Hudbay Minerals Inc.: Exhibit 99.1 - Filed by newsfilecorp.com

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

	Unaudited Condensed Consolidated Interim Financial Statements
	(In US dollars)

	HUDBAY MINERALS INC.

	For the three and six months ended June 30, 2018 and 2017

HUDBAY MINERALS INC.

Condensed Consolidated Interim Balance Sheets

(Unaudited and in thousands of US dollars)

			Jun. 30,			Dec. 31,			Jan. 1,
			2018			2017			2017
						Restated			Restated
	Note					(note 4	)		(note 4	)
Assets
Current assets
Cash and cash equivalents		$	439,576		$	356,499		$	146,864
Trade and other receivables	6		137,385			155,522			152,567
Inventories	7		157,332			141,682			112,464
Prepaid expenses and other current assets			9,095			8,995			3,992
Other financial assets	8		6,550			2,841			3,397
Taxes receivable			3			3			17,319
			749,941			665,542			436,603
Receivables	6		34,655			32,459			32,648
Inventories	7		5,592			5,809			4,537
Other financial assets	8		19,111			22,461			30,848
Intangible assets - computer software			5,002			5,575			6,614
Property, plant and equipment	9		3,863,963			3,964,233			3,953,752
Deferred tax assets	16b		13,498			31,937			40,162
		$	4,691,762		$	4,728,016		$	4,505,164
Liabilities
Current liabilities
Trade and other payables		$	178,675		$	199,117		$	169,662
Taxes payable			10,234			10,794			4,419
Other liabilities	10		34,054			51,962			42,207
Other financial liabilities	11		7,736			26,760			13,495
Finance lease obligations	12		19,753			18,327			3,172
Long term debt	13		-			-			16,490
Deferred revenue	14		98,563			107,194			87,411
			349,015			414,154			336,856
Other financial liabilities	11		23,823			20,801			28,343
Finance lease obligations	12		61,472			66,246			9,760
Long term debt	13		975,816			979,575			1,215,674
Deferred revenue	14		487,410			494,736			528,835
Provisions	15		196,665			200,138			179,702
Pension obligations			11,174			22,221			28,379
Other employee benefits			104,246			108,397			89,273
Deferred tax liabilities	16b		313,957			309,403			328,263
			2,523,578			2,615,671			2,745,085
Equity
Share capital	17b		1,777,339			1,777,409			1,588,319
Reserves			(34,646	)		(26,463	)		(53,633	)
Retained earnings			425,491			361,399			225,393
			2,168,184			2,112,345			1,760,079
		$	4,691,762		$	4,728,016		$	4,505,164
Commitments (note 20)

HUDBAY MINERALS INC.

Condensed Consolidated Interim Statements of Cash Flow

(Unaudited and in thousands of US dollars)

			Three months ended						Six months ended
			June 30,						June 30,
			2018			2017			2018			2017
						Restated						Restated
	Note					(note 4	)					(note 4	)
Cash generated from (used in) operating activities:
Profit for the period		$	24,673		$	19,137		$	66,118		$	9,108
Tax expense	16a		25,124			15,798			56,782			30,465
Items not affecting cash:
Depreciation and amortization	5b		83,703			77,734			164,399			140,488
Share-based payment (recovery) expense	5c		(1,883	)		(201	)		(3,448	)		3,121
Net finance expense	5e		35,430			42,370			72,356			84,745
Change in fair value of derivatives	5e		(1,840	)		(153	)		(4,471	)		(124	)
Change in deferred revenue related to stream	14		(17,562	)		(25,378	)		(43,498	)		(47,136	)
Change in taxes receivable/payable, net	21a		(2,360	)		2,115			(10,802	)		(4,437	)
Unrealized gain on warrants	5e		(1,105	)		(5,001	)		(6,662	)		(3,739	)
Loss (gain) on investments	5e		2,084			688			4,124			(286	)
Pension and other employee benefit payments, net of accruals			(1,586	)		(2,399	)		(1,443	)		(3,017	)
Other and foreign exchange			(6,139	)		3,109			(8,643	)		3,913
Taxes paid			(6,904	)		(3,701	)		(21,384	)		(8,383	)
Operating cash flow before change in non-cash working capital			131,635			124,118			263,428			204,718
Change in non-cash working capital	21a		(34,595	)		7,734			(35,024	)		37,527
			97,040			131,852			228,404			242,245
Cash generated from (used in) investing activities:
Acquisition of property, plant and equipment			(40,129	)		(53,455	)		(86,572	)		(94,021	)
Net (purchase) sale of investments			-			-			(388	)		229
Release of restricted cash			-			16,945			206			16,945
Net interest received			954			276			1,605			328
			(39,175	)		(36,234	)		(85,149	)		(76,519	)
Cash generated from (used in) financing activities:
Principal repayments	13		-			(67,123	)		-			(131,245	)
Interest paid on long-term debt			-			(4,415	)		(37,375	)		(15,821	)
Financing costs			(6,324	)		(4,102	)		(10,554	)		(10,465	)
Payment of finance lease			(5,190	)		(934	)		(10,228	)		(1,871	)
Share issuance costs			-			(20	)		(70	)		(20	)
Dividends paid	17b		-			-			(2,026	)		(1,775	)
			(11,514	)		(76,594	)		(60,253	)		(161,197	)
Effect of movement in exchange rates on cash and cash equivalents			429			1,065			75			1,279
Net increase in cash and cash equivalents			46,780			20,089			83,077			5,808
Cash and cash equivalents, beginning of period			392,796			132,583			356,499			146,864
Cash and cash equivalents, end of period		$	439,576		$	152,672		$	439,576		$	152,672

HUDBAY MINERALS INC.

Condensed Consolidated Interim Income Statements

(Unaudited and in thousands of US dollars, except share and per share amounts)

			Three months ended						Six months ended
			June 30,						June 30,
			2018			2017			2018			2017
						Restated						Restated
	Note					(note 4	)					(note 4	)
Revenue	5a	$	371,288		$	336,033		$	757,944		$	597,799
Cost of sales
Mine operating costs			195,275			170,398			380,552			312,855
Depreciation and amortization	5b		83,552			77,649			164,160			140,313
			278,827			248,047			544,712			453,168
Gross profit			92,461			87,986			213,232			144,631
Selling and administrative expenses			6,104			5,847			11,819			16,132
Exploration and evaluation			7,455			1,743			14,797			3,731
Other operating expense (income)	5d		210			1,889			8,059			(3,399	)
Results from operating activities			78,692			78,507			178,557			128,167
Finance income	5e		(1,978	)		(599	)		(3,356	)		(1,105	)
Finance expenses	5e		37,408			42,969			75,712			85,850
Other finance (gain) loss	5e		(6,535	)		1,202			(16,699	)		3,849
Net finance expense			28,895			43,572			55,657			88,594

Profit before tax			49,797			34,935			122,900			39,573
Tax expense	16a		25,124			15,798			56,782			30,465

Profit for the period		$	24,673		$	19,137		$	66,118		$	9,108

Earnings per share
Basic and diluted		$	0.09		$	0.08		$	0.25		$	0.04

Weighted average number of common shares outstanding (note 18):
Basic and Diluted			261,271,188			237,271,188			261,271,188			237,271,188

HUDBAY MINERALS INC.

Condensed Consolidated Interim Statements of Comprehensive Income

(Unaudited and in thousands of US dollars)

		Three months ended									Six months ended
					June 30,						June 30,
		2018			2017			2018			2017
					Restated						Restated
					(note 4	)					(note 4	)
Profit for the period	$	24,673		$	19,137		$	66,118		$	9,108

Other comprehensive (loss) income:
Item that will be reclassified subsequently to profit or loss:
Recognized directly in equity:
Net exchange (loss) gain on translation of foreign currency balances		(5,915	)		8,529			(13,940	)		10,521
		(5,915	)		8,529			(13,940	)		10,521

Items that will not be reclassified subsequently to profit or loss:
Recognized directly in equity:
Remeasurement - actuarial gain (loss)		6,330			(1,349	)		8,347			(3,298	)
Tax effect		(2,225	)		(613	)		(2,590	)		(795	)
		4,105			(1,962	)		5,757			(4,093	)

Transferred to income statement:
Wind up of subsidiaries		-			-			-			3,021
		-			-			-			3,021

Other comprehensive (loss) income net of tax, for the period		(1,810	)		6,567			(8,183	)		9,449
Total comprehensive income for the period	$	22,863		$	25,704		$	57,935		$	18,557

HUDBAY MINERALS INC.

Condensed Consolidated Interim Statements of Changes in Equity

(Unaudited and in thousands of US dollars)

		Share capital			Other capital		Foreign currency			Remeasurement
		(note 17	)		reserves		translation reserve			reserve			Retained earnings			Total equity
							(Restated, note						(Restated, note			(Restated, note
							4	)					4	)		4	)

Balance, January 1, 2017	$	1,588,319		$	28,837	$	(12,164	)	$	(70,306	)	$	225,393		$	1,760,079
Profit		-			-		-			-			9,108			9,108
Other comprehensive income (loss)		-			-		13,542			(4,093	)		-			9,449
Total comprehensive income (loss)		-			-		13,542			(4,093	)		9,108			18,557
Contributions by and distributions to owners:
Share issue costs, net of tax		(20	)		-		-			-			-			(20	)
Dividends (note 17b)		-			-		-			-			(1,775	)		(1,775	)
Total contributions by and distributions to owners		(20	)		-		-			-			(1,775	)		(1,795	)

Balance, June 30, 2017	$	1,588,299		$	28,837	$	1,378		$	(74,399	)	$	232,726		$	1,776,841
Profit		-			-		-			-			130,584			130,584
Other comprehensive income (loss)		-			-		11,174			6,547			-			17,721
Total comprehensive income (loss)		-			-		11,174			6,547			130,584			148,305
Contributions by and distributions to owners:
Equity issuance (note 17b)		195,295			-		-			-			-			195,295
Share issue costs, net of tax		(6,185	)		-		-			-			-			(6,185	)
Dividends		-			-		-			-			(1,911	)		(1,911	)
Total contributions by and distributions to owners		189,110			-		-			-			(1,911	)		187,199

Balance, December 31, 2017	$	1,777,409		$	28,837	$	12,552		$	(67,852	)	$	361,399		$	2,112,345

HUDBAY MINERALS INC.

Condensed Consolidated Interim Statements of Changes in Equity

(Unaudited and in thousands of US dollars)

		Share capital			Other capital		Foreign currency			Remeasurement
		(note 17	)		reserves		translation reserve			reserve			Retained earnings			Total equity
Balance, January 1, 2018	$	1,777,409		$	28,837	$	12,552		$	(67,852	)	$	361,399		$	2,112,345
Profit		-			-		-			-			66,118			66,118
Other comprehensive (loss) income		-			-		(13,940	)		5,757			-			(8,183	)
Total comprehensive (loss) income		-			-		(13,940	)		5,757			66,118			57,935
Contributions by and distributions to owners:
Share issue costs, net of tax (note 17b)		(70	)		-		-			-			-			(70	)
Dividends (note 17b)		-			-		-			-			(2,026	)		(2,026	)
Total contributions by and distributions to owners		(70	)		-		-			-			(2,026	)		(2,096	)

Balance, June 30, 2018	$	1,777,339		$	28,837	$	(1,388	)	$	(62,095	)	$	425,491		$	2,168,184

HUDBAY MINERALS INC.

Notes to Unaudited Condensed Consolidated Interim Financial Statements

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

For the three and six months ended June 30, 2018 and 2017

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 unaudited condensed consolidated interim financial statements (“interim financial statements”) of the Company for the three and six months ended June 30, 2018 and 2017 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 June 30, 2018, 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 primarily 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.

	Management does not consider the impact of seasonality on operations to be significant on the interim financial statements.

2.	Basis of preparation

(a)

Statement of compliance:

These interim financial statements have been prepared in accordance with IAS 34, Interim Financial Reporting and do not include all of the information required for full annual financial statements by International Financial Reporting Standards ("IFRS") as issued by the International Accounting Standards Board ("IASB").

These interim financial statements should be read in conjunction with the Company’s audited consolidated financial statements for the year ended December 31, 2017 which includes information necessary or useful to understanding the Company’s business and financial statement presentation. In particular, the Company’s significant accounting policies are presented as note 3 in the audited consolidated financial statements for the year ended December 31, 2017, and have been consistently applied in the preparation of these interim financial statements.

As a result of the application of IFRS 9, Financial Instruments (“IFRS 9”) and IFRS 15, Revenue from Contracts with Customers (“IFRS 15”), the Group has amended the relevant accounting policies. Refer to the unaudited condensed consolidated interim financial statements for the three months ended March 31, 2018 for full disclosure.

The Board of Directors approved these interim financial statements on July 31, 2018.

HUDBAY MINERALS INC.

Notes to Unaudited Condensed Consolidated Interim Financial Statements

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

For the three and six months ended June 30, 2018 and 2017

	(b)	Functional and presentation currency:

		The Group's interim 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)	Use of judgement:

		The preparation of the interim financial statements in conformity with IFRS requires the Group to make judgements, apart from those involving estimations, in applying accounting policies that affect reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the interim financial statements, as well as reported amounts of revenue and expenses during the reporting period.

		The interim financial statements reflect the judgements outlined by the Group in its audited consolidated financial statements for the year ended December 31, 2017.

	(d)	Use of estimates and assumptions:

		The preparation of the interim financial statements in conformity with IFRS requires the Group to make 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 interim financial statements, as well as reported amounts of revenue and expenses during the reporting period. Actual results may differ from these estimates.

		The interim financial statements reflect the estimates outlined by the Group in its audited consolidated financial statements for the year ended December 31, 2017.

3.	Significant accounting policies

	These interim financial statements reflect the accounting policies applied by the Group in its audited consolidated financial statements for the year ended December 31, 2017 and comparative periods.

	As a result of the application of IFRS 9, Financial Instruments (“IFRS 9”) and IFRS 15, Revenue from Contracts with Customers (“IFRS 15”), the Group has amended the relevant accounting policies. For full disclosure of these policies, refer to the disclosure documented in Hudbay’s unaudited condensed consolidated interim financial statements for the three months ended March 31, 2018.

HUDBAY MINERALS INC.

Notes to Unaudited Condensed Consolidated Interim Financial Statements

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

For the three and six months ended June 30, 2018 and 2017

4.	New standards

New standards and interpretations adopted

	(a)	IFRS 9, *Financial Instruments* (“IFRS 9”) and IFRS 15, *Revenue from Contracts with Customers* (“IFRS 15”)

		The Group applied these standards on January 1, 2018 retrospectively. Changes to previously reported balances are disclosed in Note 4(c).

	(b)	IFRIC Interpretation 22, Foreign Currency Transactions and Advance Consideration (“IFRIC 22”)

		IFRIC 22 provides requirements about which exchange rate to use in reporting foreign currency transactions (such as revenue transactions) when payment is made or received in advance. The Interpretations Committee concluded that the exchange rate should be the rate used to initially measure the non-monetary asset (prepaid asset) or liability (deferred credit) when the advance was made. If there were multiple advances, each receipt or payment would be measured at the date the non-monetary asset or liability is recognized. This interpretation is effective for annual periods beginning on or after January 1, 2018, is consistent with the Group’s existing policies, and therefore does not have any effect on the Group’s financial results.

HUDBAY MINERALS INC.

Notes to Unaudited Condensed Consolidated Interim Financial Statements

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

For the three and six months ended June 30, 2018 and 2017

(c)

New standards adopted - Impact summary

Condensed Consolidated Interim Balance Sheet

		January 1, 2017
		As reported			IFRS 9		IFRS 15			Restated
Property, plant and equipment	$	3,865,823		$			87,929		$	3,953,752
Deferred tax assets ¹		45,103			-		(4,941	)		40,162
Deferred revenue (current)		65,619			-		21,792			87,411
Deferred revenue (non-current)		472,233			-		56,602			528,835
Deferred tax liabilities ¹		320,536			-		7,727			328,263
Reserves		(42,040	)		(5,025	)	(6,568	)		(53,633	)
Retained Earnings		216,933			5,025		3,435			225,393

¹ Refer to note 16(b) for further information

		December 31, 2017
		As reported			IFRS 9			IFRS 15			Restated
Property, plant and equipment	$	3,880,894		$	-		$	83,339		$	3,964,233
Deferred tax assets		35,989			-			(4,052	)		31,937
Deferred revenue (current)		49,907			-			57,287			107,194
Deferred revenue (non-current)		448,137			-			46,599			494,736
Deferred tax liabilities		302,092			-			7,311			309,403
Reserves		(10,300	)		(10,424	)		(5,739	)		(26,463	)
Retained Earnings		377,146			10,424			(26,171	)		361,399

Condensed Consolidated Interim Income Statement

		Three months ended June 30, 2017
		As reported		IFRS 9			IFRS 15			Restated
Revenue	$	324,898	$	-		$	11,135		$	336,033
Depreciation and amortization		76,521		-			1,128			77,649
Finance expenses		26,422		-			16,547			42,969
Other finance loss		864		338			-			1,202
Profit before tax		41,813		(338	)		(6,540	)		34,935
Tax expense		16,227		-			(429	)		15,798
Profit for the period		25,586		(338	)		(6,111	)		19,137
Other comprehensive income for the period		5,922		338			307			6,567
Earnings per share - Basic and diluted		0.11		-			(0.03	)		0.08

		Six months ended June 30, 2017
		As reported		IFRS 9			IFRS 15			Restated
Revenue	$	578,055	$	-		$	19,744		$	597,799
Depreciation and amortization		138,071		-			2,242			140,313
Finance expenses		52,828		-			33,022			85,850
Other finance loss		4,435		(586	)		-			3,849
Profit before tax		54,507		586			(15,520	)		39,573
Tax expense		31,226		-			(761	)		30,465
Profit for the period		23,281		586			(14,759	)		9,108
Other comprehensive income for the period		9,607		(586	)		428			9,449
Earnings per share - Basic and diluted		0.10		-			(0.06	)		0.04

HUDBAY MINERALS INC.

Notes to Unaudited Condensed Consolidated Interim Financial Statements

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

For the three and six months ended June 30, 2018 and 2017

Condensed Consolidated Interim Statement of Cash Flow

		Three months ended June 30, 2017
		As reported			IFRS 9			IFRS 15			Restated
Profit for the period	$	25,586		$	(338	)	$	(6,111	)	$	19,137
Tax expense		16,227			-			(429	)		15,798
Depreciation and amortization		76,606			-			1,128			77,734
Net finance expense		25,823			-			16,547			42,370
Change in deferred revenue related to stream		(14,243	)		-			(11,135	)		(25,378	)
Loss on investments at FVTPL		-			688			-			688
Loss on available-for-sale investments		308			(308	)		-			-
Other and foreign exchange		3,151			(42	)		-			3,109

		Six months ended June 30, 2017
		As reported			IFRS 9			IFRS 15			Restated
Profit for the period	$	23,281		$	586		$	(14,759	)	$	9,108
Tax expense		31,226			-			(761	)		30,465
Depreciation and amortization		138,246			-			2,242			140,488
Net finance expense		51,723			-			33,022			84,745
Change in deferred revenue related to stream		(27,392	)		-			(19,744	)		(47,136	)
Gain on investments at FVTPL		-			(286	)		-			(286	)
Loss on available-for-sale investments		226			(226	)		-			-
Other and foreign exchange		3,987			(74	)		-			3,913

New standards and interpretations not yet adopted

	(d)	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 a modified retrospective approach. Early adoption is permitted, but only in conjunction with IFRS 15, Revenue from Contracts with Customers. 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, which will cause, with limited exceptions, most leases to be recorded ‘on balance sheet’. The Group is progressing in its assessment of the impact of IFRS 16 on its consolidated financial statements.

HUDBAY MINERALS INC.

Notes to Unaudited Condensed Consolidated Interim Financial Statements

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

For the three and six months ended June 30, 2018 and 2017

5.	Revenue and expenses

(a)

Revenue

The Group’s revenue by significant product types:

		Three months ended						Six months ended
		June 30,						June 30,
		2018			2017			2018			2017
					(Restated)						(Restated)
Copper	$	242,767		$	224,188		$	499,638		$	382,091
Zinc		93,323			81,820			184,246			159,129
Gold		41,583			33,312			78,190			68,836
Silver		19,046			20,170			41,222			37,158
Other metals		1,451			6,154			5,670			7,265
		398,170			365,644			808,966			654,479
Adjustments from initial estimate ¹		(4,554	)		(3,509	)		(4,591	)		(11,789	)
		393,616			362,135			804,375			642,690
Treatment and refining charges		(22,328	)		(26,102	)		(46,431	)		(44,891	)

	$	371,288		$	336,033		$	757,944		$	597,799

¹Adjustments from initial estimate represent mark-to-market adjustments on provisionally priced sales, realized and unrealized changes to fair value for non-hedge derivative contracts and adjustments to originally invoiced weights and assays.

(b)

Depreciation and amortization

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

		Three months ended				Six months ended
		June 30,				June 30,
		2018		2017		2018		2017
				(Restated)				(Restated)
Cost of sales	$	83,552	$	77,649	$	164,160	$	140,313
Selling and administrative expenses		151		85		239		175

	$	83,703	$	77,734	$	164,399	$	140,488

HUDBAY MINERALS INC.

Notes to Unaudited Condensed Consolidated Interim Financial Statements

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

For the three and six months ended June 30, 2018 and 2017

(c)

Share-based payment (recoveries) expenses

Share-based payment (recoveries) expenses are reflected in the condensed consolidated interim income statements as follows:

		Cash-settled						Total share-based
		RSUs			DSUs			payment expense
Three months ended June 30, 2018
Cost of sales	$	(86	)	$	-		$	(86	)
Selling and administrative		(837	)		(856	)		(1,693	)
Other operating		(104	)		-			(104	)

	$	(1,027	)	$	(856	)	$	(1,883	)
Six months ended June 30, 2018
Cost of sales	$	(69	)	$	-		$	(69	)
Selling and administrative		(1,423	)		(1,825	)		(3,248	)
Other operating		(131	)		-			(131	)

	$	(1,623	)	$	(1,825	)	$	(3,448	)
Three months ended June 30, 2017
Cost of sales	$	161		$	-		$	161
Selling and administrative		(172	)		(514	)		(686	)
Other operating		324			-			324

	$	313		$	(514	)	$	(201	)
Six months ended June 30, 2017
Cost of sales	$	599		$	-		$	599
Selling and administrative		1,722			223			1,945
Other operating		577			-			577

	$	2,898		$	223		$	3,121

HUDBAY MINERALS INC.

Notes to Unaudited Condensed Consolidated Interim Financial Statements

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

For the three and six months ended June 30, 2018 and 2017

(d)

Other operating income and expenses

		Three months ended					Six months ended
		June 30,					June 30,
		2018			2017		2018			2017
Regional costs	$	1,152		$	1,501	$	1,913		$	2,736
Constancia insurance recovery		-			-		-			(8,707	)
Pampacancha delivery obligation		-			-		7,218			-
Other (income) expense		(942	)		388		(1,072	)		2,572

	$	210		$	1,889	$	8,059		$	(3,399	)

During the first quarter of 2018, the Group recognized an obligation to deliver additional precious metal credits to Wheaton Precious Metals (“Wheaton”) as a result of the Group’s expectation that mining at the Pampacancha deposit will not begin until 2019.

During the first quarter of 2017, the Group accounted for amounts to be received 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. These funds were received during the second quarter of 2017.

(e)

Finance income and expenses

		Three months ended						Six months ended
		June 30,						June 30,
		2018			2017			2018			2017
					(Restated)						(Restated)
Finance income	$	(1,978	)	$	(599	)	$	(3,356	)	$	(1,105	)
Finance expense
Interest expense on long-term debt		19,196			22,215			38,714			45,134
Accretion on financial liabilities at amortized cost		313			325			627			653
Accretion on deferred revenue		16,137			16,547			32,319			33,022
Unwinding of discounts on provisions		1,157			997			2,276			2,006
Withholding taxes		2,364			2,366			4,701			4,806
Other finance expense		1,534			3,808			3,659			6,798
		40,701			46,258			82,296			92,419
Interest capitalized		(3,293	)		(3,289	)		(6,584	)		(6,569	)
		37,408			42,969			75,712			85,850
Other finance (gains) losses
Net foreign exchange (gains) losses		(5,674	)		5,668			(9,690	)		7,998
Change in fair value of financial assets and liabilities at fair value through profit or loss:
Hudbay warrants		(1,105	)		(5,001	)		(6,662	)		(3,739	)
Embedded derivatives		(1,840	)		(153	)		(4,471	)		(124	)
Investments		2,084			688			4,124			(286	)
		(6,535	)		1,202			(16,699	)		3,849

Net finance expense	$	28,895		$	43,572		$	55,657		$	88,594

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

HUDBAY MINERALS INC.

Notes to Unaudited Condensed Consolidated Interim Financial Statements

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

For the three and six months ended June 30, 2018 and 2017

Other finance expense relates primarily to fees on the Group’s revolving credit facilities.

6.	Trade and other receivables

		Jun. 30, 2018			Dec. 31, 2017		Jan. 1, 2017
Current
Trade receivables	$	130,096		$	119,055	$	85,386
Fair value movements on provisionally priced receivables		(5,019	)		17,427		12,538
Statutory receivables		9,337			13,961		43,808
Receivable from joint venture partners		1,152			2,808		-
Other receivables		1,819			2,271		10,835
		137,385			155,522		152,567
Non-current
Taxes receivable		14,695			14,394		12,424
Receivable from joint venture partners		18,387			16,414		18,681
Other receivables		1,573			1,651		1,543
		34,655			32,459		32,648

	$	$ 172,040		$	187,981	$	185,215

As at June 30, 2018, $8,900 (December 31, 2017 and January 1, 2017 - $10,905 and $42,273, respectively) 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.

7.	Inventories

		Jun. 30, 2018		Dec. 31, 2017		Jan. 1, 2017
Current
Stockpile	$	19,241	$	13,468	$	9,368
Work in progress		21,973		14,552		9,100
Finished goods		74,619		71,906		54,583
Materials and supplies		41,499		41,756		39,413
		157,332		141,682		112,464
Non-current
Materials and supplies		5,592		5,809		4,537

	$	$ 162,924	$	147,491	$	117,001

The cost of inventories recognized as an expense, including depreciation, and included in cost of sales amounted to $249,801 and $481,092 for the three and six months ended June 30, 2018 (three and six months ended June 30, 2017 - $217,530 and $398,113, respectively).

HUDBAY MINERALS INC.

Notes to Unaudited Condensed Consolidated Interim Financial Statements

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

For the three and six months ended June 30, 2018 and 2017

8.	Other financial assets

		Jun. 30, 2018		Dec. 31, 2017		Jan. 1, 2017
Current
Derivative assets	$	6,550	$	2,841	$	3,397

Non-current
Investments at fair value through profit or loss		19,111		22,255		13,700
Restricted cash		-		206		17,148
		19,111		22,461		30,848

	$	25,661	$	25,302	$	34,245

Investments at fair value through profit or loss consist of securities in Canadian metals and mining companies, all of which are publicly traded.

HUDBAY MINERALS INC.

Notes to Unaudited Condensed Consolidated Interim Financial Statements

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

For the three and six months ended June 30, 2018 and 2017

9.	Property, plant and equipment

				Accumulated
				depreciation
				and			Carrying
Jun. 30, 2018		Cost		amortization			amount
Exploration and evaluation assets	$	21,533	$	-		$	21,533
Capital works in progress		917,625		-			917,625
Mining properties		1,975,943		(735,127	)		1,240,816
Plant and equipment		2,573,598		(889,609	)		1,683,989

	$	5,488,699	$	(1,624,736	)	$	3,863,963

				Accumulated
				depreciation
				and			Carrying
Dec. 31, 2017 (Restated)		Cost		amortization			amount
Exploration and evaluation assets	$	23,010	$	-		$	23,010
Capital works in progress		933,531		-			933,531
Mining properties		1,975,061		(683,183	)		1,291,878
Plant and equipment		2,536,019		(820,205	)		1,715,814

	$	5,467,621	$	(1,503,388	)	$	3,964,233

				Accumulated
				depreciation
				and			Carrying
Jan.1, 2017 (Restated)		Cost		amortization			amount
Exploration and evaluation assets	$	15,015	$	-		$	15,015
Capital works in progress		844,759		-			844,759
Mining properties		1,852,705		(529,242	)		1,323,463
Plant and equipment		2,385,995		(615,480	)		1,770,515

	$	5,098,474	$	(1,144,722	)	$	3,953,752

10.

Other liabilities

		Jun. 30, 2018		Dec. 31, 2017		Jan. 1, 2017
Current
Provisions (note 15)	$	15,858	$	27,370	$	14,367
Pension liability		13,664		19,401		24,635
Other employee benefits		2,734		2,756		2,356
Unearned revenue		1,798		2,435		849

	$	34,054	$	51,962	$	42,207

HUDBAY MINERALS INC.

Notes to Unaudited Condensed Consolidated Interim Financial Statements

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

For the three and six months ended June 30, 2018 and 2017

11.

Other financial liabilities

		Jun. 30, 2018		Dec. 31, 2017		Jan. 1, 2017
Current
Derivative liabilities	$	1,321	$	16,140	$	10,682
Warrants at fair value through profit and loss		85		6,961		-
Contingent consideration - gold price option		-		732		-
Other financial liabilities at amortized cost		2,860		2,630		2,813
Embedded derivatives		3,470		297		-
		7,736		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		19,837		19,938		20,185
Embedded derivatives		3,986		863		-
		23,823		20,801		28,343

	$	31,559	$	47,561	$	41,838

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. The fair value adjustments for hedging type derivatives are recorded in revenue. Fair value adjustments for contract derivatives, warrants and the gold option derivatives are recorded 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 22,391,490 warrants were issued which entitled the holders 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 was equal to or above $1,400/oz on May 4, 2018. The option represented a financial liability and was recorded at fair value at the acquisition date of New Britannia and was remeasured at each reporting date with the change in the fair value being recognized as unrealized gains or losses in finance income and expense.

HUDBAY MINERALS INC.

Notes to Unaudited Condensed Consolidated Interim Financial Statements

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

For the three and six months ended June 30, 2018 and 2017

12.

Finance lease obligations

		Jun. 30, 2018			Dec. 31, 2017			Jan. 1, 2017
Total minimum lease payments	$	85,959		$	89,750		$	13,720
Effect of discounting		(4,734	)		(5,177	)		(788	)
Present value of minimum lease payments		81,225			84,573			12,932
Less: current portion		(19,753	)		(18,327	)		(3,172	)
		61,472			66,246			9,760

Minimum payments under finance leases
Less than 12 months		21,607			20,186			3,508
13 - 36 months		41,162			40,253			6,667
37 - 60 months		23,190			29,311			3,545
	$	85,959		$	89,750		$	13,720

The Group has entered into equipment leases for its South American and Manitoba business units which expire between 2020 and 2023 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.

13.

Long-term debt

Long-term debt is comprised of the following:

		Jun. 30, 2018			Dec. 31, 2017			Jan. 1, 2017
Senior unsecured notes (a)	$	985,195		$	987,903		$	986,574
Equipment finance facility (b)		-			-			50,267
Senior secured revolving credit facility (c)		-			-			202,075
Less: Unamortized transaction costs -
revolving credit facilities (d)		(9,379	)		(8,328	)		(6,752	)
		975,816			979,575			1,232,164
Less: current portion		-			-			(16,490	)

	$	975,816		$	979,575		$	1,215,674

HUDBAY MINERALS INC.

Notes to Unaudited Condensed Consolidated Interim Financial Statements

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

For the three and six months ended June 30, 2018 and 2017

(a)

Senior unsecured notes

Balance, January 1, 2017	$	986,574
Addition to Principal, net of 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
Change in fair value of embedded derivative (prepayment option)		(3,241	)
Accretion of transaction costs and premiums		533

Balance, June 30, 2018	$	985,195

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.

(b)

Equipment finance facility

Balance, January 1, 2017	$	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 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, 2017	$	202,075
Addition to Principal		25,000
Payments made		(227,075	)
Balance, December 31, 2017	$	-

On June 15, 2018, the Group entered into amendments to its two senior credit facilities to extend the maturity dates from July 14, 2021 to July 14, 2022 and to incorporate various amendments to the terms and conditions of the facilities to provide greater flexibility. The two facilities have substantially similar terms and conditions.

The South American business unit has $77,567 in letters of credit issued under the Peru facility to support its reclamation obligations. The Manitoba business unit has $52,795 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 senior credit facilities, no cash collateral is required to be posted.

HUDBAY MINERALS INC.

Notes to Unaudited Condensed Consolidated Interim Financial Statements

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

For the three and six months ended June 30, 2018 and 2017

(d)

Unamortized transaction costs - revolving credit facilities

Balance, January 1, 2017	$	6,752
Accretion of transaction costs		(3,291	)
New transaction costs		4,867
Balance, December 31, 2017	$	8,328
Accretion of transaction costs		(805	)
New transaction costs		1,856

Balance, June 30, 2018	$	9,379

14.

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, Augusta Resource Corporation 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.

With the implementation of IFRS 15 as of January 1, 2018, the Group has determined that precious metals stream contracts are subject to variable consideration and contain a significant financing component. As such, the Company now recognizes a financing charge at each reporting period and will gross up the deferred revenue balance to recognize the significant financing element that is part of these contracts. Furthermore, the Company now amortizes the deferred revenue balance using a higher base, by including the portion of mineral resources expected to be converted into mineral reserves over the life of the mine. Previously, deferred revenue was amortized over only proven and probable reserves.

The Group restated prior year comparative information to reflect the impact of the adoption of this standard in the Company’s interim financial statements.

HUDBAY MINERALS INC.

Notes to Unaudited Condensed Consolidated Interim Financial Statements

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

For the three and six months ended June 30, 2018 and 2017

The following table summarizes changes in deferred revenue:

Balance, January 1, 2017 (Restated)	$	616,246
Recognition of revenue		(88,744	)
Accretion		66,414
Effects of changes in foreign exchange		8,014
Balance, December 31, 2017 (Restated)	$	601,930
Recognition of revenue		(43,498	)
Accretion		32,319
Effects of changes in foreign exchange		(4,778	)

Balance, June 30, 2018	$	585,973

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

		Jun. 30, 2018		Dec. 31, 2017		Jan.1, 2017
				(Restated)		(Restated)
Current	$	98,563	$	107,194	$	87,411
Non-current		487,410		494,736		528,835

	$	585,973	$	601,930	$	616,246

HUDBAY MINERALS INC.

Notes to Unaudited Condensed Consolidated Interim Financial Statements

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

For the three and six months ended June 30, 2018 and 2017

15.

Provisions

Reflected in the condensed consolidated interim balance sheets as follows:

Decommis-

sioning,

restoration

Deferred

Restricted

and similar

share

Jun. 30, 2018

liabilities

units

Other

Total

Current (note 10)

2,388

4,488

8,590

392

15,858

Non-current

193,958

2,635

196,665

196,346

4,488

11,225

464

212,523

		Decommis-
		sioning,
		restoration		Deferred		Restricted
		and similar		share		share
Dec. 31, 2017		liabilities		units		units		Other		Total
Current (note 10)	$	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

		Decommis-
		sioning,
		restoration		Deferred		Restricted
		and similar		share		share
Jan. 1, 2017		liabilities		units		units		Other		Total
Current (note 10)	$	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

HUDBAY MINERALS INC.

Notes to Unaudited Condensed Consolidated Interim Financial Statements

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

For the three and six months ended June 30, 2018 and 2017

16.

Income and mining taxes

(a)

Tax expense:

The tax expense is applicable as follows:

		Three months ended						Six months ended
					June 30,						June 30,
		2018			2017			2018			2017
					(Restated)						(Restated)
Current:
Income tax expense	$	1,755		$	(3,601	)	$	16,769		$	3,428
Mining tax expense		7,767			5,187			14,710			9,732
Adjustments in respect of prior years		(258	)		-			707			(340	)
		9,264			1,586			32,186			12,820
Deferred:
Income tax - origination and reversal of temporary difference		15,659			13,172			24,878			16,170
Mining tax - origination and reversal of temporary difference		321			172			22			873
Adjustments in respect of prior years		(120	)		868			(304	)		602
		15,860			14,212			24,596			17,645

	$	25,124		$	15,798		$	56,782		$	30,465

(b)

Deferred tax assets and liabilities as represented on the condensed consolidated interim balance sheets:

		Jun. 30, 2018			Dec. 31, 2017			Jan. 1, 2017
					(Restated)			(Restated)
Deferred income tax asset	$	13,498		$	31,937		$	40,162

Deferred income tax liability		(296,777	)		(291,665	)		(310,772	)
Deferred mining tax liability		(17,180	)		(17,738	)		(17,491	)
		(313,957	)		(309,403	)		(328,263	)

Net deferred tax liability balance, end of period	$	(300,459	)	$	(277,466	)	$	(288,101	)

As of January 1, 2017 the deferred tax assets and deferred tax liabilities attributable to Canada are 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.

HUDBAY MINERALS INC.

Notes to Unaudited Condensed Consolidated Interim Financial Statements

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

For the three and six months ended June 30, 2018 and 2017

(c)

Changes in deferred tax assets and liabilities:

		Six months ended			Year ended
		Jun. 30, 2018			Dec. 31, 2017
					(Restated)
Net deferred tax liability balance, beginning of year	$	(277,466	)	$	(288,101	)
Deferred tax (expense) recovery		(24,596	)		16,542
OCI transactions		(2,590	)		(3,845	)
Items charged directly to equity		-			2,238
Foreign currency translation on the deferred tax liability		4,193			(4,300	)

Net deferred tax liability balance, end of period	$	(300,459	)	$	(277,466	)

17.

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:

	Six months ended				Year ended
	Jun. 30, 2018				Dec. 31, 2017
	Common				Common
	shares		Amount		shares		Amount
Balance, beginning of year	261,271,188	$	1,777,409		237,271,188	$	1,588,319
Equity issuance	-		-		24,000,000		195,295
Share issue costs, net of tax	-		(70	)	-		(6,205	)

Balance, end of period	261,271,188	$	1,777,339		261,271,188	$	1,777,409

During the six months ended June 30, 2018, the Company paid $2,026 in dividends on March 29, 2018 to shareholders of record as of March 9, 2018. During the six months ended June 30, 2017, the Company paid $1,775 in dividends on March 31, 2017 to shareholders of record as of March 10, 2017.

18.

Earnings per share

Three months ended

Six months ended

June 30,

2018

2017

2018

2017

Basic and diluted weighted average common shares outstanding

261,271,188

237,271,188

261,271,188

237,271,188

HUDBAY MINERALS INC.

Notes to Unaudited Condensed Consolidated Interim Financial Statements

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

For the three and six months ended June 30, 2018 and 2017

19.

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:

		Jun. 30, 2018						Dec. 31, 2017						Jan. 1, 2017
											(Restated)						(Restated)

Recurring measurements		FV			CV			FV			CV			FV			CV
Loans and receivables
Cash and cash equivalents ¹	$	439,576		$	439,576		$	356,499		$	356,499		$	146,864		$	146,864
Restricted cash¹		-			-			206			206			17,148			17,148
Trade and other receivables^1,²		153,027			153,027			142,199			142,199			116,445			116,445
Fair value through profit or loss
FV movements on provisionally priced receivables³		(5,019	)		(5,019	)		17,427			17,427			12,538			12,538
Non-hedge derivative assets³		6,550			6,550			2,841			2,841			3,397			3,397
Prepayment option - embedded derivatives⁷		7,221			7,221			3,980			3,980			4,430			4,430
Investments at FVTPL⁴		19,111			19,111			22,255			22,255			13,700			13,700
Total financial assets		620,466			620,466			545,407			545,407			314,522			314,522
Financial liabilities at amortized cost
Trade and other payables^1,²		169,560			169,560			192,448			192,448			163,027			163,027
Finance leases		81,225			81,225			84,573			84,573			12,932			12,932
Other financial liabilities⁵		19,621			22,697			19,625			22,568			17,231			22,998
Senior unsecured notes⁶		1,045,190			992,416			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		(9,379	)		(9,379	)		(8,328	)		(8,328	)		(6,752	)		(6,752	)
Fair value through profit or loss
Embedded derivatives³		7,456			7,456			1,533			1,533			86			86
Warrant liabilities³		85			85			6,961			6,961			7,588			7,588
Option liabilities³		-			-			732			732			570			570
Non-hedge derivative liabilities^1,3		1,321			1,321			16,140			16,140			10,682			10,682
Total financial liabilities		1,315,079			1,265,381			1,396,424			1,308,510			1,497,884			1,454,477
Net financial liability	$	(694,613	)	$	(644,915	)	$	(851,017	)	$	(763,103	)	$	(1,183,362	)	$	(1,139,955	)

¹Cash 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.²Excludes embedded provisional pricing derivatives, as well as tax and other statutory amounts.³Derivatives 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.⁴All 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.
⁵These financial liabilities relate to agreements with communities near the Constancia project in Peru (note 11). Fair values have been determined using a discounted cash flow analysis based on expected cash flows and a credit adjusted discount rate.⁶Fair value of the senior unsecured notes (note 13) has been determined using the quoted market price at the period end.
⁷Fair value of the prepayment option embedded derivative related to the long-term debt (note 13) has been determined using a binomial tree/lattice approach based on the Hull-White single factor interest rate term structure model.⁸The carrying value of the facilities approximates the fair value as the facilities are based on floating interest rates.

HUDBAY MINERALS INC.

Notes to Unaudited Condensed Consolidated Interim Financial Statements

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

For the three and six months ended June 30, 2018 and 2017

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.

June 30, 2018		Level 1		Level 2			Level 3		Total
Financial assets measured at fair value
Financial assets at FVTPL:
Movement of provisionally priced
receivables	$	-	$	(5,019	)	$	-	$	(5,019	)
Non-hedge derivatives		-		6,550			-		6,550
Investments at FVTPL		19,111		-			-		19,111
Prepayment option embedded derivative		-		7,221			-		7,221

	$	19,111	$	8,752		$	-	$	27,863
Financial liabilities measured at fair value
Financial liabilities at FVTPL:
Embedded derivatives	$	-	$	7,456		$	-	$	7,456
Non-hedge derivatives		-		1,321			-		1,321
Warrant liabilities		85		-			-		85

	$	85	$	8,777		$	-	$	8,862

December 31, 2017 (Restated)		Level 1		Level 2		Level 3		Total
Financial assets measured at fair value
Financial assets at FVTPL:
Movement of provisionally priced
receivables	$	-	$	17,427	$	-	$	17,427
Non-hedge derivatives		-		2,841		-		2,841
Investments at FVTPL		21,973		282		-		22,255
Prepayment option embedded derivative		-		3,980		-		3,980

	$	21,973	$	24,530	$	-	$	46,503
Financial liabilities measured at fair value
Financial liabilities at FVTPL:
Embedded derivatives	$	-	$	1,533	$	-	$	1,533
Non-hedge derivatives		-		16,140		-		16,140
Option liability		-		732		-		732
Warrant liabilities		6,961		-		-		6,961

	$	6,961	$	18,405	$	-	$	25,366

HUDBAY MINERALS INC.

Notes to Unaudited Condensed Consolidated Interim Financial Statements

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

For the three and six months ended June 30, 2018 and 2017

January 1, 2017 (Restated)		Level 1		Level 2		Level 3		Total
Financial assets measured at fair value
Financial assets at FVTPL:
Movement of provisionally priced
receivables	$	-	$	12,538	$	-	$	12,538
Non-hedge derivatives		-		3,397		-		3,397
Investments at FVTPL		12,018		192		1,490		13,700
Prepayment option embedded derivative		-		4,430		-		4,430

	$	12,018	$	20,557	$	1,490	$	34,065
Financial liabilities measured at fair value
Financial assets at FVTPL:
Embedded derivatives	$	-	$	86	$	-	$	86
Non-hedge derivatives		-		10,682		-		10,682
Option liability		-		570		-		570
Warrant liability		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 year 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 six months ended June 30, 2018, 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 June 30, 2018, the Group had 25,000 tonnes of net copper swaps outstanding at an effective average price of $3.13/lb and settling across July 2018 to October 2018. At December 31, 2017, the Group had 34,500 tonnes of net copper swaps outstanding at an average fixed receivable price $3.10/lb, which settled across January 2018 to April 2018. The aggregate fair value of the transactions at June 30, 2018 was an asset position of $6,535 (December 31, 2017 and January 1, 2017 a liability position of $13,786 and $8,657, respectively).

HUDBAY MINERALS INC.

Notes to Unaudited Condensed Consolidated Interim Financial Statements

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

For the three and six months ended June 30, 2018 and 2017

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 June 30, 2018 and December 31, 2017, 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 June 30, 2018, the Group held contracts for forward zinc purchased of 5,426 tonnes (December 31, 2017 – 2,808 tonnes) that related to forward customer sales of zinc. Prices range from $2,878 to $3,411 per tonne (December 31, 2017 – $2,534 to $3,292) and settlement dates extend to June 2019. The aggregate fair value of the transactions at June 30, 2018 was a net liability position of $1,306 (December 31, 2017 and January 1, 2017 – a net asset position of $487 and $1,372 respectively).

(c)

Embedded derivatives

Changes in fair value of provisionally priced receivables

The Group records changes in fair value of provisionally priced receivables 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.

Changes in fair value of provisionally priced receivables 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 changes in fair value of provisionally priced receivables are classified in operating activities.

As at June 30, 2018, the Group’s net position consisted of contracts awaiting final pricing for sales of 26,828 tonnes of copper (December 31, 2017 – 38,027 tonnes). As of June 30, 2018, there are also 602 tonnes of zinc (December 31, 2017 – 6,412 tonnes) awaiting final pricing. In addition, at June 30, 2018, the Group’s net position consisted of contracts awaiting final pricing for sales of 17,350 ounces of gold and 134,178 ounces of silver (December 31, 2017 – 24,553 ounces of gold and 172,886 ounces of silver).

As at June 30, 2018, the Group’s provisionally priced copper, zinc, gold and silver sales subject to final settlement were recorded at average prices of $2.99/lb (December 31, 2017 – $3.29/lb), $1.31/oz (December 31, 2017 – $1.51/oz), $1,253/oz (December 31, 2017 – $1,309/oz) and $16.13/oz (December 31, 2017 – $17.10/oz), respectively.

The aggregate changes in fair value of provisionally priced receivables within the copper and zinc concentrate sales contracts at June 30, 2018, was a liability position of $5,019 (December 31, 2017 and January 1, 2017 – an asset position of $17,427 and $12,538 respectively). The aggregate fair value of other embedded derivatives at June 30, 2018, was a liability position of $362 (December 31, 2017 and January 1, 2017 – a liability position of $1,533 and $86, respectively).

HUDBAY MINERALS INC.

Notes to Unaudited Condensed Consolidated Interim Financial Statements

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

For the three and six months ended June 30, 2018 and 2017

Prepayment option embedded derivative

The senior unsecured notes (note 13) 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 5e). The fair value of the embedded derivative at June 30, 2018 was an asset of $7,221 (December 31, 2017 and January 1, 2017 - an asset of $3,980 and $4,430, respectively).

Pampacancha delivery obligation

The Group has recognized an obligation to deliver additional precious metal credits to Wheaton as a result of the Group’s expectation that mining at the Pampacancha deposit will not begin until 2019. The fair value of the embedded derivative at June 30, 2018 was a liability of $7,094 (December 31, 2017 – nil).

	(d)	Warrants and option liabilities

		A total of 22,391,490 warrants were issued as a result of the acquisition of Augusta Resource Corporation which entitled the holders 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.

20.

Capital commitments

As at June 30, 2018, the Group had outstanding capital commitments in Canada of approximately $8,130 primarily related to committed long-lead orders for the paste plant and Stall concentrator, of which approximately $580 cannot be terminated by the Group, approximately $90,831 in Peru primarily related to sustaining capital costs, all of which can be terminated by the Group and approximately $157,914 in Arizona, primarily related to its Rosemont project, of which approximately $74,729 cannot be terminated by the Group.

HUDBAY MINERALS INC.

Notes to Unaudited Condensed Consolidated Interim Financial Statements

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

For the three and six months ended June 30, 2018 and 2017

21.

Supplementary cash flow information

(a)

Change in non-cash working capital:

		Three months ended						Six months ended
		June 30,						June 30,
		2018			2017			2018			2017
Change in:
Trade and other receivables	$	(20,328	)	$	8,456		$	5,959		$	61,631
Other financial assets/liabilities		3,231			1,940			(18,526	)		(3,852	)
Inventories		222			4,361			(12,726	)		(11,056	)
Prepaid expenses		(1,987	)		(2,027	)		(390	)		(1,662	)
Trade and other payables		(17,712	)		11,497			(20,973	)		(11,216	)
Change in taxes payable/receivable, net		2,360			(2,115	)		10,802			4,437
Provisions and other liabilities		(381	)		(14,378	)		830			(755	)

	$	(34,595	)	$	7,734		$	(35,024	)	$	37,527

(b)

Non-cash transactions:

During the six months ended June 30, 2018, 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 six months ended June 30, 2018 led to a net increase in related property, plant and equipment assets of $802 (six months ended June 30, 2017 - $12,989) mainly as a result of increased open pit mining activity and the resulting higher disturbance mostly offset by higher discount rates.

	–	Property, plant and equipment included $5,756 of net additions related to capital additions under finance lease (June 30, 2017 - $6,318).

HUDBAY MINERALS INC.

Notes to Unaudited Condensed Consolidated Interim Financial Statements

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

For the three and six months ended June 30, 2018 and 2017

22.	Segmented information

	Corporate and other activities include the Group's exploration activities in Greenfield projects worldwide. 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.

Three months ended June 30, 2018

Corporate

and other

Manitoba

Peru

Arizona

activities

Total

Revenue from external customers

193,816

177,472

371,288

Cost of sales

Mine operating costs

109,650

85,625

195,275

Depreciation and amortization

31,989

51,563

83,552

Gross profit

52,177

40,284

92,461

Selling and administrative expenses

6,104

Exploration and evaluation

3,070

959

3,426

7,455

Other operating (income) and

expenses

(227

)

937

179

(679

)

210

Results from operating activities

49,334

38,388

(179

)

(8,851

)

78,692

Finance income

(1,978

)

Finance expenses

37,408

Other finance gain

(6,535

)

Profit before tax

49,797

Tax expense

25,124

Profit for the period

24,673

HUDBAY MINERALS INC.

Notes to Unaudited Condensed Consolidated Interim Financial Statements

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

For the three and six months ended June 30, 2018 and 2017

Three months ended June 30, 2017 (Restated)
										Corporate
										and other
		Manitoba			Peru		Arizona			activities			Total
Revenue from external customers	$	168,129		$	167,904	$	-		$	-		$	336,033
Cost of sales
Mine operating costs		94,931			75,467		-			-			170,398
Depreciation and amortization		31,385			46,264		-			-			77,649
Gross profit		41,813			46,173		-			-			87,986
Selling and administrative expenses		-			-		-			5,847			5,847
Exploration and evaluation		875			273		-			595			1,743
Other operating (income) and expenses		(625	)		2,366		213			(65	)		1,889
Results from operating activities	$	41,563		$	43,534	$	(213	)	$	(6,377	)	$	78,507
Finance income													(599	)
Finance expenses													42,969
Other finance losses													1,202
Profit before tax													34,935
Tax expense													15,798
Profit for the period												$	19,137

Six months ended June 30, 2018

Corporate

and other

Manitoba

Peru

Arizona

activities

Total

Revenue from external customers

359,490

398,454

757,944

Cost of sales

Mine operating costs

208,180

172,372

380,552

Depreciation and amortization

58,901

105,259

164,160

Gross profit

92,409

120,823

213,232

Selling and administrative expenses

11,819

Exploration and evaluation

6,996

2,090

5,711

14,797

Other operating (income) and expenses

(445

)

8,848

294

(638

)

8,059

Results from operating activities

85,858

109,885

(294

)

(16,892

)

178,557

Finance income

(3,356

)

Finance expenses

75,712

Other finance gain

(16,699

)

Profit before tax

122,900

Tax expense

56,782

Profit for the period

66,118

HUDBAY MINERALS INC.

Notes to Unaudited Condensed Consolidated Interim Financial Statements

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

For the three and six months ended June 30, 2018 and 2017

Six months ended June 30, 2017 (Restated)
										Corporate
										and other
		Manitoba		Peru			Arizona			activities			Total
Revenue from external customers	$	325,837	$	271,962		$	-		$	-		$	597,799
Cost of sales
Mine operating costs		185,933		126,922			-			-			312,855
Depreciation and amortization		62,552		77,761			-			-			140,313
Gross profit		77,352		67,279			-			-			144,631
Selling and administrative expenses		-		-			-			16,132			16,132
Exploration and evaluation		1,872		577			-			1,282			3,731
Other operating expense (income)		489		(4,382	)		407			87			(3,399	)
Results from operating activities	$	74,991	$	71,084		$	(407	)	$	(17,501	)	$	128,167
Finance income													(1,105	)
Finance expenses													85,850
Other finance losses													3,849
Profit before tax													39,573
Tax expense													30,465

Profit for the period												$	9,108

June 30, 2018

Corporate

and other

Manitoba

Peru

Arizona

activities

Total

Total assets

712,620

2,732,776

879,875

366,491

4,691,762

Total liabilities

468,245

904,341

113,299

1,037,693

2,523,578

Property, plant and equipment

590,454

2,416,843

853,484

3,182

3,863,963

December 31, 2017 (Restated)
								Corporate
								and other
		Manitoba		Peru		Arizona		activities		Total
Total assets	$	738,967	$	2,750,114	$	856,589	$	382,346	$	4,728,016
Total liabilities		510,506		932,423		110,945		1,061,797		2,615,671
Property, plant and equipment		619,476		2,503,900		836,759		4,098		3,964,233

January 1, 2017 (Restated)
								Corporate
								and other
		Manitoba		Peru		Arizona		activities		Total
Total assets	$	730,240	$	2,808,370	$	822,498	$	144,056	$	4,505,164
Total liabilities		475,644		980,479		158,236		1,130,726		2,745,085
Property, plant and equipment		606,348		2,540,846		800,542		6,016		3,953,752