CEO Message

In 2018, Hudbay delivered strong operational results, including copper production that exceeded our guidance range for the year. We were also able to incorporate process improvements at each of our operating business units that drove additional efficiencies in our operations.

We delivered these results while maintaining strong safety performance at all of our operations. In Manitoba, our safety record improved compared to the previous year, with our lost time accident (LTA) frequency and lost time accident severity both down by 0.2. At our Peru Business Unit, we had only two lost time accidents, related to hand injuries sustained by contractors. However, good results are not perfect results, and with safety that is our goal; we continue to invest in incident reviews, in enhanced systems and in better training to improve our safety performance. At year’s end, we had generated $479.6 million in cash and reduced our net debt to $465.5 million. We were able to achieve these results while maintaining strong safety performance at all of our mines, which is always a priority for Hudbay.

Rosemont reaches a milestone

On March 8, 2019, we were very pleased to announce that the US Army Corps of Engineers had issued a Section 404 Water Permit (the 404 Permit) for Hudbay’s Rosemont project. This was the last milestone in a permitting process that involved 17 co-operating agencies at various levels of government, 16 hearings, over 1,000 studies and 245 days of public comment resulting in more than 43,000 comments. On March 21, the US Forest Service, which had already issued its Final Record of Decision in favour of the project, officially approved Rosemont’s Mine Plan of Operations.

With the Mine Plan of Operations in hand, we can move forward with developing a modern mine that will fulfill the requirements of its permits, create jobs and provide benefits for all of our stakeholders. Once it is fully operational, Rosemont is expected to account for 10% of US copper production. It will be a long-life, low-cost mine, built and operated by Hudbay, that perfectly embodies our strategy and our strengths.

A record year in Peru

We achieved record mill throughput at Constancia in 2018 and, as a result of metallurgical initiatives, we were also able to deliver record-level copper recoveries. Over the course of the year, Peru produced 122,178 tonnes of copper and 63,187 ounces of gold-precious metals. The molybdenum plant, operating at a significantly higher rate than previous years, produced 904 tonnes of molybdenum.

All of this was done while keeping a close eye on costs. Among its peers, including some that are two or three times its size, Constancia is currently the lowest cost open pit copper sulphide mine in South America¹. Another defining strength of our operations in Peru is strong relations with our employees. We have a three-year labour agreement with the union in Peru, where one-year agreements are typical. This helps us manage both risks and costs.

Good labour relations are an outgrowth of good community relations, which have been a priority at Constancia from day one. Building strong, trust-based relationships with the people and communities adjacent to our operations, and with all levels of government, has provided us with labour peace (which not all mines in the region enjoy) and will provide a strong foundation for expanding our activities in the area.

This is vital, because in 2018 we consolidated the mineral rights around the Constancia mine, giving us mineral claims to some very prospective properties that were of interest to the Company even before we acquired the Constancia property in 2011. Currently, we are in discussion with various community groups concerning surface rights in areas around Pampacancha and Constancia. These discussions are proceeding amicably, and we have already reached agreements with two communities. In addition to our exploration activities, we are also pursuing opportunities in Chile, the world’s leading copper-producing nation and a highly attractive jurisdiction for miners.

Changing focus in Manitoba

In Manitoba, we were confronted by some operating challenges at the beginning of the year, but we were able to address them and achieve our 2018 production guidance for copper, zinc and precious metals.

In October, we completed the closure of the Reed mine, under budget and ahead of schedule. From start to finish, Reed can serve as a model for successful, sustainable mining in an environmentally sensitive area. We also announced the closure date for several key operations in Flin Flon as well as the transition of our operational focus to Lalor and the Snow Lake belt.

At Lalor, we released a new mine plan and updated reserves and resources incorporating the gold zone and the reopening of the New Britannia mill. We completed several trade-off studies and conducted test mining of the gold zone to confirm our understanding of the deposit, and we concluded that refurbishing New Britannia is the most efficient and cost-effective choice for processing the Lalor gold and copper-gold zones. Related to these efforts, we advanced sampling and survey efforts to better understand the opportunities for copper and gold exploration available to us in the Snow Lake belt.

We recently discovered a new deposit located between the Lalor mine and the old Chisel North mine in the Chisel basin in Snow Lake. The deposit has high-grade zinc and gold intersections, which demonstrates the regional potential in Manitoba and our strong exploration expertise.

Supporting transitions in Flin Flon

We informed our employees that the 777 mine would close in 2022, along with operations at the Flin Flon mill and the zinc plant. We made exhaustive efforts to find options that would allow us to continue operations, but they were not successful. Consequently, our focus becomes reducing the impact of these closures; finding opportunities for Flin Flon employees at Lalor and Snow Lake; and helping both employees and the community manage this transition.

We are committed to supporting Flin Flon throughout this process and to being open and transparent every step of the way. Our relationship with the town goes back over 90 years, a remarkable achievement in any industry, but especially in the resource sector. Our ties to Flin Flon are both deep and personal, and we are determined to do our best by the community and its people.

Building our development pipeline

One of the biggest challenges for any company in the resource sector is building a robust development pipeline. The acquisition of the Ann Mason deposit, a high-quality copper resource in Nevada, the consolidation of prospective properties around Constancia, and our efforts in other regions all help position Hudbay to meet the long-term needs of the Company and its stakeholders with a development pipeline that exceeds 800,000 hectares under management. Our exploration budget for 2019 is $40 million, and we are pursuing exploration activities in Manitoba, British Columbia, Nevada, Peru and Chile. Demand for copper is expected to increase in the coming years, and, at present, there is not adequate supply to meet that demand. With the assets we have in production, in early development or awaiting development, Hudbay is well placed to meet the future’s growing need for copper.

Addressing concerns

I must also note that, in the fall, a shareholder raised a series of concerns that led to a proxy contest prior to our recent annual general meeting. Following the achievement of a number of business milestones and based on the input of many of our shareholders, we reached a settlement agreement with the shareholder that provided for a continuation of our ongoing board refreshment process. I am pleased with the strong support that shareholders expressed for our management team and Hudbay's strategy, and am confident that we are well placed to continue to deliver value for all of our stakeholders.

Strengthening our organization

The management theorist Peter Drucker once remarked that “culture eats strategy for breakfast.” Over the last several years, Hudbay has been working in a variety of ways to strengthen and enhance our organizational culture, across all of our operations, so that it better supports the execution of our strategy through our people. These efforts include the establishment of a requisite organizational structure at Hudbay, and led to the introduction of a refreshed mission and vision supported by our values of dignity and respect, caring, openness and trustworthiness. These values guide our decisions from the perspectives of both our internal and external stakeholders.

We also believe that inclusiveness and diversity make us a better company by providing Hudbay with access to the full range of talent available to us. We have community outreach efforts everywhere we operate as well as programs aimed at helping our employees improve and expand their skills. We are also signatories to the 30% Club and the Catalyst Accord, and share their goal of having at least 30% female representation at the board and C-suite levels by 2022.

The benefits of responsible mining

Hudbay has a long history of operating in a socially responsible way. This approach aligns with the values that define our culture and is essential for the continued success of our business. Increasingly, we are seeing that large institutional investors are only interested in companies with strong records in the areas of environmental, social and governance (ESG) performance. Our commitment to ESG was demonstrated when Hudbay was placed among the top 50 in The Globe and Mail’s 2018 Board Games Corporate Governance Ranking. The plan for our Rosemont project includes many sector-leading innovations to reduce its environmental impact. Our focus on community in both Manitoba and Peru has allowed Hudbay to enjoy productive relationships with our neighbours. Collectively, these steps help benefit society at large; they also benefit Hudbay directly by making us a better investment, a better partner, a better employer and a better company.

Looking forward

The receipt of the 404 Permit allows us to start 2019 on a high note. It also reminds us to have confidence both in our capabilities and in the permitting process. Drawing upon skills and knowledge gained in Manitoba and Peru, Rosemont will be a transformational project for Hudbay. It is expected to increase our copper-equivalent production by 50% in the next five years. It will also enable Hudbay to set a new bar for sustainable mine building and operation.

We end 2018 and begin 2019 very well positioned for the future.

In closing, I would like to thank our Board and my colleagues throughout Hudbay for their support of our strategy and their hard work and commitment throughout the year.

Sincerely,

Alan Hair
President and Chief Executive Officer

1. Source: Wood Mackenzie dataset