Management's Discussion and Analysis of Results of Operations and Financial Condition For the three and six months ended June 30, 208 July 3, 208
TABLE OF CONTENTS Page Introduction... Our Business... Summary...2 Key Financial Results...4 Key Production Results...5 Recent Developments...6 Constancia Operations Review...7 Manitoba Operations Review...0 Financial Review...6 Liquidity and Capital Resources...25 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
INTRODUCTION This Management's Discussion and Analysis ("MD&A") dated July 3, 208 is intended to supplement Hudbay Minerals Inc.'s unaudited condensed consolidated interim financial statements and related notes for the three and six months ended June 30, 208 and 207 (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 ( IASB ). References to Hudbay, the Company, we, us, our or similar terms refer to Hudbay Minerals Inc. and its direct and indirect subsidiaries as at June 30, 208. "Hudbay Peru" refers to HudBay Peru S.A.C., our whollyowned subsidiary which owns a 00% interest in the Constancia mine, and Hudbay Arizona refers to Hudbay Arizona Inc., 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 www.sedar.com and on EDGAR at www.sec.gov. As of January, 208 we have adopted IFRS 9, Financial Instruments ( IFRS 9 ) and IFRS 5, Revenue from Contracts with Customers ( IFRS 5 ). The Group applied this amendment retrospectively. Changes to previously reported balances are disclosed in Note 4(c) of the consolidated interim financial statements. Disclosures in this MD&A are restated for the impacts of these accounting changes. 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 be a responsible, 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 highquality, long-life deposits with exploration potential in jurisdictions that support responsible mining, and to see the regions and communities in which we operate benefit from our presence. 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.
SUMMARY Net profit and earnings per share in the second quarter of 208 were $24.7 million and $0.09, respectively, compared to a net profit and earnings per share of $9. million and $0.08, respectively, in the second quarter of 207. In the second quarter of 208, cash generated from operating activities was $97.0 million, down from $3.9 million in the same period of 207 due to non-cash working capital changes. Operating cash flow before change in non-cash working capital increased to $3.6 million in the second quarter of 208 from $24. million in the same quarter of 207. The increase in operating cash flow is the result of higher realized prices for copper, zinc and precious metals, partially offset by decreases in the sales volumes of copper, zinc and silver and higher mine operating costs. Net profit and earnings per share in the second quarter of 208 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 gain 5.7 5.3 0.02 Mark-to-market adjustments of various items 4.7 3.3 0.0 Non-cash deferred tax adjustments - (7.3) (0.03) Compared to the same quarter in 207, production of copper-equivalent contained metal in concentrate in the second quarter of 208 decreased by 6.7% as a result of lower production of copper and zinc, partially offset by higher production of precious metals. In the second quarter of 208, consolidated cash cost per pound of copper produced, net of by-product credits, was $0.96, an increase compared to $0.85 in the same period last year. The increase is mainly due to increased operating costs in our Peru and Manitoba business units and reduced copper production, partially offset by higher by-product credits realized. 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 byproduct credits, in the second quarter of 208 was $.48, down slightly from $.49 in the second quarter of 207, as higher cash costs were offset by reduced sustaining capital spending. Net debt 2 declined by $49.2 million from the first quarter to $536.2 million at June 30, 208, as a result of positive cash flow from our operations. At June 30, 208, total liquidity, including cash and available credit facilities, was $859.2 million, up from $80.0 million at March 3, 208. Based on results to date, we are on track to meet production and capital expenditure guidance expectations, as well as Peru combined unit operating cost guidance. As a result of a number of factors including cold weather in the first quarter, costs at the 777 mine and the impact of a fan outage at the Lalor mine, Manitoba combined mine/mill unit operating costs are expected to be between C$25 and C$35 per tonne in 208. Cash cost and sustaining cash cost per pound of copper produced, net of by-product credits, and net debt 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. 2 Net debt is a non-ifrs financial performance measures with no standardized definition under IFRS. For further information and a detailed reconciliation, please see discussion under "Non-IFRS Financial Reporting Measures" beginning on page 29 of this MD&A. 2
(in thousands) Revenue & operating cash flow before change in non-cash working capital $450,000 $350,000 $250,000 $50,000 $50,000 -$50,000 Revenue Operating cash flow before stream deposit and change in non -cash working capital Production on a copper equivalent basis is calculated by converting contained metal in concentrate produced at average LME prices. 3
KEY FINANCIAL RESULTS Financial Condition (in $ thousands) Jun. 30, 208 Dec. 3, 207 (Restated) Cash and cash equivalents 439,576 356,499 Total long-term debt 975,86 979,575 Net debt 536,240 623,076 Working capital 400,926 25,388 Total assets 4,69,762 4,728,06 Equity 2,68,84 2,2,345 Net debt is a non-ifrs financial performance measures with no standardized definition under IFRS. For further information and a detailed reconciliation, please see discussion under "Non-IFRS Financial Reporting Measures" beginning on page 29 of this MD&A. Financial Performance Three months ended Six months ended (in $ thousands, except per share amounts) Jun. 30, Jun. 30, Jun. 30, Jun. 30, 208 207 208 207 Revenue 37,288 336,033 757,944 597,799 Cost of sales 278,827 248,047 544,72 453,68 Profit before tax 49,797 34,935 22,900 39,573 Profit 24,673 9,37 66,8 9,08 Basic and diluted earnings per share 0.09 0.08 0.25 0.04 Operating cash flow before change in non-cash working capital 3,635 24,8 263,428 204,78 4
KEY PRODUCTION RESULTS Three months ended Three months ended Jun. 30, 208 Jun. 30, 207 Peru Manitoba Total Peru Manitoba Total Contained metal in concentrate produced Copper tonnes 26,88 0,807 37,625 29,798,044 40,842 Gold oz 5,90 27,290 32,480 3,802 22,862 26,664 Silver oz 596,570 355,09 95,66 546,295 264,05 80,346 Zinc tonnes - 33,70 33,70-34,896 34,896 Payable metal sold Copper tonnes 25,409 0,062 35,47 28,482 0,767 39,249 Gold oz 3,764 25,932 29,696 3,445 22,006 25,45 Silver oz 438,532 250,952 689,484 558,67 232,090 790,707 Zinc 2 tonnes - 28,68 28,68-29,424 29,424 Cash cost 3 $/lb.64 (0.7) 0.96.24 (0.8) 0.85 Sustaining cash cost 3 $/lb.82 0.38.82 0.38 All-in sustaining cash cost 2 $/lb.48.49 Six months ended Six months ended Jun. 30, 208 Jun. 30, 207 Peru Manitoba Total Peru Manitoba Total Contained metal in concentrate produced Copper tonnes 58,369 8,462 76,83 57,009 8,564 75,573 Gold oz 0,608 52,965 63,573 7,737 39,650 47,387 Silver oz,242,456 686,343,928,799,085,830 462,4,548,24 Zinc tonnes - 6,952 6,952-65,466 65,466 Payable metal sold Copper tonnes 54,977 7,000 7,977 47,047 8,67 65,664 Gold oz 8,67 47,082 55,753 4,99 46,00 50,920 Silver oz,034,62 54,778,575,940 94,880 525,392,467,272 Zinc 2 tonnes - 53,620 53,620-56,256 56,256 Cash cost 3 $/lb.46 (0.58) 0.97.27 (0.37) 0.86 Sustaining cash cost 3 $/lb.63 0.65.72 0.34 All-in sustaining cash cost 2 $/lb.47.48 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. 5
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. Credit Facility Extension & Amendments On June 5, 208 we entered into amendments to our senior credit facilities to extend the maturity date by one year to July 4, 2022 from July 4, 202 and to incorporate various amendments to the terms and conditions of the facilities to provide us with greater flexibility. The two facilities have substantially similar terms and conditions and continue to provide revolving credit to a maximum amount of up to $550 million. Dividend Declared A semi annual dividend of C$0.0 per share was declared on July 3, 208. The dividend will be paid on September 28, 208 to shareholders of record as of September 7, 208. 6
CONSTANCIA OPERATIONS REVIEW Three months ended Six months ended Guidance Jun. 30, Jun. 30, Jun. 30, Jun. 30, Annual 208 207 208 207 208 Ore mined tonnes 8,744,200 7,337,53 8,233,969 4,550,73 Copper % 0.47 0.55 0.49 0.55 Gold g/tonne 0.05 0.04 0.05 0.04 Silver g/tonne 4.03 3.8 4. 3.92 Ore milled tonnes 7,726,606 6,93,690 5,577,775 3,249,299 Copper % 0.44 0.53 0.47 0.54 Gold g/tonne 0.05 0.04 0.05 0.04 Silver g/tonne 3.92 3.9 4.0 4.08 Copper concentrate tonnes 3,738 8,586 242,286 227,22 Concentrate grade % Cu 23.58 25.3 24.09 25.0 Copper recovery % 79.7 80.6 80.3 80.4 Gold recovery % 44.8 44.8 44.9 44.7 Silver recovery % 6.2 62.6 6.9 62.4 Combined unit operating costs 2 $/tonne 0.33 8.99 9.62 9.09 7.50-9.20 Reported tonnes and grade for ore mined are estimates based on mine plan assumptions and may not reconcile fully to ore milled. 2 Reflects combined mine, mill and general and administrative ("G&A") costs per tonne of ore milled. Reflects the deduction of expected capitalized stripping costs. Ore mined at our Constancia mine during the second quarter of 208 increased by 9% compared to the same period in 207 in line with improved mill availability. Milled copper grades in the second quarter were approximately 7% lower than the same period in 207 as we entered lower grade phases of the mine plan. Mill throughput improved % compared to the same period in 207 due to increased plant availability as well as plant optimization initiatives during the second quarter of 208. Recoveries of copper and silver were slightly lower in the second quarter of 208, compared to the same period in 207, while gold recoveries remain unchanged over the same period. We are implementing several metallurgical initiatives with the intention of increasing copper recoveries as anticipated in the recently filed 208 Technical Report for Constancia. Combined mine, mill and G&A unit operating costs in the second quarter of 208 were 5% higher than the same period in 207. The higher combined unit operating costs are due to higher costs for diesel, steel and power and a decrease in capitalized stripping, partially offset by higher mill throughput. Combined unit operating costs for the first half of 208 include accruals for signing bonuses for the three-year collective bargaining agreement agreed to earlier in 208, as well as costs associated with the scheduled plant maintenance outage in May 208, which was significantly broader in scope than the planned maintenance in the fourth quarter of 208. Accordingly, combined unit operating costs in the second half of 208 are expected to be lower than the first half, with full year combined unit operating costs expected to be in line with the guidance range for 208. The year to date production variances were driven by the same factors as the second quarter variances versus prior year. 7
Three months ended Six months ended Guidance Contained metal in Jun. 30, Jun. 30, Jun. 30, Jun. 30, Annual concentrate produced 208 207 208 207 208 Copper tonnes 26,88 29,798 58,369 57,009 95,000-5,000 Gold oz 5,90 3,802 0,608 7,737 Silver oz 596,570 546,295,242,456,085,830 Precious metals oz 3,72,606 28,357 23,249 50,000-70,000 2 Precious metals production includes gold and silver production on a gold-equivalent basis. Silver is converted to gold at a ratio of 70:. 2 Initial 208 guidance for Constancia precious metals production was 65,000 to 85,000 ounces. Production of copper during the second quarter of 208 was lower than the same period in 207 due to an expected decline in mined grades in accordance with the mine plan, which was partially offset by higher mill throughput. Production for the first half of 208 for all commodities increased compared to the same period in 207 due to improved mill throughput offset in part by lower copper grades. Production results to date are on track to meet 208 Constancia production guidance. 45,000 40,000 35,000 ) 30,000 s e n 25,000 20,000 (to 5,000 0,000 5,000 0 Production on a copper equivalent basis 40,296 37,257 35,674 3,996 32,846 34,40 29,44 29,233 Copper equivalent production in the past two quarters has declined due to lower copper mine grades, in accordance with the mine plan. Peru Cash Cost and Sustaining Cash Cost Three months ended Six months ended Jun. 30, Jun. 30, Jun. 30, Jun. 30, 208 207 208 207 Cash cost per pound of copper produced, net of by-product credits $/lb.64.24.46.27 Sustaining cash cost per pound of copper produced, net of by-product credits $/lb.82.82.63.72 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 these non-ifrs financial performance measures, please see the discussion under "Non-IFRS Financial Performance Measures" beginning on page 29 of this MD&A. 8
Cash cost per pound of copper produced, net of by-product credits, for the three and six months ended June 30, 208 was $.64 and $.46, increasing by 32% and 5%, respectively, from the same period in 207. The increases are mainly as a result of higher consumable costs and lower capitalized stripping. Sustaining cash cost per pound of copper produced, net of by-product credits, for the three and six months ended June 30, 208 was $.82 and $.63, remaining consistent and decreasing by 5%, respectively, from the same period in 207, as a result of reduced sustaining capital in heavy civil works that offsets the factors noted above. Metal Sold Three months ended Six months ended Jun. 30, Jun. 30, Jun. 30, Jun. 30, 208 207 208 207 Payable metal in concentrate Copper tonnes 25,409 28,482 54,977 47,047 Gold oz 3,764 3,445 8,67 4,99 Silver oz 438,532 558,67,034,62 94,880 9
MANITOBA OPERATIONS REVIEW Mines Three months ended Six months ended Jun. 30, Jun. 30, Jun. 30, Jun. 30, 208 207 208 207 777 Ore tonnes 23,34 287,884 47,520 576,248 Copper %.55.70.37.6 Zinc % 5.09 5.06 4.96 4.8 Gold g/tonne.99 2.0 2.04.93 Silver g/tonne 3.8 24.65 30.60 22.90 Lalor Ore tonnes 339,064 337,387 66,68 67,005 Copper % 0.8 0.65 0.74 0.60 Zinc % 6.30 7.88 5.99 7.98 Gold g/tonne 2.30.82 2.8.68 Silver g/tonne 26.79 2.44 27.0 20.75 Reed Ore tonnes 42,32 2,4 264,44 240,648 Copper % 3.25 4.2 3.39 3.55 Zinc % 0.75 0.4 0.84 0.54 Gold g/tonne 0.79 0.47 0.75 0.45 Silver g/tonne 8.34 6.20 8.84 5.92 Total Mines Ore tonnes 694,330 746,385,397,579,433,90 Copper %.54.62.45.50 Zinc % 4.79 5.58 4.67 5.46 Gold g/tonne.89.7.86.58 Silver g/tonne 24.36 20.2 24.78 9.2 Includes 00% of Reed mine production. Three months ended Six months ended Jun. 30, Jun. 30, Jun. 30, Jun. 30, Unit Operating Costs 208 207 208 207 Mines 777 C$/tonne 85.36 59.65 82.53 59.33 Lalor C$/tonne 86.35 77.50 86.56 80.7 Reed C$/tonne 67.48 59.76 79. 57.08 Total Mines C$/tonne 83.4 68.5 84.07 68.49 Reflects costs per tonne of ore mined. 0
Ore mined at our Manitoba operations during the second quarter of 208 decreased by 7% compared to the same period in 207. Increased production at our Reed mine was offset by decreased production at our 777 mine. Overall, gold and silver grades were % and 2% higher, respectively, while copper and zinc grades were 5% and 4% lower, respectively, in the second quarter of 208 compared to the same period of 207. Grade variances were due to planned stope sequencing. Unit operating costs for all Manitoba mines for the second quarter of 208 increased by 22% compared to the same period in 207 for the reasons described below. Ore mined at Lalor was consistent with the same period last year. Production ramp-up is underway as the mine transitions to higher copper and gold grades with lower zinc as outlined in the life of mine plan. Higher unit operating costs reflect increased cement rock filling, extensive cable bolting, as well as continued operating and capital development that are required to increase Lalor s production rate. A failure of one of two main exhaust fans in June has reduced the overall mine air to 65% of planned ventilation requirements, which has created operating restrictions underground that are impacting daily production and delaying the ramp-up to 4,500 tonnes per day. Repairs to the fan are expected to be complete in August. While critical development required for future production is continuing, the mine is producing ore at a rate of approximately 3,000 tonnes per day due to the ventilation restrictions. The construction of the Lalor paste plant was completed in May, and pouring of the paste commenced in June, which is expected to improve stope cycle times and allow greater flexibility in the mine planning and sequencing. Reed mine delivered consistent higher production as the mine finished development in late April and focused on mucking stopes from Zone 0 at depth. Development costs are not being capitalized with the pending closure of the mine, resulting in higher unit operating costs compared to prior periods. Ore production at Reed was substantially complete at the end of July, as planned. Ore mined at 777 declined as ground conditions warranted rehabilitation of headings and a more conservative stope sequence in order to adapt to more challenging operating conditions as the mine ages. Higher 777 unit operating costs were driven by higher mobile and fixed infrastructure maintenance costs and ground rehabilitation work completed in the quarter, together with the impact of lower production. Low availability of scoops and trucks negatively impacted production in the quarter and the mine is focusing on repairs to improve availability of equipment. Year-to-date ore mined at our Manitoba operations was 3% lower than the same period in 207 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 and zinc grades in 208 were lower than the same period in 207 by 3% and 4%, respectively, while gold and silver grades were 8% and 30% higher, respectively, which is in line with mine plan expectations. Year-todate total mine unit costs were 23% higher than the same period in 207 as a result of the same factors that impacted second quarter total mine unit costs. Lalor unit costs are expected to be elevated in the third quarter of 208 due to reduced production and costs arising from the exhaust fan failure.
Processing Facilities Three months ended Six months ended Jun. 30, Jun. 30, Jun. 30, Jun. 30, 208 207 208 207 Flin Flon Concentrator Ore tonnes 439,327 436,88 830,954 80,082 Copper % 2.4 2.37.95 2.5 Zinc % 3.6 3.70 3.87 3.58 Gold g/tonne.66.62.7.50 Silver g/tonne 22.25 9.2 23.33 7.98 Copper concentrate tonnes 38,384 39,354 65,560 66,79 Concentrate grade % Cu 22.82 24.9 22.86 23.92 Zinc concentrate tonnes 27,37 27,45 55,79 48,953 Concentrate grade % Zn 49.55 50.68 49.56 5.04 Copper recovery % 93.3 92. 92.7 9.8 Zinc recovery % 85.6 86. 85.2 86. Gold recovery % 65.3 59.9 65.0 59.7 Silver recovery % 63.4 56.8 6. 55.3 Contained metal in concentrate produced Copper tonnes 8,760 9,58 4,986 5,976 Zinc tonnes 3,563 3,895 27,347 24,987 Precious metals oz 8,3 5,778 35,069 27,038 Stall Concentrator Ore tonnes 38,275 290,30 595,07 553,453 Copper % 0.76 0.64 0.69 0.58 Zinc % 6.56 7.88 6.23 7.93 Gold g/tonne 2.4.80 2..66 Silver g/tonne 26.35 2.4 26.99 20.52 Copper concentrate tonnes 9,733 7,083 7,442 2,856 Concentrate grade % Cu 2.03 2.54 9.93 20.3 Zinc concentrate tonnes 38,356 40,362 67,759 77,724 Concentrate grade % Zn 5.2 52.03 5.07 52.08 Copper recovery % 84.5 8.6 84.8 80.5 Zinc recovery % 94.0 9.8 93.4 92.3 Gold recovery % 54.8 55.3 57.9 55.2 Silver recovery % 57.8 56.7 59. 55.7 Contained metal in concentrate produced Copper tonnes 2,047,526 3,476 2,588 Zinc tonnes 9,607 2,00 34,605 40,479 Precious metals oz 4,232 0,856 27,70 9,28 Precious metals production includes gold and silver production on a gold-equivalent basis. Silver is converted to gold at a ratio of 70:. 2
Three months ended Six months ended Guidance Jun. 30, Jun. 30, Jun. 30, Jun. 30, Annual Unit Operating Costs 208 207 208 207 208 Concentrators Flin Flon C$/tonne 9.99 7.57 2.38 9.2 Stall C$/tonne 25.44 26.60 26.33 3.08 Combined mine/mill unit operating costs 2 Manitoba C$/tonne 20.04 09. 28.56 3.88 25-35 3 Reflects costs per tonne of milled ore. 2 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. 3 Initial 208 guidance for Manitoba unit operating costs was C$0-23 per tonne. Ore processed in Flin Flon in the second quarter of 208 was consistent with the same period in 207. Lower production at our 777 mine was offset by the transfer of excess Lalor ore to the Flin Flon concentrator and higherthan-expected ore output from the Reed mine. Copper and zinc recoveries in the second quarter of 208 were consistent with the same period in 207 while gold and silver recoveries were 9% and 2% higher, respectively, due to higher head grades. Unit operating costs at the Flin Flon concentrator were 4% higher in the second quarter of 208 compared to the same period in 207 as a result of higher maintenance expenditures. Ore processed was 0% higher and copper recoveries were 4% higher at the Stall concentrator in the second quarter of 208 compared with the same period in 207, due to ongoing operational and maintenance improvements and better metallurgical understanding of the Lalor ore. Unit operating costs at the Stall concentrator were 4% lower in the second quarter of 208 compared to the same period in 207 as a result of the increased throughput. Ore processed year-to-date in 208 in Flin Flon was 3% higher than the same period in 207 as a result of the processing of excess Lalor ore in Flin Flon. Year-to-date recoveries of copper and zinc were generally consistent with the same period in 207, while gold and silver recoveries were 9% and 0% higher, respectively, compared to 207. Year-to-date unit operating costs at the Flin Flon concentrator were % higher than the same period in 207 as a result of higher maintenance and material handling costs in the first half of 208. Ore processed year-todate in 208 at the Stall concentrator was 8% higher, and recoveries for copper, gold and silver were higher than the same period in 207 while zinc was consistent. Year-to-date unit operating costs at the Stall concentrator were 5% lower than the same period in 207 as a result of higher production. Manitoba combined mine, mill and G&A unit operating costs in the second quarter and year-to-date in 208 were 0% and 3% higher, respectively, than in the same periods in 207 due mainly to higher 777 and Lalor mining costs, Flin Flon mill maintenance and ore rehandling costs. Lalor costs will continue to be affected by additional costs to truck Lalor ore to the Flin Flon mill. As a result of a number of factors described above including cold weather in the first quarter, costs at the 777 mine and the impact of a fan outage at the Lalor mine, Manitoba combined mine/mill unit operating costs are expected to be between C$25 and C$35 per tonne in 208, with higher costs during the third quarter of 208 while Lalor exhaust fan repairs are completed. 3
Three months ended Six months ended Guidance Manitoba contained metal in Jun. 30, Jun. 30, Jun. 30, Jun. 30, Annual concentrate produced,2 208 207 208 207 208 Copper tonnes 0,807,044 8,462 8,564 27,500-32,500 Gold oz 27,290 22,862 52,965 39,650 Silver oz 355,09 264,05 686,343 462,4 Zinc tonnes 33,70 34,896 6,952 65,466 05,000-30,000 Precious metals 3 oz 32,363 26,634 62,770 46,256 20,000-45,000 Includes 00% of Reed mine production. 2 Metal reported in concentrate is prior to deductions associated with smelter terms. 3 Precious metals production includes gold and silver production on a gold-equivalent basis. Silver is converted to gold at a ratio of 70:. In the second quarter of 208, copper production was comparable to the same period in 207, while production of gold and silver was 9% and 34% higher, respectively. Zinc production was 5% lower compared to the same period in 207 as a result of lower grades at Lalor, in line with the mine plan. Production of all metals is expected to be within full year guidance. Zinc Plant Three months ended Six months ended Guidance Jun. 30, Jun. 30, Jun. 30, Jun. 30, Annual Zinc Production 208 207 208 207 208 Zinc Concentrate Treated Domestic tonnes 53,865 53,026 08,273 0,6 Refined Metal Produced Domestic tonnes 25,520 25,476 50,85 54,294 0,000-5,000 4
Three months ended Six months ended Guidance Jun. 30, Jun. 30, Jun. 30, Jun. 30, Annual Unit Operating Costs 208 207 208 207 208 Zinc Plant C$/lb 0.49 0.44 0.50 0.42 0.40-0.50 Zinc unit operating costs include G&A costs. Production of cast zinc in the second quarter of 208 was consistent with the same period in 207 and operating costs per pound of zinc metal produced were % higher as a result of higher costs due to a maintenance shutdown during the second quarter of 208 and general inflationary increases in utilities, material, and labour costs. Operating costs per pound of zinc metal produced were 9% higher compared to the same period year-todate in 207 for the reasons stated above. Refined zinc metal production and zinc plant unit operating costs are expected to be within guidance ranges for 208. Manitoba Cash Cost and Sustaining Cash Cost Cost per pound of copper produced Three months ended Six months ended Jun. 30, Jun. 30, Jun. 30, Jun. 30, 208 207 208 207 Cash cost per pound of copper produced, net of by-product credits $/lb (0.7) (0.8) (0.58) (0.37) Sustaining cash cost per pound of copper produced, net of by-product credits $/lb 0.38 0.38 0.65 0.34 Cost per pound of zinc produced Cash cost per pound of zinc produced, net of by-product credits $/lb 0. 0.2 0.36 0.25 Sustaining cash cost per pound of zinc produced, net of by-product credits $/lb 0.46 0.39 0.73 0.45 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 per pound of copper produced, net of by-product credits, in the second quarter of 208 was negative $0.7 per pound of copper produced. This was lower compared to the same period in 207, primarily as a result of significantly increased zinc by-product credits, partially offset by the factors affecting unit operating costs described above. Sustaining cash cost per pound of copper produced, net of by-product credits, in the second quarter of 208 was $0.38, which is consistent with the prior year period as the lower cash cost was offset by higher planned sustaining capital expenditures. Sustaining cash costs increased by $0.3 year-to-date, compared to the same period as prior year, as a result of planned increased sustaining and exploration capital spending. Cash cost and sustaining cash cost per pound of zinc produced, net of by-product credits, in the second quarter of 208 were lower and higher, respectively, compared to the same period last year as a result of the same cost factors and capital spending described above, with decreased zinc production. 5
Metal Sold Three months ended Six months ended Jun. 30, Jun. 30, Jun. 30, Jun. 30, 208 207 208 207 Payable metal in concentrate Copper tonnes 0,062 0,767 7,000 8,67 Gold oz 25,932 22,006 47,082 46,00 Silver oz 250,952 232,090 54,778 525,392 Zinc tonnes 975,760 2,675,760 Refined zinc tonnes 27,93 27,664 50,945 54,496 FINANCIAL REVIEW Financial Results In the second quarter of 208, we recorded a profit of $24.7 million compared to a profit of $9. million for the same period in 207, an increase in profit of $5.6 million. Year-to-date in 208, we recorded a profit of $66. million compared to a profit of $9. million in the same period in 207, an increase in profit of $57.0 million. 6
The following table provides further details on these variances: Three months ended Six months ended (in $ millions) Jun. 30, 208 Jun. 30, 208 Increase (decrease) in components of profit or loss: Revenues 35.3 60. Cost of sales Mine operating costs (24.9) (67.7) Depreciation and amortization (5.8) (23.8) Net Finance expense 4.7 32.9 Other (4.4) (8.2) Tax (9.3) (26.3) Increase in profit in 208 compared to 207 5.6 57.0 Revenue Revenue for the second quarter of 208 was $37.3 million, $35.3 million higher than the same period in 207, primarily as a result of higher metal prices for all commodities, and higher gold sales volumes, partially offset by lower copper, zinc and silver sales volumes. Year-to-date revenue was $757.9 million, $60. million higher than the same period in 207, due to significantly higher realized sales prices for all commodities and higher copper and precious metals sales volumes, partially offset by lower zinc sales volumes. Three months ended Six months ended (in $ millions) Jun. 30, 208 Jun. 30, 208 Metals prices Higher copper prices 39.7 82.4 Higher zinc prices 4.3 3.6 Higher gold prices 6.3 0.9 Higher silver prices. 4.2 Sales volumes (Lower) higher copper sales volumes (2.6) 37.6 Lower zinc sales volumes (3.5) (7.5) Higher gold sales volumes 5. 4.8 (Lower) higher silver sales volumes (3.) 2.8 Other Derivative mark-to-market decrease (.5) (.7) Other volume and pricing differences (5.3) (3.5) Effect of lower (higher) treatment and refining charges 3.8 (.5) Increase in revenue in 208 compared to 207 35.3 60. See discussion below for further information regarding metals prices. 7
Our revenue by significant product type is summarized below: Three months ended Six months ended Jun. 30, Jun. 30, Jun. 30, Jun. 30, (in $ millions) 208 207 208 207 Copper 242.8 224.2 499.6 382. Zinc 93.3 8.8 84.2 59. Gold 4.6 33.3 78.2 68.8 Silver 9.0 20.2 4.2 37.2 Other.5 6. 5.7 7.3 Gross revenue 398.2 365.6 808.9 654.5 Adjustments to initial estimate (4.6) (3.5) (4.6) (.8) Treatment and refining charges (22.3) (26.) (46.4) (44.9) Revenue 37.3 336.0 757.9 597.8 Adjustments to initial estimate represents mark-to-market adjustments on provisionally prices sales, realized and unrealized changes to fair value for non-hedge derivative contracts and adjustments to originally invoiced weights and assays. 8
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 second quarter and year-to-date in 208 and 207, respectively, are summarized below: Realized prices for the Realized prices for the Three months ended Six months ended LME QTD Jun. 30, Jun. 30, LME YTD Jun. 30, Jun. 30, 208 2 208 207 3 208 2 208 207 3 Prices Copper $/lb 3.2 3.08 2.58 3.4 3.2 2.59 Zinc 4 $/lb.4.50.27.48.56.29 Gold 5 $/oz,404,223,375,265 Silver 5 $/oz 25.8 26.2 27.58 25.5 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 Gold and Silver realized prices for 207 have been restated due to IFRS 5 impacts. Please refer to note 4 of the financial statements for further information. 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 2. 9
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 June 30, 208 (in $ millions) Copper Zinc Gold Silver Other Total Revenue per financial statements 242.8 93.3 4.6 9.0.5 398.2 Adjustments to initial estimate 2 (.7) (.7) 0. (.2) (0.) (4.6) Derivative mark-to-market and Other 3 -.3 - - -.3 Revenue, excluding mark-to-market on non-qp hedges 24. 92.9 4.7 7.8.4 394.9 Payable metal in concentrate sold 4 35,47 28,68 29,696 689,484 - - Realized price 5,6 6,798 3,299,404 25.8 - - Realized price 7 3.08.50 - - - - Six months ended June 30, 208 (in $ millions) Copper Zinc Gold Silver Other Total Revenue per financial statements 499.6 84.2 78.2 4.2 5.7 808.9 Adjustments to initial estimate 2 (4.7) (.3) - 0.8 0.6 (4.6) Derivative mark-to-market and Other 3 -.8 (.6).4 -.6 Revenue, excluding mark-to-market on non-qp hedges 494.9 84.7 76.6 43.4 6.3 805.9 Payable metal in concentrate sold 4 7,977 53,620 55,753,575,940 - - Realized price 5,6 6,875 3,444,375 27.58 - - Realized price 7 3.2.56 - - - - Three months ended June 30, 207 (in $ millions) Copper Zinc Gold Silver Other Total Revenue per financial statements 224.2 8.8 33.3 20.2 6. 365.6 Adjustments to initial estimate 2 (.2) 0.4 (2.2) 0.5 (.0) (3.5) Derivative mark-to-market and Other 3 - (0.2) - - - (0.2) Revenue, excluding mark-to-market on non-qp hedges 223.0 82.0 3. 20.7 5. 36.9 Payable metal in concentrate sold 4 39,249 29,424 25,45 790,707 - - Realized price 5,6 5,682 2,790,223 26.2 - - Realized price 7 2.58.27 - - - - Six months ended June 30, 207 (in $ millions) Copper Zinc Gold Silver Other Total Revenue per financial statements 382. 59. 68.8 37.2 7.3 654.5 Adjustments to initial estimate 2 (7.).0 (4.4) (0.3) (.0) (.8) Derivative mark-to-market and Other 3-0. - - - 0. Revenue, excluding mark-to-market on non-qp hedges 375.0 60.2 64.4 36.9 6.3 642.8 Payable metal in concentrate sold 4 65,664 56,256 50,920,467,272 - - Realized price 5,6 5,7 2,848,265 25.5 - - Realized price 7 2.59.29 - - - - Average realized price per unit sold may not calculate based on amounts presented in this table due to rounding. 2 Adjustments to initial estimate not derived from contracts represents mark-to-market adjustments on provisionally priced sales, realized and unrealized changes to fair value for non-hedge derivative contracts and adjustments to originally invoiced weights and assays. 3 Derivative mark-to-market excludes mark-to-market on QP hedges. 4 Copper and zinc shown in metric tonnes and gold and silver shown in ounces. 5 Realized price for copper and zinc in $/metric tonne and realized price for gold and silver in $/oz. 6 Gold and Silver realized prices for 207 have been restated due to IFRS 5 impacts. Please refer to note 4 of the financial statements for further information. 7 Realized price for copper and zinc in $/lb. 20
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 the timing of the transfer of control to customers. Stream Sales The following table shows stream sales included within realized prices and their respective deferred revenue and cash payment rates: Three months ended Six months ended Jun. 30, 208 Jun. 30, 208 Manitoba Peru Manitoba Peru Gold oz 3,82 2,72 8,944 5,49 Silver oz 69,565 409,802 222,47 984,94 Gold deferred revenue drawdown rate $/oz,265 967,279 967 Gold cash rate 2 $/oz 42 400 42 400 Silver deferred revenue drawdown rate $/oz 24.60 2.79 24.84 2.79 Silver cash rate 2 $/oz 6.08 5.90 6.08 5.90 Three months ended Six months ended Jun. 30, 207 Jun. 30, 207 Manitoba Peru Manitoba Peru Gold oz 6,32 2,623 2,607 4,67 Silver oz 24,757 558,67 266,863 94,880 Gold deferred revenue drawdown rate $/oz,220,03,250,03 Gold cash rate 2 $/oz 408 400 408 400 Silver deferred revenue drawdown rate $/oz 23.89 2.53 23.86 2.53 Silver cash rate 2 $/oz 6.02 5.90 6.02 5.90 Deferred revenue amortization is recorded in Manitoba at C$,635/oz and C$3.88/oz for gold and silver, respectively, 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. 2
Cost of Sales Our detailed cost of sales is summarized as follows: Three months ended Six months ended Jun. 30, Jun. 30, Jun. 30, Jun. 30, (in $ thousands) 208 207 208 207 Peru Mine 23,53 2,6 47,35 25,900 Concentrator 42,93 35,758 74,644 68,069 Changes in product inventory (5,289) 2,534 (6,670) (5,024) Depreciation and amortization 5,563 46,264 05,259 77,76 G&A 2,494,964 29,950 25,423 Freight, royalties and other charges 2,74 2,600 27,097 22,554 Total Peru cost of sales 37,88 2,73 277,63 204,683 Manitoba Mines 42,007 35,965 86,750 69,880 Concentrators 3,080,440 26,67 24,578 Zinc plant 7,928 5,590 36,762 32,96 Purchased ore and concentrate (before inventory changes) 9,747 5,867 7,275 9,268 Changes in product inventory 3,72,039 (5,732),298 Depreciation and amortization 3,989 3,385 58,90 62,552 G&A,67,907 25,44 25,303 Freight, royalties and other charges,505 3,23 2,84 23,40 Total Manitoba cost of sales 4,639 26,36 267,08 248,485 Cost of sales 278,827 248,047 544,72 453,68 Total cost of sales for the second quarter of 208 was $278.8 million, reflecting an increase of $30.7 million from the second quarter of 207. Cost of sales related to Peru was $5.5 million higher compared to the second quarter of 207 as a result of higher consumable costs, concentrator maintenance, reduced capitalized stripping and depreciation costs. In Manitoba, cost of sales increased by $5.3 million compared to the second quarter of 207 as a result of higher mining and zinc plant maintenance costs. Cost of sales year-to-date in 208 was $544.7 million, an increase of $9.5 million compared to 207. The increase is mostly attributable to Peru, which had higher year-to-date costs of $277.6 million, due to significant increases in depreciation related to higher sales and higher mining costs outlined in the Constancia Operations Review section. For details on unit operating costs refer to the tables in the Operations Review section beginning on page 7 of this MD&A. For the second quarter of 208, other significant variances in expenses from operations, compared to the same period in 207, include the following: Exploration expenses were $7.5 million in the second quarter of 208, an increase of $5.7 million compared to the same period in 207, reflecting our increased funding for brownfield and grassroots exploration in 208. 22
Finance expenses decreased by $5.6 million compared to the same period in 207. The reduction in costs reflects the full repayment of cash borrowings on our senior secured revolving credit facilities over the course of 207. Other finance gain increased by $7.7 million compared to the same period in 207. This increase is due to higher foreign exchange gains of $.3 million compared to the same period last year which is a function of a strengthening US dollar benefiting certain US monetary assets in the Manitoba business unit. In addition, there was a gain of $.7 million arising mainly from a decrease in the fair value of our various financial instruments liabilities subject to fair value accounting. Partially offsetting these gains were losses compared to the same period last year for investments in our junior mining portfolio for mark-to-market fair value adjustments of $.4 million and reduced gains compared to the prior year on the revaluation of Hudbay warrants of $3.9 million. For 208 year-to-date, other significant variances in expenses from operations, compared to 207 year-to-date, include the following: Selling and administrative expenses decreased by $4.3 million compared to the same period in 207. The decrease was primarily due to lower stock based compensation charges as a result of the revaluation of previously issued share units to lower share prices during the current quarter compared to the same period last year. Exploration expenses increased by $. million compared to the same period in 207, for the same reason stated above. Other operating expenses were $8. million in the first half of 208, an increase of $.5 million compared to the same period in 207. This is primarily due to the recognition of an obligation to deliver additional precious metal credits to Wheaton as a result of our expectation that mining at the Pampacancha deposit will not begin until 209. Additionally, in the first quarter of 207, Hudbay recorded a recovery of $8.7 million for insurance proceeds related to the Constancia grinding line 2 failure in 205. Finance income increased by $2.3 million compared to the same period in 207 as a result of higher interest earned in the period from higher cash balances versus the first half of 207. Finance expenses decreased by $0. million compared to the same period in 207 for the reason stated above. Other finance gain increased by $20.5 million compared to the same period in 207. This increase is due to higher foreign exchange gains of $7.7 million compared to the same period last year which is a function of a strengthening US dollar benefiting certain US monetary assets in the Manitoba business unit. In addition, there were increased gains of $4.3 million and $2.9 million arising mainly from a decrease in the fair value of our various financial instruments liabilities subject to fair value accounting and our Hudbay warrants, respectively. Partially offsetting these gains was a loss compared to the same period last year for the investments in our junior mining portfolio for mark-to-market fair value adjustments of $4.4 million. 23
Tax Expense (Recovery) For the three and six months ended June 30, 208, tax expense increased by $9.3 million and $26.3 million, respectively, compared to the same periods in 207. The following table provides further details: Three months ended Six months ended Jun. 30, Jun. 30, Jun. 30, Jun. 30, (in $ thousands) 208 207 208 207 Deferred tax expense - income tax 6,048 4,040 25,084 6,708 Deferred tax (recovery) expense - mining tax (88) 72 (488) 937 Total deferred tax expense 5,860 4,22 24,596 7,645 Current tax expense - income tax,682 (3,60) 7,66 3,429 Current tax expense - mining tax 7,582 5,87 4,525 9,39 Total current tax expense 9,264,586 32,86 2,820 Tax expense 25,24 5,798 56,782 30,465 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 $22.9 million for the year-to-date period in 208 would have resulted in a tax expense of approximately $33.2 million; however, we recorded an income tax expense of $42.8 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 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 $5. million; and Increase in deferred tax expense of approximately $6.5 million from the same quarter in 207 (decrease of $4.3 million from the first half of 207) 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 rise to taxable temporary differences. Mining Tax Expense Applying the estimated Manitoba mining tax rate of 0.0% to our income before taxes of $22.9 million for the year-to-date period in 208 would have resulted in a tax expense of approximately $2.3 million and we recorded a mining tax expense of $4.0 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. 24
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 June 30, 208 at the tax rate we expect to apply when temporary differences reverse. LIQUIDITY AND CAPITAL RESOURCES Senior Secured Revolving Credit Facilities We have two revolving credit facilities (the Credit Facilities ) for our Canadian and Peruvian businesses, with combined total availability of $550 million and substantially similar terms and conditions. As at June 30, 208, between our Credit Facilities we have drawn $30.4 million in letters of credit, leaving total undrawn availability of $49.6 million. As at June 30, 208, we were in compliance with our covenants under the Credit Facilities. As noted under Recent Developments above, the Credit Facilities were amended on June 5, 208 to extend the maturity dates from July 4, 202 to July 4, 2022 and to incorporate various amendments to the terms and conditions of the Credit Facilities to provide us with greater flexibility. Financial Condition Financial Condition as at June 30, 208 compared to December 3, 207 Cash and cash equivalents increased by $83. million from December 3, 207 to $439.6 million as at June 30, 208. This increase was a result of cash generated from operating activities of $228.4 million. These inflows were partly offset by $86.6 million of capital investments primarily at our Peru and Manitoba operations and interest payments of $37.4 million. We hold the majority of our cash and cash equivalents in low-risk, liquid investments with major Canadian and Peruvian financial institutions. In addition to the increased cash and cash equivalents position, working capital increased by $49.5 million to $400.9 million from December 3, 207 to June 30, 208, primarily due to: Trade and other payables decreased by $20.4 million primarily as a result of the timing of spending on mine and mill supplies and interest accruals; Other financial liabilities decreased by $9.0 million mainly due to more favourable positions for our derivative and warrant liabilities; Other liabilities decreased by $7.9 million primarily as a result of lower stock-based compensation and current pension liabilities; and Current inventories increased by $5.7 million as zinc concentrate work in process and stockpile inventories climbed, partially offset by Trade Receivables decreased by $8. million, mainly due to timing of sales. 25