – depending on your assumption on what happens with commodity prices over the next few years, is there any scenarios being looked at where you go beyond 2,700 tons per day at Snow Lake. I think if I recall, in 2010, there had been 3,500 considered as a number, any comments on that?

David S. Bryson

For the concentrator, like we said, the refurbishment, Matt, will just bring it back what it is, so there isn't much potential to upgrade past the 2,700 and again, when we originally looked at it we were basically maximizing the grinding circuit and flotation. So if you were again – if you ever considered to do anything above that, it would take quite a substantial amount of capital dollars and again, you'd be working on a mill that was built in the '70s.

So the new concentrator, obviously, beside the mill, allows for the lower operating costs on the mine, there is no truck haul that allows for ease of paste backfill to the mine, so it also gives you opportunity for scale. So the new concentrator again offers lots of opportunities, really, we're just taking advantage of what was in place now and it seems to fit for us for the short-term.

Matt Murphy – UBS

Yeah, yeah. Okay thanks. And just a question on the CapEex so we run at Constancia. Just wondering if you can break out, is any of that increase related to time line in terms of if you think about productivity being slightly lower than expected so far, is any of the CapEx adding labor or adding units of production and make sure you make that time line, or is it all just based on what’s been spent to-date?

David S. Bryson

I think there is obviously going to be an element of cash up cost in there as well, so suddenly you could say that some scheduling impact with it.

Matt Murphy – UBS

Okay. And just on the discretionary sustaining deferrals, what kind of cap ex is that?

Alan T. C. Hair

All we are looking at – there is a number of items, but the most significant ones are the differing the – or moving the final construction of the west side of the Tailings management facility into the post-construction phase of the projects and also just sequencing the road upgrades, those are the two big ticket items at –

David S. Bryson

At Lalor, yeah oh sorry.

Unidentified Company Representative

Matt was your question related to the deferrals in Manitoba, those sustaining CapEx?

Matt Murphy – UBS

Yeah, sorry.

Unidentified Company Representative

Sorry okay. Yeah and that’s what Alan was referring those were expenditures of Lalor that are being differed, essentially Tailings…

Alan T. C. Hair

No I was (inaudible).

David S. Bryson

But it is similar story at Lalor. Do you want to add, talk what the deferrals with sustaining CapEx.

Unidentified Company Representative

Oh the sustaining CapEx deferrals, they are just relatively minor items, I mean we’ve been in this situation before we were sustaining back in decade ago where sustaining numbers have been very low and we’ve obviously caught up there over the years. So we think we are in a position just to defer and delay a whole host of relatively minor projects, there is nothing particular exciting on the list.

Matt Murphy – UBS

Okay. Thanks a lot, good luck.

David S. Bryson

Thanks.

Operator

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

Alex Terentieu – Raymond James

Hi, guys, I've got a few more questions for you on Lalor here. Well first, will all the ore go to Snow Lake until the concentrator there is maxed out or will you start sending some ore to Flin Flon ahead of 2015?

Brad W. Lantz

Hi Alex its Brad. No it looks like right now certainly everything that we are producing now is processed in Snow Lake, so the matching out of the increasing concentrator capacity and the commissioning of the shaft actually times out extremely well. So I mean that is an option, it is an option for us to (inaudible) so that we do not stockpile that we process what we mined, but it looks like it all matches out right now.

Alex Terentieu – Raymond James

Okay. Thank you. Is there any incremental cost into 2015 at Flin Flon that you will need to have to put into – to allow to handle the additional tons and the higher zinc content there?

Brad W. Lantz

I wouldn’t say so, they are just being in and in fact it would improve the situation in probably lower cost, so on a unit cost base this should help us if anything.\

Alex Terentieu – Raymond James

Okay, thanks, just a couple more. Actually I just want to make sure then, I guess with this concentrator deferral, you don't really expect any notable impact on your long-term production plans for the mine that's kind of your thinking at the moment for Lalor anyways?

Brad W. Lantz

That’s correct, in fact with this proposal it should actually improve and enhance the mine plan so it’s going to give us that ability to process what we mine, so if anything it should benefit the mine plan.

Alex Terentieu – Raymond James

Okay. And one last question. Could you keep processing in this scenario, the maxing outs, Snow Lake, and the rest going to Flin Flon, or is there a point in time when it just doesn't make economic or other sense to do so, and a new concentrator at Lalor is absolutely needed? I mean, is there some sort of environmental or other issue, economic, whatever, that's driving you? I mean, I haven't run the economics in my model yet, but I'm just trying to see how long this scenario could keep going if needed?

Brad W. Lantz

Well the plan is to keep that scenario going to late 2016 when the new concentrator would be available. Again, as long as Lalor and again as we are expanding and we are starting initial production and we get up about a 1.2 million tons, we could handle with the two concentrators what’s there. The minute again you get up to capacity at Lalor and you get the 1.6 million or potentially better you just could not process what is there, so again the timing of its fairly close at the time we have the concentrator late 2016 would match up with the expansion within the mine plan.

Alex Terentieu – Raymond James

So is it – Lalor, I mean, Flin Flon and Snow Lake could handle up to 1.6, but the need to build a new concentrator at Lalor is really if you're going to go any bigger, but beyond a size expansion, you're kind of safe with what you have?

Brad W. Lantz

I would say, we would handle both 1.1 million , 1.2 million, when we are at 1.6 million we are stockpiling.

Alex Terentieu – Raymond James

Yes, okay. Okay, good. Thank you.

Operator

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

Patrick Morton – RBC Capital Markets

Hi, guys. So when you balance out higher capital at Constancia, some savings on the sustaining capital, et cetera, and then deferral of Lalor, your next three years' financing requirement call it to the end of 2015, what is the balance of change in additional financing required from your perspective?

David S. Bryson

Hey, Patrick, I'd say that sort of all things considered, sort of through to – I mean, we tend to sort of focus on sort of early 2015, just given the strong cash flows that Constancia is expected to generate in the first few quarters, given the high grades in soft ore there. When we think about sort of funding requirements and our target liquidity balances, the sum total of all of this is an improvement in our liquidity position of at least $100 million.

Patrick Morton – RBC Capital Markets

Okay great and, we’ve talked a lot about the deferral of the Lalor concentrator and I realize the tonnage constraint is one of the reasons why you don’t want to differ it beyond 2016, but the loss or at least the deferral of call it 400,000 or 500,000 tons a year, why not push out Lalor until you are certain that Constancia is up in running and then start building that $325 million facility one you have the cash flow and you are confident about Constancia, rather than there is still pretty tight balance sheet for the next two and half three years.

David S. Bryson

No it’s a fair point, I just want to point out Patrick, doing work activity we are going to continue to undertake at Lalor is detailed engineering, so they were in a position to start construction by the middle of 2015, so its about an 18 month construction period, so we will have a very good idea about that point mid 2015 as to how Constancia is performing before we have to make any firm commitments on Lalor. So we do have quite a bit of flexibility, we have a lot of time here to make a definitely commitment.

Patrick Morton – RBC Capital Markets

Thanks guys.

Operator

Your next question comes from the line of Zach Zonir of GMP Securities. Please go ahead.

Zach Zonir – GMP Securities

Hi, guys, thanks for taking my questions. My first actually was just a quick follow-up on, I think, your last answer on Lalor. You mentioned you have to decide by mid 2015, it was an 18 month construction, did you mean mid 2014?

David S. Bryson

No we are saying we would need the new concentrator by the end of 2016.

Zach Zonir – GMP Securities

Okay. Got it, understood. All right. And then my question is – one was a follow-up on liquidity. I think you had just talked about, given the announcements today, it was a net improvement of about $100 million, and then we looked at sort of the streaming and the off-take financing that you also talked about last quarter. So given you're still pursuing those options, I'm just wondering, on a go-forward basis, in terms of operating cash flow internally, have you guys sort of revised your own internal estimates, and if so, from a pricing standpoint, are you looking at, in your internal numbers, pricing similar to today's market for commodities or perhaps lower?

David S. Bryson

I think what prompted our deferrals and cuts in terms of discretionary expenditures was the reality of the softening metals market, we didn't want to be in a position where our existing business was consuming any of the capital on the balance sheet that was otherwise devoted towards the three development-stage projects. So basically, those discretionary cuts have brought us back to where we were in our budget in a higher metal price environment.

Unidentified Analyst

Got it. And it sounds like with the offtake, I mean, your at least initial plans, if your put a facility like place that would remain undrawn and that assumption is also under a scenario perhaps using current metal prices, is that accurate. And then just my follow-up here is just going back to Constancia and the discussions with these offtake partners, I'm just wondering if you could give us a sense, from a reason standpoint, are the smelters that you're talking with, North American, South American? And if so, would there be any differences perhaps with what's in the technical report in terms of transportation costs or so forth and so forth?

David A. Garofalo

Sure. I don't want to get into who we're talking to at this point for competitive reasons, to be honest, but the offtake agreements that would be linked to this, our expectation is that they'd be very much comparable to sort of standard offtake agreements that we would enter into with any of the likely smelters that we would send material to.

I mean, as it happens, freight costs to sort of places in Europe are not significantly different than freight to East Asia and so there's a lot of different places that we could send the material to. It's pretty clean concentrate and so, as I say, we've seen good interest from a variety of quarters on the concentrate and we're trying to leverage that into sort of an attractive financing opportunity, but we don't see any adverse impact on the terms of our concentrate sales that would sort of be a price that we would have to pay in order to get this financing.

Unidentified Analyst

Yeah, that’s very helpful. Thanks for taking my questions.

David A. Garofalo

Yeah, thanks.

Operator

Your next question will come from the line of John Hughes – De Jardin Securities. Please go ahead.

John Hughes – De Jardin Securities

Well, thank you operator. Just two quick ones left. One on Lalor Lake, one on Constancia. On Lalor, the advancement on that exploration is very interesting in terms of that advancing a year and getting into the copper-gold zone. And I'm wondering is there any extension underground that has to be driven in order to access where you want to go, or are you going -- is this sort of a planned thing or is this something new? Because it certainly could be quite exciting to get into that copper-gold zone. I don't know if, yes, Brad wants to answer.

Brad W. Lantz

Yes, Brad so we’ve had the group working again as I mentioned the five year mining plan one of the requests was you can give us an option to get in an exploration target for the for the copper-gold zone. So again, it appears, with the project development moving along extremely well there down developing a lot of to shaft bottom were down to the 985 level it appear that we could drive address of both 400 meters, 450 meters that would give us a nice real target that would drill our copper-gold zone. So I mean that opportunity exists and it looks like again it’s when we decide to move a head on something along that lines. It’s a dollar items to do it.

John Hughes – De Jardin Securities

Oh, I see. So that 400-meter drifts, could the timeframe for completion, would that be sort of a three to four months timeframe?

Brad W. Lantz

Would be very, very, very quickly could be develop very quickly. What’s happening again it’s a project development is winding down that the next step of development for the mine will be to develop and prepare for production for when that production shaft is commission next summer. So along the lines with doing that development to prepare for our production. We could parallel drift for exploration for that that zone.

John Hughes – De Jardin Securities

Oh, I see. Okay. So and again, we'd be looking sort of like in the first quarter sometime next year; the first opportunity to set up a rig down there if that's the route you decide to go?

Brad W. Lantz

That would probably be the earliest date, yes.

John Hughes – De Jardin Securities

And the last point on that, what kind of in terms of drilling, like what kind of are we looking at a few hundred meters or longer to get into the copper-gold zone?

Brad W. Lantz

I have seen the plans, again I would had be remiss to say , but we were drilling, you'd be drilling from about 980 meter and again the surface drilling I given us own standard 1500 meters in-depth and we certainly were open down one. So I mean the holes would be 500 to 700 meter holes and it certainly that the initial address get you started then as results came in we’ve laid out again additional development that would improve the horizon that drill. What we our plan to do as you use that access drift for drilling and then ultimately either we are going to extract or up that same drift. Just leave it open for possibilities.

John Hughes – De Jardin Securities

Okay. Well, that's great. Thank you for the update. A last one just on Constancia with the 15% noted increase in CapEx does the 15% apply to what we had seen before on the CAD1.546 billion or is it 15% on a number less than that, given how much has already been spent?

David S. Bryson

No it was on the original capital cost of CAD1.546.

John Hughes – De Jardin Securities

Okay, that helps. Thank you very much indeed.

Operator

Your next question will come from the line of Alex Kaduski of CIBC. Please go ahead.

Alex Kaduski – CIBC

Yeah, thanks for taking my question. I just wanted to go over a couple of things. Sorry if you've gone over this already, but is the intention to still issue an updated mine plan for Constancia this fall? And are any of the CapEx changes related to that or is that already incorporated into the plan?

David A. Garofalo

We never had the only mine plan we were updating was actually Lalor's mine plan and we had never intended to update Constancia's. That remains unchanged.

Alex Kaduski – CIBC

Okay. So that that (inaudible) for us replacing that.

David A. Garofalo

Yeah, that was already incorporated in version that we did last year.

Alex Kaduski – CIBC

Okay. And just with respect to Lalor, I was sort of under the impression that in many ways, the new concentrator was nice to have and it gave you a bunch of benefits. Has the fact that you've scaled back on exploration sort of taken some of the pressure off of developing that on the existing timeline, given you a bit of latitude to shuffle it back?

David A. Garofalo

Well, the exploration actually, we did curtail grassroots exploration and we're focusing on brownfield exploration, and in fact, we're accelerating the underground exploration at Lalor by about a year, given how successful our underground team has been in terms of lateral development. So we can actually get into the copper-gold zone again from underground, or for the first time, from underground, about a year earlier next year. So we are preserving exploration dollars for brownfield exploration like that, high-priority exploration that can add meaningfully to the resource and reserve base in the short term.

Alex Kaduski – CIBC

Okay, great thanks.

Operator

(Operator Instructions) Your next question is a follow from the line of (inaudible) of Scotia Bank. Please go ahead.

Unidentified Analyst

Hi, thanks, it's (inaudible) here. If you go ahead with the Lalor concentrator for startup at the end of 2016, I guess you’d start spending in kind of mid-2015. Can you give us a sense of what the spend would be, say, in each, 2015 versus 2016 on the CAD325 million?

Brad W. Lantz

It’s Brad. Should be roughly, and this point number so of my have year about 200 million also in 215, 150 in 2016.

Unidentified Analyst

Okay. And can you remind us what the timing is for the new Lalor mine plan in terms of that being released?

Brad W. Lantz

To be fourth quarter 2013.

Unidentified Analyst

Okay. And just finally with Constancia, in terms of the port and the power agreements, any update on sort of your expected timeline to complete some agreements there? When do those become sort of, I guess the concerning to the schedule?

David A. Garofalo

(inaudible). There would be no concerns around schedule, but can like Cashel will give you some additional color on where we stand with those.

David S. Bryson

Hi, Orris the power agreement is imminents we work with the port operator all the issues of accommodating our ore until the expansion is in there waiting to put in their capital dollars to the expansion when they get certainty of the construction at Las Bambas and Serra Verde underway because they have much higher volumes of concentrate, but we worked around the warehouse facility that will be use for Constancia and there will be able to accommodate all our production.

In that short-term until Las Bambas is up and running we will paying a higher 14 rehandling fees that’s slightly higher them what we gave in our technical report example, but when the expansion in there would be the cost to the port will be lower. So that port agreement is imminent. We're just working out final details on language but the major business items are done. And with the power agreement the power purchase agreement itself.

Again we get we benefit from the facts that many projects here either suspended or on old and a lot of the gas suppliers have been running ahead with their capital projects. So we got into detail decisions with one provider and we were very close to signing its we got into some discussion on just outside of commercial arrangements more awarding within the contract and we flex and set while we want to go into little more discussion.

So that when I would say within the next month will be there. So the two of them are really imminent and we work through all the business discussion and there just very few I’s and T’s to be dotted and crossed at this moment.

Unidentified Analyst

Okay. So you expect by end of the year to have them both in hand?

David S. Bryson

Yeah with out it know.

Unidentified Analyst

Okay. Thanks so much.

Operator

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

David A. Garofalo

Well, thank you are going to participating, unfortunate the capital cost is I think over shadow the fact that Constancia we make considerable fiscal progress on the construction and we are welcoming the investment committee for visit for them to see for themselves its been September so we hope to see that site. Thanks very much and have a nice day.

Operator

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

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