Hudbay Minerals - Earnings Call - Q2 2025

Transcript

Speaker 4

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Hudbay Minerals Inc. Second Quarter 2025 Results Conference Call. At this time, all participants are in listen-only mode. Following the presentation, we will conduct a question-and-answer session. To join the question queue, you may press *1 on your telephone keypad. Should you need assistance during the conference call, you may signal an operator by pressing *0. I would like to remind everyone that this conference call is being recorded today, August 13, 2025, at 11:00 A.M. Eastern Time. I would now like to turn the conference over to Candace Brule, Vice President, Investor Relations. Please go ahead.

Speaker 3

Thank you, Operator. Good morning and welcome to Hudbay Minerals Inc.'s 2025 Second Quarter Results Conference Call. Hudbay's financial results were issued this morning and are available on our website at www.hudbay.com. A corresponding PowerPoint presentation is available in the Investor Events section of our website, and we encourage you to refer to it during this call. Our presenter today is Peter Kukielski, Hudbay's President and Chief Executive Officer. Accompanying Peter for the Q&A portion of the call will be Eugene Lee, our Chief Financial Officer, and Andre Lauzon, our Chief Operating Officer. Please note that comments made on today's call may contain forward-looking information, and this information, by its nature, is subject to risks and uncertainties, and as such, actual results may differ materially from the views expressed today. For further information on these risks and uncertainties, please consult the company's relevant filings on SEDAR Plus and EDGAR.

These documents are also available on our website. As a reminder, all amounts discussed on today's call are in U.S. dollars unless otherwise noted. Now I'll pass the call over to Peter Kukielski.

Speaker 0

Thank you, Candace. Good morning, everyone, and thank you for joining us for today's presentation. Once again, we delivered another quarter of significant free cash flow generation driven by continued industry-leading cost margins and diversified exposure to copper and gold. This strong financial performance enabled us to further reduce long-term debt, invest in our many high-return growth projects, and further strengthen our balance sheet to its best position in well over a decade. We are also very pleased to announce a minority joint venture agreement with Mitsubishi Corporation at our Copper World project in Arizona, which further solidifies our financial strength and significantly reduces our funding requirement to develop this attractive project. We have secured the premier joint venture partner at an attractive valuation to develop our world-class Copper World project and establish a long-term strategic partnership that will unlock significant value in our copper growth pipeline.

Through a highly accretive joint venture, an enhanced precious metal streaming deal, and the achievement of our financial targets, we have successfully realized the key elements of our prudent 3P financial plan and significantly de-risked the Copper World project as we advance towards a sanctioned decision in 2026. I will touch on the JV transaction in more detail in a moment, but first I'll discuss our second quarter results starting on slide three. The strong financial results in the second quarter were driven by steady copper production, complementary gold production, and continued cost control across the business. Our operations in Manitoba showed remarkable resilience against unprecedented wildfires, prioritizing the safety of our people and communities while still delivering strong gold production.

In Peru, our steady operating performance delivered production and cost in line with our expectations, and in British Columbia, we made excellent progress on our optimization plans with the SAG mill conversion project. Consolidated copper production in the second quarter was 30,000 tons, and consolidated gold production was 56,000 ounces. Consolidated copper production was relatively in line with the first quarter, as higher production in Peru offset lower production in Manitoba from a suspension of operations in June due to mandatory wildfire evacuation orders. Consolidated gold production was lower than the first quarter because of the wildfire impacts in Manitoba. Consolidated silver production was 815,000 ounces, and zinc production was 5,000 tons in the second quarter. We had another quarter of industry-leading cost performance with consolidated cash costs of -$0.02 per pound and sustaining cash costs of $1.65 per pound.

The increase compared to the first quarter was due to lower byproduct credits combined with planned higher sustaining capital expenditures, but both metrics are well below the low end of the cost guidance ranges. With the strong performance in the first half of the year, we are reaffirming our full-year consolidated production guidance for all metals. We are favorably tracking well below our full-year consolidated cost guidance for 2025, which has resulted in an improved cost guidance range of $0.65 to $0.85, a decrease from our original cost guidance range of $0.80 to $1.00 per pound. In the second quarter, we achieved an adjusted EBITDA of $245 million, resulting in record annual trailing 12-month adjusted EBITDA of $996 million as of June 30.

Net earnings were $0.30 per share, and adjusted net earnings were $0.19 per share in the second quarter after adjusting for non-cash gains from foreign exchange, revaluation from environmental reclamation provisions, mark-to-market investment revaluation, and flow-through share expenditures. Cash generated from operating activities of $260 million increased compared to the first quarter as a result of higher gross margins driven by stable copper production, higher realized prices, and positive working capital management. Similarly, operating cash flow before change in non-cash working capital was $194 million, a $30 million increase from the first quarter as a result of lower cash taxes offset by lower gold and copper sales volumes in Manitoba. The strong financial performance during the second quarter marked the eighth consecutive quarter of meaningful free cash flow generation, as shown on slide four.

We generated $88 million of free cash flow in the quarter, and over the last 12 months, we have generated more than $400 million in free cash flow as a result of steady operating performance, expanding margins from strong copper and gold exposure, and a focus on cost control across the business. As a result of the continued free cash flow generation and prudent balance sheet management, we repurchased and retired $50 million of senior unsecured notes at a discount to par during the quarter. This has resulted in approximately $295 million in total debt repayments and gold prepayment liability reductions since the beginning of 2024, including $133 million in total bond buybacks, $100 million of revolver repayments, and $62 million to fully repay the gold prepay facility completed in August 2024.

We ended the quarter with $626 million in cash and cash equivalents, and our net debt reduced to $434 million. This has further improved our leverage ratio to 0.4 times as of June 30th, the lowest in more than a decade. While the majority of revenues continue to be derived from copper production, gold continues to represent more than 36% of total revenues in the second quarter. Our unique copper and gold diversification continues to provide significant leverage to both higher copper and gold prices. Our fortified balance sheet and robust free cash flow generation will allow us to continue to prudently reinvest in our portfolio of attractive, high-return brownfield and greenfield opportunities to drive near-term and long-term production growth. Turning to slide five, our Peru operations produced 22,000 tons of copper in the second quarter, in line with quarterly cadence expectations.

Copper production increased compared to the first quarter as milled copper grades exceeded first quarter levels. Constancia also produced 7,000 ounces of gold, 552,000 ounces of silver, and 375 tons of molybdenum. During the quarter, the last major stripping program at Pampacancha was completed, which included higher amounts of waste stripping than originally planned. As a result, we replaced higher-grade Pampacancha ore with higher-grade Constancia ore in the quarter, and Pampacancha is now expected to be depleted in the first quarter of 2026 rather than in late 2025. Protests that started early in the third quarter temporarily impacted the transportation of supplies and concentrate and have affected mine sequencing. The Constancia mill has continued to operate during this period, and the road blockades along the concentrate transportation route have since reopened, allowing us to reduce site concentrate inventory levels and replenish supplies.

Despite these short-term mine plan changes, we remain on track to achieve our full-year production guidance for all metals in Peru. Mill throughput in the quarter was impacted by the planned semi-annual mill maintenance shutdown and therefore was lower than the first quarter. Milled copper grades increased by 13% relative to the first quarter due to higher grades in the Constancia pit, while milled gold grades remained consistent with the prior quarter as Pampacancha stripping activities were underway in both quarters. Mill recoveries for all metals remained in line with our metallurgical models for the ore type that was being processed. The operations delivered strong cost performance in the quarter, with cash costs of $1.45 per pound, despite higher maintenance costs associated with the planned mill maintenance program and lower byproduct credits. We remain well positioned to achieve the full-year cash cost guidance in Peru.

Moving to our Manitoba operations on slide six, I personally want to thank the dedicated onsite team who demonstrated tremendous effort and unwavering commitment during the unprecedented wildfire situation in both Flin Flon and Snow Lake during the quarter. The team tirelessly safeguarded our assets and collaborated closely with local communities and provincial authorities, providing essential support to emergency response efforts. These efforts resulted in no damage to Hudbay's infrastructure and facilities. In addition, we committed over $2 million in funding support to our evacuated employees, including $1.6 million in direct financial support and $0.5 million in a donation to the Canadian Red Cross to support wildfire emergency relief and rebuilding efforts in northern Manitoba. Despite disruptions from the mandatory evacuation orders in May and June, the Manitoba operations showed remarkable resilience and achieved several key milestones in the second quarter.

The operations produced 43,000 ounces of gold, 1.6 thousand tons of copper, 5.1 thousand tons of zinc, and 198,000 ounces of silver in the second quarter. These were lower than the first quarter, primarily due to lower production in June associated with the 13-day temporary suspension of operations from the wildfire evacuation shutdown. The Lalor mine managed through a period of reduced workforce prior to and after the temporary suspension of operations. Despite these challenges, the mine averaged 3,300 tons per day in the second quarter, strategically prioritizing mining from gold zones to ensure a consistent feed for the New Britannia mill. Gold grades were in line with mine plan expectations, while being lower than the exceptional gold grade mined in the first quarter of 2024. Continuous improvement efforts at Lalor focused on ore quality and advancing stope modifications to enhance mucking productivity.

Capital development continued, aiming to secure high-grade copper-gold mineralization from zone 27 and prepare zone 17 for the next copper-gold mining front. The New Britannia mill achieved record monthly production levels in April, exceeding 2,300 tons per day. This significant milestone is a testament to ongoing low-capital projects and recent piping improvements that boosted throughput and maintained strong gold recoveries. New Britannia's mill throughput averaged approximately 1,800 tons per day during the second quarter, reflecting the record levels achieved in April, offset by lower throughput levels in June associated with the wildfire evacuation shutdown. New Britannia gold recoveries of 89% were consistent with the first quarter. The Stall mill continues to process less ore compared to prior periods, which is aligned with our strategy of allocating more Lalor ore feed to New Britannia to maximize gold recoveries.

The Stall mill achieved gold recoveries of 68% in the quarter, reflecting benefits from recent recovery improvement programs. Gold cash costs for the second quarter were $710 per ounce, impacted by lower gold production as previously mentioned, but were within the guidance range. On July 10, a second mandatory wildfire evacuation notice was issued for the town of Snow Lake, and we suspended the Snow Lake operations in a controlled, safe, and orderly manner. All of our employees remain safe, and there has been no structural damage to Hudbay's onsite surface infrastructure and facilities. With a strong start to the year, we continue to expect to achieve our 2025 production guidance in Manitoba. With cash costs in the first half of the year outperforming the low end of the cost guidance range, we are still well positioned to achieve the 2025 cash cost guidance range in Manitoba.

At our third operating business unit, British Columbia, which is discussed on slide seven, we continue to focus on advancing our optimization plans. Copper Mountain produced 6.6 thousand tons of copper, 5.7 thousand ounces of gold, and 65 thousand ounces of silver. Production of gold was higher than the first quarter due largely to higher recoveries, while copper and silver were lower, primarily as a result of lower head grades from the use of stockpiled ore in the second quarter. We remain on track to achieve our 2025 production guidance for all metals in British Columbia and continue to expect higher production in the second half of the year as the mill improvement project takes effect. Mining activities in the quarter continue to focus on execution of the three-year accelerated stripping program intended to bring higher grade ore into the mine plan.

Total material moved in the quarter increased with the effective usage of the mining fleet and continued focus on mining efficiencies, including improvements with blasted muck inventories and operator recruitment. Total material moved is expected to continue to increase quarter over quarter as per the mine plan. Mill throughput in the second quarter was limited by both planned and unplanned maintenance and area constraints related to the completion of the SAG conversion project. We made significant progress on this project, which entails converting the third ball mill to a second SAG mill. On July 10, we successfully completed the initial phase of the project on time and on budget. The next phase of the project involves converting an interim feed arrangement to a permanent configuration, which remains on target for completion in the second half of the year.

This is anticipated to enable mill throughput to ramp up throughout the second half of the year and increase the nominal plant capacity to its permanent level of 50,000 tons per day in 2026. During the second quarter, copper recoveries were 81% and gold recoveries were 68%, both higher than the first quarter despite lower head grades. Similar to our other operations, British Columbia achieved strong cost performance this quarter. Cash costs were $2.39 per pound in the quarter, an improvement over the first quarter as a result of higher byproduct credits and the realized benefits from ongoing optimization efforts. With cash costs in the low end of the 2025 guidance range for the first half of the year, we are well on track to achieve our 2025 cash cost guidance range in British Columbia.

We also achieved a significant permitting milestone for our new Ingle Bell growth project at Copper Mountain during the quarter. On May 12, after more than a year of detailed preparation, our permitting application was successfully accepted into review by the BC Major Mines Office and is now advancing through a mine review committee process. Our team continues ongoing engagement with the local First Nations and other stakeholder groups as part of our commitment to cultivating transparency and mutually beneficial relationships. At our Copper World project in Arizona, we are very pleased to be welcoming Mitsubishi Corporation as our 30% strategic partner, representing an important milestone as we advance this high-quality copper project towards sanctioning and unlock significant value in our copper growth portfolio. Slide eight discusses the details of the transaction.

Under the joint venture transaction, Mitsubishi will acquire a 30% minority equity interest in Copper World for an initial contribution of $600 million. This comprises $420 million in cash contribution at closing and $180 million within 18 months of closing. Mitsubishi will also fund its pro rata 30% share of future capital contributions. This valuation is highly attractive to Hudbay as it implies a significant premium to consensus net asset value for Copper World. As a result of the JV proceeds and future capital contributions, the levered project IRR to Hudbay significantly increases to approximately 90%. I have a long history of involvement with joint ventures over my career, including developing and operating Antamina with Mitsubishi back in the 1990s and 2000s, and I've seen how strategic joint ventures have built some of the best mines in the world.

After a highly robust and competitive process, we have selected the premier partner of choice in Mitsubishi. As noted on slide nine, Mitsubishi is one of the largest of the Japanese trading houses and is a globally integrated minerals trading and investment company. Mitsubishi currently has investments in five of the top 20 copper mines in the world and is looking to continue to add to that world-class pipeline. They have a significant U.S. business that has over 50 subsidiaries and affiliates across various business sectors and manages $9 billion in total assets in North America. This strategic partnership validates the attractive long-term value of Copper World as a world-class copper asset and endorses the strong technical capabilities of Hudbay. We've also amended the Wheaton Precious Metals stream at Copper World, as summarized on slide 10.

This enhanced stream provides an additional contingent payment of up to $70 million on future potential mill expansion milestones and recognizes the long-term potential at Copper World. We've also modernized the ongoing payments for gold and silver from fixed pricing to 15% of spot prices to provide upside exposure to higher precious metals prices. The JV transaction initial cash contributions plus future prorata equity capital contributions from Mitsubishi provide significant financial flexibility for Hudbay by reducing our estimated share of the remaining capital contributions to approximately $200 million based on PFS estimates. It also defers our first capital contribution to 2028 at the earliest. Slide 11 highlights our 3P plan that we implemented in late 2022 to guide investment and value creation at Copper World.

The announcements of the Mitsubishi joint venture and the enhanced Wheaton stream, together with the recent achievement of our stated balance sheet targets, have successfully completed the key elements of our 3P plan. Since 2022, we have secured all required permits for Copper World phase one. Definitive feasibility studies are well underway and on track for completion by mid-2026 as we advance the project towards a sanctioned decision. With the financial results we announced today, we completed all of the key elements of our prudent financing strategy. We are well positioned to build one of the next major copper mines in the U.S. while continuing to maintain a strong balance sheet throughout the build. Copper World will support the U.S. government's foreign investment and national security objectives with direct $1.5 billion of investment into the U.S.

critical mineral supply chain, which also represents one of the largest investments in Southern Arizona's history. Hudbay is the fourth largest copper company listed on the New York Stock Exchange, and with the majority of our shareholders domiciled in the U.S., we are pleased to advance America's next major copper mine. Copper World is a critical minerals project that underpins the U.S. as a global leader in copper production. We are supported by a partner with a large operational footprint in the U.S., deep ties to the domestic economy, and a history of significant investment into the U.S. The fully permitted initial phase of the Copper World project is located on private land owned by Hudbay. The mine is expected to produce 85,000 tons of copper per year over an initial 20-year mine life, with an average of 92,000 tons per year expected over the first 10 years.

During the three-year construction period, Copper World is expected to create more than 1,000 jobs and will engage union labor for project construction with letters of commitments currently in place with seven U.S. labor unions. Copper World is also expected to contribute over $850 million in U.S. taxes and create more than 400 direct jobs and 3,000 indirect jobs in Arizona once in production. Our Made in America copper production will contribute to the domestic U.S. copper supply chain and strengthen manufacturing capacity, national security, and energy independence. Turning to slide 13, Copper World is the most advanced greenfield project in our portfolio and offers significant copper exposure and highly attractive project economics.

With this successful JV milestone at Copper World, we will continue to de-risk the project by accelerating detailed engineering, some key long lead items, and other de-risking activities this year, resulting in an additional $20 million in growth capital expenditures that have been advanced to 2025 from future years. As a result, total 2025 Arizona growth spending guidance has increased to $110 million from $90 million on a 100% basis. Copper World is one of the highest grade open pit copper projects in the Americas, with mineral reserves of 385 million tons at 0.54% copper. Once in production, Copper World is expected to be one of the largest copper producers in the United States.

Concluding on slide 14, Hudbay currently produces more than 130,000 tons of copper per year, which is further augmented by more than 250,000 ounces of gold per year, offering commodity diversification and cash flow resiliency in volatile pricing environments. In our pipeline of near-term and long-term copper growth, Copper World positions us well to benefit from strong long-term copper market fundamentals. Once Copper World is in production, we expect our annual copper production to grow by more than 50% from current levels. This will reinforce our position as one of the largest Americas-focused pure-play copper producers with a well-balanced and geographically diversified portfolio of assets.

Our expected production will be weighted approximately one-third in each of Canada, the United States, and Peru, and the significant increase in copper production from Copper World will further enhance Hudbay's exposure to copper with more than 70% of consolidated production and revenue expected to be derived from copper. Hudbay's existing strong operating platform in Tier 1 mining jurisdictions and resilient balance sheet offer significant upside potential for further value creation at higher copper and gold prices. Through our new JV partnership, we will leverage our complementary strengths to deliver Copper World, produce domestic copper in the U.S. for the domestic critical mineral supply chain, and unlock significant value in our long-term copper growth pipeline. At the same time, we continue to advance our many other high-return growth opportunities to unlock value across the portfolio and create meaningful value for all our stakeholders. We are pleased to take your questions.

Speaker 4

Thank you. Ladies and gentlemen, we will now begin the question and answer session. To join the question queue, you may press star then one on your telephone keypad. You will hear a tone acknowledging your request. If you are using a speaker phone, please pick up your handset before pressing any keys. To withdraw your question, please press star then two. Today's first question comes from Ralph Profiti with Stifel. Please go ahead.

Speaker 0

Thanks, Operator, and good morning, everyone. Congratulations on a quite significant deal. Peter, I have one question on commercial arrangements and then maybe one for Eugene on the balance sheet. Firstly, will Mitsubishi be allowed commercial offtake in proportion to that 30%, Peter? Have you looked at the ability for commercial arrangements to place concentrates in U.S. smelters, or is there the possibility to either bring forward the concentrate leach facility or even expand it?

Speaker 1

Morning, Ralph, and thanks very much for your kind words. The short answer to your question is on the first item is yes. Mitsubishi will have rights to 30% offtake that's consistent with their ownership share. As far as where the concentrate would be placed, it remains to be seen because we haven't really got into that level of detail. I think the other question that you raised was with respect to the Albion process. Of course, Albion is part of the pre-feasibility study. We plan to get it into operation as soon as possible. Sorry, was your question with respect to when we would do it, or would you repeat that, please?

Speaker 0

Yes, Peter. The potential to bring forward from year four that concentrate lease facility, which is in the current pre-feasibility study, is that a possibility?

Speaker 1

Absolutely. That will be completely studied in the feasibility study that we undertake together with our partner. Absolutely a possibility.

Speaker 0

Thank you, Peter. Eugene, when you look at the leverage ratio of the balance sheet and the cash flow generating power of Hudbay in the next few years, it reduces the project financing number to a relatively small number. I would have thought that there's a possibility that this can perhaps be foregone. Is there strategic special interest or cost of capital that Mitsubishi is bringing to the table? Is this the reason that this still is advantageous to the deal? What's your thinking behind that?

Speaker 2

Thanks for the question, Ralph. We're really pleased to bring on Mitsubishi as an equity joint venture partner. As you can see from the slides, the JV proceeds plus the capital contributions from Mitsubishi contribute to over 50% of the project capital. Using, I'll call it a light version of project level financing, at about one-third, that makes Hudbay's equity contribution only 15% of the capital. We think that one-third equity is the right way, or one-third debt is the right way to look at funding a project of the size that's manageable. We think that there is project level financing that is available to this project and from a variety of sources, both from U.S.-based sources and potentially with our partner that will help the equity returns for both Hudbay and Mitsubishi. It's kind of an enviable position to be in.

We want to build this project with a lower level of debt, but also with some debt that has a low cost of capital to generate the most efficient returns, but also sustainably be able to build this project on a risk-adjusted basis that provides the most shareholder value for our shareholders.

Speaker 0

Great. Thank you. It's a very strong deal.

Speaker 1

Thank you, Ralph.

Speaker 4

Thank you. Our next question today comes from Orest Wowkodaw with Scotiabank. Please go ahead.

Yeah, hi, good morning. I echo Ralph's comments. Congratulations on the transaction. I have a few more questions on how you're thinking about Copper World. Has there been any discussion with the U.S. administration about potentially moving forward with the Rosemont part sooner than phase two, and whether there potentially might be some give and take on the permitting related to that now?

Speaker 1

Morning, Orest. Thank you for the kind comments. I think the overall comment is that we are completely and absolutely focused on phase one of Copper World. It's fully permitted. We own the land. It's simple. It's got a 20-year mine life. It's 385 million tons of reserves. Right now, there is no need to enter into discussions related to the next phase of Copper World. That said, we do think that the current federal environment is highly constructive, and we've been encouraged by the bipartisan support that we have for developing the overall project. At this point, we are completely focused on phase one. Let's get that done. Let's get the feasibility study done. Let's get into operation, and we'll turn our attention to phase two once we've done that.

Okay. The feasibility study you mentioned is underway. A couple of questions there. The idea of moving forward the Albion process, if you do bring it forward, can we still assume that's not going to be at the front end, which would obviously increase the capital and the risk profile?

Yeah, I think it's pretty safe to assume that, Orest. We'll take a look with our partner during feasibility of what the optimal timing for it is. At this point, we're not looking at increasing CapEx associated with Albion.

Okay. It's been a couple of years since you issued a CapEx estimate for Copper World. I know you're in the early stages of the feasibility, but can you give us any sense of whether you're seeing any major cost inflation from the previous number?

Sure. I mean, we live in an inflationary cost environment, and there will likely be modest increases to the initial CapEx at Copper World since the last figure that we published back in the 2023 PFS. That being said, remember that we're also seeing higher copper prices today, and there's a more bullish long-term view of future copper price given the supply-demand fundamentals. We do see that there will be mild CapEx escalation. In any event, Copper World will still be substantially funded even in the case of a modest CapEx increase.

Okay. Final question. Is there any major scope changes in the feasibility study versus the other study? I'm just wondering if you're thinking a bigger processing facility or anything like that.

No, there are no changes foreseen in the current feasibility study in terms of scope. We've contemplated the idea of an expansion after we go into production, but that won't be part of the definitive feasibility study scope.

I see. Thank you very much, and congratulations.

Thank you, Orest.

Speaker 4

Thank you. Our next question today comes from Dalton Baretto with Canaccord Genuity. Please go ahead.

Thanks. Good morning, Peter and team. Really excellent work on this. I wanted to start by asking about any potential approvals here. I'm thinking back to the challenges Nippon Steel had with their acquisition of U.S. Steel. Do you think this transaction raises any eyebrows in Washington? Do you need any approvals there?

Speaker 1

I mean, that's a great question, Dalton. I don't believe that it does. We do plan to file a SFIA brief or whatever one calls it, but it's not a requirement. We do plan to do that. We don't see any complexity associated with that.

Speaker 2

This project enables the production of Made in America copper, and we feel that this is job creating and aligned with the U.S. administration's critical minerals intentions for national security and U.S. supply chain strengthening.

Speaker 1

Dalton, I would just add to what Eugene said, that this is a minority stake, and this minority stake is going to facilitate the creation of a lot of jobs in the U.S., as well as new investments in the U.S.

Okay, thanks for that, Peter. As a follow-up, I wanted to ask the same question Orest asked on the Albion, but sort of reverse it. Your balance sheet's in great shape, and yes, there'll be a bit more CapEx involved. On the flip side, there's a lack of smelting capacity in the U.S. There's a potential a tariff could come in on concentrate export, and there's the obvious social benefits there. Is there any reason, like what sort of reasons would you have for not bringing it to the front end?

Dalton, I think that that's a subject that needs to be properly studied in the feasibility study. You can be absolutely assured that as we go through the feasibility study with our partner, we will investigate the optimal approach to developing this project. At this point, we are saying that Albion will be coming to production separately and will be part of a separate estimate. For sure, we will study it in the feasibility study.

Great. Thank you, Peter. That's all for me.

Speaker 4

Thank you. Our next question today comes from Fahad Tariq with Jefferies. Please go ahead.

Hi, thanks for taking my question. Can you maybe walk through Manitoba in the third quarter? I'm just trying to get a better sense of grades and see if the high grades will continue and potentially be an offset for the continued shutdowns. Thanks.

Speaker 1

Sure. Thanks for the question, Andre. The grades are pretty much the same right through the year. They're pretty flat through to the end of the year, with no major variation from what we're seeing. We did have a very strong quarter as a surprise in Q1 with grades, but those happen from time to time. It's very consistent through the year. The fire situation is actually getting much, much better. They've been getting rain and the fires passed through town. We're really expecting operations to resume this month. I'm looking forward to that meeting our guidance forecast that we're projecting to the end of the year.

Okay. Apologies if I missed the answer to this or if this was already asked, but are you having any discussions with the current U.S. administration that could help with Copper World phase two or Mason permitting?

No, we're not having discussions right now related to phase one. We're completely focused on phase one. Phase two is down the road. Let's get phase one done, and then once it's behind us, we'll focus on what phase two might look like. What I would add is that we do view the current environment in the U.S. on a bipartisan basis, as well as the current administration, to be highly constructive with respect to the project. I think that'll stand phase two in good stead. We're focused on phase one right now because it's on private land, 385 million tons of reserves, 20-year mine life, perfect partner. We've got our work cut out for us.

Fair enough. Thank you.

Speaker 0

On the Mason one, Peter, I think what this deal allows us to look at our portfolio at other opportunities. Mason is another great opportunity in our portfolio, and with the current administration and permitting, you know it's ripe to be advanced as well. I think this deal does set us up to be able to look at other opportunities in our portfolio.

Speaker 1

Absolutely.

Thank you.

Speaker 4

Thank you. Our next question today comes from Matthew Murphy at BMO Capital Markets. Please go ahead.

Speaker 0

Hi. Just modeling out the Copper World financing, the waterfall you have in terms of project financing structure, how do we think about order of funding sources then? Is that representative that like first you would do the Wheaton stream, then project finance, and then this JV capital would get drawn, and then your capital goes in last alongside whatever else additional capital Mitsubishi has to put in?

Speaker 2

Hi, Matt. It's Eugene here. Actually, the waterfall is a simplification of the sources of capital rather than the order. The order of capital is a much longer spreadsheet. I think what you can, the priority of the funding is the first funding comes from this JV partner. The proceeds that are in this deal, $420 million on closing, followed by $180 million within 18 months of closing, that's sort of the first piece of capital that's going to be used. Upon sanctioning the Wheaton stream, $50 million of the $230 million is due. Having spent about $100 million in project spend, the next $180 million of Wheaton's comes through. The first significant portion of capital comes directly from the JV proceeds and Wheaton.

The project financing we expect to be arranged at the time of sanctioning, and that would be available to be drawn as the next piece of capital. The last piece of capital would be the 70/30 piece of equity that Hudbay and Mitsubishi jointly fund. That's one of the reasons why we said in this agreement that it allows Hudbay's equity funding to be delayed until 2028 at the earliest, which is what gives us the very strong IRR of 90+% from a project IRR to Hudbay versus a project IRR of around 20% for the project.

Speaker 4

Okay, thanks for that. Separate question. Good to hear that you've fared okay through the fires. That's a relief. Have you been able to do your exploration programs this summer? What's the outlook for getting drilling to work? Maybe I'll include Peru as part of that question. Do you have any update on your timing where you actually get drills turning in Peru?

Speaker 1

Sure, Matt. It's Peter. We did conduct an exploration program, or we started an exploration program in Manitoba during the summer. Obviously, that was interrupted by the wildfires both in Flin Flon and in Snow Lake. Exploration has been paused right now. Once the conditions abate, we'll go back into exploration. There's nothing significant coming out of Manitoba right now, but we do expect to have a very, very strong continuing exploration program through the winter. In Peru, the status is similar. We don't have a time at which we'll start exploration at Maria Reyna and Caballito because the consulta previa process has to be completed first. That's underway right now. We don't have a precise date when we'll get it because it's in the hands of the government, but it's the last piece that remains before we actually start drilling.

Speaker 0

Peter, just to add to that, as we press released earlier, we did sign an agreement with Mossey Creek Anishinabe around the Talbot deposit, and the area has cleared for us from the fires. We have two drills currently operating and drilling off that deposit. A couple of the other drills are capped, as Peter had mentioned, but that program's up and running and doing well. We'll look to see some results in the future.

Speaker 1

Perfect.

Speaker 2

Thank you.

Speaker 4

Thank you. Our next question comes from Shane Nagle at National Bank Financial. Please go ahead.

Speaker 0

Thanks, Operator. Most of my questions have been asked here, but congratulations again on a good transaction at Copper World and a good quarter as well. Just a couple of questions. One, maybe on the intricacies of this matching contribution, the $180 million, is that basically covering your costs as they're incurred within the project? Is that $180 million truly Hudbay's share? Is that $180 million into the JV? Just trying to better understand the mechanics of that second contribution.

Speaker 2

Hi, Shane. The $180 million is straight into the JV. As I think I mentioned to Matt, that's basically the first $600 million of project work will be funded from the JV proceeds, including the initial earning and the matching contribution, which will be within 18 months of closing.

Speaker 0

Okay. It's not entirely net to Hudbay in terms of the total $600 million number. It's kind of into the JV.

Speaker 2

Yes, that's the most efficient way to take the proceeds into the project and ensure the project gets developed with the lowest level of equity capital contribution for Hudbay going forward.

Speaker 0

Okay. Just secondly on Constancia and Papaconcha, you mentioned the mine sequencing being impacted in Q3 due to the protests, and we'll see the deposit now depleted in Q1. Does this mean that there's more stockpiles to be processed in Q3 as well as a result of that? Yeah.

Speaker 1

That's Andre. Yeah, you're correct. We're processing a little bit more stockpile in the quarter, but not slowing down Pampacancha. Pampacancha is going full bore. It's more of a blend of the two looking forward.

Speaker 0

Okay, great. That's all for me. Thanks, guys.

Speaker 4

Thank you. That concludes our question and answer session. I'd like to turn the conference back over to Candace Brule with any closing remarks.

Speaker 3

Thank you, Operator. Thank you, everyone, for joining us today. If you have any further questions, please reach out to our Investor Relations team.

Speaker 4

Thank you. This brings to a close today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.