Hudbay positioning itself for the next up cycle

With a joint advanced major in geology and chemistry from Saint Francis Xavier University and a PGeo designation, he has an extensive background in precious metals and base metals exploration, resource and reserve estimation, engineering studies, and open pit and underground operations.

If there’s something Meagher has learned during all these years it’s that there are no reasons for hidden agendas, and that transparency and communication are how you establish trust with people. “As long as you have that, you can sort through most of the problems”, he says.

Nowadays, as Hudbay’s COO, he’s in charge of the company’s business development; a company which, thanks to Constancia, has achieved over 300% growth in copper production along with low operating costs, improving cash flow and increasing liquidity.

Cashel Meagher at the Constancia site, in Peru, during mine construction.

MINING.com: You got into this new position in kind of a turbulent time. Prices are still volatile (even though market sentiment seems to be better than at the beginning of 2016) and the market is not expected to recover soon. How do you feel? Are investors shunning copper and betting on other metals such as gold?

Cashel Meagher: At the start of this year there wasn’t a light at the end of the tunnel. Even though the price hasn’t drastically improved – copper was around $2.10 last week-, market sentiment seems more positive than it was earlier in the year and there’s definitely optimism within the markets. We went through a natural progression where M&A activity picked up, there were some big equity offerings and partial ownership sales, and now some of the junior base metal miners are raising money. Recently Panoro Minerals, which has properties in Peru, managed to raise over $6 million on the exchange. The fact there are investors willing to put money at risk again is pretty encouraging; in December, January there wasn’t any money available in the equity market. This is a big market shift and suggests there’s light at the end of the tunnel, although it could be still a year or year and a half. Throughout the world – whether it’s China, India or Indonesia – people demand a better life tomorrow than they have today, which involves cellphones, blenders and electric cars, and all these things require copper. Steadily demand will increase. In the position I am in, I have to be an optimist. I believe that copper will go up in price. It’s simply on the demand side. More people want more copper to be able to do the things they want, and I think it’s a very positive outlook.

MINING.com: What’s next for Constancia now that it has reached full production? Are there increased efficiencies you can pursue?

CM: In the first year we’ve been producing the highest grade very successfully. We’ve actually achieved higher grades than previously outlined in our disclosure because we’ve underestimated some of the oxide components.  The oxide ore has resulted in somewhat reduced recoveries, but with higher grades going through the mill than we anticipated and higher throughput, the net result is more copper. Going forward, the grades will come down naturally based on the type of geology we go into. Full production at Constancia has also shifted the focus from a ramp-up process to an operational efficiency process. We’re actually going to be selling our first commercial molybdenum in the next month. We’re ramping up our moly plant now, and understanding better the type of geology and ore we have, to be able to recover and separate molybdenum from the copper concentrate. It will be a net revenue gainer for us. Our big focus now is on operational efficiencies. In Constancia we have a lower-grade deposit -one of the lower grade large open pits in South America- so we have to have a low operating cost per ton milled.  G&A, mining and mill costs, all together, need to be very competitive for us to be profitable with copper around $2. We need to be able to ensure we have a very lean operation, and the focus has been on productivity, whether it’s a focus on throughput -we’ve been achieving higher throughputs than the original mill design- on recovery -which we believe there’s still ample room to improve on- or on ongoing capital efficiencies. Our tailings dam construction at Constancia is as important to our cost structure as mining and milling efficiency. So as we are building our tailings dam to international standards, we are focused on making it an efficient process in lockstep with our operations and attempts to achieve cost efficiencies.

MINING.com: What opportunity does the higher-grade Pampacancha deposit present for Constancia?

CM: What Pampacancha does for us is it gives us an opportunity to mine high-grade ore again at a better time in the commodities cycle. The nice thing about Pampacancha is that it’s a satellite deposit, four kilometres to our mill, and it will be mined for a period of four to five years, following which the ancillary land outside of that satellite pit would be returned to the community. The local community that owns our land -the communities themselves are the owners of the surface rights of the land and we own the mineral rights- is the same community that owns part of the Constancia property, so we already have a relationship with them. We purchased 750 hectares from them before and we have to purchase around 200-350 hectares more to be able to develop the Pampacancha deposit. Our local communities go through an election process every two years, so when the new community has their new leadership in the new year we’ll be engaged to discuss the opportunity going ahead. It’s about them participating in part of the benefits from the mining of their land, and it’s about us establishing a direct-current framework by increasing investments in projects in health, education, infrastructure, and social programs. We have a platform where we have a joint committee with the community to be able to manage those processes.

MINING.com: Constancia was Hudbay’s first significant open-pit mine construction. What were your main challenges down there in Peru? What was the toughest and easiest issue you faced?

CM: I personally have done a lot of underground mining, and some open-pit mining. Given the choice technically, it’s easier to go from an underground deposit to an open-pit deposit. There are less variables for consideration and there’s actually more flexibility in what you can do. The real challenges for Hudbay weren’t necessarily the technical challenges but cultural, moving out of North America into a new environment, and obviously language. Spending between $500 million to $1 billion dollars a year while not knowing the language and trying to learn it, learning about the people and the culture, and being at altitude 600 kilometres from the coast, were all incredible challenges. We went into a new jurisdiction for us and people treated us really well. Peruvian people allowed us to learn and to integrate, and I think that’s why it’s one of the better projects in the country. There was no arrogance in the process, but instead it was one of openness. Transparency and honesty went a long way in a culture that has had problems with corruption. We were committed to acting honestly and ethically, and in the long run it worked out well. In hindsight there were probably things we would have changed, but it was a learning process for us, and now we’re a stronger company because of it. We’ve got one of the stronger teams and will be able to reproduce this more efficiently the next time.

MINING.com: And now, back in the corporate office in Toronto, what are your challenges? What is your biggest challenge at Hudbay now as COO?

CM: The biggest challenge for me is the role. I used to be more accountable and hands-on, more involved in the construction and operation of Constancia, and now I’m having to rely on an extra layer of management to understand and see what’s going on. Regarding the company itself, while it’s a well-established company and has many institutions, processes, and systems, the entrepreneurship and efficiency that’s the culture now in Peru and in Constantia needs to be reimported back to the Canadian operations. We have to get a focus back on what I call the “meat and potatoes” of mining -mine grade, mine recovery, op-ex, capex and mill throughput. I think it’s a very different challenge but I don’t think it’s different than any business: it’s all people. The only way you can get work done is through people and so it’s about managing people and their expectations, and I think it’ll come down to the same solution, which is communication and transparency. It needs to be an open and transparent communication.

MINING.com: In July 2014 Hudbay acquired control of Augusta Resource Corporation and its Rosemont Project, an open-pit copper deposit in Arizona that is expected to be the third largest copper mine in the US (accounting for around 10% of total US copper production). The permitting process is taking longer than expected. How is this affecting your plans for growth?

CM: We knew it was going to take a long time and frankly we were hoping to have our permit at this stage. We’re still convinced it’s not whether we’ll get the permit, it’s when we’ll get the permit. We think the better science will prevail and our challenge has been to explain to all the stakeholders what the science is and what the reality is. The reality is that it will be a sustainable mine: it’s an excellent asset, located in a fabulous place for a mine, and in the end we think cooler heads will prevail and see the value we can bring to this project and region. After I’ve experienced Constancia, I think it’s a better project: economically, location, and technically. It’s definitely easier to construct and it has one certain technology that hasn’t been fully realized yet; dry stack tailings are beneficial to the environment by the extraction of the moisture from the tailings and this water can be reused in the operations. We actually hope within the next six to eight months to produce more disclosure on Rosemont so we can show what Hudbay’s plan is, because it’s changed a little from the Augusta plan on how we would operate, build, and mine it. We are working on a more robust capital construction scenario with a more thoughtful mining plan.

MINING.com: What are Hudbay’s other plans for growth aside from Rosemont?

CM: We have some exploration opportunities we are pursuing and we picked up some land. We have acquired an option on a property in an established mining district between El Morro and Relincho. We are very excited about it. We’ve conducted the geochemistry and geophysics, we’ve generated some targets, and we’re looking for the opportunity to drill maybe this summer season.

MINING.com: Has the strategy remained consistent after the recent changes to senior management?

CM: The strategy remains consistent and the changes in senior management have provided for more of a focus on operational and capital efficiencies. We’ll do some exploration in Chile as I mentioned before, we have a couple of properties in Peru -Lucamo and Caval-, and we’re pursuing other projects that are closer to being shovel ready. There are very few shovel ready copper projects, or resource stage projects, in the world for copper. We’re looking in the Americas and principally in Canada, US, Peru and Chile. We’re also watching Ecuador. We are interested in what people are doing there, and we believe the direction of the government is more sustainable than what happened in other Latin American jurisdictions. We’re positioning ourselves well to do some exploration. There’s good gold and base metal exploration opportunities around Snow Lake, in Manitoba, and we have an exploration group that is compiling targets there.

MINING.com: Let’s talk about safety matters. Hudbay has had a strong safety record in recent years. Do you think there is more Hudbay can do to improve its safety record?

CM: We always do. Our management philosophy around safety is line accountability. This means it’s not only having safety systems and programs, but the focus is on the people at the face. These people are ultimately accountable for their own safety and the safety of their colleagues, with guidance from our safety systems and programs. There’s a direct accountability to me being the Chief Operating Officer for safety. I need to know that the vice president of the business unit that works for me has line managers, general foremen, and supervisors who view safety as of paramount importance. The way we do it is we go around the sites having a certain number of VFL’s (Visible Felt Leadership) to complete -each month or each quarter, depending on the level of management- where we engage the worker at the face in a personal discussion about how they feel regarding safety, what do they see and how can it be improved. We implemented that starting in January and it revealed to us areas we can improve on, and much of it has to do with consistency and management. It’s about being consistent in the application of accountability and responsibility. The rules and policies are applied the same way across the organization. It’s a tier management process where if one supervisor is lax in ensuring compliance with the policy and the other three aren’t, we discipline the supervisor, but if all the supervisors are lax, we don’t discipline the supervisors, we discipline their manager. We don’t depend on the Safety department alone for safety; we depend on the people that are accountable and responsible for the workers to ensure that their people are working safely.

MINING.com: What are the main safety risks at Constancia?

CM: Transportation to and from site for people, and our truckers delivering and trucking away product, is the biggest risk we have at Constancia. Actually on the site itself the risks are so well-managed and so well-documented that they are reduced. The risk is when you’re outside the site and you are traveling between either Cusco or Arequipa and the site, the traffic you encounter and the behavior of that traffic.

MINING.com: Environmental footprint and social impact are two of the main concerns the mining sector faces. Nowadays, more than ever, the industry is looking for new ways to operate more sustainably. What kind of new technologies is Hudbay adopting to reduce its environmental footprint?

CM: The environmental footprint must be considered alongside the perception of the stakeholders. Let’s be realistic, an open-pit mine like Constancia with its tailings dam will have an environmental impact. Human presence in any environment provides an environmental impact. It’s necessary to balance the benefits of the mine against the impacts, and we believe it’s our responsibility to communicate that to stakeholders. It goes back to communication and transparency. We’re not hiding. We are creating benefits for local, regional, national and international stakeholders and we must be open and transparent about the environmental impacts that we are responsible for. We abide by Mining Association of Canada rules and Towards Sustainable Mining processes, and apply the rules in Canada if the local rules in other jurisdictions don’t exceed Canadian rules. We will use technological advances as much as we can to reduce the environmental footprint. Arizona is a very good example, because I believe it will change the face of mining: should we build Rosemont, its dry stack tailings will change the environmental expectations and the level of technology available to major large-scale mining projects. Dry stack tailings will change Rosemont’s environmental impact. Tails will no longer be hydro tails with 55% density. We will be depositing 85% density tails using these dry stack methods and reusing that water more efficiently. In Constancia we changed our local stakeholders’ lives by bringing connectivity, electricity, water, health, and education. Our view is that it’s a net benefit to society and to the environment.

MINING.com: Does the boom-bust commodity cycle (exactly like the one copper prices are facing now) affect these sustainability efforts?

CM: We’re in a cyclical industry: it affects our cost and capital, and our profitability. That’s why we need assets that produce over the long term, meaning we need assets that last 15 to 20 years, because there will be multiple cycles in there. Our shareholders want exposure to the boom and bust so they get opportunities over that period of time. We know that in 15 to 20 years there’s going to be at a minimum three high cycles; those high cycles help ensure the payback we expect when we commit to a project. So the long-term benefit to us and our shareholders will be ensured. At the same time our sustainability efforts and investments for the benefit of local stakeholders are worthwhile, and they get the continued benefit of this throughout the commodity cycles. That’s our philosophy.

MINING.com: Can you discuss the challenges faced with the local communities in Peru? Are there any differences in the way the company engages with local and indigenous communities here in Canada than in Peru or the US?

CM: There’s not in the sense of transparency and communication, which need to be constant, but the situations are obviously different when dealing with developing areas and people removed from infrastructure, education, health and resources. We’re bringing these solutions and it’s been great to see the benefits to our local communities. I would say the expectations with the Peruvian communities are different. We’ve tried to change the process to more of the North American style of engagement through long-term life of mine agreements in the Peruvian context. We believe Peru is on its way to a better, more robust economy with less corruption and we want to be one of the leaders in that. That’s why when we engage these communities we take a more of an IBA (Impact/Benefit Agreement) approach and we feel that has worked for us. We also have engagement with First Nations near Flin Flon, in northern Manitoba. We have a model whereby we bring federal agencies and benefits, rather than only relying on the company money. We are able to bring together local community leadership with various ministries in the Peruvian government to give them access to infrastructure, health, education and agriculture programs. We’ve also engaged North American models, bringing people from Peru’s Chumbivilcas region to Canada into organic farms to show them how specialty products could be sold at a higher value and how mines exist within communities. For example, we brought three congregations from Peruvian local communities to the Timmins area to show them how the McIntyre mine is in the middle of Schumacher and how the nearby houses co-exist with the open-pit mine. These groups have learned how communities can co-exist with mining and the benefits mining brought to this particular community. We’re bringing lessons both ways, and we’re recognizing that there’s a lot of value in communication and transparency.