Management's Discussion and Analysis of Results of Operations and Financial Condition. For the three and nine months ended September 30, 2017

Transcription

1 Management's Discussion and Analysis of Results of Operations and Financial Condition For the three and nine months ended September 30, 207 November, 207

2 TABLE OF CONTENTS Page Introduction... Our Business... Summary...2 Key Financial Results...3 Key Production Results...4 Recent Developments...5 Constancia Operations Review...6 Manitoba Operations Review...9 Financial Review...5 Liquidity and Capital Resources...24 Trend Analysis and Quarterly Review...29 Non-IFRS Financial Performance Measures...29 Accounting Changes and Critical Estimates...37 Changes in Internal Control Over Financial Reporting...37 Notes to Reader...37

3 INTRODUCTION This Management's Discussion and Analysis ("MD&A") dated November, 207 is intended to supplement Hudbay Minerals Inc.'s unaudited condensed consolidated interim financial statements and related notes for the three and nine months ended September 30, 207 and 206 (the "consolidated interim financial statements"). The consolidated interim financial statements have been prepared in accordance with International Financial Reporting Standards ( IFRS"), including International Accounting Standard 34, Interim Financial Reporting, as issued by the International Accounting Standards Board. References to Hudbay, the Company, we, us, our or similar terms refer to Hudbay Minerals Inc. and its direct and indirect subsidiaries as at September 30, 207. "Hudbay Peru" refers to HudBay Peru S.A.C., our wholly-owned subsidiary which owns a 00% interest in the Constancia mine, and Hudbay Arizona refers to HudBay Arizona Corporation (formerly named Augusta Resource Corporation), our wholly-owned subsidiary, which indirectly owns a 92.05% interest in the Rosemont project. Readers should be aware that: This MD&A contains certain forward-looking statements and forward-looking information (collectively, forward-looking information ) that are subject to risk factors set out in a cautionary note contained in our MD&A. This MD&A has been prepared in accordance with the requirements of the securities laws in effect in Canada, which may differ materially from the requirements of United States securities laws applicable to US issuers. We use a number of non-ifrs financial performance measures in our MD&A. The technical and scientific information in this MD&A has been approved by qualified persons based on a variety of assumptions and estimates. For a discussion of each of the above matters, readers are urged to review the Notes to Reader discussion beginning on page 37 of this MD&A. Additional information regarding Hudbay, including the risks related to our business and those that are reasonably likely to affect our financial statements in the future, is contained in our continuous disclosure materials, including our most recent Annual Information Form ( AIF ), consolidated financial statements and Management Information Circular available on SEDAR at and on EDGAR at All amounts are in US dollars unless otherwise noted. OUR BUSINESS We are an integrated mining company primarily producing copper concentrate (containing copper, gold and silver), zinc concentrate and zinc metal. With assets in North and South America, we are focused on the discovery, production and marketing of base and precious metals. Directly and through our subsidiaries, we own four polymetallic mines, four ore concentrators and a zinc production facility in northern Manitoba and Saskatchewan (Canada) and Cusco (Peru), and a copper project in Arizona (United States). Our growth strategy is focused on the exploration and development of properties we already control, as well as other mineral assets we may acquire that fit our strategic criteria. Our vision is to become a top-tier operator of long-life, low-cost mines in the Americas. Our mission is to create sustainable value through the acquisition, development and operation of high-quality and growing long-life deposits in mining-friendly jurisdictions. We are governed by the Canada Business Corporations Act and our shares are listed under the symbol "HBM" on the Toronto Stock Exchange, New York Stock Exchange and Bolsa de Valores de Lima. We also have warrants listed under the symbol HBM.WT on the Toronto Stock Exchange and HBM/WS on the New York Stock Exchange.

4 SUMMARY Net profit and earnings per share in the third quarter of 207 were $40.9 million and $0.7, respectively, compared to a net profit and earnings per share of $33.6 million and $0.4, respectively, in the third quarter of 206. In the third quarter of 207, cash generated from operating activities was $67.9 million, up from $95.9 million in the same period of 206. Operating cash flow before change in non-cash working capital increased to $53.9 million in the third quarter of 207 from $24.2 million in the same quarter of 206. The increase in net profit and operating cash flow is the result of growth in sales volumes of zinc and gold and higher realized copper and zinc prices, partially offset by decreases in the sales volumes of copper. Net profit and earnings per share in the third quarter of 207 were affected by, among other things, the following items: (in $ millions, except per share amounts) Pre-tax After-tax Per share gain (loss) gain (loss) gain (loss) Foreign exchange loss (6.5) (6.0) (0.02) Mark-to-market adjustments of various items (9.4) (8.4) (0.04) Transaction costs written-off due to debt refinancing (3.6) (2.4) (0.0) Recovery for damages during commissioning of Constancia mill Non-cash deferred tax adjustments Compared to the same quarter of 206, production of zinc in concentrate increased as a result of higher zinc grades in Manitoba, while copper production declined due to expected lower copper grades in Peru. In the third quarter of 207, consolidated cash cost per pound of copper produced, net of by-product credits, was $0.86, a decrease compared to $0.9 in the same period last year. Incorporating sustaining capital, capitalized exploration, royalties and corporate selling and administrative expenses, consolidated all-in sustaining cash cost per pound of copper produced, net of by-product credits, in the third quarter of 207 was $.64, up from $.46 in the third quarter of 206. The increase in all-in sustaining cash cost was driven by higher planned sustaining capital expenditures in Peru and lower copper production compared to the third quarter of 206. Cash cost and sustaining cash cost per pound of copper produced, net of by-product credits, and net debt are not recognized under IFRS. For more detail on this non-ifrs financial performance measure, please see the discussion under "Non-IFRS Financial Performance Measures" beginning on page 29 of this MD&A. 2

5 Net debt declined by $300.2 million from June 30, 207 to $649.6 million at September 30, 207, as a result of cash flow from our operations and $87.4 million of net proceeds from an equity issuance. At September 30, 207, total liquidity including cash and available credit facilities was $749.9 million, up from $496.8 million at June 30, 207. We are on track to meet previously issued 207 guidance for production and capital costs in both Peru and Manitoba. Unit operating costs in Peru have declined and are tracking within the guidance range for 207; however, Manitoba unit costs are expected to be moderately higher than 207 guidance levels. KEY FINANCIAL RESULTS Financial Condition (in $ thousands) Sep. 30, 207 Dec. 3, 206 Cash and cash equivalents 328,927 46,864 Total long-term debt 978,494,232,64 Net debt 649,567,085,300 Working capital 260,305 2,539 Total assets 4,59,63 4,456,556 Equity 2,047,65,763,22 Financial Performance Three months ended Nine months ended (in $ thousands, except per share amounts) Sep. 30, Sep. 30, Sep. 30, Sep. 30, Revenue 370,356 3, ,40 82,024 Cost of sales 259,39 242,965 70,37 667,35 Profit before tax 58,68 42,00 3,88 3,670 Profit 40,942 33,57 64,223 2,080 Basic and diluted earnings per share Operating cash flow before change in non-cash working capital 53,943 24, , ,6 Net debt is a non-ifrs financial performance measures with no standardized definition under IFRS. For further information and a detailed reconciliation, please see the discussion under "Non-IFRS Financial Reporting Measures" beginning on page 29 of this MD&A. 3

6 KEY PRODUCTION RESULTS Three months ended Three months ended Sep. 30, 207 Sep. 30, 206 Peru Manitoba Total Peru Manitoba Total Contained metal in concentrate produced Copper tonnes 30,936 9,509 40,445 35,604 0,333 45,937 Gold oz 4,702 23,975 28,677 6,867 22,998 29,865 Silver oz 67,959 37, , , ,293,043,79 Zinc tonnes - 36,635 36,635-3,606 3,606 Payable metal sold Copper tonnes 30,28,384 4,52 38,859 9,647 48,506 Gold oz 3,03 24,526 27,629 6,479 9,235 25,74 Silver oz 465,25 292,26 757,52 573, ,56 780,253 Zinc 2 tonnes - 27,804 27,804-26,2 26,2 Cash cost 3 $/lb.9 (0.20) Sustaining cash cost 3 $/lb All-in sustaining cash cost 2 $/lb Nine months ended Nine months ended Sep. 30, 207 Sep. 30, 206 Peru Manitoba Total Peru Manitoba Total Contained metal in concentrate produced Copper tonnes 87,944 28,073 6,07 99,446 3,262 30,708 Gold oz 2,440 63,625 76,065 2,243 65,57 86,84 Silver oz,703, ,978 2,483,767 2,036, ,278 2,763,28 Zinc tonnes - 02,0 02,0-8,438 8,438 Payable metal sold Copper tonnes 77,75 30,00 07,76 96,694 30,565 27,259 Gold oz 8,022 70,527 78,549 8,06 52,70 70,86 Silver oz,407,30 87,653 2,224,783,72,52 548,923 2,270,435 Zinc 2 tonnes - 84,059 84,059-75,359 75,359 Cash cost 3 $/lb.24 (0.3) Sustaining cash cost 3 $/lb All-in sustaining cash cost 2 $/lb Metal reported in concentrate is prior to deductions associated with smelter contract terms. 2 Includes refined zinc metal sold and payable zinc in concentrate sold. 3 Cash cost, sustaining cash cost and all-in sustaining cash cost per pound of copper produced, net of by-product credits are non-ifrs financial performance measures with no standardized definition under IFRS. For further information and a detailed reconciliation, please see the discussion under "Non-IFRS Financial Reporting Measures" beginning on page 29 of this MD&A. 4

7 RECENT DEVELOPMENTS Rosemont Developments Work continues with the U.S. Forest Service on the draft Mine Plan of Operations, which is progressing as planned. The remaining key federal permit outstanding is the Section 404 Water Permit from the U.S. Army Corps of Engineers. On September 25, 207, an opponent of the Rosemont project filed a lawsuit against the U.S. Fish and Wildlife Service and U.S. Forest Service challenging, among other things, the issuance of the Final Record of Decision in respect of Rosemont. This lawsuit is one of many challenges against the Rosemont permitting process and Hudbay is confident the permits will be upheld. Common Equity Issuance On September 27, 207, we completed an equity offering of 24,000,000 common shares of the company at a price of C$0.0 per share, for gross proceeds of C$242.4 million ($95.3 million). We intend to use the net proceeds of the offering to advance our current growth projects, enhance our financial flexibility to pursue other growth opportunities, reduce debt and for general corporate purposes. 5

8 CONSTANCIA OPERATIONS REVIEW Three months ended Nine months ended Guidance Sep. 30, Sep. 30, Sep. 30, Sep. 30, Annual Ore mined tonnes 8,90,444 6,945,479 22,74,75 20,304,794 Copper % Gold g/tonne Silver g/tonne Ore milled tonnes 7,828,430 6,854,345 2,077,729 9,830,454 Copper % Gold g/tonne Silver g/tonne Copper concentrate tonnes 2,428 40, , ,555 Concentrate grade % Cu Copper recovery % Gold recovery % Silver recovery % Combined unit operating costs $/tonne Reflects combined mine and mill costs per tonne of ore milled. Peru operations combined mine and mill unit costs include G&A, and reflects the deduction of expected capitalized stripping costs and excludes costs. Ore mined at our Constancia mine during the third quarter of 207 increased by 8% compared to the same period in 206 as we continue to increase stockpiles to improve our ability to blend ore at the processing plant. As expected, milled copper grades in the third quarter were approximately 2% lower than the same period in 206 as we entered lower grade phases of the mine plan. Mill throughput improved 4% due to increased plant availability as well as plant optimization initiatives during the third quarter of 207. Recoveries of copper, gold and silver were lower in the third quarter of 207, compared to the same period in 206 primarily due to expected lower head grades and normal ore type variability. Optimization in process recoveries continues to be implemented and evaluated along with consistent positive grade reconciliations. Combined mine, mill and G&A unit operating costs in the third quarter of 207 were 4% lower than the same period in 206 as a result of increased throughput and lower operating costs. Combined unit operating costs in Peru are expected to be within the guidance range for

9 Three months ended Nine months ended Guidance Contained metal in Sep. 30, Sep. 30, Sep. 30, Sep. 30, Annual concentrate produced Copper tonnes 30,936 35,604 87,944 99,446 00,000-5,000 Gold oz 4,702 6,867 2,440 2,243 Silver oz 67, ,498,703,789 2,036,940 Precious metals oz 3,530 7,574 36,780 50,342 55,000-65,000 Precious metals production includes gold and silver production on a gold-equivalent basis. Silver is converted to gold at a ratio of 70:. Production of copper, gold and silver in the third quarter of 207 was lower than the same period in 206 due to an expected decline in mined grades, while production increased from the second to third quarter of 207 as a result of improved mill throughput. Production in Peru is expected to be within guidance ranges for 207. Peru Cash Cost and Sustaining Cash Cost Three months ended Nine months ended Sep. 30, Sep. 30, Sep. 30, Sep. 30, Cash cost per pound of copper produced, net of by-product credits $/lb Sustaining cash cost per pound of copper produced, net of by-product credits $/lb Cash cost and sustaining cash costs per pound of copper produced, net of by-product credits, are not recognized under IFRS. For more detail on this non-ifrs financial performance measure, please see the discussion under "Non-IFRS Financial Performance Measures" beginning on page 29 of this MD&A. Cash cost per pound of copper produced, net of by-product credits, for the three months ended September 30, 207 was $.9, an increase of 5% from the same period in 206 mainly as a result of decreased copper grades. Sustaining cash cost per pound of copper produced, net of by-product credits, for the three months ended September 30, 207 was $.80, an increase of 3% from the same period in 206 as a result of the factors noted above, as well as expected higher sustaining capital. 7

10 Metal Sold Three months ended Nine months ended Sep. 30, Sep. 30, Sep. 30, Sep. 30, Payable metal in concentrate Copper tonnes 30,28 38,859 77,75 96,694 Gold oz 3,03 6,479 8,022 8,06 Silver oz 465,25 573,097,407,30,72,52 8

11 MANITOBA OPERATIONS REVIEW Mines Three months ended Nine months ended Sep. 30, Sep. 30, Sep. 30, Sep. 30, Ore tonnes 235, ,436 8,84 999,694 Copper % Zinc % Gold g/tonne Silver g/tonne Lalor Ore tonnes 342,84 27,72 959,89 84,206 Copper % Zinc % Gold g/tonne Silver g/tonne Reed Ore tonnes 7,536 2, ,84 338,842 Copper % Zinc % Gold g/tonne Silver g/tonne Total Mines Ore tonnes 695,33 69,537 2,29,24 2,52,742 Copper % Zinc % Gold g/tonne Silver g/tonne Includes 00% of Reed mine production. Three months ended Nine months ended Sep. 30, Sep. 30, Sep. 30, Sep. 30, Unit Operating Costs Mines 777 C$/tonne Lalor C$/tonne Reed C$/tonne Total Mines C$/tonne Ore mined at our Manitoba operations during the third quarter of 207 was consistent with ore mined in the same period in 206. Increased production at our Lalor and Reed mines was partially offset by decreased production at our 777 mine. Overall, copper, zinc, gold and silver grades were 3%, 20%, 9% and 0% higher, respectively, in the third quarter of 207 compared to the same period of 206. Grade variances were due to planned stope sequencing, including the re-sequencing of the 777 mine plan to prioritize higher grade zinc stopes in 207. Unit 9

12 operating costs for all Manitoba mines for the third quarter of 207 increased by 33% compared to the same period in 206. We ceased capitalizing Reed development costs in the third quarter of 207 as a result of the mine s expected closure in the third quarter of 208, resulting in higher Reed unit operating costs compared to prior periods. The 777 mine experienced a plugged paste backfill line at the start of the third quarter of 207, which has since been restored; however the lack of paste backfill reduced the number of production stopes in the quarter, and 777 costs were affected by cleaning and re-drilling of backfill holes and the cost of cemented rock fill to mitigate the lack of paste. The impact on production rates is expected to continue to the fourth quarter of 207, with the mine expected to return to normal production rates and expected costs towards the end of the year. Consistent with our revised mine plan, Lalor s unit costs reflect increased cement rock filling costs as well as substantial operating and capital development work that was undertaken to increase Lalor s production rate to 4,500 tonnes per day. The strong ramp up of ore production from the Lalor mine in 207 has resulted in the accumulation of an ore stockpile as Lalor s mine production has exceeded the Stall concentrator s current milling capacity. With intention to take advantage of higher metal prices and increase our revenues at a slightly higher unit cost, ore will be trucked to the Flin Flon mill for processing for the remainder of the year. Year-to-date ore mined at our Manitoba operations was % lower than the same period in 206 as a result of lower production at our 777 mine partially offset by higher production at our Reed and Lalor mines. Year-to-date copper grades in 207 were lower than the same period in 206 by 6%, while zinc, gold and silver grades were 32%, 2%, and 2% higher, respectively, which is in line with mine plan expectations. Year-to-date total mine unit costs were 26% higher than the same period in 206 as a result of the same factors that impacted third quarter total mine unit costs. 0

13 Processing Facilities Three months ended Nine months ended Sep. 30, Sep. 30, Sep. 30, Sep. 30, Flin Flon Concentrator Ore tonnes 390, ,589,200,448,299,978 Copper % Zinc % Gold g/tonne Silver g/tonne Copper concentrate tonnes 3,79 35,939 97,970 2,0 Concentrate grade % Cu Zinc concentrate tonnes 30,5 23,638 79,464 54,22 Concentrate grade % Zn Copper recovery % Zinc recovery % Gold recovery % Silver recovery % Contained metal in concentrate produced Copper tonnes 7,778 8,487 23,754 26,820 Zinc tonnes 5,99 2,204 40,906 27,943 Precious metals oz 6,404 3,554 43,442 36,58 Stall Concentrator Ore tonnes 280, , ,398 83,77 Copper % Zinc % Gold g/tonne Silver g/tonne Copper concentrate tonnes 8,04 8,754 20,870 2,347 Concentrate grade % Cu Zinc concentrate tonnes 40,334 37,469 8,058 04,06 Concentrate grade % Zn Copper recovery % Zinc recovery % Gold recovery % Silver recovery % Contained metal in concentrate produced Copper tonnes,73,846 4,39 4,442 Zinc tonnes 20,76 9,402 6,95 53,495 Precious metals oz 2,08 3,649 3,326 39,429 Precious metals production includes gold and silver production on a gold-equivalent basis. Silver is converted to gold at a ratio of 70:.

14 Three months ended Nine months ended Guidance Sep. 30, Sep. 30, Sep. 30, Sep. 30, Annual Unit Operating Costs Concentrators Flin Flon C$/tonne Stall C$/tonne Combined mine/mill unit operating costs Manitoba C$/tonne Reflects combined mine, mill and G&A costs per tonne of milled ore. Includes the cost of ore purchased from our joint venture partner at Reed mine. Ore processed in Flin Flon in the third quarter of 207 was 0% lower than the same period in 206 as a result of lower production at our 777 mine, which was partially offset by processing 63,936 tonnes of ore from our Lalor mine. Copper recovery in the third quarter of 207 was consistent with the same period in 206, while zinc, gold, and silver recoveries were 6%, 7%, and 8% higher, respectively, due to higher head grades. Unit operating costs at the Flin Flon concentrator were 20% lower in the third quarter of 207 compared to the same period in 206 as a result of lower maintenance expenditures. Ore processed and recoveries at the Stall concentrator in the third quarter of 207 were consistent with the same period in 206. Unit operating costs at the Stall concentrator were 2% higher in the third quarter of 207 compared to the same period in 206 as a result of higher maintenance expenditures. Ore processed year-to-date in 207 in Flin Flon was 8% lower than the same period in 206 as a result of lower production at our 777 mine. Year-to-date recoveries of copper, gold, and silver, were fairly consistent with the same period in 206, while zinc recovery was 7% higher due to higher zinc head grades. Year-to-date unit operating costs at the Flin Flon concentrator were 3% higher than the same period in 206 as a result of lower production as well as higher maintenance costs in the first half of 207. Ore processed year-to-date and recoveries for all metals in 207 at the Stall concentrator were consistent with the same period in 206. Year-to-date unit operating costs at the Stall concentrator were 33% higher than the same period in 206 as a result of higher maintenance expenditures and the use of higher-cost temporary crushing facilities primarily during the first quarter. Manitoba combined mine, mill and G&A unit operating costs in the third quarter and year-to-date in 207 were 30%, and 27% higher, respectively, than in the same periods in 206 due to the factors described above as well as higher 777, Reed and Lalor unit costs due to the factors described under Mines, above. In addition, the stockpiling of Lalor ore described above increases combined mine/mill unit costs as that metric is expressed as total costs during the period (irrespective of inventory changes), divided by the tonnes of ore milled. This factor should reverse as stockpiles reduce, although future costs will be affected by higher Reed mine unit costs as the capitalization of development costs has ceased, and additional costs will be incurred to truck Lalor ore to the Flin Flon mill. Processing the additional Lalor production in Flin Flon is expected to drive economies of scale and additional revenues through a faster ramp up. As a result of all of these factors, Manitoba combined unit operating costs for the full year 207 are expected to be moderately higher than the guidance range of C$88 C$08 per tonne. 2

15 Three months ended Nine months ended Guidance Manitoba contained metal in Sep. 30, Sep. 30, Sep. 30, Sep. 30, Annual concentrate produced, Copper tonnes 9,509 0,333 28,073 3,262 32,500-42,500 Gold oz 23,975 22,998 63,625 65,57 Silver oz 37, , , ,278 Zinc tonnes 36,635 3,606 02,0 8,438 25,000-50,000 Precious metals 3 oz 28,52 27,203 74,768 75,947 90,000-0,000 Includes 00% of Reed mine production. 2 Metal reported in concentrate is prior to deductions associated with smelter terms. 3 Precious metals production includes gold and silver production on a gold-equivalent basis. Silver is converted to gold at a ratio of 70:. In the third quarter of 207, production of copper was 8% lower than the same period in 206 as a result of lower production at 777, while zinc, gold, and silver production was 6%, 4%, and 8% higher, respectively, compared to the same period of 206 as a result of higher grades at 777 and Lalor as well as higher production at Lalor. Production in Manitoba is expected to be within guidance ranges for 207. Zinc Plant Three months ended Nine months ended Guidance Sep. 30, Sep. 30, Sep. 30, Sep. 30, Annual Zinc Production Zinc Concentrate Treated Domestic tonnes 54,50 57,6 64,67 56,632 Refined Metal Produced Domestic tonnes 25,858 26,559 80,52 73,695 95,000-5,000 Three months ended Nine months ended Guidance Sep. 30, Sep. 30, Sep. 30, Sep. 30, Annual Unit Operating Costs Zinc Plant C$/lb Zinc unit operating costs include G&A costs. 3

16 Production of cast zinc in the third quarter of 207 was 3% lower compared to the same period in 206 and operating costs per pound of zinc metal produced were 5% higher as a result of lower production. Year-to-date production in 207 was 9% higher compared to the same period in 206 as a result of higher amperages in the zinc plant cell house due to improvements made in the operation of the cooling towers during the hotter summer months. Operating costs per pound of zinc metal produced year-to-date were 7% lower compared to the same period in 206 as a result of increased production. Refined zinc metal production and zinc plant unit operating costs are expected to be within guidance ranges for 207. Manitoba Cash Cost and Sustaining Cash Cost Cost per pound of copper produced Three months ended Nine months ended Sep. 30, Sep. 30, Sep. 30, Sep. 30, Cash cost per pound of copper produced, net of by-product credits $/lb (0.20) 0.8 (0.3) 0.55 Sustaining cash cost per pound of copper produced, net of by-product credits $/lb Cost per pound of zinc produced Cash cost per pound of zinc produced, net of by-product credits $/lb Sustaining cash cost per pound of zinc produced, net of by-product credits $/lb Cash cost and sustaining cash cost per pound of copper & zinc produced, net of by-product credits, are not recognized under IFRS. For more detail on this non-ifrs financial performance measure, please see the discussion under "Non-IFRS Financial Performance Measures" beginning on page 29 of this MD&A. In Manitoba, cash cost, net of by-product credits, in the third quarter of 207 was negative $0.20 per pound of copper produced compared to $0.8 in the third quarter of 206. The decrease is primarily a result of significantly increased by-product credits for all metals, which were partially offset by expected higher costs at our 777 and Reed mines during this part of their mine life. Sustaining cash cost, net of by-product credits, in the third quarter of 207 decreased to $0.59 per pound of copper produced compared to $0.69 in the third quarter of 206 as a result of the same factors described above which were partially offset by planned increased capital spending. On a yearto-date basis, the declines in cash cost, net of by-product credits and sustaining cash cost, net of by-product credits, were the result of the same factors impacting third quarter results. Cash cost and sustaining cash cost per pound of zinc produced, net of by-product credits, was lower compared to the same period last year as a result of increased zinc production, and higher grades realized with the revised 777 mine plan, partially offset by the higher mining costs associated with the 777 and Reed mine at this stage of their mine lives. 4

17 Metal Sold Three months ended Nine months ended Sep. 30, Sep. 30, Sep. 30, Sep. 30, Payable metal in concentrate Copper tonnes,384 9,647 30,00 30,565 Gold oz 24,526 9,235 70,527 52,70 Silver oz 292,26 207,56 87, ,923 Zinc tonnes 3,803-5,563 - Refined zinc tonnes 24,00 26,2 78,496 75,359 Due to increased Lalor mine throughput and higher zinc grades at 777, zinc concentrate production is exceeding the processing capacity of the Flin Flon zinc plant. As a result, sales of excess zinc concentrate inventory began in the second quarter of 207 and will continue as long as concentrate production exceeds zinc plant processing capacity. FINANCIAL REVIEW Financial Results In the third quarter of 207, we recorded a profit of $40.9 million compared to a profit of $33.6 million for the same period in 206, an increase in profit of $7.3 million. Year-to-date in 207, we recorded a profit of $64.2 million compared to a profit of $2. million in the same period in 206, an increase in profit of $52. million. 5

18 The following table provides further details on these variances: Three months ended Nine months ended (in $ millions) Sep. 30, 207 Sep. 30, 207 Increase (decrease) in components of profit or loss: Revenues Cost of sales Mine operating costs (9.2) (45.8) Depreciation and amortization Net Finance expense (9.6) (6.0) Other (6.3) 4.0 Tax (9.3) (29.4) Increase in profit in 207 compared to Revenue Revenue for the third quarter of 207 was $370.4 million, $58.9 million higher than the same period in 206, primarily as a result of higher metal prices for copper and zinc, and higher gold and zinc sales volumes, partially offset by lower copper sales volumes. Year-to-date revenue was $948.4 million, $36.4 million higher than the same period in 206, due to significantly higher realized sales prices for copper and zinc metals, and lower treatment and refining charges, partially offset by lower copper sales volumes. Three months ended Nine months ended (in $ millions) Sep. 30, 207 Sep. 30, 207 Metals prices Higher copper prices Higher zinc prices Lower gold prices (2.) (2.) Lower silver prices (3.) (6.0) Sales volumes Lower copper sales volumes (33.4) (96.6) Higher zinc sales volumes Higher gold sales volumes Higher silver sales volumes Other Derivative mark-to-market decrease (0.4) (7.6) Other volume and pricing differences Effect of lower treatment and refining charges Increase in revenue in 207 compared to See discussion below for further information regarding metals prices. 6

19 Our revenue by significant product type is summarized below: Three months ended Nine months ended Sep. 30, Sep. 30, Sep. 30, Sep. 30, (in $ millions) Copper Zinc Gold Silver Other Gross revenue , Treatment and refining charges (30.) (35.0) (75.0) (89.0) Revenue Copper, gold and silver revenues include unrealized gains and losses related to non-hedge derivative contracts including fixed for floating swaps, that are included in realized prices. Zinc revenues include unrealized gains and losses related to non-hedge derivative contracts that are not included in realized prices. 7

20 Realized sales prices This measure is intended to enable management and investors to understand the average realized price of metals sold to third parties in each reporting period. The average realized price per unit sold does not have any standardized meaning prescribed by IFRS, is unlikely to be comparable to similar measures presented by other issuers, and should not be considered in isolation or a substitute for measures of performance prepared in accordance with IFRS. For sales of copper, gold and silver we may enter into non-hedge derivatives ( QP hedges ) which are intended to manage the provisional pricing risk arising from quotational period terms in concentrate sales agreements. The QP hedges are not removed from the calculation of realized prices. We expect that gains and losses on QP hedges will offset provisional pricing adjustments on concentrate sales contracts. Our realized prices for the third quarter and year-to-date in 207 and 206, respectively, are summarized below: Realized prices for the Realized prices for the Three months ended Nine months ended LME QTD Sep. 30, Sep. 30, LME YTD Sep. 30, Sep. 30, Prices Copper $/lb Zinc 3 $/lb Gold 4 $/oz,296,303,27,297 Silver 4 $/oz Realized prices exclude refining and treatment charges and are on the sale of finished metal or metal in concentrate. Realized prices include the effect of provisional pricing adjustments on prior period sales. 2 London Metal Exchange average for copper and zinc prices. 3 This amount includes a realized sales price of $.37 for cast zinc metal and $.42 for zinc concentrate sold for the three months ended September 30, 207. Zinc realized prices include premiums paid by customers for delivery of refined zinc metal, but exclude unrealized gains and losses related to non-hedge derivative contracts that are included in zinc revenues. For the three months ended September 30, 207, the unrealized component of the zinc derivative resulted in a gain of $0.0/lb. For the three months ended September 30, 206, the unrealized component of the zinc derivative resulted in a gain of $0.0/lb. 4 Sales of gold and silver from our 777 and Constancia mines are subject to our precious metals stream agreement with Wheaton Precious Metals, pursuant to which we recognize deferred revenue for precious metals deliveries and also receive cash payments. Stream sales are included within realized prices and their respective deferred revenue and cash payment rates can be found on page 20. 8

21 The following table provides a reconciliation of average realized price per unit sold, by metal, to revenues as shown in the consolidated financial statements: Three months ended September 30, 207 (in $ millions) Copper Zinc Gold Silver Other Total Revenue per financial statements Derivative mark-to-market 2 - (0.3) (0.3) Revenue, excluding mark-to-market on non-qp hedges Payable metal in concentrate sold 3 4,52 27,804 27, , Realized price 4 6,346 3,036, Realized price Nine months ended September 30, 207 (in $ millions) Copper Zinc Gold Silver Other Total Revenue per financial statements ,023.4 Derivative mark-to-market 2 - (0.2) (0.2) Revenue, excluding mark-to-market on non-qp hedges ,023.2 Payable metal in concentrate sold 3 07,76 84,059 78,549 2,224, Realized price 4 5,957 2,90, Realized price Three months ended September 30, 206 (in $ millions) Copper Zinc Gold Silver Other Total Revenue per financial statements Derivative mark-to-market 2 - (0.7) (0.7) Revenue, excluding mark-to-market on non-qp hedges Payable metal in concentrate sold 3 48,506 26,2 25,74 780, Realized price 4 4,84 2,374, Realized price Nine months ended September 30, 206 (in $ millions) Copper Zinc Gold Silver Other Total Revenue per financial statements Derivative mark-to-market 2 - (7.8) (7.8) Revenue, excluding mark-to-market on non-qp hedges Payable metal in concentrate sold 3 27,259 75,359 70,86 2,270, Realized price 4 4,752 2,09, Realized price Average realized price per unit sold may not calculate based on amounts presented in this table due to rounding. 2 Derivative mark-to-market excludes mark-to-market on QP hedges. 3 Copper and zinc shown in tonnes and gold and silver shown in ounces. 4 Realized price for copper and zinc in $/metric tonne and realized price for gold and silver in $/oz. 5 Realized price for copper and zinc in $/lb. The price, quantity and mix of metals sold, affect our revenue, operating cash flow and profit. Revenue from metals sales can vary from quarter to quarter due to production levels, shipping volumes and transfer of risk and title to customers. 9

22 Stream Sales The following table shows stream sales included within realized prices and their respective deferred revenue and cash payment rates: Three months ended Nine months ended Sep. 30, 207 Sep. 30, 207 Manitoba Peru Manitoba Peru Gold oz 5,304,959 7,9 6,630 Silver oz 35,30 443, ,64,385,084 Gold deferred revenue drawdown rate $/oz,097 43,00 43 Gold cash rate 2 $/oz Silver deferred revenue drawdown rate $/oz Silver cash rate 2 $/oz Three months ended Nine months ended Sep. 30, 206 Sep. 30, 206 Manitoba Peru Manitoba Peru Gold oz 8,29 3,665 25,738,937 Silver oz 96,06 573,097 3,886,72,52 Gold deferred revenue drawdown rate $/oz,05 436, Gold cash rate 2 $/oz Silver deferred revenue drawdown rate $/oz Silver cash rate 2 $/oz Deferred revenue amortization is recorded in Manitoba at C$,368/oz and C$20.33/oz for gold and silver, respectively, (January, 207 to June 30, C$,464/oz and C$22.60/oz; C$,382/oz and C$25.23/oz) and converted to US dollars at the exchange rate in effect at the time of revenue recognition. 2 The gold and silver cash rate for Manitoba increased by % from $400/oz and $5.90/oz effective August, 205. Subsequently every year, on August, the cash rate will increase by % compounded. The weighted average cash rate is disclosed. 20

23 Cost of Sales Our detailed cost of sales is summarized as follows: Three months ended Nine months ended Sep. 30, Sep. 30, Sep. 30, Sep. 30, (in $ thousands) Peru Mine 4,225 6,396 40,25 43,309 Concentrator 30,730 3,934 98,799 86,468 Changes in product inventory 7,006 7,793 (8,020) 5,006 Depreciation and amortization 47,37 5,720 22,656 29,252 G&A 3,588,387 39,0 3,444 Freight, royalties and other charges 3,34 4,85 35,895 43,859 Total Peru cost of sales 26,027 34,08 328, ,338 Manitoba Manitoba mines 40,320 29,02 0,200 87,780 Manitoba concentrators,703 2,80 36,28 32,8 Zinc plant 7,32 6,284 49,508 48,474 Purchased ore and concentrate (before inventory changes) 6,457 3,985 5,725 2,204 Changes in product inventory (3,298) (2,973) (2,000),867 Depreciation and amortization 32,374 30,559 94,927 9,86 G&A 5,076 9,847 40,379 26,53 Freight, royalties and other charges 3,420 9,369 36,83 27,853 Total Manitoba cost of sales 33,364 08,884 38,85 328,03 Cost of sales 259,39 242,965 70,37 667,35 Total cost of sales for the third quarter of 207 was $259.4 million, reflecting an increase of $6.4 million from the third quarter of 206. Cost of sales related to Peru was $8. million lower primarily due to lower depreciation. In Manitoba, cost of sales increased by $24.5 million compared to the third quarter of 206 as a result of higher mining, freight and profit sharing costs. Cost of sales year-to-date in 207 was $70.3 million, an increase of $43.0 million compared to 206. The increase is mostly attributable to Manitoba which had higher year-to-date costs of $53.8 million compared to the same period last year due to the reasons outlined above and additional costs due to utilization of temporary crushing facilities at the Stall mill primarily during the first quarter. For details on unit operating costs refer to the respective tables in the Operations Review section beginning on page 6 of this MD&A. For the third quarter of 207, other significant variances in expenses from operations, compared to the same period in 206, include the following: Selling and administrative expenses increased by $5. million, which was mainly the result of increased share based compensation expenses resulting from the revaluation of previously issued share units to higher share prices during the current quarter compared to the same period last year. 2

24 Exploration and evaluation expenses increased by $5.3 million mainly as a result of mineral property farm-in agreement with Amarc Resources Ltd. that was entered into in July 207. Under the terms of the agreement, Hudbay may acquire, through a staged investment process, up to a 60% ownership interest in Amarc's IKE copper porphyry district, located near Gold Bridge, British Columbia. Other operating income increased by $4.2 million mainly as a result of a recovery from damages incurred pertaining to the Constancia grinding line 2 failure in 205. Finance expenses decreased by $2.0 million mainly as a result of lower interest costs on our senior unsecured notes after we completed our refinancing in December 206. In addition, there were lower interest costs realized on our senior secured revolving credit facilities (the Credit Facilities ), which was a function of reduced outstanding amounts on these Credit Facilities compared to the same period last year. Other finance expenses increased by $2.5 million primarily as a result of: Foreign exchange losses of $6.5 million in the third quarter of 207 compared to losses of $0.6 million in the third quarter of 206; Disposals, impairment and mark-to-market adjustments on held for trading and available-for-sale investments resulted in a net loss of $.6 million during the current period of 207 compared to a gain of $0. million during the same period last year; Fair value adjustments pertaining to the embedded derivative on the senior unsecured notes, our gold option liability related to the acquisition of the New Britannia mine and mill ( NBM Mill ) and an embedded derivative pertaining to purchase contracts resulted in a loss of $.4 million in the third quarter of 207 compared to gains of $7.7 million in the third quarter of 206; and Mark-to-market losses on warrants of $2.0 million compared to a gain of $2.8 million in the same period last year. For 207 year-to-date, other significant variances in expenses from operations, compared to 206 year-to-date, include the following: The increase in selling and administrative expenses of $2.9 million and the increase in exploration and evaluation expenses of $6.8 million was generally caused by the same factors as previously mentioned for the quarterly movement. The increase in other operating income of $3.7 million during the 207 year-to-date period compared to same year-to-date period last year was primarily the result of various recoveries pertaining to the Constancia grinding line 2 failure in 205. Finance expenses decreased by $9. million mainly as a result of lower interest costs on our senior unsecured notes after we completed our refinancing in December 206. In addition, there were lower interest costs realized on our Credit Facilities, which was a function of reduced outstanding amounts on these Credit Facilities compared to the same period last year. 22

25 Other finance expenses increased by $25.0 million primarily as a result of: Foreign exchange losses of $4.5 million in 207 year-to-date compared to losses of $0.7 million in the same period in 206; Disposals, impairment and mark-to-market adjustments on held for trading and available-for-sale investments resulted in a net loss of $.8 million during the current period of 207 compared to a gain of $.3 million during the same period last year; Fair value adjustments pertaining to the embedded derivative on the senior unsecured notes, our gold option liability related to the acquisition of the New Britannia mine and mill and an embedded derivative pertaining to purchase contracts resulted in a loss of $.3 million in the current year-to-date period compared to gains of $6.6 million in the comparable period in 206; and Mark-to-market adjustments on warrants resulted in a gain of $.8 million compared to a gain of $2.0 million in the same period last year. Tax Expense (Recovery) For the three and nine months ended September 30, 207, tax expense increased by $9.3 million and $29.4 million, respectively, compared to the same periods in 206. The following table provides further details: Three months ended Nine months ended Sep. 30, Sep. 30, Sep. 30, Sep. 30, (in $ thousands) Deferred tax expense - income tax 9,463 7,857 26,909 8,874 Deferred tax (recovery) expense - mining tax (652) (,487) Total deferred tax expense 8,8 6,370 27,29 9,647 Current tax expense - income tax 7,422,778 0,849 5,680 Current tax expense - mining tax, ,897 4,263 Total current tax expense 8,928 2,060 2,746 9,943 Tax expense 7,739 8,430 48,965 9,590 Deferred tax expense (recovery) represents our draw down/increase of non-cash deferred income and mining tax assets/liabilities. Income Tax Expense Applying the estimated Canadian statutory income tax rate of 27.0% to our income before taxes of $3.2 million for the year-to-date period in 207 would have resulted in a tax expense of approximately $30.6 million; however, we recorded an income tax expense of $37.8 million. The significant items causing our effective income tax rate to be different than the 27.0% estimated Canadian statutory income tax rate include: Certain deductible temporary differences with respect to Peru mostly relating to decommissioning and restoration liabilities were not recognized as we have determined that it is not probable that we will realize the recovery based on the timing of the reversals of the deductible temporary differences and the future projected taxable profit of the Peru operations, resulting in an increase in deferred tax expense of approximately $8.3 million (206 year-to-date - $5.7 million); Certain deductible temporary differences with respect to Manitoba mostly relating to decommissioning and restoration liabilities were not recognized as we have determined that it is not probable that we will realize the recovery based on the timing of the reversals of the deductible temporary differences and the future projected taxable profit of the Manitoba operations, adjusted for the average annual effective rate methodology, resulting in an increase in deferred tax expense of approximately $2.8 million (206 year-to-date - $3. million); Certain deductible temporary differences with respect to our foreign operations are recorded using an income tax rate other than the Canadian statutory income tax of 27.0%, resulting in an increase in deferred tax expense of $2.5 million (206 year-to-date decrease $.3 million); and 23

26 A decrease in the deferred tax expense of $7.8 million (206 year-to-date - $2.6 million) due to the fact that certain Canadian non-monetary assets are recognized at historical cost while the tax bases of the assets change as exchange rates fluctuate, which gives rise to taxable temporary differences. Mining Tax Expense Applying the estimated Manitoba mining tax rate of 0.0% to our income before taxes of $3.2 million for the year-to-date period in 207, would have resulted in a tax expense of approximately $.3 million and we recorded a mining tax expense of $.2 million (206 $5.0 million). Effective mining tax rates can vary significantly based on the composition of our earnings and the expected amount of mining taxable profits. Corporate costs and other costs not related to mining operations are not deductible in computing mining profits. A brief description of how mining taxes are calculated in our various business units is discussed below. Manitoba The Province of Manitoba imposes mining tax on profit related to the sale of mineral products mined in the Province of Manitoba (mining taxable profit) at the following rates: 0% of total mining taxable profit if mining profit is C$50 million or less; 5% of total mining taxable profit if mining profits are between C$55 million and C$00 million; and 7% of total mining taxable profit if mining profits exceed C$05 million. We estimate that the tax rate that will be applicable when temporary differences reverse will be approximately 0.0%. Peru The Peruvian government imposes two parallel mining tax regimes, the Special Mining Tax and the Modified Royalty, on companies' operating mining income on a sliding scale, with progressive rates ranging from 2.0% to 8.4% and.0% to 2.0%, respectively. Based on financial forecasts, we have recorded a deferred tax liability as at September 30, 207 at the tax rate we expect to apply when temporary differences reverse. LIQUIDITY AND CAPITAL RESOURCES Senior Unsecured Notes Refinancing On December 2, 206, we completed an offering of $.0 billion aggregate principal amount of senior notes in two series: (i) a series of 7.250% senior notes due 2023 in an aggregate principal amount of $400 million and (ii) a series of 7.625% senior notes due 2025 in an aggregate principal amount of $600 million. The proceeds from this offering were used to redeem all US$920 million of our 9.50% senior unsecured notes due Senior Secured Revolving Credit Facilities As at September 30, 207, between our Credit Facilities we have drawn $29.0 million in letters of credit, leaving total undrawn availability of $42.0 million. As at September 30, 207, we were in compliance with our covenants under the Credit Facilities. The Credit Facilities were amended on July 4, 207 to secure both facilities with substantially all of our assets other than assets related to the Rosemont project, amend the financial covenants, extend the maturity dates from March 3, 209 to July 4, 202 and reduce the interest rate from LIBOR plus 4.50% to LIBOR plus 3.00%, based on financial results for the twelve months ended June 30, 207. The revised covenants include maintaining gross total debt to EBITDA of less than 4.00 times in 207, senior secured debt to EBITDA of less than 2.00 times, and interest coverage of more than 3.00 times. 24