Our Company Ceo
Message

2015 was a year of transition and important growth accomplishments for Hudbay. In my first letter as Chief Executive Officer, I’m pleased to report that 2015 was also a year that confirmed the strengths of our strategy and our people.

When Hudbay successfully ramped up to full commercial production at Constancia, it completed the transition from a company that had been focused on development to one focused on optimizing production and processes at operating mines. As we reported early this year, copper sales volumes from our mines – Constancia, Lalor, Reed and 777 – increased 850% year-over-year in the fourth quarter of 2015. This is a remarkable achievement by any measure and in any market conditions.

Experience Managing the Mining Cycle

The impact of this strong performance was in stark contrast to the low price environment that affected the entire commodity market. At the same time, it demonstrated why we focused on bringing Lalor and Constancia, in particular, into production. High-quality, long-life, low-cost mines enable Hudbay to perform even in the tough times, and position us to capitalize on opportunity when, as it always does, the cycle follows its natural path to metal price increases.

In response to deteriorating commodity prices, we launched an extensive review of all of our operations as part of a company-wide efficiency improvement initiative. This review delivered expected 2016 capital expenditure and operating cost reductions of more than $100 million, compared to 2016 guidance, with no effect on our production guidance. It is important to make clear that pursuing and implementing these savings had no impact on safety. Safety is never negotiable.

In early 2016, Hudbay also announced amendments to our credit facility. We received commitments from lenders under our two secured credit facilities to consolidate the lender groups and restructure the two facilities with more flexible financial covenants and longer maturity dates. Not only does our success in this renegotiation enhance our liquidity position, but it is also a clear indication that the market recognizes Hudbay’s strengths and it leaves us well positioned to respond to the current price environment.

Meeting Challenges

Given the size, location and complexity of the project, the ramp-up to commercial production at Constancia went remarkably smoothly, but inevitably, there were challenges. In fall 2015, driven in part by strong ramp-up performance, we experienced a build-up of copper concentrate inventory at the mine site. In response, a larger fleet was quickly certified, the range of routes to the port at Matarani optimized, and by the end of 2015, the entire excess inventory had been transported to port and sold.

Hudbay Manitoba’s collective agreements with the seven unions expired on December 31, 2014. We were unable to establish an agreement with one union, which subsequently went on strike in May 2015. Work proceeded under a contingency plan, and a new three-year collective agreement was finalized in August 2015.

Our acquisition of the New Britannia mine and mill (NBM mill), in May 2015, is an example of imaginative near-term cost control and strategic long-term thinking. Though it is currently on care and maintenance, the NBM mill can be refurbished more quickly and more cost-effectively than building a new concentrator, as was initially planned for Lalor. At the same time, it offers a range of functionality that gives us considerable flexibility in processing copper and gold from Lalor.

Mindful of Our Responsibilities

An organization-wide commitment to corporate social responsibility (CSR) has been essential to the achievements of the last five years, and will help sustain Hudbay through the ups and downs of the commodity cycle. At all times, while taking steps to drive efficiency and optimize performance, we remain mindful of our responsibilities to our employees, our communities and the environment. CSR is very much like safety in this respect.

CSR makes a key contribution to productivity and efficiency at all of our operations, including our 2016 priorities to achieve ISO 14001 (environmental) and OHSAS 18001 (health and safety) certification at Constancia, and to adopt the Mining Association of Canada’s Towards Sustainable Mining Initiative, the Voluntary Principles on Security and Human Rights, and other international best practice standards.

This past year, we also strengthened our policies and procedures with respect to anti-corruption, and took measurable steps to ensure they are widely understood throughout Hudbay.

As already mentioned, safety remained our top priority. Our overall lost time accident (LTA) frequency was 0.3 per 200,000 hours worked in 2015. While not on par with our record 2014 performance of 0.1, it was still a strong year for safety.

Connected to Communities

Building strong relationships with the communities near our operations is a defining characteristic of Hudbay, and has been since its founding almost 90 years ago. Local residents must benefit from our activities. This includes hiring people from nearby communities to work at our operations, which can involve helping them upgrade their existing skills or teaching them new ones. At Constancia, Hudbay Peru employed more than 400 local people in 2015, and our Manitoba subsidiary created 160 new jobs, primarily at Lalor.

Along with providing employment, we contribute to local development through the goods and services we purchase from local businesses, and through the taxes and royalties we pay on our activities. This year, Hudbay Peru completed its first project under an innovative program that allows companies to pay up to half their income tax through contributions to public infrastructure projects. These funds financed the building of an irrigation system in the district of Livitaca.

Reflecting our commitment to openness and transparency, we pursued community outreach initiatives at all of our operations and projects, keeping people informed of our activities and helping them understand how they can engage and work with us. This included particular efforts focused on Aboriginal communities near our operations, where we continually work to build new relationships and strengthen existing ties.

We marked our longest-standing community relationship throughout 2015 by commemorating the 100th anniversary of the discovery of the Flin Flon deposit. Please visit the interactive centennial museum on our website for a historic look at this milestone and its impact on our company and the northern Manitoba region.

A Sustainable Approach

Hudbay is committed to mitigating impacts at its operations, while contributing to regional sustainability. Our efforts in Manitoba include an ongoing commitment to boreal woodland caribou conservation, while in Peru they include species rescue and relocation initiatives, revegetation programs using regionally appropriate seedlings grown by local community members, and wetlands management.

Environmental studies at Rosemont in Arizona have been ongoing for the last several years. The data from these studies has been used in developing management and mitigation plans that should help to establish Rosemont as a leader in environmental practice.

A Strong Foundation

Hudbay is guided by experience, so in the current challenging market, our focus will be on process optimization and cost efficiency. But experience also tells us there are few companies in the sector as strongly positioned as Hudbay to deliver long-term growth in performance and value.

In 2016, Rosemont Copper Company, our Arizona subsidiary, will continue work on the Rosemont permitting process and feasibility study to position it as one of the best shovel-ready projects in the industry, ready to move forward when the economics for development improve. At Constancia, even after its first full year of commercial operation, the potential of this high-value, long-life asset continues to impress.

The same is true in Manitoba, where the foundation provided at Lalor ensures that we will continue to operate in the region well beyond the 100th anniversary in 2015 of the discovery of the original Flin Flon deposit. Despite our best efforts, including the exploration of the War Baby claim in 2015, in a matter of years, 777 will reach the end of its life as an operating mine. A priority for Hudbay in 2016 will be working with our colleagues and with the community in Flin Flon to help ensure a smooth and effective social and economic transition. At the same time, I cannot overstate that our commitment to Manitoba remains strong and our connection to Flin Flon will endure.

We intend to grow our company via exploration and development of projects already in our control, like Rosemont, while also keeping an eye on acquisition opportunities that fit our strategic criteria. In order to successfully achieve these initiatives, we recognize the need to have strong operating and management teams, which is why we will continue to develop leadership programs to maintain uniform high leadership capability within Hudbay. Above all, we value the safety and well-being of all our employees and the communities where we operate, and maintaining or improving our safety performance and strong relationships with our local communities will remain top priorities for the Company.

I would like to thank the Board for the confidence they have shown in me, and I want to thank my colleagues throughout Hudbay for the support they have extended to me in my new role. The theme of this year’s report is Mining Experience, because it captures how Hudbay benefits from a depth of experience and a knowledge of mining that combine to give us a truly unique advantage.

I invite you to review our report and our websites to find out more about Hudbay’s achievements in 2015, and our priorities for the years ahead.

Sincerely,
Alan Hair
President and Chief Executive Officer