XML 73 R32.htm IDEA: XBRL DOCUMENT

Financial instruments

12 Months Ended

Dec. 31, 2017

Statement [Line Items]

Financial instruments [Text Block]

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 cash ¹		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 derivatives ³		17,427			17,427			12,538			12,538
Non-hedge derivative assets ³		2,841			2,841			3,397			3,397
Prepayment option - embedded derivative ⁷		3,980			3,980			4,430			4,430
Investments at FVTPL ⁴		282			282			192			192
Available-for-sale investments ⁴		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 liabilities ⁵		19,625			22,568			17,231			22,998
Senior unsecured notes ⁶		1,082,740			991,883			1,040,178			991,004
Equipment finance facility ⁸		-			-			50,267			50,267
Senior secured revolving credit facilities ⁸		-			-			202,075			202,075
Unamortized transaction costs ⁸		(8,328	)		(8,328	)		(6,752	)		(6,752	)
Fair value through profit or loss
Embedded derivatives ³		1,533			1,533			86			86
Warrant liabilities ³		6,961			6,961			7,588			7,588
Option liabilities ³		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.}

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

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.

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.

(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:

					Dec. 31, 2017					Dec. 31, 2016
	$	CAD ¹			USD ²			PEN ³		CAD ¹		USD ²			PEN ³
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	)

¹ HMI is exposed to foreign currency risk on CAD.

² The Manitoba segment is exposed to foreign currency risk on USD. ³ The 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 rate ¹	+ 10%	$	5.6 million	$	(2.0) million
USD/CAD exchange rate ¹	- 10%		(6.8) million		2.4 million
USD/PEN exchange rate ²	+ 10%		2.1 million		- million
USD/PEN exchange rate ²	- 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 rate ¹	+ 10%	3.9 million	(1.2) million
USD/CAD exchange rate ¹	- 10%	(4.9) million	1.5 million
USD/PEN exchange rate ²	+ 10%	2.0 million	- million
USD/PEN exchange rate ²	- 10%	(2.5) million	- million

¹ Effect 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.

² Effect 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.

			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

³ Effect on profit due to embedded provisional pricing derivatives (note 26c) and copper fixed for floating swaps (note 26b).
⁴ Effect 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 prices ⁵	+ 25%	$	- million	$	5.5 million
Share prices ⁵	- 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 prices ⁵	+ 25%	$	- million	$	4.5 million
Share prices ⁵	- 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.

			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.

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									More than
Dec. 31, 2017		amount			cash flows			or less			13 - 36 months			37 - 60 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	)	$	-		$	-

																	More
		Carrying			Contractual			12 months or									than 60
Dec. 31, 2016		amount			cash flows			less			13 - 36 months			37 - 60 months			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	)	$	-