Filed by HudBay Minerals Inc.

Pursuant to Rule 425 under the Securities Act of 1933, as amended

Subject Company: Augusta Resource Corporation

Commission File Number: 001-32943

Date: April 30, 2014

 

 

 

HUDBAY MINERALS INC.

 

Management’s Discussion and Analysis of

Results of Operations and Financial Condition

 

For the three months ended

March 31, 2014

 

April 30, 2014

 

 

TABLE OF CONTENTS

 

	Page
Notes to Reader	1
Our Business	5
Summary	5
Key Financial and Production Results	6
Recent Developments	7
Development Update	8
Operations Review	10
Financial Review	15
Liquidity and Capital Resources	22
Trend Analysis and Quarterly Review	26
Non-IFRS Financial Performance Measures	27
Accounting Changes and Critical Estimates	30
Changes in Internal Control Over Financial Reporting	30

 

 

NOTES TO READER

 

This Management’s Discussion and Analysis (“MD&A”) dated April 30, 2014 is intended to supplement HudBay Minerals Inc.’s unaudited condensed consolidated interim financial statements and related notes for the three months ended March 31, 2014 and 2013 (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.

 

Additional information regarding HudBay Minerals Inc., 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”), audited consolidated financial statements, and Management Information Circular, available on SEDAR at www.sedar.com and on EDGAR at www.sec.gov.

 

All amounts are in Canadian dollars unless otherwise noted.

 

References to “Hudbay”, the “Company”, “we”, “us”, “our” or similar terms refer to HudBay Minerals Inc. and its direct and indirect subsidiaries. “Hudbay Peru” refers to HudBay Peru Inc., our wholly-owned subsidiary.

 

Forward-Looking Information

 

This MD&A contains “forward-looking statements” and “forward-looking information” (collectively, “forward-looking information”) within the meaning of applicable Canadian and United States securities legislation. All information contained in this MD&A, other than statements of current and historical fact, is forward-looking information. Often, but not always, forward-looking information can be identified by the use of words such as “plans”, “expects”, “budget”, “guidance”, “scheduled”, “estimates”, “forecasts”, “strategy”, “target”, “intends”, “objective”, “goal”, “understands”, “anticipates” and “believes” (and variations of these or similar words) and statements that certain actions, events or results “may”, “could”, “would”, “should”, “might” “occur” or “be achieved” or “will be taken” (and variations of these or similar expressions). All of the forward-looking information in this MD&A is qualified by this cautionary note.

 

Forward looking information includes, but is not limited to, statements with respect to the anticipated timing, mechanics, completion and settlement of the Offer (as defined below) to acquire all of the issued and outstanding shares of Augusta Resource Corporation (“Augusta”), the market for and listing of the common shares we may issue pursuant to the Offer, the value of our common shares that may be received as consideration under the Offer, our ability to complete the transactions contemplated by the Offer, the permitting, development and financing of Augusta’s Rosemont copper project (the “Rosemont Project”), the purpose of the Offer, the completion of any compulsory acquisition or subsequent acquisition transaction in connection with the Offer and any commitment to acquire outstanding shares of Augusta, our objectives, strategies, intentions, expectations and guidance and future financial and operating performance and prospects, production at our 777, Lalor and Reed mines and initial production from the Constancia project, continued processing at our Flin Flon concentrator, Snow Lake concentrator and Flin Flon zinc plant, our ability to complete the development of our Lalor, and Constancia projects and the anticipated scope and cost of any development plans for these projects, anticipated timing of our projects and events that may affect our projects, including the anticipated issue of required licenses and permits, our expectation that we will receive the remaining deposit amount under our amended precious metals stream transaction with Silver Wheaton Corp. (“Silver Wheaton”) and additional funding under our equipment financing transaction with Caterpillar Financial Services Corporation (“CAT Financial”), expectations with respect to additional credit facilities, the anticipated effect of external factors on revenue, such as commodity prices, anticipated exploration and development expenditures and activities and the possible success of such activities, estimation of mineral reserves and resources, mine life projections, timing and amount of estimated future production, reclamation costs, economic outlook, government regulation of mining operations, and business and acquisition strategies.

 

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Forward-looking information is not, and cannot be, a guarantee of future results or events. Forward-looking information is based on, among other things, opinions, assumptions, estimates and analyses that, while considered reasonable by us at the date the forward-looking information is provided, inherently are subject to significant risks, uncertainties, contingencies and other factors that may cause actual results and events to be materially different from those expressed or implied by the forward-looking information.

 

The material factors or assumptions that we identified and were applied by us in drawing conclusions or making forecasts or projections set out in the forward looking information include, but are not limited to:

 

·                  the success of mining, processing, exploration and development activities;

·                  the accuracy of geological, mining and metallurgical estimates;

·                  the costs of production;

·                  the supply and demand for metals we produce;

·                  no significant and continuing adverse changes in financial markets, including commodity prices and foreign exchange rates;

·                  the supply and availability of concentrate for our processing facilities;

·                  the supply and availability of reagents for our concentrators;

·                  the availability of third party processing facilities for our concentrate;

·                  the supply and availability of all forms of energy and fuels at reasonable prices;

·                  the availability of transportation services at reasonable prices;

·                  no significant unanticipated operational or technical difficulties;

·                  the execution of our business and growth strategies, including the success of our strategic investments and initiatives;

·                  the availability of financing for our exploration and development projects and activities;

·                  the ability to complete project targets on time and on budget and other events that may affect our ability to develop our projects;

·                  the timing and receipt of various regulatory and governmental approvals;

·                  the availability of personnel for our exploration, development and operational projects and ongoing employee relations;

·                  our ability to secure required land rights to complete our Constancia project;

·                  maintaining good relations with the communities in which we operate, including the communities surrounding our Constancia project and First Nations communities surrounding our Lalor project and Reed mine;

·                  no significant unanticipated challenges with stakeholders at our various projects;

·                  no significant unanticipated events or changes relating to regulatory, environmental, health and safety matters;

·                  no contests over title to our properties, including as a result of rights or claimed rights of aboriginal peoples;

·                  the timing and possible outcome of pending litigation and no significant unanticipated litigation;

·                  certain tax matters, including, but not limited to current tax laws and regulations and the refund of certain value added taxes from the Canadian and Peruvian governments;

·                  no significant and continuing adverse changes in general economic conditions or conditions in the financial markets;

·                  the accuracy of Augusta’s public disclosure;

·                  that all conditions to the Offer will be satisfied or waived; and

·                  the timing and likelihood of entering into a standby credit facility and offtake arrangement in respect of Constancia.

 

The risks, uncertainties, contingencies and other factors that may cause actual results to differ materially from those expressed or implied by the forward-looking information may include, but are not limited to, the impact of the issuance of our common shares as consideration under the Offer on the market price of our common shares, the development of the Rosemont Project not occurring as planned, the exercising of dissent and appraisal rights by Augusta shareholders should a compulsory acquisition or subsequent acquisition transaction be undertaken in connection with the Offer, the reduced trading liquidity of common shares of Augusta not deposited under the Offer, Augusta becoming a minority-owned or majority-owned subsidiary of Hudbay after consummation of the Offer, the possibility that Hudbay may remain a minority shareholder of Augusta after consummation of the Offer without the ability to control the management or direction of Augusta, the inaccuracy of Augusta’s public disclosure upon which the Offer is predicated, the triggering of change of control provisions in

 

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Augusta’s agreements leading to adverse consequences, the failure to obtain required approvals or clearances from government authorities on a timely basis, risks generally associated with the mining industry, such as economic factors (including future commodity prices, currency fluctuations, energy prices and general cost escalation), uncertainties related to the development and operation of our projects (including the impact on project cost and schedule of construction delays and unforeseen risks and other factors beyond our control), depletion of our reserves, risks related to political or social unrest or change and those in respect of aboriginal and community relations, rights and title claims, operational risks and hazards, including unanticipated environmental, industrial and geological events and developments and the inability to insure against all risks, failure of plant, equipment, processes, transportation and other infrastructure to operate as anticipated, compliance with government and environmental regulations, including permitting requirements and anti-bribery legislation, dependence on key personnel and employee relations, volatile financial markets that may affect our ability to obtain financing on acceptable terms, uncertainties related to the geology, continuity, grade and estimates of mineral reserves and resources and the potential for variations in grade and recovery rates, uncertain costs of reclamation activities, our ability to comply with our pension and other post-retirement obligations, our ability to abide by the covenants in our debt instruments or other material contracts, tax refunds, hedging transactions, as well as the risks discussed under the heading “Risk Factors” in our most recent Annual Information Form.

 

Should one or more risk, uncertainty, contingency or other factor materialize or should any factor or assumption prove incorrect, actual results could vary materially from those expressed or implied in the forward-looking information. Accordingly, you should not place undue reliance on forward-looking information. We do not assume any obligation to update or revise any forward-looking information after the date of this MD&A or to explain any material difference between subsequent actual events and any forward-looking information, except as required by applicable law.

 

Information concerning Augusta

 

Except as otherwise expressly indicated herein, the information concerning Augusta contained in this MD&A has been taken from and is based solely upon Augusta’s public disclosure on file with the relevant securities regulatory authorities. Augusta has not reviewed this document and has not confirmed the accuracy and completeness of the information in respect of Augusta contained in this MD&A. Although we have no knowledge that would indicate that any information or statements contained in this MD&A concerning Augusta taken from, or based upon, such public disclosure contain any untrue statement of a material fact or omit to state a material fact that is required to be stated or that is necessary to make a statement not misleading in light of the circumstances in which it was made, none of our directors or officers have verified the accuracy or completeness of such information or statements or are aware of any failure by Augusta to disclose events or facts which may have occurred or which may affect the significance or accuracy of any such information or statements. We have no means of verifying the accuracy or completeness of any of the information contained herein that is derived from Augusta’s publicly available documents or records or whether there has been any failure by Augusta to disclose events that may have occurred or may affect the significance or accuracy of any information. Except as otherwise indicated, information concerning Augusta is given based on information in Augusta’s public disclosure available as of the date of the Offer.

 

Note to United States Investors

 

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 U.S. issuers.

 

Information concerning our mineral properties has been prepared in accordance with the requirements of Canadian securities laws, which differ in material respects from the requirements of the Securities and Exchange Commission (the “SEC”) set forth in Industry Guide 7. Under the SEC’s Industry Guide 7, mineralization may not be classified as a “reserve” unless the determination has been made that the mineralization could be economically and legally produced or extracted at the time of the reserve determination, and the SEC does not recognize the reporting of mineral deposits which do not meet the SEC Industry Guide 7 definition of “Reserve”. In accordance with National Instrument 43-101 — Standards of Disclosure for Mineral Projects (“NI 43-101”) of the Canadian Securities Administrators, the terms “mineral reserve”, “proven mineral reserve”, “probable mineral reserve”, “mineral resource”, “measured mineral resource”, “indicated mineral resource” and “inferred mineral resource” are

 

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defined in the Canadian Institute of Mining, Metallurgy and Petroleum (the “CIM”) Definition Standards for Mineral Resources and Mineral Reserves adopted by the CIM Council on December 11, 2005. While the terms “mineral resource”, “measured mineral resource”, “indicated mineral resource” and “inferred mineral resource” are recognized and required by NI 43-101, the SEC does not recognize them. You are cautioned that, except for that portion of mineral resources classified as mineral reserves, mineral resources do not have demonstrated economic value. Inferred mineral resources have a high degree of uncertainty as to their existence and as to whether they can be economically or legally mined. It cannot be assumed that all or any part of an inferred mineral resource will ever be upgraded to a higher category. Therefore, you are cautioned not to assume that all or any part of an inferred mineral resource exists, that it can be economically or legally mined, or that it will ever be upgraded to a higher category. Likewise, you are cautioned not to assume that all or any part of measured or indicated mineral resources will ever be upgraded into mineral reserves.

 

Cautionary Note in Respect of the Offer

 

The full details of the Offer are set out in the takeover bid circular and accompanying offer documents, as amended (collectively, the “Offer Documents”), which we filed with the Canadian securities regulatory authorities. We also filed with the SEC a registration statement on Form F-10, as amended (the “Registration Statement”), which contains a prospectus relating to the Offer (the “Prospectus”), and a tender offer statement on Schedule TO, as amended (the “Schedule TO”). The disclosure related to the Offer in this MD&A is not a substitute for the Offer Documents, the Prospectus, the Registration Statement or the Schedule TO. AUGUSTA SHAREHOLDERS AND OTHER INTERESTED PARTIES ARE URGED TO READ THESE DOCUMENTS, ALL DOCUMENTS INCORPORATED BY REFERENCE, ALL OTHER APPLICABLE DOCUMENTS AND ANY AMENDMENTS OR SUPPLEMENTS TO ANY SUCH DOCUMENTS WHEN THEY BECOME AVAILABLE, BECAUSE EACH WILL CONTAIN IMPORTANT INFORMATION ABOUT HUDBAY, AUGUSTA AND THE OFFER. Materials filed with the Canadian securities regulatory authorities are available electronically without charge at www.sedar.com. Materials filed with the SEC are available electronically without charge at the SEC’s website at www.sec.gov. All such materials may also be obtained without charge at Hudbay’s website, www.hudbayminerals.com or by directing a written or oral request to the information agent for the Offer, Kingsdale Shareholder Services at 1-866-229-8874 (North American Toll Free Number) or 1-416-867-2272 (outside North America), or by email at contactus@kingsdaleshareholder.com or to the Vice President, Legal and Corporate Secretary of Hudbay at 25 York Street, Suite 800, Toronto, Ontario, telephone (416) 362-8181.

 

This MD&A does not constitute an offer to buy or the solicitation of an offer to sell any of the securities of Hudbay or Augusta.

 

Presentation of Non-IFRS Financial Performance Measures

 

We use realized prices as a non-IFRS financial performance measure in our MD&A. For a detailed description, please see the discussion under “Financial Review” beginning on page 15 of our MD&A. In addition, we use operating cash flow per share and cash cost per pound of copper sold as non-IFRS financial performance measures in our MD&A. For a detailed description of each of the non-IFRS financial performance measures used in this MD&A, please see the discussion under “Non-IFRS Financial Performance Measures” beginning on page 27 of our MD&A.

 

Qualified Person

 

The technical and scientific information in this MD&A related to the Constancia project has been approved by Cashel Meagher, P. Geo, our Vice President, South America Business Unit. The technical and scientific information related to all other sites and projects contained in this MD&A has been approved by Robert Carter, P. Eng, our Director, Technical Services. Messrs. Meagher and Carter are qualified persons pursuant to NI 43-101. For a description of the key assumptions, parameters and methods used to estimate mineral reserves and resources, as well as data verification procedures and a general discussion of the extent to which the estimates of scientific and technical information may be affected by any known environmental, permitting, legal title, taxation, sociopolitical, marketing or other relevant factors, please see the Technical Reports for each of our material properties as filed on SEDAR at www.sedar.com.

 

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OUR BUSINESS

 

We are an integrated mining company producing copper concentrate (containing copper, gold and silver) and zinc metal. With assets in North and South America, we are focused on the discovery, production and marketing of base and precious metals. Through our subsidiaries, we own copper/zinc/gold mines, ore concentrators and a zinc production facility in northern Manitoba and Saskatchewan and a copper project in Peru. We also have equity investments in a number of junior exploration companies. 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 mission is to create sustainable value through increased commodity exposure on a per share basis for our shareholders. 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

 

·             Full year production and operating cost guidance remains unchanged with improvements achieved in Lalor and 777 operating costs, and underground rehabilitation at 777 now complete, as expected.

 

·             Constancia project approximately 71% complete at March 31, 2014; on track for first production during Q4 2014.

 

·             Lalor on budget and on schedule to double production capacity and increase production rates in the second half of 2014.

 

·             Reed achieved commercial production ahead of guidance and completed construction under budget.

 

·             On February 9, 2014, we announced our intention to commence an offer to acquire Augusta Resource Corporation, operator of the undeveloped Rosemont Project in Arizona.

 

·             Received commitment letter in connection with a US$150 million, four-year Constancia standby credit facility; closing expected in the second quarter of 2014.

 

First quarter operating cash flow before stream deposit and change in non-cash working capital decreased to negative $4.6 million from $12.3 million in the first quarter of 2013. The net loss and loss per share in the first quarter of 2014 were $27.2 million and $0.15, respectively, compared to a profit and earnings per share of $1.9 million and $0.01, respectively, in the first quarter of 2013.

 

Cash flow from operations, net earnings and cash cost per pound of copper were all negatively affected by a significant accumulation of unsold copper (29% of quantity produced in the quarter) and precious metals (44% of quantity produced in the quarter). As a result of rehabilitation work at the 777 mine that was successfully completed in February 2014, production of copper concentrate rebounded as expected late in the first quarter and was in line with overall expectations. This limited the availability of concentrate for shipping prior to quarter end, and extreme cold weather in the quarter affected railway service from our Manitoba operations.

 

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KEY FINANCIAL AND PRODUCTION RESULTS

 

Financial Condition ($000s)		Mar. 31, 2014		Dec. 31, 2013
Cash and cash equivalents		764,001		631,427
Working capital		660,594		583,124
Total assets		4,401,233		3,843,986
Equity1		1,857,806		1,635,611

 

Financial Performance 

 

			Three months ended
(in $ thousands except per share and cash cost amounts)			Mar. 31, 2014		Mar. 31, 2013
Revenue			106,779		119,881
(Loss) profit before tax			(24,139	)	7,924
Basic and diluted (loss) earnings per share1			(0.15	)	0.01
(Loss) profit for the period			(27,219	)	1,907
Operating cash flow before stream deposit and change in non-cash working capital			(4,634	)	12,261
Operating cash flow per share 2			(0.02	)	0.07
Cash cost, after by-product credits (per pound sold) 2			2.53		1.85
Production
Contained metal in concentrate3
Copper	(tonnes)		7,954		7,643
Zinc	(tonnes)		19,294		18,210
Gold	(troy oz.)		18,648		18,669
Silver	(troy oz.)		187,001		174,604
Metal Sold
Payable metal in concentrate
Copper	(tonnes)		5,539		7,821
Gold	(troy oz.)		10,766		12,222
Silver	(troy oz.)		102,809		112,119
Refined zinc	(tonnes)		21,104		24,218

 

1  Attributable to owners of the Company.

2  Operating cash flow (before stream deposit and change in non-cash working capital) per share and cash cost, after by-product credits, per pound of copper sold are non-IFRS financial performance measures with no standardized definition under IFRS. For further information and a detailed reconciliation, please see page 27 of this MD&A.

3  Metal reported in concentrate is prior to refining losses or deductions associated with smelter contract terms.

 

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Earnings for the first quarter of 2014 were affected by, among other things, the following items:

 

		Pre-tax gain (loss) ($ millions)		After-tax gain (loss) ($ millions)		Per Share1 ($/share)
Mark-to-market gain on metal price hedging		8.6		6.3		0.03
Gain on mark-to-market of embedded derivative related to long-term debt		2.9		2.9		0.02
Loss as a result of provisional pricing adjustments		(2.9	)	(1.8	)	(0.01	)
Foreign currency translation loss		(8.6	)	(10.9	)	(0.06	)
Augusta transaction costs		(3.7	)	(3.7	)	(0.02	)
Impairments and mark-to-market adjustments related to junior mining investments		(0.7	)	(0.7	)	—
Loss on disposal of Back Forty project		(6.5	)	(6.5	)	(0.04	)
Impact on deferred taxes of certain Peru costs and change in discount rates on decommissioning and restoration liabilities		—		(3.5	)	(0.02	)

 

1 Attributable to the owners of the company.

 

RECENT DEVELOPMENTS

 

Offer to Acquire Augusta

 

On February 9, 2014, we announced our intention to commence an offer to acquire all of the issued and outstanding common shares of Augusta not already owned by us (the “Offer”). Under the terms of the Offer, Augusta shareholders are entitled to receive 0.315 of a Hudbay common share for each Augusta common share held.

 

The Offer is currently open for acceptance until 5:00 p.m. (Toronto time) on May 5, 2014, unless extended or withdrawn. We will not extend the Offer beyond May 5, 2014 unless, at or by that date, the remaining conditions to the Offer have been satisfied or waived, including the condition that Augusta’s shareholder rights plan (the “Shareholder Rights Plan”) has been waived, invalidated or cease-traded.

 

On April 14, 2014, we applied to the British Columbia Securities Commission for an order to cease trade the Shareholder Rights Plan and a hearing commenced on April 29, 2014. The hearing was adjourned to May 2, 2014, when the parties will make additional submissions to the Commission.

 

Constancia Standby Credit Facility

 

We are arranging a US$150 million standby credit facility to provide financing for expenditures on the Constancia project, if required. BNP Paribas and ING Capital LLC are acting as Mandated Lead Arrangers and have provided a commitment letter for the financing, subject to customary conditions and other terms contained therein including completion of due diligence and definitive documentation. The facility is expected to have a term of four years, with any drawdowns bearing interest at LIBOR + 3.50%. In addition, we intend to enter into a long-term agreement with Louis Dreyfus Commodities Metals Suisse S.A. for the sale of approximately 20% of the life of mine copper concentrate production from Constancia on standard market terms. The definitive agreements are expected to be finalized during the second quarter of 2014.

 

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DEVELOPMENT UPDATE

 

Constancia

 

At our 100% owned Constancia copper project in Peru, the project was over 71% complete on a proportion spent basis at the end of March 2014. Of the total project capital budget of US$1.7 billion, we have incurred approximately US$1.2 billion in costs to March 31, 2014 and entered into an additional US$200 million in commitments.

 

·                  We continue to advance construction activities on the power transmission line from Tintaya to Constancia, with construction approximately 75% complete and completion is expected in July 2014, in time for the start of Constancia commissioning activities. The Socabaya to Tintaya 220kV transmission line upgrade is complete and was energized in April of this year. All families in areas critical to commencement of operations have been resettled. All required mining equipment for pre-stripping operations has been commissioned and pre-stripping activities commenced on schedule in early March 2014. Purchased power and port services contracts are in place.

·                  Significant progress has been achieved on construction of the concentrator. All fabricated structural steel is on site, and deliveries of fabricated mechanical steel and piping continue. The crusher, mills, flotation cells and other major mechanical equipment have been placed, and mechanical fit-out continues. Water and tailings pipeline and water reclaim piping construction are advancing.

·                  Electrical and instrumentation installation is underway and electrical rooms are being delivered to site for installation.  Dam construction on the east tailings embankment is well underway and on schedule, and water retention in the east tailings impoundment has commenced. Water capture to build water inventory for operations began in December 2013.

·                  Constancia construction remains on track for first production in late 2014 and commercial production in the second quarter of 2015.

 

The existing project schedule and capital cost estimate contemplates that the remaining capital spending on the project will occur in 2014 as set out below:

 

		(in US$ millions)
Total estimated future capital spending - 2014		500
Total spent in Q1 2014		178
Total spent in 2012 - 2013		1,030
Total1		1,708

 

1        The total project budget does not reflect pre-production costs and revenue and life of mine community agreement obligations, all of which will be applied to capitalized costs.

 

Lalor

 

At our 100% owned Lalor project in Manitoba, of the total mine construction budget of $441 million, we have invested approximately $390 million and have entered into an additional $42 million in commitments to March 31, 2014. The underground mine remains on schedule and on budget. We are continuing underground project development and have completed the excavation of the production shaft. We have completed the steel guide installation to the 955 metre level, and are currently constructing the loading pocket along with the remaining sets in the shaft. We expect to complete the steel guide installation in the second quarter of 2014.

 

Construction is proceeding well on the 910 and 955 metre levels on the mine dewatering systems, rock breakers and the loadout systems. Commissioning of the production shaft, completion of mine construction, doubling of the production capacity at the mine and concentrator to 2,700 tonnes per day and an increase to the production rate remain on schedule for July 2014.

 

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The completion of surface construction is expected late in 2014. We have recently received our Environment Act licence for Lalor, which will enable full production via the main shaft.

 

Given the nature of the Lalor project, we expect to refer to three phases of the Lalor project when determining commercial production for accounting purposes. The first phase of the project includes the main ventilation shaft and associated surface and underground workings that have contributed to the production of ore between 2012 and 2014. We commenced commercial production for the first phase on April 1, 2013 with Lalor initial production contributing to profit starting at that time.

 

The second phase of the project is expected to be completed in the second half of 2014 when the main production shaft has been commissioned for ore hoisting.  At that time we expect to discontinue the use of the ventilation shaft for hoisting and transition fully to use of the main production shaft. We have determined that the appropriate level of activity that represents commercial production for the second phase of the project is hoisting at 60% of the average of planned ore mined over a one year period for a minimum of a one month period. Once the new production shaft is operational but prior to reaching commercial production from the production shaft, all revenue and costs associated with mine production from Lalor will be capitalized.

 

The third phase of the project involves the new concentrator. We are processing Lalor ore at the nearby Snow Lake concentrator until we complete construction of the new concentrator located at the Lalor site.

 

The remaining capital spending on the Lalor mine project is expected to occur in 2014 as set out below:

 

		(in $ millions)
Total estimated future capital spending - 2014		51
Total spent in Q1 2014		9
Total spent in 2010 - 2013		381
Total1		441

 

1        The total project budget does not reflect pre-production costs and revenue and investment tax credits associated with new mine status for income tax purposes, all of which will be applied to capitalized costs.

 

Reed

 

Our 70% owned Reed mine in Manitoba achieved commercial production at the end of the first quarter, ahead of guidance, having operated at an average of 792 tonnes per day in the first quarter of 2014. Of our $72 million estimated capital construction budget, we have invested approximately $66 million to March 31, 2014 to complete the project under budget. Approximately $4 million of project capital will be spent as sustaining capital over the life of the mine. As of March 31, 2014, project development had advanced 2,332 metres with an additional 883 metres of pre-production development for a total of 3,215 metres of advancement.

 

During the first quarter of 2014, we mined 71,236 tonnes of ore at a copper grade of 1.92% and a zinc grade of 2.14% from a combination of ore development and longhole stope mining.

 

As commercial production has been achieved at the Reed mine, beginning in the second quarter of 2014, we will record a receivable for 30% of development cost contributions due from our joint venture partner, VMS Ventures Inc. This receivable will be repaid from cash flow from the Reed mine. In addition, all revenue and operating costs from April 1, 2014 onwards associated with mine production from Reed will be reflected in the income statement.

 

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OPERATIONS REVIEW

 

Health and Safety

 

For the three months ended March 31, 2014, we have recorded a lost time accident frequency (including contractors) of 0.1 per 200,000 hours worked compared to 0.9 for the same period in 2013.

 

Mines

 

			Three Months Ended
			Mar. 31		Mar. 31
			2014		2013
777
Ore	tonnes		404,114		406,653
Copper	%		1.78		1.99
Zinc	%		3.43		3.61
Gold	g/tonne		1.70		2.01
Silver	g/tonne		22.42		20.88
Lalor
Ore	tonnes		106,723		81,845
Copper	%		0.92		0.57
Zinc	%		6.72		9.94
Gold	g/tonne		2.07		1.03
Silver	g/tonne		22.49		16.81
Reed
Ore	tonnes		71,236		—
Copper	%		1.92		—
Zinc	%		2.14		—
Gold	g/tonne		0.98		—
Silver	g/tonne		11.95		—
Total Mines
Ore	tonnes		582,073		488,498
Copper	%		1.64		1.75
Zinc	%		3.87		4.67
Gold	g/tonne		1.68		1.85
Silver	g/tonne		21.16		20.20

 

				Three Months Ended
				Mar. 31		Mar. 31
Unit Operating Costs				2014		2013
Mines
777		$/tonne		46.61		52.98
Lalor		$/tonne		96.92		—	1
Reed		$/tonne		—		—
Total Mines		$/tonne		57.12		52.98

 

1  Lalor was not in commercial production in the first quarter of 2013

 

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777 Mine

 

Ore production at our 777 mine for the first quarter of 2014 remained consistent compared to the same period in 2013. Copper, zinc, and gold grades were lower and silver grades were higher in the first quarter of 2014 compared with the grades in the first quarter of 2013 by 10%, 5%, 15%, and 7%, respectively, due to planned mine sequencing.

 

Operating costs per tonne of ore in the first quarter of 2014 were 12% lower, compared to the same period in 2013, primarily due to reduced contractor costs, offset partly by increased propane heating costs due to an abnormally cold winter.

 

Lalor Mine

 

Ore production at our Lalor mine for the first quarter of 2014 increased 30% compared to the same period in 2013 as Lalor was ramping up production in the first quarter of 2013. Copper, gold and silver grades in the first quarter of 2014 were higher compared with the grades in the first quarter of 2013 by 62%, 101% and 34%, respectively, as new areas were mined compared to 2013. Zinc grades in the first quarter of 2014 were lower compared with the grades in the first quarter of 2013 by 32% also due to these new areas. Costs during the first quarter of 2013 were capitalized to the Lalor project. Operating costs per tonne of ore in the first quarter of 2014 improved by 12% when compared to the fourth quarter of 2013 as progress was made in replacing contractors with permanent employees.  Further economies of scale are projected in the second half of 2014 when Lalor is expected to double its production capacity to 2,700 tonnes of ore per day and increase its production rate.

 

Reed Mine

 

The Reed mine commenced production in September 2013 and achieved commercial production at the end of the first quarter. Costs during the first quarter of 2014 have been capitalized to the Reed project.

 

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Processing Facilities

 

				Three Months Ended				Guidance
				Mar. 31		Mar. 31		Annual
				2014		2013		2014
Flin Flon Concentrator1
Ore		tonnes		451,469		401,882
Copper		%		1.79		2.00
Zinc		%		3.29		3.59
Gold		g/tonne		1.61		2.01
Silver		g/tonne		21.19		20.75
Copper concentrate		tonnes		30,878		30,629
Concentrate grade		% Cu		23.48		24.10
Zinc concentrate		tonnes		23,588		23,444
Concentrate grade		% Zn		51.28		51.91
Copper recovery		%		90.0		92.0
Zinc recovery		%		81.3		84.5
Gold recovery		%		59.8		65.4
Silver recovery		%		47.9		58.7
Contained metal in concentrate produced
Copper		tonnes		7,249		7,381		33,000-41,000
Zinc		tonnes		12,097		12,170		50,000-60,000
Precious metals		ounces		16,542		19,645		73,000-88,000
Snow Lake Concentrator
Ore		tonnes		106,274		69,956
Copper		%		0.81		0.54
Zinc		%		7.33		9.17
Gold		g/tonne		2.24		1.43
Silver		g/tonne		20.47		13.98
Copper concentrate		tonnes		3,293		1,446
Concentrate grade		% Cu		21.40		18.10
Zinc concentrate		tonnes		14,055		12,063
Concentrate grade		% Zn		51.20		50.08
Copper recovery		%		81.5		69.5
Zinc recovery		%		92.7		94.2
Gold recovery		%		60.0		53.6
Silver recovery		%		56.2		54.9
Contained metal in concentrate produced
Copper		tonnes		705		262		3,000-4,000
Zinc		tonnes		7,197		6,040		37,000-45,000
Precious metals		ounces		5,355		2,020		26,000-32,000

 

1 Includes 100% of Reed mine production

 

12

 

				Three Months Ended				Guidance
				Mar. 31		Mar. 31		Annual
Unit Operating Costs				2014		2013		2014
Concentrators
Flin Flon		$/tonne		14.35		15.81
Snow Lake		$/tonne		36.64		45.87
Combined mine/mill unit operating costs 1
Flin Flon (777/Reed)		$/tonne		64.02		69.44		54-66
Snow Lake (Lalor)		$/tonne		133.96		—		102-124

 

1 Reflects combined mine and mill costs per tonne of milled ore. The first quarter results exclude mine and mill costs and tonnes associated with pre-commercial production mine output.

 

				Three Months Ended				Guidance1
Manitoba contained metal in				Mar. 31		Mar. 31		Annual
concentrate produced 2,3				2014		2013		2014
Copper		tonnes		7,954		7,643		36,000 - 45,000
Zinc		tonnes		19,294		18,210		87,000 - 105,000
Gold		troy oz.		18,648		18,669
Silver		troy oz.		187,001		174,604
Precious metals 4		troy oz.		21,897		21,665		99,000 - 120,000

 

1  Guidance relates to Manitoba only

2  Includes 100% of Reed mine production

3 Metal reported in concentrate is prior to refining losses or deductions associated with smelter terms. Production volumes include anticipated pre-commercial production amounts from Lalor and Reed.

4 Precious metals include gold and silver production. For precious metals production, silver is converted to gold using the average gold and silver realized sales precious during the period. For precious metals guidance, silver is converted to gold at a ratio of 50:1.

 

Flin Flon Concentrator

 

For the first quarter of 2014, ore processed was 12% higher compared to the same period in 2013 primarily as a result of pre-commercial production from Reed. In the first quarter of 2014, copper and zinc concentrate production was consistent compared to the first quarter of 2013. Compared to the first quarter of 2013, copper, zinc and gold head grades were 11%, 8% and 20% lower, respectively, as a result of normal mine sequencing. Silver head grades were 2% higher than in 2013. Recoveries of copper, zinc, gold and silver in the first quarter of 2014 were 2%, 4%, 9% and 18% lower compared to the same period in 2013 as a result of lower copper and zinc grades, which drive concentrator recovery performance. Operating cost per tonne of ore processed in the first quarter of 2014 decreased by 9% compared to the same period in 2013, largely due to the increase in production in the first quarter of 2014 as a result of Reed pre-commercial production.

 

Metal production from the Flin Flon concentrator is expected to increase during the remainder of 2014 with improved ore availability as the Reed mine ramps up to full production

 

13

 

Snow Lake Concentrator

 

During the first quarter of 2014, ore processed was 52% higher compared to the first quarter of 2013 as a result of increased availability of ore from Lalor production. Zinc concentrate grades in the first quarter of 2014 were 2% higher and zinc concentrate produced was 17% higher than in the first quarter of 2013 as a result of increased throughput. Operating cost per tonne of ore processed in the first quarter of 2014 decreased by 20% compared to the same period in 2013 due to increased ore throughput as the Lalor mine continued to ramp up production.

 

Metal production from the Snow Lake concentrator is expected to increase during the remainder of 2014 once the new Lalor shaft is commissioned and refurbishment of the Snow Lake concentrator is complete in July 2014. Combined Snow Lake mine/mill unit operating costs are expected to decline in line with increased production.

 

Metallurgical Facilities

 

				Three Months Ended				Guidance
				Mar. 31		Mar. 31		Annual
Zinc Production				2014		2013		2014
Zinc Concentrate Treated
Domestic		tonnes		30,426		45,643
Purchased		tonnes		16,247		1,540
Total		tonnes		46,673		47,183		195,000-225,000
Refined Metal Produced
Domestic		tonnes		15,543		22,047
Purchased		tonnes		8,213		805
Total		tonnes		23,756		22,852		100,000-110,000

 

				Three Months Ended				Guidance
				Mar. 31		Mar. 31		Annual
Unit Operating Costs				2014		2013		2014
Zinc Plant		$/tonne		0.41		0.38		0.30 - 0.37

 

Zinc Plant

 

Production of cast zinc in the first quarter of 2014 was higher by 4% compared to the same period in 2013 as concentrate availability and plant recoveries improved. Operating costs per pound of zinc metal produced were 8% higher during the first quarter of 2014 compared to the first quarter of 2013 and exceeded the 2014 guidance range as a result of higher than usual propane costs from periods of extreme cold weather and maintenance expense timing as some planned work from the second quarter was brought forward to the first quarter of 2014.

 

 

14

 

Metal Sold

 

				Three Months Ended
				Mar. 31		Mar. 31
				2014		2013
Payable metal in concentrate
Copper		tonnes		5,539		7,821
Gold		troy oz.		10,766		12,222
Silver		troy oz.		102,809		112,119
Refined zinc		tonnes		21,104		24,218

 

FINANCIAL REVIEW

 

Financial Results

 

In the first quarter of 2014, we recorded a loss of $27.2 million compared to a profit of $1.9 million for the first quarter of 2013. This $29.1 million decrease was mainly a result of lower revenues, primarily due to lower copper sales volumes and prices, a loss realized on the disposal of our subsidiary and increased foreign exchange losses. This was partially offset by a planned reduction in exploration expenses.

 

		Three Months Ended
(in $ millions)		Mar. 31, 2014
Increase (decrease) in profit or loss resulting from these components:
Revenues		(13.1	)
Cost of sales
Mine operating costs		(0.3	)
Depreciation and amortization		(1.3	)
Selling and administrative expenses		(3.0	)
Exploration and evaluation		6.8
Other operating income and expenses		(1.6	)
Loss on disposal of subsidiary		(6.5	)
Finance income		(1.6	)
Finance expenses		(0.5	)
Other finance (gains) losses		(10.9	)
Tax		2.9
Decrease in profit for the period		(29.1	)

 

 

15

 

Revenue

 

Total revenue for the first quarter of 2014 was $106.8 million, $13.1 million lower than the same period in 2013. This decrease was primarily due to lower sales volumes and lower copper prices compared to the first quarter of 2013. This decrease was partially offset by favourable movements in foreign exchange rates and unrealized gains on our copper and zinc hedges.

 

 

		Three Months Ended
(in $ millions)		Mar. 31, 2014
Metals prices1
Lower copper prices		(8.5	)
Higher zinc prices		0.1
Higher gold prices		1.2
Higher silver prices		0.2
Sales volumes
Lower copper sales volumes		(16.4	)
Lower zinc sales volumes		(6.9	)
Lower gold sales volumes		(1.4	)
Lower silver sales volumes		(0.2	)
Other
Favourable movement in foreign exchange rates		8.0
Derivative mark-to-market increase		11.1
Pre-production revenue decrease		0.2
Other volume and pricing differences		(0.4	)
Effect of higher treatment and refining charges		(0.1	)
Decrease in revenue in 2014 compared to 2013		(13.1	)

 

1 See discussion below for further information regarding metals prices.

 

Our revenue by significant product type is summarized below:

 

		Three months ended
		Mar. 31,		Mar. 31,
(in $ millions)		2014		2013
Copper		46.7		60.3
Zinc		52.2		51.6
Gold		14.1		14.0
Silver		2.3		2.2
Other		1.1		1.5
Gross revenue		116.4		129.6
Treatment and refining charges		(5.1	)	(5.0	)
Pre-production revenue		(4.5	)	(4.7	)
Revenue		106.8		119.9

 

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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.

 

Our realized prices for the first quarter of 2014 and 2013 are summarized below:

 

						Realized prices1 for the
						three months ended
				LME Q1		Mar. 31		Mar. 31
				20142		2014		2013
Prices in US$
Copper 3		US$/lb.		3.19		2.86		3.45
Zinc3		US$/lb.		0.92		1.01		1.00
Gold3,4		US$/troy oz.				1,268		1,130
Silver3,4		US$/troy oz.				22.03		19.39
Prices in C$
Copper3		C$/lb.		3.52		3.16		3.50
Zinc3		C$/lb.		1.02		1.11		1.01
Gold3,4		C$/troy oz.				1,331		1,145
Silver3,4		C$/troy oz.				23.00		19.66
Exchange rate5		US$1 to C$				1.09		1.01

 

1 Realized prices exclude refining and treatment charges and are on the sale of finished metal or metal in concentrate.

2 London Metal Exchange average for copper and zinc prices.

3 Copper, zinc, gold and silver revenues include unrealized gains and losses related to non hedge derivative contracts including costless collars that are not included in the above realized prices.

For the three months ended March 31, 2014, the unrealized components of those derivatives resulted in a gain of US$0.61/lb; gain of US$0.02/lb., loss of US18.39/oz., and a loss of US$0.21/oz., respectively.

For the three months ended March 31, 2013, the unrealized component of our zinc derivatives resulted in a loss of US$0.05/lb.

4 Since August 1, 2012, sales of gold and silver from our 777 mine have been subject to our precious metals stream agreement with Silver Wheaton, pursuant to which we recognize deferred revenue for precious metals deliveries and also receive cash payments of US$400/oz for gold deliveries and US$5.90/oz for silver deliveries. Previously, we sold gold and silver from our 777 mine as contained metal within our copper concentrate. Realized gold and silver prices in the first quarter of 2014 include deferred revenue of US$965.19/oz and US$17.89/oz, respectively. Realized gold and silver prices in the first quarter of 2013 include deferred revenue of US$927.55/oz and US$15.29/oz, respectively.

5 Average exchange rate for the period.

 

Realized prices for copper during the first quarter of 2014 were significantly lower than the LME average for the quarter mainly due to provisional pricing adjustments arising from the decline in copper prices during the quarter.

 

17