HudBay's Q2 profit cut in half to $33.2-million
HudBay Minerals Inc(C:HBM)
Shares Issued 126,485,770
Last Close7/29/2008 $9.34
Wednesday July 30 2008 - News Release
Mr. Brad Woods reports
HUDBAY REPORTS SECOND QUARTER 2008 RESULTS
HudBay Minerals Inc. has released its second quarter 2008 results. Netearnings in the second quarter were $33.2-million compared with$69.1-million in the second quarter of 2007. The lower earningsprimarily reflect a lower average realized price for zinc, higher costsof purchased copper concentrates, planned lower sales of copper and theyear over year appreciation in the Canadian dollar versus the U.S.dollar. HudBay had a strong quarter operationally, delivering$70.7-million in operating cash flow and at the same time significantlyadvancing its strategy of growth through opportunistic investment,aggressive exploration and optimizing operations.
"Our team has accomplished a great deal through the first six months of 2008," said Allen Palmiere, President & CEO. "Production is tracking well in relation to our full year plan and operating cash flow continues to be strong. We are seeing excellent results from our exploration program, and we've announced the proposed business combination with Skye Resources, which represents a tremendous long term opportunity for HudBay and its shareholders."
INVESTMENT UPDATE
A key element of HudBay's value creation strategy is to build scale and scope through opportunistic investments that complement the Company's existing operations. In support of this strategy, on June 23, 2008, HudBay and Skye Resources Inc. (Skye) announced by news release a definitive agreement to combine their respective businesses. Skye's world class Fenix Nickel Project in Guatemala includes 41.1-million tonnes of reserves as well as a large resource base and is capable of near term production with a projected mine life of 30 years, and significant opportunity for expansion(5). Following completion of the proposed transaction, HudBay's expanded profile is expected to include:
- a large increase in reserves and resources;
- a diversified multi-metal resource base;
- an attractive mix of producing, development and exploration assets that provides a solid platform for future growth; and
- a strong balance sheet with significant cash and solid operating cash flow going forward.
A meeting of Skye's securityholders to approve the proposed business combination is scheduled for August 19, 2008. Completion of the transaction also remains subject to court and regulatory approval.
EXPLORATION UPDATE
HudBay is advancing one of the most aggressive exploration programs in Canada and is targeting to spend approximately $43-million on exploration in 2008, which follows the Company's $41-million expenditure in 2007. Total exploration spending was $13.0-million in the quarter and $21.5-million during the first six months of 2008. Exploration activities in the first six months of the year focused primarily on HudBay's exploration territories in the prolific Flin Flon Greenstone Belt, including the Company's Lalor Lake zinc discovery. Capitalized exploration on the Lalor Lake property was $4.7-million. In-mine exploration accounted for approximately $3.2-million of the Company's exploration spending in the first six months and is aimed at continuing HudBay's tradition of annually expanding in-mine reserves and resources.
Lalor Lake Deposit - In 2007 HudBay discovered the Lalor Lake deposit and subsequently announced a conceptual estimate for the deposit of a potential of 18 to 20 million tonnes at 7.7% to 8.8% zinc(6). On March 3, 2008, the Company issued a news release announcing additional assays that indicated the potential for significant precious metals in the deposit. Also, certain of the drill hole results have assayed higher grades of copper. HudBay is continuing to drill at Lalor Lake with six rigs to define the extent and confidence in the interpretation of the deposit and expects to complete a National Instrument 43-101 compliant resource estimate on the deposit in August 2008.
FINANCIAL AND OPERATING RESULTS
The bracketed values that follow denote the comparative figures for the respective periods in 2007.
Production and Sales
HudBay's production in the second quarter and through the first half of 2008 continued to track well in relation to the Company's expectations for its overall 2008 targets. As highlighted in the table below, zinc production increased by 9% in the second quarter and by 10% in the first half of 2008 compared with the respective periods of 2007. As expected, copper production is lower in 2008, due to HudBay's planned lower copper smelter production levels, which are necessary to meet the Government of Canada's 2008 air release limit targets for sulphur dioxide. 2008 gold production has been comparable to 2007 levels, and silver production has increased significantly owing to higher silver content in the purchased concentrates processed to date in 2008.
Sales volumes of zinc increased by 5% to 34,802 tonnes in Q2 2008 and by 4% to 67,718 in the first half of 2008, reflecting increased production levels. Copper sales at 18,957 tonnes and 39,559 tonnes in the second quarter and first half of 2008 respectively, while lower than the same periods in 2007, are in line with HudBay's expectations for the full year. Copper sales have exceeded HudBay's copper production levels in 2008, reflecting the partial reduction of copper inventory that built up in previous periods. Sales of gold and silver in the second quarter of 2008, at 30,311 ounces and 554,733 ounces respectively, were higher than in Q2 2007 and reflective of higher production levels of both metals. During the first six months of 2008, gold sales were marginally lower than in 2007 at 50,119 ounces and silver sales increased significantly from the same period in 2007, owing to higher contained silver in purchased concentrates.
Earnings
Net earnings were $33.2-million in the second quarter of 2008, or $0.26 per share ($69.1-million, or $0.55 per share). The lower Q2 2008 earnings versus Q2 2007 were primarily due to: decreased revenues from lower zinc prices and lower copper sales volumes; reduced interest and other income; and a stronger Canadian dollar versus the US dollar in Q2 2008. These impacts were partially offset by lower operating and other expenses as well as decreased tax expense arising from lower earnings before tax.
Specific components of the lower earnings in the second quarter of 2008 versus the second quarter of 2007 are as follows:
- Lower revenues decreased earnings before tax by $74.3-million.
- Lower operating costs increased earnings before tax by $8.9-million.
- Decreases in other expenses increased earnings before tax by $12.0-million, largely due to foreign exchange (gain) loss, which improved by $13.3-million.
- Lower interest and other income, which decreased earnings before tax by $5.9-million.
- Other items increased earnings before tax by $1.8-million.
- Lower tax expenses increased net earnings by $21.6-million.
Net earnings were $54.8-million or $0.43 per share in the first six months of 2008 ($132.2-million or $1.05 per share). The lower year over year earnings are primarily attributable to lower revenues due to a lower realized zinc price and lower copper sales volumes and a stronger Canadian dollar versus the US dollar through the first half of 2008. More specific details on the contributors to the lower earnings in the first half of 2008 are as follows:
- Lower revenues decreased earnings before tax by $151.8-million.
- Lower operating costs increased earnings before tax by $6.7-million.
- Decreases in other expenses increased earnings before tax by $7.9-million, largely due to foreign exchange (gain) loss, which improved by $16.7-million, offset in part by increases in general and administrative costs.
- Reduced losses on derivative instruments increased earnings before tax by $7.0-million.
- Other items increased earnings before tax by $1.9-million.
- Lower tax expenses increased net earnings by $50.9-million.
Revenue
Total revenue in Q2 2008 was $284.0-million ($358.3-million). Revenues in the quarter reflect a lower average realized zinc price of US$1.03/lb compared with US$1.75/lb in the second quarter of 2007, lower copper sales volumes and appreciation in the Canadian dollar. These decreases were partly offset by higher average realized prices for copper, gold and silver, as well as higher sales volumes of zinc, gold and silver.
Total revenue during the first six months of 2008 was$555.7-million compared with $707.4-million in the same period of 2007.Lower revenue in the first half of 2008 is attributable to a loweraverage realized zinc price of US$1.11/lb compared with US$1.70/lb inthe first half of 2007, appreciation in the Canadian dollar and lowersales volumes of copper and gold. These reductions were partiallyoffset by higher average realized prices for copper, gold and silver aswell as higher sales volumes of zinc and silver.
Operating Expenses
Operating expenses were $188.5-million in Q2 2008 ($197.3-million) and $375.2-million in the first half of 2008 ($381.9-million). The lower expenses in the second quarter and first six months of 2008 primarily reflect lower copper sales volumes, the appreciation of the Canadian dollar versus the US dollar, which favourably affected US dollar denominated operating costs, and lower profit sharing expense. These reductions were partially offset by higher costs for purchased copper concentrates, generally higher costs for mining and processing and higher net profits interest expenses associated with the Callinan agreement.
Tax Expense
Tax expense in Q2 2008 was $31.3-million ($52.8-million) and $56.4-million in the first half of 2008 ($107.3-million). The year over year decreases reflect lower taxable income in 2008 versus 2007 partially offset by a higher effective tax rate. The higher effective tax rate in 2008 relates to the non-deductibility of certain expenses and valuation allowance adjustments related to US operations. Q2 2008 tax expense consists of $22.1-million of income tax expense ($38.8-million) and $9.2-million of mining tax expense ($14.0-million). Tax expense in the first half of 2008 consists of $39.5-million of income tax expense ($77.4-million) and $16.9-million of mining tax expense ($29.8-million).
For further information, please see the attached selected financial information for the periods ended June 30, 2008 and 2007. Please also see HudBay's consolidated financial statements together with Management's Discussion and Analysis of Operations and Financial Condition for the three and six months ended June 30, 2008. A copy of HudBay's consolidated financial statements for the three and six months ended June 30, 2008 as well as its MD&A for the three and six months ended June 30, 2008 are available under the profile of HudBay on SEDAR at www.sedar.com and on the HudBay website at www.hudbayminerals.com.
CONSOLIDATED STATEMENT OF EARNINGS
(in thousands of dollars)
Three months ended Six months ended
June 30, June 30, June 30, June 30,
2008 2007 2008 2007
Revenue $ 284,035 $ 358,298 $ 555,672 $ 707,440
--------- --------- --------- ---------
Expenses
Operating 188,487 197,344 375,190 381,852
Depreciation and
amortization 22,847 23,294 47,080 45,168
General and
administrative 5,600 4,898 15,453 9,471
Stock-based compensation 2,964 2,074 7,492 6,783
Accretion of asset
retirement obligations 904 789 1,808 1,578
Foreign exchange (gain)
loss (271) 13,074 (1,587) 15,118
--------- --------- --------- ---------
220,531 241,473 445,436 459,970
--------- --------- --------- ---------
Operating earnings 63,504 116,825 110,236 247,470
Exploration (6,480) (10,512) (12,576) (18,261)
Interest and other income 6,806 12,721 14,508 18,319
Gain (loss) on derivative
instruments 712 2,919 (1,029) (8,060)
--------- --------- --------- ---------
Earnings before tax 64,542 121,953 111,139 239,468
Tax expense 31,340 52,814 56,385 107,253
--------- --------- --------- ---------
Net earnings for the
period $ 33,202 $ 69,139 $ 54,754 $ 132,215
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Earnings per share
Basic $ 0.26 $ 0.55 $ 0.43 $ 1.05
Diluted $ 0.26 $ 0.54 $ 0.43 $ 1.03
CONSOLIDATED STATEMENT OF RETAINED EARNINGS
(in thousands of dollars)
Six months ended
June 30, June 30,
2008 2007
Retained earnings, beginning of period $ 868,857 $ 642,723
Net earnings for the period 54,754 132,215
Transition adjustment -- financial instruments - (1,005)
Share repurchases (7,285) -
--------- ---------
Retained earnings, end of period $ 916,326 $ 773,933
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© 2008 Canjex Publishing Ltd.