HudBay Minerals Inc.: Form 6-K - Filed by newsfilecorp.com

0001062993-18-000969.txt : 20180222 0001062993-18-000969.hdr.sgml : 20180222 20180222165429 ACCESSION NUMBER: 0001062993-18-000969 CONFORMED SUBMISSION TYPE: 6-K PUBLIC DOCUMENT COUNT: 17 CONFORMED PERIOD OF REPORT: 20180222 FILED AS OF DATE: 20180222 DATE AS OF CHANGE: 20180222 FILER: COMPANY DATA: COMPANY CONFORMED NAME: Hudbay Minerals Inc. CENTRAL INDEX KEY: 0001322422 STANDARD INDUSTRIAL CLASSIFICATION: METAL MINING [1000] IRS NUMBER: 980485558 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 6-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-34244 FILM NUMBER: 18633273 BUSINESS ADDRESS: STREET 1: 25 YORK STREET, SUITE 800 CITY: TORONTO STATE: A6 ZIP: M5J 2V5 BUSINESS PHONE: 416-362-8181 MAIL ADDRESS: STREET 1: 25 YORK STREET, SUITE 800 CITY: TORONTO STATE: A6 ZIP: M5J 2V5 FORMER COMPANY: FORMER CONFORMED NAME: HudBay Minerals Inc. DATE OF NAME CHANGE: 20050331 6-K 1 form6k.htm FORM 6-K HudBay Minerals Inc.: Form 6-K - Filed by newsfilecorp.com

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 6-K

REPORT OF FOREIGN PRIVATE ISSUER
PURSUANT TO RULE 13A-16 OR 15D-16 OF
THE SECURITIES EXCHANGE ACT OF 1934

For the month of February 2018

Commission File Number: 001-34244

HUDBAY MINERALS INC.
(Translation of registrant’s name into English)

25 York Street, Suite 800
Toronto, Ontario
M5J 2V5, Canada
(Address of principal executive offices)

Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F.

Form 20-F [ ] Form 40-F [X]

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1): [ ]

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7): [ ]

Indicate by check mark whether the registrant by furnishing the information contained in this Form is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.

Yes [ ] No [X]

If “Yes” is marked, indicate below the file number assigned to the registrant in connection with Rule 12g3-2(b): 82- _____________________________

EXPLANATORY NOTE

On February 21, 2018, Hudbay Minerals Inc. (“Hudbay”) filed on the Canadian Securities Administrators’ System for Electronic Document Analysis and Retrieval (SEDAR) website at www.sedar.com the following documents: (1) Consolidated Financial Statements for the years ended December 31, 2017 and 2016; (2) Management's Discussion and Analysis of Results of Operations and Financial Condition for the year ended December 31, 2017; and (3) a press release announcing the fourth quarter and full year financial results for 2017.

Copies of the filings are attached to this Form 6-K and incorporated herein by reference, as follows:

99.1	Consolidated Financial Statements for the years ended December 31, 2017 and 2016
99.2	Management's Discussion and Analysis of Results of Operations and Financial Condition for the year ended December 31, 2017
99.3	Press release announcing the fourth quarter and full year financial results for 2017

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	HUDBAY MINERALS INC.
	(registrant)

	By:	/s/ Patrick Donnelly
	Name:	Patrick Donnelly
	Title:	Vice President and General Counsel

Date: February 22, 2018

EXHIBIT INDEX

The following exhibits are furnished as part of this Form 6-K:

Exhibit

Description

99.1	Consolidated Financial Statements for the years ended December 31, 2017 and 2016
99.2	Management's Discussion and Analysis of Results of Operations and Financial Condition for the year ended December 31, 2017
99.3	Press release announcing the fourth quarter and full year financial results for 2017

EX-99.1 2 exhibit99-1.htm EXHIBIT 99.1 Hudbay Minerals Inc. - Exhibit 99.1 - Filed by newsfilecorp.com

Consolidated Financial Statements
(In US dollars)

HUDBAY MINERALS INC.

Years ended December 31, 2017 and 2016

MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Management of Hudbay Minerals Inc. (“Hudbay” or the “Company”) is responsible for establishing and maintaining internal control over financial reporting (“ICFR”).

Under the supervision of and with the participation of the Chief Executive Officer and the Chief Financial Officer, Hudbay’s management assessed the effectiveness of the Company’s ICFR as at December 31, 2017 based upon the Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, management concluded that Hudbay’s ICFR was effective as of December 31, 2017.

The effectiveness of the Company’s ICFR as of December 31, 2017 has been audited by Deloitte LLP, Independent Registered Public Accounting Firm, as stated in their report immediately preceding the Company’s audited consolidated financial statements for the year ended December 31, 2017.

Alan Hair	David Bryson
President and Chief Executive Officer	Senior Vice President and Chief Financial Officer

Toronto, Canada

February 21, 2018

	Deloitte LLP
	Bay Adelaide East
	22 Adelaide Street West
	Suite 200
	Toronto ON M5H 0A9
	Canada

	Tel: 416-601-6150
	Fax: 416-601-6151
	www.deloitte.ca

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of Hudbay Minerals Inc.

Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated financial statements of Hudbay Minerals Inc. and subsidiaries (the “Company”), which comprise the consolidated balance sheets as at December 31, 2017 and December 31, 2016, the consolidated income statements, consolidated statements of comprehensive income (loss), consolidated statements of changes in equity and consolidated statements of cash flows for the years then ended, and the related notes, including a summary of significant accounting policies and other explanatory information (collectively referred to as the “financial statements”).

In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as at December 31, 2017 and December 31, 2016, and its financial performance and its cash flows for the years then ended in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board.

Report on Internal Control over Financial Reporting
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 21, 2018 expressed an unqualified opinion on the Company’s internal control over financial reporting.

Basis for Opinion
Management’s Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these financial statements in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board, and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.

Auditor’s Responsibility
Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards and the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement, whether due to fraud or error. Those standards also require that we comply with ethical requirements. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. Further, we are required to be independent of the Company in accordance with the ethical requirements that are relevant to our audit of the financial statements in Canada and to fulfill our other ethical responsibilities in accordance with these requirements.

An audit includes performing procedures to assess the risks of material misstatement of the financial statements, whether due to fraud or error, and performing procedures that respond to those risks. Such procedures include examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the Company’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances. An audit also includes evaluating the appropriateness of accounting policies and principles used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.

We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a reasonable basis for our audit opinion.

Chartered Professional Accountants
Licensed Public Accountants
Toronto, Canada
February 21, 2018

We have served as the Company's auditor since 2005.

	Deloitte LLP
	Bay Adelaide East
	22 Adelaide Street West
	Suite 200
	Toronto ON M5H 0A9
	Canada

	Tel: 416-601-6150
	Fax: 416-601-6151
	www.deloitte.ca

Report of Independent Registered Public Accounting Firm

To the Board of Directors and the Shareholders of Hudbay Minerals Inc.

Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of Hudbay Minerals Inc. and subsidiaries (the “Company”) as of December 31, 2017, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control — Integrated Framework (2013) issued by COSO.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB) and Canadian generally accepted auditing standards, the consolidated financial statements as of and for the year ended December 31, 2017, of the Company and our report dated February 21, 2018, expressed an unmodified/unqualified opinion on those financial statements.

Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Chartered Professional Accountants
Licensed Public Accountants
Toronto, Canada
February 21, 2018

HUDBAY MINERALS INC.
Consolidated Balance Sheets
(in thousands of US dollars)

			Dec. 31,			Dec. 31,
	Note		2017			2016

Assets
Current assets
Cash and cash equivalents	6	$	356,499		$	146,864
Trade and other receivables	7		155,522			152,567
Inventories	8		141,682			112,464
Prepaid expenses			8,995			3,992
Other financial assets	9		2,841			3,397
Taxes receivable			3			17,319
			665,542			436,603
Receivables	7		32,459			32,648
Inventories	8		5,809			4,537
Other financial assets	9		22,461			30,848
Intangible assets - computer software	10		5,575			6,614
Property, plant and equipment	11		3,880,894			3,865,823
Deferred tax assets	21b		35,989			79,483
		$	4,648,729		$	4,456,556

Liabilities
Current liabilities
Trade and other payables	12	$	199,117		$	169,662
Taxes payable			10,794			4,419
Other liabilities	13		51,962			42,207
Other financial liabilities	14		26,760			13,495
Finance lease obligations	15		18,327			3,172
Long-term debt	16		-			16,490
Deferred revenue	17		49,907			65,619
			356,867			315,064
Other financial liabilities	14		20,801			28,343
Finance lease obligations	15		66,246			9,760
Long-term debt	16		979,575			1,215,674
Deferred revenue	17		448,137			472,233
Provisions	18		200,138			179,702
Pension obligations	19		22,221			28,379
Other employee benefits	20		108,397			89,273
Deferred tax liabilities	21b		302,092			354,916
			2,504,474			2,693,344

Equity
Share capital	22b		1,777,409			1,588,319
Reserves			(10,300	)		(42,040	)
Retained earnings			377,146			216,933
			2,144,255			1,763,212

		$	4,648,729		$	4,456,556

Capital commitments (note 27).

HUDBAY MINERALS INC.
Consolidated Statements of Cash Flows
(in thousands of US dollars)

			Year ended
			December 31,
	Note		2017			2016
Cash generated from (used in) operating activities:
Profit (loss) for the year		$	163,899		$	(35,193	)
Tax expense	21a		34,829			40,798
Items not affecting cash:
Depreciation and amortization	5b		293,235			299,134
Share-based payment expense	5c		15,919			9,887
Net finance expense	5f		100,179			164,279
Change in fair value of derivatives	5f		1,790			(1,238	)
Change in deferred revenue related to stream	17		(48,958	)		(65,762	)
Change in taxes receivable/payable, net			(39,326	)		(3,666	)
Unrealized (gain) loss on warrants	5f		(1,051	)		2,111
Pension and other employee benefit payments, net of accruals			3,142			(11,120	)
Loss (gain) on available-for-sale investments	5f		1,970			(373	)
Asset impairment losses	5g		11,320			-
Other and foreign exchange			4,230			2,625
Taxes paid			(10,617	)		(13,614	)
Operating cash flow before change in non-cash working capital			530,561			387,868
Change in non-cash working capital	29a		9,015			87,206
			539,576			475,074
Cash generated from (used in) investing activities:
Acquisition of property, plant and equipment			(249,763	)		(192,822	)
Sale of investments			(2,245	)		(359	)
Release of restricted cash			16,854			45,913
Net interest received			890			212
			(234,264	)		(147,056	)
Cash generated from (used in) financing activities:
Long-term debt borrowing	16c		25,000			62,247
Principal repayments	16		(281,439	)		(176,490	)
Net refinancing of senior unsecured notes			-			21,194
Interest paid			(52,743	)		(126,520	)
Financing costs			(26,597	)		(21,763	)
Payment of finance lease			(7,509	)		(2,897	)
Sale leaseback	29b		67,275			-
Net proceeds from issuance of equity	22b		186,852			11,719
Dividends paid	22b		(3,686	)		(3,567	)
			(92,847	)		(236,077	)
Effect of movement in exchange rates on cash and cash equivalents			(2,830	)		1,071
Net increase in cash and cash equivalents			209,635			93,012
Cash and cash equivalents, beginning of year			146,864			53,852

Cash and cash equivalents, end of year		$	356,499		$	146,864
For supplemental information, see note 29.

HUDBAY MINERALS INC.
Consolidated Income Statements
(in thousands of US dollars, except share and per share amounts)

			Year ended
			December 31,
	Note		2017			2016
Revenue	5a	$	1,362,553		$	1,128,678
Cost of sales
Mine operating costs			695,728			607,170
Depreciation and amortization	5b		292,880			298,630
			988,608			905,800
Gross profit			373,945			222,878
Selling and administrative expenses			42,283			37,774
Exploration and evaluation expenses			15,474			4,742
Other operating (income) expenses	5e		(12,440	)		10,586
Asset impairment loss	5g		11,320			-
Results from operating activities			317,308			169,776
Finance income	5f		(2,849	)		(2,792	)
Finance expenses	5f		103,028			167,071
Other finance loss (gain)	5f		18,401			(108	)
Net finance expense			118,580			164,171
Profit before tax			198,728			5,605
Tax expense	21a		34,829			40,798

Profit (loss) for the year		$	163,899		$	(35,193	)

Earnings (loss) per share - basic and diluted		$	0.67		$	(0.15	)

Weighted average number of common shares outstanding:	24
Basic and Diluted			243,500,696			235,807,509

HUDBAY MINERALS INC.
Consolidated Statements of Comprehensive Income (Loss)
(in thousands of US dollars)

		Year ended
		December 31,
		2017			2016
Profit (loss) for the year	$	163,899		$	(35,193	)

Other comprehensive income:
Items that may be reclassified subsequently to profit or loss
Recognized directly in equity:
Net exchange gain on translation of foreign operations		20,866			8,301
Change in fair value of available-for-sale financial investments		2,507			3,598
Effect of foreign exchange on available-for-sale financial investments		922			53
		24,295			11,952

Items that will not be reclassified subsequently to profit or loss:
Recognized directly in equity:
Remeasurement - actuarial gain (loss)		6,299			(11,252	)
Tax effect		(3,845	)		2,198
		2,454			(9,054	)

Transferred to income statements:
Wind up of subsidiaries		3,021			-
Impairment of available-for-sale investments		2,059			1,102
Sale of available-for-sale investments		(89	)		(1,037	)
		4,991			65

Other comprehensive income, net of tax, for the year		31,740			2,963

Total comprehensive income (loss) for the year	$	195,639		$	(32,230	)

HUDBAY MINERALS INC.
Consolidated Statements of Changes in Equity
(in thousands of US dollars)

							Foreign
					Other		currency			Available-
					capital		translation			for-sale		Remeasurement			Retained			Total
		Share capital			reserves		reserve			reserve		reserve			earnings			equity
Balance, January 1, 2016	$	1,576,600		$	28,837	$	(13,897	)	$	1,309	$	(61,252	)		255,693		$	1,787,290
Loss		-			-		-			-		-			(35,193	)		(35,193	)
Other comprehensive income (loss)		-			-		8,301			3,716		(9,054	)		-			2,963
Total comprehensive income (loss)		-			-		8,301			3,716		(9,054	)		(35,193	)		(32,230	)
Contributions by and distributions to owners:
Stock options exercised		11,814			-		-			-		-			-			11,814
Share issue costs, net of tax (note 22b)		(95	)		-		-			-		-			-			(95	)
Dividends (note 22b)		-			-		-			-		-			(3,567	)		(3,567	)
Total contributions by and distributions to owners		11,719			-		-			-		-			(3,567	)		8,152

Balance, December 31, 2016	$	1,588,319		$	28,837	$	(5,596	)	$	5,025	$	(70,306	)	$	216,933		$	1,763,212

Profit		-			-		-			-		-			163,899			163,899
Other comprehensive income		-			-		23,887			5,399		2,454			-			31,740
Total comprehensive income		-			-		23,887			5,399		2,454			163,899			195,639
Contributions by and distributions to owners:
Equity issuance (note 22b)		195,295			-		-			-		-			-			195,295
Share issue costs, net of tax (note 22b)		(6,205	)		-		-			-		-			-			(6,205	)
Dividends (note 22b)		-			-		-			-		-			(3,686	)		(3,686	)
Total contributions by and distributions to owners		189,090			-		-			-		-			(3,686	)		185,404

Balance, December 31, 2017	$	1,777,409		$	28,837	$	18,291		$	10,424	$	(67,852	)	$	377,146		$	2,144,255

HUDBAY MINERALS INC.

Notes to Consolidated Financial Statements

(in thousands of US dollars, except where otherwise noted)

Years ended December 31, 2017 and 2016

1.	Reporting entity

	On January 1, 2017, Hudbay Minerals Inc. amalgamated under the Canada Business Corporations Act with its subsidiaries Hudson Bay Mining and Smelting Co., Limited and Hudson Bay Exploration and Development Company Limited to form Hudbay Minerals Inc. (“HMI” or the “Company”). The address of the Company's principal executive office is 25 York Street, Suite 800, Toronto, Ontario. The consolidated financial statements of the Company for the years ended December 31, 2017 and 2016 represent the financial position and the financial performance of the Company and its subsidiaries (together referred to as the “Group” or “Hudbay” and individually as “Group entities”).

	Wholly owned subsidiaries as at December 31, 2017, include HudBay Marketing & Sales Inc. (“HMS”), HudBay Peru Inc., HudBay Peru S.A.C. ("Hudbay Peru"), HudBay (BVI) Inc., Hudbay Arizona Inc. and Rosemont Copper Company (“Rosemont”).

	Hudbay is an integrated mining company producing copper concentrate (containing copper, gold and silver), zinc concentrate and zinc metal. With assets in North and South America, the Group is focused on the discovery, production and marketing of base and precious metals. Directly and through its subsidiaries, Hudbay owns four polymetallic mines, four ore concentrators and a zinc production facility in northern Manitoba and Saskatchewan (Canada) and Cusco (Peru) and a copper project in Arizona (United States). The Group also has equity investments in a number of junior exploration companies. The Company is governed by the Canada Business Corporations Act and its shares are listed under the symbol "HBM" on the Toronto Stock Exchange, New York Stock Exchange and Bolsa de Valores de Lima. Hudbay also has warrants listed under the symbol “HBM.WT” on the Toronto Stock Exchange and “HBM/WS” on the New York Stock Exchange.

2.	Basis of preparation

	(a)	Statement of compliance:

		These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards ("IFRS") as issued by the International Accounting Standards Board ("IASB") effective for the year ended December 31, 2017.

		The Board of Directors approved these consolidated financial statements on February 21, 2018.

	(b)	Functional and presentation currency:

		The Group's consolidated financial statements are presented in US dollars, which is the Company’s and all material subsidiaries' functional currency, except the Company’s Manitoba business unit, which has a functional currency of Canadian dollars. All values are rounded to the nearest thousand ($000) except where otherwise indicated.

	(c)	Basis of measurement:

		The consolidated financial statements have been prepared on the historical cost basis except for the following items in the consolidated balance sheets:

	−	Derivatives, embedded derivatives, other financial instruments at fair value through profit or loss ("FVTPL") and available-for-sale financial assets are measured at fair value;
	−	Liabilities for cash-settled share-based payment arrangements are measured at fair value; and

HUDBAY MINERALS INC.

Notes to Consolidated Financial Statements

(in thousands of US dollars, except where otherwise noted)

Years ended December 31, 2017 and 2016

−

A defined benefit liability is recognized as the net total of the plan assets, unrecognized past service costs and unrecognized actuarial losses, less unrecognized actuarial gains and the present value of the defined benefit obligation.

	(d)	Use of judgements and estimates:

		The preparation of the consolidated financial statements in conformity with IFRS requires the Group to make judgements, estimates and assumptions that affect the application of accounting policies, reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and reported amounts of revenue and expenses during the reporting period. Actual results may differ from these estimates.

		The Group reviews these estimates and underlying assumptions on an ongoing basis, based on experience and other factors, including expectations of future events that the Group believe to be reasonable under the circumstances. Revisions to accounting estimates are recognized prospectively in the period in which the estimates are revised and in any future periods affected.

		The following are significant judgements and estimates impacting the consolidated financial statements:

	−	Mineral reserves and resources (notes 3i, 3m and 3o) - the group estimates mineral reserves and resources to determine future recoverable mine production based on assessment of geological, engineering and metallurgical analyses, estimates of future production costs, capital costs and reclamation costs, as well as long term commodity prices and foreign exchange rates. There are numerous uncertainties inherent in estimating mineral reserves and resources, including many factors beyond the Group’s control. The estimates are based on information compiled by appropriately qualified persons relating to the geological data on the size, depth and shape of the ore body and interpreting this data requires complex geological judgements. Changes in assumptions, including economic assumptions such as metals prices and market conditions, could have a material effect on the financial position and results of operations.

		Changes in the mineral reserve or resource estimates may affect:

	−	the carrying value of exploration and evaluation assets, capital works in progress, mining properties and plant and equipment;
	−	depreciation expense for assets depreciated either on a unit-of-production basis or on a straight line basis where useful lives are restricted by the life of the related mine or plan;
	−	the provision for decommissioning, restoration and similar liabilities; and
	−	the carrying value of deferred tax assets.

−

Property plant and equipment (notes 3i and 11) - the carrying amounts of property, plant and equipment and exploration and evaluation assets on the Group’s consolidated balance sheets are significant and reflect multiple estimates and applications of judgement. Management exercises judgement in determining whether the costs related to exploration and evaluation are eligible for capitalization and whether they are likely to be recoverable by future exploration, which may be based on assumptions about future events and circumstances. Judgement and estimates are used when determining whether exploration and evaluation assets should be transferred to capital works in progress within property, plant and equipment. For mines in the production stage, management applies judgement to determine development costs to be capitalized based on the extent they are incurred in order to access reserves mineable over more than one year. In doing this, estimates such as number of tonnes of waste to be removed over the life of the mining area and economically recoverable reserves extracted as a result.

HUDBAY MINERALS INC.

Notes to Consolidated Financial Statements

(in thousands of US dollars, except where otherwise noted)

Years ended December 31, 2017 and 2016

		For depreciable property, plant and equipment assets, management makes estimates to determine depreciation. For assets depreciated using the straight line method, residual value and useful lives of the assets or components are estimated. A significant estimate is required to determine the total production basis for units-of-production depreciation. The most currently available reserve and resource report is utilized in determining the basis which has material impacts on the amount of depreciation recorded through inventories and the consolidated income statements. There are numerous uncertainties inherent in estimating mineral reserves, and assumptions that were valid at the reporting date may change when new information becomes available. The actual volume of ore extracted and any changes in these assumptions could affect prospective depreciation rates and carrying values.

		In determining whether stripping costs incurred during the production phase of a mining property relate to mineral reserves and mineral resources that will be mined in a future period and therefore should be capitalized, the Group makes estimates of the proportion of stripping activity which relates to extracting current ore and the proportion which relates to obtaining access to ore reserves which will be mined in the future.

	−	Impairment of non-financial assets (notes 3h, 3j and 11) - there are significant estimates involved in the determination of the recoverable amount of cash generating units (“CGU”). Recoverable amounts are calculated using discounted after-tax cash flows based on cash flow projections and assumptions in the Group’s most current life of mine (“LOM”) plans. LOM plans are based on optimized mine and processing plans and the assessment of capital expenditure requirements of a mine site. LOM plans incorporate management’s best estimates of key assumptions which include discount rates, future commodity prices, production based on current estimates of recoverable reserves, future operating and capital costs, future foreign exchange rates and the value of mineral resources not included in the Constancia and Arizona LOM plan. Expected future cash flows used to determine the recoverable amount during impairment testing are inherently uncertain and could materially change over time. Should management’s estimate of the future not reflect actual events, impairments may be identified, which could have a material effect on the Group’s consolidated financial statements. Although it is reasonably possible for a change in key assumptions to occur, the possible effects of a change in any single assumption may not fairly reflect the impact on a CGU’s fair value as the assumptions are inextricably linked.

	−	Tax provisions (notes 3o and 21) - management makes estimates in determining the measurement and recognition of deferred tax assets and liabilities recorded on the consolidated balance sheets. The measurement of deferred tax assets and deferred tax liabilities is based on tax rates that are expected to apply in the period that the asset is realized or liability is settled based on tax rates that have been enacted or substantively enacted by the end of the reporting period. Deferred tax assets, including those arising from unutilized tax losses, require management to assess the likelihood of taxable income in future periods in order to utilize recognized deferred tax assets. Estimates of future taxable income are based on forecasted cash flows from operations and the application of existing tax laws in each jurisdiction. To the extent that future cash flows and taxable income differ significantly from estimates, the ability to realize the net deferred tax assets recorded at the balance sheet date could be affected. At the end of each reporting period, management reassesses the period that assets are expected to be realized or liabilities are settled and the likelihood of taxable income in future periods in order to support and adjust the deferred tax assets and deferred tax liabilities recognized on the consolidated balance sheets.

HUDBAY MINERALS INC.

Notes to Consolidated Financial Statements

(in thousands of US dollars, except where otherwise noted)

Years ended December 31, 2017 and 2016

	−	Timing of commercial production (note 3i) - judgement was applied to ascertain the point in time when a group of mine assets associated with a given project were capable of being used in the manner intended by management. Amongst other quantitative and qualitative factors, throughput, mill grades and recoveries were assessed over a period of up to three months to make this determination. A factor of 60% of planned output and/or design capacity measures were utilized in determining the appropriate timing. A change in judgement regarding timing of commercial production could have material impacts on the amount of revenues and depreciation recorded in the consolidated income statements and the valuation of property, plant and equipment in the consolidated balance sheets.

	−	Functional currency (note 3b) - judgement was required in determining that the US dollar is the appropriate functional currency of certain entities of Hudbay. This was determined by assessing the currency which influences sales prices for concentrate and metals sales, labour and input costs, as well as the currency in which Hudbay finances its operations. The US dollar functional currency determination results in foreign exchange gains and losses being recorded on the consolidated income statements pertaining to the revaluation of non-US monetary assets and liabilities, most notably, the Canadian denominated trade receivables, cash, working capital and intercompany balances. If judgement was altered and a different functional currency was selected for certain entities of Hudbay, this could result in material differences in the amounts recorded in the consolidated income statements pertaining to foreign exchange gains or losses.

	−	Assaying utilized to determine revenue and recoverability of inventories (notes 3c and 3f) - assaying of contained metal is a key estimate in determining the amount of revenues recorded in the consolidated income statements. The estimate is finalized after final surveying is completed, which may extend to six months in certain transactions. Since assays are utilized to determine the value of recorded revenues, significant differences in given assays may result in a material misstatement of revenues on the consolidated income statements. Assay survey results are also a factor utilized to determine if inventories on hand have a net realizable value that exceeds cost. Material differences in assay results may lead to misstatements of inventory balances in the consolidated balance sheets.

	−	Decommissioning and restoration obligations (notes 3m and 18) - significant judgement and estimates are utilized in the determination of the decommissioning and restoration provisions in the consolidated balance sheets. Judgement is involved in determining the timing and extent of cash outflows required to satisfy constructive obligations based on the timing of site closures in the LOM plans, expected unit costs to determine cash obligations to remediate disturbances and regulatory and constructive requirements to determine the extent of the remediation required. The timing of cash outflows and discount rates associated with discounting the provision are also key estimates. Changes in these estimates may result in a change in classification of the provision between non-current and current as well as material differences in the total provision recorded in the consolidated balance sheets.

HUDBAY MINERALS INC.

Notes to Consolidated Financial Statements

(in thousands of US dollars, except where otherwise noted)

Years ended December 31, 2017 and 2016

	−	Accounting for stream transactions (note 17) - significant judgement was required in determining the appropriate accounting for the Wheaton Precious Metals Corp. (“Wheaton”) stream transactions that were entered into. The upfront cash deposit received from Wheaton on the stream transactions have been accounted for as deferred revenue as management has determined that it is not a derivative as it will be satisfied through the delivery of non-financial items (i.e., gold and silver credits) rather than cash or financial assets. It is management’s intention to settle the obligations under the stream transactions through its own production and if this is not possible, this would lead to the stream transactions becoming a derivative since a cash settlement payment may be required. This would cause a change to the accounting treatment, resulting in the revaluation of the fair value of the agreement through the income statement on a recurring basis.

	−	Pensions and other employee benefits (notes 3l, 19 and 20) - the Group’s post retirement obligations relate mainly to ongoing health care benefit plans. The Group estimates obligations related to the pension and other employee benefits plans using actuarial determinations that incorporate assumptions using management’s best estimates of factors including plan performance, salary escalation, retirement dates of employees and drug cost escalation rates. Due to the complexity of the valuation, the underlying assumptions and its long term nature, a defined benefit obligation is highly sensitive to changes in these assumptions. Management reviews all assumptions at each reporting date. In determining the appropriate discount rate, the Group considers the interest rates on corporate bonds in the respective currency with at least an AA rating, with extrapolated maturities corresponding to the expected duration of the defined benefit obligation. The mortality rate is based on publicly available mortality tables for the specific country, and the Group bases future salary increases and pension increases on expected future inflation rates for the respective country.

3.	Significant accounting policies

	The accounting policies set out below have been applied consistently to all periods presented in these consolidated financial statements and by all Group entities.

	(a)	Basis of consolidation:

		Intercompany balances and transactions are eliminated upon consolidation. When a Group entity transacts with an associate or jointly controlled entity of the Group, unrealized profits and losses are eliminated to the extent of the Group’s interest in the relevant associate or joint venture. The accounting policies of Group entities are changed when necessary to align them with the policies adopted by the Company.

		Subsidiaries

		A subsidiary is an entity controlled by the Group. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases.

		Business combinations and goodwill

		When the Group makes an acquisition, it first determines whether the assets acquired and liabilities assumed constitute a business, in which case the acquisition requires accounting as a business combination. Management applies judgement in determining whether the acquiree is capable of being conducted and managed for the purpose of providing a return, considering the inputs of the acquiree and processes applied to those inputs that have the ability to create outputs.

HUDBAY MINERALS INC.

Notes to Consolidated Financial Statements

(in thousands of US dollars, except where otherwise noted)

Years ended December 31, 2017 and 2016

The Group applies the acquisition method of accounting to business combinations, whereby the goodwill is measured at the acquisition date as the fair value of the consideration transferred including the recognized amount of any non-controlling interests in the acquiree. When the excess is negative, a bargain purchase gain is recognized immediately in the consolidated income statements. The assessment of fair values on acquisition includes those mineral reserves and resources that are able to be reliably measured. In determining these fair values, management must also apply judgement in areas including future cash flows, metal prices, exchange rates and appropriate discount rates. Changes in such estimates and assumptions could result in significant differences in the amount of goodwill recognized.

The consideration transferred is the aggregate of the fair values at the date of acquisition of the sum of the assets transferred, the liabilities incurred or assumed, and the equity instruments issued by the acquirer in exchange for control of the acquiree. Acquisition-related costs are recognized in the consolidated income statements as incurred, unless they relate to issue of debt or equity securities.

Where applicable, the consideration transferred includes any asset or liability resulting from a contingent consideration arrangement and measured at its acquisition date fair value. Subsequent changes in such fair values are adjusted against the cost of acquisition where they qualify as measurement period adjustments. All other subsequent changes in the fair value of contingent consideration classified as an asset or liability are accounted for in accordance with relevant IFRS. Changes in the fair value of contingent consideration classified as equity are not recognized.

Where a business combination is achieved in stages, the Group's previously held interests in the acquired entity are remeasured to fair value at the acquisition date, which is the date the Group attains control, and any resulting gain or loss is recognized in the consolidated income statements. Amounts previously recognized in other comprehensive income (“OCI”) related to interests in the acquiree prior to the acquisition date are reclassified to the consolidated income statements, where such treatment would be appropriate if that interest were disposed of.

After initial recognition, goodwill is measured at cost less any accumulated impairment losses. For the purpose of impairment testing, goodwill acquired in a business combination is, from the acquisition date, allocated to each of the Group’s CGUs that are expected to benefit from the synergies of the combination, irrespective of whether other assets or liabilities of the acquiree are assigned to those units. Goodwill is allocated to the lowest level at which it is monitored for internal management purposes and is not larger than an operating segment before aggregation. Where goodwill forms part of a CGU and part of the operation within that unit is disposed of, the goodwill associated with the disposed operation is included in the determination of any gain or loss on disposal.

Goodwill is not amortized and is tested for impairment annually and whenever there is an indication of impairment. If any such indication exists, the recoverable amount of the CGU is estimated in order to determine the extent of the impairment, if any. The recoverable amount is determined as the higher of fair value less direct costs to sell and the CGU’s value in use. An impairment loss in respect of goodwill is not reversed.

Fair value for mineral interests and related goodwill is generally determined as the present value of the estimated future cash flows expected to arise from the continued use of the asset, including any expansion prospects, and its eventual disposal, using assumptions that an independent market participant may take into account.

HUDBAY MINERALS INC.

Notes to Consolidated Financial Statements

(in thousands of US dollars, except where otherwise noted)

Years ended December 31, 2017 and 2016

		Value in use is determined as the present value of the estimated future cash flows expected to arise from the continued use of the asset in its present form and its eventual disposal. Value in use is determined by applying assumptions specific to the Group’s continued use and cannot take into account future development.

		The weighted average cost of capital of the Group or comparable market participants is used as a starting point for determining the discount rates, with appropriate adjustments for the risk profile of the countries in which the individual CGUs operate and the specific risks related to the development of the project.

		Where the asset does not generate cash flows that are independent of other assets, the Group estimates the recoverable amount of the CGU to which the asset belongs. If the carrying amount of an asset or CGU exceeds its recoverable amount, the carrying amount of the asset or CGU is reduced to its recoverable amount. An impairment loss is recognized as an expense in the consolidated income statements.

	(b)	Translation of foreign currencies:

		Management determines the functional currency of each Group entity as the currency of the primary economic environment in which the entity operates.

		Foreign currency transactions

		Transactions in foreign currencies are translated to the respective functional currencies of Group entities at exchange rates in effect at the transaction dates.

		At the end of each reporting period, monetary assets and liabilities denominated in foreign currencies are translated to the functional currency using the noon exchange rate. Non-monetary assets and liabilities measured at fair value are translated using the exchange rates at the date when fair value was determined. Non-monetary assets and liabilities measured at historical cost in a foreign currency are translated using exchange rates that were in effect at the transaction dates. The same translations are applied when an entity prepares its financial statements from books and records maintained in a currency other than its functional currency, except revenue and expenses may be translated at monthly average exchange rates that approximate those in effect at the transaction dates.

		Foreign currency gains and losses arising on period-end revaluations are recognized in the consolidated income statements, except for differences arising on translation of available-for-sale equity instruments, a financial liability designated as a hedge of a net investment in a foreign operation, or qualifying cash flow hedges, which are recognized in OCI.

HUDBAY MINERALS INC.

Notes to Consolidated Financial Statements

(in thousands of US dollars, except where otherwise noted)

Years ended December 31, 2017 and 2016

		Foreign operations

		For the purpose of the consolidated financial statements, assets and liabilities of Group entities that have functional currencies other than the US dollar are translated to US dollars at the reporting date using the noon exchange rate. Revenue and expenses are translated at monthly average exchange rates that approximate those in effect at the transaction dates. Differences arising from these foreign currency translations are recognized in OCI and presented within equity in the foreign currency translation reserve. When a foreign operation is disposed, the relevant exchange differences accumulated in the foreign currency translation reserve are transferred to the consolidated income statements as part of the profit or loss on disposal. On the partial disposal of a subsidiary that includes a foreign operation, the relevant proportion of such amount is reattributed to non-controlling interests. On disposal of a partial investment in an associate or joint venture that includes a foreign operation while retaining significant influence or joint control, the relevant proportion is reclassified to profit or loss.

		Net investment in a foreign operation

		Foreign currency gains and losses arising on translation of a monetary item receivable from or payable to a foreign operation for which settlement is neither planned nor likely to occur in the foreseeable future are considered to form part of a net investment in the foreign operation. Such gains and losses are recognized in OCI and presented within equity in the foreign currency translation reserve.

	(c)	Revenue recognition:

		Revenue from the sale of goods is measured at the fair value of the consideration received or receivable, net of treatment and refining charges and pre-production revenue.

		Sales revenue is recognized when the significant risks and rewards of ownership have been transferred to the buyer, the Group has insignificant continuing management involvement with the goods, the amount of revenue can be measured reliably, recovery of the consideration is probable and the associated costs and possible return of goods can be estimated reliably. Transfers of risks and rewards vary depending on individual contract terms and frequently occur at the time when title passes to the customer. For medium and long-term contracts, revenue recognition criteria are assessed for individual sales within the contracts. Revenue from the sale of by-products is included within revenue.

		Sales of concentrate and certain other products are “provisionally priced”. For these contracts, sales prices are subject to final adjustment at the end of a future period after shipment, based on quoted market prices during the quotational period specified in the contract. Revenue is recognized when the above criteria are met, using weight and assay results and forward market prices to estimate the fair value of the total consideration receivable. Such a provisional sale contains an embedded derivative that must be separated from the host contract. At each reporting date, provisionally priced metals sales are marked to market, with adjustments (both gains and losses) recorded in revenue in the consolidated income statements and in trade and other receivables on the consolidated balance sheets.

		The Group recognizes deferred revenue in the event it receives payments from customers before a sale meets criteria for revenue recognition.

		Interest revenue is recognized in finance income as it accrues, using the effective interest method.

		Dividend revenue from investments is recognized when the shareholder’s right to receive payment has been established provided that it is probable that the economic benefits will flow to the Group and the amount of revenue can be measured reliably.

HUDBAY MINERALS INC.

Notes to Consolidated Financial Statements

(in thousands of US dollars, except where otherwise noted)

Years ended December 31, 2017 and 2016

	(d)	Cost of sales:

		Cost of sales consists of those costs previously included in the measurement of inventory sold during the period, as well as certain costs not included in the measurement of inventory, such as the cost of warehousing and distribution to customers, provisional pricing adjustments related to purchased concentrates, profit sharing, royalty payments, share-based payments and other indirect expenses related to producing operations.

	(e)	Cash and cash equivalents:

		Cash and cash equivalents include cash, demand deposits and short-term, highly liquid investments that are readily convertible to known amounts of cash and are subject to an insignificant risk of changes in value. Cash equivalents have maturities of three months or less at the date of acquisition. Interest earned is included in finance income on the consolidated income statements and in investing activities on the consolidated statements of cash flows.

		Amounts that are restricted from being used for at least twelve months after the reporting date are classified as non-current assets and presented in restricted cash on the consolidated balance sheets. Changes in restricted cash balances are classified as investing activities on the consolidated statements of cash flows.

	(f)	Inventories:

		Inventories consist of stockpiles, in-process inventory (concentrates and metals), metal products and supplies. Concentrates, metals and all other saleable products are valued at the lower of cost and estimated net realizable value. Net realizable value represents the estimated selling price for inventories less all estimated costs of completion and costs necessary to make the sale. Where the net realizable value is less than cost, the difference is charged to the consolidated income statements as an impairment charge in cost of sales. Costs associated with stripping activities in an open pit mine are capitalized to inventory and recorded through cost of sales unless the stripping activity can be shown to improve access to further quantities of ore that will be mined in future periods, in which case, the stripping costs are capitalized.

		Cost of production of concentrate inventory is determined on a weighted average cost basis and the cost of production of finished metal inventory is determined using the first in first out basis. The cost of production includes direct costs associated with conversion of production inventory: material, labour, contractor expenses, purchased concentrates, and an attributable portion of production overheads and depreciation of all property, plant and equipment involved with the mining and production process. Hudbay measures in-process inventories based on assays of material received at metallurgical plants and estimates of recoveries in the production processes. Due to significant uncertainty associated with volume and metal content, immaterial costs are not allocated to routine operating levels of stockpiled ore. Estimates and judgements are required to assess the nature of any significant changes to levels of ore stockpiles and determining whether allocation of costs is required.

		Supplies are valued at the lower of average cost and net realizable value. A regular review is undertaken to determine the extent of any provision for obsolescence.

HUDBAY MINERALS INC.

Notes to Consolidated Financial Statements

(in thousands of US dollars, except where otherwise noted)

Years ended December 31, 2017 and 2016

	(g)	Intangible assets:

		Computer software is measured at cost less accumulated amortization and accumulated impairment losses. Costs include all directly attributable costs necessary to create, produce and prepare the asset to be capable of operating it in the manner intended by management.

		Amortization methods, useful lives, and residual values if any, are reviewed at each year end and adjusted prospectively, if required. When an intangible asset is disposed of, or when no further economic benefits are expected, the asset is derecognized, and any resulting gain or loss is recorded in the consolidated income statements.

		Currently, the Group’s intangible assets relate primarily to enterprise resource planning (“ERP”) information systems, which are amortized over their estimated useful lives.

	(h)	Exploration and evaluation expenditures:

		Exploration and evaluation activity begins when the Group obtains legal rights to explore a specific area and involves the search for mineral reserves, the determination of technical feasibility, and the assessment of commercial viability of an identified resource. Expenditures incurred in the exploration and evaluation phase include the cost of acquiring interests in mineral rights, licenses and properties and the costs of the Group’s exploration activities, such as researching and analyzing existing exploration data, gathering data through geological studies, exploratory drilling, trenching, sampling, and certain feasibility studies.

		The Group expenses the cost of its exploration and evaluation activities and capitalizes the cost of acquiring interests in mineral rights, licenses and properties in business combinations, asset acquisitions or option agreements. Amounts capitalized are recognized as exploration and evaluation assets and presented in property, plant and equipment. Exploration and evaluation assets acquired as a result of an asset acquisition or option agreement are initially recognized at cost, and those acquired in a business combination are recognized at fair value on the acquisition date. They are subsequently carried at cost less accumulated impairment. No depreciation is charged during the exploration and evaluation phase. The Group expenses the cost of subsequent exploration and evaluation activity related to acquired exploration and evaluation assets. Cash flows associated with acquiring exploration and evaluation assets are classified as investing activities in the consolidated statements of cash flows; those associated with exploration and evaluation expenses are classified as operating activities.

		Judgement is required in determining whether the respective costs are eligible for capitalization where applicable, and whether they are likely to be recoverable, which may be based on assumptions about future events and circumstances. Estimates and assumptions made may change if new information becomes available.

		The Group monitors exploration and evaluation assets for factors that may indicate their carrying amounts are not recoverable. If such indicators are identified, the Group tests the exploration and evaluation assets or their CGUs, as applicable, for impairment. The Group also tests impairment when assets reach the end of the exploration and evaluation phase.

HUDBAY MINERALS INC.

Notes to Consolidated Financial Statements

(in thousands of US dollars, except where otherwise noted)

Years ended December 31, 2017 and 2016

		Exploration and evaluation assets are transferred to capital works in progress within property, plant and equipment once the Group determines that probable future economic benefits will be generated as a result of the expenditures. The Group’s determination of probable future economic benefit is based on management’s evaluation of the technical feasibility and commercial viability of the geological properties of a given ore body based on information obtained through evaluation activities, including metallurgical testing, resource and reserve estimates and the economic assessment of whether the ore body can be mined economically. Tools that may be used to determine this include a preliminary feasibility study, confidence in converting resources into reserves and the probability that the property could be developed into a mine site. At that time, the property is considered to enter the development phase, and subsequent evaluation costs are capitalized.

	(i)	Property, plant and equipment:

		The Group measures items of property, plant and equipment at cost less accumulated depreciation and any accumulated impairment losses.

		The initial cost of an item of property, plant and equipment includes its purchase price or construction costs, including import duties and non-refundable purchase taxes, any costs directly attributable to bringing the asset into operation, and for qualifying assets, borrowing costs. The initial cost of property, plant and equipment also includes the initial estimate of the cost of dismantling and removing the item and restoring the site on which it is located, the obligation for which the Group incurs either when the item is acquired or as a consequence of having used the item during a particular period for purposes other than to produce inventories during that period.

		Capitalization of costs ceases once an asset is in the location and condition necessary for it to be capable of operating in the manner intended by management. At this time, depreciation commences. For a new mine, this occurs upon commencement of commercial production. Any revenue earned in the process of preparing an asset to be capable of operating in the manner intended by management is included in the cost of the constructed asset. Any other incidental revenue earned prior to commencement of commercial production is recognized in the consolidated income statements.

		Carrying amounts of property, plant and equipment, including assets under finance leases, are depreciated to their estimated residual value over the estimated useful lives of the assets or the estimated life of the related mine or plant, if shorter. Where components of an asset have different useful lives, depreciation is calculated on each separate component. Components may be physical or non-physical, including the cost of regular major inspections and overhauls required in order to continue operating an item of property, plant and equipment.

		Certain items of property, plant and equipment are depreciated on a unit-of-production basis. The unit-of- production method is based on proven and probable tonnes of ore reserves. There are numerous uncertainties inherent in estimating ore reserves, and assumptions that were valid at the reporting date may change when new information becomes available. The actual volume of ore extracted and any changes in these assumptions could affect prospective depreciation rates and carrying values.

		The carrying amount of an item of property, plant and equipment is derecognized on disposal or when no future economic benefits are expected from its use or disposal. Upon derecognition of an item of property, plant and equipment, the difference between its carrying value and net sales proceeds, if any, is presented as a gain or loss in other operating income or expense in the consolidated income statements.

HUDBAY MINERALS INC.

Notes to Consolidated Financial Statements

(in thousands of US dollars, except where otherwise noted)

Years ended December 31, 2017 and 2016

	(i)	Capital works in progress:

		Capital works in progress consist of items of property, plant and equipment in the course of construction or mineral properties in the course of development, including those transferred upon completion of the exploration and evaluation phase. On completion of construction or development, costs are transferred to plant and equipment and/or mining properties as appropriate. Capital works in progress are not depreciated.

	(ii)	Mining properties:

		Mining properties consist of costs transferred from capital works in progress when a mining property reaches commercial production, costs of subsequent mine and exploration development, and acquired mining properties in the production stage.

		Mining properties include costs directly attributable to bringing a mineral asset into the state where it is capable of operating in the manner intended by management and includes such costs as the cost of shafts, ramps, track haulage drifts, ancillary drifts, pumps, electrical substations, refuge stations, ventilation raises, permanent manways, and ore and waste pass raises. The determination of development costs to be capitalized during the production stage of a mine operation requires the use of judgements and estimates such as estimates of tonnes of waste to be removed over the life of the mining area and economically recoverable reserves extracted as a result.

		A mining property is considered to be capable of operating in a manner intended by management when it commences commercial production. Upon commencement of commercial production, a mining property is depreciated on a unit-of-production method. Unit-of-production depreciation rates are determined based on the related proven and probable mineral reserves and associated future development costs.

		Subsequent mine development costs are capitalized to the extent they are incurred in order to access reserves mineable over more than one year. Ongoing maintenance and development expenditures are expensed as incurred and included in cost of sales in profit or loss. These include ore stope access drifts, footwall and hangingwall drifts in stopes, drawpoints, drill drifts, sublevels, slots, drill raises, stope manway access raises and definition diamond drilling.

	(iii)	Plant and equipment:

		Plant and equipment consists of buildings and fixtures, surface and underground fixed and mobile equipment and assets under finance lease.

		Plant and equipment are depreciated on either unit-of-production or straight-line basis based on factors including the production life of assets and mineable reserves. In general, mining assets are depreciated using a unit-of-production method; equipment is depreciated using the straight-line method, based on the shorter of its useful life and that of the related mine or facility; and plants are depreciated using the straight-line method, with useful lives limited by those of related mining assets.

HUDBAY MINERALS INC.

Notes to Consolidated Financial Statements

(in thousands of US dollars, except where otherwise noted)

Years ended December 31, 2017 and 2016

(iv)

Depreciation rates of major categories of assets:

	— Capital works in progress	- not depreciated
	— Mining properties	- unit-of-production
	— Mining assets	- unit-of-production
	— Plant and Equipment
	— Equipment	- straight-line over 1 to 21 years
	— Other plant assets	- straight-line over 1 to 21 years /
		unit-of-production

		The Group reviews its depreciation methods, remaining useful lives and residual values at least annually and accounts for changes in estimates prospectively.

	(v)	Commercial production:

		Commercial production is the level of activities intended by management for a mine, or a mine and mill complex, to be capable of operating in the manner intended by management. The Group considers a range of factors when determining the level of activity that represents commercial production for a particular project, including a pre-determined percentage of design capacity for the mine and mill; achievement of continuous production, ramp-ups, or other output; or specific factors such as recoveries, grades, or inventory build-ups. In a phased mining approach, management may consider achievement of specific milestones at each phase of completion. In a non-phased mining approach, management considers average actual metrics that are at least 60% of average design capacity or plan over a continuous period. Management assesses the operation’s ability to sustain production over a period of approximately one to three months, depending on the complexity related to the stability of continuous operation. Commercial production is considered to have commenced, and depreciation expense is recognized, at the beginning of the month after criteria have been met.

	(vi)	Capitalized borrowing costs:

		The Group capitalizes borrowing costs that are directly attributable to the acquisition, construction or production of qualifying assets, which are assets that necessarily take a substantial period of time to get ready for their intended use or sale. Capitalization of borrowing costs ceases once the qualifying assets commence commercial production or are otherwise ready for their intended use or sale.

		Where funds are borrowed specifically to finance a project, the amount capitalized represents the actual borrowing costs incurred. Where the funds used to finance a project form part of general borrowings, the amount capitalized is calculated using a weighted average of interest rates applicable to relevant general borrowings of the Group during the period, to a maximum of actual borrowing costs incurred. Investment income earned by temporarily investing specific borrowings pending their expenditure on qualifying assets is deducted from the borrowing costs eligible for capitalization. Capitalization of interest is suspended during extended periods in which active development is interrupted.

		All other borrowing costs are recognized in the consolidated income statements in the period in which they are incurred.

HUDBAY MINERALS INC.

Notes to Consolidated Financial Statements

(in thousands of US dollars, except where otherwise noted)

Years ended December 31, 2017 and 2016

	(vii)	Capitalized stripping costs:

		Costs associated with stripping activities in an open pit mine are capitalized to inventory and recorded through cost of sales unless the stripping activity can be shown to improve access to further quantities of ore that will be mined in future periods, in which case, the stripping costs are capitalized. Capitalized stripping costs are included in “mining properties” within property, plant and equipment.

		Capitalized stripping costs are depreciated using a units-of-production method over the expected reserves within a given phase of mine development.

	(j)	Impairment of non-financial assets:

		At the end of each reporting period, the Group reviews the carrying amounts of property, plant and equipment, exploration and evaluation assets and intangible assets - computer software to determine whether there is any indication of impairment. If any such indication exists, the Group estimates the recoverable amount of the asset in order to determine the extent of the impairment loss, if any. The Group generally assesses impairment at the level of CGUs, which are the smallest identifiable groups of assets that generate cash inflows that are largely independent of cash inflows from other assets.

		The Group's CGUs consist of Manitoba, Peru, Arizona and exploration and evaluation assets.

		The Group allocates exploration and evaluation assets to CGUs based on their operating segment, geographic location and management’s intended use for the property. Exploration and evaluation assets are allocated to CGUs separate from those containing producing or development-phase assets, except where exploration and evaluation assets have the potential to significantly affect the future production of producing or development-phase assets.

		Goodwill, if recorded, is tested for impairment annually and whenever there is an indication that the asset may be impaired.

		Where an indicator of impairment exists, a formal estimate of the recoverable amount of the asset or CGU is made. The recoverable amount is the higher of the fair value less costs of disposal and value in use:

	−	Fair value less costs of disposal is the amount obtainable from the sale of the asset or CGU in an arm’s length transaction between knowledgeable, willing parties, less costs of disposal. Fair value for mineral assets is often determined as the present value of the estimated future cash flows expected to arise from the continued use of the asset, including any expansion prospects, and its eventual disposal, using assumptions that an independent market participant may take into account. These cash flows are discounted by an appropriate discount rate that reflects current market assessments of the time value of money and the risks specific to the asset to arrive at a net present value of the asset.

	−	Value in use is determined as the present value of the estimated future cash flows expected to arise from the continued use of the asset or CGU in its present form and its eventual disposal, discounted using a pre-tax rate that reflects current market assessments of the time value of money and risks specific to the asset for which estimates of future cash flows have not been adjusted. Value in use calculations apply assumptions specific to the Group’s continued use and cannot take into account future development. These assumptions are different to those used in calculating fair value, and consequently the value in use calculation is likely to give a different result to a fair value calculation.

HUDBAY MINERALS INC.

Notes to Consolidated Financial Statements

(in thousands of US dollars, except where otherwise noted)

Years ended December 31, 2017 and 2016

		The Group estimates future cash flows based on estimated future recoverable mine production, expected sales prices (considering current and historical commodity prices, price trends and related factors), production levels and cash costs of production, all based on detailed engineering LOM plans. Future recoverable mine production is determined from reserves and resources after taking into account estimated dilution and recoveries during mining, and estimated losses during ore processing and treatment. Estimates of recoverable production from measured, indicated and inferred mineral resources not included in the LOM plan are assessed for economic recoverability and may also be included in the valuation of fair value less costs of disposal. Gains from the expected disposal of assets are not included in estimated future cash flows. Assumptions underlying future cash flow estimates are subject to risks and uncertainties. Changes in estimates may affect the expected recoverability of the Group's investments in mining properties.

		If the carrying amount of an asset or CGU exceeds its recoverable amount, the carrying amount is reduced to the recoverable amount, and an impairment loss is recognized in the consolidated income statements in the expense category consistent with the function of the impaired asset or CGU. The Group presents impairment losses on the consolidated income statements as part of results from operating activities. Impairment losses recognized in respect of a CGU are allocated first to reduce the carrying amount of any goodwill allocated to the CGU and then to reduce the carrying amounts of other assets in the CGU on a pro-rata basis for depreciable assets.

		The Group assesses previously recognized impairment losses each reporting date for any indications that the losses have decreased or no longer exist. Such an impairment loss is reversed, in full or in part, if there has been significant changes with a positive effect on the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortization, if no impairment loss had been recognized for the asset in prior years. Such reversals of impairment losses are recognized in the consolidated income statements. An impairment loss recognized in relation to goodwill is not reversed for subsequent increases in the recoverable amount.

	(k)	Assets held for sale:

		The Group classifies non-current assets, or disposal groups consisting of assets and liabilities, as held for sale when it expects to recover their carrying amounts primarily through sale rather than through continuing use. To meet criteria to be held for sale, the sale must be highly probable, and the assets or disposal groups must be available for immediate sale in their present condition. The Group must be committed to a plan to sell the assets or disposal group, and the sale should be expected to qualify for recognition as a completed sale within one year from the date of classification.

		The Group measures assets or disposal groups at the lower of their carrying amount and fair value less costs of disposal. Impairment losses on initial classification as held for sale and subsequent gains and losses on remeasurement are recognized in the consolidated income statements; however, gains are not recognized in excess of any cumulative impairment loss. Any impairment loss on a disposal group first is allocated to goodwill, and then to remaining assets and liabilities on pro rata basis, except that no loss is allocated to inventories, financial assets, deferred tax assets, employee benefit assets or investment property. Upon classifying assets or disposal groups as held for sale, the Group presents the assets separately as a single amount and the liabilities separately as a single amount on the consolidated balance sheets. When an asset no longer meets the criteria for classification as an asset held for sale, the Group records the asset at the lower of its recoverable amount and the carrying amount before the asset was classified as held for sale.

HUDBAY MINERALS INC.

Notes to Consolidated Financial Statements

(in thousands of US dollars, except where otherwise noted)

Years ended December 31, 2017 and 2016

	(l)	Pension and other employee benefits:

		The Group has non-contributory and contributory defined benefit programs for the majority of its Canadian employees. The defined benefit pension benefits are based on years of service and final average salary for the salaried plans and are based on a flat dollar amount combined with years of service for the hourly plans. The Group provides non pension health and other post employment benefits to certain active employees and pensioners (post employment benefits) and also provides disability income, health benefits and other post employment benefits to hourly and salaried disabled employees (other long-term employee benefits).

		The Group accrues its obligations under the defined benefit plans as the employees render the services necessary to earn the pension and post employment benefits. The actuarial determination of the accrued benefit obligations for pensions and post employment benefits uses the projected benefit method pro- rated on service (which incorporates management's best estimate of future salary levels, other cost escalation, retirement ages of employees and other actuarial factors). For other long-term employee benefits, the Group recognizes the full cost of the benefit obligation at the time the employee becomes disabled. Actuarial advice is provided by external consultants.

		For the funded defined benefit plans, the Group recognizes the deficit or excess of the fair value of plan assets over the present value of the defined benefit obligation as a liability or an asset in the consolidated balance sheets. However, the Group recognizes an excess of assets only to the extent that it represents a future economic benefit which is available in the form of refunds from the plan or reductions in future contributions to the plan. When these criteria are not met, it is not recognized but is disclosed in the notes to the consolidated financial statements. Impacts of minimum funding requirements in relation to past service are considered when determining the balance sheet position.

		Defined benefit costs are categorized as follows:

	-	Service costs (including current service cost, past service cost, as well as gains and losses on curtailments and settlements and administration costs),
	-	Net interest expense or income, and
	-	Remeasurement

The first two components of defined benefit costs shown above are recognized in the consolidated income statements. Past service cost is recognized in the consolidated income statements in the period of a plan amendment. Net interest is calculated by applying the discount rate at the beginning of the period to the net defined benefit liability or asset.

Remeasurement, comprising actuarial gains and losses, the effect of changes to the asset ceiling (if applicable) and the return on plan assets (excluding interest), is reflected immediately in the consolidated balance sheets with a gain or loss recognised in OCI in the period in which they occur. Remeasurement recognised in OCI is reflected immediately in retained earnings and will not be reclassified to the consolidated income statements. For the other long-term employee benefits plan, remeasurments are recognized immediately in the consolidated income statements.

HUDBAY MINERALS INC.

Notes to Consolidated Financial Statements

(in thousands of US dollars, except where otherwise noted)

Years ended December 31, 2017 and 2016

		Actuarial determinations used in estimating obligations relating to these plans incorporate assumptions using management's best estimates of factors including plan performance, salary escalation, retirement dates of employees and healthcare cost escalation rates. Due to the complexity of the valuation, the underlying assumptions and its long-term nature, a defined benefit obligation is highly sensitive to changes in these assumptions. All assumptions are reviewed at each reporting date. In determining the appropriate discount rate, management considers the interest rates on corporate bonds in the respective currency with at least an AA rating, with extrapolated maturities corresponding to the expected duration of the defined benefit obligation. The mortality rate is based on publicly available mortality tables for the specific country. Future salary increases and pension increases are based on expected future inflation rates for the respective country.

		The Group also has defined contribution plans providing pension benefits for certain of its salaried employees and certain of its US employees utilizing 401K plans. The Group recognizes the cost of the defined contribution plans based on the contributions required to be made during each period.

		Termination benefits are recognized as an expense when the Group is committed demonstrably, without realistic possibility of withdrawal, to a formal detailed plan to either terminate employment before the normal retirement date, or to provide termination benefits as a result of an offer made to encourage voluntary redundancy. Termination benefits for voluntary redundancies are recognized as an expense if the Group has made an offer of voluntary redundancy, it is probable that the offer will be accepted, and the number of acceptances can be estimated reliably. Benefits that are payable more than one year after the reporting period are discounted to their present value.

	(m)	Provisions:

		Provisions are recognized when the Group has a present obligation (legal or constructive) as a result of a past event, it is probable that an outflow of resources will be required to settle the obligation, and a reliable estimate can be made. The provisions are recorded as management’s best estimate of the amount required to settle an obligation.

		Provisions are stated at their present value, which is determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the liability.

		Decommissioning, restoration and similar liabilities

		Provisions are recorded for legal and constructive obligations associated with the future costs of rehabilitating the Group’s current and previous operating and development sites. Such costs are associated with decommissioning and restoration activities such as dismantling and removing structures, rehabilitating mines and tailings, and reclamation and re-vegetation of affected areas.

		The present value of estimated costs is recorded in the period in which the asset is installed or the environment is disturbed and a reasonable estimate of future costs and discount rates can be made. The provision is discounted using a risk-free rate, and estimates of future cash flows are adjusted to reflect risk.

HUDBAY MINERALS INC.

Notes to Consolidated Financial Statements

(in thousands of US dollars, except where otherwise noted)

Years ended December 31, 2017 and 2016

Subsequent to the initial measurement, the obligation is adjusted to reflect the passage of time and changes in the estimated future cash flows underlying the obligation. The increase in the provision due to the passage of time is recognized as finance expense, whereas increases and decreases due to changes in the estimated future cash flows, which are not the result of current inventory production, are capitalized and depreciated over the life of the related asset. Actual costs incurred upon settlement of the site restoration obligation are charged against the provision to the extent the provision was established for those costs. Upon settlement of the liability, a gain or loss may be recorded. For closed sites, changes to estimated costs are recognized immediately in the consolidated income statements within other operating expenses.

The Group assesses the reasonableness of its estimates and assumptions each year and when conditions change and the estimates are revised accordingly. Judgement is required to determine the scope of future decommissioning and restoration activities, as well as such estimates and assumptions including discount rates, expected timing of decommissioning and restoration costs, inflationary factors and market risks. Changes in cost estimates, which may arise from changes in technology and pricing of the individual components of the cost may result in offsetting changes to the asset and liability and corresponding changes to the associated depreciation and finance costs. In view of the uncertainties concerning these future obligations, the ultimate timing and cost of reclamation and mine closure may differ materially from these estimates.

If the change in estimate results in a significant increase in the decommissioning liability and therefore an addition to the carrying value of the asset, the Group considers whether this is an indication of impairment of the asset as a whole and, if so, tests for impairment in accordance with IAS 36, Impairment of Assets. If, for mature mines, the revised mine assets net of decommissioning and restoration liabilities exceeds the recoverable value, that portion of the increase is charged directly to expense as an impairment loss.

In view of the uncertainties concerning environmental remediation, the ultimate cost of decommissioning and restoration liabilities could differ materially from the estimated amounts provided. The estimate of the total liability is subject to change based on amendments to laws and regulations and as new information concerning the Group's operations becomes available. Future changes, if any, to the estimated total liability as a result of amended requirements, laws, regulations and operating assumptions, as well as discount rates, may be significant and would be recognized prospectively as a change in accounting estimate, when applicable. Environmental laws and regulations are continually evolving in all regions in which the Group operates. The Group is not able to determine the impact, if any, of environmental laws and regulations that may be enacted in the future on its results of operations or financial position due to the uncertainty surrounding the ultimate form that such future laws and regulations may take.

Onerous contracts

A contract is considered to be onerous when the unavoidable costs of meeting obligations under the contract exceed the economic benefits expected to be received under it. The Group records a provision for any onerous contracts at the lesser of costs to comply with a contract and costs to terminate it.

Restructuring provisions

A provision for restructuring is recognized when management, with appropriate authority within the Group, has approved a detailed and formal restructuring plan, and the restructuring has either commenced or has been announced publicly. Future operating costs are not provided for.

HUDBAY MINERALS INC.

Notes to Consolidated Financial Statements

(in thousands of US dollars, except where otherwise noted)

Years ended December 31, 2017 and 2016

(n)	Financial Instruments:

	Financial assets, financial liabilities, and non-financial derivative contracts are initially recognized at fair value plus, in the case of a financial asset or financial liability not at fair value through profit or loss, directly attributable transaction costs. Measurement in subsequent periods depends on the financial instrument’s classification. The Group uses trade date accounting for regular way purchases or sales of financial assets. The Group determines the classification of its financial instruments and non-financial derivatives at initial recognition.

	Financial assets and liabilities are offset and the net amount presented in the consolidated balance sheets when, and only when, the Group has a legal right to offset the amounts and intends either to settle on a net basis or to realize the asset and settle the liability simultaneously.

	(i)	Non-derivative financial instruments – classification:

		Loans and receivables

		Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market, other than those classified or designated as FVTPL or available- for-sale. Subsequent to initial recognition, loans and receivables are measured at amortized cost using the effective interest method, less any impairment losses. Gains and losses are recorded in the consolidated income statements when the loans and receivables are derecognized or impaired, and through the amortization process.

		Held-to-maturity investments

		Non-derivative financial assets with fixed or determinable payments and fixed maturity are classified as held-to-maturity when the Group has the positive intention and ability to hold to maturity, other than financial assets that meet the definition of loans and receivables or that are designated as FVTPL or available-for-sale. Subsequent to initial recognition, financial assets classified as held-to- maturity are held at amortized cost using the effective interest method, less any impairment losses. The Group does not currently have any financial assets classified as held-to-maturity.

		Available-for-sale financial assets

		Available-for-sale financial assets are non-derivative financial assets that are designated as available-for-sale or are not classified as loans and receivables, held-to-maturity, or FVTPL. Subsequent to initial recognition, available-for-sale financial assets are measured at fair value. Gains and losses are recorded in OCI and presented in equity within the available-for-sale reserve, with the exception of impairment losses, which are immediately recognized in the consolidated income statements. When available-for-sale assets are derecognized or determined to be impaired, the cumulative gain or loss previously recognized in the available-for-sale reserve is transferred to the consolidated income statements. The Group has classified investments in shares of Canadian metals and mining companies as available-for-sale assets.

HUDBAY MINERALS INC.

Notes to Consolidated Financial Statements

(in thousands of US dollars, except where otherwise noted)

Years ended December 31, 2017 and 2016

		Financial assets and financial liabilities at fair value through profit or loss

		Financial assets and financial liabilities at FVTPL consist of those classified as held-for-trading and those designated as FVTPL on initial recognition. Financial instruments are classified as held-for- trading if they are acquired for the purpose of selling or repurchasing in the near term or if they are derivatives that are not designated in effective hedging relationships. Upon initial recognition, transaction costs are recognized in the consolidated income statements as incurred. Financial assets and financial liabilities at FVTPL are measured at fair value, and changes in fair value are recognized in other finance gains and losses except gains and losses on the non-hedge financial derivatives related to customer sales contracts are presented in revenue. The Group’s FVTPL category currently contains only derivatives and embedded derivatives. During the years ended December 31, 2017 and December 31, 2016, the Group’s financial assets and liabilities at FVTPL consisted of derivatives, embedded derivatives and investments in warrants classified as held-for- trading; the Group did not have any financial assets or liabilities designated as FVTPL on initial recognition.

		Financial liabilities at amortized cost

		Subsequent to initial recognition, the Group measures financial liabilities, other than those at FVTPL and those that are derivatives in designated hedging relationships, at amortized cost using the effective interest method. Gains and losses on derecognition are recognized in other finance gains and losses.

	(ii)	Derivatives:

		Derivatives are initially recognized at fair value when the Group becomes a party to the derivative contract and are subsequently re-measured to fair value at the end of each reporting period. The resulting gain or loss is recognized in the consolidated income statements immediately unless the derivative is designated and effective as a hedging instrument. Derivatives with positive fair value are recognized as assets; derivatives with negative fair value are recognized as liabilities.

		Contracts to buy or sell non-financial items that meet the definition of a derivative but were entered into and are held in accordance with the Group's expected purchase, sale or usage requirements are not recognized as derivatives. Such contracts are recorded as non-derivative purchases and sales.

	(iii)	Embedded derivatives:

		The Group considers whether a contract contains an embedded derivative when it becomes a party to the contract. Derivatives embedded in other financial instruments or other host contracts are treated as separate derivatives when their risks and characteristics are not closely related to those of the host contracts and the host contracts are not measured at FVTPL.

	(iv)	Hedge accounting:

		The Group may use derivatives and non-derivative financial instruments to manage exposures to interest, currency, credit and other market risks. Where hedge accounting can be applied, a hedging relationship is designated as a fair value hedge, a cash flow hedge or a hedge of a net investment in a foreign operation. The purpose of hedge accounting is to ensure that gains, losses, revenue and expenses from effective hedging relationships are recorded in the consolidated income statements in the same period.

HUDBAY MINERALS INC.

Notes to Consolidated Financial Statements

(in thousands of US dollars, except where otherwise noted)

Years ended December 31, 2017 and 2016

		At the inception of a hedge, the Group formally documents the hedging relationship and the risk management objective and strategy for undertaking the hedge. Such hedges are expected to be highly effective in achieving offsetting changes in fair value or cash flows. The Group tests effectiveness each period.

		In a cash flow hedging relationship, the effective portion of changes in the fair value of the hedging derivative is recognized in OCI and presented in the hedging reserve in equity. The gain or loss relating to the ineffective portion is recognized immediately in the consolidated income statements and is included in other finance gains and losses. Amounts previously recognized in OCI are reclassified to the consolidated income statements in the same periods as the hedged cash flows affect profit or loss and are presented on the same line of the consolidated income statements as the recognized hedged item. When the hedged item is a non-financial asset or liability, the amounts previously recognized in OCI are reclassified to the carrying amount of the non-financial asset or liability.

		Hedge accounting is discontinued prospectively if the hedging instrument is sold, terminated or exercised, if the hedge no longer meets criteria for hedge accounting, or if the Group revokes the hedge designation. In these cases, any gain or loss accumulated in equity (in the hedging reserve) remains in equity until the forecast transaction occurs, at which time it is reclassified to the consolidated income statements. If the forecast transaction is no longer expected to occur, any gain or loss accumulated in equity is reclassified immediately from equity to the consolidated income statements.

	(v)	Fair values of financial instruments:

		The fair value of a financial instrument is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s-length transaction.

		Fair values of financial instruments traded in active markets are determined based on quoted market prices, where available. Bid prices are generally used for assets held or liabilities to be issued; asking prices are generally used for assets to be acquired or liabilities held.

		For financial instruments not traded in an active market, fair values are determined based on appropriate valuation techniques. Such techniques may include discounted cash flow analysis, using recent arm’s-length market transactions, reference to the current fair value of another instrument that is substantially the same, and other valuation models.

		The Group applies a hierarchy to classify valuation methods used to measure financial instruments carried at fair value. Levels 1 to 3 are defined based on the degree to which fair value inputs are observable and have a significant effect on the recorded fair value, as follows:

−	Level 1:	Quoted prices (unadjusted) in active markets for identical assets or liabilities;
−	Level 2:	Valuation techniques use significant observable inputs, either directly (i.e., as prices) or indirectly (i.e., derived from prices), or valuations are based on quoted prices for similar instruments; and
−	Level 3:	Valuation techniques use significant inputs that are not based on observable market data (unobservable inputs).

An analysis of fair values of financial instruments is provided in note 26.

HUDBAY MINERALS INC.

Notes to Consolidated Financial Statements

(in thousands of US dollars, except where otherwise noted)

Years ended December 31, 2017 and 2016

	(vi)	Impairment of financial instruments:

		Each reporting date, the Group assesses financial assets not carried at FVTPL to determine whether there is objective evidence of impairment. A financial asset or group of financial assets is impaired if objective evidence indicates that one or more events occurred after initial recognition of the asset that negatively affected the estimated future cash flows of the financial asset or group of financial assets.

		Objective evidence that financial assets are impaired can include significant financial difficulty of the issuer or debtor, default or delinquency in interest or principal payments, restructuring of an amount due to the Group on terms that the Group would not consider otherwise, indications that a debtor or issuer will enter bankruptcy, or the disappearance of an active market for a security. For an investment in an equity security, a significant or prolonged decline in the fair value of the security below its cost is also objective evidence of impairment. Significant decline is defined as 20% of the security’s cost base and prolonged is defined as three consecutive quarters.

		Impairment of financial assets carried at amortized cost:

		The Group considers evidence of impairment for loans and receivables and any held-to-maturity investments at both a specific asset and collective level. First, the Group specifically assesses financial assets that are individually significant and groups of financial assets that are not individually significant. If evidence of impairment is not identified in the specific assessment, the Group then combines assets based on similar credit risk characteristics (excluding any assets that were specifically determined to be impaired) and collectively assesses them for impairment. Objective evidence of impairment for a portfolio of receivables could include the Group’s past experience of collecting payments, an increase in the number of delayed payments in the portfolio past the average credit period, as well as observable changes in national or local economic conditions that correlate with default on receivables.

		If there is objective evidence that an impairment loss has been incurred, the Group measures the amount of the loss as the difference between the asset’s carrying amount and the present value of estimated future cash flows (excluding future expected credit losses that have not yet been incurred), discounted at the financial asset’s original effective interest rate. In the case of collateralized financial assets, the Group measures the amount of the loss as the difference between the asset’s carrying amount and the greater of the present value of estimated future cash flows (excluding future expected credit losses that have not yet been incurred), discounted at the financial asset’s original effective interest rate and the cash flows that may result from foreclosure less costs for obtaining and selling the collateral, whether or not foreclosure is probable.

		The Group recognizes any impairment loss in the consolidated income statements and reduces the carrying amount of the financial asset using an allowance account, unless the Group is satisfied that no recovery of the amount owing is possible; at that point amounts are considered unrecoverable and are written off against the financial asset directly.

		If, in a subsequent year, the amount of the estimated impairment loss decreases as a result of an event occurring after the impairment was recognized, the Group reverses all or a portion of the previously recognized impairment loss by adjusting the asset carrying value or the allowance account and recognizing the reversal in the consolidated income statements in other finance gains and losses.

HUDBAY MINERALS INC.

Notes to Consolidated Financial Statements

(in thousands of US dollars, except where otherwise noted)

Years ended December 31, 2017 and 2016

		Impairment of available-for-sale financial assets:

		Impairment losses on available-for-sale investments are recognized by transferring the cumulative loss that has been recognized in OCI (and presented in the available-for-sale reserve in equity) to the consolidated income statements. The amount of the impairment loss is the difference between the investment’s acquisition costs, net of any principal repayments, and its current fair value, less any impairment loss previously recognized in the consolidated income statements.

		Impairment losses recognized in the consolidated income statements related to available-for-sale equity investments are not subsequently reversed. Any subsequent increases in fair value of the equity investments are recognized in OCI. However, impairment losses recognized related to available-for-sale debt instruments are subsequently reversed, in whole or in part, if the fair value of the debt instrument increases as a result of an event occurring after the impairment loss was recognized, and the amount of the reversal is recognized in the consolidated income statements in other finance gains and losses.

		The Group presents impairment losses and reversals of impairment losses recognized in the consolidated income statements in other finance gains and losses.

	(vii)	Derecognition of financial instruments:

		The Group derecognizes financial assets when the contractual rights to the cash flows from the assets expire, or when the Group transfers the rights to receive the contractual cash flows on the financial assets in a transaction in which substantially all the risks and rewards of ownership of the financial asset are transferred. Any interest in transferred financial assets that is created or retained by the Group is recognized as a separate asset or liability. The Group derecognizes financial liabilities when its contractual obligations are discharged, cancelled or expire.

	(o)	Taxation:

		Current Tax

		Current income tax assets and liabilities for the current and prior periods are measured at the amount expected to be recovered from or paid to the taxation authorities. The tax rates and tax laws used to compute the amount are those that are enacted or substantively enacted by the balance sheet date.

		Hudbay is subject to income taxes in numerous jurisdictions. Significant judgement is required in determining the worldwide provision for income taxes due to the complexity of legislation. There are many transactions and calculations for which the ultimate tax determination is uncertain during the ordinary course of business. The Group recognizes liabilities for anticipated tax issues based on estimates of whether additional taxes will be due. Where the final tax outcome of these matters is different from the amounts that were initially recorded, such differences will affect the income tax and deferred tax provisions in the period in which such determination is made.

		Additionally, future changes in tax laws in the jurisdictions in which the Group operates could limit the ability of the Group to obtain tax deductions in future periods.

HUDBAY MINERALS INC.

Notes to Consolidated Financial Statements

(in thousands of US dollars, except where otherwise noted)

Years ended December 31, 2017 and 2016

Deferred Tax

Deferred tax is recognized using the balance sheet method in respect of temporary differences at the balance sheet date between the tax basis of assets and liabilities, and their carrying amounts for financial reporting purposes.

Deferred income tax liabilities are recognized for all taxable temporary differences, except:

	−	where the deferred income tax liability arises from the initial recognition of goodwill, or the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and

	−	in respect of taxable temporary differences associated with investments in subsidiaries, associates and interests in joint ventures, where the timing of the reversal of the temporary differences can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future.

Deferred income tax assets are recognized for all deductible temporary differences, carry-forward of unused tax assets and unused tax losses, to the extent that it is probable that taxable profit will be available against which the deductible temporary differences, and the carry-forward of unused tax assets and unused tax losses can be utilized, except:

	−	where the deferred income tax asset relating to the deductible temporary difference arises from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and

	−	in respect of deductible temporary differences associated with investments in subsidiaries, associates and interests in joint ventures, deferred tax assets are recognized only to the extent that it is probable that the temporary differences will reverse in the foreseeable future and taxable profit will be available against which the temporary differences can be utilized.

To the extent that it is probable that taxable profit will be available to offset the deductible temporary differences, the Group recognizes the deferred tax asset regarding the temporary difference on decommissioning, restoration and similar liabilities and recognizes the corresponding deferred tax liability regarding the temporary difference on the related assets.

The carrying amount of deferred income tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred income tax asset to be utilized. Unrecognized deferred income tax assets are reassessed at each balance sheet date and are recognized to the extent that it has become probable that future taxable profit will be available to allow the deferred tax asset to be recovered.

Judgement is required in determining whether deferred tax assets are recognized on the consolidated balance sheets. Deferred tax assets, including those arising from unutilized tax losses, require management to assess the likelihood of taxable profit in future periods in order to utilize recognized deferred tax assets. Estimates of future taxable income are based on forecast cash flows from operations and the application of existing tax laws in each jurisdiction. To the extent that future cash flows and taxable income differ significantly from estimates, the ability to realize the net deferred tax assets recorded at the balance sheet date could be affected.

HUDBAY MINERALS INC.

Notes to Consolidated Financial Statements

(in thousands of US dollars, except where otherwise noted)

Years ended December 31, 2017 and 2016

		Deferred tax is measured on an undiscounted basis at the tax rates that are expected to apply in the periods in which the asset is realized or the liability is settled, based on tax rates and tax laws enacted or substantively enacted at the balance sheet date.

		Deferred income tax assets and deferred income tax liabilities are offset if a legally enforceable right exists to offset current tax assets against current tax liabilities and the deferred income taxes relate to the same taxable entity and the same taxation authority.

		Current and deferred taxes relating to items recognized outside profit or loss (whether in other comprehensive income or directly in equity) are recognized outside profit or loss and not in the consolidated income statements. Mining taxes and royalties are treated and disclosed as current and deferred taxes if they have the characteristics of an income tax.

	(p)	Share capital and reserves:

		Transaction costs

		Transaction costs directly attributable to equity transactions are recognized as a deduction from equity.

		Other capital reserve

		The other capital reserve is used for equity-settled share-based payments and includes amounts for stock options granted and not exercised.

		Foreign currency translation reserve

		The foreign currency translation reserve is used to record exchange differences arising from the translation of the financial statements of foreign operations. Exchange differences arising from the translation of the financial statements of foreign operations form part of the net investment in the foreign operation. Translation gains and losses remain in the reserve until disposal of all or a portion of the foreign operation.

		Available-for-sale reserve

		The available-for-sale reserve contains the cumulative change in the fair value of available-for-sale investments with the exception of impairment losses and foreign currency differences on monetary available-for-sale assets. Gains and losses are reclassified to the consolidated income statements when the available-for-sale investments are impaired or derecognized.

	(q)	Share-based payments:

		Hudbay offers a Deferred Share Unit ("DSU") plan for non-employee members of the Board of Directors and a Restricted Share Unit (“RSU”) plan for employees. Hudbay also has options outstanding under a stock option plan. These plans are included in provisions on the consolidated balance sheets and further described in note 23. Changes in the fair value of the liabilities are recorded in the consolidated income statements.

HUDBAY MINERALS INC.

Notes to Consolidated Financial Statements

(in thousands of US dollars, except where otherwise noted)

Years ended December 31, 2017 and 2016

		Cash-settled transactions, consisting of DSUs and RSUs, are initially measured at fair value and recognized as an obligation at the grant date. The liabilities are remeasured to fair value at each reporting date up to and including the settlement date, with changes in fair value recognized in the consolidated income statements. The Group values the liabilities based on the change in the Company's share price. Additional DSUs and RSUs are credited to reflect dividends paid on Hudbay common shares over the vesting period. The current portion of the liability reflects those grants that have vested or that are expected to vest within twelve months.

		DSUs vest on the grant date and are redeemable when a participant is no longer a member of the Board of Directors. Issue and redemption prices of DSUs are based on the average closing price of the Company's common shares for the five trading days prior to issuance or redemption.

		RSUs are generally issued under Hudbay’s Long Term Equity Plan (“LTEP Plan”) and vest on or before December 31st of the third calendar year after the year in which the services corresponding to such share unit award were performed. RSUs granted under the LTEP Plan may be settled in the form of Hudbay common shares or, at the option of Hudbay, the cash equivalent based on the market price of the common shares as of the vesting date. Hudbay has historically settled RSUs in cash. Except in specified circumstances, RSUs terminate when an employee ceases to be employed by the Group. Valuations of RSUs reflect estimated forfeitures.

		Equity-settled transactions with employees relate to stock options and are measured by reference to the fair value at the earlier of the grant date and the date that the employees unconditionally became entitled to the awards. Fair value is determined using a Black-Scholes option pricing model, which relies on estimates of the future risk-free interest rate, future dividend payments, future share price volatility and the expected average life of the options. The Group believes this model adequately captures the substantive features of the option awards and is appropriate to calculate their fair values. The fair value determined at the grant date is recognized over the vesting period in accordance with vesting terms and conditions, with a corresponding increase to other capital reserves. The amount recognized as an expense is adjusted to reflect the number of awards for which the related service and non-market vesting conditions are expected to be met.

	(r)	Earnings per share:

		The Company presents basic and diluted earnings (loss) per share (“EPS”) data for its common shares. Basic EPS is calculated by dividing the profit or loss attributable to common shareholders of the Company by the weighted average number of common shares outstanding during the period. Diluted EPS is determined by adjusting the profit or loss attributable to common shareholders and the weighted average number of common shares outstanding for the effects of all dilutive potential common shares, which currently consist of stock options granted to employees and warrants.

		When calculating earnings per share for periods where the Group has a loss, Hudbay's calculation of diluted earnings per share excludes any incremental shares from the assumed conversion of stock options as they would be anti-dilutive.

	(s)	Leases:

		Finance leases, under which substantially all the risks and rewards incidental to ownership of the leased item are transferred to the Group, are capitalized as assets at the inception of the lease at the lower of fair value or the present value of the minimum lease payments. Lease payments are apportioned between finance charges and the reduction of the liability so as to achieve a constant periodic rate of interest on the remaining balance of the liability. Finance charges are reflected in the consolidated income statements as finance costs.

HUDBAY MINERALS INC.

Notes to Consolidated Financial Statements

(in thousands of US dollars, except where otherwise noted)

Years ended December 31, 2017 and 2016

		Under operating lease arrangements, the risks and rewards incidental to ownership are not transferred to the Group. Operating lease payments are recognized as an expense in the consolidated income statements on a straight-line basis over the lease term.

	(t)	Segment reporting:

		An operating segment is a component of the Group that engages in business activities from which it may earn revenue and incur expenses and for which discrete financial information is available. The Group’s chief executive officer regularly reviews the operating results of each operating segment to make decisions about resources to be allocated to the segment and assess its performance. In determining operating segments, the Group considers location and decision-making authorities. Refer to note 30.

	(u)	Statements of cash flows:

		The Group presents interest paid and dividends paid as financing activities, except if the interest is related to capitalized borrowing costs, and interest received is presented as an investing activity in the consolidated statements of cash flow. The Group presents the consolidated statements of cash flows using the indirect method.

4.	New standards

	New standards and interpretations not yet adopted

	(a)	IFRS 9, *Financial Instruments* (“IFRS 9”)

		Issued on July 24, 2014, IFRS 9 is the IASB’s replacement of IAS 39, Financial Instruments: Recognition and Measurement. The standard includes requirements for recognition and measurement, impairment, derecognition and general hedge accounting. The IASB completed its project to replace IAS 39 in phases, adding to the standard as it completed each phase. The version of IFRS 9 issued in 2014 supersedes all previous versions and is mandatorily effective for periods beginning on or after January 1, 2018 with early adoption permitted (subject to local endorsement requirements).

		The Group is close to finalizing its determination of the effect of adoption of IFRS 9 on its consolidated financial statements; the following is noted;

	−	Investments previously classified as Available for Sale (“AFS”) investments will no longer be measured at fair value through other comprehensive income (“FVTOCI”). Under IFRS 9, they will be measured at FVTPL. In addition, they are now called “Investments at fair value through profit or loss.” Retrospectively, the accumulated OCI reserve balance will be closed to retained earnings, resulting in an opening retained earnings adjustment. The change in fair value of the investments will be restated and recognized as finance income/expense retrospectively and going forward. A line item within finance income and expenses called “Mark-to-market adjustments for investments at fair value through profit or loss” will be utilized for changes in fair value of the investments. At current accumulated other OCI values, the restatement will cause an increase to previously reported earnings for the consolidated balance sheets of January 1, 2017 and December 31, 2017.

	−	There is no longer a concept of impairment to such investments under IFRS 9, all impairments of AFS investments that had been recognized within the consolidated income statements will need to be restated and re-classified to the “Mark-to-market adjustments for investments at fair value through profit or loss” line item. There is no impact to earnings as a result of this.

	−	The Joint venture receivable related to our Arizona Business Unit will be measured at FVTPL. This requires management to discount the receivable balance as of January 1, 2017, using a risk adjusted market participant discount rate. There will be no earnings impact on previously stated results from this adjustment.

HUDBAY MINERALS INC.

Notes to Consolidated Financial Statements

(in thousands of US dollars, except where otherwise noted)

Years ended December 31, 2017 and 2016

	−	The embedded derivatives within our provisionally priced sales receivables are no longer permitted to be bi-furcated from the accounts receivable recorded; therefore, both will be presented together on the financial statements, and provisionally priced sales receivables will be recorded at FVTPL. There is no impact to the financial statements as a result of this adjustment.

	−	An expected credit loss model will be used to impair any financial assets measured at amortized cost when material. No material impacts are expected to be noted.

		The standard will be applied retrospectively restating prior period comparatives as of January 1, 2018.

	(b)	IFRS 15, *Revenue from Contracts with Customers* (“IFRS 15”)

		In May 2014, the IASB issued IFRS 15 which is effective for periods beginning on or after January 1, 2018 and is to be applied retrospectively. IFRS 15 clarifies the principles for recognizing revenue from contracts with customers. IFRS 15 will also result in enhanced disclosures about revenue, provide guidance for transactions that were not previously addressed comprehensively (i.e. service revenue and contract modifications) and improve guidance for multiple-element arrangements.

		The Group is close to finalizing its determination of the effect of adoption of IFRS 15 on its consolidated financial statements; the following is noted:

		Metal revenue not subject to precious metals stream contracts

	−	The group does not expect differences pertaining to the timing or the amount of revenue recognition for either concentrate (copper, zinc, molybdenum) or finished zinc sales.

	−	Within sales contracts with customers, separate performance obligations may arise pertaining to the shipping of goods sold. Where significant, costs and the revenue allocated to this separate performance obligation are recognized over the period of time the goods sold are shipped, on a gross basis. No material impacts are expected as a result of separate performance obligations.

	−	The Group will disclose revenue generated from changes in mark-to-market of its provisionally priced sales separately from contract metal sales to customers. This will create differences in revenue by metal type as reported previously due to fair value adjustments subsequent to initial provisional invoicing being reported on a separate line.

Metal revenue subject to precious metal stream contracts

	−	Since the stream deposits were received in advance of the Group’s performance of its obligation, there is an inherent financing component in the transaction. The Group’s deferred revenue balance associated with stream transactions will be adjusted to reflect a change in drawdown rates due to the recognition of a significant financing component on existing streaming transactions.

	−	The Group has preliminarily determined that the stream contracts are within the scope of IFRS 15 variable consideration guidance. As such, the deferred revenue drawdown rate requires the use of certain resources in the calculation that are beyond proven and probable reserves which management is reasonably confident are transferable to reserves. With this approach, it is highly probable that changes in subsequent reserve and resource estimates will not result in a significant revenue reversal of previously recognized revenue. The impact of this expected adjustment is to lower the deferred revenue drawdown rate compared to previously reported rates.

	−	As a result of the above expected changes to the accounting for stream contracts, it is expected that adjustments to previously reported periods will cause a material net increase to previously reported precious metals revenues and finance expenses as well as increases to the carrying value of the deferred revenue deposit.

HUDBAY MINERALS INC.

Notes to Consolidated Financial Statements

(in thousands of US dollars, except where otherwise noted)

Years ended December 31, 2017 and 2016

		The standard will be applied using the full retrospective approach as of January 1, 2018 and 2017 comparative information.

	(c)	IFRS 16, *Leases* (“IFRS 16”)

		In January 2016, the IASB issued this standard which is effective for periods beginning on or after January 1, 2019, which replaces the current guidance in IAS 17, Leases (“IAS 17”), and is to be applied either retrospectively or using a modified retrospective approach. Early adoption is permitted, but only in conjunction with IFRS 15, Revenue from Contracts with Customers. The Group will adopt the standard when it becomes effective. Under IAS 17, lessees were required to make a distinction between a finance lease (on balance sheet) and an operating lease (off balance sheet). IFRS 16 now requires lessees to recognize a lease liability reflective of future lease payments and a “right-of-use asset” for virtually all lease contracts. The Group has not yet determined the effect of adoption of IFRS 16 on its consolidated financial statements.

5.	Revenue and expenses

	(a)	Revenue

		The Group’s revenue by significant product types:

		Year ended
		December 31,
		2017			2016
Copper	$	925,074		$	835,470
Zinc		352,941			236,971
Gold		130,837			119,792
Silver		45,793			52,108
Other		13,974			2,719
		1,468,619			1,247,060
Treatment and refining charges		(106,066	)		(118,382	)

	$	1,362,553		$	1,128,678

		Included in revenue for the year ended December 31, 2017 are losses related to unrealized non-hedge derivative contracts of $6,089 (year ended December 31, 2016 - losses of $19,180).

	(b)	Depreciation and amortization

		Depreciation of property, plant and equipment and amortization of intangible assets are reflected in the consolidated income statements as follows:

		Year ended
		December 31,
		2017		2016
Cost of sales	$	292,880	$	298,630
Selling and administrative expenses		355		504

	$	293,235	$	299,134

HUDBAY MINERALS INC.

Notes to Consolidated Financial Statements

(in thousands of US dollars, except where otherwise noted)

Years ended December 31, 2017 and 2016

	(c)	Share-based payment expenses

		Share-based payment expenses are reflected in the consolidated income statements as follows:

		Cash-settled				Total share-based
		RSUs		DSUs		payment expense
Year ended December 31, 2017
Cost of sales	$	1,946	$	-	$	1,946
Selling and administrative expenses		9,667		2,982		12,649
Other operating expenses		1,324		-		1,324

	$	12,937	$	2,982	$	15,919
Year ended December 31, 2016
Cost of sales	$	860	$	-	$	860
Selling and administrative expenses		6,452		2,111		8,563
Other operating expenses		464		-		464

	$	7,776	$	2,111	$	9,887

	(d)	Employee benefits expense

		This table presents employee benefit expense recognized in the Group's consolidated income statements, including amounts transferred from inventory upon sale of goods:

		Year ended
		December 31,
		2017		2016
Current employee benefits	$	147,760	$	136,299
Profit-sharing plan expense		19,757		5,064
Share-based payments (notes 5c, 18, 23)
Cash-settled restricted share units		12,937		7,776
Cash-settled deferred share units		2,982		2,111
Employee share purchase plan		1,328		1,303
Post-employment pension benefits
Defined benefit plans		10,132		12,121
Defined contribution plans		2,443		1,061
Past service costs		10,442		-
Other post-retirement employee benefits		7,250		7,406
Termination benefits		419		1,810

	$	215,450	$	174,951

Manitoba has a profit sharing plan required by the collective bargaining agreement whereby 10% of Manitoba’s after tax profit (excluding provisions or recoveries for deferred income tax and deferred mining tax) for any given fiscal year will be distributed to all eligible employees in the Flin Flon/Snow Lake operations, with the exception of executive officers and key management personnel.

Peru has a profit sharing plan required by Peruvian law whereby 8% of Peru’s taxable income will be distributed to all employees within Peru’s operations.

HUDBAY MINERALS INC.

Notes to Consolidated Financial Statements

(in thousands of US dollars, except where otherwise noted)

Years ended December 31, 2017 and 2016

		The Group has an employee share purchase plan for executives and other eligible employees where participants may contribute between 1% and 10% of their pre-tax base salary to acquire Hudbay shares. The Group makes a matching contribution of 75% of the participant’s contribution.

		See note 19 for a description of the Group's pension plans and note 20 for the Group's other employee benefit plans.

	(e)	Other operating (income) expenses

		Year ended
		December 31,
		2017			2016
Regional costs	$	4,308		$	4,388
Constancia insurance recovery		(12,857	)		-
Realized gain on contingent consideration of Balmat		(6,400	)		-
Other expenses		2,509			6,198

	$	(12,440	)	$	10,586

During the first and third quarters of 2017, the Group received cash from its insurers and counterparties to partially indemnify the Group for losses suffered as a result of an incident in 2015 that caused damage to Line 2 of the Constancia processing facilities and a delay in commissioning the process plant.

During the fourth quarter of 2017, the Group realized a gain from contingent consideration received upon the sale of Balmat in 2015 as a result of certain project milestones being achieved.

HUDBAY MINERALS INC.

Notes to Consolidated Financial Statements

(in thousands of US dollars, except where otherwise noted)

Years ended December 31, 2017 and 2016

(f)

Finance income and expenses

		Year ended
		December 31,
		2017			2016
Finance income	$	(2,849	)	$	(2,792	)
Finance expense
Interest expense on long-term debt		87,819			108,767
Accretion on financial liabilities at amortized cost		1,302			1,316
Unwinding of discounts on provisions		4,159			2,586
Tender premium on 9.50% senior unsecured notes		-			47,718
Withholding taxes		9,641			10,083
Other finance expense		13,256			11,306
		116,177			181,776
Interest capitalized		(13,149	)		(14,705	)
		103,028			167,071
Other finance losses (gains)
Net foreign exchange loss (gain)		15,772			(489	)
Change in fair value of financial assets and liabilities at fair value through profit or loss:
Hudbay warrants		(1,051	)		2,111
Embedded derivatives		1,790			(1,238	)
Investments classified as held-for-trading		(80	)		(119	)
Reclassified from other comprehensive income on disposal of available-for-sale investments		(89	)		(1,475	)
Reclassified from other comprehensive income on impairment of available-for-sale investments		2,059			1,102
		18,401			(108	)

Net finance expense	$	118,580		$	164,171

Interest expense related to certain long-term debt has been capitalized to the Rosemont project until commercial production is reached.

Other finance expense relates primarily to non-interest facility fees on financing instruments.

HUDBAY MINERALS INC.

Notes to Consolidated Financial Statements

(in thousands of US dollars, except where otherwise noted)

Years ended December 31, 2017 and 2016

	(g)	Impairment

		During the year ended December 31, 2017, the Group recorded impairment losses of $11,320 for non-current assets. For the year ended December 31, 2016, the Group recorded no impairment losses.

		Manitoba
Pre-tax impairment to:
Property, plant & equipment (note 11)	$	11,320
Tax impact - (recovery)		(3,849	)

After-tax impairment charge	$	7,471

As a result of analyzing various scenario planning alternatives surrounding the Stall mill and New Britannia processing facilities, it was determined that certain assets that were previously purchased to build a new concentrator in Snow Lake, Manitoba are no longer useful. As a result, during the year ended December 31, 2017, the Group recognized an impairment loss of $11,320 related to these assets. The impairment was determined based on the difference between carrying value and fair value less costs of disposal.

The Group presented the impairment losses within the Manitoba segment in note 30.

The fair value measurements for the determination of impairment charges in their entirety are categorized as Level 2 based on the degree to which fair value inputs are observable and have a significant effect on the recorded fair value.

6.	Cash and cash equivalents

		Dec. 31, 2017		Dec. 31, 2016
Cash on hand and demand deposits	$	356,499	$	129,850
Short-term money market instruments with maturities of three months or less at acquisition date		-		17,014

	$	356,499	$	146,864

HUDBAY MINERALS INC.

Notes to Consolidated Financial Statements

(in thousands of US dollars, except where otherwise noted)

Years ended December 31, 2017 and 2016

7.	Trade and other receivables

		Dec. 31, 2017		Dec. 31, 2016
Current
Trade receivables	$	119,055	$	85,386
Embedded derivatives - provisional pricing (note 26c)		17,427		12,538
Statutory receivables		13,961		43,808
Receivable from joint venture partners		2,808		-
Other receivables		2,271		10,835
		155,522		152,567
Non-current
Taxes receivable		14,394		12,424
Receivable from joint venture partners		16,414		18,681
Other receivables		1,651		1,543
		32,459		32,648

	$	187,981	$	185,215

	As at December 31, 2017, $10,905 (December 31, 2016 - $42,273) of the current statutory receivables relates to refundable sales taxes in Peru that Hudbay Peru has paid on capital expenditures and operating expenses.

	The non-current receivable from joint venture partners is for the Group’s joint venture partner for the Rosemont project in Arizona.

8.	Inventories

		Dec. 31, 2017		Dec. 31, 2016
Current
Stockpile	$	13,468	$	9,368
Work in progress¹		14,552		9,100
Finished goods		71,906		54,583
Materials and supplies		41,756		39,413
		141,682		112,464
Non-current
Materials and supplies		5,809		4,537

	$	147,491	$	117,001

¹Represents zinc concentrate which will be processed further into cast zinc metal or sold directly.

The cost of inventories recognized as an expense, including depreciation, and included in cost of sales amounted to $855,141 for the year ended December 31, 2017 (year ended December 31, 2016 - $803,802).

HUDBAY MINERALS INC.

Notes to Consolidated Financial Statements

(in thousands of US dollars, except where otherwise noted)

Years ended December 31, 2017 and 2016

9.	Other financial assets

		Dec. 31, 2017		Dec. 31, 2016
Current
Derivative assets	$	2,841	$	3,397

Non-current
Available-for-sale investments		21,973		13,508
Investments at fair value through profit or loss		282		192
Restricted cash (note 26d)		206		17,148
		22,461		30,848

	$	25,302	$	34,245

Available-for-sale investments

Available-for-sale investments consist of investments in Canadian metals and mining companies, most of which are publicly traded. During the years ended December 31, 2017 and 2016, the Group recognized impairment losses on investments in listed shares and transferred pre-tax losses of $2,059 and $1,102, respectively, from the available-for-sale reserve within equity to the consolidated income statements (note 5f).

The following table summarizes the change in available-for-sale investments:

		Dec. 31, 2017			Dec. 31, 2016

Balance, beginning of year	$	13,508		$	9,206
Additions		5,265			2,857
Increase from remeasurement to fair value		2,507			3,598
Disposals		(229	)		(2,206	)
Effect of movements in exchange rates		922			53

Balance, end of year	$	21,973		$	13,508

HUDBAY MINERALS INC.

Notes to Consolidated Financial Statements

(in thousands of US dollars, except where otherwise noted)

Years ended December 31, 2017 and 2016

10.

Intangible assets - computer software

		Dec. 31, 2017		Dec. 31, 2016

Cost
Balance, beginning of year	$	16,998	$	16,179
Additions		1,203		407
Effects of movement in exchange rates		968		412
Balance, end of year		19,169		16,998

Accumulated amortization
Balance, beginning of year		10,384		7,320
Amortization for the year		2,541		2,882
Effects of movement in exchange rates		669		182
Balance, end of year		13,594		10,384

Net book value	$	5,575	$	6,614

11.

Property, plant and equipment

Exploration

and

Capital

evaluation

works in

Mining

Plant and

Dec. 31, 2017

assets

progress

properties

equipment

Total

Cost

Balance, beginning of year

15,015

844,759

1,775,432

2,368,658

5,003,864

Additions

7,000

156,807

26,830

190,637

Capitalized stripping and development

69,178

Decommissioning and restoration

5,509

5,101

10,661

Interest capitalized

13,149

Transfers and other movements

(79,671

)

79,671

Impairment

(11,320

)

(11,320

)

Disposals

(13

)

(1,600

)

(9,586

)

(11,199

)

Effects of movement in exchange rates

995

2,955

49,184

47,553

100,687

Other

6,814

455

7,354

Balance, end of year

23,010

933,531

1,897,788

2,518,682

5,373,011

Accumulated depreciation

Balance, beginning of year

523,460

614,581

1,138,041

Depreciation for the year

118,754

182,552

301,306

Disposals

(7,540

)

(7,540

)

Effects of movement in exchange rates

31,516

28,741

60,257

Other

(19

)

Balance, end of year

673,711

818,406

1,492,117

Net book value

23,010

933,531

1,224,077

1,700,276

3,880,894

HUDBAY MINERALS INC.

Notes to Consolidated Financial Statements

(in thousands of US dollars, except where otherwise noted)

Years ended December 31, 2017 and 2016

		Exploration
		and		Capital
		evaluation		works in			Mining		Plant and
Dec. 31, 2016		assets		progress			properties		equipment			Total

Cost
Balance, beginning of year	$	14,650	$	812,618		$	1,603,952	$	2,289,556		$	4,720,776
Additions		-		87,505			45,383		15,445			148,333
Capitalized stripping and
development		-		19,666			48,886		-			68,552
Decommissioning and restoration		-		(46	)		1,966		23,036			24,956
Interest capitalized		-		14,705			-		-			14,705
Transfers and other movements		-		(89,506	)		56,848		32,658			-
Disposals		-		(1,501	)		-		(11,089	)		(12,590	)
Effects of movement in exchange rates		365		1,334			18,382		18,897			38,978
Other		-		(16	)		15		155			154
Balance, end of year		15,015		844,759			1,775,432		2,368,658			5,003,864

Accumulated depreciation
Balance, beginning of year		-		-			394,098		436,402			830,500
Depreciation for the year		-		-			119,420		178,175			297,595
Disposals		-		-			-		(9,160	)		(9,160	)
Effects of movement in exchange rates		-		-			9,810		9,076			18,886
Other		-		-			132		88			220
Balance, end of year		-		-			523,460		614,581			1,138,041

Net book value	$	15,015	$	844,759		$	1,251,972	$	1,754,077		$	3,865,823

Refer to note 3i for a description of depreciation methods used by the Group and note 3i(iv) for depreciation rates of major classes of assets. Depreciation of property, plant and equipment and intangible assets related to producing properties is initially recognized in inventory and is then transferred to the cost of sales in the consolidated income statements as sales occur. Refer to note 5b for amounts recognized in the consolidated income statements.

For non-financial assets, management examined internal and external indicators of impairment or reversals. With the exception of certain mill assets currently stored in Winnipeg, Manitoba (refer to note 5g), no indicators of impairment or reversals of non-financial assets as at year ended December 31, 2017 were found.

HUDBAY MINERALS INC.

Notes to Consolidated Financial Statements

(in thousands of US dollars, except where otherwise noted)

Years ended December 31, 2017 and 2016

12.

Trade and other payables

		Dec. 31, 2017		Dec. 31, 2016
Trade payables	$	71,336	$	80,509
Accruals and payables		86,078		78,154
Accrued interest		34,848		4,300
Exploration and evaluation payables		186		64
Embedded derivatives - provisional pricing (note 26c)		373		86
Statutory payables		6,296		6,549

	$	199,117	$	169,662

	Accruals and payables include operational and capital costs and employee benefit amounts owing.

13.	Other liabilities

		Dec. 31, 2017		Dec. 31, 2016
Current
Provisions (note 18)	$	27,370	$	14,367
Pension liability (note 19)		19,401		24,635
Other employee benefits (note 20)		2,756		2,356
Unearned revenue		2,435		849

	$	51,962	$	42,207

14.

Other financial liabilities

		Dec. 31, 2017		Dec. 31, 2016
Current
Derivative liabilities	$	16,140	$	10,682
Warrants at fair value through profit and loss		6,961		-
Contingent consideration - gold price option		732		-
Other financial liabilities at amortized cost		2,630		2,813
Embedded derivatives		297		-
		26,760		13,495

Non-current
Contingent consideration - gold price option		-		570
Warrants at fair value through profit and loss		-		7,588
Other financial liabilities at amortized cost		19,938		20,185
Embedded derivatives		863		-
		20,801		28,343

	$	47,561	$	41,838

HUDBAY MINERALS INC.

Notes to Consolidated Financial Statements

(in thousands of US dollars, except where otherwise noted)

Years ended December 31, 2017 and 2016

	Other financial liabilities at amortized cost relate to agreements with communities near the Constancia operation which allow Hudbay to extract minerals over the useful life of the Constancia operation, carry out exploration and evaluation activities in the area and provide Hudbay with community support to operate in the region.

	The derivative liabilities include derivative and hedging transactions as well as warrants issued as consideration for the acquisition of Augusta Resource Corporation. Derivative liabilities are carried at their fair value with changes in fair value recorded to the consolidated income statements in other finance (gain) loss. The fair value of derivative and hedging transactions are determined based on internal valuation models and the fair value of warrants issued are determined based on the quoted market prices for the listed warrants. A total of 21,830,490 warrants were issued which entitle the holder to acquire a common share of the Company at a price of C$15.00 per share on, but not prior to, July 20, 2018. The Company, may, at its option, upon written notice to the warrant holders, settle the exercise of warrants for the in-the-money value, in cash, shares or a combination thereof.

	The purchase price of the acquisition of New Britannia Mine and Mill contained an option (European) that pays the seller $5,000 if the price of gold is equal to or above $1,400/oz on May 4, 2018. The option represents a financial liability and was recorded at fair value at the acquisition date of New Britannia and will be remeasured at each reporting date with the change in the fair value being recognized as unrealized gains or losses in finance income and expense.

15.	Finance lease obligations

		Dec. 31, 2017			Dec. 31, 2016
Total minimum lease payments	$	89,750		$	13,720
Effect of discounting		(5,177	)		(788	)
Present value of minimum lease payments		84,573			12,932
Less: current portion		(18,327	)		(3,172	)
		66,246			9,760
Minimum payments under finance leases
Less than 12 months		20,186			3,508
13-36 months		40,253			6,667
37-60 months		29,311			3,545
More than 60 months		-			-

	$	89,750		$	13,720

The Group has entered into equipment leases for its South American and Manitoba business units which expire between 2020 and 2022 and with interest rates between 1.95% to 4.45%, per annum. The Group has the option to purchase the equipment and vehicles leased at the end of the terms of the leases. The Group’s obligations under finance leases are secured by the lessor’s title to the leased assets. The present value of the net minimum lease payments has been recognized as a finance lease asset, which was included as a non-cash addition to property plant and equipment, and a corresponding amount as a finance lease obligation. The fair value of the finance lease liabilities approximates their carrying amount.

During the third quarter of 2017, the Peru business unit refinanced its equipment finance facility (note 16b) by entering into a sale and leaseback transaction with terms as described above. The transaction resulted in cash proceeds of $67,275 (note 29b), the majority of which was used to repay and extinguish the equipment finance facility. As the leaseback is classified as a finance lease, there was no change in the carrying value of

HUDBAY MINERALS INC.

Notes to Consolidated Financial Statements

(in thousands of US dollars, except where otherwise noted)

Years ended December 31, 2017 and 2016

	the heavy mobile equipment and no impacts to the consolidated income statements.

16.	Long-term debt

	Long-term debt is comprised of the following:

		Dec. 31, 2017			Dec. 31, 2016
Senior unsecured notes (a)	$	987,903		$	986,574
Equipment finance facility (b)		-			50,267
Senior secured revolving credit facilities (c)		-			202,075
Less: Unamortized transaction costs - revolving credit facilities (d)		(8,328	)		(6,752	)
		979,575			1,232,164
Less: current portion		-			(16,490	)

	$	979,575		$	1,215,674

(a)

Senior unsecured notes

Balance, January 1, 2016	$	917,329
Addition to Principal, net of transaction costs		987,671
Payments made		(920,000	)
Change in fair value of embedded derivative (prepayment option)		(1,146	)
Write-down of unamortized transaction costs		2,216
Accretion of transaction costs and premiums		504
Balance, December 31, 2016	$	986,574
Transaction costs		(133	)
Change in fair value of embedded derivative (prepayment option)		450
Accretion of transaction costs and premiums		1,012

Balance, December 31, 2017	$	987,903

On December 12, 2016 and December 28, 2016, the Group redeemed for cash all of its outstanding $920,000 aggregate principal amount of 9.50% senior unsecured notes due 2020. The unamortized transaction costs of $2,216 were expensed upon extinguishment of the Group’s 9.50% senior unsecured notes.

On December 12, 2016, the Group completed an offering of $1,000,000 aggregate principal amount of senior notes in two series: (i) a series of 7.25% senior notes due 2023 in an aggregate principal amount of $400,000 and (ii) a series of 7.625% senior notes due 2025 in an aggregate principal amount of $600,000. The senior notes are guaranteed on a senior unsecured basis by substantially all of the Company’s subsidiaries, other than HudBay (BVI) Inc. and certain excluded subsidiaries, which include the Company’s subsidiaries that own an interest in the Rosemont project and any newly formed or acquired subsidiaries that primarily hold or may develop non-producing mineral assets that are in the pre-construction phase of development.

HUDBAY MINERALS INC.

Notes to Consolidated Financial Statements

(in thousands of US dollars, except where otherwise noted)

Years ended December 31, 2017 and 2016

(b)

Equipment finance facility

Balance, January 1, 2016	$	66,521
Transaction costs		(1,013	)
Payments made		(16,490	)
Accretion of transaction costs		1,249
Balance, December 31, 2016	$	50,267
Transaction costs		(326	)
Payments made		(54,364	)
Write-down of unamortized transaction costs		3,552
Accretion of transaction costs		871

Balance, December 31, 2017	$	-

The equipment finance facility is reflected in the consolidated balance sheets as follows:

		Dec. 31,		Dec. 31,
		2017		2016
Current	$	-	$	16,490
Non-current		-		33,777

	$	-	$	50,267

		The equipment finance facility was repaid and extinguished during the third quarter of 2017 resulting in the write-down of unamortized transaction costs.

	(c)	Senior secured revolving credit facilities

Balance, January 1, 2016	$	297,075
Addition to Principal, net of transaction costs		65,000
Payments made		(160,000	)
Balance, December 31, 2016	$	202,075
Addition to Principal		25,000
Payments made		(227,075	)

Balance, December 31, 2017	$	-

On July 14, 2017, the Group entered into amendments to its two senior credit facilities to secure both facilities with substantially all of the Group’s assets other than assets related to the Rosemont project, amend the financial covenants, extend the maturity dates from March 31, 2019 to July 14, 2021 and reduce the interest rate from LIBOR plus 4.50% to LIBOR plus 3.00%, based on financial results for the twelve months ended June 30, 2017. The two facilities have substantially similar terms and conditions.

HUDBAY MINERALS INC.

Notes to Consolidated Financial Statements

(in thousands of US dollars, except where otherwise noted)

Years ended December 31, 2017 and 2016

(d)

Unamortized transaction costs - revolving credit facilities

Balance, January 1, 2016	$	6,045
Accretion of transaction costs		(4,272	)
New transaction costs		4,979
Balance, December 31, 2016	$	6,752
Accretion of transaction costs		(3,291	)
New transaction costs		4,867

Balance, December 31, 2017	$	8,328

17.	Deferred revenue

	On August 8, 2012 and November 4, 2013, the Group entered into precious metals stream transactions with Wheaton whereby the Group has received aggregate deposit payments of $885,000 against delivery of (i) 100% of payable gold and silver from the 777 mine until the end of 2016, and delivery of 50% of payable gold and 100% of payable silver for the remainder of the 777 mine life; and (ii) 100% of payable silver and 50% of payable gold from the Constancia mine.

	In addition to the deposit payments, as gold and silver is delivered to Wheaton, the Group receives cash payments equal to the lesser of (i) the market price and (ii) $400 per ounce (for gold) and $5.90 per ounce (for silver), subject to 1% annual escalation after three years.

	The Group recorded the deposits received as deferred revenue and recognizes amounts in revenue as gold and silver are delivered to Wheaton. The Group determines the amortization of deferred revenue to the consolidated income statements on a per unit basis using the estimated total number of gold and silver ounces expected to be delivered to Wheaton over the life of the 777 and Constancia operations. The Group estimates the current portion of deferred revenue based on deliveries anticipated over the next twelve months.

	In February 2010, Hudbay Arizona entered into a precious metals stream transaction with Wheaton whereby the Group will receive deposit payments of $230,000 against delivery of 100% of the payable silver and gold from the Rosemont project. The deposit will be payable upon the satisfaction of certain conditions precedent, including the receipt of permits for the Rosemont project and the commencement of construction. In addition to the deposit payments, as gold and silver is delivered to Wheaton, the Group receives cash payments equal to the lesser of (i) the market price and (ii) $450 per ounce (for gold) and $3.90 per ounce (for silver), subject to 1% annual escalation after three years. To date, no such deposit has been received under the terms of this contract.

HUDBAY MINERALS INC.

Notes to Consolidated Financial Statements

(in thousands of US dollars, except where otherwise noted)

Years ended December 31, 2017 and 2016

The following table summarizes changes in deferred revenue:

Balance, January 1, 2016	$	597,260
Recognition of revenue		(65,762	)
Effects of changes in foreign exchange		6,354
Balance, December 31, 2016	$	537,852
Recognition of revenue		(48,958	)
Effects of changes in foreign exchange		9,150

Balance, December 31, 2017	$	498,044

Deferred revenue is reflected in the consolidated balance sheets as follows:

		Dec. 31, 2017		Dec. 31, 2016
Current	$	49,907	$	65,619
Non-current		448,137		472,233

	$	498,044	$	537,852

18.

Provisions

Decommis-

sioning,

restoration

Deferred

Restricted

and similar

share units

share units¹

liabilities

(note 23a

)

(note 23a

)

Other

Total

Balance, January 1, 2017

177,296

3,933

11,052

1,788

194,069

Net additional provisions made

6,485

868

7,327

202

14,882

Amounts used

(69

)

(638

)

(5,491

)

(937

)

(7,135

)

Unwinding of discount (note 5f)

4,159

Effect of change in discount rate

2,658

Effect of foreign exchange

9,512

346

1,194

11,147

Effect of change in share price

2,114

5,327

287

7,728

Balance, December 31, 2017

200,041

6,623

19,409

1,435

227,508

¹Certain amounts relating to the Arizona segment are capitalized.

Provisions are reflected in the consolidated balance sheets as follows:

Current (note 13)

2,344

6,623

17,119

1,284

27,370

Non-current

197,697

2,290

151

200,138

200,041

6,623

19,409

1,435

227,508

HUDBAY MINERALS INC.

Notes to Consolidated Financial Statements

(in thousands of US dollars, except where otherwise noted)

Years ended December 31, 2017 and 2016

		Decommis-
		sioning,
		restoration			Deferred			Restricted
		and similar			share units			share units¹
		liabilities			(note 23a	)		(note 23a	)		Other			Total
Balance, January 1, 2016	$	147,035		$	2,803		$	4,388		$	-		$	154,226
Net additional provisions made		30,038			1,018			6,348			1,922			39,326
Amounts used		(894	)		(1,078	)		(2,736	)		(430	)		(5,138	)
Unwinding of discount (note 5f)		2,586			-			-			-			2,586
Effect of change in discount rate		(4,189	)		-			-			-			(4,189	)
Effect of foreign exchange		2,720			97			(47	)		20			2,790
Effect of change in share price		-			1,093			3,099			276			4,468

Balance, December 31, 2016	$	177,296		$	3,933		$	11,052		$	1,788		$	194,069

¹Certain amounts relating to the Arizona segment are capitalized.

Provisions are reflected in the consolidated balance sheets as follows:

Current (note 13)	$	1,054	$	3,933	$	8,451	$	929	$	14,367
Non-current		176,242		-		2,601		859		179,702

	$	177,296	$	3,933	$	11,052	$	1,788	$	194,069

Decommissioning, restoration and similar liabilities are remeasured at each reporting date to reflect changes in discount rates, which can significantly affect the liabilities.

Decommissioning, restoration and similar liabilities

The Group's decommissioning, restoration and similar liabilities relate to the rehabilitation and closure of currently operating mines and metallurgical plants, development-phase properties and closed properties. The amount of the provision has been recorded based on estimates and assumptions that management believes are reasonable; however, actual decommissioning and restoration costs may differ from expectations.

During the year ended December 31, 2017 additional provisions were recognized as a result of an increased pit footprint, as per mine plan, at the Constancia operation.

During the year ended December 31, 2016 additional provisions were recognized as a result of an increased pit footprint, as per mine plan, at the Constancia operation and an updated closure plan for a site in the Manitoba business unit. In addition, updates to certain closure plans in Manitoba resulted in increases in expected cash outflows.

The Group's decommissioning and restoration liabilities relate mainly to its Manitoba operations. Management anticipates that significant decommissioning and restoration activities will take place near the time closure of the mining and processing facilities, anticipated to occur from 2020 for Flin Flon operations and up to 2028 for Snow Lake operations (including the Lalor mine). However, these provisions also reflect estimated post-closure cash flows that extend to 2099 for ongoing monitoring and water treatment requirements. Management anticipates most decommissioning and restoration activities for the Constancia operation will occur from 2035 to 2040.

HUDBAY MINERALS INC.

Notes to Consolidated Financial Statements

(in thousands of US dollars, except where otherwise noted)

Years ended December 31, 2017 and 2016

	These estimates have been discounted to their present value at rates ranging from 1.43% to 2.74% per annum (2016 - 0.63% to 3.07%), using pre-tax risk-free interest rates that reflect the estimated maturity of each specific liability.

19.	Pension obligations

	The Group maintains non-contributory and contributory defined benefit pension plans for certain of its employees.

	The Group uses a December 31 measurement date for all of its plans. For the Group's significant plans, the most recent actuarial valuations filed for funding purposes were performed during 2017 using data as at December 31, 2016. For these plans, the next actuarial valuation required for funding purposes will be performed during 2018 as at December 31, 2017.

	Movements in the present value of the defined benefit obligation in the current and previous years were as follows:

		Year ended
		December 31,
		2017			2016
Opening defined benefit obligation	$	349,165		$	337,004
Current service cost		10,707			10,768
Past service cost related to the new collective bargaining agreement		10,442			-
Interest cost		12,602			13,415
Benefits paid from plan		(33,721	)		(32,644	)
Benefits paid from employer		(999	)		(1,424	)
Participant contributions		93			93
Effects of movements in exchange rates		24,440			10,348
Remeasurement actuarial (gains)/losses:
Arising from changes in demographic assumptions		1,598			-
Arising from changes in financial assumptions		9,402			14,955
Arising from experience adjustments		(675	)		(3,350	)

Closing defined benefit obligation	$	383,054		$	349,165

The defined benefit obligation closing balance, by member group, is as follows:

		Dec. 31, 2017		Dec. 31, 2016
Active members	$	250,965	$	235,815
Deferred members		4,304		3,636
Retired members		127,785		109,714

Closing defined benefit obligation	$	383,054	$	349,165

HUDBAY MINERALS INC.

Notes to Consolidated Financial Statements

(in thousands of US dollars, except where otherwise noted)

Years ended December 31, 2017 and 2016

Movements in the fair value of the pension plan assets in the current and previous years were as follows:

		Year ended
		December 31,
		2017			2016
Opening fair value of plan assets:	$	296,151		$	279,523
Interest income		11,005			11,634
Remeasurements losses:
Return on plan assets (excluding amounts included in net interest expense)		24,437			2,905
Contributions from the employer		22,484			26,198
Employer direct benefit payments		999			1,424
Contributions from plan participants		93			93
Benefit payment from employer		(999	)		(1,424	)
Administrative expenses paid from plan assets		(80	)		(77	)
Benefits paid		(33,721	)		(32,644	)
Effects of changes in foreign exchange rates		21,063			8,519

Closing fair value of plan assets	$	341,432		$	296,151

The amount included in the consolidated balance sheets arising from the entity's obligation in respect of its defined benefit plans is as follows:

		Dec. 31, 2017			Dec. 31, 2016
Present value of funded defined benefit obligation	$	365,655		$	333,720
Fair value of plan assets		(341,432	)		(296,151	)
Present value of unfunded defined benefit obligation		17,399			15,445

Net liability arising from defined benefit obligation	$	41,622		$	53,014

Reflected in the consolidated balance sheets as follows:

		Dec. 31, 2017		Dec. 31, 2016
Pension obligation - current (note 13)	$	19,401	$	24,635
Pension obligation - non-current		22,221		28,379

Total pension obligation	$	41,622	$	53,014

HUDBAY MINERALS INC.

Notes to Consolidated Financial Statements

(in thousands of US dollars, except where otherwise noted)

Years ended December 31, 2017 and 2016

Pension expense is as follows:

		Dec. 31, 2017		Dec. 31, 2016
Service costs:
Current service cost	$	10,707	$	10,768
Past service cost and loss from settlements		10,442		-
Total service cost		21,149		10,768
Net interest expense		1,597		1,781
Administration cost		80		77

Defined benefit pension expense	$	22,826	$	12,626


Defined contribution pension expense	$	908	$	829

Remeasurement on the net defined benefit liability:

		Dec. 31, 2017			Dec. 31, 2016
(Return)/loss on plan assets (excluding amounts included in net interest expense)	$	(24,437	)	$	(2,905	)
Actuarial gains arising from changes in demographic assumptions		1,598			-
Actuarial losses/(gains) arising from changes in financial assumptions		9,402			14,955
Actuarial gains arising from experience adjustments		(675	)		(3,350	)

Defined benefit loss/(gain) related to remeasurement	$	(14,112	)	$	8,700


Total pension cost	$	9,622		$	22,155

Pension amounts recognized include those directly related to production of inventory; such amounts are recognized initially as costs of inventory and are expensed in the consolidated income statements within cost of sales upon sale of the inventory.

The current service cost, the interest cost and administration cost for the year are included in the employee benefits expense. The remeasurement of the net defined benefit liability is included in OCI.

Past service costs in 2017 relate to the new collective bargaining agreements in Manitoba.

HUDBAY MINERALS INC.

Notes to Consolidated Financial Statements

(in thousands of US dollars, except where otherwise noted)

Years ended December 31, 2017 and 2016

The defined benefit pension plans typically expose the Group to actuarial risks such as: investment risk, interest rate risk, longevity risk and salary risk.

Investment risk	The present value of the liabilities for the defined benefit plans is calculated using a discount rate determined by reference to high quality corporate bond yields; if the return on plan assets is below this rate, it will create a plan deficit. The Group's primary quantitative investment objectives are maximization of the long term real rate of return, subject to an acceptable degree of investment risk and preservation of principal. Risk tolerance is established through consideration of several factors including past performance, current market condition and the funded status of the plan.
Interest risk	A decrease in the bond interest rate will increase the pension plan liabilities; however, this will be partially offset by an increase in the return on the plan's debt investments.
Longevity risk	The present value of the defined benefit plans liabilities is calculated by reference to the best estimate of the mortality of plan participants both during and after their employment. An increase in the life expectancy of the plan participants will increase the pension plans liabilities.
Salary risk	The present value of the defined benefit plans liabilities for some of the pension plans is calculated by reference to the future salaries of plan participants. As such, an increase in the salary of the plan participants will increase the plans' liabilities.

The principal assumptions used for the purposes of the actuarial valuations were as follows:

	2017	2016
Defined benefit cost:
Discount rate - benefit obligations	3.69 %	4.08 %
Discount rate - service cost	3.82 %	4.25 %
Expected rate of salary increase¹	2.75 %	3.00 %
Average longevity at retirement age for current pensioners (years)²:
Males	20.9	20.8
Females	23.3	23.3

	2017	2016
Defined benefit obligation:
Discount rate	3.45 %	3.69 %
Expected rate of salary increase¹	2.75 %	2.75 %
Average longevity at retirement age for current pensioners (years)²:
Males	21.0	20.9
Females	23.7	23.3
Average longevity at retirement age for current employees (future pensioners) (years)^2:
Males	22.9	22.2
Females	25.5	24.5

¹Plus merit and promotional scale based on member's age
² CPM2014 Priv with CPM-B projection scale.

HUDBAY MINERALS INC.

Notes to Consolidated Financial Statements

(in thousands of US dollars, except where otherwise noted)

Years ended December 31, 2017 and 2016

The Group reviews the assumptions used to measure pension costs (including the discount rate) on an annual basis. Economic and market conditions at the measurement date affect these assumptions from year to year. In determining the discount rate, the Group considers the duration of the pension plan liabilities.

Significant actuarial assumptions for the determination of the defined benefit obligation are discount rate, expected salary increase and mortality. The sensitivity analysis below has been determined based on reasonably possible changes of the respective assumptions occurring at the end of the reporting periods, while holding other assumptions constant:

	-	If the discount rate is 50 basis points higher (lower), the defined benefit obligation would decrease by $27,622 (increase by $31,183).
	-	If the expected salary growth increases (decreases) by 1%, the defined benefit obligation would increase by $3,893 (decrease $3,533).
	-	If the life expectancy increases (decreases) by one year for both men and women, the defined benefit obligation would increase by $5,804 (decrease by $5,903)

The sensitivity analysis presented above may not be representative of the actual change in the defined benefit obligation as it is unlikely that the change in assumptions would occur in isolation of one another as some of the assumptions may be correlated.

Furthermore, in presenting the above sensitivity analysis, the present value of the defined benefit obligation has been calculated using the projected unit credit method at the end of the reporting period, which is the same as that applied in calculating the defined benefit obligation liability recognised in the consolidated balance sheets.

The Group’s main pension plans are registered federally with the Office of the Superintendent of Financial Institution and with the Canada Revenue Agency. The registered pension plans are governed in accordance with the Pension Benefits Standards Act and the Income Tax Act. The sponsor contributes the amount needed to maintain adequate funding as dictated by the prevailing regulations.

Expected employer contribution to the pension plans for the fiscal year ending December 31, 2018 is $19,401.

The average duration of the pension obligation at December 31, 2017 is 15.8 years (2016 – 15.7 years). This number can be broken down as follows:

	-	Active members: 18.4 years (2016: 17.1 years)
	-	Deferred members: 26.9 years (2016: 23.5 years)
	-	Retired members: 10.2 years (2016: 12.4 years)

Asset-Liability-Matching studies are performed periodically to analyse the investment policies in terms of risk-and-return profiles.

The actual return on plan assets in 2017 was 11.5% (2016: 5.01%)

The pension plans do not invest directly in either securities or property/real estate of the Group.

With the exception of fixed income investments, the plan assets are actively managed by investment managers, with the goal of attaining returns that potentially outperform passively managed investments. Within appropriate limits, the actual composition of the invested funds may vary from the prescribed investment mix.

HUDBAY MINERALS INC.

Notes to Consolidated Financial Statements

(in thousands of US dollars, except where otherwise noted)

Years ended December 31, 2017 and 2016

The following is a summary of the fair value classification levels for investment:

December 31, 2017

Level 1

Level 2

Level 3

Total

Investments:

Money market instruments

4,625

Pooled equity funds

116,027

Pooled fixed income funds

189,964

Alternative investment funds

30,699

Balanced funds

117

120,652

220,780

341,432

December 31, 2016		Level 1		Level 2		Level 3		Total
Investments:
Money market instruments	$	4,515	$	-	$	-	$	4,515
Pooled equity funds		121,103		-		-		121,103
Pooled fixed income funds		-		143,489		-		143,489
Alternative investment funds		-		26,404		-		26,404
Balanced funds		-		640		-		640

	$	125,618	$	170,533	$	-	$	296,151

HUDBAY MINERALS INC.

Notes to Consolidated Financial Statements

(in thousands of US dollars, except where otherwise noted)

Years ended December 31, 2017 and 2016

20.	Other employee benefits

	The Group sponsors both other long-term employee benefit plans and non-pension post-employment benefits plans and uses a December 31 measurement date. These obligations relate mainly to commitments for post-retirement health benefits. Information about the Group's post-employment and other long-term employee benefits is as follows:

	Movements in the present value of the defined benefit obligation in the current and previous years were as follows:

		Year ended
		December 31,
		2017			2016
Opening defined benefit obligation	$	89,005		$	80,259
Current service cost¹		2,614			2,579
Interest cost		3,567			3,367
Effects of movements in exchange rates		7,026			2,197
Remeasurement actuarial (gains)/losses:
Arising from changes in demographic assumptions		1,172			-
Arising from changes in financial assumptions		6,761			2,712
Arising from experience adjustments		(120	)		(160	)
Benefits paid		(2,196	)		(1,949	)

Closing defined benefit obligation	$	107,829		$	89,005

¹Includes remeasurement of other long term employee benefits

The defined benefit obligation closing balance, by group member, is as follows:

		Dec 31, 2017		Dec 31, 2016
Active members	$	64,460	$	52,611
Inactive members		43,369		36,394

Closing defined benefit obligation	$	107,829	$	89,005

HUDBAY MINERALS INC.

Notes to Consolidated Financial Statements

(in thousands of US dollars, except where otherwise noted)

Years ended December 31, 2017 and 2016

Movements in the fair value of defined benefit amounts in the current and previous years were as follows:

		Dec. 31, 2017			Dec. 31, 2016
Employer contributions	$	2,196		$	1,949
Benefits paid		(2,196	)		(1,949	)

Closing fair value of assets	$	-		$	-

The non-pension employee benefit plan obligations are unfunded.

Reconciliation of assets and liabilities recognized in the consolidated balance sheets:

		Dec. 31,		Dec. 31,
		2017		2016
Unfunded benefit obligation	$	107,829	$	89,005
Vacation accrual and other - non-current		3,324		2,624

Net liability	$	111,153	$	91,629

Reflected in the consolidated balance sheets as follows:

		Dec. 31,		Dec. 31,
		2017		2016
Other employee benefits liability - current (note 13)	$	2,756	$	2,356
Other employee benefits liability - non-current		108,397		89,273

Net liability	$	111,153	$	91,629

HUDBAY MINERALS INC.

Notes to Consolidated Financial Statements

(in thousands of US dollars, except where otherwise noted)

Years ended December 31, 2017 and 2016

Other employee future benefit expense includes the following:

		Dec. 31, 2017		Dec. 31, 2016
Current service cost¹	$	2,614	$	2,579
Net interest cost		3,567		3,367

Components recognized in consolidated income statements	$	6,181	$	5,946

¹ Includes remeasurement of other long term employee benefits

		Dec. 31, 2017			Dec. 31, 2016
Remeasurement on the net defined benefit liability:
Actuarial (gains)/losses arising from changes in demographic assumptions	$	1,172		$	-
Actuarial (gains)/losses arising from changes in financial assumptions		6,761			2,712
Actuarial gains arising from changes experience adjustments		(120	)		(160	)

Components recognized in statements of comprehensive income	$	7,813		$	2,552


Total other employee future benefit cost	$	13,994		$	8,498

Other employee benefit amounts recognized include those directly related to production of inventory; such amounts are recognized initially as costs of inventory and are expensed in the consolidated income statements within cost of sales upon sale of the inventory.

HUDBAY MINERALS INC.

Notes to Consolidated Financial Statements

(in thousands of US dollars, except where otherwise noted)

Years ended December 31, 2017 and 2016

	2017	2016
Defined benefit cost:
Discount rate	4.03 %	4.19 %
Initial weighted average health care trend rate	6.13 %	6.28 %
Ultimate weighted average health care trend rate	4.00 %	4.00 %
Average longevity at retirement age for current pensioners (years)¹:
Males	21.6	21.6
Females	24.1	24.0

	2017	2016
Defined benefit obligation:
Discount rate	3.64 %	4.03 %
Initial weighted average health care trend rate	5.97 %	6.13 %
Ultimate weighted average health care trend rate	4.00 %	4.00 %
Average longevity at retirement age for current pensioners (years):
Males	21.0	21.6
Females	23.7	24.1
Average longevity at retirement age for current employees (future pensioners) (years):
Males	22.9	23.0
Females	25.5	25.3

¹ CPM2014 Priv with CPM-B projection scale.

The Group reviews the assumptions used to measure other employee benefit costs (including the discount rate) on an annual basis.

The other employee benefit costs typically expose the Group to actuarial risks such as: interest rate risk, health care cost inflation risk and longevity risk.

Interest risk	A decrease in the bond interest rate will increase the plan liabilities.
Health care cost inflation risk	The majority of the plan's benefit obligations are linked to health care cost inflation and higher inflation will lead to higher liabilities.
Longevity risk	The majority of the plans' benefit liability is calculated by reference to the best estimate of the mortality of plan participants both during and after their employment. An increase in the life expectancy of the plan participants will increase the plans liabilities. This is particularly significant for benefits subject to health care cost inflation where increases in inflation result in higher sensitivity to changes in life expectancy.

The sensitivity analyses below have been determined based on reasonably possible changes of the respective assumptions occurring at the end of the reporting period, while holding other assumptions constant:

	-	If the discount rate is 50 basis points higher (lower), the defined benefit obligation would decrease by $9,095 (increase by $10,440).
	-	If the health care cost assumption increases (decreases) by 1%, the defined benefit obligation would increase by $21,821 (decrease by $16,888).
	-	If the life expectancy increases (decreases) by one year for both men and women, the defined benefit obligations would increase by $3,917 (decrease by $3,880).

HUDBAY MINERALS INC.

Notes to Consolidated Financial Statements

(in thousands of US dollars, except where otherwise noted)

Years ended December 31, 2017 and 2016

The average duration of the non pension post employment obligation at December 31, 2017 is 18.9 years (2016: 18.1 years). This number can be broken down as follows:

	-	Active members: 22.8 years (2016: 22.1 years)
	-	Inactive members: 13.1 years (2016: 12.7 years)

21.	Income and mining taxes

	(a)	Tax expense (recoveries):

		The tax expense (recoveries) is applicable as follows:

		Year ended
		December 31,
		2017			2016
Current
Income taxes:
Canada	$	5,970		$	7,000
Peru		24,523			-
Mining Taxes:
Canada		4,744			1,309
Peru		14,706			8,971
		49,943			17,280
Deferred
Income taxes (recoveries) - origination, revaluation and/or
reversal of temporary differences:
Canada		2,636			(24,013	)
Peru		30,721			39,350
United States		(46,908	)		5,617
Mining taxes (recoveries) - origination, revaluation and/or
reversal of temporary differences:
Canada		467			3,739
Peru		(613	)		(1,441	)
Adjustments in respect of prior years		(1,417	)		266
		(15,114	)		23,518
	$	34,829		$	40,798

Adjustments in respect of prior years refers to amounts changing due to the filing of tax returns and assessments from government authorities.

HUDBAY MINERALS INC.

Notes to Consolidated Financial Statements

(in thousands of US dollars, except where otherwise noted)

Years ended December 31, 2017 and 2016

(b)

Deferred tax assets and liabilities:

		Dec. 31, 2017			Dec. 31, 2016
Deferred income tax asset:
Canada	$	35,989		$	79,483

Deferred income tax liability:
Canada		-			(34,379	)
Peru		(177,519	)		(149,351	)
United States		(107,691	)		(154,600	)
Deferred mining tax liability:
Canada		(5,615	)		(4,706	)
Peru		(11,267	)		(11,880	)
		(302,092	)		(354,916	)


Net deferred tax liability balance	$	(266,103	)	$	(275,433	)

As of January 1, 2017 the deferred tax assets and deferred tax liabilities attributable to Canada are now disclosed as a net deferred tax asset. This follows from the amalgamation between HudBay Minerals Inc. and its former subsidiaries, Hudson Bay Mining and Smelting Co., Limited (“HBMS”) and Hudson Bay Exploration and Development Company Limited.

(c)

Changes in deferred tax assets and liabilities:

		Year ended			Year ended
		Dec. 31, 2017			Dec. 31, 2016
Net deferred tax liability balance, beginning of year	$	(275,433	)	$	(253,859	)
Deferred income tax recovery (expense)		15,032			(21,028	)
Deferred mining tax recovery (expense)		82			(2,490	)
OCI transactions		(3,845	)		2,198
Items charged directly to equity		2,238			-
Foreign currency translation on the deferred tax liability		(4,177	)		(254	)

Net deferred tax liability balance, end of year	$	(266,103	)	$	(275,433	)

	(d)	Reconciliation to statutory tax rate:

		As a result of its mining operations, the Group is subject to both income and mining taxes. Generally, most expenditures incurred are deductible in computing income tax, whereas mining tax legislation, although based on a measure of profitability from carrying on mining operations, is more restrictive in respect of the deductions permitted in computing income subject to mining tax. These restrictions include costs unrelated to mining operations as well as deductions for financing expenses, such as interest and royalties. In addition, income unrelated to carrying on mining operations is not subject to mining tax.

		A reconciliation between tax expense and the product of accounting profit multiplied by the Group’s statutory income tax rate for the years ended December 31, 2017 and 2016 is as follows:

HUDBAY MINERALS INC.

Notes to Consolidated Financial Statements

(in thousands of US dollars, except where otherwise noted)

Years ended December 31, 2017 and 2016

		Year ended
		December 31,
		2017			2016
Statutory tax rate		27.00%			27.00%

Tax expense at statutory rate	$	53,656		$	1,513
Effect of:
Deductions related to mining taxes		(6,075	)		(3,223	)
Adjusted income taxes		47,581			(1,710	)
Mining tax expense		19,367			12,771
		66,948			11,061

Permanent differences related to:
Capital items		1,462			401
Other income tax permanent differences		338			262
Impact of remeasurement on decommissioning liability		15,290			13,803
Temporary income tax differences not recognized		10,015			8,598
Impact related to differences in tax rates in foreign operations		4,605			2,250
Impact of changes to statutory tax rate		(52,855	)		7,960
Foreign exchange on non-monetary items		(9,387	)		(3,433	)
Impact related to tax assessments and tax return amendments		(1,587	)		(104	)

Tax expense	$	34,829		$	40,798

The impact of changes to statutory tax rates reflects the Tax Cuts and Jobs Act enacted in the U.S that reduced the corporate statutory tax rate.

HUDBAY MINERALS INC.

Notes to Consolidated Financial Statements

(in thousands of US dollars, except where otherwise noted)

Years ended December 31, 2017 and 2016

	(e)	Income tax effect of temporary differences - recognized:

		The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2017 and 2016 are as follows:

		Balance sheet						Income Statement
								Year ended			Year ended
		Dec. 31,			Dec. 31,			Dec. 31,			Dec. 31,
		2017			2016			2017			2016
Deferred income tax (liability) asset/ expense (recovery)
Property, plant and equipment	$	(102,053	)	$	1,163		$	103,216		$	(255	)
Pension obligation		10,034			942			(12,937	)		(215	)
Other employee benefits		16,742			2,972			(13,770	)		(1,471	)
Non-capital losses		91,495			59,034			(32,461	)		(24,098	)
Share issue and debt costs		15,707			16,319			2,850			(14,858	)
Other		4,064			(947	)		(8,810	)		2,084
Deferred income tax asset / expense (recovery)		35,989			79,483			38,088			(38,813	)
Deferred income tax liability (asset)/ (recovery) expense
Property, plant and equipment		313,581			417,060			(103,479	)		22,810
Pension obligation		-			(12,150	)		12,150			4,556
Other employee benefits		192			(14,806	)		14,998			(2,111	)
Asset retirement obligations		(789	)		(11,357	)		10,568			4,701
Non-capital losses		(27,539	)		(46,500	)		18,961			21,567
Other		(235	)		6,083			(6,318	)		8,318
Deferred income tax liability/ (recovery) expense		285,210			338,330			(53,120	)		59,841
Deferred income tax liability/ (recovery) expense	$	(249,221	)	$	(258,847	)	$	(15,032	)	$	21,028

The above reconciling items are disclosed at the tax rates that apply in the jurisdiction where they have arisen.

HUDBAY MINERALS INC.

Notes to Consolidated Financial Statements

(in thousands of US dollars, except where otherwise noted)

Years ended December 31, 2017 and 2016

	(f)	Income tax temporary differences - not recognized:

		The Group has not recognized a deferred tax asset in respect of the following deductible income tax temporary differences:

		Dec. 31,		Dec. 31,
		2017		2016
Property, plant and equipment	$	32,089	$	16,690
Capital losses		223,916		109,670
Other employee benefits		78,871		52,093
Asset retirement obligations		174,448		135,481
Non-capital losses		104,171		99,737

Temporary differences not recognized	$	613,495	$	413,671

		The deductible temporary differences excluding non-capital losses do not expire under current tax legislation.

		The Canadian non-capital losses were incurred between 2006 and 2017 and expire between 2026 and 2037. The Group incurred United States net operating losses between 2004 and 2017 which have a twenty year carry forward period. Peruvian net operating losses were incurred from 2013 to 2016 which have a four year carry forward period.

	(g)	Mining tax effect of temporary differences:

		The tax effects of temporary differences that give rise to significant portions of the deferred mining tax assets and liabilities at December 31, 2017 and December 31, 2016 are as follows:

		Dec. 31,			Dec. 31,
Canada		2017			2016
Property, plant and equipment	$	(5,615	)	$	(4,706	)

		Dec. 31,			Dec. 31,
Peru		2017			2016
Property, plant and equipment	$	(11,267	)	$	(11,880	)

		For the year ended December 31, 2017, the Group had unrecognized deferred mining tax assets of approximately $8,740 (December 31, 2016 - $7,610)

	(h)	Unrecognized taxable temporary differences associated with investments:

		There are no taxable temporary differences associated with investments in subsidiaries, associates and joint ventures, for which a deferred tax liability has not been recognized.

	(i)	Taxes receivable/payable:

		The timing of payments results in significant variances in period-to-period comparisons of the tax receivable and tax payable balances.

HUDBAY MINERALS INC.

Notes to Consolidated Financial Statements

(in thousands of US dollars, except where otherwise noted)

Years ended December 31, 2017 and 2016

	(j)	Other disclosure:

		The tax rules and regulations applicable to mining companies are highly complex and subject to interpretation. The Group may be subject in the future to a review of its historic income and other tax filings and, in connection with such reviews disputes can arise with the taxing authorities over the interpretation or application of certain tax rules and regulations in respect of the Group’s business. These reviews may alter the timing or amount of taxable income or deductions. The amount ultimately reassessed upon resolution of issues raised may differ from the amount accrued.

22.	Share capital

	(a)	Preference shares:

		Authorized: Unlimited preference shares without par value

	(b)	Common shares:

		Authorized: Unlimited common shares without par value Issued and fully paid:

	Year ended				Year ended
	Dec. 31, 2017				Dec. 31, 2016
	Common				Common
	shares		Amount		shares		Amount
Balance, beginning of year	237,271,188	$	1,588,319		235,231,688	$	1,576,600
Equity issuance	24,000,000		195,295		2,039,500		11,814
Share issue costs, net of tax	-		(6,205	)	-		(95	)

Balance, end of year	261,271,188	$	1,777,409		237,271,188	$	1,588,319

On September 27, 2017, the Company issued 24,000,000 Hudbay common shares for net proceeds of $189,090 (net of tax and costs).

During the year ended 2016, the Company issued 1,000,000 Hudbay common shares for net proceeds of $4,958 in connection with the vesting of restricted share units. On December 12, 2016 the Company issued 1,039,500 Hudbay common shares and 561,000 Hudbay warrants for net proceeds of $6,761 upon the exercise of 3,300,000 warrants issued by Augusta Resource Corporation which were assumed as part of the acquisition of Hudbay Arizona and which entitled the holder to acquire 0.315 of a Hudbay common share and 0.17 of a Hudbay warrant for each Augusta warrant (note 26e).

During the year, the Company paid two semi-annual dividends of C$0.01 per share each. The Company paid $1,774 and $1,912 on March 31, 2017 and September 29, 2017 to shareholders of record as of March 10, 2017 and September 8, 2017, respectively.

In 2016, the Company paid $1,773 and $1,794 on March 31, 2016 and September 30, 2016 to shareholders of record as of March 11, 2016 and September 9, 2016, respectively.

The Company declared a semi-annual dividend of C$0.01 per share on February 21, 2018. The dividend will be paid on March 29, 2018 to shareholders of record as of March 9, 2018 and is expected to total C$2,613.

HUDBAY MINERALS INC.

Notes to Consolidated Financial Statements

(in thousands of US dollars, except where otherwise noted)

Years ended December 31, 2017 and 2016

23.	Share-based payments

	(a)	Cash-settled share-based payments:

		The Group has two cash-settled share-based payment plans, as described below.

		Deferred Share Units (DSU)

		At December 31, 2017, the carrying amount and the intrinsic value of the outstanding liability related to the DSU plan was $6,623 (December 31, 2016 - $3,933) (note 18). The following table outlines information related to DSUs granted, expenses recognized and payments made during the year.

		Year ended
		Dec. 31, 2017		Dec. 31, 2016
Granted during the year:
Number of units		130,964		231,867
Weighted average price (C$/unit)	$	8.59	$	5.81
Expenses recognized during the year¹(notes 5c, 18)	$	2,982	$	2,111
Payments made during the year (note 18)	$	638	$	1,078

¹This expense relates to the grant of DSUs, as well as mark-to-market adjustments, and is presented within selling and administrative expenses on the consolidated income statements.

Restricted Share Units (RSU)

RSUs granted under the LTEP Plan may be settled in the form of Hudbay common shares or, at the option of Hudbay, the cash equivalent based on the market price of the common shares as of the vesting date. RSUs may also be granted under Hudbay’s Share Unit Plan, however; the RSUs granted under the Share Unit Plan may only be settled in cash. Hudbay has historically settled all RSUs in cash. The Company has determined that the appropriate accounting treatment is to classify the RSUs as cash-settled transactions.

At December 31, 2017, the carrying amount of the outstanding liability related to the RSU plan was $19,409 (December 31, 2016 - $11,052) (note 18). The following table outlines information related to RSUs granted, expenses recognized and payments made in the year.

HUDBAY MINERALS INC.

Notes to Consolidated Financial Statements

(in thousands of US dollars, except where otherwise noted)

Years ended December 31, 2017 and 2016

		Year ended
		Dec. 31, 2017			Dec. 31, 2016
Number of units, beginning of year		3,492,408			1,943,507
Number of units granted during the year		987,194			2,576,957
Credits for dividends		8,156			14,776
Number of units forfeited during the year		(201,946	)		(133,329	)
Number of units vested ¹		(880,099	)		(909,503	)

Number of units, end of year		3,405,713			3,492,408

Weighted average price - granted (C$/unit)	$	10.60		$	4.01
Expenses recognized during the year²(note 5c)	$	12,937		$	7,776
Payments made during the year (note 18)	$	5,491		$	2,736

¹Includes 587,633 units that have vested; however, are unreleased and unpaid as of December 31, 2017.²This net expense reflects recognition of RSU expense over the service period, as well as mark-to-market adjustments, and is presented mainly within cost of sales and selling and administrative expenses. Certain amounts related to the Arizona segment are capitalized.

	(b)	Equity-settled share-based payment - stock options:

		The Group's stock option plan was approved in June 2005 and amended in May 2008 (the "Plan").

		Under the amended Plan, the Group may grant to employees, officers, directors or consultants of the Group or its affiliates options to purchase up to a maximum of 13 million common shares of the Group. Options granted under the amended Plan have a maximum term of five years and become exercisable as follows: the first 33 1/3% are exercisable after one year, the next 33 1/3% are exercisable after two years, and the last 33 1/3% are exercisable after three years. Except in specified circumstances, options are not assignable and terminate upon, or within a specified time following, the optionee ceasing to be employed by or associated with the Group. The Plan further provides that the price at which common shares may be issued under the Plan cannot be less than the market price of the common shares on the last trading date before the relevant options are approved by the Board.

		Prior to the May 2008 amendment, the Plan approved in June 2005 allowed the Group to grant options up to 10% (to a maximum of 8 million issued outstanding options) of the issued and outstanding common shares of the Group to employees, officers, and directors of the Group for a maximum term of ten years. Of the common shares covered by the stock option plan, the first 33 1/3% were exercisable immediately, the next 33 1/3% were exercisable after one year, and the last 33 1/3% were exercisable after two years.

		The Board’s current policy is to not make share option grants to our executives and directors. No options were granted under the Plan during the years ended December 31, 2017 and December 31, 2016, and none have been granted since 2010.

		The Group estimates expected life of options and expected volatility based on historical data, which may differ from actual outcomes.

HUDBAY MINERALS INC.

Notes to Consolidated Financial Statements

(in thousands of US dollars, except where otherwise noted)

Years ended December 31, 2017 and 2016

Year ended

Year ended

Dec. 31, 2017

Dec. 31, 2016

Number

Weighted

Number

Weighted

of shares

average

of shares

average

subject

exercise

subject

exercise

to option

price

to option

price

Balance, beginning of year

1,470,377

19.24

1,904,185

17.57

Forfeited

(20,002

)

15.86

(125,677

)

17.52

Expired

(927,023

)

21.22

(308,131

)

9.70

Balance, end of year

523,352

15.86

1,470,377

19.24

The following table summarizes the options outstanding:

Dec. 31, 2017

Range of
exercise prices
C$

Number of
options
outstanding

Weighted-
average
remaining
contractual life
(years)

Weighted-
average
exercise
price
C$

Number of
options
exercisable

Weighted-
average
exercise
price
C$

$ 15.86

523,352

0.2

15.86

523,352

15.86

Dec. 31, 2016

Range of exercise prices C$	Number of options outstanding	Weighted- average remaining contractual life (years)		Weighted- average exercise price C$	Number of options exercisable		Weighted- average exercise price C$
$ 15.86 - 18.33	543,354	1.2	$	15.86	543,354	$	15.86
18.34 - 21.28	757,023	0.2		20.80	757,023		20.80
21.29 - 21.98	10,000	0.1		21.75	10,000		21.75
21.99 - 22.97	60,000	0.9		22.20	60,000		22.20
22.98 - 23.74	100,000	0.6		23.74	100,000		23.74

$ 15.86 - 23.74	1,470,377	0.6	$	19.24	1,470,377	$	19.24

24.

Earnings (loss) per share data

	Year ended
	December 31,
	2017	2016

Basic & diluted weighted average common shares outstanding	243,500,696	235,807,509

HUDBAY MINERALS INC.

Notes to Consolidated Financial Statements

(in thousands of US dollars, except where otherwise noted)

Years ended December 31, 2017 and 2016

25.	Capital management

	The Group’s definition of capital includes total equity and long-term debt. The Group’s long-term debt balance as at December 31, 2017 was $979,575 (December 31, 2016 – $1,215,674).

	The Group’s objectives when managing capital are to maintain a strong capital base in order to:

	-	Advance the Group’s corporate strategies to create long-term value for its stakeholders; and
	-	Sustain the Group’s operations and growth throughout metals and materials cycles

Hudbay monitors its capital and capital structure on an ongoing basis to ensure they are sufficient to achieve the Group’s short-term and long-term strategic objectives in a capital intensive industry. The Group faces several risks, including volatile metals prices, access to capital, and risk of delays and cost escalation associated with major capital projects. The Group continually assesses the adequacy of its capital structure to ensure its objectives are met. Hudbay monitors its cash and cash equivalents, which were $356,499 as at December 31, 2017 (2016 - $146,864), together with availability under its committed credit facilities. The Group invests its cash and cash equivalents primarily in Canadian bankers’ acceptances, deposits at major Canadian and Peruvian banks, or treasury bills issued by the federal or provincial governments. In addition to the requirement to maintain sufficient cash balances to fund continuing operations, the Group must maintain sufficient cash to fund the interest expense on the long-term debt outstanding (note 16). As part of the Group’s capital management activities, the Group monitors interest coverage ratios and leverage ratios.

HUDBAY MINERALS INC.

Notes to Consolidated Financial Statements

(in thousands of US dollars, except where otherwise noted)

Years ended December 31, 2017 and 2016

26.	Financial instruments

	(a)	Fair value and carrying value of financial instruments:

		The following presents the fair value ("FV") and carrying value ("CV") of the Group's financial instruments and non-financial derivatives:

		Dec. 31, 2017						Dec. 31, 2016
Recurring measurements		FV			CV			FV			CV
Loans and receivables
Cash and cash equivalents ¹	$	356,499		$	356,499		$	146,864		$	146,864
Restricted cash¹		206			206			17,148			17,148
Trade and other receivables^1,2		142,199			142,199			116,445			116,445
Fair value through profit or loss
Trade and other receivables - embedded derivatives³		17,427			17,427			12,538			12,538
Non-hedge derivative assets³		2,841			2,841			3,397			3,397
Prepayment option - embedded derivative⁷		3,980			3,980			4,430			4,430
Investments at FVTPL⁴		282			282			192			192
Available-for-sale investments⁴		21,973			21,973			13,508			13,508
Total financial assets		545,407			545,407			314,522			314,522
Financial liabilities at amortized cost
Trade and other payables^1,2		192,448			192,448			163,027			163,027
Finance leases		84,573			84,573			12,932			12,932
Other financial liabilities⁵		19,625			22,568			17,231			22,998
Senior unsecured notes⁶		1,082,740			991,883			1,040,178			991,004
Equipment finance facility⁸		-			-			50,267			50,267
Senior secured revolving credit facilities⁸		-			-			202,075			202,075
Unamortized transaction costs⁸		(8,328	)		(8,328	)		(6,752	)		(6,752	)
Fair value through profit or loss
Embedded derivatives³		1,533			1,533			86			86
Warrant liabilities³		6,961			6,961			7,588			7,588
Option liabilities³		732			732			570			570
Non-hedge derivative liabilities^1,3		16,140			16,140			10,682			10,682
Total financial liabilities		1,396,424			1,308,510			1,497,884			1,454,477
Net financial liability	$	(851,017	)	$	(763,103	)	$	(1,183,362	)	$	(1,139,955	)

	1	Cash and cash equivalents, restricted cash, trade and other receivables and trade and other payables are recorded at carrying value, which approximates fair value due to their short-term nature and generally negligible credit losses.
	2	Excludes embedded provisional pricing derivatives, as well as tax and other statutory amounts.
	3	Derivatives and embedded provisional pricing derivatives are carried at their fair value, which is determined based on internal valuation models that reflect observable forward market commodity prices, currency exchange rates, and discount factors based on market US dollar interest rates adjusted for credit risk. For the warrant and option liabilities, fair value is determined based on quoted market closing price or the Black-Scholes model.
	4	Available-for-sale investments are carried at their fair value, which is determined using quoted market bid prices in active markets for listed shares and determined using valuation models for shares of private companies. Investments at FVTPL consist of warrants to purchase listed shares, which are carried at fair value as determined using available market closing prices.
	5	These financial liabilities relate to agreements with communities near the Constancia operation in Peru which allow Hudbay to extract minerals over the useful life of the Constancia operation, carry out exploration and evaluation activities in the area and provide Hudbay with community support to operate in the region. Fair values have been determined using a discounted cash flow analysis based on expected cash flows and a credit adjusted discount rate.
	6	Fair value of the senior unsecured notes (note 16) has been determined using the quoted market price at the period end.
	7	Fair value of the prepayment option embedded derivative related to the long-term debt has been determined using a binomial tree/lattice approach based on the Hull-White single factor interest rate term structure model.
	8	The carrying value of the facilities approximates the fair value as the facilities are based on floating interest rates.

HUDBAY MINERALS INC.

Notes to Consolidated Financial Statements

(in thousands of US dollars, except where otherwise noted)

Years ended December 31, 2017 and 2016

Fair value hierarchy

The table below provides an analysis by valuation method of financial instruments that are measured at fair value subsequent to recognition. Levels 1 to 3 are defined based on the degree to which fair value inputs are observable and have a significant effect on the recorded fair value, as follows:

−	Level 1:	Quoted prices in active markets for identical assets or liabilities;
−	Level 2:	Valuation techniques use significant observable inputs, either directly or indirectly, or valuations are based on quoted prices for similar instruments; and
−	Level 3:	Valuation techniques use significant inputs that are not based on observable market data.

December 31, 2017

Level 1

Level 2

Level 3

Total

Financial assets measured at fair value

Financial assets at FVTPL:

Embedded derivatives

17,427

Non-hedge derivatives

2,841

Investments at FVTPL

282

Prepayment option embedded derivative

3,980

Available-for-sale investments

21,973

24,530

46,503

Financial liabilities measured at fair value

Financial liabilities at FVTPL:

Embedded derivatives

1,533

Non-hedge derivatives

16,140

Option liability

732

Warrant liabilities

6,961

18,405

25,366

December 31, 2016		Level 1		Level 2		Level 3		Total
Financial assets measured at fair value
Financial assets at FVTPL:
Embedded derivatives	$	-	$	12,538	$	-	$	12,538
Non-hedge derivatives		-		3,397		-		3,397
Investments at FVTPL		-		192		-		192
Prepayment option embedded derivative		-		4,430		-		4,430
Available-for-sale investments		12,018		-		1,490		13,508

	$	12,018	$	20,557	$	1,490	$	34,065
Financial liabilities measured at fair value
Financial liabilities at FVTPL:
Embedded derivatives	$	-	$	86	$	-	$	86
Non-hedge derivatives		-		10,682		-		10,682
Option liability		-		570		-		570
Warrant liabilities		7,588		-		-		7,588

	$	7,588	$	11,338	$	-	$	18,926

HUDBAY MINERALS INC.

Notes to Consolidated Financial Statements

(in thousands of US dollars, except where otherwise noted)

Years ended December 31, 2017 and 2016

The Group's Level 3 investment relates to a minority investment in an unlisted junior mining company. During the twelve months ended December 31, 2017, the Group concluded that the value of the investment was unlikely to be recoverable and revalued the investment to zero.

The Group’s policy is to recognize transfers into and transfers out of fair value hierarchy levels as of the date of the event or change in circumstances that caused the transfer. During the year ended December 31, 2017, the Group did not make any transfers.

(b)

Derivatives and hedging:

		Copper fixed for floating swaps

		Hudbay enters into copper fixed for floating swaps in order to manage the risk associated with provisional pricing terms in copper concentrate sales agreements. As at December 31, 2017, the Group had 34,500 tonnes of net copper swaps outstanding at an effective average price of $3.10/lb and settling across January 2018 to April 2018. At December 31, 2016, the Group had 41,000 tonnes of copper fixed for floating swaps outstanding at an average fixed receivable price $2.42/lb, which settled across February to June 2017. The aggregate fair value of the transactions at December 31, 2017 was a liability position of $13,786 (December 31, 2016 a liability position of $8,657).

		Non-hedge derivative gold and silver contracts

		From time to time, the Group enters into gold and silver forward sales contracts to hedge the commodity price risk associated with the future settlement of provisionally priced deliveries. At December 31, 2017 and December 31, 2016, the Group held no gold or silver forward sales contracts.

		Non-hedge derivative zinc contracts

		Hudbay enters into fixed price sales contracts with zinc customers and, to ensure that the Group continues to receive a floating or unhedged realized zinc price, Hudbay enters into forward zinc purchase contracts that effectively offset the fixed price sales contracts. At December 31, 2017, the Group held contracts for forward zinc purchased of 2,808 tonnes (December 31, 2016 – 2,644 tonnes) that related to forward customer sales of zinc. Prices range from $2,534 to $3,292 per tonne (December 31, 2016 – $1,514 to $2,783) and settlement dates extend to December 2018. The aggregate fair value of the transactions at December 31, 2017 was a net asset position of $487 (December 31, 2016 – a net asset position of $1,373).

	(c)	Embedded derivatives

		Provisional pricing embedded derivatives

		The Group records embedded derivatives related to provisional pricing in concentrate purchase, concentrate sale and certain other sale contracts. Under the terms of these contracts, prices are subject to final adjustment at the end of a future period after title transfers based on quoted market prices during the quotation period specified in the contract. The period between provisional pricing and final pricing is typically up to three months.

HUDBAY MINERALS INC.

Notes to Consolidated Financial Statements

(in thousands of US dollars, except where otherwise noted)

Years ended December 31, 2017 and 2016

		Provisional pricing embedded derivatives are presented in trade and other receivables when they relate to sales contracts and in trade and other payables when they relate to purchase contracts. At each reporting date, provisionally priced metals are marked-to-market based on the forward market price for the quotation period stipulated in the contract, with changes in fair value recognized in revenue for sales contracts and in cost of sales for purchase concentrate contracts. Cash flows related to provisional pricing embedded derivatives are classified in operating activities.

		As at December 31, 2017, the Group’s net position consisted of contracts awaiting final pricing for sales of 38,027 tonnes of copper (December 31, 2016 – 32,750 tonnes). As of December 31, 2017, there are also 6,412 tonnes of zinc ((December 31, 2016 – nil tonnes) awaiting final pricing. In addition, at December 31, 2017, the Group’s net position consisted of contracts awaiting final pricing for sales of 24,553 ounces of gold and 172,886 ounces of silver (December 31, 2016 – 13,827 ounces of gold and 116,912 ounces of silver).

		As at December 31, 2017, the Group’s provisionally priced copper, zinc, gold and silver sales subject to final settlement were recorded at average prices of $3.29/lb (December 31, 2016 – $2.51/lb), $1.51/oz (December 31, 2016 – nil contracts), $1,309/oz (December 31, 2016 – $1,151/oz) and $17.10/oz (December 31, 2016 – $15.96/oz), respectively.

		The aggregate fair value of the copper and zinc embedded derivatives within the copper and zinc concentrate sales contracts at December 31, 2017, was an asset position of $17,427 (December 31, 2016 – an asset position of $12,538). The aggregate fair value of other embedded derivatives at December 31, 2017, was a liability position of $1,533 (December 31, 2016 – a liability position of $86).

		Prepayment option embedded derivative

		The senior unsecured notes (note 16) contain prepayment options, which represent embedded derivatives that require bifurcation from the host contract. The prepayment options are measured at fair value, with changes in the fair value being recognized as unrealized gains or losses in finance income and expense (note 5f). The fair value of the embedded derivative at December 31, 2017 was an asset of $3,980 (December 31, 2016 - an asset of $4,430).

	(d)	Restricted cash

		The South American business unit has $71,932 in letters of credit issued under the Peru facility to support its reclamation obligations. The Manitoba business unit has $56,633 in letters of credit issued under the Canada facility to support its reclamation and pension obligations. Given that these letters of credit are issued under the revolving credit facilities, no cash collateral is required to be posted.

		Hudbay currently has a restricted cash balance of $206, which consists of cash collateral posted to secure Hudbay Peru letters of credit issued to support certain financial obligations.

	(e)	Warrants and option liabilities

		A total of 22,391,490 warrants were issued as a result of the acquisition of Hudbay Arizona which entitle the holder to acquire a common share of the Company at a price of C$15.00 per share on, but not prior to, July 20, 2018. The Company, may, at its option, upon written notice to the warrant holders, settle the exercise of warrants for the in-the-money value, in cash, shares or a combination thereof.

		The purchase price of the acquisition of New Britannia Mine and Mill contained an option (European) that pays the seller $5,000 if the price of gold is equal to or above $1,400/oz on May 4, 2018.

HUDBAY MINERALS INC.

Notes to Consolidated Financial Statements

(in thousands of US dollars, except where otherwise noted)

Years ended December 31, 2017 and 2016

(f)	Financial risk management

	The Group’s financial risk management activities are governed by Board-approved policies addressing risk identification, hedging authorization procedures and limits and reporting. Hudbay's policy objective, when hedging activities are undertaken, is to reduce the volatility of future profit and cash flow within the strategic and economic goals of the Group. The Group from time to time employs derivative financial instruments, including forward and option contracts, to manage risk originating from exposures to commodity price risk, foreign exchange risk and interest rate risk. Significant derivative transactions are approved by the Board of Directors, and hedge accounting is applied when certain criteria have been met. The Group does not use derivative financial instruments for trading or speculation purposes.

	The following is a discussion of the Group’s risk exposures.

	(i)	Market risk

		Market risk is the risk that changes in market prices, including foreign exchange rates, commodity prices and interest rates will cause fluctuations in the fair value or future cash flows of a financial instrument.

Foreign currency risk

The Group’s primary exposure to foreign currency risk arises from:

	-	Translation of Canadian dollar denominated costs and, to a lesser extent, Peruvian soles cost into US dollars. Substantially all of the Group’s revenue are denominated in US dollars, while the majority of its operating costs are denominated in either the Canadian dollar or Peruvian sol. Generally, with gross profit, appreciation of the US dollar relative to the Canadian dollar will increase the Group’s profit.

	-	Translation of foreign currency denominated cash and cash equivalents, trade and other receivables, trade and other payables, as well as other financial liabilities. Appreciation of the US dollar relative to a foreign currency will decrease the net asset value of these balances once they have been translated to US dollars, resulting in foreign currency translation losses on foreign currency denominated assets and gains on foreign currency denominated liabilities.

The Manitoba segment’s primary financial instrument foreign currency exposure is on US denominated cash and cash equivalents, trade and other receivables and other financial liabilities. The Peru segment’s primary financial instrument foreign currency exposure is on Peruvian soles cash and cash equivalents, trade and other payables and other financial liabilities.

The Group’s exposure to foreign currency risk was as follows based on notional financial instruments amounts stated in US equivalent dollars:

HUDBAY MINERALS INC.

Notes to Consolidated Financial Statements

(in thousands of US dollars, except where otherwise noted)

Years ended December 31, 2017 and 2016

		Dec. 31, 2017									Dec. 31, 2016
		CAD¹			USD ²			PEN³			CAD¹			USD²			PEN³
Cash and cash equivalents	$	9,518		$	20,597		$	3,692 $			4,759 $			8,121		$	3,440
Trade and other receivables		530			77,824			1,114			720			28,639			2,503
Other financial assets		22,255			-			-			13,279			-			-
Trade and other payables		(6,115	)		(9,687	)		(17,917	)		(20,014	)		(4,303	)		(17,145	)
Other financial liabilities		(6,961	)		-			(22,568	)		(7,588	)		-			(22,998	)
	$	19,227		$	88,734		$	(35,679	)	$	(8,844	)	$	32,457		$	(34,200	)

¹HMI is exposed to foreign currency risk on CAD.
²The Manitoba segment is exposed to foreign currency risk on USD.
³The Peru segment is exposed to foreign currency risk on PEN.

The following sensitivity analysis for foreign currency risk relates solely to financial instruments and non financial derivatives that were outstanding as at the year end date; each sensitivity calculation assumes all other variables are held constant. This analysis is based on values as at December 31, 2017 and does not reflect the overall effect that changes in market variables would have on the Group's results of operations.

			Would have changed		Would have changed
December 31, 2017	Change of:		2017 after-tax profit by:		2017 after-tax OCI by:
USD/CAD exchange rate¹	+ 10%	$	5.6 million	$	(2.0) million
USD/CAD exchange rate¹	- 10%		(6.8) million		2.4 million
USD/PEN exchange rate²	+ 10%		2.1 million		- million
USD/PEN exchange rate²	- 10%		(2.6) million		- million

		Would have changed	Would have changed
December 31, 2016	Change of:	2016 after-tax profit by:	2016 after-tax OCI by:
USD/CAD exchange rate¹	+ 10%	3.9 million	(1.2) million
USD/CAD exchange rate¹	- 10%	(4.9) million	1.5 million
USD/PEN exchange rate²	+ 10%	2.0 million	- million
USD/PEN exchange rate²	- 10%	(2.5) million	- million

¹Effect on profit due to foreign currency remeasurements of balances denominated in a currency different from a Hudbay subsidiary's functional currency; effect on OCI due to remeasurement of available-for-sale investments.
²Effect on profit due to foreign currency remeasurement of balances denominated in Peruvian Sol.

Commodity price risk

Hudbay is exposed to market risk from prices for the commodities the Group produces and sells, such as copper, zinc, gold and silver. From time to time, the Group maintains price protection programs and conducts commodity price risk management through the use of derivative contracts.

The following sensitivity analysis for commodity price risk relates solely to financial instruments and non financial derivatives that were outstanding as at the year end date; each sensitivity calculation assumes all other variables are held constant, This analysis is based on values as at December 31, 2017 and does not reflect the overall effect that changes in market variables would have on the Groups’ results of operations.

HUDBAY MINERALS INC.

Notes to Consolidated Financial Statements

(in thousands of US dollars, except where otherwise noted)

Years ended December 31, 2017 and 2016

			Would have changed		Would have changed
December 31, 2017	Change of:		2017 after-tax profit by:		2017 after-tax OCI by:
Copper prices ($/lb)³	+ $0.30	$	(2.3) million	$	- million
Copper prices ($/lb)³	- $0.30		2.3 million		- million
Zinc prices ($/lb)⁴	+ $0.10		0.9 million		- million
Zinc prices ($/lb)⁴	- $0.10		(0.9) million		- million

			Would have changed		Would have changed
December 31, 2016	Change of:		2016 after-tax profit by:		2016 after-tax OCI by:
Copper prices ($/lb)³	+ $0.30	$	(4.8) million	$	- million
Copper prices ($/lb)³	- $0.30		4.7 million		- million
Zinc prices ($/lb)⁴	+ $0.10		0.3 million		- million
Zinc prices ($/lb)⁴	- $0.10		(0.3) million		- million

³Effect on profit due to embedded provisional pricing derivatives (note 26c) and copper fixed for floating swaps (note 26b).
⁴Effect on profit due to embedded provisional pricing derivatives (note 26c) and non-hedge zinc derivatives (note 26b).

Share price risk

Hudbay is exposed to market risk from share prices for the Group’s investments in listed Canadian metals and mining companies. These investments are made to foster strategic relationships, in connection with joint venture agreements and for investment purposes. Management monitors the value of these investments for the purposes of determining whether to add or reduce the Group’s positions.

The following sensitivity analysis for share price risk relates solely to financial instruments and non financial derivatives that were outstanding as at the year-end date; each sensitivity calculation assumes all other variables are held constant. This analysis is based on values as at December 31, 2017 and does not reflect the overall effect that changes in market variables would have on the Group’s finance expenses.

			Would have changed		Would have changed
December 31, 2017	Change of:		2017 after-tax profit by:		2017 after-tax OCI by:
Share prices⁵	+ 25%	$	- million	$	5.5 million
Share prices⁵	- 25%		(1.9) million		(3.6) million

			Would have changed		Would have changed
December 31, 2016	Change of:		2016 after-tax profit by:		2016 after-tax OCI by:
Share prices⁵	+ 25%	$	- million	$	4.5 million
Share prices⁵	- 25%		(0.8) million		(3.7) million

⁵

Effect on OCI due to mark-to-market and effect on profit due to impairment on available-for-sale investments in listed shares (note 9).

Interest rate risk

The group is exposed to cash flow interest rate risk on its cash and cash equivalents, fair value interest rate risk on its embedded derivative associated with its Notes, and interest rate risk on its senior secured revolving credit facilities.

This analysis is based on values at December 31, 2017 and does not reflect the overall effect that changes in market variables would have on the group’s finance expenses.

HUDBAY MINERALS INC.

Notes to Consolidated Financial Statements

(in thousands of US dollars, except where otherwise noted)

Years ended December 31, 2017 and 2016

			Would have changed		Would have changed
December 31, 2017	Change of:		2017 after-tax profit by:		2017 after-tax OCI by:
Interest rates	+ 2.00%	$	0.4 million	$	- million
Interest rates	- 2.00%		(2.8) million		- million

			Would have changed		Would have changed
December 31, 2016	Change of:		2016 after-tax profit by:		2016 after-tax OCI by:
Interest rates	+ 2.00%	$	(5.0) million	$	- million
Interest rates	- 2.00%		0.7 million		- million

		At December 31, 2017 and 2016, the effect of interest rate changes on the Group's cash equivalents would not have resulted in a significant tax impact on profit.

		Refer to note 6 for information about the Group’s cash and cash equivalents.

	(ii)	Credit risk

		Credit risk is the risk of financial loss to the Group if a customer or counterparty to a financial instrument fails to meet its obligations. The Group’s maximum exposure to credit risk at the reporting date is represented by the carrying amount, net of any impairment losses recognized, of financial assets and non financial derivative assets recorded on the consolidated balance sheets. Refer to note 26a.

		A large portion of the Group’s cash and cash equivalents are represented by deposits with major Schedule 1 Canadian banks. Deposits and other investments with Schedule 1 Canadian banks represented 97% of total cash and cash equivalents as at December 31, 2017 (2016 – 87%). The Group’s investment policy requires it to comply with a list of approved investment, concentration and maturity limits, as well as credit quality. Credit concentrations in the group’s short term investments are monitored on an ongoing basis.

		Transactions involving derivatives are with counterparties the Group believes to be creditworthy.

		Management has a credit policy in place that requires the Group to obtain credit insurance from an investment grade credit insurance provider to mitigate exposure to credit risk in its receivables. At December 31, 2017, approximately 75% of the Group’s trade receivables were insured or payable by letters of credit (2016 - 79% were insured or payable by letters of credit). Insured receivables have a credit insurance deductible of 10%. The deductible and any additional exposure to credit risk is monitored and approved on an ongoing basis.

		Five customers accounted for approximately 77% of total trade receivables as at December 31, 2017 (2016 – five customers accounted for approximately 79%). Credit risk for these customers is assessed as medium to low risk.

		As at December 31, 2017, none of the Group’s trade receivables was aged more than 30 days (2016 – nil).

	(iii)	Liquidity risk

		Liquidity risk is the risk that the Group will not be able to meet its obligations associated with financial liabilities. Hudbay's objective is to maintain sufficient liquid resources to meet operational and investing requirements.

HUDBAY MINERALS INC.

Notes to Consolidated Financial Statements

(in thousands of US dollars, except where otherwise noted)

Years ended December 31, 2017 and 2016

The following summarizes the contractual undiscounted cash flows of the Group’s non-derivative and derivative financial liabilities, including any interest payments, by remaining contractual maturity. The table includes all instruments held at the reporting date for which payments had been contractually agreed at the reporting date. The undiscounted amounts shown are gross amounts, unless the liabilities will be settled net. Amounts in foreign currency are translated at the closing rate at the reporting date. When a counterparty has a choice of when an amount is paid, the liability is allocated to the earliest possible time period.

		Carrying			Contractual			12 months			13 - 36			37 - 60			More than
Dec. 31, 2017		amount			cash flows			or less			months			months			60 months
Assets used to manage liquidity risk
Cash and cash equivalents	$	356,499		$	356,499		$	356,499		$	-		$	-		$	-
Trade and other receivables		142,199			147,196			124,134			12,403			10,659			-
Non-hedge derivative asset		2,841			2,841			2,841			-			-			-
	$	501,539		$	506,536		$	483,474		$	12,403		$	10,659		$	-
Non-derivative financial liabilities
Trade and other payables, including embedded derivative	$	(192,821	)	$	(192,821	)	$	(192,821	)	$	-		$	-		$	-
Other financial liabilities		(22,568	)		(37,216	)		(3,824	)		(4,791	)		(4,780	)		(23,821	)
Long-term debt, including prepayment option embedded derivative		(979,575	)		(1,520,416	)		(79,715	)		(159,430	)		(152,396	)		(1,128,875	)
Finance lease liabilities		(84,573	)		(89,750	)		(20,186	)		(40,253	)		(29,311	)		-
	$	(1,279,537	)	$	(1,840,203	)	$	(296,546		$	(204,474	)	$	(186,487	)	$	(1,152,696	)
Derivative financial liabilities
Warrant liabilities	$	(6,961	)	$	(6,961	)	$	(6,961	)	$	-		$	-		$	-
Gold option		(732	)		(732	)		(732	)		-			-			-
Non-hedge derivative contracts		(16,140	)		(16,140	)		(15,263	)		(877	)		-			-
	$	(23,833	)	$	(23,833	)	$	(22,956	)	$	(877	)	$	-		$	-

HUDBAY MINERALS INC.

Notes to Consolidated Financial Statements

(in thousands of US dollars, except where otherwise noted)

Years ended December 31, 2017 and 2016

		Carrying			Contractual			12 months			13 - 36			37-60			More than
Dec. 31, 2016		amount			cash flows			or less			months			months			60 months
Assets used to manage liquidity risk
Cash and cash equivalents	$	146,864		$	146,864		$	146,864		$	-		$	-		$	-
Trade and other receivables		116,445			116,445			96,221			1,543			18,681			-
Non-hedge derivative assets		3,397			3,397			3,397			-			-			-
	$	266,706		$	266,706		$	246,482		$	1,543		$	18,681		$	-
Non-derivative financial liabilities
Trade and other payables, including embedded derivatives	$	(163,113	)	$	(163,113	)	$	(163,113	)	$	-		$	-		$	-
Other financial liabilities		(22,998	)		(35,392	)		(4,025	)		(3,303	)		(4,616	)		(23,448	)
Long-term debt, including prepayment option embedded derivative		(1,232,164	)		(1,946,925	)		(105,278	)		(105,278	)		(544,957	)		(1,191,412	)
Finance lease liabilities		(12,932	)		(13,720	)		(3,508	)		(3,338	)		(6,874	)		-
	$	(1,431,207	)	$	(2,159,150	)	$	(275,924	)	$	(111,919	)	$	(556,447	)	$	(1,214,860	)
Derivative financial liabilities
Warrant liabilities	$	(7,588	)	$	(7,588	)	$	-		$	-		$	(7,588	)	$	-
Gold option		(570	)		(570	)		-			-			(570	)		-
Non-hedge derivative contracts		(10,682	)		(10,682	)		(10,682	)		-			-			-
	$	(18,840	)	$	(18,840	)	$	(10,682	)	$	-		$	(8,158	)	$	-

27.	Commitments and contingencies

	(a)	Operating lease commitments

		The Group has entered into various lease commitments for facilities and equipment. The leases expire in periods ranging from one to eight years. There are no restrictions placed on the Group by entering into these leases. Future minimum lease payments under non-cancelable operating leases recognized in operating expenses at December 31 are:

		2017		2016
Within one year	$	5,682	$	5,591
After one year but not more than five years		12,291		12,606
More than five years		1,781		442

	$	19,754	$	18,639

Payments recognized in operating expenses:

		2017		2016
Minimum lease payments	$	4,972	$	4,575

	$	4,972	$	4,575

	(b)	Capital commitments

		As at December 31, 2017, the Group had outstanding capital commitments in Canada of approximately $25,793 primarily related to equipment on order, of which approximately $2,556 cannot be terminated by the Group; approximately $86,044 in Peru, of which all can be terminated by the Group, and approximately $162,412, primarily related to its Rosemont project, of which approximately $78,646 cannot be terminated by the Group.

	(c)	Contingent liabilities

		Contingent liabilities

		The Group is involved in various claims, litigation and other matters arising in the ordinary course and conduct of business. While it is not possible to determine the ultimate outcome of such actions at this time, and inherent uncertainties exist in predicting such outcomes, it is the Group's belief that the ultimate resolution of such actions is not reasonably likely to have a material adverse effect on its consolidated financial position or results of operations. The assessment of contingencies inherently involves the exercise of significant judgement and estimates of the outcome of future events. As a result of the assessment, no significant contingent liabilities have been recorded in these consolidated financial statements.

HUDBAY MINERALS INC.

Notes to Consolidated Financial Statements

(in thousands of US dollars, except where otherwise noted)

Years ended December 31, 2017 and 2016

As part of the streaming agreement with Wheaton for the 777 mine, the Group must repay, with precious metals credits, the legal deposit provided by Wheaton by August 1, 2052, the expiry date of the agreement. If the legal deposit is not fully repaid with precious metals credits related to 777 production by the expiry date, a cash payment for the remaining amount will be due at the expiry date of the agreement. As a result of changes in the remaining 777 mine reserves and lower precious metals prices, there is a possibility that an amount of Wheaton’s legal deposit may not be repaid by means of 777 mine’s precious metals credits over its expected remaining mine life. Given that reserve estimates, production timing and precious metals prices are subject to uncertainty, management has concluded that a cash payment at the expiry of the agreement with Wheaton is unlikely. As at December 31, 2017 the fair value of the cash payment is not material to the consolidated financial statements.

Contingent assets

There were no significant contingent assets to disclose at December 31, 2017 or December 31, 2016.

28.	Related parties

	(a)	Group companies

		The financial statements include the financial statements of the Company and the following significant subsidiaries:

				Beneficial
				ownership of
				ultimate controlling
				party (Hudbay
				Minerals Inc.)
			Entity's
Name	Jurisdiction	Business	Parent	2017	2016
HudBay Marketing & Sales Inc.	Canada	Marketing and sales	HMI	100%	100%
HudBay Peru Inc.	British Columbia	Holding company	HMI	100%	100%
HudBay Peru S.A.C.	Peru	Exploration/ development	Peru Inc.	100%	100%
HudBay (BVI) Inc.	British Virgin Islands	Precious metals sales	Peru Inc.	100%	100%
Hudbay Arizona Inc.	British Columbia	Holding company	HMI	100%	100%

			HudBay
			Arizona (US)
		Exploration/	Holding
Rosemont Copper Company ¹	Arizona	development	Corporation	100%	100%

¹Rosemont Copper Company currently owns a 92.05% interest in the Rosemont project; its interest is subject to an earn-in agreement with United Copper & Moly LLC ("UCM"), pursuant to which UCM has earned a 7.95% interest in the project and may earn up to a 20% interest.

Transactions between the Company and its subsidiaries, which are related parties of the Company, have been eliminated on consolidation and are not disclosed in this note.

HUDBAY MINERALS INC.

Notes to Consolidated Financial Statements

(in thousands of US dollars, except where otherwise noted)

Years ended December 31, 2017 and 2016

	(b)	Compensation of key management personnel

		The Group’s key management includes members of the Board of Directors, the Group's Chief Executive Officer, the Group’s senior vice presidents and vice presidents.

		Total compensation to key management personnel was as follows:

		2017		2016
Short-term employee benefits¹	$	8,654	$	8,470
Post-employment benefits		777		594
Long-term share-based awards		6,110		5,479

	$	15,541	$	14,543

¹Such as salaries and social security contributions, paid annual leave and paid sick leave, profit-sharing and bonuses and non-monetary benefits (such as medical care, housing, cars and free or subsidized goods or services) for current employees.

29.

Supplementary cash flow information

(a)

Change in non-cash working capital:

		Year ended
		December 31,
		2017			2016

Change in:
Trade and other receivables	$	(8,979	)	$	68,270
Other financial assets/liabilities		6,620			19,181
Inventories		(18,690	)		2,653
Prepaid expenses and other current assets		(4,619	)		3,646
Trade and other payables		(6,336	)		(8,339	)
Changes in taxes payable/receivable		39,326			3,666
Other		1,693			(1,871	)

	$	9,015		$	87,206

HUDBAY MINERALS INC.

Notes to Consolidated Financial Statements

(in thousands of US dollars, except where otherwise noted)

Years ended December 31, 2017 and 2016

	(b)	Non-cash transactions:

		During the year ended December 31, 2017, the Group entered into the following non-cash investing and financing activities which are not reflected in the consolidated statements of cash flows:

	−	Remeasurements of the Group's decommissioning and restoration liabilities for the year ended December 31, 2017 led to a net increase in related property, plant and equipment assets of $10,661 (year ended December 31, 2016 - $24,956) as a result of declines in discount rates and increased mine activity footprints and the resulting higher disturbance.

	−	Property, plant and equipment included $3,234 of net additions related to capital additions under finance lease (December 31, 2016 - $12,932).

	−	In 2017, the Peru business unit completed the sale of some heavy mobile equipment and then executed a finance lease to leaseback that same equipment. The transaction resulted in cash proceeds of $67,275. Given that the classification of the leaseback as a finance lease, there was no change in the carrying value of the heavy mobile equipment and no impacts to the statements of income.

30.	Segmented information

	The Group is an integrated metals producer. When making decisions on expansions, opening or closing mines, as well as day to day operations, management evaluates the profitability of the overall operation of the Group. The Group's main mining operations are located in Manitoba and Saskatchewan (Canada) and Cusco (Peru) and are included in the Manitoba segment and Peru segment, respectively. The Manitoba and Peru segments generate the Group's revenue. The Manitoba segment sells copper concentrate (containing copper, gold and silver), zinc metal and other products. The Peru segment consists of the Group's Constancia operation and sells copper concentrate. The Group’s Arizona segment consists of the Group’s Rosemont project in Arizona. Corporate and other activities include the Group’s exploration activities in Chile. The exploration entities are not individually significant, as they do not meet the minimum quantitative thresholds. Corporate activities are not considered a segment and are included as a reconciliation to total consolidated results. Accounting policies for each reported segment are the same as the Company. Results from operating activities represents the profit earned by each segment without allocation of corporate costs. This is the measure reported to the chief operating decision-maker, the Group's President and Chief Executive Officer, for the purposes of resource allocation and the assessment of segment performance. Total assets and liabilities do not reflect intercompany balances, which have been eliminated on consolidation.

HUDBAY MINERALS INC.

Notes to Consolidated Financial Statements

(in thousands of US dollars, except where otherwise noted)

Years ended December 31, 2017 and 2016

Year ended December 31, 2017

Corporate

and other

Manitoba

Peru

Arizona

activities

Total

Revenue from external customers

704,777

657,776

1,362,553

Cost of sales

Mine operating costs

392,863

302,865

695,728

Depreciation and amortization

118,770

174,110

292,880

Gross profit

193,144

180,801

373,945

Selling and administrative expenses

42,283

Exploration and evaluation

5,649

1,442

8,383

15,474

Other operating (income) and expenses

(56

)

(6,612

)

517

(6,289

)

(12,440

)

Asset impairment

11,320

Results from operating activities

176,231

185,971

(517

)

(44,377

)

317,308

Finance income

(2,849

)

Finance expenses

103,028

Other finance losses

18,401

Profit before tax

198,728

Tax expense

34,829

Profit for the year

163,899

Year ended December 31, 2016
									Corporate
									and other
		Manitoba		Peru		Arizona			activities			Total
Revenue from external customers	$	512,671	$	616,007	$	-		$	-		$	1,128,678
Cost of sales
Mine operating costs		318,037		289,133		-			-			607,170
Depreciation and amortization		120,531		178,099		-			-			298,630
Gross profit		74,103		148,775		-			-			222,878
Selling and administrative expenses		-		-		-			37,774			37,774
Exploration and evaluation		1,228		1,262		-			2,252			4,742
Other operating expense (income)		5,490		7,790		618			(3,312	)		10,586
Results from operating activities	$	67,385	$	139,723	$	(618	)	$	(36,714	)	$	169,776
Finance income												(2,792	)
Finance expenses												167,071
Other finance gains												(108	)
Profit before tax												5,605
Tax expense												40,798

Loss for the year											$	(35,193	)

HUDBAY MINERALS INC.

Notes to Consolidated Financial Statements

(in thousands of US dollars, except where otherwise noted)

Years ended December 31, 2017 and 2016

December 31, 2017

Corporate

and other

Manitoba

Peru

Arizona

activities

Total

Total assets

743,019

2,666,775

856,589

382,346

4,648,729

Total liabilities

525,515

806,217

110,945

1,061,797

2,504,474

Property, plant and equipment

619,476

2,420,561

836,759

4,098

3,880,894

Year ended December 31, 2017

Corporate

and other

Manitoba

Peru

Arizona

activities

Total

Additions to property, plant and equipment

97,936

143,372

18,507

259,815

December 31, 2016
								Corporate
								and other
		Manitoba		Peru		Arizona		activities		Total
Total assets	$	769,561	$	2,720,441	$	822,498	$	144,056	$	4,456,556
Total liabilities		528,326		876,056		158,236		1,130,726		2,693,344
Property, plant and equipment		606,348		2,452,917		800,542		6,016		3,865,823

Year ended December 31, 2016
								Corporate
								and other
		Manitoba		Peru		Arizona		activities		Total
Additions to property, plant and equipment	$	65,521	$	125,489	$	25,856	$	19	$	216,885

HUDBAY MINERALS INC.

Notes to Consolidated Financial Statements

(in thousands of US dollars, except where otherwise noted)

Years ended December 31, 2017 and 2016

Geographical Segments

The following tables represent revenue information regarding the Group’s geographical segments for the years ended December 31:

		2017		2016
Revenue by customer location ¹
Canada	$	421,247	$	372,439
United States		236,467		146,419
Switzerland		159,085		256,377
Germany		144,684		39,703
China		145,935		139,200
Peru		101,033		68,964
Philippines		120,199		70,933
Other		33,903		34,643

	$	1,362,553	$	1,128,678

¹Presented based on the ultimate destination of the product if known. If the eventual destination of the product sold through traders is not known then revenue is allocated to the location of the customer's business office and not the ultimate destination of the product.

During the year ended December 31, 2017, four customers accounted for approximately 27%, 11%, 11%, and 5%, respectively, of total revenue during the year. Revenue from these customers has been presented in the Manitoba and Peru operating segments. During the year ended December 31, 2016, five customers accounted for approximately 27%, 22%, 13%, 12%, and 6%, respectively, of total revenue during the year. Revenue from these customers has been presented in the Manitoba and Peru operating segment.

EX-99.2 3 exhibit99-2.htm EXHIBIT 99.2 Hudbay Minerals Inc. - Exhibit 99.2 - Filed by newsfilecorp.com

Management's Discussion and Analysis of
Results of Operations and Financial Condition

For the year ended
December 31, 2017

February 21, 2018

*TABLE OF CONTENTS*	*Page*

Introduction	1

Our Business	1

Strategy	2

Summary of Results	4

Key Financial Results	6

Key Production Results	7

Recent Developments	8

Constancia Operations Review	9

Manitoba Operations Review	12

Outlook	19

Financial Review	21

Liquidity and Capital Resources	31

Financial Risk Management	35

Trend Analysis and Quarterly Review	36

Accounting Changes	38

Critical Accounting Judgments and Estimates	38

Non-IFRS Financial Performance Measures	39

Disclosure Controls and Procedures and Internal Control Over Financial Reporting	47

Notes to Reader	48

INTRODUCTION

This Management's Discussion and Analysis ("MD&A") dated February 21, 2018 is intended to supplement Hudbay Minerals Inc.'s audited consolidated financial statements and related notes for the year ended December 31, 2017 (the "consolidated financial statements"). The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS") as issued by the International Accounting Standards Board.

References to “Hudbay”, the “Company”, “we”, “us”, “our” or similar terms refer to Hudbay Minerals Inc. and its direct and indirect subsidiaries as at December 31, 2017. "Hudbay Peru" refers to HudBay Peru S.A.C., our wholly-owned subsidiary which owns a 100% interest in the Constancia mine, and “Hudbay Arizona” refers to HudBay Arizona Inc., our wholly-owned subsidiary, which indirectly owns a 92.05% interest in the Rosemont project.

Readers should be aware that:

	−	This MD&A contains certain “forward-looking statements” and “forward-looking information” (collectively, “forward-looking information”) that are subject to risk factors set out in a cautionary note contained in our MD&A.
	−	This MD&A has been prepared in accordance with the requirements of the securities laws in effect in Canada, which may differ materially from the requirements of United States securities laws applicable to US issuers.
	−	We use a number of non-IFRS financial performance measures in our MD&A.
	−	The technical and scientific information in this MD&A has been approved by qualified persons based on a variety of assumptions and estimates.

For a discussion of each of the above matters, readers are urged to review the “Notes to Reader” discussion beginning on page 48 of this MD&A.

Additional information regarding Hudbay, including the risks related to our business and those that are reasonably likely to affect our financial statements in the future, is contained in our continuous disclosure materials, including our most recent Annual Information Form (“AIF”), consolidated financial statements and Management Information Circular available on SEDAR at www.sedar.com and on EDGAR at www.sec.gov.

All amounts are in US dollars unless otherwise noted.

OUR BUSINESS

We are an integrated mining company primarily producing copper concentrate (containing copper, gold and silver), zinc concentrate and zinc metal. With assets in North and South America, we are focused on the discovery, production and marketing of base and precious metals. Directly and through our subsidiaries, we own four polymetallic mines, four ore concentrators and a zinc production facility in northern Manitoba and Saskatchewan (Canada) and Cusco (Peru), and a copper project in Arizona (United States). Our growth strategy is focused on the exploration and development of properties we already control, as well as other mineral assets we may acquire that fit our strategic criteria. Our vision is to be a responsible, top-tier operator of long-life, low-cost mines in the Americas. Our mission is to create sustainable value through the acquisition, development and operation of high-quality, long-life deposits with exploration potential in jurisdictions that support responsible mining, and to see the regions and communities in which we operate benefit from our presence. We are governed by the Canada Business Corporations Act and our shares are listed under the symbol "HBM" on the Toronto Stock Exchange, New York Stock Exchange and Bolsa de Valores de Lima. We also have warrants listed under the symbol “HBM.WT” on the Toronto Stock Exchange and “HBM/WS” on the New York Stock Exchange.

STRATEGY

Our mission is to create sustainable value through acquisition, development and operation of high quality, long life deposits with exploration potential in jurisdictions that support responsible mining, and to see the regions and communities in which we operate benefit from our presence.

We believe that the greatest opportunities for shareholder value creation in the mining industry are in the discovery of new mineral deposits and the development of new facilities to profitably extract ore from those deposits. We also believe that our successful development, ramp-up and operation of the Constancia mine in Peru, along with our long history of mining and experience in northern Manitoba provide us with a competitive advantage in these respects relative to other mining companies of similar scale.

We intend to grow Hudbay through exploration and development of properties we already control, such as our Rosemont project in Arizona, as well as through the acquisition of other properties that fit our strategic criteria. We also continuously work to optimize the value of our producing assets through efficient and safe operations.

In an attempt to ensure that any acquisitions we undertake create sustainable value for stakeholders, we have established a number of criteria for evaluating mineral property acquisition opportunities. These include the following:

	−	Geography: Potential acquisitions should be located in jurisdictions that support responsible mining activity and have acceptable levels of political risk. Given our current scale and geographic footprint, our current geographic focus is on select investment grade countries in the Americas, with strong rule of law and respect for human rights;
	−	Geology: We believe we have particular expertise in the exploration and development of porphyry and volcanogenic massive sulphide mineral deposits. While these types of deposits typically contain copper, zinc and precious metals in varying quantities, we have a primary focus on copper;
	−	Commodity: Among the metals we produce, we believe copper has the best long-term supply/demand fundamentals and the greatest opportunities for risk-adjusted returns;
	−	Quality: We are focused on adding long-life, low cost assets to our existing portfolio of high quality assets. Long life assets can capture peak pricing of multiple commodity price cycles and low cost assets can generate free cash flow even through the trough of price cycles;
	−	Potential: We consider the full spectrum of acquisition opportunities from early-stage exploration to producing assets, but they must meet our stringent criteria for growth and value creation. We believe that the market for mineral assets is sophisticated and fully values delineated resources and reserves, especially at properties that are already in production, which makes it difficult to acquire properties for substantially less than their fair value. Therefore, we typically look for mineral assets that we believe offer significant potential for exploration, development and optimization;
	−	Process: Before we make an acquisition, we develop a clear understanding of how we can add value to the acquired property primarily through the application of our technical, social, operational and project execution expertise, as well as through the provision of necessary financial capacity and other operational optimization opportunities;
	−	Operatorship: We believe real value is created through leading efficient project development and operations. Additionally, we believe that large, transformational mergers or acquisitions are risky and potentially value destructive in the mining industry;
	−	Financial: Acquisitions should be accretive to Hudbay on a per share basis. Given that our strategic focus includes the acquisition of non-producing assets at various stages of development, when evaluating accretion we will consider measures such as net asset value per share and the contained value of reserves and resources per share.

Our key objectives for 2018 are to:

	−	Utilize technology and process improvements to drive additional efficiencies in our operations to generate incremental free cash flow and increase net asset value;
	−	Complete the Lalor paste plant and ramp up base metal ore throughput from Lalor to 4,500 tonnes per day;
	−	Begin initial mining of Lalor gold zone material to enhance Lalor’s economics and better understand the potential for gold processing options;

	−	Deliver on plans to advance the development of the high grade Pampacancha deposit so that it can start to be mined in late 2018;
	−	Advance permitting and technical work at the Rosemont project;
	−	Utilize free cash flow generation to further reduce net debt;
	−	Test promising exploration targets near Constancia and Lalor, and at greenfield sites in Peru, Chile and Canada; and
	−	Continue to evaluate exploration and acquisition opportunities that meet our criteria described above, and pursue those opportunities that we determine to be in the best interest of the company and our stakeholders.

SUMMARY RESULTS

Summary of Fourth Quarter Results

Operating cash flow before change in non-cash working capital increased to $171.9 million in the fourth quarter of 2017 from $122.3 million in the same quarter of 2016. We benefited from 32% and 29% higher realized prices on copper and zinc, respectively, while higher zinc sales and precious metals sales offset lower copper sales.

Net profit and basic and diluted earnings per share in the fourth quarter of 2017 were $99.7 million and $0.38, respectively, compared to a net loss and loss per share of $47.3 million and $0.20, respectively, in the fourth quarter of 2016. The prior period loss was mainly due to a $47.7 million charge taken in relation to the call premium that was paid to bondholders to facilitate the early redemption of our refinanced $920 million notes (the “Redeemed Notes”). The fourth quarter of 2017 benefited from an increase in gross profit of $57.6 million compared to the same period last year, mostly due to the previously mentioned higher realized copper and zinc prices. In addition, non-recurring deferred tax adjustments of $45.4 million were recorded in the fourth quarter of 2017, primarily as a result of changes in U.S. tax legislation (See “Tax Expense (Recovery)”).

Net profit and basic and diluted earnings per share in the fourth quarter of 2017 were affected by, among other things, the following items:

(in $ millions, except per share amounts)	Pre-tax		After-tax		Per share
	gain (loss)		gain (loss)		gain (loss)
Mark-to-market adjustments of various items	(5.6	)	(4.3	)	(0.02	)
Past service pension costs	(10.4	)	(6.9	)	(0.03	)
Gain on contingent consideration from Balmat sale	6.4		6.4		0.03
Asset impairment	(11.3	)	(7.5	)	(0.03	)
Non-cash deferred tax adjustments	-		45.4		0.17

Compared to the same quarter of 2016, fourth quarter 2017 production of zinc, gold and silver in concentrate increased due to increased Lalor mine throughput and higher zinc grades at 777, while copper production remained consistent.

In the fourth quarter of 2017, consolidated cash cost per pound of copper produced, net of by-product credits, was $0.77, a decrease compared to $0.85 in the same period last year¹. Incorporating sustaining capital, capitalized exploration, royalties and corporate selling and administrative expenses, consolidated all-in sustaining cash cost per pound of copper produced, net of by-product credits, in the fourth quarter of 2017 was $1.49, up from $1.46 in the fourth quarter of 2016¹. The increase in all-in sustaining cash cost was driven by higher planned sustaining capital expenditures in Manitoba.

Net debt¹declined by $26.5 million from September 30, 2017 to $623.1 million at December 31, 2017, as a result of cash flow from our operations. At December 31, 2017, total liquidity including cash and available credit facilities was $777.9 million, up from $749.9 million at September 30, 2017.

Cash cost and sustaining cash cost per pound of copper produced, net of by-product credits, and net debt are not recognized under IFRS. For more detail on these non-IFRS financial performance measures, please see the discussion under "Non-IFRS Financial Performance Measures" beginning on page 39 of this MD&A.

During the fourth quarter, we recognized a pre-tax expense of $10.4 million for past service pension costs arising from new collective bargaining agreements in our Manitoba business unit. We also recognized an asset impairment charge of $11.3 million related to equipment purchased to build a new concentrator in Snow Lake, Manitoba that we no longer expect to be usable in our operations. We realized a gain of $6.4 million upon receipt of deferred consideration from the sale of the Balmat mine, which followed the completion of certain milestones.

Summary of Full Year Results

Operating cash flow before change in non-cash working capital increased in 2017 to $530.6 million from $387.9 million in 2016. This increase reflects higher copper and zinc prices realized throughout 2017 and higher zinc and gold sales. The increased zinc sales are a function of higher production from the re-sequencing of the 777 mine plan to prioritize higher grade zinc stopes.

Net profit and basic and diluted earnings per share for 2017 were $163.9 million and $0.67, respectively, compared to a net loss and loss per share of $35.2 million and $0.15, respectively, in 2016. The prior year loss was mostly the result of a $49.9 million charge taken in relation to the December 2016 call premium that was paid to bondholders to facilitate the early redemption of our $920 million of Redeemed Notes and the write-down of unamortized transaction costs associated with the Redeemed Notes. In the current year, we benefited from the aforementioned increase in copper and zinc prices and higher sales of zinc and gold. In addition, as indicated, there was a non-cash tax recovery of $45.4 million primarily as a result of changes to US tax legislation (See “Tax Expense (Recovery)”). Lastly, although copper grades were lower and mine operating costs were higher as a result of greater ore production activity, cash cost per pound of copper produced declined from 2016 by 10% to $0.84 as a result of higher byproduct credits from zinc production and prices.

On a consolidated basis, Hudbay’s copper production exceeded 2017 guidance and production of zinc and precious metals were within 2017 guidance ranges. Combined unit operating costs at Manitoba and Peru exceeded guidance ranges primarily due to increased operating costs and lower than expected mill throughput, while zinc plant unit operating costs were within the guidance range.

KEY FINANCIAL RESULTS

Financial Condition
(in $ thousands)	Dec. 31, 2017	Dec. 31, 2016
Cash and cash equivalents	356,499	146,864
Total long-term debt	979,575	1,232,164
Net debt ¹	623,076	1,085,300
Working capital	308,675	121,539
Total assets	4,648,729	4,456,556
Equity	2,144,255	1,763,212


Financial Performance	Three months ended			Year ended
(in $ thousands, except per share amounts)	Dec. 31,	Dec. 31,		Dec. 31,	Dec. 31,
	2017	2016		2017	2016
Revenue	414,143	316,654		1,362,553	1,128,678
Cost of sales	278,291	238,449		988,608	905,800
Profit (loss) before tax	85,540	(26,065	)	198,728	5,605
Profit (loss)	99,676	(47,273	)	163,899	(35,193	)
Basic and diluted earnings (loss) per share	0.38	(0.20	)	0.67	(0.15	)
Operating cash flow before change in non-cash working capital	171,904	122,257		530,561	387,868

¹Net debt is a non-IFRS financial performance measure with no standardized definition under IFRS. For further information and a detailed reconciliation, please see the discussion under "Non-IFRS Financial Reporting Measures" beginning on page 39 of this MD&A.

KEY PRODUCTION RESULTS

Three months ended

Three months ended

Dec. 31, 2017

Dec. 31, 2016

Peru

Manitoba

Total

Peru

Manitoba

Total

Contained metal in concentrate produced ¹

Copper

tonnes

33,837

9,338

43,175

33,986

9,797

43,783

Gold

5,139

27,389

32,528

5,033

22,449

27,482

Silver

670,219

333,272

1,003,491

723,392

269,286

992,678

Zinc

tonnes

33,055

29,144

Payable metal in concentrate sold

Copper

tonnes

34,227

7,252

41,479

35,969

8,223

44,192

Gold

4,442

26,779

31,221

6,183

19,158

25,341

Silver

543,763

291,723

835,486

701,654

209,671

911,325

Zinc²

tonnes

32,318

28,094

Cash cost³

$ /lb

1.38

(1.42

)

0.77

1.11

(0.06

)

0.85

Sustaining cash cost³

$ /lb

1.81

(0.35

)

1.54

0.58

All-in sustaining cash cost³

$ /lb

1.49

1.46

Year ended

Year ended

Dec. 31, 2017

Dec. 31, 2016

Peru

Manitoba

Total

Peru

Manitoba

Total

Contained metal in concentrate produced ¹

Copper

tonnes

121,781

37,411

159,192

133,432

41,059

174,491

Gold

17,579

91,014

108,593

26,276

88,020

114,296

Silver

2,374,008

1,113,250

3,487,258

2,760,332

995,564

3,755,896

Zinc

tonnes

135,156

110,582

Payable metal in concentrate sold

Copper

tonnes

111,402

37,253

148,655

132,663

38,788

171,451

Gold

12,464

97,306

109,770

24,199

71,328

95,527

Silver

1,950,893

1,109,376

3,060,269

2,423,165

758,594

3,181,759

Zinc²

tonnes

116,377

103,453

Cash cost³

$ /lb

1.28

(0.59

)

0.84

1.09

0.41

0.93

Sustaining cash cost³

$ /lb

1.76

0.23

1.51

1.16

All-in sustaining cash cost³

$ /lb

1.52

1.52

¹	Metal reported in concentrate is prior to deductions associated with smelter contract terms.
²	Includes refined zinc metal sold and payable zinc in concentrate sold.
³	Cash cost, sustaining cash cost and all-in sustaining cash cost per pound of copper produced, net of by-product credits are non-IFRS financial performance measures with no standardized definition under IFRS. For further information and a detailed reconciliation, please see the discussion under "Non-IFRS Financial Reporting Measures" beginning on page 39 of this MD&A.

RECENT DEVELOPMENTS

Rosemont Developments

Work continues with the U.S. Forest Service on the draft Mine Plan of Operations, which is progressing as planned. The remaining key federal permit outstanding is the Section 404 Water Permit from the U.S. Army Corps of Engineers.

On November 27, 2017, opponents of the Rosemont project filed a lawsuit against the U.S. Forest Service challenging, among other things, the issuance of the Final Record of Decision in respect of Rosemont. This is one of two active lawsuits challenging the Final Record of Decision and is one of the many legal challenges that have been advanced against the Rosemont permitting process. Hudbay is confident that Rosemont’s permits will continue to be upheld.

Dividend Declared

We declared a semi-annual dividend of C$0.01 per share on February 21, 2018. The dividend will be paid on March 29, 2018 to shareholders of record as of March 9, 2018.

Collective Bargaining Agreements

Three-year collective bargaining agreements have been entered into with Hudbay’s unionized workforces at each of its Manitoba and Peru operations, providing labour stability.

CONSTANCIA OPERATIONS REVIEW

Three months ended

Year ended

Guidance ¹

Dec. 31,

Dec. 31,

Dec. 31,

Dec. 31,

Annual

2017

2016

2017

2016

2017

2018

Ore mined

tonnes

7,241,633

6,215,160

29,982,808

26,519,954

Copper

0.55

0.61

0.54

0.62

Gold

g/tonne

0.10

0.05

0.06

0.07

Silver

g/tonne

4.01

4.24

3.96

4.25

Ore milled

tonnes

7,666,223

7,202,321

28,743,952

27,032,775

Copper

0.54

0.58

0.52

0.60

Gold

g/tonne

0.04

0.05

0.04

0.06

Silver

g/tonne

3.86

4.65

3.92

4.90

Copper concentrate

tonnes

131,308

132,741

479,858

527,296

Concentrate grade

% Cu

25.77

25.60

25.38

25.31

Copper recovery

82.1

81.6

81.1

82.4

Gold recovery

48.0

43.9

47.4

48.4

Silver recovery

70.5

67.1

65.5

64.9

Combined unit operating costs ¹

$ /tonne

9.75

7.98

8.83

8.09

7.20 - 8.80

7.50 - 9.20

¹Reflects combined mine, mill and general and administrative ("G&A") costs per tonne of ore milled. Reflects the deduction of expected capitalized stripping costs.

Ore mined at our Constancia mine during the fourth quarter of 2017 increased by 17% compared to the same period in 2016 in line with improved mill availability. As expected, milled copper grades in the fourth quarter were approximately 7% lower than the same period in 2016 as we entered lower grade phases of the mine plan. Mill throughput improved 6% due to increased plant availability as well as plant optimization initiatives during the fourth quarter of 2017.

Recoveries of copper, gold and silver were higher in the fourth quarter of 2017, compared to the same period in 2016. Optimization in process recoveries continues to be implemented and evaluated.

Combined mine, mill and G&A unit operating costs in the fourth quarter of 2017 were 22% higher than the same period in 2016. The higher combined unit costs are mostly related to decreased capitalized stripping, higher utility prices and higher overall operating costs due to increased molybdenum production during the period. Additionally, increased plant maintenance costs were incurred, as there was a major scheduled plant shutdown. Full year 2017 unit operating costs were higher than guidance expectations due to lower than expected mill throughput combined with factors affecting the fourth quarter costs described above.

Three months ended

Year ended

Guidance

Contained metal in

Dec. 31,

Dec. 31,

Dec. 31,

Dec. 31,

Annual

concentrate produced

2017

2016

2017

2016

2017

2018

Copper

tonnes

33,837

33,986

121,781

133,432

100,000 - 115,000

95,000 - 115,000

Gold

5,139

5,033

17,579

26,276

Silver

670,219

723,392

2,374,008

2,760,332

Precious metals¹

14,713

15,367

51,493

65,709

55,000 - 65,000

65,000 - 85,000

¹Precious metals production includes gold and silver production on a gold equivalent basis. Silver converted to gold at a ratio of 70:1.

In 2017, copper production at Constancia exceeded guidance, while precious metals production was slightly below the lower end of the guidance.

Copper equivalent production improved over the course of 2017 as a result of improved mill throughput, although production was lower than 2016 due to lower grades as we entered lower grade phases of the mine plan.

Peru Cash Cost and Sustaining Cash Cost

Three months ended

Year ended

Dec. 31,

Dec. 31,

Dec. 31,

Dec. 31,

2017

2016

2017

2016

Cash cost per pound of copper produced, net of by-product credits ¹

$ /lb

1.38

1.11

1.28

1.09

Sustaining cash cost per pound of copper produced, net of by-product credits ¹

$ /lb

1.81

1.54

1.76

1.51

¹Cash cost and sustaining cash costs per pound of copper produced, net of by-product credits, are not recognized under IFRS. For more detail on these non-IFRS financial performance measures, please see the discussion under "Non-IFRS Financial Performance Measures" beginning on page 39 of this MD&A.

Cash cost per pound of copper produced, net of by-product credits, for the three months ended December 31, 2017 was $1.38, an increase of 24% from the same period in 2016 mainly as a result of lower deferred stripping, increased plant cash costs and profit sharing.

Sustaining cash cost per pound of copper produced, net of by-product credits, for the three months ended December 31, 2017 was $1.81, an increase of 18% from the same period in 2016 as a result of the factors noted above.

Metal Sold

Three months ended

Year ended

Dec. 31,

Dec. 31,

Dec. 31,

Dec. 31,

2017

2016

2017

2016

Payable metal in concentrate

Copper

tonnes

34,227

35,969

111,402

132,663

Gold

4,442

6,183

12,464

24,199

Silver

543,763

701,654

1,950,893

2,423,165

Production and Combined Unit Costs Guidance

In 2018, production of copper contained in concentrate in Peru is forecast to decrease by approximately 14% compared to 2017 production, due to lower copper grades at Constancia as the mine shifts to production of lower-grade hypogene ore in the main pit, in line with the mine plan.

Production of precious metals contained in concentrate in 2018 in Peru is forecast to increase by approximately 46% compared to 2017 production, primarily due to the expected start of mining at the Pampacancha deposit.

Combined unit costs for Peru in 2018 are expected to be approximately 4% higher than 2017 guidance as a result of the addition of a fourth operating shift at Constancia in line with the new three-year collective bargaining agreement, as well as higher diesel and steel prices.

Peru Updates

Negotiations to secure surface rights over the Pampacancha deposit are ongoing. The community has provided Hudbay with access to the land to carry out early-works activities and Hudbay expects to begin ore production later this year. In the event that the commencement of mining at Pampacancha is unexpectedly delayed beyond 2018, Hudbay expects to mine material from the main Constancia pit instead, which would not impact copper production guidance, but would reduce 2018 Peru precious metals production guidance by approximately 25%.

Twin hole drilling in the Constancia pit has indicated that the positive copper grade bias versus resource grades that has been experienced since the start of Constancia’s production is expected to persist through the life of the deposit, although the extent of the bias is expected to be less than what has been experienced to date. 2018 Peru copper guidance partially reflects the anticipated grade bias; work is ongoing to develop a revised mine plan and updated reserves, which are expected to be released by April 2018.

MANITOBA OPERATIONS REVIEW

Mines

Three months ended

Year ended

Dec. 31,

Dec. 31,

Dec. 31,

Dec. 31,

2017

2016

2017

2016

777

Ore

tonnes

202,528

298,135

1,014,369

1,297,829

Copper

1.86

1.67

1.65

1.57

Zinc

5.40

3.81

5.17

3.47

Gold

g/tonne

2.48

1.64

2.11

1.52

Silver

g/tonne

34.46

24.06

27.59

21.34

Lalor

Ore

tonnes

334,229

272,156

1,293,418

1,086,362

Copper

0.77

0.58

0.68

0.62

Zinc

7.20

7.42

7.73

7.01

Gold

g/tonne

2.25

2.07

1.93

2.24

Silver

g/tonne

25.19

21.73

23.18

21.63

Reed ¹

Ore

tonnes

102,229

104,719

460,413

443,561

Copper

3.52

2.90

3.67

3.96

Zinc

0.69

0.63

0.60

0.62

Gold

g/tonne

0.51

0.44

0.47

0.50

Silver

g/tonne

8.97

5.76

7.19

6.78

Total Mines

Ore

tonnes

638,986

675,010

2,768,200

2,827,752

Copper

1.55

1.42

1.53

1.58

Zinc

5.59

4.77

5.61

4.38

Gold

g/tonne

2.04

1.63

1.75

1.64

Silver

g/tonne

25.54

20.28

22.14

19.17

¹Includes 100% of Reed mine production. We purchase 30% of the Reed ore production from our joint venture partner on market-based terms.

Three months ended

Year ended

Dec. 31,

Dec. 31,

Dec. 31,

Dec. 31,

Unit Operating Costs

2017

2016

2017

2016

Mines

777

C$/tonne

90.34

53.40

68.49

52.27

Lalor

C$/tonne

80.91

69.14

80.12

66.41

Reed

C$/tonne

109.02

57.39

73.70

48.29

Total Mines

C$/tonne

87.36

60.51

74.85

57.51

Ore mined at our Manitoba mines during the fourth quarter of 2017 decreased by 5% compared to the same period in 2016 primarily as a result of lower production at the 777 mine. Ore mined at the 777 mine declined as ground conditions necessitated the implementation of a more conservative stope sequence in order to adapt to more challenging operating conditions as the mine ages. Lower than planned equipment availability, and delays in the mine sequence resulting from a plugged paste backfill line in the third quarter also impacted fourth quarter production rates. Overall copper, zinc, gold and silver grades were higher in the fourth quarter of 2017 compared to the same period in 2016 by 9%, 17%, 25% and 26%, respectively as a result of higher grades at all mines.

Total mine unit operating costs in the fourth quarter of 2017 were 44% higher compared to the same period in 2016.

We ceased capitalizing Reed development costs in the third quarter of 2017 as a result of the mine’s expected closure in the third quarter of 2018, resulting in higher Reed unit operating costs compared to prior periods. The 777 mine’s unit costs were negatively impacted by lower production as a result of the items noted above. Consistent with our revised mine plan, Lalor’s unit costs reflect increased cement rock filling costs as well as substantial operating and capital development work that was undertaken to increase Lalor’s production rate to 4,500 tonnes per day by the third quarter of 2018. The successful ramp up of ore production from the Lalor mine has resulted in the accumulation of an ore stockpile which exceeds the Stall concentrator’s current milling capacity. With intention to take advantage of higher metal prices and increase our revenues, excess Lalor ore production was trucked to the Flin Flon mill for processing, which contributed to the increased unit costs for Lalor.

Full year ore production at our Manitoba mines in 2017 was 2% lower than in 2016 as a result of decreased production at the 777 mine, which was partially offset by increased production at the Lalor mine. The 777 mine production was lower for the reasons noted above. Zinc grades were 28% higher due to higher Lalor mine output and the prioritization of production from higher-grade zinc zones at the 777 mine. Unit operating costs in 2017 increased by 30% compared to 2016 as a result of Lalor ramp-up activities including increasing drilled inventory and the associated operating development to access the required drill platforms, increased cemented rock filling to avoid leaving high grade ore pillars, and additional ore haulage costs to truck the excess ore feed to the Flin Flon mill to utilize its excess processing capacity.

Processing Facilities

Three months ended

Year ended

Dec. 31,

Dec. 31,

Dec. 31,

Dec. 31,

2017

2016

2017

2016

Flin Flon Concentrator

Ore

tonnes

402,240

464,747

1,602,688

1,764,725

Copper

2.06

2.04

2.12

2.18

Zinc

4.50

2.96

4.08

2.74

Gold

g/tonne

1.89

1.32

1.65

1.26

Silver

g/tonne

25.78

19.23

21.69

17.63

Copper concentrate

tonnes

34,308

36,695

132,278

148,706

Concentrate grade

% Cu

22.54

23.44

23.81

23.82

Zinc concentrate

tonnes

29,987

22,518

109,451

76,730

Concentrate grade

% Zn

50.76

51.34

51.28

51.49

Copper recovery

93.3

90.6

92.6

92.2

Zinc recovery

84.1

84.2

85.9

81.6

Gold recovery

65.3

60.6

62.2

59.7

Silver recovery

61.9

57.7

58.9

56.7

Contained metal in concentrate produced

Copper

tonnes

7,734

8,602

31,488

35,422

Zinc

tonnes

15,222

11,562

56,128

39,504

Precious metals ¹

18,916

14,344

62,357

50,861

Stall Concentrator

Ore

tonnes

267,636

257,759

1,102,034

1,089,530

Copper

0.71

0.58

0.65

0.63

Zinc

7.28

7.39

7.76

7.03

Gold

g/tonne

2.26

2.10

1.91

2.25

Silver

g/tonne

25.14

21.77

22.85

21.67

Copper concentrate

tonnes

8,492

5,951

29,362

27,298

Concentrate grade

% Cu

18.89

20.08

20.18

20.65

Zinc concentrate

tonnes

34,708

33,995

152,766

138,056

Concentrate grade

% Zn

51.38

51.72

51.73

51.48

Copper recovery

84.5

80.0

82.4

82.1

Zinc recovery

91.6

92.3

92.4

92.8

Gold recovery

58.6

60.3

56.3

57.4

Silver recovery

58.7

57.4

56.2

56.4

Contained metal in concentrate produced

Copper

tonnes

1,604

1,195

5,923

5,637

Zinc

tonnes

17,833

17,582

79,028

71,075

Precious metals ¹

13,234

11,952

44,561

51,381

¹ Precious metals production includes gold and silver production on a gold-equivalent basis. Silver is converted to gold at a ratio of 70:1.

Three months

ended

Year ended

Guidance

Dec. 31,

Dec. 31,

Dec. 31,

Dec. 31,

Annual

Unit Operating Costs

2017

2016

2017

2016

2017

2018

Concentrators

Flin Flon

C$/tonne

20.68

18.48

19.26

18.32

Stall

C$/tonne

29.09

27.58

29.63

23.62

Combined mine/mill unit operating costs ¹

Manitoba

C$/tonne

124.67

96.38

118.04

92.77

88 -108

110 -123

¹Reflects combined mine, mill and G&A costs per tonne of ore milled. Includes the cost of ore purchased from our joint venture partner at the Reed mine.

Ore processed in the Flin Flon concentrator in the fourth quarter of 2017 was 13% lower than the same period in 2016 primarily as a result of lower mine production, and challenges in primary crushing due to frozen blocks of ore feed recovered from stockpiles. Copper and precious metals recoveries were higher in the fourth quarter of 2017 compared to the same period in 2016 as a result of higher head grades and improvements made to the mill. Unit operating costs at the Flin Flon concentrator were 12% higher in the fourth quarter of 2017 compared to the same period in 2016 as a result of higher maintenance expenditures and reduced production. Ore processed at the Stall concentrator in the fourth quarter of 2017 was 4% higher than the same period in 2016. Unit operating costs at the Stall concentrator were 5% higher in the fourth quarter of 2017 compared to the same period in 2016 as a result of higher maintenance expenditures resulting from unplanned repairs.

For the full year, ore processed in Flin Flon was 9% lower than in 2016 as a result of lower production at our 777 mine, partially offset by processing Lalor ore in Flin Flon starting in August. Zinc and precious metals recoveries in 2017 were higher compared to 2016 as a result of higher head grades. Unit operating costs at the Flin Flon concentrator in 2017 were 5% higher than in 2016 as a result of lower production as well as unscheduled maintenance in the first quarter of 2017 and the completion of staged repairs throughout the remainder of the year with the intention of maintaining the asset to match the expected mine life. For the full year, ore processed at the Stall concentrator was consistent with 2016. Unit operating costs at the Stall concentrator in 2017 were 25% higher than in 2016 as a result of higher maintenance throughout 2017 as well as the use of higher cost temporary crushing facilities in the first quarter.

Manitoba combined mine, mill and G&A unit operating costs in the fourth quarter and full year in 2017 were 29% and 27% higher, respectively, than in the same periods in 2016 due to the factors described above as well as higher 777, Reed and Lalor unit costs due to the factors described under “Mines” above. In addition, the stockpiling of Lalor ore described above increased combined mine/mill unit costs as that metric is expressed as total costs during the period (irrespective of inventory changes), divided by the tonnes of ore milled. Processing the additional Lalor production in Flin Flon is expected to drive economies of scale and additional revenues through a faster ramp up. Combined mine/mill unit operating costs in Manitoba exceeded the guidance range for the reasons noted above.

		Three months ended		Year ended		Guidance
Manitoba contained metal		Dec. 31,	Dec. 31,	Dec. 31,	Dec. 31,	Annual
in concentrate produced ^1,2		2017	2016	2017	2016	2017	2018
Copper	tonnes	9,338	9,797	37,411	41,059	32,500 - 42,500	27,500 - 32,500
Gold	oz	27,389	22,449	91,014	88,020	-	-
Silver	oz	333,272	269,286	1,113,250	995,564	-	-
Zinc	tonnes	33,055	29,144	135,156	110,582	125,000 - 150,000	105,000 - 130,000
Precious metals³	oz	32,150	26,296	106,918	102,242	90,000 - 110,000	120,000 - 145,000

¹Includes 100% of Reed mine production. We own a 70% interest in the Reed mine and purchase 30% of the Reed ore production from our joint venture partner on market based terms.
²Metal reported in concentrate is prior to deductions associated with smelter terms.
³Precious metals production includes gold and silver production on a gold-equivalent basis. Silver is converted to gold at a ratio of 70:1.

In the fourth quarter of 2017, production of copper was 5% lower than the same period in 2016 as a result of lower production at 777, while zinc, gold, and silver production was 13%, 22%, and 24% higher, respectively, compared to the same period of 2016 as a result of higher grades at all mines as well as higher production at Lalor. Production of all metals in Manitoba for full year 2017 was within the guidance ranges.

Zinc Plant

Three months ended

Year ended

Guidance

Dec. 31,

Dec. 31,

Dec. 31,

Dec. 31,

Annual

Zinc Production

2017

2016

2017

2016

2017

2018

Zinc Concentrate Treated

Domestic

tonnes

59,302

60,350

223,973

216,982

Refined Metal Produced

Domestic

tonnes

27,794

28,899

107,946

102,594

95,000-115,000

110,000-115,000

Three months ended

Year ended

Guidance

Dec. 31,

Dec. 31,

Dec. 31,

Dec. 31,

Annual

Unit Operating Costs

2017

2016

2017

2016

2017

2018

Zinc Plant ¹

C$/lb

0.43

0.44

0.43

0.45

0.40 - 0.50

¹Zinc unit operating costs include G&A costs.

Production of cast zinc and operating cost per pound of zinc metal produced in the fourth quarter was consistent with the same period in 2016 while full year production was 5% higher than 2016 as a result of higher amperages in the zinc plant cell house due to improvements made in the operation of the cooling towers during the hotter summer months. Unit costs were 2% lower in the fourth quarter compared to the same period in 2016 and 4% lower for the 2017 year compared to 2016 as a result of increased production. Zinc plant production and unit costs were within the guidance ranges for 2017.

Manitoba Cash Cost and Sustaining Cash Cost

Three months ended

Year ended

Dec. 31,

Dec. 31,

Dec. 31,

Dec. 31,

2017

2016

2017

2016

Cost per pound of copper produced

Cash cost per pound of copper produced, net of by-product credits ¹

$ /lb

(1.42

)

(0.06

)

(0.59

)

0.41

Sustaining cash cost per pound of copper produced, net of by-product credits ¹

$ /lb

(0.35

)

0.58

0.23

1.16

Cost per pound of zinc produced

Cash cost per pound of zinc produced, net of by-product credits ¹

$ /lb

0.29

0.36

0.20

0.32

Sustaining cash cost per pound of zinc produced, net of by-product credits ¹

$ /lb

0.59

0.57

0.43

0.61

¹Cash cost and sustaining cash cost per pound of copper & zinc produced, net of by-product credits, are not recognized under IFRS. For more detail on this non-IFRS financial performance measure, please see the discussion under "Non-IFRS Financial Performance Measures" beginning on page 39 of this MD&A.

In Manitoba, cash cost per pound of copper produced, net of by-product credits, in the fourth quarter of 2017 and full year were negative $1.42 and negative $0.59 per pound of copper produced, respectively. These were lower compared to the same periods in 2016, primarily as a result of significantly increased by-product credits for all metals, which were partially offset by expected higher costs at our 777 and Reed mines during this part of their mine lives.

Sustaining cash cost per pound of copper produced, net of by-product credits, in the fourth quarter of 2017 and full year were negative $0.35 and $0.23 per pound of copper produced, respectively, compared to $0.58 and $1.16 in the prior year as a result of the same factors described above, which were partially offset by planned increased capital spending.

Cash cost and sustaining cash cost per pound of zinc produced, net of by-product credits, were comparable and lower compared to the same period last year as a result of increased zinc production, and higher grades realized with the revised 777 mine plan, partially offset by the higher mining costs associated with the 777 and Reed mines at this stage of their mine lives.

Metal Sold

Three months ended

Year ended

Dec. 31,

Dec. 31,

Dec. 31,

Dec. 31,

2017

2016

2017

2016

Payable metal in concentrate

Copper

tonnes

7,252

8,223

37,253

38,788

Gold

26,779

19,158

97,306

71,328

Silver

291,723

209,671

1,109,376

758,594

Zinc

tonnes

7,138

12,701

Refined zinc

tonnes

25,180

28,094

103,676

103,453

Due to increased Lalor mine throughput and higher zinc grades at 777, zinc concentrate production exceeded the processing capacity of the Flin Flon zinc plant. As a result, sales of excess zinc concentrate inventory began in the second quarter of 2017 and will continue as long as concentrate production exceeds zinc plant processing capacity; which is estimated to continue until the second quarter of 2018.

Production and Combined Unit Costs Guidance

In 2018, production of copper contained in concentrate in Manitoba is forecast to decrease by approximately 20% compared to 2017 production, due to the Reed mine closing.

Production of precious metals contained in concentrate in 2018 in Manitoba is forecast to increase by approximately 24% compared to 2017 production, primarily due to an expected increase in precious metals production from the Lalor mine.

Combined unit costs for Manitoba are forecast to be higher than 2017 guidance of C$88-108/tonne, due mainly to reduced ore production at the 777 mine, the cessation of the capitalization of development costs at Reed as it approaches the end of its mine life and costs for trucking ore from Lalor to the Flin Flon concentrator for processing, in lieu of capital expenditures on expanding the Stall concentrator.

Hudbay’s anticipated zinc concentrate production from the Manitoba Business Unit in 2018 is expected to result in full utilization of the Flin Flon zinc plant’s processing capacity, with some zinc concentrate planned for sale to third parties.

OUTLOOK

This outlook includes forward-looking information about our operations and financial expectations based on our expectations and outlook as of February 21, 2018. This outlook, including expected results and targets, is subject to various risks, uncertainties and assumptions, which may impact future performance and our achievement of the results and targets discussed in this section. For additional information on forward-looking information, refer to "Forward-Looking Information" on page 48 of this MD&A. We may update our outlook depending on changes in metals prices and other factors.

In addition to this section, refer to the "Operations Review" and "Financial Review" sections for additional details on our outlook for 2018. For information on our sensitivity to metals prices, refer below to the "Commodity Markets" and "Sensitivity Analysis" sections of this MD&A.

Material Assumptions

Our 2018 operational and financial performance will be influenced by a number of factors. At the macro-level, the general performance of the Chinese, North American and global economies will influence the demand for our products. The realized prices we achieve in the commodity markets significantly affect our performance. Our general expectations regarding metals prices and foreign exchange rates are included below in the “Commodity Markets” and “Sensitivity Analysis” sections of this MD&A.

2018 Mine and Mill Production (Contained Metal in Concentrate)

		Year ended
		December 31, 2017	2018 Guidance
Copper	tonnes	159,192	122,500 - 147,500
Zinc	tonnes	135,156	105,000 - 130,000
Precious metals¹	oz	158,411	185,000 - 230,000

¹Precious metals production includes gold and silver production on a gold-equivalent basis. Silver converted to gold at a ratio of 70:1.

In 2018, consolidated production of copper contained in concentrate is forecast to decrease by approximately 15% compared to 2017 production, due to lower copper grades at Constancia as the mine shifts to production of lower-grade hypogene ore in the main pit, in line with the mine plan, and the Reed mine closure. Production of zinc contained in concentrate in 2018 is forecast to decrease by approximately 13% compared to 2017 production, due to lower zinc grades at the 777 and Lalor mines, in line with the respective mine plans.

Consolidated production of precious metals contained in concentrate in 2018 is forecast to increase by approximately 31% compared to 2017 production, primarily due to an expected increase in precious metals production from the Lalor mine in Manitoba and the expected start of mining at the Pampacancha deposit in Peru. In 2018, precious metals contained in ore production from the Lalor mine, which has no royalty or stream obligations, is expected to account for 67% of Manitoba’s precious metals production, compared to 49% of 2017 actual Manitoba precious metals production. Mine development at Lalor is now adjacent to the gold zones, and a recent batch sample of gold ore sent to the Flin Flon concentrator realized favourable gold recoveries of more than 60%. The mine plan for 2018 includes some mining of the gold zone for processing at Flin Flon, which is included in our precious metals production guidance. This will enable a better understanding of the gold zone characteristics and better inform the evaluation of options for processing Lalor gold.

Production and Cost Outlook

For a discussion of our 2018 expectations for Peru and Manitoba production and costs, refer to the “Production and Combined Unit Costs Guidance” sections of each business units operations review above.

Exploration

During the downturn in metals prices over the past few years, Hudbay more than doubled its owned or optioned mineral properties from approximately 380,000 hectares to approximately 860,000 hectares across Canada, Peru, the United States and Chile. Hudbay’s 2018 exploration budget of $50 million, more than twice that of 2017, will be focused on exploration near existing processing infrastructure in Manitoba and Peru, as well as grassroots exploration properties in Chile and British Columbia.

As disclosed on January 8, 2018, Hudbay has acquired a large, contiguous block of mineral rights to explore for mineable deposits within trucking distance of the Constancia processing facility. Hudbay is commencing permitting, community relations and technical activities required to access and conduct drilling activities on these properties and will provide further detail on its exploration plans in due course.

Exploration Guidance	Year ended
(in $ millions)	December 31, 2017		2018 Guidance
Manitoba	7.1		15.0
Peru	1.4		20.0
Generative and other	8.4		15.0
Total exploration expenditures	16.9		50.0
Capitalized Spending¹	(1.4	)	(10.0	)

Total¹	15.5		40.0

¹Assumes $10 million of Manitoba expenditures will be capitalized in 2018.

Commodity Markets

In addition to our production, financial performance is directly affected by a number of factors, including metals prices, foreign exchange rates, and input costs, including energy prices. Average prices for copper and zinc were significantly higher in 2017 compared to 2016, whereas precious metals prices were little changed.

We have developed the following market analysis from various information sources including analyst and industry experts.

Copper

In 2017, the London Metal Exchange (“LME”) copper price averaged $2.80 per pound ("/lb"), with prices ranging between $2.48/lb and $3.27/lb. Copper refined metal markets experienced a small deficit in 2017, as global economic growth improved while copper supply growth was muted.

In 2018, both copper supply and demand are expected to increase moderately, although there is a greater than usual risk of production disruptions due to renegotiations of labour agreements at major copper mines.

Although copper prices have recovered to levels that support the viability of existing operations, we believe current copper prices remain at levels that are too low to incentivize significant investments in new copper production. New copper production will be needed to replace mine depletion and progressively lower mine grades globally. As a result, copper mine supply is expected to peak before the end of the decade which, assuming continued global and Chinese economic growth, is expected to be followed by copper market deficits and significantly higher copper prices.

Zinc

In 2017, the LME zinc price averaged $1.31/lb, with prices ranging from $1.10/lb to $1.53/lb. Zinc market deficits that have been in place for several years continued to grow in 2017, with the refined metal deficit estimated to reach 6% of global demand. Zinc demand in China and globally saw moderate growth in 2017, which is expected to continue into 2018, while zinc metal production was constrained by limited concentrate supply. The recent increase in zinc prices to more than $1.50/lb is likely to incentivize new zinc production, thereby reducing the size of the global deficit, although prices could still increase further if available metal inventory reaches critically low levels during 2018.

Sensitivity Analysis

The following table displays the estimated impact of changes in metals prices and foreign exchange rates on our 2018 net profit, earnings per share and operating cash flow, assuming that our operational performance is consistent with our guidance for 2018. The effects of a given change in an assumption are isolated.

	2018	Change of 10%	Impact on	Impact on	Impact on
	Base	represented by:	Profit	EPS¹	operating cash flow²
Metals Prices ³
Copper price	$3.00/lb	+/- $0.30/lb	+/- $50M	+/- 0.19	+/- $56M
Zinc price	$1.30/lb	+/- $0.13/lb	+/- $23M	+/- 0.09	+/- $32M
Gold price⁴	$1,300/oz	+/- $130/oz	+/- $9M	+/- 0.04	+/- $10M

Exchange Rates⁵
C$/US$	1.25	+/- 0.125	+/- $40M	+/- 0.15	+/- $38M

¹Based on 261.3 million common shares outstanding as at December 31, 2017.
²Operating cash flow before changes in non-cash working capital.
³Copper and zinc prices are based on quoted LME prices and gold price is based on London Bullion Market Association prices.
⁴Gold price sensitivity also includes the impact of a +/-10% change in the silver price (2018 assumption: $18/oz of silver).
⁵Change in profit from operational performance only, does not include change in profit arising from translation of balance sheet accounts.

FINANCIAL REVIEW

Financial Results

In the fourth quarter of 2017, our profit was $99.7 million compared to a loss of $47.3 million for the fourth quarter of 2016. For the full year 2017, we recorded a profit of $163.9 million compared to a loss of $35.2 million in 2016.

The following table provides further details of this variance:

	Three months ended		Year ended
(in $ millions)	Dec. 31, 2017		Dec. 31, 2017
Increase (decrease) in components of profit or loss:
Revenues	97.5		233.9
Cost of sales
Mine operating costs	(42.7	)	(88.6	)
Depreciation and amortization	2.9		5.8
Net finance expense	61.6		45.6
Other	(7.7	)	(3.6	)
Tax	35.3		6.0

Increase in profit for the period	146.9		199.1

Revenue

Total revenue for the fourth quarter of 2017 was $414.1 million, $97.5 million higher than the same period in 2016. This increase was due to higher copper and zinc prices, while higher zinc and gold sales volumes offset lower copper sales volumes.

For the full year 2017, revenue was $1,362.6 million, $233.9 million higher than in 2016, due primarily to higher copper and zinc prices, along with higher zinc and precious metal sales. These increases were partially offset by lower copper sales volumes, along with lower average precious metals prices for the year.

	Three months ended		Year ended
(in $ millions)	Dec. 31, 2017		Dec. 31, 2017
Metals prices¹
Higher copper prices	72.0		206.5
Higher zinc prices	24.8		94.0
Lower gold prices	(0.9	)	(13.2	)
Lower silver prices	(1.1	)	(7.0	)
Sales volumes
Lower copper sales volumes	(16.1	)	(116.9	)
Higher zinc sales volumes	11.0		28.9
Higher gold sales volumes	7.4		24.2
(Lower) higher silver sales volumes	(0.8	)	0.7
Other
Derivative mark-to-market increase (decrease)	0.7		(6.9	)
Other volume and pricing differences	2.1		11.3
Effect of (higher) lower treatment and refining charges	(1.6	)	12.3

Increase in revenue in 2017 compared to 2016	97.5		233.9

¹ See discussion below for further information regarding metals prices.

Our revenue by significant product type is summarized below:

	Three months ended				Year ended
	Dec. 31,		Dec. 31,		Dec. 31,		Dec. 31,
(in $ millions)	2017		2016		2017		2016
Copper	286.6		230.7		925.1		835.5
Zinc	108.1		71.6		352.9		237.0
Gold	35.2		28.8		130.8		119.8
Silver	12.4		14.3		45.8		52.1
Other	2.8		0.7		14.1		2.7
Gross revenue¹	445.1		346.1		1,468.7		1,247.1
Treatment and refining charges	(31.0	)	(29.4	)	(106.1	)	(118.4	)
Revenue	414.1		316.7		1,362.6		1,128.7

¹Copper, gold and silver revenues include unrealized gains and losses related to non-hedge derivative contracts including fixed for floating swaps, that are included in realized prices. Zinc revenues include unrealized gains and losses related to non-hedge derivative contracts that are not included in realized prices.

Realized sales prices

This measure is intended to enable management and investors to understand the average realized price of metals sold to third parties in each reporting period. The average realized price per unit sold does not have any standardized meaning prescribed by IFRS, is unlikely to be comparable to similar measures presented by other issuers, and should not be considered in isolation or a substitute for measures of performance prepared in accordance with IFRS.

For sales of copper, gold and silver we may enter into non-hedge derivatives (“QP hedges”) which are intended to manage the provisional pricing risk arising from quotational period terms in concentrate sales agreements. The QP hedges are not removed from the calculation of realized prices. We expect that gains and losses on QP hedges will offset provisional pricing adjustments on concentrate sales contracts.

Our realized prices for the fourth quarter and year-to-date in 2017 and 2016, respectively, are summarized below:

Realized prices¹for the

Three months ended

Year ended

LME QTD

Dec. 31,

Dec. 31,

LME YTD

Dec. 31,

Dec. 31,

2017²

2017

2016

2017²

2017

2016

Prices

Copper

$ /lb

3.09

3.13

2.37

2.80

2.82

2.21

Zinc³

$ /lb

1.47

1.53

1.19

1.31

1.38

1.01

Gold⁴

$ /oz

1,129

1,136

1,192

1,254

Silver⁴

$ /oz

14.89

15.72

14.96

16.38

¹Realized prices exclude refining and treatment charges and are on the sale of finished metal or metal in concentrate. Realized prices include the effect of provisional pricing adjustments on prior period sales.²London Metal Exchange average for copper and zinc prices.³This amount includes a realized sales price of $1.55 for cast zinc metal and $1.48 for zinc concentrate sold for the three months ended December 31, 2017. Zinc realized prices include premiums paid by customers for delivery of refined zinc metal, but exclude unrealized gains and losses related to non-hedge derivative contracts that are included in zinc revenues. For the three months ended December 31, 2017, the unrealized component of the zinc derivative resulted in a loss of $0.02/lb. For the three months ended December 31, 2016, the unrealized component of the zinc derivative resulted in a loss of $0.03/lb.⁴Sales of gold and silver from our 777 and Constancia mines are subject to our precious metals stream agreement with Wheaton Precious Metals, pursuant to which we recognize deferred revenue for precious metals deliveries and also receive cash payments. Stream sales are included within realized prices and their respective deferred revenue and cash payment rates can be found on page 26.

The following table provides a reconciliation of average realized price per unit sold, by metal, to revenues as shown in the consolidated financial statements:

Three months ended December 31, 2017
(in $ millions) ¹	Copper	Zinc		Gold	Silver	Other	Total
Revenue per financial statements	286.6	108.1		35.2	12.4	2.8	445.1
Derivative mark-to-market ²	-	1.1		-	-	-	1.1
Revenue, excluding mark-to-market on non-QP hedges	286.6	109.2		35.2	12.4	2.8	446.2
Payable metal in concentrate sold ³	41,479	32,318		31,221	835,486	-	-
Realized price ⁴	6,909	3,381		1,129	14.89	-	-
Realized price ⁵	3.13	1.53		-	-	-	-
Year ended December 31, 2017
(in $ millions) ¹	Copper	Zinc		Gold	Silver	Other	Total
Revenue per financial statements	925.1	352.9		130.8	45.8	14.1	1,468.7
Derivative mark-to-market ²	-	0.9		-	-	-	0.9
Revenue, excluding mark-to-market on non-QP hedges	925.1	353.8		130.8	45.8	14.1	1,469.6
Payable metal in concentrate sold ³	148,655	116,377		109,770	3,060,269	-	-
Realized price ⁴	6,223	3,041		1,192	14.96	-	-
Realized price ⁵	2.82	1.38		-	-	-	-
Three months ended December 31, 2016
(in $ millions) ¹	Copper	Zinc		Gold	Silver	Other	Total
Revenue per financial statements	230.7	71.6		28.8	14.3	0.7	346.1
Derivative mark-to-market ²	-	1.8		-	-	-	1.8
Revenue, excluding mark-to-market on non-QP hedges	230.7	73.4		28.8	14.3	0.7	347.9
Payable metal in concentrate sold ³	44,192	28,094		25,341	911,325	-	-
Realized price ⁴	5,221	2,614		1,136	15.72	-	-
Realized price ⁵	2.37	1.19		-	-	-	-
Year ended December 31, 2016
(in $ millions) ¹	Copper	Zinc		Gold	Silver	Other	Total
Revenue per financial statements	835.5	237.0		119.8	52.1	2.7	1,247.1
Derivative mark-to-market ²	-	(6.0	)	-	-	-	(6.0	)
Revenue, excluding mark-to-market on non-QP hedges	835.5	231.0		119.8	52.1	2.7	1,241.1
Payable metal in concentrate sold ³	171,451	103,453		95,527	3,181,759	-	-
Realized price ⁴	4,872	2,233		1,254	16.38	-	-
Realized price ⁵	2.21	1.01		-	-	-	-

¹	Average realized price per unit sold may not calculate based on amounts presented in this table due to rounding.
²	Derivative mark-to-market excludes mark-to-market on QP hedges.
³	Copper and zinc shown in tonnes and gold and silver shown in ounces.
⁴	Realized price for copper and zinc in $/metric tonne and realized price for gold and silver in $/oz.
⁵	Realized price for copper and zinc in $/lb.

The price, quantity and mix of metals sold, affect our revenue, operating cash flow and profit. Revenue from metals sales can vary from quarter to quarter due to production levels, shipping volumes and transfer of risk and title to customers.

Metals Prices

For details on market metal prices refer to the discussion on “Commodity Markets” section beginning on page 20 of this MD&A.

Stream Sales

The following table shows stream sales included within realized prices and their respective deferred revenue and cash payment rates:

Three months ended

Year ended

Dec. 31, 2017

Manitoba

Peru

Manitoba

Peru

Gold¹

6,568

2,212

24,479

8,842

Silver¹

124,484

539,135

526,648

1,924,220

Gold deferred revenue drawdown rate²

$ /oz

1,079

431

1,097

431

Gold cash rate ³

$ /oz

412

400

410

400

Silver deferred revenue drawdown rate²

$ /oz

16.04

7.45

16.66

7.41

Silver cash rate ³

$ /oz

6.08

5.90

6.05

5.90

		Three months ended		Year ended
		Dec. 31, 2016		Dec. 31, 2016
		Manitoba	Peru	Manitoba	Peru
Gold	oz	6,314	3,343	32,051	15,280
Silver	oz	83,838	701,654	395,724	2,423,165
Gold deferred revenue drawdown rate¹	$ /oz	977	432	1,049	435
Gold cash rate ²	$ /oz	408	400	405	400
Silver deferred revenue drawdown rate¹	$ /oz	17.89	7.40	19.14	7.39
Silver cash rate ²	$ /oz	6.02	5.90	5.98	5.90

¹	Included in both three months ended and year ended December 31, 2017 amounts above, is 3,611 oz of gold and 46,205 oz of silver that did not result in a drawdown of deferred revenue.
²	Deferred revenue amortization is recorded in Manitoba at C$1,368/oz and C$20.33/oz for gold and silver, respectively, (January 1, 2017 to June 30, 2017 - C$1,464/oz and C$22.60/oz; 2016 - C$1,382/oz and C$25.23/oz) and converted to US dollars at the exchange rate in effect at the time of revenue recognition.
³	The gold and silver cash rate for Manitoba increased by 1% from $400/oz and $5.90/oz effective August 1, 2015. Subsequently every year, on August 1, the cash rate will increase by 1% compounded. The weighted average cash rate is disclosed.

Cost of Sales

Our detailed cost of sales is summarized as follows:

Three months ended

Year ended

Dec. 31,

Dec. 31,

Dec. 31,

Dec. 31,

(in $ thousands)

2017

2016

2017

2016

Peru

Mine

21,334

12,261

61,459

55,570

Concentrator

39,703

32,253

138,502

118,721

Changes in product inventory

4,725

8,538

(2,960

)

13,544

Depreciation and amortization

51,455

48,847

174,110

178,099

G&A

17,528

12,957

56,205

44,401

Freight, royalties and other charges

13,764

13,038

49,659

56,897

Total Peru cost of sales

148,509

127,894

476,975

467,232

Manitoba

Mines

41,794

29,193

151,994

116,973

Concentrators

12,666

11,767

48,947

43,885

Zinc plant

18,458

17,113

67,966

65,587

Purchased ore and concentrate (before inventory changes)

6,156

4,501

21,881

16,705

Changes in product inventory

(7,918

)

(4,894

)

(9,919

)

(3,027

)

Depreciation and amortization

23,842

29,345

118,770

120,531

G&A

23,267

13,291

63,645

39,970

Freight, royalties and other charges

11,517

10,239

48,349

37,944

Total Manitoba cost of sales

129,782

110,555

511,633

438,568

Cost of sales

278,291

238,449

988,608

905,800

Total cost of sales for the fourth quarter of 2017 was $278.3 million, reflecting an increase of $39.8 million from the fourth quarter of 2016. Cost of sales related to Peru was $20.6 million higher compared to the fourth quarter of 2016 as a result of higher mining, depreciation and G&A costs. In Manitoba, cost of sales increased by $19.2 million compared to the fourth quarter of 2016 as a result of higher mining and G&A costs. Manitoba G&A costs increased mainly due to a past service pension charge of $10.4 million as a result of the new three year collective bargaining agreements that were reached.

Cost of sales year-to-date in 2017 was $988.6 million, an increase of $82.8 million compared to 2016. The increase is mostly attributable to Manitoba which had higher year-to-date costs of $75.8 million compared to the same period last year due to higher mining costs for the reasons outlined in the Manitoba Operations Review Section, the past service pension charge outlined above, increased profit sharing costs, and additional costs due to utilization of temporary crushing facilities at the Stall mill primarily during the first quarter.

For details on unit operating costs refer to the respective tables in the “Operations Review” section beginning on page 9 of this MD&A.

For the fourth quarter of 2017, other significant variances in expenses, compared to the same period in 2016, include the following:

−	Selling and administrative expenses increased by $1.6 million, which was mainly the result of increased share based compensation expenses resulting from the revaluation of previously issued share units to higher share prices during the current quarter compared to the same period last year.

−	Exploration and evaluation expenses increased by $3.9 million mainly as a result of increased surveying activities at the Manitoba business unit.

−	Other operating income was higher by $9.3 million mainly as a result of a $6.4 million gain associated with contingent consideration from the Balmat sale as a result of a project milestone being achieved by the buyer.

−	Asset Impairment of $11.3 million is the result of revaluing certain processing equipment that was previously purchased to build a new concentrator in Snow Lake, Manitoba to expected disposition proceeds. We no longer expect these assets to be usable in our operations.

−	Finance expenses decreased by $54.9 million mainly as a result of a $47.7 million call premium paid to facilitate the early redemption of our $920 million of Redeemed Notes in 2016. In addition, interest costs have been lower in 2017 due to overall debt reduction during the year, lower interest rate resulting from the refinancing in 2016 as well as lower borrowings on our revolving credit facilities and improved terms following the amendments to our Credit Facilities in July 2017.

−	Other finance expenses decreased by $6.5 million primarily as a result of:

	−	Fair value adjustments pertaining to the embedded derivative on the senior unsecured notes, our gold option liability related to the acquisition of the New Britannia mine and mill (“NBM Mill”) and an embedded derivative pertaining to purchase contracts resulted in a loss of $0.4 million in the fourth quarter of 2017 compared to loss of $5.4 million in the fourth quarter of 2016;
	−	Mark-to-market losses on warrants of $0.7 million compared to a loss of $4.1 million in the same period last year;
	−	Disposals, impairment and mark-to-market adjustments on held for trading and available-for-sale investments resulted in a net loss of $0.2 million during the current period of 2017 compared to a loss of $0.8 million during the same period last year,
	−	Foreign exchange losses of $1.3 million in the fourth quarter of 2017 compared to gains of $1.2 million in the fourth quarter of 2016.

For the full year, other significant variances in expenses in 2017, compared to 2016 include the following:

−	Selling and administrative expenses increased by $4.5 million, which was mainly the result of increased share based compensation expenses resulting from the revaluation of previously issued share units to higher share prices during the current year compared to last year.

−	Exploration and evaluation expenses increased by $10.7 million as a result of higher exploration spending in Manitoba as well as spending pursuant to an option agreement on properties in British Columbia.

−	Other operating income increased $23.0 million during the 2017 compared to last year as a result of gains arising from the Balmat disposition together with various insurance recoveries pertaining to the Constancia grinding line 2 failure in 2015.

−	Asset Impairment of $11.3 million due to reasons stated above.

−	Finance expenses decreased by $64.0 million mainly as a result of the same factors as mentioned for the quarterly movement.

−	Other finance expenses increased by $18.5 million primarily as a result of:

	−	Foreign exchange losses of $15.8 million in 2017 compared to gains of $0.5 million in 2016;
	−	Disposals, impairment and mark-to-market adjustments on held for trading and available-for-sale investments resulted in a net loss of $1.9 million during 2017 compared to a gain of $0.5 million during 2016;
	−	Fair value adjustments pertaining to the embedded derivative on the senior unsecured notes, our gold option liability related to the acquisition of the New Britannia mine and mill and an embedded derivative pertaining to purchase contracts resulted in a loss of $1.8 million in the current year compared to gains of $1.2 million in 2016,
	−	Mark-to-market adjustments on warrants resulted in a gain of $1.1 million compared to a gain of $2.1 million in 2016.

Tax Expense (Recovery)

For the three months ended and the year ended December 31, 2017, tax expense decreased by $35.3 million and $6.0 million, respectively, compared to the same periods in 2016. The following table provides further details:

	Three months ended			Year ended
	Dec. 31,		Dec. 31,	Dec. 31,		Dec. 31,
(in $ thousands)	2017		2016	2017		2016
Deferred tax expense - income tax ¹	(41,941	)	12,154	(15,032	)	21,028
Deferred tax (recovery) expense - mining tax ¹	(392	)	1,717	(82	)	2,490
Total deferred tax expense	(42,333	)	13,871	(15,114	)	23,518
Current tax expense - income tax	19,644		1,320	30,493		7,000
Current tax expense - mining tax	8,553		6,017	19,450		10,280
Total current tax expense	28,197		7,337	49,943		17,280

Tax (recovery) expense	(14,136	)	21,208	34,829		40,798

¹Deferred tax expense (recovery) represents our draw down/increase of non-cash deferred income and mining tax assets/liabilities.

Income Tax Expense

Applying the estimated Canadian statutory income tax rate of 27.0% to our income before taxes of $198.7 million for the year-to-date period in 2017 would have resulted in a tax expense of approximately $53.7 million; however, we recorded an income tax expense of $15.5 million. The significant items causing our effective income tax rate to be different than the 27.0% estimated Canadian statutory income tax rate include:

−	We revised our computation of deferred tax liabilities related to taxable temporary for changes in statutory tax rates taking into account the newly enacted tax legislation in the U.S. that decreased the estimated statutory tax rate of the Arizona business unit from 38.2% to 24.9%, resulting in a deferred tax recovery of $52.9 million;
−	A decrease in the deferred tax expense of $9.4 million due to the fact that certain Canadian non-monetary assets are recognized at historical cost while the tax bases of the assets change as exchange rates fluctuate, which gives rise to taxable temporary differences;
−	Certain deductible temporary differences with respect to Peru mostly relating to decommissioning and restoration liabilities were not recognized as we have determined that it is not probable that we will realize the recovery based on the timing of the reversals of the deductible temporary differences and the future projected taxable profit of the Peru operations, resulting in an increase in deferred tax expense of approximately $10.0 million;
−	Certain deductible temporary differences with respect to Manitoba mostly relating to decommissioning and restoration liabilities were not recognized as we have determined that it is not probable that we will realize the recovery based on the timing of the reversals of the deductible temporary differences and the future projected taxable profit of the Manitoba operations, resulting in an increase in deferred tax expense of approximately $8.8 million; and

−	Certain deductible temporary differences with respect to our foreign operations are recorded using an income tax rate other than the Canadian statutory income tax of 27.0%, resulting in an increase in deferred tax expense of $4.6 million.

For 2016, applying the estimated Canadian statutory income tax rate of 27.0% to our income before taxes of $5.6 million would have resulted in a tax expense of approximately $1.5 million; however, we recorded an income tax expense of $28.0 million. The significant items causing our effective income tax rate to be different than the 27.0% estimated Canadian statutory income tax rate include:

−	Certain deductible temporary differences with respect to liabilities for Manitoba decommissioning and restoration and other employee benefit liabilities were not recognized, as it was not probable that we would realize the recovery based on the timing of the reversals of the deductible temporary differences and the future projected taxable profit of the Manitoba operations, resulting in an increase in deferred tax expense of approximately $13.8 million;
−	The tax benefit of certain Peruvian expenses was not recognized in the year since it was not considered probable that the benefit of these expenditures would be realized as the tax authorities in Peru would view them as non-deductible expenditures for income tax purposes, resulting in an increase in deferred tax expense of $7.3 million;
−	Certain deductible temporary differences with respect to our foreign operations are recorded using an income tax rate other than the Canadian statutory income tax rate of 27.0%, resulting in an increase in deferred tax expense of $2.3 million; and
−	A decrease in the deferred tax expense of $3.4 million due to the fact that certain Canadian non-monetary assets are recognized at historical cost while the tax bases of the assets change as exchange rates fluctuate, which gives rise to taxable temporary differences.

Mining Tax Expense

Applying the estimated Manitoba mining tax rate of 10.0% to our income before taxes of $198.7 million for the year-to-date period in 2017, would have resulted in a tax expense of approximately $19.9 million and we recorded a mining tax expense of $19.4 million. Effective mining tax rates can vary significantly based on the composition of our earnings and the expected amount of mining taxable profits. Corporate costs and other costs not related to mining operations are not deductible in computing mining profits. A brief description of how mining taxes are calculated in our various business units is discussed below.

Manitoba

The Province of Manitoba imposes mining tax on profit related to the sale of mineral products mined in the Province of Manitoba (mining taxable profit) at the following rates:

−	10% of total mining taxable profit if mining profit is C$50 million or less;
−	15% of total mining taxable profit if mining profits are between C$55 million and C$100 million; and
−	17% of total mining taxable profit if mining profits exceed C$105 million.

We estimate that the tax rate that will be applicable when temporary differences reverse will be approximately 10.0% .

Peru

The Peruvian government imposes two parallel mining tax regimes, the Special Mining Tax and the Modified Royalty, on companies' operating mining income on a sliding scale, with progressive rates ranging from 2.0% to 8.4% and 1.0% to 12.0%, respectively. Based on financial forecasts, we have recorded a deferred tax liability as at December 31, 2017 at the tax rate we expect to apply when temporary differences reverse.

LIQUIDITY AND CAPITAL RESOURCES

Senior Secured Revolving Credit Facilities

We have two revolving credit facilities (the “Credit Facilities”) for our Canadian and Peruvian businesses, with combined total availability of $550 million and substantially similar terms and conditions. As at December 31, 2017, between our Credit Facilities we have drawn $128.6 million in letters of credit, leaving total undrawn availability of $421.4 million. As at December 31, 2017, we were in compliance with our covenants under the Credit Facilities.

The Credit Facilities were amended on July 14, 2017 to secure both facilities with substantially all of our assets other than assets related to the Rosemont project, amend the financial covenants, extend the maturity dates from March 31, 2019 to July 14, 2021 and reduce the interest rate from LIBOR plus 4.50% to LIBOR plus 2.50%, based on financial results for the twelve months ended December 31, 2017. The revised covenants include maintaining gross total debt to EBITDA of less than 4.00 times in 2017, senior secured debt to EBITDA of less than 2.00 times, and interest coverage of more than 3.00 times.

Equipment Finance Facility

As at December 31, 2017, we had no amounts owing under the facility. The facility was repaid in full and extinguished during the third quarter of 2017 with the proceeds of a sale and leaseback transaction.

Senior Unsecured Notes Refinancing

On December 12, 2016, we completed an offering of $1.0 billion aggregate principal amount of senior notes in two series: (i) a series of 7.250% senior notes due 2023 in an aggregate principal amount of $400 million, and (ii) a series of 7.625% senior notes due 2025 in an aggregate principal amount of $600 million. The proceeds from this offering were used to redeem all US$920 million of our 9.50% senior unsecured notes due 2020.

Financial Condition

Financial Condition as at December 31, 2017 compared to December 31, 2016

Cash and cash equivalents increased $209.6 million during 2017 to $356.5 million as at December 31, 2017. This increase was mainly a result of cash generated from operating activities of $539.6 million, net proceeds from an equity issuance of $186.9 million, gross proceeds from a sale and leaseback equipment refinancing of $67.3 million and release of restricted cash of $16.9 million. These inflows were partly offset by $256.4 million of net debt repayments, $52.7 million on interest repayments, and $249.8 million of capital investments primarily at our Peru and Manitoba operations. We hold the majority of our cash and cash equivalents in low-risk, liquid investments with major Canadian and Peruvian financial institutions.

In addition to the increased cash and cash equivalents position, working capital increased by $187.1 million to $308.7 million from December 31, 2016 to December 31, 2017, primarily due to:

−	Inventories increased by $29.2 million as a result of the timing of concentrate shipments;
−	Trade and other payables increased by $29.5 million primarily as a result of the timing of interest payments on our long term debt; and
−	Tax receivables decreased by $17.3 million, primarily due to statutory payments received in Peru.

Cash Flows

The following table summarizes our cash flows for the three months and year ended December 31, 2017 and December 31, 2016:

	Three months ended				Year ended
	Dec. 31,		Dec. 31,		Dec. 31,		Dec. 31,
(in $ thousands)	2017		2016		2017		2016
Profit (loss) for the period	99,676		(47,273	)	163,899		(35,193	)
Tax (recovery) expense	(14,136	)	21,208		34,829		40,798
Items not affecting cash	84,656		151,523		342,450		395,877
Taxes paid	1,708		(3,201	)	(10,617	)	(13,614	)
Operating cash flow before changes in non-cash working capital	171,904		122,257		530,561		387,868
Change in non-cash working capital	(42,467	)	17,868		9,015		87,206
Cash generated from operating activities	129,437		140,125		539,576		475,074
Cash (used in) generated by investing activities	(87,859	)	(43,870	)	(234,264	)	(147,056	)
Cash generated by (used in) financing activities	(9,461	)	(68,464	)	(92,847	)	(236,077	)
Effect of movement in exchange rates on cash and cash equivalents	(4,545	)	815		(2,830	)	1,071

Increase in cash and cash equivalents	27,572		28,606		209,635		93,012

Cash Flow from Operating Activities

Cash generated from operating activities was $129.4 million during the fourth quarter of 2017, a decrease of $10.7 million compared with the same period last year. Operating cash flow before change in non-cash working capital was $171.9 million during the fourth quarter of 2017, reflecting an increase of $49.6 million compared to the fourth quarter of 2016. Operating cash flow benefited from higher overall realized copper and zinc sales prices compared to the fourth quarter of 2016.

Year-to-date cash generated from operating activities was $539.6 million in 2017, an increase of $64.5 million compared to 2016. Operating cash flow before changes in non-cash working capital was $530.6 million, an increase of $142.7 million compared to 2016. Operating cash flow benefited from higher copper and zinc prices and higher zinc and gold sales volumes, offset in part by lower copper sales volumes.

Cash Flow from Investing and Financing Activities

During the fourth quarter of 2017, we used $97.4 million in investing and financing activities, primarily driven by $88.0 million of capital expenditures.

Year-to-date, we used $327.1 million of cash in investing and financing activities, primarily driven by net principal repayments on our debt borrowings of $256.4 million, capital expenditures of $249.8 million and interest paid of $52.7 million, partially offset by $186.9 million of net proceeds from an equity issuance and $67.3 million of gross proceeds from a sale and leaseback transaction.

Capital Expenditures

The following summarizes accrued and cash additions to capital assets for the periods indicated:

	Three months
	ended				Year ended				Guidance
	Dec. 31,		Dec. 31,		Dec. 31,		Dec. 31,		Annual ¹
(in $ millions)	2017		2016		2017		2016		2017	2018
Manitoba sustaining capital expenditures	19.6		12.2		58.6		60.0		65.0	85.0
Peru sustaining capital expenditures	30.2		31.7		123.8		118.0		120.0	50.0
Total sustaining capital expenditures	49.8		43.9		182.4		178.0		185.0	135.0
Arizona other capitalized costs	5.0		3.4		18.5		25.4		20.0	35.0
Peru growth capitalized expenditures	12.4		-		14.0		-		25.0	45.0
Manitoba growth capitalized
expenditures	15.5		-		39.8		-		40.0	20.0
Other capitalized costs²	8.1		3.1		23.7		36.6
Capitalized exploration	0.6		-		1.4		1.9		2.0	10.0
Capitalized interest	3.2		3.7		13.1		14.7
Total other capitalized costs	44.8		10.2		110.5		78.6
Total accrued capital additions	94.6		54.1		292.9		256.6
Reconciliation to cash capital additions:
Decommissioning and restoration obligation	(6.3	)	1.9		(10.7	)	(25.0	)
Capitalized interest	(3.2	)	(3.7	)	(13.1	)	(14.7	)
Changes in capital accruals and other	2.9		(8.8	)	(19.3	)	(24.1	)

Total cash capital additions	88.0		43.5		249.8		192.8

¹Capital expenditure guidance excludes capitalized interest.
²Other capitalized costs include decommissioning and restoration adjustments.

Sustaining capital expenditures in 2017 was consistent with guidance.

Sustaining capital expenditures in Manitoba for the three and twelve months ended December 31, 2017 were $19.6 million and $58.6 million, respectively, an increase of $7.4 million and a decrease of $1.4 million, respectively, compared to the same periods in 2016. The increase in Manitoba sustaining capital expenditures in the fourth quarter for 2017 compared to the same period last year is due to increased spending on plant and mine equipment as well as increased capital development completed at our Lalor mine.

Sustaining capital expenditures in Peru for the three and twelve months ended December 31, 2017 were $30.2 million and $123.8 million, respectively, a decrease of $1.5 million and an increase of $5.8 million, respectively, compared to the same periods in 2016.

Total planned sustaining capital expenditures in 2018 are expected to decrease approximately 27% from 2017 levels. The decrease is mainly due to a decline of approximately $70 million in spending in Peru, as a major raise of the Constancia tailings management facility was successfully completed in 2017. Planned capital expenditures in Manitoba include continued drilling of the gold and copper-gold zones at Lalor and development of the ramp to access zone 27, the copper-gold zone, in 2018.

Manitoba capital expenditures also include provisions for completion of the Lalor paste backfill plant, which is intended to reduce operating costs, increase mining rates and maximize ore recovery. Manitoba capital costs do not include expenditures for the refurbishment of the Stall mill, as Hudbay intends to continue to utilize available processing capacity at the Flin Flon mill to supplement Stall’s current processing capacity in lieu of expanding the Stall mill.

Peru growth capital of $45 million includes expenditures for developing the Pampacancha deposit and acquiring surface rights from the local community. Arizona spending of $35 million on the Rosemont project is intended to support ongoing permitting, legal and mitigation efforts, and would increase significantly if permitting is completed and the project is sanctioned for development during 2018.

Contractual Obligations and Commitments

The following table summarizes, as at December 31, 2017, our significant contractual obligations for the periods specified:

		Less than	13-36	37-60	More than
Payment Schedule (in $ thousands)	Total	12 months	months	months	60 months
Long-term debt obligations including interest	1,520,416	79,715	159,430	152,396	1,128,875
Capital lease obligations	89,751	20,186	40,253	29,312	-
Operating lease obligations	15,283	6,123	6,979	2,181	-
Purchase obligation - capital commitments¹	274,249	53,179	73,710	18,000	129,360
Purchase obligation - other commitments²	560,866	146,349	171,895	114,207	128,415
Pension and other employee future benefits obligations	149,450	22,135	28,486	7,278	91,551
Decommissioning and restoration obligations³	201,283	2,310	4,376	10,107	184,490

Total	2,811,298	329,997	485,129	333,481	1,662,691

¹	Amounts classified as after 5 years relate to the mobile fleet for the Rosemont project. The obligation has been classified as after 5 years due to our ability to defer this obligation.
²	Primarily made up of a long-term agreement with operational suppliers, obligation for power purchase, concentrate, fleet and port services.
³	Before inflation.

In addition to the contractual obligations included in the above payment schedule, we also have the following commitments which impact our financial position:

−	A profit-sharing plan with most Manitoba employees;

−	A profit-sharing plan with all Peru employees;
−	Wheaton Precious Metals Corporation (“Wheaton”) precious metals stream agreements for the 777 and Constancia mines
−	A net smelter returns royalty agreement related to the 777 mine; and
−	Various royalty agreements related to the Constancia mine

Liquidity

As at December 31, 2017, we had total liquidity of approximately $777.9 million, including $356.5 million in cash and cash equivalents, as well as $421.4 million in availability under our Credit Facilities. We expect that our current liquidity and future cash flows will be sufficient to meet our obligations in the coming year.

Outstanding Share Data

As of February 20, 2018, there were 261,271,188 common shares of Hudbay issued and outstanding. In addition, Hudbay warrants to acquire an aggregate of 22,391,490 common shares of Hudbay were outstanding and options for an aggregate of 523,352 common shares outstanding.

FINANCIAL RISK MANAGEMENT

From time to time, we maintain price protection programs and conduct commodity price risk management to reduce risk through the use of financial instruments.

Base Metals Price Strategic Risk Management

Our strategic objective is to provide our investors with exposure to base metals prices, unless a reason exists to implement a hedging arrangement. In the normal course, we typically consider base metal price hedging:

	−	In conjunction with a major capital commitment to a growth opportunity for which operating cash flow is a key funding source;
	−	To ensure the viability of a shorter life and/or higher cost mine;
	−	To manage the risk associated with provisional pricing terms in concentrate purchase and sale agreements;
	−	To offset fixed price zinc sales contracts with customers.

During 2017, we entered into copper hedging transactions intended to manage the risk associated with provisional pricing terms in concentrate sales agreements. As at December 31, 2017, we had 34,500 tonnes of copper fixed for floating swaps outstanding at an average fixed receivable price of $3.10/lb associated with provisional pricing risk in concentrate sales agreements. These swaps settle across January to April 2018.

To provide a service to customers who purchase zinc from our plants and require known future prices, we enter into fixed price sales contracts. To ensure that we continue to receive a floating or unhedged realized zinc price, we enter into forward zinc purchase contracts that effectively offset the fixed price sales contracts with our customers.

From time to time, we enter into gold and silver forward sales contracts to hedge the commodity price risk associated with the future settlement of provisionally priced deliveries. We are generally obligated to deliver gold and silver to Wheaton prior to the determination of final settlement prices. These forward sales contracts are entered into at the time we deliver gold and silver to Wheaton, and are intended to mitigate the risk of subsequent adverse gold and silver price changes. Gains and losses resulting from the settlement of these derivatives are recorded directly to revenue, as the forward sales contracts do not achieve hedge accounting, and the associated cash flows are classified in operating activities.

Our swap agreements are with counterparties we believe to be creditworthy and do not require us to provide collateral.

Interest Rate and Foreign Exchange Risk Management

To the extent that we incur indebtedness at variable interest rates to fund our growth objectives, we may enter into interest rate hedging arrangements to manage our exposure to short-term interest rates. To the extent that we make commitments to capital expenditures denominated in foreign currencies, we may enter into foreign exchange forwards or acquire foreign currency outright, which may result in foreign exchange gains or losses in our consolidated income statements.

At December 31, 2017, approximately $337.4 million of our cash and cash equivalents was held in US dollars, approximately $15.4 million of our cash and cash equivalents was held in Canadian dollars, and approximately $3.7 million of our cash and cash equivalents was held in Peruvian soles.

TREND ANALYSIS AND QUARTERLY REVIEW

The following table sets forth selected consolidated financial information for each of our eight most recently completed quarters:

		2017						2016

(in $ millions)	Q4	Q3	Q2	Q1		Q4		Q3	Q2		Q1
Revenue	414.1	370.4	324.9	253.2		316.7		311.4	247.0		253.6
Gross margin	135.9	111.0	78.0	49.2		78.2		68.5	48.3		27.9
Profit (loss) before tax	85.5	58.7	41.8	12.7		(26.1	)	42.0	6.6		(16.9	)
Profit (loss)	99.7	40.9	25.6	(2.3	)	(47.3	)	33.6	(5.7	)	(15.8	)
Earnings (loss) per share:
Basic and Diluted	0.38	0.17	0.11	(0.01	)	(0.20	)	0.14	(0.02	)	(0.07	)
Operating cash flow¹	171.9	153.9	124.1	80.6		122.3		124.2	69.5		71.9

¹Operating cash flow before changes in non-cash working capital

Copper and zinc prices increased substantially during the fourth quarter of 2017, driving the improvement in revenue, gross profit and operating cash flow before changes in non-cash working capital experienced in the quarter compared to prior quarters.

Copper and zinc prices increased during the third quarter of 2017, a key factor in the improvement in revenue, gross profit and operating cash flow before changes in non-cash working capital experienced in the quarter compared to prior quarters.

Copper and zinc prices were volatile during the second quarter of 2017. In all, during the quarter, notwithstanding the volatility, realized prices were flat. Higher volumes of copper concentrate and zinc metal sales drove higher revenues, gross profits and operating cash flow before changes in non-cash working capital in the second quarter of 2017 compared to the first quarter.

Revenue and operating cash flow before changes in non-cash working capital were stable from the third quarter of 2016 to the second quarter of 2017, with the exception of the first quarter of 2017, which was affected by lower production due to planned and unplanned maintenance activities at our operations. Consistent increases in revenue and operating cash flow were realized in the third and fourth quarter of 2017 due to increasing copper and zinc prices.

For additional information on the previous year’s trends and quarterly reviews, refer to our MD&A dated February 22, 2017.

In addition to the items noted which impacted gross margin, net profit (loss) was impacted by the following items:

	Significant non-recurring items	Before tax net income	After tax net income
Quarter	affecting net income	impact (in $ millions)	impact (in $ millions)
Q4 2016	Cost of refinancing Redeemed Notes	(49.9)	(36.5)
Q4 2016	Non cash deferred tax adjustments	-	(20.7)
Q4 2017	Non cash deferred tax adjustments	-	45.4

The following table sets forth selected consolidated financial information for each of the three most recently completed years:

(in $ millions, except for earnings (loss) per share and
dividends declared per share)	2017	2016		2015
Revenue	1,362.6	1,128.7		886.1
Gross Margin	373.9	222.9		118.4
Profit (loss) before tax	198.7	5.6		(399.0	)
Profit (loss)	163.9	(35.2	)	(331.4	)
(Loss) earnings per share:
Basic and diluted	0.67	(0.15	)	(1.41	)
Total assets	4,648.7	4,456.6		4,479.6
Operating cash flow^2,3	530.6	387.9		231.8
Total long-term financial liabilities³	1,066.6	1,253.8		1,232.6
Dividends declared per share - C$⁴	0.02	0.02		0.02

¹	Attributable to owners of the Company.
²	Operating cash flow before precious metals stream deposit and change in non-cash working capital is a non-IFRS financial performance measure with no standardized definition under IFRS. For further information and a detailed reconciliation, please see page 39 of this MD&A.
³	Total long-term financial liabilities include non-current portions of net long-term debt, other financial liabilities.
⁴	Dividend paid during March and September of each year.

In the current year, realized copper and zinc prices rose 28% and 37%, respectively, compared to prices in 2016. Zinc production rose 22% compared to 2016 due to the re-sequencing of the 777 mine plan to prioritize higher grade zinc stopes. These pricing and production improvements were the primary driver in the growth in revenue and operating cash flow before changes in non-cash working capital. Revenue increased by $233.9 million or 21% and cash flow before changes in non-cash working capital rose by $142.7 million or 37%. Stronger performance in these metrics came notwithstanding lower copper and precious metals in concentrate production. Cash costs per pound of copper produced was also lower on a consolidated basis, down from $0.93 to $0.84. The decrease was a function of higher by-product credits for all metals, which was partially offset by expected higher costs at our 777 and Reed mines during this part of their mine life and expected reduced copper production at Constancia due to lower copper grades.

In 2016, copper metal in concentrate produced rose by 18% compared to 2015 as a result of having a full year of operations at our Constancia operation. Zinc production rose 7% in Manitoba compared to 2015 while precious metals production climbed 20% compared to 2015. The higher production of metals allowed us to capitalize on higher copper and zinc prices later in 2016 and strong prices for precious metals earlier in 2016. The result was a 156% increase in cash generated from operations of $289.4 million to $475.1 million. Cash generated from operations also benefited from the collection of statutory receivables in Peru and reduced inventory levels. Operating cash flow before change in non-cash working capital rose by $156.0 million, or 67%, in 2016.

In addition to the items noted which impacted gross margin, net profit (loss) was impacted by the following items:

Year	Significant non-recurring items affecting net income	Before tax net income impact (in $ millions)		After tax net income impact (in $ millions)
2015	Asset & Goodwill impairment charges	(433.4	)	(347.8	)
2015	Pension expense arising from new collective bargaining agreements	(17.1	)	(11.3	)
2015	Gain on disposal of Balmat	37.0		37.0
2016	Cost of refinancing Redeemed Notes	(49.9	)	(36.5	)
2016	Non cash deferred tax adjustments	-		(20.7	)
2017	Non cash deferred tax adjustments	-		45.4

ACCOUNTING CHANGES

New standards and interpretations not yet adopted

For information on new standards and interpretations not yet adopted, refer to note 4 of our audited consolidated financial statements for the year ended December 31, 2017.

CRITICAL ACCOUNTING JUDGEMENTS AND ESTIMATES

The preparation of the consolidated financial statements in conformity with IFRS requires us to make judgements, estimates and assumptions that affect the application of accounting policies, reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and reported amounts of revenue and expenses during the reporting period. Actual results may differ from these estimates.

We review these estimates and underlying assumptions on an ongoing basis based on our experience and other factors, including expectations of future events that we believe to be reasonable under the circumstances. Revisions to accounting estimates are recognized in the period in which the estimates are revised and in any future periods affected. Certain accounting estimates and judgements have been identified as being “critical” to the presentation of our financial condition and results of operations because they require us to make subjective and/or complex judgments about matters that are inherently uncertain; or there is a reasonable likelihood that materially different amounts could be reported under different conditions or using different assumptions and estimates.

The following are significant judgements and estimates impacting the consolidated financial statements:

−	Judgements and estimates that affect multiple areas of the consolidated financial statements:

	−	Mineral reserves and resources which form the basis of life of mine plans which are utilized in impairment testing, timing of payments related to decommissioning obligations and depreciation of capital assets. We estimate our ore reserves and mineral resources based on information compiled by qualified persons as defined in accordance with NI 43-101;
	−	Determination of functional currency;
	−	Income and mining taxes, including estimates of future taxable profit which impacts the ability to realize deferred tax assets on our balance sheet;
	−	Commencement of commercial production which impacts the timing of revenue recognition, reclassification of capital works in progress and depreciation commencement;
	−	Acquisition method accounting; and
	−	In respect of the outcome of uncertain future events as it concerns recognizing contingent liabilities.

−	Judgements and estimates that relate mainly to assets (these judgements may also affect other areas of the consolidated financial statements):

−

Property, plant and equipment:

	−	Cost allocations for mine development;
	−	Mining properties expenditures capitalized;
	−	Classification of supply costs as related to capital development or inventory acquisition;
	−	Determining when exploration and evaluation assets should be transferred to capital works in progress within property, plant and equipment;
	−	Determination of when an asset or group of assets is in the condition and location to be ready for use as intended by management for the purposes of commencing deprecation;
	−	Componentization;
	−	Assessment of impairment, including determination of cash generating units and assessing for indicators of impairment;
	−	Recoverability of exploration and evaluation assets, including determination of cash generating units and assessing for indications of impairment;
	−	Determining whether assets meet criteria for classification as held for sale;
	−	Units of production depreciation;
	−	Plant and equipment estimated useful lives and residual values;
	−	Capitalized stripping costs; and
	−	Finite life intangible assets.

−

Impairment of non-financial assets:

	−	Future production levels and timing;
	−	Operating and capital costs;
	−	Future commodity prices;
	−	Foreign exchange rates; and
	−	Risk adjusted discount rates.

	−	Valuation of acquired assets; and
	−	In process inventory quantities, inventory cost allocations and inventory valuation.

−	Judgements and estimates that relate mainly to liabilities (these judgements may also affect other areas of the consolidated financial statements):

	−	Determining the accounting classification of the precious metals stream deposit;
	−	Determination of deferred revenue per unit related to the precious metals stream transactions and determination of current portion of deferred revenue;
	−	Pensions and other employee benefits;
	−	Decommissioning, restoration and similar liabilities including estimated future costs and timing of spending;
	−	Contingent liabilities; and
	−	Capital commitments.

−	Estimates that relate mainly to the consolidated income statements:

−

Assaying used to determine revenues and recoverability of inventories.

For more information on judgements and estimates, refer to note 2 of our consolidated financial statements for the year ended December 31, 2017.

NON-IFRS FINANCIAL PERFORMANCE MEASURES

Net debt is shown because it is a performance measure used by the Company to assess our financial position. Cash cost, sustaining and all-in sustaining cash cost per pound of copper produced are shown because we believe they help investors and management assess the performance of our operations, including the margin generated by the operations and the company. Cash cost and sustaining cash cost per pound of zinc produced are shown because we believe they help investors and management assess the performance of our Manitoba operations. These measures do not have a meaning prescribed by IFRS and are therefore unlikely to be comparable to similar measures presented by other issuers. These measures should not be considered in isolation or as a substitute for measures prepared in accordance with IFRS and are not necessarily indicative of operating profit or cash flow from operations as determined under IFRS. Other companies may calculate these measures differently.

Net Debt

The following table presents our calculation of net debt as at December 31, 2017 and December 31, 2016:

	Dec. 31,		Dec. 31,
(in $ thousands)	2017		2016
Total long-term debt	979,575		1,232,164
Cash and cash equivalents	(356,499	)	(146,864	)

Net debt	623,076		1,085,300

Cash Cost, Sustaining and All-in Sustaining Cash Cost (Copper Basis)

Cash cost per pound of copper produced (“cash cost”) is a non-IFRS measure that management uses as a key performance indicator to assess the performance of our operations. Our calculation designates copper as our primary metal of production as it has been the largest component of revenues. The calculation is presented in four manners:

−	Cash cost, before by-product credits - This measure is gross of by-product revenues and is a function of the efforts and costs incurred to mine and process all ore mined. However, the measure divides this aggregate cost over only pounds of copper produced, our primary metal of production. This measure is generally less volatile from period to period, as it is not affected by changes in the price received for by-product metals. It is, however, significantly affected by the relative mix of copper concentrate and finished zinc production, where the sale of the zinc will occur later, and an increase in production of zinc metal will tend to result in an increase in cash cost under this measure.

−	Cash cost, net of by-product credits - In order to calculate the net cost to produce and sell copper, the net of by-product credits measure subtracts the revenues realized from the sale of the metals other than copper. The by-product revenues from zinc, gold, and silver are significant and are integral to the economics of our operations. The economics that support our decision to produce and sell copper would be different if we did not receive revenues from the other significant metals being extracted and processed. This measure provides management and investors with an indication of the minimum copper price consistent with positive operating cash flow and operating margins, assuming realized by-product metal prices are consistent with those prevailing during the reporting period. It also serves as an important operating statistic that management and investors utilize to measure our operating performance versus that of our competitors. However, it is important to understand that if by-product metal prices decline alongside copper prices, the cash cost net of by-product credits would increase, requiring a higher copper price than that reported to maintain positive cash flows and operating margins.

−	Sustaining cash cost, net of by-product credits - This measure is an extension of cash cost that includes sustaining capital expenditures, capitalized exploration and net smelter returns royalties. It does not include corporate selling and administrative expenses. It provides a more fulsome measurement of the cost of sustaining production than cash cost, which is focused on operating costs only.

−	All-in sustaining cash cost, net of by-product credits - This measure is an extension of sustaining cash cost that includes corporate G&A. Due to the inclusion of corporate selling and administrative expenses, all-in sustaining cash cost is presented on a consolidated basis only.

The tables below present a detailed build-up of cash cost and sustaining cash cost, net of by-product credits, by business unit in addition to consolidated all-in sustaining cash cost, net of by-product credits, and reconciliations between cash cost, net of by-product credits, to the most comparable IFRS measures of cost of sales for the three months and year ended December 31, 2017 and 2016. Cash cost, net of by-product credits may not calculate exactly based on amounts presented in the tables below due to rounding.

Consolidated

Three months ended

Year ended

Net pounds of copper produced

(in thousands)

Dec. 31, 2017

Dec. 31, 2016

Dec. 31, 2017

Dec. 31, 2016

Peru

74,597

74,927

268,481

294,168

Manitoba

20,587

21,599

82,477

90,519

Net pounds of copper produced

95,184

96,526

350,958

384,687

Consolidated

Three months ended

Year ended

Cash cost per pound of

Dec. 31, 2017

Dec. 31, 2016

Dec. 31, 2017

Dec. 31, 2016

copper produced

$000s

$/lb

$000s

$/lb

$000s

$/lb

$000s

$/lb

Cash cost, before by-product credits

222,730

2.34

182,677

1.90

788,740

2.25

701,979

1.83

By-product credits

(149,172

)

(1.57

)

(101,043

)

(1.05

)

(494,587

)

(1.41

)

(345,828

)

(0.90

)

Cash cost, net of by-product credits

73,558

0.77

81,634

0.85

294,153

0.84

356,151

0.93

Consolidated	Three months ended								Year ended
Supplementary cash cost	Dec. 31, 2017				Dec. 31, 206 1				Dec. 31, 2017				Dec. 31, 2016
information	$000s		$/lb ¹		$000s		$/lb ¹		$000s		$/lb ¹		$000s		$/lb ¹

By-product credits:
Zinc	108,137		1.14		71,588		0.74		352,941		1.01		236,971		0.62
Gold	35,233		0.37		28,792		0.30		130,837		0.37		119,792		0.31
Silver	12,441		0.13		14,327		0.15		45,793		0.13		52,108		0.14
Other	2,777		0.03		640		0.01		13,974		0.04		2,719		0.01
Total by-product credits	158,588		1.67		115,347		1.20		543,545		1.55		411,590		1.08
Less: deferred revenue	(9,416	)	(0.10	)	(14,304	)	(0.15	)	(48,958	)	(0.14	)	(65,762	)	(0.18	)
Total by-product credits, net of pre-production credits	149,172		1.57		101,043		1.05		494,587		1.41		345,828		0.90

Reconciliation to IFRS:
Cash cost, net of by-product credits	73,558				81,634				294,153				356,151
By-product credits	158,588				115,347				543,545				411,590
Change in deferred revenues	(9,416	)			(14,304	)			(48,958	)			(65,762	)
Treatment and refining charges	(31,043	)			(29,401	)			(106,066	)			(118,382	)
Share-based payment	712				537				1,946				860
Pension enhancement	10,442				-				10,442				-
Inventory write-off (reversals)	(174	)			-				(1,677	)			-
Change in product inventory	(3,193	)			3,644				(12,879	)			10,517
Royalties	3,520				2,800				15,222				12,196
Depreciation and amortization²	75,297				78,192				292,880				298,630

Cost of sales	278,291				238,449				988,608				905,800

¹Per pound of copper produced.
²Depreciation is based on concentrate sold.

Peru

Three months ended

Year ended

(in thousands)

Dec. 31, 2017

Dec. 31, 2016

Dec. 31, 2017

Dec. 31, 2016

Pounds of copper produced¹

74,597

74,927

268,481

294,168

Net pounds of copper produced¹

74,597

74,927

268,481

294,168

¹Contained copper in concentrate.

Peru	Three months ended								Year ended
Cash cost per pound of copper	Dec. 31, 2017				Dec. 31, 2016				Dec. 31, 2017				Dec. 31, 2016
produced	$000s		$/lb		$000s		$/lb		$000s		$/lb		$000s		$/lb
Mining	21,334		0.29		12,261		0.16		61,459		0.23		55,570		0.19
Milling	39,703		0.53		32,253		0.43		138,502		0.52		118,721		0.40
G&A	17,594		0.24		12,914		0.17		57,479		0.21		44,289		0.15
Onsite costs	78,631		1.05		57,428		0.77		257,440		0.96		218,580		0.74
Treatment & refining	20,328		0.27		23,256		0.31		66,289		0.25		83,574		0.28
Freight & other	12,027		0.16		11,849		0.16		43,905		0.16		51,317		0.17
Cash cost, before by-product credits	110,986		1.49		92,533		1.24		367,634		1.37		353,471		1.21
By-product credits	(8,267	)	(0.11	)	(9,691	)	(0.13	)	(24,862	)	(0.09	)	(34,045	)	(0.12	)

Cash cost, net of by-product credits	102,719		1.38		82,842		1.11		342,772		1.28		319,426		1.09

Peru	Three months ended								Year ended
Supplementary cash cost	Dec. 31, 2017				Dec. 31, 2016				Dec. 31, 2017				Dec. 31, 2016
information	$000s		$/lb ¹		$000s		$/lb ¹		$000s		$/lb ¹		$000s		$/lb ¹

By-product credits:
Gold	4,295		0.06		5,961		0.08		8,501		0.03		22,886		0.08
Silver	7,516		0.10		10,366		0.14		25,513		0.10		35,589		0.12
Other	1,424		0.02		-		-		8,912		0.03		129		-
Total by-product credits	13,235		0.18		16,327		0.22		42,926		0.16		58,604		0.20
Less: deferred revenue	(4,968	)	(0.07	)	(6,636	)	(0.09	)	(18,064	)	(0.07	)	(24,559	)	(0.08	)
Total by-product credits, net of pre-production credits	8,267		0.11		9,691		0.13		24,862		0.09		34,045		0.12

Reconciliation to IFRS:
Cash cost, net of by-product credits	102,719				82,842				342,772				319,426
By-product credits	13,235				16,327				42,926				58,604
Change in deferred revenues	(4,968	)			(6,636	)			(18,064	)			(24,559	)
Treatment and refining charges	(20,328	)			(23,256	)			(66,289	)			(83,574	)
Inventory write-off (reversals)	(174	)							(1,677	)
Share-based payment	108				43				403				112
Change in product inventory	4,725				8,538				(2,960	)			13,544
Royalties	1,737				1,189				5,754				5,580
Depreciation and amortization²	51,455				48,847				174,110				178,099

Cost of sales	148,509				127,894				476,975				467,232

¹Per pound of copper produced.
²Depreciation is based on concentrate sold.

Manitoba

Three months ended

Year ended

(in thousands)

Dec. 31, 2017

Dec. 31, 2016

Dec. 31, 2017

Dec. 31, 2016

Net pounds of copper produced¹

20,587

21,599

82,477

90,519

¹Contained copper in concentrate.

Manitoba	Three months ended								Year ended
Cash cost per pound of	Dec. 31, 2017				Dec. 31, 2016				Dec. 31, 2017				Dec. 31, 2016
copper produced	$000s		$/lb		$000s		$/lb		$000s		$/lb		$000s		$/lb
Mining	41,794		2.03		29,193		1.35		151,994		1.84		116,973		1.29
Milling	12,666		0.62		11,767		0.54		48,947		0.59		43,885		0.48
Refining (zinc)	18,458		0.90		17,113		0.79		67,966		0.82		65,587		0.72
G&A	12,221		0.59		12,797		0.59		51,660		0.63		39,222		0.43
Purchased ore and zinc concentrates	6,156		0.30		4,501		0.21		21,881		0.27		16,705		0.18
Onsite costs	91,295		4.43		75,371		3.49		342,448		4.15		282,372		3.12
Treatment & refining	10,715		0.52		6,145		0.28		39,777		0.48		34,808		0.38
Freight & other	9,734		0.47		8,628		0.40		38,881		0.47		31,328		0.35
Cash cost, before by-product credits	111,744		5.43		90,144		4.17		421,106		5.11		348,508		3.85
By-product credits	(140,905	)	(6.84	)	(91,352	)	(4.23	)	(469,725	)	(5.70	)	(311,783	)	(3.44	)

Cash cost, net of by-product credits	(29,161	)	(1.42	)	(1,208	)	(0.06	)	(48,619	)	(0.59	)	36,725		0.41

Manitoba	Three months ended								Year ended
Supplementary cash cost	Dec. 31, 2017				Dec. 31, 2016				Dec. 31, 2017				Dec. 31, 2016
information	$000s		$/lb ¹		$000s		$/lb ¹		$000s		$/lb ¹		$000s		$/lb ¹

By-product credits:
Zinc	108,137		5.25		71,588		3.31		352,941		4.28		236,971		2.62
Gold	30,938		1.50		22,831		1.06		122,336		1.48		96,906		1.07
Silver	4,925		0.24		3,961		0.18		20,280		0.25		16,519		0.18
Other	1,353		0.07		640		0.03		5,062		0.06		2,590		0.03
Total by-product credits	145,353		7.06		99,020		4.58		500,619		6.07		352,986		3.90
Less: deferred revenue	(4,448	)	(0.22	)	(7,668	)	(0.36	)	(30,894	)	(0.37	)	(41,203	)	(0.46	)
Total by-product credits, net
of pre-production credits	140,905		6.84		91,352		4.23		469,725		5.70		311,783		3.44

Reconciliation to IFRS:
Cash cost, net of by-product credits	(29,161	)			(1,208	)			(48,619	)			36,725
By-product credits	145,353				99,020				500,619				352,986
Change in deferred revenues	(4,448	)			(7,668	)			(30,894	)			(41,203	)
Treatment and refining charges	(10,715	)			(6,145	)			(39,777	)			(34,808	)
Share-based payment	604				494				1,543				748
Pension enhancement	10,442				-				10,442				-
Change in product inventory	(7,918	)			(4,894	)			(9,919	)			(3,027	)
Royalties	1,783				1,611				9,468				6,616
Depreciation and amortization²	23,842				29,345				118,770				120,531

Cost of sales	129,782				110,555				511,633				438,568

¹Per pound of copper produced.
²Depreciation is based on concentrate sold.

Consolidated

Three months ended

Year ended

All-in sustaining cash cost per

Dec. 31, 2017

Dec. 31, 2016

Dec. 31, 2017

Dec. 31, 2016

pound of copper produced

$000s

$/lb

$000s

$/lb

$000s

$/lb

$000s

$/lb

Cash cost, net of by-product credits

73,558

0.77

81,634

0.85

294,154

0.84

356,151

0.93

Sustaining capital expenditures

49,857

0.52

43,831

0.45

180,577

0.51

178,023

0.46

Capitalized exploration

613

0.01

1,446

1,898

Royalties

3,520

0.04

2,800

0.03

15,222

0.04

12,196

0.03

Sustaining cash cost, net of by-product credits

127,548

1.35

128,265

1.33

491,399

1.40

548,268

1.42

Corporate selling and administrative expenses

14,261

0.14

12,623

0.13

42,283

0.12

37,774

0.10

All-in sustaining cash cost, net of by-product credits

141,809

1.49

140,888

1.46

533,682

1.52

586,042

1.52

Peru

Three months ended

Year ended

Sustaining cash cost per pound

Dec. 31, 2017

Dec. 31, 2016

Dec. 31, 2017

Dec. 31, 2016

of copper produced

$000s

$/lb

$000s

$/lb

$000s

$/lb

$000s

$/lb

Cash cost, net of by-product credits

102,719

1.38

82,842

1.11

342,773

1.28

319,426

1.09

Sustaining capital expenditures

30,245

0.41

31,673

0.42

123,848

0.46

118,034

0.40

Royalties

1,737

0.02

1,189

0.02

5,754

0.02

5,580

0.02

Sustaining cash cost per pound of copper produced

134,701

1.81

115,704

1.54

472,375

1.76

443,040

1.51

Manitoba	Three months ended								Year ended
Sustaining cash cost per pound	Dec. 31, 2017				Dec. 31, 2016				Dec. 31, 2017				Dec. 31, 2016
of copper produced	$000s		$/lb		$000s		$/lb		$000s		$/lb		$000s	$/lb

Cash cost, net of by-product credits	(29,161	)	(1.42	)	(1,208	)	(0.06	)	(48,619	)	(0.59	)	36,725	0.41
Sustaining capital expenditures	19,612		0.95		12,158		0.56		56,729		0.70		59,989	0.66
Capitalized exploration	613		0.03		-		-		1,446		0.02		1,898	0.02
Royalties	1,783		0.09		1,611		0.07		9,468		0.10		6,616	0.07
Sustaining cash cost per pound of copper produced	(7,153	)	(0.35	)	12,561		0.58		19,024		0.23		105,228	1.16

Zinc Cash Cost and Zinc Sustaining Cash Cost

Cash cost per pound of zinc produced (“zinc cash cost”) is a non-IFRS measure that management uses as a key performance indicator to assess the performance of our Manitoba operations. This alternative cash cost calculation designates zinc as our primary metal of production as it is becoming the largest component of revenues for our Manitoba business unit, and should therefore be less volatile over time than Manitoba cash cost per pound of copper. The calculation is presented in three manners:

−	Zinc cash cost, before by-product credits - This measure is gross of by-product revenues and is a function of the efforts and costs incurred to mine and process all ore mined. However, the measure divides this aggregate cost over only pounds of zinc produced, our primary metal of production. This measure is generally less volatile from period to period, as it is not affected by changes in the price received for by-product metals. It is, however, significantly affected by the relative mix of copper concentrate and finished zinc production, where the sale of the copper will occur later, and an increase in production of copper metal will tend to result in an increase in zinc cash cost under this measure.

−	Zinc cash cost, net of by-product credits - In order to calculate the net cost to produce and sell zinc, the net of by-product credits measure subtracts the revenues realized from the sale of the metals other than zinc. The by-product revenues from copper, gold, and silver are significant and are integral to the economics of our Manitoba operation. The economics that support our decision to produce and sell zinc would be different if we did not receive revenues from the other significant metals being extracted and processed. This measure provides management and investors with an indication of the minimum zinc price consistent with positive operating cash flow and operating margins, assuming realized by-product metal prices are consistent with those prevailing during the reporting period. It also serves as an important operating statistic that management and investors utilize to measure our operating performance at Manitoba operation versus that of our competitors. However, it is important to understand that if by-product metal prices decline alongside zinc prices, the zinc cash cost net of by-product credits would increase, requiring a higher zinc price than that reported to maintain positive cash flows and operating margins.

−	Zinc sustaining cash cost, net of by-product credits - This measure is an extension of zinc cash cost that includes sustaining capital expenditures, capitalized exploration and net smelter returns royalties. It does not include corporate selling and administrative expenses. It provides a more fulsome measurement of the cost of sustaining production than zinc cash cost, which is focused on operating costs only.

The tables below present a detailed build-up of zinc cash cost and zinc sustaining cash cost, net of by-product credits, for the Manitoba business unit, and reconciliations between zinc cash cost, net of by-product credits, to the most comparable IFRS measures of cost of sales for the three months and year ended December 31, 2017 and 2016. Zinc cash cost, net of by-product credits, may not calculate exactly based on amounts presented in the tables below due to rounding.

Manitoba

Three months ended

Year ended

(in thousands)

Dec. 31, 2017

Dec. 31, 2016

Dec. 31, 2017

Dec. 31, 2016

Pounds of zinc produced¹

72,874

64,251

297,969

243,791

Net pounds of zinc produced¹

72,874

64,251

297,969

243,791

¹Contained zinc in concentrate.

Manitoba

Three months ended

Year ended

Cash cost per pound of

Dec. 31, 2017

Dec. 31, 2016

Dec. 31, 2017

Dec. 31, 2016

zinc produced

$000s

$/lb

$000s

$/lb

$000s

$/lb

$000s

$/lb

Cash cost, before by-product credits¹

111,744

1.53

90,144

1.40

421,106

1.41

348,508

1.43

By-product credits

(90,956

)

(1.25

)

(67,025

)

(1.04

)

(360,719

)

(1.21

)

(269,304

)

(1.10

)

Zinc cash cost, net of by-product credits

20,788

0.29

23,119

0.36

60,387

0.20

79,204

0.32

¹For additional detail on cash cost, before by-product credits please see page 43 of this MD&A.

Manitoba	Three months ended								Year ended
Supplementary cash cost	Dec. 31, 2017				Dec. 31, 2016				Dec. 31, 2017				Dec. 31, 2016
information	$000s		$/lb ¹		$000s		$/lb ¹		$000s		$/lb ¹		$000s		$/lb ¹

By-product credits:
Copper	58,188		0.80		47,261		0.74		243,935		0.82		194,492		0.80
Gold	30,938		0.42		22,831		0.36		122,336		0.41		96,906		0.40
Silver	4,925		0.07		3,961		0.06		20,280		0.07		16,519		0.07
Other	1,353		0.02		640		0.01		5,062		0.02		2,590		0.01
Total by-product credits	95,404		1.31		74,693		1.16		391,613		1.31		310,507		1.27
Less: deferred revenue	(4,448	)	(0.06	)	(7,668	)	(0.12	)	(30,894	)	(0.10	)	(41,203	)	(0.17	)
Total by-product credits, net of pre-production credits	90,956		1.25		67,025		1.04		360,719		1.21		269,304		1.10

Reconciliation to IFRS:
Cash cost, net of by-product credits	20,788				23,119				60,387				79,204
By-product credits	95,404				74,693				391,613				310,507
Change in deferred revenues	(4,448	)			(7,668	)			(30,894	)			(41,203	)
Treatment and refining charges	(10,715	)			(6,145	)			(39,777	)			(34,808	)
Share-based payment	604				494				1,543				748
Pension enhancement	10,442				-				10,442				-
Change in product inventory	(7,918	)			(4,894	)			(9,919	)			(3,027	)
Royalties	1,783				1,611				9,468				6,616
Depreciation and amortization²	23,842				29,345				118,770				120,531
Cost of sales	129,782				110,555				511,633				438,568

¹Per pound of zinc produced.
²Depreciation is based on concentrate sold.

Manitoba

Three months ended

Year ended

Sustaining cash cost per pound

Dec. 31, 2017

Dec. 31, 2016

Dec. 31, 2017

Dec. 31, 2016

of zinc produced

$000s

$/lb

$000s

$/lb

$000s

$/lb

$000s

$/lb

Zinc cash cost, net of by-product credits

20,788

0.29

23,119

0.36

60,387

0.20

79,204

0.32

Sustaining capital expenditures

19,612

0.28

12,158

0.19

56,729

0.20

59,989

0.25

Capitalized exploration

613

0.01

1,446

1,898

0.01

Royalties

1,783

0.02

1,611

0.03

9,468

0.03

6,616

0.03

Sustaining cash cost per pound

of zinc produced

42,796

0.59

36,888

0.57

128,030

0.43

147,707

0.61

DISCLOSURE CONTROLS AND PROCEDURES AND INTERNAL CONTROL OVER FINANCIAL REPORTING

Disclosure controls and procedures (“DC&P”)

Management is responsible for establishing and maintaining adequate DC&P. As of December 31, 2017, we have evaluated the effectiveness of the design and operation of our DC&P in accordance with requirements of National Instrument 52-109 of the Canadian Securities Commission (“NI 52-109”) and the Sarbanes Oxley Act of 2002 (as adopted by the US Securities and Exchange Commission). Our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”) supervised and participated in this evaluation.

As of December 31, 2017, based on management’s evaluation, our CEO and CFO concluded that our DC&P were effective to ensure that information required to be disclosed by us in reports we file or submit is recorded, processed, summarized and reported within the time periods specified in securities legislation and is accumulated and communicated to our management, including our CEO and CFO, to allow timely decisions regarding required disclosure.

Internal control over financial reporting (“ICFR”)

Management is responsible for establishing and maintaining adequate ICFR. Under the supervision and with the participation of our management, including our CEO and CFO, we evaluated the effectiveness of our ICFR based upon the Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on management’s evaluation, our CEO and CFO concluded that our ICFR was effective as of December 31, 2017.

The Company’s internal control over financial reporting as at December 31, 2017 has been audited by Deloitte LLP, Independent Registered Public Accounting Firm who also audited the Company’s consolidated financial statements for the year ended December 31, 2017. Deloitte LLP expressed an unqualified opinion on the Company’s internal control over financial reporting.

Changes in ICFR

We did not make any changes to ICFR during the year ended December 31, 2017 that materially affected, or are reasonably likely to materially affect, our ICFR.

Inherent limitations of controls and procedures

All internal control systems, no matter how well designed, have inherent limitations. As a result, even systems determined to be effective may not prevent or detect misstatements on a timely basis, as systems can provide only reasonable assurance that the objectives of the control system are met. In addition, projections of any evaluation of the effectiveness of ICFR to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may change.

NOTES TO READER

Forward-Looking Information

This MD&A contains 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, production, cost and capital and exploration expenditure guidance, anticipated production at our mines and processing facilities, the anticipated timing, cost and benefits of developing the Rosemont project, Pampacancha deposit and Lalor growth projects, the anticipated impact of any delays to the start of mining the Pampacancha deposit, the anticipated results of litigation challenging the Rosemont permitting process, Hudbay’s expectations regarding the persistence of the positive grade reconciliation at Constancia and a restatement of the mineral reserves, anticipated exploration plans, anticipated mine plans, anticipated metals prices and the anticipated sensitivity of our financial performance to metals prices, events that may affect our operations and development projects, the permitting, development and financing of the Rosemont project, the potential to optimize the scale of production at Lalor and to efficiently process the excess base metals ore and initial gold zone ore production at the Flin Flon mill, anticipated cash flows from operations and related liquidity requirements, the anticipated effect of external factors on revenue, such as commodity prices, estimation of mineral reserves and resources, mine life projections, reclamation costs, economic outlook, government regulation of mining operations, and business and acquisition strategies. 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 scheduled maintenance and availability of our processing facilities;
	−	the accuracy of geological, mining and metallurgical estimates;
	−	anticipated metals prices and the costs of production;
	−	the supply and demand for metals we produce;
	−	the supply and availability of all forms of energy and fuels 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 additional financing, if needed;
	−	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, governmental and joint venture partner approvals;
	−	the availability of personnel for our exploration, development and operational projects and ongoing employee relations;
	−	the ability to secure required land rights to develop the Pampacancha deposit;
	−	maintaining good relations with the communities in which we operate, including the communities surrounding our Constancia mine and Rosemont project and First Nations communities surrounding our Lalor and Reed mines;

	−	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; and
	−	no significant and continuing adverse changes in general economic conditions or conditions in the financial markets (including commodity prices and foreign exchange rates).

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, 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 risks associated with the permitting, development and economics of the Rosemont project and related legal challenges), risks related to the maturing nature of our 777 mine and the pending closure of our Reed mine and their impact on the related Flin Flon metallurgical complex, dependence on key personnel and employee and union relations, risks related to the schedule for mining the Pampacancha deposit (including the timing and cost of acquiring the required surface rights and the impact of any schedule delays), risks related to the cost, schedule and economics of the capital projects intended to increase processing capacity for Lalor ore, risks related to political or social unrest or change, risks 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, depletion of our reserves, volatile financial markets that may affect our ability to obtain additional financing on acceptable terms, the failure to obtain required approvals or clearances from government authorities on a timely basis, 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 and 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.

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 US issuers.

Qualified Person

The technical and scientific information in this MD&A related to the Constancia mine and Rosemont project has been approved by Cashel Meagher, P. Geo, our Senior Vice President and Chief Operating Officer. The technical and scientific information related to our Manitoba sites and projects contained in this MD&A has been approved by Robert Carter, P. Eng, General Manager Mining Operations, Manitoba Business Unit. 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 our material properties as filed by us on SEDAR at www.sedar.com.

EX-99.3 4 exhibit99-3.htm EXHIBIT 99.3 Hudbay Minerals Inc. - Exhibit 99.3 - Filed by newsfilecorp.com

Hudbay Announces Fourth Quarter and Full Year 2017 Results

Toronto, Ontario, February 21, 2018 – Hudbay Minerals Inc. (“Hudbay” or the “company”) (TSX, NYSE:HBM) today released its fourth quarter and full year 2017 financial results. All amounts are in U.S. dollars, unless otherwise noted.

Summary:

On a consolidated basis, full year metals production met or exceeded 2017 guidance ranges
Net profit of $99.7 million and basic and diluted earnings per share of $0.38 in the fourth quarter of 2017, compared to a net loss of $47.3 million and loss per share of $0.20 in the fourth quarter of 2016
Operating cash flow¹of $172 million in the fourth quarter of 2017, a 41% increase from the fourth quarter of 2016, and $531 million for the full year 2017, a 37% increase from 2016
Reduced net debt²position by $462 million and improved liquidity during 2017; as at December 31, 2017, Hudbay had net debt of $623 million and total available liquidity of $778 million, including $356 million in cash
Consolidated cash cost², net of by-product credits, of $0.77 per pound of copper, a 9% decrease from the fourth quarter of 2016
Consolidated all-in sustaining cash cost², net of by-product credits, of $1.49 per pound of copper in the fourth quarter of 2017, up 2% from $1.46 in the fourth quarter of 2016
Full year combined unit operating costs at Manitoba and Peru exceeded 2017 guidance ranges, primarily due to increased operating costs and lower than expected mill throughput; zinc unit operating costs were within the guidance range

In the fourth quarter of 2017, operating cash flow before change in non-cash working capital was $171.9 million, compared to $122.3 million in the fourth quarter of 2016. The increase in operating cash flow is the result of higher realized copper and zinc prices, while higher zinc sales and precious metals sales offset lower copper sales.

“We ended 2017 on a positive note by achieving or exceeding production guidance and continuing to grow positive free cash flow while reducing debt,” said Alan Hair, president and chief executive officer. “Our focus for 2018 is delivering on this year’s operating targets and completing the ramp-up of base metal ore production at Lalor, commencing production from the Lalor gold zones and Pampacancha, and moving Rosemont through the permitting process into development.”

^{_____________________________________________
1}Operating cash flow before change in non-cash working capital.
²Cash cost and all-in sustaining cash cost per pound, net of by-product credits and net debt are not recognized under IFRS. For a detailed description of each of these non-IFRS financial performance measures, please see the discussion under “Non-IFRS Financial Performance Measures” beginning on page 6 of this news release.

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	2018 No. 5

Net profit and earnings per share in the fourth quarter of 2017 were affected by, among other things, the following items:

	Pre-tax gain	After-tax gain	Per share
	(loss)	(loss)	gain (loss)
	($ millions)	($ millions)	($/share)
Mark-to-market adjustments of various items	(5.6)	(4.3)	(0.02)
Past service pension costs	(10.4)	(6.9)	(0.03)
Gain on contingent consideration from Balmat sale	6.4	6.4	0.03
Asset impairment	(11.3)	(7.5)	(0.03)
Non-cash deferred tax adjustments	-	45.4	0.17

Compared to the fourth quarter of 2016, production of zinc, gold and silver in concentrate increased due to increased Lalor mine throughput and higher zinc grades at 777, while copper production remained consistent.

In the fourth quarter of 2017, consolidated cash cost per pound of copper produced, net of by-product credits, was $0.77, a decrease compared to $0.85 in the same period of last year. Incorporating sustaining capital, capitalized exploration, royalties and corporate selling and administrative expenses, consolidated all-in sustaining cash cost per pound of copper produced, net of by-product credits, in the fourth quarter of 2017 was $1.49, up from $1.46 in the fourth quarter of 2016. The increase in all-in sustaining cash cost was driven by higher planned sustaining capital expenditures in Manitoba.

Cash and cash equivalents increased by $27.6 million in the fourth quarter of 2017 to $356.5 million at December 31, 2017. This increase was mainly a result of operating cash flow of $129.4 million, partly offset by $88.0 million of capital expenditures and $9.5 million in expenditures related to financing activities.

Net debt declined to $623.1 million at December 31, 2017 from $649.6 million at September 30, 2017, as a result of cash flow from Hudbay’s operations. At December 31, 2017, total liquidity, including cash and available credit facilities, was $777.9 million, up from $749.9 million at September 30, 2017. Over the course of 2017, net debt declined from $1,085.3 million to $623.1 million.

During the fourth quarter, Hudbay recognized a pre-tax expense of $10.4 million for past service pension costs arising from new collective bargaining agreements in the Manitoba business unit. The company also recognized an asset impairment charge of $11.3 million related to equipment purchased to build a new concentrator in Snow Lake, Manitoba, that the company no longer expects to be usable in its operations. Hudbay realized a gain of $6.4 million upon receipt of deferred consideration from the sale of the Balmat mine, which followed the completion of certain milestones.

Financial Condition ($000s)	Dec. 31, 2017	Dec. 31, 2016
Cash and cash equivalents	356,499	146,864
Total long-term debt	979,575	1,232,164
Net debt¹	623,076	1,085,300
Working capital	308,675	121,539
Total assets	4,648,729	4,456,556
Equity	2,144,255	1,763,212

¹ Net debt is a non-IFRS financial performance measure with no standardized definition under IFRS. For further information, please see page 6 of this news release.

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	2018 No. 5

Financial Performance	Three months ended		Year ended
($000s except per share and cash cost amounts)	Dec. 31		Dec. 31
	2017	2016	2017	2016
Revenue	414,143	316,654	1,362,553	1,128,678
Cost of sales	278,291	238,449	988,608	905,800
Profit (loss) before tax	85,540	(26,065)	198,728	5,605
Profit (loss)	99,676	(47,273)	163,899	(35,193)
Basic and diluted earnings (loss) per share	0.38	(0.20)	0.67	(0.15)
Operating cash flow before change in non-cash working capital	171,904	122,257	530,561	387,868

Production and Cost Performance		Three months ended			Three months ended
		Dec. 31, 2017			Dec. 31, 2016
		Peru	Manitoba	Total	Peru	Manitoba	Total
Contained metal in concentrate produced¹
Copper	tonnes	33,837	9,338	43,175	33,986	9,797	43,783
Gold	oz	5,139	27,389	32,528	5,033	22,449	27,482
Silver	oz	670,219	333,272	1,003,491	723,392	269,286	992,678
Zinc	tonnes	-	33,055	33,055	-	29,144	29,144
Payable metal in concentrate sold
Copper	tonnes	34,227	7,252	41,479	35,969	8,223	44,192
Gold	oz	4,442	26,779	31,221	6,183	19,158	25,341
Silver	oz	543,763	291,723	835,486	701,654	209,671	911,325
Zinc²	tonnes	-	32,318	32,318	-	28,094	28,094
Cash cost³	$/lb	1.38	(1.42)	0.77	1.11	(0.06)	0.85
Sustaining cash cost³	$/lb	1.81	(0.35)		1.54	0.58
All-in sustaining cash cost³	$/lb			1.49			1.46
Realized copper price⁴	$/lb			3.13			2.37
		Year ended			Year ended
		Dec. 31, 2017			Dec. 31, 2016
		Peru	Manitoba	Total	Peru	Manitoba	Total
Contained metal in concentrate produced¹
Copper	tonnes	121,781	37,411	159,192	133,432	41,059	174,491
Gold	oz	17,579	91,014	108,593	26,276	88,020	114,296
Silver	oz	2,374,008	1,113,250	3,487,258	2,760,332	995,564	3,755,896
Zinc	tonnes	-	135,156	135,156	-	110,582	110,582
Payable metal in concentrate sold
Copper	tonnes	111,402	37,253	148,655	132,663	38,788	171,451
Gold	oz	12,464	97,306	109,770	24,199	71,328	95,527
Silver	oz	1,950,893	1,109,376	3,060,269	2,423,165	758,594	3,181,759
Zinc²	tonnes	-	116,377	116,377	-	103,453	103,453

Cash cost³	$/lb	1.28	(0.59)	0.84	1.09	0.41	0.93
Sustaining cash cost³	$/lb	1.76	0.23		1.51	1.16
All-in sustaining cash cost³	$/lb			1.52			1.52
Realized copper price⁴	$/lb			2.82			2.21

¹Metal reported in concentrate is prior to deductions associated with smelter contract terms.
²Includes refined zinc metal sold and payable zinc in concentrate sold.
³ Cash cost, sustaining cash cost and all-in sustaining cash cost per pound of copper produced, net of by-product credits, are non-IFRS financial performance measures with no standardized definition under IFRS. For further information, please see page 6 of this news release.
⁴Realized prices exclude refining and treatment charges and are on the sale of finished metal or metal in concentrate. Realized prices include the effect of provisional pricing adjustments on prior period sales.

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	2018 No. 5

Peru Operations Review

During the fourth quarter of 2017, the Peru operations produced 33,837 tonnes of copper, which was approximately 9% higher than production in the third quarter of 2017 as a result of improved copper head grade and copper recoveries, and consistent with the same quarter of 2016 as expected grade decline was offset by improved mill throughput. In 2017, copper production at Constancia exceeded the guidance ranges, while precious metals production was slightly below the lower end of the guidance range.

Recoveries of copper, gold and silver were higher in the fourth quarter of 2017, compared to the same period in 2016. Optimization of plant performance continues to be a focus at Constancia.

Combined mine, mill and G&A unit operating costs in the fourth quarter of 2017 were 22% higher than the same period in 2016. The higher combined unit costs are mostly related to decreased capitalized stripping, higher utility prices and higher overall operating costs due to increased molybdenum production during the period. Additionally, increased plant maintenance costs were incurred during a significant scheduled plant shutdown. Full year 2017 unit operating costs were higher than guidance expectations due to lower than expected mill throughput in the first half of the year combined with factors affecting the fourth quarter costs described above.

Negotiations to secure surface rights over the Pampacancha deposit are ongoing. The community has provided Hudbay with access to the land to carry out early-works activities and Hudbay expects to begin ore production later this year. In the event that the commencement of mining at Pampacancha is unexpectedly delayed beyond 2018, Hudbay expects to mine material from the Constancia pit instead, which would not impact copper production guidance, but would reduce 2018 Peru precious metals production guidance by approximately 25%.

Manitoba Operations Review

During the fourth quarter of 2017, the Manitoba operations produced 33,055 tonnes of zinc, 9,338 tonnes of copper and 32,150 ounces of gold-equivalent precious metals. Production of zinc and precious metals was higher than the same quarter in 2016 by approximately 13% and 22%, respectively, as a result of higher grades at all mines as well as higher ore production at Lalor. Production of all metals in Manitoba for full year 2017 was within the guidance ranges.

Ore mined at Hudbay’s Manitoba operations during the fourth quarter of 2017 decreased by 5% compared to the same period in 2016 primarily as a result of lower production at the 777 mine. Ore mined at the 777 mine declined as ground conditions necessitated the implementation of a more conservative stope sequence in order to adapt to more challenging operating conditions as the mine ages. Lower than planned equipment availability and delays in the mine sequence resulting from a plugged paste backfill line in the third quarter also impacted fourth quarter 777 production rates. Overall copper, zinc, gold and silver grades were higher in the fourth quarter of 2017 compared to the same period in 2016 by 9%, 17%, 25% and 26%, respectively, as a result of higher grades at all mines. Unit operating costs in the fourth quarter of 2017 were 44% higher compared to the same period in 2016.

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	2018 No. 5

Hudbay ceased capitalizing Reed development costs in the third quarter of 2017 as a result of the mine’s expected closure in the third quarter of 2018, resulting in higher Reed unit operating costs compared to prior periods. The 777 mine’s unit costs were negatively impacted by lower production as a result of the items noted above. Consistent with Hudbay’s revised mine plan, Lalor’s unit costs reflect increased cement rock filling costs as well as substantial operating and capital development work that was undertaken to increase Lalor’s production rate to 4,500 tonnes per day by the third quarter of 2018. The successful ramp up of ore production from the Lalor mine has resulted in the accumulation of an ore stockpile which exceeds the Stall concentrator’s current milling capacity. With the intention to take advantage of higher metal prices and increase Hudbay’s revenues, excess Lalor ore was trucked to the Flin Flon mill for processing, which contributed to the increased unit costs for Lalor.

Ore processed in Flin Flon in the fourth quarter of 2017 was 13% lower than the same period in 2016 primarily as a result of lower mine production, and challenges in primary crushing due to frozen blocks of ore feed recovered from stockpiles. Copper and precious metals recoveries were higher in the fourth quarter of 2017 compared to the same period in 2016 as a result of higher head grades, and improvements made to the mill. Unit operating costs at the Flin Flon concentrator were 12% higher in the fourth quarter of 2017 compared to the same period in 2016 as a result of higher maintenance expenditures and reduced production. Ore processed at the Stall concentrator in the fourth quarter of 2017 was 4% higher than the same period in 2016. Unit operating costs at the Stall concentrator were 5% higher in the fourth quarter of 2017 compared to the same period in 2016 as a result of higher maintenance expenditures resulting from unplanned repairs.

Manitoba combined mine, mill and G&A unit operating costs in the fourth quarter and full year in 2017 were 29% and 27% higher, respectively, than in the same periods in 2016 due to the factors described above. In addition, the stockpiling of Lalor ore increased combined mine/mill unit costs, as that metric is expressed as total costs during the period (irrespective of inventory changes) divided by the tonnes of ore milled. Processing the additional Lalor production in Flin Flon is expected to drive economies of scale and additional revenues through a faster ramp up. Combined mine/mill unit operating costs in Manitoba exceeded the guidance range for the reasons noted above. Zinc plant production and unit operating costs were within the guidance ranges for 2017.

Cash cost per pound of copper produced, net of by-product credits, in the fourth quarter of 2017 and full year were negative $1.42 and negative $0.59 per pound of copper produced, respectively. These were lower compared to the same periods in 2016 due primarily to significantly increased by-product credits for all metals, which were partially offset by expected higher costs at Hudbay’s 777 and Reed mines during this part of their mine lives.

Rosemont Developments

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	2018 No. 5

Collective Bargaining Agreements

Three-year collective bargaining agreements have been entered into with Hudbay’s unionized workforces at each of its Manitoba and Peru operations, providing labour stability.

Dividend Declared

Hudbay declared a semi-annual dividend of C$0.01 per share on February 21, 2018. The dividend will be paid on March 29, 2018 to shareholders of record as of March 9, 2018.

Outlook

Production, capital expenditure, exploration and unit cost guidance for 2018 remains unchanged from that provided on January 17, 2018.

Non-IFRS Financial Performance Measures

Net debt is shown in this news release because it is a performance measure used by the company to assess its financial position. Cash cost, sustaining and all-in sustaining cash cost per pound of copper produced are shown because the company believes they help investors and management assess the performance of its operations, including the margin generated by the operations and the company. These measures do not have a meaning prescribed by IFRS and are therefore unlikely to be comparable to similar measures presented by other issuers. These measures should not be considered in isolation or as a substitute for measures prepared in accordance with IFRS and are not necessarily indicative of operating profit or cash flow from operations as determined under IFRS. Other companies may calculate these measures differently. For further details on these measures, including reconciliations to the most comparable IFRS measures, please refer to page 39 of Hudbay’s management’s discussion and analysis for the three months and year ended December 31, 2017 available on SEDAR at www.sedar.com and EDGAR at www.sec.gov.

Website Links

Hudbay:

www.hudbay.com

Management’s Discussion and Analysis:

http://www.hudbayminerals.com/files/doc_financials/2017/Q4/MDA174.pdf

Financial Statements:

http://www.hudbayminerals.com/files/doc_financials/2017/Q4/FS174.pdf

	TSX, NYSE – HBM
	2018 No. 5

Conference Call and Webcast

Date:	Thursday, February 22, 2018

Time:	10 a.m. ET

Webcast:	www.hudbay.com

Dial in:	416-849-1847 or 1-866-530-1554

Qualified Person

The technical and scientific information in this news release related to the Constancia mine and Rosemont project has been approved by Cashel Meagher, P. Geo, Hudbay’s Senior Vice President and Chief Operating Officer. The technical and scientific information related to the Manitoba sites and projects contained in this news release has been approved by Robert Carter, P. Eng, Hudbay’s General Manager Mining Operations, Manitoba Business Unit. 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 the company’s material properties as filed by Hudbay on SEDAR at www.sedar.com.

Forward-Looking Information

This news release contains forward-looking information within the meaning of applicable Canadian and United States securities legislation. All information contained in this news release, 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 news release is qualified by this cautionary note.

Forward-looking information includes, but is not limited to, production, cost and capital and exploration expenditure guidance, anticipated production at Hudbay’s mines and processing facilities, the anticipated timing, cost and benefits of developing the Rosemont project, Pampacancha deposit and Lalor growth projects, the anticipated impact of any delays to the start of mining the Pampacancha deposit, the anticipated results of litigation challenging the Rosemont permitting process, Hudbay’s expectations regarding the persistence of the positive grade reconciliation at Constancia and a restatement of the mineral reserves, anticipated exploration plans, anticipated mine plans, anticipated metals prices and the anticipated sensitivity of the company’s financial performance to metals prices, events that may affect its operations and development projects, the permitting, development and financing of the Rosemont project, the potential to optimize the scale of production at Lalor and to efficiently process the excess base metals ore and initial gold zone ore production at the Flin Flon mill, anticipated cash flows from operations and related liquidity requirements, the anticipated effect of external factors on revenue, such as commodity prices, estimation of mineral reserves and resources, mine life projections, reclamation costs, economic outlook, government regulation of mining operations, and business and acquisition strategies. 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 the company 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.

	TSX, NYSE – HBM
	2018 No. 5

The material factors or assumptions that Hudbay identified and were applied by the company 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 scheduled maintenance and availability of the processing facilities;
the accuracy of geological, mining and metallurgical estimates;
anticipated metals prices and the costs of production;
the supply and demand for metals the company produces;
the supply and availability of all forms of energy and fuels at reasonable prices;
no significant unanticipated operational or technical difficulties;
the execution of Hudbay’s business and growth strategies, including the success of its strategic investments and initiatives;
the availability of additional financing, if needed;
the ability to complete project targets on time and on budget and other events that may affect the company’s ability to develop its projects;
the timing and receipt of various regulatory, governmental and joint venture partner approvals;
the availability of personnel for the exploration, development and operational projects and ongoing employee relations;
the ability to secure required land rights to develop the Pampacancha deposit;
maintaining good relations with the communities in which the company operates, including the communities surrounding the Constancia mine and Rosemont project and First Nations communities surrounding the Lalor and Reed mines;
no significant unanticipated challenges with stakeholders at the company’s various projects;
no significant unanticipated events or changes relating to regulatory, environmental, health and safety matters;
no contests over title to the company’s 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; and
no significant and continuing adverse changes in general economic conditions or conditions in the financial markets (including commodity prices and foreign exchange rates).

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, 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 the company’s projects (including risks associated with the permitting, development and economics of the Rosemont project and related legal challenges), risks related to the maturing nature of the 777 mine and the pending closure of the Reed mine and their impact on the related Flin Flon metallurgical complex, dependence on key personnel and employee and union relations, risks related to the schedule for mining the Pampacancha deposit (including the timing and cost of acquiring the required surface rights and the impact of any schedule delays), risks related to the cost, schedule and economics of the capital projects intended to increase processing capacity for Lalor ore, risks related to political or social unrest or change, risks 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, depletion of the company’s reserves, volatile financial markets that may affect the company’s ability to obtain additional financing on acceptable terms, the failure to obtain required approvals or clearances from government authorities on a timely basis, 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, the company’s ability to comply with its pension and other post-retirement obligations, the company’s ability to abide by the covenants in its debt instruments and other material contracts, tax refunds, hedging transactions, as well as the risks discussed under the heading “Risk Factors” in Hudbay’s most recent Annual Information Form.

	TSX, NYSE – HBM
	2018 No. 5

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. Hudbay does not assume any obligation to update or revise any forward-looking information after the date of this news release or to explain any material difference between subsequent actual events and any forward-looking information, except as required by applicable law.

Note to United States Investors

This news release 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.

About Hudbay

Hudbay (TSX, NYSE: HBM) is an integrated mining company primarily producing copper concentrate (containing copper, gold and silver), zinc concentrate and zinc metal. With assets in North and South America, the company is focused on the discovery, production and marketing of base and precious metals. Directly and through its subsidiaries, Hudbay owns four polymetallic mines, four ore concentrators and a zinc production facility in northern Manitoba and Saskatchewan (Canada) and Cusco (Peru), and a copper project in Arizona (United States). The company’s growth strategy is focused on the exploration and development of properties it already controls, as well as other mineral assets it may acquire that fit its strategic criteria. Hudbay’s vision is to be a responsible, top-tier operator of long-life, low-cost mines in the Americas. Hudbay’s mission is to create sustainable value through the acquisition, development and operation of high-quality, long-life deposits with exploration potential in jurisdictions that support responsible mining, and to see the regions and communities in which the company operates benefit from its presence. The company is governed by the Canada Business Corporations Act and its shares are listed under the symbol "HBM" on the Toronto Stock Exchange, New York Stock Exchange and Bolsa de Valores de Lima. Hudbay also has warrants listed under the symbol “HBM.WT” on the Toronto Stock Exchange and “HBM/WS” on the New York Stock Exchange.

For further information, please contact:

Carla Nawrocki
Director, Investor Relations
(416) 362-7362
carla.nawrocki@hudbay.com

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