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HudBay Minerals Inc. (NYSE:HBM)

Q3 2013 Earnings Conference Call

November 11, 2013 9:30 am ET

Executives

David Garofalo – President, Chief Executive Officer

David Bryson – Chief Financial Officer

Alan Hair – Chief Operating Officer

Brad Lantz – Vice President, Manitoba Business Unit

John Vincic – Vice President, Investor Relations

Analysts

Alex Terentiew – Raymond James

Orest Wowkadow – Scotiabank

David Charles – Dundee Capital Markets

Matt Murphy- UBS

John Tumazos – John Tumazos Very Independent Research

Oscar Cabrera – Bank of America Merrill Lynch

Greg Barnes – TD Securities

Patrick Morton – RBC Capital Markets

Zach Zolnierz – GMP Securities

Alec Kodatsky – CIBC

Gary Chapman – Guardian Capital

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the HudBay third 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 for analysts and institutional investors. Instructions will be provided at that time. If anyone has any difficulties hearing the conference, please press the star followed by the zero and an operator will assist you. I would like to remind you that today’s conference call is being recorded today, Monday, November 11, 2013.

I will now 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 third quarter results conference call. HudBay’s financial results were issued Friday, November 8, 2013 and are available on our website at www.HudBayminerals.com. The 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 SEDAR and EDGAR. These documents are also available on our website.

For the purposes of this presentation, we have assumed a U.S. to Canadian dollar conversion ratio of 1:1. And now, I’d like to pass the call over to David Garofalo. Dave?

David Garofalo

Thanks John. Good morning everyone. Our operating and project teams in Canada and Peru built on their well-established track record of working safely and productively. During the quarter, we reported our lost time accident frequency of 0.2 per 200,000 hours worked and 0.4 year-to-date, which is well below the average for the mine sector. We continue to make steady progress towards achieving our ambitious production growth objectives.

At our 100% owned Lalor mine in Manitoba, sinking of the main production shaft is substantially complete. We’ve constructed the station development at the 955 meter level and have reached the shaft bottom access on the 985 meter level. At our 70% owned Reed mine in Manitoba, we received the Environment Act license from the provincial government and commenced initial production on time and on budget. At our 100% owned Constancia copper project in Peru, we have now completed nearly all the detailed engineering, more than 40% of the overall project, and signed 10-year port and power supply agreements. Both agreements were consistent with budget and expectations. I will discuss the development projects in greater detail in a moment, but first let me turn to our financial results for the quarter.

Total revenue for the third quarter of 2013 was $130.2 million, which decreased compared to the same quarter of last year primarily because of lower copper sales volumes due to the planned permanent closures of the Trout Lake and Chisel North mines in 2012 and lower metal prices compared to the third quarter of 2012. Operating cash flow before stream deposits and change in non-cash working capital was approximately $13 million, which decreased compared to last year primarily due to lower sales volumes and lower realized metal prices and the impact of the precious metal stream transaction that was entered into in 2012 with Silver Wheaton.

During the third quarter of 2013, we recorded a profit of approximately $3 million compared to a loss of $5.4 million for the same period last year. The increased profit was primarily a result of higher foreign exchange gains and lower tax expense marginally offset by lower revenue as a result of lower volumes and prices. With two quarters of commercial production for the first phase of Lalor behind us, we expect to see a continuation of the trend of improved cash flow over the next year as we commission the main shaft and as Reed continues its production ramp-up in conjunction with the expansion of milling capacity at the Snow Lake concentrator in the second half of 2014.

Our third quarter 2013 ore production at our Manitoba business unit was 29% higher than the prior third quarter as a result of a full quarter of production at Lalor, additional production from the 777 North mine, and the starter production at Reed. Overall, mine operating costs per ton were (audio interference). 777 mine unit costs continued with the quarter-over-quarter decline due to improved equipment availability and lower contractor activity. We expect our full-year contained copper in concentrate production be slightly below the guidance range of 33,000 to 38,000 tons for 2013 while we expect full-year contained zinc and precious metal production to be in the upper ends of the respective 2013 guidance ranges of 85,000 to 100,000 tons of zinc and 85,000 to 105,000 gold equivalent ounces. The lower copper production is mainly due to the deferral of higher copper grade zones from the 2013 777 mine plan to future years as a result of temporary limitations in paste backfill availability and requirements for ground support in the higher copper grade zones.

At our Lalor mine in northern Manitoba, we had invested approximately $371 million of the overall $441 million capital budget for the mine component of the project through October 31, 2013 and have entered into an additional $40 million in mine project commitments. The Lalor mine remained on schedule and on budget as it approaches the completion of the underground portion of the project.

As mentioned in the second quarter of 2013, we intend to invest $9 million at the existing Snow Lake concentrator to refurbish existing equipment and facilities to double production capacity to approximately 2,700 tons per day. This investment is expected to enable the deferral of construction of the new Lalor concentrator and the planned expenditure of approximately $325 million of the overall $794 million Lalor capital cost. The increase in production capacity at the Snow Lake concentrator is expected to be completed by mid-2014 when the main 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.

Initial production at Lalor continues to meet our expectations as we hoisted nearly 111,000 tons of ore from the ventilation shaft at a zinc grade of 8.95% and a copper grade of 0.9% during the quarter. We have continued to demonstrate our strong safety track record at the Lalor project with over 680 days to date without a lost time accident.

Underground project development continued in the third quarter. We completed the station development at the 955 meter level and have reached the shaft bottom access to the 985 meter level. We’ve also started work on the ore pass and waste pass handling systems and the settling cones.

Sinking of the main production shaft was substantially complete subsequent to quarter-end, and construction work for the main ore and waste handling systems as well as the main dewatering system has been awarded and will begin in the fourth quarter of 2013 and continue to mid-2014. We are near completion on construction of the main substation, which is scheduled to be commissioned in the fourth quarter of 2013.

The construction of the main intake fan system is 90% complete and is scheduled to be commissioned in the second quarter of 2014, after the main production shaft has been completed. We expect to restart exploration drilling at Lalor and to begin drilling the copper-gold zone from underground for the first time in 2014, approximately one year ahead of previous expectations.

At Reed, we invested approximately $59 million of our $72 million capital construction budget through October 31, 2013 and have entered into an additional $7 million in commitments for the project. After receiving the Environment Act license, which permits the operation of a 1,300 ton per day underground copper mine and supporting infrastructure, the Reed mine commenced initial production on schedule with first ore milled in Flin Flon in September. During the quarter, we mined 8,235 tons at a copper grade of 1.66% copper and a zinc grade of 2.74%.

The underground ramp continues to progress well, having advanced approximately 1,358 meters. We’ve also completed an additional 147 meters of pre-production drifting as of September 30, 2013. The project remains on track to reach full production of approximately 1,300 tons of ore per day in the first half of 2014. Similar to the Lalor project, Reed is also an example of our exemplary safety track record with over 570 days to date without a lost time accident.

At our Constancia project, we’ve incurred approximately $872 million in costs through October 31, 2013. We have also entered into an additional $336 million of commitments for the project. The detailed engineering at Constancia is essentially complete. Consistent with projections provided in July 2013, results from the completion of the revised definitive capital cost estimate indicate total cost to project completion of approximately $1.7 billion.

Sustaining capital expenditures in the first five years of production are now expected to average $80 million per annum, reflecting the deferral of some capital spending as outlined in July 2013. The key milestones for the project did not change, with initial production expected in late 2014 and commercial production expected in the second quarter of 2015.

Overall, Constancia’s project progress is over 47% complete. We have signed a 10-year port agreement to store low concentrate with the local port authority and we’ve also executed a 10-year power supply agreement. Both agreements are consistent with budget and expectations.

We have begun construction activities on the power transmission lines from Tintaya to Constancia with preliminary agreements securing approximately 90% of the land access rates for pylon construction. Mine equipment is being delivered to site on schedule and major haul trucks are currently being assembled. Two of three hydraulic shovels are in Peru with components currently being delivered to site. All of the mills have been delivered to site. The first of the ball mill and SAG mill shells are currently being hoisted and installed on the completed mill foundations, and assembly and installation of the float cells is underway. HudBay is conducting steel erection at the plant site and productivity is advancing well.

Water management infrastructure is in place to manage rainy season conditions and for the required water storage necessary for start-up. Foundation work and dam construction at the east tailings facility are underway and on schedule. Bog removal in the tailings facility continues with good productivity and volume assumptions are in line with expectations. Development of the bog dam is now complete.

In accordance with the agreements we’ve entered into with local communities, new homes have been delivered to 28 of 36 families and 31 homes have been constructed. The relocation of these families is in progress. Plans are underway to commence negotiations to secure surface rights over the Pampacancha deposit.

We further enhanced our balance sheet subsequent to quarter-end through the $135 million steam agreement with Silver Wheaton announced last week. Our liquidity is also supported by the remaining $125 million deposit payment due from the original silver stream agreement with Silver Wheaton when $1 billion is spent at Constancia, as well as $100 million in cash receivables from Lalor’s new mine tax status and Peruvian value-added taxes expected by mid-2014.

We also closed the previously announced equipment and financing facility for the Constancia mobile fleet with Cat Financial and we expect to draw down on this facility in stages beginning in the fourth quarter of 2013 as the equipment is delivered to site and assembled for use in accordance with the project schedule. As such, our available liquidity at September 30 adjusted for the Constancia gold stream on a pro forma basis was approximately $1.3 billion, including nearly $800 million of cash. These amounts are available to fund our remaining capital spending on Constancia, Lalor, and Reed of approximately $1.0 billion to the end of 2014. These amounts also do not include a contemplated offtake debt financing related to copper concentrate offtake from Constancia.

In order to further mitigate balance sheet risk during the final stage of construction for our Constancia project, we’ve entered into a series of copper and zinc hedges on our planned (indiscernible) through to the end of 2014. For copper, we’ve entered into costless collar transactions on approximately 69 million pounds at an average floor price of $3 per pound and an average cap price of $3.46 per pound. In zinc, we’ve entered into costless collar transactions on approximately 103 million pounds at an average floor price of $0.80 per pound and an average cap price of $0.97 per pound. These hedge arrangements do not have margin requirements.

As we approach the end of 2013, I’d like to mark the 100th anniversary of the discovery of the original Flin Flon deposit in Flin Flon, Manitoba in 2014. Throughout our history, our employees have worked safely, respected the communities where we operate and the environment, and we will continue to do so. We are proud of this 100-year legacy and look forward to continuing it as we embark on the next century in our company’s history. Thank you to all our employees and contractors for their efforts.

With that, Operator, we’re pleased to take questions.

Question and Answer Session

Operator

Thank you. [Operator instructions]

Your first question today will come from the line of Alex Terentiew of Raymond James. Please go ahead.

Alex Terentiew – Raymond James

Hey, good morning guys. I’ve just got a couple questions. First, I just want to start with Constancia. You note sustaining capex of the project of about $80 million per year for the first five years. Is this spending spread fairly evenly amongst those years, and also if you can just give us a few details on what that spending is going toward.

Alan Hair

Hi Alex, it’s Alan Hair here. I’ll answer that. The sustaining capital includes about $87 million that’s deferred from the actual phase, as we’ve indicated, I think, on the last call, so that’s going to be mainly spent in the first two years and then the balance of the average is fairly evenly spread through the five years.

Alex Terentiew – Raymond James

Okay, that’s perfect. And another question if I may on Lalor. You’ve noted you’re having a few challenges hiring experienced miners, which has fed through to higher contractor costs. Are you seeing improvements in hiring here, and if so, when should we see costs come down at the mine?

Alan Hair

Again it’s Alan here, I’ll answer that. We’ve actually embarked on quite a major program to try and hire our own personnel and train our own personnel. In fact, we’ve just started a few weeks ago with the mining college in Flin Flon has got it’s first intake of people in the mining school part, and we’re also actively recruiting further afield to see if we can bring in people from other parts of Canada. So the target is to have the manpower ramped up in line with the main shaft moving into production by the middle of next year, so I think you’ll see a significant step change in costs once the new shaft is up and running and we get both the increased benefit of higher throughput and hopefully we’ll have the manning plan fully executed by then.

Alex Terentiew – Raymond James

Okay, that’s great. Thank you.

Operator

Your next question will come from the line of Orest Wowkadow of Scotiabank. Please go ahead.

Orest Wowkadow – Scotiabank

Hi, good morning. A couple of financial questions. Firstly, what do you expect the working capital draw to look like in 2015 with the start-up and ramp-up of Constancia?

David Bryson

Hi Orest, it’s David Bryson. I think we’ve got a few options to look at there. It depends in part on the strategy that we implement for the disposition of concentrate from Constancia, and we’re trying to leverage the offtake financing that we’re working on to sort of also provide some opportunities for sort of minimizing the working capital draw with conventional smelter contracts so there’d be a longer working capital requirement, and we think that we can mitigate that. So I’m not sure I want to put a specific number. It depends on a point in time. There will certainly be some working capital requirements, but as we move through that period we’ll sort of also have operating cash flow from Manitoba coming along.

So we think that with the gold stream that we’ve entered into, together with supplemental standby liquidity from the offtake financing, that we’ll be well positioned to meet the capital funding requirements as well as any working capital requirements from Constancia.

Orest Wowkadow – Scotiabank

So you wouldn’t be able to give us a number at this point? Would it be less than $50 million, or do you think it’s possibly bigger than that?

David Bryson

Again, it really depends on the sale strategy for Constancia and the turnaround time for concentrate sales. We’re focused on that. I mean, I think that $50 million is certainly in the ballpark.

Orest Wowkadow – Scotiabank

Okay, and then just one more. In terms of if for some reason costs go higher, can you just outline for us again the limitations that you’re—so your senior unsecured notes have certain covenants in terms of your ability to incur additional debt in certain circumstances. Can you just outline exactly what that means?

David Bryson

Sure, and I could spend quite a bit of time talking about that, but I think just to cut to the chase in terms of debt incurrence, we sort of have baskets that are available to us for the equipment financing. We have baskets that are sufficient to accommodate the offtake financing that we’re contemplating up to $175 million, although I don’t expect that the total size of the facility will be that large. And then additionally, we have a basket that accommodates our revolving credit facility that is the greater of $300 million and 10% of our assets, which would be sort of approaching $400 million at the moment.

So we think that that latter basket does give us the capacity to incur additional debt, but that’s not our game plan at the moment. We expect that the financing that we’ve arranged won’t sort of require that we incur additional indebtedness over and above what’s already planned.

Orest Wowkadow – Scotiabank

Okay, great. Thanks very much.

Operator

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

David Charles – Dundee Capital Markets

Yes, good morning. Just a quick question, maybe the first one for Brad. I’m just wondering were are the issues that we saw with the excess at the high grade stopes at 777 just a one quarter affair, or should we expect these issues to continue more into the future given that it sounds like those stopes require more security measures, let’s put it that way.

Brad Lantz

Good morning David, it’s Brad. Yes, those stopes—well specifically, I guess, on the north side of 777 is the first area that we have mined, so that’s the 15-year mining area. I would expect going ahead, we have—we will see some more reconditioning of the ground, which is going to be required to mine that. Some of that is also pillar recovery, which will just slow down our aggressiveness of mining it. So again, I think it’s all manageable; it just won’t be extracted at maybe the rates that we’re familiar with in the past. It’s just going to come out a little slower, but it’s still all recoverable.

David Charles – Dundee Capital Markets

Okay, so basically what you’re going to do is you’re going to adjust your expectations a little bit so at least going forward we won’t see at least any issues like you experienced in the second quarter.

Brad Lantz

I think that’s pretty fair, yes.

David Charles – Dundee Capital Markets

That’s great. Thanks very much. And just maybe one other question, and this one is for David Bryson or David Garofalo. You guys have in the past talked about a potential tax rebate from Peru. Maybe if you could give us an update on that and whether you expect to have some of that this year, or whether it’s a 2014 event.

David Bryson

It’s David Bryson. The process is still coming along fine with that. We’re just waiting for some final paperwork to be processed in the Peruvian bureaucracy, and we would expect to see those refunds start coming certainly in the first half of 2014 and have the rebates coming in the ordinary course well before we would see the low point in our cash balance at the end of 2014.

David Charles – Dundee Capital Markets

And the total amount again, just to refresh my memory?

David Bryson

Well, the amount in our financial statements at the end of the quarter, the Peruvian receivables were in trade and other receivables, and that was $85 million at the end of the quarter. The amounts owing in respect of Canadian income tax is the taxes receivable line on our balance sheet, and that was about $40 million at the end of the quarter.

David Charles – Dundee Capital Markets

Excellent. Thank you very much.

Operator

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

Matt Murphy- UBS

Good morning. Just a question on the hedging strategy – do you see that being extended into 2015 at all, given you’ll still have fairly high leverage as the mine starts up? And how about currency – have you considered hedging the Canadian dollar?

David Garofalo

Yes, the hedges, we don’t contemplate extending them into 2015. We believe our cost structure in 2015 will come down quite significantly as Constancia achieves commercial production, and we think that’s the most effective hedge. Philosophically, we’re not in favor of hedging. We see this as a financing tool during the construction period to minimize balance sheet risk, so I don’t think we’ll see any hedging really beyond the end of 2014.

On the currency side, no, we’re not contemplating any hedges on currency.

Matt Murphy- UBS

Okay, and then maybe just one on the rate of spend at Constancia. I see your guidance at $210 million in Q4 versus 124 million in Q3. How confident are you that that rate of spend will pick up, and how is it going quarter-to-date?

Alan Hair

Matt, it’s Alan Hair here. Yes, things are ramping up nicely at Constancia. The construction side of things is fully mobilized now, as you heard in David’s notes earlier that construction is now well advanced on the mills and the actual plant site. All seven rougher (ph) cells are already in, so we are starting to rack up a reasonable spend every month, so we think those numbers are realistic.

Matt Murphy- UBS

Okay, thanks a lot.

Operator

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

John Tumazos – John Tumazos Very Independent Research

Good morning, thank you. I was looking at the (indiscernible) currency, and it’s 2.80. A year ago, it was a little under 2.6. Some machinery and truck and shovel, some other prices fell in the last year or two. Could you elaborate a little bit on the $1.7 billion capital revision where currency and some other things were going your way, so it looks like adjusting for that, the capital might have gone $300 million the wrong way. Could you break it down in terms of social issues versus detailed engineering versus wage rates, or give a little bit more granularity and explanation please?

David Bryson

John, it’s David Bryson. I can start with a comment just in terms of the foreign exchange impact on capital costs. When we set the original project budget for Constancia, the Peruvian currency was at levels sort of in the mid-270s, and as you pointed it, it did appreciate to the 260 range; but we had put some hedging arrangements in place around that. It’s since come back now to the 280 range, so currency really isn’t a major factor in the movements that we’ve seen in capital costs, nor is major equipment to be honest. Because those orders were placed prior to what we’ve seen in the equipment market, there’s not a whole lot there either. So I think some of the assumptions that you’re making in terms of what might have been achievable might be a bit optimistic.

Alan, I don’t know if there’s anything else you might want to add in terms of drivers on the CAPEX beyond what we’ve already disclosed?

Alan Hair

Well, I think we’ve been fairly clear – the single largest driver was around the heavy civil earth works for a variety of different reasons. We obviously incurred some additional costs associated with the community relocation, mainly due to just the straight costs associated with building the housing and infrastructure. And then construction labor, although things have quieted a little bit in Peru, we found our numbers for the main construction packages to be a bit higher than we expected. So I think we’ve clearly indicated before that those were the main areas of cost growth.

John Tumazos – John Tumazos Very Independent Research

Thank you.

Operator

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

Oscar Cabrera – Bank of America Merrill Lynch

Thanks Operator. Good morning everyone. Just wondering if you can provide us an update with the relocation of families that you had living in the area that you are in a critical path to complete by the second quarter of next year.

Alan Hair

Hi Oscar, it’s Alan Hair here. One of the key milestones in terms of relocation they’re going to reach in a couple of weeks’ time, and that’s the completion of the (indiscernible) relocation area. We’re just finishing off irrigation and fencing there, and when that occurs, we’re in a position to really start moving people or, more importantly, the livestock. So we expect to see relocation pick up the pace in the next little while.

We’ve been able to manage the relocation to date without it impacting the critical path, although there are some families that we will need to have moved by the beginning of next year, but we still believe we’re on track to do that.

Oscar Cabrera – Bank of America Merrill Lynch

Okay, but have you reached an agreement with those folks, or are you still talking to them?

Alan Hair

In total, I think there was, like, six families that were still in discussions with out of the 36 in total.

Oscar Cabrera – Bank of America Merrill Lynch

Okay, great. Thank you. And then if I may, just to follow up on Orest’s question about working capital, what sort of cash position would you be comfortable with through the finishing of construction on Constancia and Lalor, and when do you think the peak spend or the peak debt would be through the next two years?

David Bryson

Oscar, I would say that sort of incorporating working capital requirements, we would intend to have a minimum cash position of no less than $100 million plus incremental liquidity sort of associated with the offtake linked financing that we’re arranging. We would anticipate that just depending on the assumptions, some of the ways that we structure our sales contracts and receivables, that we would expect that minimum cash based on our ramp-up schedule to be either in the fourth quarter of 2014 or the first quarter of 2015. It will be sort of one or the other, we expect, and just sort of where it breaks depends on how some things play out.

Oscar Cabrera – Bank of America Merrill Lynch

Great, that’s very helpful. Thank you. Lastly if I may, with respect to your—you know, you have been pretty clear on your strategy to fund exploration companies to maybe in the future look at expanding your own portfolio. I’m just interested in your sale of the Back Forty project for shares in Aquila. Just wondering if you can provide color around that transaction and also if your thinking has changed with regards to other investments that you have in the portfolio currently.

David Garofalo

Yes Oscar, it’s Dave Garofalo. Back Forty simply just didn’t meet our growth criteria in that the scale of the project just wasn’t sufficient for our purposes. It really didn’t move the needle in terms of any need for us, even though it is a good project; and given that it didn’t meet our scale criteria, we thought it was better off in the hands of a junior that could continue to advance the project through permitting and ultimately, we hope, to mine construction. So we’re happy to take some leverage back in that through a share issuance from Aquila, the newly combined Aquila, and with a financing package in place that can advance that project through at least the pre-feasibility stage.

It really doesn’t change our philosophy in terms of funding juniors. We’re really not allocating more capital to our junior portfolio, and we’re looking to recycle that capital where we have opportunities, and Aquila is an example of that.

Oscar Cabrera – Bank of America Merrill Lynch

Right. Thank you, Dave.

Operator

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

Greg Barnes – TD Securities

Thank you, Operator. David Bryson, I think I misunderstood what you said about the revolving credit facility and the minimum tangible net worth of $400 million, and that relating to how much was available under the facility. Could you talk about that a little bit more?

David Bryson

Greg, you’re referring to the maintenance covenant that we have in the revolver?

Greg Barnes – TD Securities

I guess so, yes.

David Bryson

So we have—maybe I—

Brad Lantz

No, I think he’s referring to your discussion of the baskets in the high yield notes, and you talked about us having the ability to borrow up to 10% of our—

David Bryson

Right, and that was a quite separate discussion than the tangible net worth test that we have under the revolver. The revolver’s only maintenance financial covenant is the maintenance of a tangible net worth of approximately $1.2 billion, and when you sort of adjust for intangible assets and goodwill and the like, we were at about $1.6 billion at the end of the quarter. That covenant was actually reset at sort of 75% of actual when we revised the revolver last quarter.

That doesn’t really have any bearing on our aggregate incurrence capacity, Greg, which is what I was referring to when I was talking about the incurrence covenants under the high yield note indenture, and that’s not sort of a maintenance covenant. Actually, it sort of was a reference to what we can do under the available baskets under the high yield indenture without reference to the ratio-based incurrence covenants that we, to be frank, wouldn’t (indiscernible). But because those are incurrence covenants and there is baskets outside of that, and they are not maintenance covenants, they are not particularly relevant to our financing plans through to completion at Constancia.

Greg Barnes – TD Securities

I must admit, I don’t understand all that. So under the $650 million in high yield notes that you have outstanding, can you add more to that or not?

David Bryson

Yes.

Greg Barnes – TD Securities

You can?

David Bryson

Yes. Subject to allowing for our revolving credit facility, we could in theory incur a total of, I think it’s about $360 million in additional indebtedness in reliance on one basket that doesn’t require sort of any ratio-based test compliance. It’s just a basket that is available as long as we don’t have an inventive default under the indenture, and that’s what I was referring to when I was sort of talking about the up to $400 million.

Greg Barnes – TD Securities

And what form would that additional indebtedness take?

David Bryson

It can take pretty much any form of indebtedness as long as it’s coming from a bank or an institutional investor.

Greg Barnes – TD Securities

So it could be more—another round of high yield notes, or commercial debt or whatever?

David Bryson

That’s not the plan, but that is available to us if we thought it was appropriate.

Greg Barnes – TD Securities

Okay, so over and above everything in terms of the offtake agreement, the silver streams and gold streams, you could another $360 million if you absolutely needed it, I guess? That’s the bottom line?

David Bryson

If we did the full $360 million, we would have to eliminate our revolver; but—

Greg Barnes – TD Securities

But that’s not material anyway.

David Bryson

Right.

Greg Barnes – TD Securities

Okay. Just one further question for Alan. Just following up on Oscar’s question about moving the families, I think there were two families in the area of the waste dumps that it sounded at the time that we were there a month or so ago, the discussions had ground to a halt. Have things improved with them?

Alan Hair

Discussions are still ongoing, Greg. I don’t think we’d characterize them as having ground to a halt. I believe actually with one of the two, I think they’re very close to completion.

Greg Barnes – TD Securities

Okay, good, good. Thank you.

Operator

Ladies and gentlemen, if there are any additional questions at this time, please press the star followed by the one. Your next question will come from the line of Patrick Morton of RBC. Please go ahead.

Mr. Morton, perhaps your line is on mute?

Patrick Morton – RBC Capital Markets

Yes, thanks guys. Just going back to Matt’s question, the rate of spending at Constancia, I know earlier in the year we were planning to spend over $900 million and it looks like we’ll be a bit under $700 million for the 2013 year. Can you touch on how big of a concern that is, slower spending, and if there’s any specific reasons? That’d be great.

Alan Hair

Patrick, it’s Alan Hair here. No, as I answered the earlier question, we’re fully mobilized now on both the construction side and obviously we spoke about the issues before around the heavy civil earth works, but that’s going very, very well now as well. In fact, the bulk dam is basically complete and the construction of the east tailings dam is going well.

So basically, we’re just up and running, I’d say, and progressing very well in terms of the spend to meet the schedule that we’ve indicated.

Patrick Morton – RBC Capital Markets

How has the weather been? I know it’s early days in the rainy season, but so far--?

Alan Hair

So far – yes, you’re right. It’s still early days and there’s been no significant rainfall so far.

Patrick Morton – RBC Capital Markets

Thanks guys.

Operator

Your next question will come from the line of Zach Zolnierz of GMP Securities. Please go ahead.

Zach Zolnierz – GMP Securities

Thanks for taking my questions. A few quick ones on the liquidity side. I just wanted to go back to the net tangible test and just make sure I understood it. You don’t expect to actually rub up against that $1.2 billion, because as we think about the next 12 months as liquidity is drawn down, that CAPEX essentially will boost BP&E on the balance sheet. Is that the right way to think about it?

David Bryson

It’s really driven by sort of net earnings, Zach, and sort of as we’re coming out of the trough now with respect to production and cash flow, we would expect that to improve over time. So yes, I think given the plans that we have and the outlook, it’s a bit difficult to visualize what could cause a problem there. If we had sort of what would have to be a major impairment on one of our assets, then we’d have to start paying attention to that; but we ran our annual goodwill impairment test at the end of the third quarter and had no issues with that test.

Zach Zolnierz – GMP Securities

Okay, that’s helpful. And then second, and I apologize if I didn’t hear this, but on the offtake financing, is that still expected in the 100 to 150 range, and then just wondering if you could comment on what is left as far as negotiations there because I think the way you were talking about it, it seems like it’s pretty certain you plan to put that in place.

David Bryson

Yes, you’ve got the amount that we’re thinking of correct, sort of in the 100 to 150 range, and financing is sort of never locked down until it’s closed. I think that we’ve had good interest from a variety of parties on this, and I think—I’m feeling very confident in terms of our ability to get it put together. We’ve invested quite a bit of time and effort into it. I think we have quite detailed terms worked out, and we expect to be moving shortly into definitive documentation on that. But as with sort of project-level financings, it can take some time to work those details once you let the lawyers in the room.

Zach Zolnierz – GMP Securities

All right. And then the final one from me is I think in the presentation, you have the Canadian income taxes and the Peruvian value-added taxes line as $100 million source of cash. I think when you went over the numbers on the balance sheet, it was closer to 125. Is that just the timing, the 12-month difference?

David Bryson

Yes, I think that was just sort of what I’d describe as more conservative estimate of it as to what we would expect to see back. I think sort of a small part of the income taxes would be something that sort of might reverse itself, so I think $100 million is a number that we’re pretty confident in.

Zach Zolnierz – GMP Securities

Okay, appreciate it, guys.

Operator

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

Alec Kodatsky – CIBC

Thanks guys. Just a quick question on the surface rights for the power line. I think in the release, you indicated you’re at 90% in terms of locking that up. Is that where you want to be in terms of just being able to maintain the construction, just how the progress is going now that we’re moving into the winter there? Just a general update would be helpful.

Alan Hair

Hi Alec, it’s Alan Hair again. Yes, we’re actually—we’re quite happy with the progress in the power line. That 90% basically leaves us only two more groups that we have to negotiate with, and we don’t anticipate any problems with those. Construction is well advanced on a number of sites now, both in terms of the civils and we’re already actually erecting pylons in certain areas. So I think I’d characterize—I think we’d characterized that before as an area of highest risk. I think the risk is diminishing daily in that one.

Alec Kodatsky – CIBC

Okay, great. That’s all I had. Thanks very much, Alan.

Operator

Your next question will come from the line of Gary Chapman of Guardian Capital. Please go ahead.

Gary Chapman – Guardian Capital

Hi, morning. Just a follow-up on the surface rights. The two parties you need to negotiate with, have you located them? Is it just a matter of negotiating, or you still have to find who the landowners are?

Alan Hair

No, that’s problem has passed so we’re actually in negotiations with both of the parties.

Gary Chapman – Guardian Capital

Okay, thanks. And a second question – the rainy season, is everything in place that needs to be in place in terms of construction-wise to deal with the rainy season?

Alan Hair

We believe so. We actually believe we’re very well prepared now, even if it was another unusually wet year.

Gary Chapman – Guardian Capital

Okay, thanks very much.

Operator

And ladies and gentlemen, this does conclude the question and answer session. I will now turn the call back to Mr. Garofalo for any closing.

David Garofalo

Thank you everybody for participating. Please feel free to give John or David or myself a call if you have any further questions and want to get into a bit more detail. Have a great day.

Operator

Thank you. Ladies and gentlemen, this will conclude the conference call for today. Again, we thank you for your participation and you may now disconnect your line.

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