Exhibit 99.2
Audited Consolidated Financial Statements
(In US dollars)
HUDBAY MINERALS INC.
Years ended December 31, 2022 and 2021
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management of Hudbay Minerals Inc. ("Hudbay" or the "Company") is responsible for establishing and maintaining internal control over financial reporting ("ICFR").
Under the supervision of and with the participation of the Chief Executive Officer and the Chief Financial Officer, Hudbay's management assessed the effectiveness of the Company's ICFR as of December 31, 2022 based upon the Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, management concluded that Hudbay's ICFR was effective as of December 31, 2022.
The effectiveness of the Company's ICFR as of December 31, 2022 has been audited by Deloitte LLP, Independent Registered Public Accounting Firm, as stated in their report immediately preceding the Company's audited consolidated financial statements for the year ended December 31, 2022.
| Peter Kukielski | Eugene Lei |
| President and Chief Executive Officer | Senior Vice President and Chief Financial Officer |
Toronto, Canada
February 23, 2023
 |
Deloitte LLP Bay Adelaide East 8 Adelaide Street West Suite 200 Toronto ON M5H 0A9 Canada Tel: 416-601-6150 Fax: 416-601-6151 www.deloitte.ca |
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of Hudbay Minerals Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Hudbay Minerals Inc. and subsidiaries (the "Company") as of December 31, 2022 and 2021, the related consolidated income statements, consolidated statements of comprehensive profit (loss), changes in equity and cash flows for each of the two years in the period ended December 31, 2022, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and its financial performance and its cash flows for each of the two years in the period ended December 31, 2022, in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 23, 2023, expressed an unqualified opinion on the Company's internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current-period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Impairment - Assessment of Whether Indicators of Impairment or Impairment Reversal Exist in Non-financial Assets - Refer to Note 2d & 3i to the Financial Statements
Critical Audit Matter Description
The Company's determination of whether an indicator of impairment or impairment reversal exists in non-financial assets at the cash generating unit ("CGU") level requires significant management judgment.
While there are several inputs that are required to determine whether or not an indicator of impairment or impairment reversal exists, the judgments with the highest degree of subjectivity are the future long-term copper price, inputs to the market capitalization deficiency assessment (specifically control premiums, industry specific factors and company performance), and the discount rate. Auditing these estimates and inputs required a high degree of subjectivity in applying audit procedures and in evaluating the results of those procedures. This resulted in an increased extent of audit effort, including the involvement of fair value specialists.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the future long-term copper price, inputs to the market capitalization deficiency assessment (specifically control premiums, industry specific factors and company performance), and the discount rate in the assessment of indicators of impairment or impairment reversal included the following, among others:
• Evaluated the effectiveness of controls over management's assessment of the indicators of impairment or impairment reversal.
• With the assistance of fair value specialists:
◦ Evaluated the future long-term copper price by comparing management forecasts to third party forecasts,
◦ Performed an assessment of the market capitalization deficiency to the carrying value of the CGUs which included: assessing control premiums, industry specific factors, company performance, and
◦ Evaluated the reasonableness of the discount rate by comparing the key inputs to external data.
Impairment - Identification of Impairment Indicator within Arizona CGU - Refer to Note 2d, 3i, & 12 to the Financial Statements
Critical Audit Matter Description
The Company's determination of whether an indicator of impairment or impairment reversal exists in non-financial assets at the cash generating unit ("CGU") level requires significant management judgment. An impairment loss is recognized if the carrying amount of the CGU exceeds its recoverable amount. The recoverable amount of the CGU is estimated based on the higher of its fair value less cost of disposal and its value in use. An impairment indicator was identified at the Arizona CGU due to the release of the preliminary economic assessment ("PEA") and two-phase mine plan for the Copper Word Complex ("Copper World"). The Company used a discounted cashflow model to determine the recoverable amount of the Arizona CGU which required management to make significant estimates and assumptions related to the future commodity prices, production based on current estimates of recoverable resources, discount rates, and future operating and capital costs.
While there are several inputs that are required to determine the recoverable amount of the Arizona CGU, the estimates and assumptions with the highest degree of subjectivity and judgment uncertainty are the future long-term copper price and the discount rates. Auditing these estimates and assumptions required a high degree of auditor judgment in applying audit procedures and in evaluating the results of those procedures. This resulted in an increased extent of audit effort, including the involvement of fair value specialists.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the future long-term copper price and discount rates used to determine the recoverable amount of the Arizona CGU included the following procedures, among others:
• Evaluated the effectiveness of relevant controls over management's determination of the long-term copper price and the discount rates.
• With the assistance of fair value specialists:
◦ Evaluated the future long-term copper price by comparing management forecasts to third party forecasts, and
◦ Evaluated the reasonableness of the discount rates by testing the source information underlying the determination of the discount rates and developed a range of independent estimates for the discount rates and compared to the discount rates selected by management.
/s/
Chartered Professional Accountants
Licensed Public Accountants
February 23, 2023
We have served as the Company's auditor since 2005.
|
Deloitte LLP Bay Adelaide East 8 Adelaide Street West Suite 200 Toronto ON M5H 0A9 Canada Tel: 416-601-6150 Fax: 416-601-6151 www.deloitte.ca |
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of Hudbay Minerals Inc.
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of Hudbay Minerals Inc. and subsidiaries (the "Company") as of December 31, 2022, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control - Integrated Framework (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended December 31, 2022, of the Company and our report dated February 23, 2023, expressed an unqualified opinion on those financial statements.
Basis for Opinion
The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Deloitte LLP
Chartered Professional Accountants
Licensed Public Accountants
Toronto, Canada
February 23, 2023
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HUDBAY MINERALS INC. Consolidated Balance Sheets |
| Dec. 31, | Dec. 31, | ||||||
| Note | 2022 | 2021 | |||||
| Assets | |||||||
| Current assets | |||||||
| Cash | 7 | $ | $ | ||||
| Trade and other receivables | 8 | ||||||
| Inventories | 9 | ||||||
| Prepaid expenses and other current assets | |||||||
| Other financial assets | 10 | ||||||
| Taxes receivable | |||||||
| Receivables | 8 | ||||||
| Inventories | 9 | ||||||
| Other financial assets | 10 | ||||||
| Intangibles and other assets | 11 | ||||||
| Property, plant and equipment | 12 | ||||||
| Deferred tax assets | 23b | ||||||
| $ | $ | ||||||
| Liabilities | |||||||
| Current liabilities | |||||||
| Trade and other payables | 13 | $ | $ | ||||
| Taxes payable | |||||||
| Other liabilities | 14 | ||||||
| Other financial liabilities | 15 | ||||||
| Gold prepayment liability | 5, 16 | ||||||
| Lease liabilities | 17 | ||||||
| Deferred revenue | 19 | ||||||
| Other financial liabilities | 15 | ||||||
| Gold prepayment liability | 5, 16 | ||||||
| Lease liabilities | 17 | ||||||
| Long-term debt | 18 | ||||||
| Deferred revenue | 19 | ||||||
| Pension obligations | 21 | ||||||
| Other employee benefits | 22 | ||||||
| Environmental and other provisions | 20 | ||||||
| Deferred tax liabilities | 23b | ||||||
| Equity | |||||||
| Share capital | 24b | ||||||
| Reserves | ( |
) | |||||
| Retained earnings | ( |
) | ( |
) | |||
| $ | $ | ||||||
| Commitments (note 29) | |||||||
1
HUDBAY MINERALS INC.
Consolidated Income Statements
|
(in thousands of US dollars, except per share amounts) |
| Note | Year ended December 31, | ||||||
| 2022 | 2021 | ||||||
| Revenue | 6a | $ | $ | ||||
| Cost of sales | |||||||
| Mine operating costs | 6b | ||||||
| Depreciation and amortization | 6c | ||||||
| Impairment - environmental provision | 6i | ||||||
| Gross profit | |||||||
| Selling and administrative expenses | |||||||
| Exploration expenses | 5 | ||||||
| Other expenses | 5, 6f | ||||||
| Re-evaluation adjustment - environmental provision | 5, 20 | ( |
) | ( |
) | ||
| Impairment - Arizona | 6h | ||||||
| Results from operating activities | |||||||
| Net interest expense on long term debt | 6g | ||||||
| Accretion on streaming arrangements | 6g | ||||||
| Change in fair value of financial instruments | 6g | ||||||
| Other net finance costs | 6g | ||||||
| Net finance expense | |||||||
| Profit (loss) before tax | ( |
) | |||||
| Tax expense | 23a | ||||||
| Profit (loss) for the year | $ | $ | ( |
) | |||
| Profit (loss) per share | |||||||
| Basic | $ | $ | ( |
) | |||
| Diluted | $ | $ | ( |
) | |||
| Weighted average number of common shares outstanding: | |||||||
| Basic | 26 | ||||||
| Diluted | 26 | ||||||
2
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HUDBAY MINERALS INC. Consolidated Statements of Cash Flows |
| Year ended December 31, | |||||||
| Note | 2022 | 2021 | |||||
| Cash generated from operating activities: | |||||||
| Profit (loss) for the year | $ | $ | ( |
) | |||
| Tax expense | 23a | ||||||
| Items not affecting cash: | |||||||
| Depreciation and amortization |
6c |
||||||
| Share-based compensation |
6d |
||||||
| Net interest expense on long-term debt |
6g |
||||||
| Accretion on streaming arrangements |
6g |
||||||
| Change in fair value of financial instruments |
6g |
||||||
| Other net finance costs |
6g |
||||||
| Inventory adjustments |
6b |
||||||
| Amortization of deferred revenue and variable consideration |
6a |
( |
) | ( |
) | ||
| Pension and other employee benefit payments, net of accruals | |||||||
| Re-evaluation adjustment - environmental obligation |
5, 20 |
( |
) | ( |
) | ||
| Impairment - environmental obligation |
6i |
||||||
| Impairment - Arizona |
6h |
||||||
| Decommissioning and restoration payments |
20 |
( |
) | ( |
) | ||
| Other |
31a |
( |
) | ||||
| Taxes paid | ( |
) | ( |
) | |||
| Operating cash flow before precious metals stream deposit and changes in non-cash working capital | |||||||
| Precious metals stream deposit |
19 |
||||||
| Change in non-cash working capital |
31b |
( |
) | ||||
| Cash used in investing activities: | |||||||
| Acquisition of property, plant and equipment |
5 |
( |
) | ( |
) | ||
| Community agreements |
5 |
( |
) | ( |
) | ||
| Net proceeds from disposal of investments | |||||||
| Proceeds from disposition of property, plant and equipment | |||||||
| Change in restricted cash | ( |
) | ( |
) | |||
| Interest received | |||||||
| ( |
) | ( |
) | ||||
| Cash used in financing activities: | |||||||
| Issuance of senior unsecured notes, net of transaction costs |
18a |
||||||
| Principal repayments |
18a |
( |
) | ||||
| Premium paid on redemption of notes |
18a |
( |
) | ||||
| Interest paid on long-term debt | ( |
) | ( |
) | |||
| Financing costs | ( |
) | ( |
) | |||
| Lease payments |
17 |
( |
) | ( |
) | ||
| Gold prepayment liability |
16 |
( |
) | ||||
| Deferred Rosemont acquisition payment | ( |
) | |||||
| Net proceeds from exercise of stock options | |||||||
| Dividends paid | 24b | ( |
) | ( |
) | ||
| ( |
) | ( |
) | ||||
| Effect of movement in exchange rates on cash | ( |
) | |||||
| Net decrease in cash | ( |
) | ( |
) | |||
| Cash, beginning of the year | |||||||
| Cash, end of the year | $ | $ | |||||
3
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HUDBAY MINERALS INC. Consolidated Statements of Comprehensive Profit (Loss) |
| Year ended December 31, | ||||||
| 2022 | 2021 | |||||
| Profit (loss) for the year | $ | $ | ( |
) | ||
| Other comprehensive (loss) income: | ||||||
| Item that will be reclassified subsequently to profit or loss: | ||||||
| Recognized directly in equity: | ||||||
| Net (loss) gain on translation of foreign currency balances | ( |
) | ||||
| ( |
) | |||||
| Items that will not be reclassified subsequently to profit or loss: | ||||||
| Recognized directly in equity: | ||||||
| Gold prepayment revaluation (note 16) | ( |
) | ||||
| Tax effect | ( |
) | ||||
| Remeasurement - actuarial gain | ||||||
| Tax effect | ( |
) | ( |
) | ||
| Other comprehensive income net of tax, for the year | ||||||
| Total comprehensive profit (loss) for the year | $ | $ | ( |
) | ||
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HUDBAY MINERALS INC. Consolidated Statements of Changes in Equity |
| Share capital (note 24) |
Other capital reserves |
Foreign currency translation reserve |
Remeasurement reserve |
Retained earnings | Total equity | |||||||||||||
| Balance, January 1, 2021 | $ | $ | $ | $ | ( |
) | $ | ( |
) | $ | ||||||||
| Loss | - | - | - | - | ( |
) | ( |
) | ||||||||||
| Other comprehensive income | - | - | - | |||||||||||||||
| Total comprehensive income (loss) | - | - | ( |
) | ( |
) | ||||||||||||
| Contributions by and distributions to owners: | ||||||||||||||||||
| Dividends (note 24b) | - | - | - | - | ( |
) | ( |
) | ||||||||||
| Stock options (note 6d) | - | - | - | - | ||||||||||||||
| Issuance of shares related to stock options redeemed | ( |
) | - | - | - | |||||||||||||
| Total contributions by and distributions to owners | - | - | ( |
) | ( |
) | ||||||||||||
| Balance, December 31, 2021 | $ | $ | $ | $ | ( |
) | $ | ( |
) | $ |
5
HUDBAY MINERALS INC.
|
Consolidated Statements of Changes in Equity |
| Share capital (note 24) |
Other capital reserves |
Foreign currency translation reserve |
Remeasurement reserve |
Retained earnings | Total equity | |||||||||||||
| Balance, January 1, 2022 | $ | $ | $ | $ | ( |
) | $ | ( |
) | $ | ||||||||
| Profit | - | - | - | - | ||||||||||||||
| Other comprehensive (loss) income | - | - | ( |
) | - | |||||||||||||
| Total comprehensive (loss) income | - | - | ( |
) | ||||||||||||||
| Contributions by and distributions to owners: | ||||||||||||||||||
| Dividends (note 24b) | - | - | - | - | ( |
) | ( |
) | ||||||||||
| Stock options (note 6d) | - | - | - | - | ||||||||||||||
| Issuance of shares related to stock options redeemed | ( |
) | - | - | - | |||||||||||||
| Total contributions by and distributions to owners | - | - | ( |
) | ( |
) | ||||||||||||
| Balance, December 31, 2022 | $ | $ | $ | ( |
) | $ | ( |
) | $ | ( |
) | $ |
6
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HUDBAY MINERALS INC. Notes to Audited Consolidated Financial Statements |
1. Reporting entity
Hudbay Minerals Inc. ("HMI" or the "Company") is a company existing under the Canada Business Corporations Act. The address of the Company's principal executive office is 25 York Street, Suite 800, Toronto, Ontario. The audited consolidated financial statements ("financial statements") of the Company for the year ended December 31, 2022 and 2021 represent the financial position and the financial performance of the Company and its subsidiaries (together referred to as "Hudbay").
Wholly owned subsidiaries as at December 31, 2022 and 2021 include HudBay Marketing & Sales Inc. ("HMS"), HudBay Peru Inc., HudBay Peru S.A.C. ("Hudbay Peru"), HudBay (BVI) Inc., Hudbay Arizona Inc, Copper World, Inc. ("Copper World") and Mason Resources (US) Inc. ("Mason").
Hudbay is a diversified mining company with long-life assets in North and South America. Huday's operations in Cusco (Peru) produce copper with gold, silver and molybdenum by-products. Hudbay's operations in Manitoba (Canada) produce gold with copper, zinc and silver by-products. Hudbay has an organic pipeline that includes copper development projects in Arizona and Nevada (United States), and a focused growth strategy on exploration, development, operation, and optimization of properties that Hudbay already controls, as well as other mineral assets that Hudbay may acquire that fit the Company's strategic criteria. 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.
2. Basis of preparation
(a) Statement of compliance:
These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards ("IFRS") as issued by the International Accounting Standards Board ("IASB") effective for the year ended December 31, 2022.
The Board of Directors approved these consolidated financial statements on February 23, 2023.
(b) Functional and presentation currency:
Hudbay's consolidated financial statements are presented in US dollars, which is the Company's and all material subsidiaries' functional currency, except the Company's Manitoba business unit, which has a functional currency of Canadian dollars. All values are rounded to the nearest thousand ($000) except where otherwise indicated.
(c) Basis of measurement:
The consolidated financial statements have been prepared on the historical cost basis except for the following items in the consolidated balance sheets:
- Derivatives, embedded derivatives, other financial instruments, and financial assets measured at fair value through profit or loss ("FVTPL");
- Liabilities for cash-settled share-based compensation arrangements are measured at fair value; and,
- A defined benefit liability is recognized as the net total of the plan assets, unrecognized past service costs and unrecognized actuarial losses, less unrecognized actuarial gains and the present value of the defined benefit obligation.
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HUDBAY MINERALS INC.
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(d) Use of judgements and estimates:
The preparation of the consolidated financial statements in conformity with IFRS requires Hudbay to make judgements, estimates and assumptions that affect the application of accounting policies, reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and reported amounts of revenue and expenses during the reporting period. Actual results may differ from these estimates.
Hudbay reviews these estimates and underlying assumptions on an ongoing basis, based on experience and other factors, including expectations of future events that the Company believes to be reasonable under the circumstances. Revisions to accounting estimates are recognized prospectively in the period in which the estimates are revised and in any future periods affected.
The following are critical and significant judgements and estimates impacting the consolidated financial statements:
- Indicators and testing of impairment (reversal of impairment) of non-financial assets (notes 3h, 3i and 12) - There are a number of potential indicators that could trigger non-financial asset impairment or reversal of impairment. These indicators may require critical judgements to determine the extent that external and/or internal environmental business changes may impact Hudbay's overall assessment of the recoverability of non-financial assets. Such business changes include changes to the life of mine ("LOM") plan, changes to budget, changes to closure plans, changes to discount rates and changes to long-term commodity prices. If an impairment or impairment reversal indicator is noted then there are also critical estimates involved in the determination of the recoverable amount of cash generating units ("CGU") or below for more specific groups of assets. Recoverable amounts are calculated using discounted after-tax cash flows based on cash flow projections and assumptions in Hudbay's most recent LOM plans. LOM plans are based on optimized mine and processing plans and the assessment of capital expenditure requirements of a mine site. LOM plans incorporate management's best estimates of key assumptions which include future commodity prices, the value of mineral resources not included in the applicable LOM plans, production based on current estimates of recoverable reserves, discount rates, future operating and capital costs and future foreign exchange rates. Most critical to the value of the recoverable amount are the assumptions of future commodity prices and the value of mineral resources not included in the applicable LOM plans. Expected future cash flows used to determine the recoverable amount during impairment testing are inherently uncertain and could materially change over time. Should management's estimate of the future not reflect actual events, impairments may be identified, which could have a material effect on the financial statements. Although it is reasonably possible for a change in key assumptions to occur, the possible effects of a change in any single assumption may not fairly reflect the impact of CGU's fair value as the assumptions are inextricably linked.
- Mineral reserves and resources (notes 3g, 3k and 3i) - Hudbay estimates mineral reserves and resources to determine future recoverable mine production based on assessment of geological, engineering and metallurgical analyses, estimates of future production costs, capital costs and reclamation costs, as well as long term commodity prices and foreign exchange rates. There are numerous uncertainties inherent in estimating mineral reserves and resources, including many factors beyond Hudbay's control. The estimates are based on information compiled by appropriately qualified persons relating to the geological data on the size, depth and shape of the ore body and interpreting this data requires complex geological judgements. Changes in assumptions, including economic assumptions such as metals prices and market conditions, could have a material effect on the financial position and results of operations.
Changes in the mineral reserve or resource estimates may affect:
- the carrying value of exploration and evaluation assets, capital works in progress, mining properties and plant and equipment;
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HUDBAY MINERALS INC.
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- depreciation expense for assets depreciated either on a unit-of-production basis or on a straight line basis where useful lives are restricted by the life of the related mine plan;
- the provision for decommissioning, restoration and similar liabilities;
- the carrying value of deferred tax assets; and,
- amortization of deferred revenue.
- Property plant and equipment (notes 3h and 12) - The carrying amounts of property, plant and equipment and exploration and evaluation assets on Hudbay's consolidated balance sheets are significant and reflect multiple estimates and applications of judgement. Management exercises judgement in determining whether the costs related to exploration and evaluation are eligible for capitalization and whether they are likely to be recoverable by future exploration, which may be based on assumptions about future events and circumstances. Judgement and estimates are used when determining whether exploration and evaluation assets should be transferred to capital works in progress within property, plant and equipment. For mines in the production stage, management applies judgement to determine development costs to be capitalized based on the extent they are incurred in order to access reserves mineable over more than one year. For depreciable property, plant and equipment assets, management makes estimates to determine depreciation. For assets depreciated using the straight line method, residual value and useful lives of the assets or components are estimated. A significant estimate is required to determine the total production basis for units-of-production depreciation. The most currently available reserve and resource report is utilized in determining the basis which has material impacts on the amount of depreciation recorded through inventories and the consolidated income statements. There are numerous uncertainties inherent in estimating mineral reserves, and assumptions that were valid at the reporting date may change when new information becomes available. The actual volume of ore extracted and any changes in these assumptions could affect prospective depreciation rates and carrying values. In determining whether stripping costs incurred during the production phase of a mining property relate to mineral reserves and mineral resources that will be mined in a future period and therefore should be capitalized, Hudbay makes estimates of the proportion of stripping activity which relates to extracting current ore and the proportion which relates to obtaining access to ore reserves which will be mined in the future.
- Tax provisions (notes 3m and 23) - Management makes estimates in determining the measurement and recognition of deferred tax assets and liabilities recorded on the consolidated balance sheets. The measurement of deferred tax assets and deferred tax liabilities is based on tax rates that are expected to apply in the period that the asset is realized or liability is settled based on tax rates that have been enacted or substantively enacted by the end of the reporting period. Deferred tax assets, including those arising from unutilized tax losses, require management to assess the likelihood of taxable income in the future periods in order to utilize recognized deferred tax assets. Estimates of future taxable income are based on forecasted cash flows from operations and the application of existing tax laws in each jurisdiction. To the extent that future cash flows and taxable income differ significantly from estimates, the ability to realize the net deferred tax assets recorded at the balance sheet date could be affected. At the end of each reporting period, management reassesses the period that the assets are expected to be realized or liabilities are settled and the likelihood of taxable income in future periods in order to support and adjust the deferred tax assets and deferred tax liabilities recognized on the consolidated balance sheets.
- Assaying utilized to determine revenue and recoverability of inventories (notes 3c and 3f) - Assaying of contained metal is a key estimate in determining the amount of revenues recorded in the consolidated income statements. The estimate is finalized after final surveying is completed, which may extend to six months in certain transactions. Since assays are utilized to determine the value of recorded revenues, significant differences in given assays may result in a material misstatement of revenues on the consolidated income statements. Assay survey results are also a factor utilized to determine if inventories on hand have a net realizable value that exceeds cost. Material differences in assay results may lead to misstatements of inventory balances in the consolidated balance sheets.
9 |
HUDBAY MINERALS INC.
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- Decommissioning and restoration obligations (notes 3k and 20) - Significant judgement and estimates are utilized in the determination of the decommissioning and restoration provisions in the consolidated balance sheets. Judgement is involved in determining the timing and extent of cash outflows required to satisfy constructive obligations based on the timing of site closures in the LOM plans, expected unit costs to determine cash obligations to remediate disturbances and regulatory and constructive requirements, as well as technological changes to determine the extent and timing of the remediation required. The timing of cash outflows and discount rates associated with discounting the provision are also key estimates. Changes in these estimates may result in a change in classification of the provision between non-current and current as well as material differences in the total provision recorded in the consolidated balance sheets.
- Pension and other employee benefit (notes 3j, 21 and 22) - Hudbay's post retirement obligations relate mainly to ongoing health care benefits plans. Hudbay estimates obligations related to the pension and other employee benefits plans using actuarial determinations that incorporate assumptions using management's best estimates of factors including plan performance, salary escalation, retirement dates of employees and drug cost escalation rates. Due to the complexity of the valuation, the underlying assumptions and its long term nature, the defined benefit obligation is highly sensitive to changes in these assumptions. Management reviews all assumptions at each reporting date. In determining the appropriate discount rate, Hudbay considers the interest rates on corporate bonds in the respective currency with at least an AA rating, with extrapolated maturities corresponding to the expected duration of the defined benefit obligation. The mortality rate is based on publicly available mortality tables for the specific country, and Hudbay bases future salary increases and pension increases on expected future inflation rates for the respective country.
(e) Estimation uncertainty:
The Company has assessed the economic impacts of the novel coronavirus ("COVID-19") pandemic, Russia's invasion of Ukraine and heightened social unrest following a change in Peru's political leadership in early December 2022 on its consolidated financial statements. As at December 31, 2022, management has determined that the Company's ability to execute its medium and longer term plans and the economic viability of its assets (including the carrying value of its long-lived assets and inventory valuations) are not materially impacted.
In making this judgment, the Company has assessed various criteria including, but not limited to, existing laws, regulations, orders, disruptions and potential disruptions in our supply chain, disruptions in the markets for our products, commodity prices and foreign exchange prices and the actions that the Company has taken at its operations to protect the health and safety of its workforce and local community.
3. Significant accounting policies
The accounting policies set out below have been applied consistently to all periods presented in these consolidated financial statements and by all Hudbay's entities.
(a) Basis of consolidation:
Intercompany balances and transactions are eliminated upon consolidation. When a Hudbay entity transacts with an associate or jointly controlled entity of the Company, unrealized profits and losses are eliminated to the extent of Hudbay's interest in the relevant associate or joint venture. The accounting policies of Hudbay's entities are changed when necessary to align them with the policies adopted by the Company.
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Subsidiaries
A subsidiary is an entity controlled by Hudbay. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases.
Business combinations and goodwill
Should Hudbay make an acquisition, it first determines whether the assets acquired and liabilities assumed constitute a business, in which case the acquisition requires accounting as a business combination. Management applies judgement in determining whether the acquiree is capable of being conducted and managed for the purpose of providing a return, considering the inputs of the acquiree and processes applied to those inputs that have the ability to create outputs.
Hudbay applies the acquisition method of accounting to business combinations, whereby the goodwill is measured at the acquisition date as the fair value of the consideration transferred including the recognized amount of any non-controlling interests in the acquiree. When the excess is negative, a bargain purchase gain is recognized immediately in the consolidated income statements. The assessment of fair values on acquisition includes those mineral reserves and resources that are able to be reliably measured. In determining these fair values, management must also apply judgement in areas including future cash flows, metal prices, exchange rates and appropriate discount rates. Changes in such estimates and assumptions could result in significant differences in the amount of goodwill recognized.
The consideration transferred is the aggregate of the fair values, at the date of the acquisition, of the sum of the assets transferred, the liabilities incurred or assumed, and the equity instruments issued by the acquirer in exchange for control of the acquiree. Acquisition-related costs are recognized in the consolidated income statements as incurred, unless they relate to issuance of debt or equity securities.
Where applicable, the consideration transferred includes any asset or liability resulting from a contingent consideration arrangement and measured at its acquisition date fair value. Subsequent changes in such fair values are adjusted against the cost of acquisition where they qualify as measurement period adjustments. All other subsequent changes in the fair value of contingent consideration classified as an asset or liability are accounted for in accordance with relevant IFRS. Changes in the fair value of contingent consideration classified as equity are not recognized.
Where a business combination is achieved in stages, the Company's previously held interests in the acquired entity are remeasured to fair value at the acquisition date, which is the date Hudbay attains control, and any resulting gain or loss is recognized in the consolidated income statements. Amounts previously recognized in other comprehensive income ("OCI") related to interests in the acquiree prior to the acquisition date are reclassified to the consolidated income statements, where such treatment would be appropriate if that interest were disposed of.
After initial recognition, goodwill is measured at cost less any accumulated impairment losses. For the purpose of impairment testing, goodwill acquired in a business combination is, from the acquisition date, allocated to each of Hudbay's CGUs that are expected to benefit from the synergies of the combination, irrespective of whether other assets or liabilities of the acquiree are assigned to those units. Goodwill is allocated to the lowest level at which it is monitored for internal management purposes and is not larger than an operating segment before aggregation. Where goodwill forms part of a CGU and part of the operation within that unit is disposed of, the goodwill associated with the disposed operation is included in the determination of any gain or loss on disposal.
Goodwill is not amortized and is tested for impairment annually and whenever there is an indication of impairment. If any such indication exists, the recoverable amount of the CGU is estimated in order to determine the extent of the impairment, if any. The recoverable amount is determined as the higher of fair value less direct costs to sell and the CGU's value in use. An impairment loss in respect of goodwill is not reversed.
Fair value for mineral interests and related goodwill is generally determined as the present value of the estimated future cash flows expected to arise from the continued use of the asset, including any expansion prospects, and its eventual disposal, using assumptions that an independent market participant may take into account.
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Value in use is determined as the present value of the estimated future cash flows expected to arise from the continued use of the asset in its present form and its eventual disposal. Value in use is determined by applying assumptions specific to Hudbay's continued use and cannot take into account future development.
The weighted average cost of capital of Hudbay or comparable market participants is used as a starting point for determining the discount rates, with appropriate adjustments for the risk profile of the countries in which the individual CGUs operate and the specific risks related to the development of the project.
Where the asset does not generate cash flows that are independent of other assets, Hudbay estimates the recoverable amount of the CGU to which the asset belongs. If the carrying amount of an asset or CGU exceeds its recoverable amount, the carrying amount of the asset or CGU is reduced to its recoverable amount. An impairment loss is recognized as an expense in the consolidated income statements.
(b) Translation of foreign currencies:
Management determines the functional currency of each Hudbay entity as the currency of the primary economic environment in which the entity operates.
Foreign currency transactions
Transactions in foreign currencies are translated to the respective functional currencies of Hudbay's entities at exchange rates in effect at the transaction dates.
At the end of each reporting period, monetary assets and liabilities denominated in foreign currencies are translated to the functional currency using the closing exchange rate. Non-monetary assets and liabilities measured at fair value are translated using the exchange rates at the date when fair value was determined. Non-monetary assets and liabilities measured at historical cost in a foreign currency are translated using exchange rates that were in effect at the transaction dates. The same translations are applied when an entity prepares its financial statements from books and records maintained in a currency other than its functional currency, except revenue and expenses may be translated at monthly average exchange rates that approximate those in effect at the transaction dates.
Foreign currency gains and losses arising on period-end revaluations are recognized in the consolidated income statements, except for a financial liability designated as a hedge of a net investment in a foreign operation, or qualifying cash flow hedges, which are recognized in OCI.
Foreign operations
For the purpose of the consolidated financial statements, assets and liabilities of Hudbay's entities that have functional currencies other than the US dollar are translated to US dollars at the reporting date using the closing exchange rate. Revenue and expenses are translated at monthly average exchange rates that approximate those in effect at the transaction dates. Differences arising from these foreign currency translations are recognized in OCI and presented within equity in the foreign currency translation reserve. When a foreign operation is disposed, the relevant exchange differences accumulated in the foreign currency translation reserve are transferred to the consolidated income statements as part of the profit or loss on disposal. On the partial disposal of a subsidiary that includes a foreign operation, the relevant proportion of such amount is reattributed to non-controlling interests. On disposal of a partial investment in an associate or joint venture that includes a foreign operation while retaining significant influence or joint control, the relevant proportion is reclassified to profit or loss.
Net investment in a foreign operation
Foreign currency gains and losses arising on translation of a monetary item receivable from or payable to a foreign operation for which settlement is neither planned nor likely to occur in the foreseeable future are considered to form part of a net investment in the foreign operation. Such gains and losses are recognized in OCI and presented within equity in the foreign currency translation reserve.
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(c) Revenue recognition:
Revenue from the sale of goods is measured at the fair value of the consideration received or receivable, net of treatment and refining charges. Revenue from the sale of by-products is included within revenue.
Revenue is recognized when control of the goods sold has been transferred to the customer. Control is deemed to have passed to the customer when significant risk and reward of the product has passed to the customer, Hudbay has a present right to payment, and physical possession of the product has been transferred to the customer. Sales of doré are recorded when a trade confirmation is duly signed and executed between Hudbay and the end purchaser. Sale of concentrate and finished zinc frequently occur under the following terms, and management has assessed these terms in order to determine timing of transfer of control and revenue recognition as generally outlined in the following table.
| Incoterms used by Hudbay | Revenue recognized when goods: |
| Cost, Insurance and Freight (CIF) | Are loaded on board the vessel |
| Free on Board (FOB) | Are loaded on board the vessel |
| Delivered at place (DAP) | Arrive at the named place of destination |
| Delivered at terminal (DAT) | Arrive at the named place of destination |
| Free Carrier (FCA) | Arrive at the named place of delivery |
Sales of copper and zinc concentrate and certain other products are provisionally priced. For these contracts, sales prices are subject to final adjustment at the end of a future period after shipment, based on quoted market prices during the quotational period specified in the contract. Revenue is recognized when the above criteria are achieved, using weight and assay results and forward market prices to estimate the fair value of the total consideration receivable. Therefore, revenue is initially recorded based on an initial provisional invoice. Subsequently, at each reporting date, until the provisionally priced sale is finalized, sales receivables are marked to market, with adjustments (both gains and losses) recorded within revenue separately as "Pricing and volume adjustments" in the notes to the consolidated financial statements and in trade and other receivables on the consolidated balance sheets. As per IFRS 15 Revenue from contracts with customers, variability in price is deemed to be fair value movements on provisionally priced receivables under the scope of IFRS 9 Financial Instruments; variability in quantities is deemed to be variable consideration. The variable consideration from weights and assay changes to quantities has been assessed to be insignificant to warrant precluding revenue being recorded as a result of possible future sales reversals. An annual analysis of the accuracy of our weights and assays is completed, and if the accuracy rate falls below a certain threshold, management then evaluates whether revenue from future sales should be constrained as a result of it being highly probable that there would be a significant revenue reversal in the future.
Hudbay only includes in the transaction price an amount which is not highly likely to be subject to significant subsequent revenue reversal. Within sales contracts with customers, separate performance obligations may arise pertaining to the shipping of goods sold. If applicable, costs and the transaction price are allocated on a relative standalone selling basis to any separate performance obligations and are recognized over the period of time the goods sold are shipped, on a gross basis.
Hudbay recognizes deferred revenue in the event it receives payments from customers before a sale meets criteria for revenue recognition.
Precious metals stream contracts, which at inception of the contract are determined that they can be satisfied through the delivery of Hudbay's own production of non-financial items (i.e. gold and silver credits) rather than cash or other financial assets, are accounted for as deferred revenue. If settlement with Hudbay's own production of gold and silver is not possible, the stream transaction is recognized as a financial liability since settlement may require a cash payment. This would cause a change to the accounting treatment, resulting in the revaluation of the agreement to the fair value through the consolidated income statements on a recurring basis.
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Deferred revenue associated with precious metals stream contracts are subject to variable consideration and contain a significant financing component since funds were received in advance of the delivery of concentrate. When a significant financing component is recognized, finance expense will be higher and revenues will be higher as the larger deferred revenue balance is amortized to revenues. A market-based discount rate is utilized at the inception of each of the respective stream agreements to determine a discount rate for computing the interest charges for the significant financing component of the deferred revenue balance. As product is delivered, the deferred revenue amount including accreted interest will be drawn down. The draw down rate requires the use of proven and probable reserves and certain resources in the calculation that are beyond proven and probable reserves which management is reasonably confident will be transferable to reserves. Key estimates used in determining the significant financing component include the discount rate and the reserve and resources assumed for conversion.
(d) Cost of sales:
Cost of sales consists of those costs previously included in the measurement of inventory sold during the period, as well as certain costs not included in the measurement of inventory, such as the cost of warehousing and distribution to customers, provisional pricing adjustments related to purchased concentrates, profit sharing, royalty payments, share-based compensation expense and other indirect expenses related to producing operations.
Cost of sales also include non-cash net realizable value adjustments to inventory, one-time adjustments related to overheads incurred when not operating at normal capacity and one-time labour charges related to facilitating the production of inventories for past service pension costs, curtailment gains and severance.
(e) Cash and cash equivalents:
Cash and cash equivalents include cash, demand deposits and short-term, highly liquid investments that are readily convertible to known amounts of cash and are subject to an insignificant risk of changes in value. Cash equivalents have maturities of three months or less at the date of acquisition. Interest earned is included in finance income on the consolidated income statements and in investing activities on the consolidated statements of cash flows.
Amounts that are restricted from being used for at least twelve months after the reporting date are classified as non-current assets and presented in restricted cash on the consolidated balance sheets. Changes in restricted cash balances are classified as investing activities on the consolidated statements of cash flows.
(f) Inventories:
Inventories consist of stockpiles, in-process inventory (concentrates and metals), metal products and supplies. Concentrates, doré, metals and all other saleable products are valued at the lower of cost and estimated net realizable value. Net realizable value represents the estimated selling price for inventories less all estimated direct and indirect costs of completion and costs necessary to make the sale. Where the net realizable value is less than cost, the difference is charged to the consolidated income statements as an impairment charge in cost of sales. Costs associated with stripping activities in an open pit mine are capitalized to inventory and recorded through cost of sales unless the stripping activity can be shown to improve access to further quantities of ore that will be mined in future periods, in which case, the stripping costs are capitalized to property, plant and equipment.
Cost of production of concentrate inventory is determined on a weighted average cost basis and the cost of production of finished metal inventory is determined using the first in first out basis. The cost of production includes direct costs associated with conversion of production inventory based on normal production capacity: material, labour, contractor expenses, purchased concentrates, and an attributable portion of production overheads and depreciation of all property, plant and equipment involved with the mining and production process. Hudbay measures in-process inventories based on assays of material received at metallurgical plants and estimates of recoveries in the production processes. Due to significant uncertainty associated with volume and metal content, immaterial costs are not allocated to routine operating levels of stockpiled ore. Estimates and judgements are required to assess the nature of any significant changes to levels of ore stockpiles and determining whether allocation of costs is required.
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Supplies are valued at the lower of average cost and net realizable value.
(g) Exploration and evaluation expenditures:
Exploration and evaluation activity begins when Hudbay obtains legal rights to explore a specific area and involves the search for mineral reserves, the determination of technical feasibility, and the assessment of commercial viability of an identified resource. Expenditures incurred in the exploration and evaluation phase include the cost of acquiring interests in mineral rights, licenses and properties and the costs of Hudbay's exploration activities, such as researching and analyzing existing exploration data, gathering data through geological studies, exploratory drilling, trenching, sampling, and certain feasibility studies.
Hudbay expenses the cost of its exploration and evaluation activities and capitalizes the cost of acquiring interests in mineral rights, licenses and properties in business combinations, asset acquisitions or option agreements. Amounts capitalized are recognized as exploration and evaluation assets and presented in property, plant and equipment. Exploration and evaluation assets acquired as a result of an asset acquisition or option agreement are initially recognized at cost, and those acquired in a business combination are recognized at fair value on the acquisition date. They are subsequently carried at cost less accumulated impairment. No depreciation is charged during the exploration and evaluation phase. Hudbay expenses the cost of subsequent exploration and evaluation activity related to acquired exploration and evaluation assets. Cash flows associated with acquiring exploration and evaluation assets are classified as investing activities in the consolidated statements of cash flows; those associated with exploration and evaluation expenses are classified as operating activities.
Judgement is required in determining whether the respective costs are eligible for capitalization where applicable, and whether they are likely to be recoverable, which may be based on assumptions about future events and circumstances. Estimates and assumptions made may change if new information becomes available.
Hudbay monitors exploration and evaluation assets for factors that may indicate their carrying amounts are not recoverable. If such indicators are identified, the Company tests the exploration and evaluation assets or their CGUs, as applicable, for impairment. Hudbay also tests for impairment when assets reach the end of the exploration and evaluation phase.
Exploration and evaluation assets are transferred to capital works in progress within property, plant and equipment once the Company determines that probable future economic benefits will be generated as a result of the expenditures. Hudbay's determination of probable future economic benefit is based on management's evaluation of the technical feasibility and commercial viability of the geological properties of a given ore body based on information obtained through evaluation activities, including metallurgical testing, resource and reserve estimates and the economic assessment of whether the ore body can be mined economically. Tools that may be used to determine this include a preliminary feasibility study, confidence in converting resources into reserves and the probability that the property could be developed into a mine site. At that time, the property is considered to enter the development phase, and subsequent evaluation costs are capitalized.
(h) Property, plant and equipment:
Hudbay measures items of property, plant and equipment at cost less accumulated depreciation and any accumulated impairment losses.
The initial cost of an item of property, plant and equipment includes its purchase price or construction costs, including import duties and non-refundable purchase taxes, any costs directly attributable to bringing the asset into operation, and for qualifying assets, borrowing costs. The initial cost of property, plant and equipment also includes the initial estimate of the cost of dismantling and removing the item and restoring the site on which it is located, the obligation which Hudbay incurs either when the item is acquired or as a consequence of having used the item during a particular period for purposes other than to produce inventories during that period.
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Capitalization of costs ceases once an asset is in the location and condition necessary for it to be capable of operating in the manner intended by management. At this time, depreciation commences. For a new mine, this occurs upon commencement of commercial production. As a result of the early adoption of the amendments to IAS 16, since January 1, 2021, any revenues less cost to produce, earned prior to commencement of commercial production, are included in the consolidated income statements.
Carrying amounts of property, plant and equipment, including right-of-use ("ROU") assets, are depreciated to their estimated residual value over the estimated useful lives of the assets or the estimated life of the related mine or plant, if shorter. Where components of an asset have different useful lives, depreciation is calculated on each separate component. Components may be physical or non-physical, including the cost of regular major inspections and overhauls required in order to continue operating an item of property, plant and equipment.
Certain items of property, plant and equipment are depreciated on a unit-of-production basis. The unit-of-production method is based on proven and probable tonnes of ore reserves. There are numerous uncertainties inherent in estimating ore reserves, and assumptions that were valid at the reporting date may change when new information becomes available. The actual volume of ore extracted and any changes in these assumptions could affect prospective depreciation rates and carrying values.
The carrying amount of an item of property, plant and equipment is derecognized on disposal or when no future economic benefits are expected from its use or disposal. Upon derecognition of an item of property, plant and equipment, the difference between its carrying value and net sales proceeds, if any, is presented as a gain or loss in other operating income or expense in the consolidated income statements.
i. Capital works in progress:
Capital works in progress consist of items of property, plant and equipment in the course of construction or mineral properties in the course of development, including those transferred upon completion of the exploration and evaluation phase. On completion of construction or development, costs are transferred to plant and equipment and/or mining properties as appropriate. Capital works in progress are not depreciated.
ii. Mining properties:
Mining properties consist of costs transferred from capital works in progress when a mining property reaches commercial production, costs of subsequent mine and exploration development, and acquired mining properties in the production stage.
Mining properties include costs directly attributable to bringing a mineral asset into the state where it is capable of operating in the manner intended by management and includes such costs as the cost of shafts, ramps, track haulage drifts, ancillary drifts, pumps, electrical substations, refuge stations, ventilation raises, permanent manways, and ore and waste pass raises. The determination of development costs to be capitalized during the production stage of a mine operation requires the use of judgements and estimates such as estimates of tonnes of waste to be removed over the life of the mining area and economically recoverable reserves extracted as a result.
A mining property is considered to be capable of operating in a manner intended by management when it commences commercial production based on pre-established criteria. Upon commencement of commercial production, a mining property is depreciated on a unit-of-production method. Unit-of-production depreciation rates are determined based on the related proven and probable mineral reserves and associated future development costs.
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Subsequent mine development costs are capitalized to the extent they are incurred in order to access reserves mineable over more than one year. Ongoing maintenance and development expenditures are expensed as incurred and included in cost of sales in profit or loss. These include ore stope access drifts, footwall and hangingwall drifts in stopes, drawpoints, drill drifts, sublevels, slots, drill raises, stope manway access raises and definition diamond drilling.
iii. Plant and equipment:
Plant and equipment consists of buildings and fixtures, surface and underground fixed and mobile equipment and assets under lease.
Plant and equipment are depreciated on either unit-of-production or straight-line basis based on factors including the production life of assets and mineable reserves. In general, mining assets are depreciated using a unit-of-production method; equipment is depreciated using the straight-line method, based on the shorter of its useful life and that of the related mine or facility; and plants are depreciated using the straight-line method, with useful lives limited by those of related mining assets.
iv. Right-of-use lease assets:
At inception of a contract, Hudbay assesses whether a contract is, or contains, a lease. A contract is, or contains, a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. The Company assesses the following criteria in the determination of whether a contract conveys the right to control the use of an identified asset:
• The contract involves the use of an identified asset - this may be specified explicitly or implicitly, and should be physically distinct or represent substantially all of the capacity of a physically distinct asset. If the supplier has substantive substitution rights, then the asset is not identified;
• Hudbay has the right to obtain substantially all of the economic benefits from use of the asset throughout the period of use; and
• Hudbay has the right to direct the use of the asset by means of decision making rights that are most relevant to changing how and for what purpose the asset is used. In the case where decisions about the asset's purpose is predetermined, Hudbay is deemed to have the right to direct the use of the asset if either:
▪ Hudbay has the right to operate the asset; or,
▪ Hudbay designed the asset in a way that predetermines how and for what purpose it will be used.
The Company recognizes a ROU asset and lease liability at the lease commencement date. The initial measurement of the ROU asset is on a present value basis. This is based on the calculated lease liability plus any initial direct costs incurred, an estimate of removal or restoration costs, and any payments made prior to commencement of the lease less any lease incentives received.
The right of use asset is subsequently depreciated using the straight-line method from the commencement date to the earlier of the end of the useful life of the right-of-use asset or the end of the lease term. The estimated useful lives of the right-of-use assets are determined on the same basis as those of property and equipment. In addition, the right-of-use asset is periodically reduced by impairment losses, if any, and adjusted for certain remeasurements of the lease liability.
The lease liability is measured at the present value of the lease payments that are yet to be paid at the commencement date, discounted using the interest rate implicit in the lease or, if that rate cannot be easily determined, Hudbay's incremental borrowing rate. Generally, the Company uses its incremental borrowing rate as the discount rate for applicable leases.
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Lease payments included in the measurement of the lease liability comprise fixed payments including in substance fixed payments and variable payments that depend on an index or rate, amounts expected to be payable under a residual value guarantee and the additional costs Hudbay reasonably expects to incur due to purchase options, extension options and termination options reasonably expected to be exercised.
The lease liability is measured at amortized cost using the effective interest method. It is remeasured when there is a change in the expected future cash flows of a leasing contract either due to a change in index or rate, or due to a change in terms of the contract. When the lease liability is remeasured in this way, a corresponding adjustment is made to the carrying amount of the right-of-use asset, or is recorded in profit or loss if the carrying amount of the right-of-use asset is zero.
Hudbay has elected not to separate non-lease components and account for the lease and non-lease components as a single lease component for lease contracts of all asset classes.
The Company has elected not to recognize ROU assets and lease liabilities for short-term leases of machinery that have a lease term of 12 months or less and leases of low-value assets. Hudbay recognizes the lease payments associated with these leases as an expense on a straight-line basis over the lease term.
Hudbay does not enter into transactions where the Company acts as a lessor.
The incremental borrowing rate used for new ROU leases is a key management judgement.
v. Depreciation rates of major categories of assets:
• Capital works in progress - not depreciated
• Mining properties - unit-of- production
• Mining asset - unit-of- production
• Plant and Equipment
◦ Equipment -
◦ Other plant assets -
• ROU Assets -
Hudbay reviews its depreciation methods, remaining useful lives and residual values at least annually and accounts for changes in estimates prospectively.
vi. Commercial production:
Commercial production is the level of activities intended by management for a mine, or a mine and mill complex, to be capable of operating in the manner intended by management. Hudbay considers a range of factors when determining the level of activity that represents commercial production for a particular project, including a predetermined percentage of design capacity for the mine and mill; achievement of continuous production, ramp-ups, or other output; or specific factors such as recoveries, grades, or inventory build-ups. In a phased mining approach, management may consider achievement of specific milestones at each phase of completion. In a non-phased mining approach, management considers average actual metrics that are at least 60% of average design capacity or plan over a continuous period. Management assesses the operation's ability to sustain production over a period of approximately one to three months, depending on the complexity related to the stability of continuous operation. Commercial production is considered to have commenced, and depreciation expense is recognized, at the beginning of the month after criteria have been met.
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vii. Capitalized borrowing costs:
The Company capitalizes borrowing costs that are directly attributable to the acquisition, construction or production of qualifying assets, which are assets that necessarily take a substantial period of time, generally one year or more, to get ready for their intended use or sale. Capitalization of borrowing costs ceases once the qualifying assets commence commercial production or are otherwise ready for their intended use or sale.
Where funds are borrowed specifically to finance a project, the amount capitalized represents the actual borrowing costs incurred. Where the funds used to finance a project form part of general borrowings, the amount capitalized is calculated using a weighted average of interest rates applicable to relevant general borrowings of Hudbay during the period, to a maximum of actual borrowing costs incurred. Investment income earned by temporarily investing specific borrowings pending their expenditure on qualifying assets is deducted from the borrowing costs eligible for capitalization. Capitalization of interest is suspended during extended periods in which active development is interrupted.
All other borrowing costs are recognized in the consolidated income statements in the period in which they are incurred.
viii. Capitalized stripping costs:
Costs associated with stripping activities in an open pit mine are capitalized to inventory and recorded through cost of sales unless the stripping activity can be shown to improve access to further quantities of ore that will be mined in future periods, in which case, the stripping costs are capitalized to property, plant and equipment. Capitalized stripping costs are included in "mining properties" within property, plant and equipment.
Capitalized stripping costs are depreciated using a units-of-production method over the expected reserves within a given phase of mine development.
(i) Impairment of non-financial assets:
At the end of each reporting period, Hudbay reviews the carrying amounts of property, plant and equipment, exploration and evaluation assets and intangible assets - computer software to determine whether there is any indication of impairment. If any such indication exists, the Company estimates the recoverable amount of the asset in order to determine the extent of the impairment loss, if any. Hudbay generally assesses impairment at the level of CGUs, which are the smallest identifiable groups of assets that generate cash inflows that are largely independent of cash inflows from other assets.
Hudbay's CGUs consist of Manitoba, Peru, Arizona and greenfield exploration assets.
The Company allocates near mine exploration and evaluation assets to CGUs based on their operating segment, geographic location and management's intended use for the property. Near mine exploration and evaluation assets are allocated to CGUs separate from those containing producing or development-phase assets, except where such exploration and evaluation assets have the potential to significantly affect the future production of producing or development-phase assets.
Goodwill, if recorded, is tested for impairment annually and whenever there is an indication that the asset may be impaired.
Where an indicator of impairment exists, a formal estimate of the recoverable amount of the asset or CGU is made. The recoverable amount is the higher of the fair value less costs of disposal and value in use:
- Fair value less costs of disposal is the amount obtainable from the sale of the asset or CGU in an arm's length transaction between knowledgeable, willing parties, less costs of disposal. Fair value for mineral assets is often determined as the present value of the estimated future cash flows expected to arise from the continued use of the asset, including any expansion prospects, and its eventual disposal, using assumptions that an independent market participant may take into account. These cash flows are discounted by an appropriate discount rate that reflects current market assessments of the time value of money and the risks specific to the asset to arrive at a net present value of the asset.
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- Value in use is determined as the present value of the estimated future cash flows expected to arise from the continued use of the asset or CGU in its present form and its eventual disposal, discounted using a pre-tax rate that reflects current market assessments of the time value of money and risks specific to the asset for which estimates of future cash flows have not been adjusted. Value in use calculations apply assumptions specific to the Company's continued use and cannot take into account future development. These assumptions are different to those used in calculating fair value, and consequently the value in use calculation is likely to give a different result to a fair value calculation.
Hudbay estimates future cash flows based on estimated future recoverable mine production, expected sales prices (considering current and historical commodity prices, price trends and related factors), production levels and cash costs of production, all based on detailed engineering LOM plans. Future recoverable mine production is determined from reserves and resources after taking into account estimated dilution and recoveries during mining, and estimated losses during ore processing and treatment. Estimates of recoverable production from measured, indicated and inferred mineral resources not included in the LOM plan are assessed for economic recoverability and may also be included in the valuation of fair value less costs of disposal. Gains from the expected disposal of assets are not included in estimated future cash flows. Assumptions underlying future cash flow estimates are subject to risks and uncertainties. Changes in estimates may affect the expected recoverability of the Company's investments in mining properties.
If the carrying amount of an asset or CGU exceeds its recoverable amount, the carrying amount is reduced to the recoverable amount, and an impairment loss is recognized in the consolidated income statements in the expense category consistent with the function of the impaired asset or CGU. Hudbay presents impairment losses on the consolidated income statements as part of results from operating activities. Impairment losses recognized in respect of a CGU are allocated first to reduce the carrying amount of any goodwill allocated to the CGU and then to reduce the carrying amounts of other assets in the CGU on a pro-rata basis for depreciable assets.
The Company assesses previously recognized impairment losses each reporting date for any indications that the losses have decreased or no longer exist. Such an impairment loss is reversed, in full or in part, if there have been significant changes with a positive effect on the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset's carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortization, if no impairment loss had been recognized for the asset in prior years. Such reversals of impairment losses are recognized in the consolidated income statements. An impairment loss recognized in relation to goodwill is not reversed for subsequent increases in the recoverable amount.
(j) Pension and other employee benefits:
Hudbay has non-contributory and contributory defined benefit programs for the majority of its Canadian employees. The defined benefit pension benefits are based on years of service and final average salary for the salaried plans and are based on a flat dollar amount combined with years of service for the hourly plans. The Company provides non pension health and other post-employment benefits to certain active employees and pensioners (post-employment benefits) and also provides disability income, health benefits and other post-employment benefits to hourly and salaried disabled employees (other long-term employee benefits).
Hudbay accrues its obligations under the defined benefit plans as the employees render the services necessary to earn the pension and post-employment benefits. The actuarial determination of the accrued benefit obligations for pensions and post-employment benefits uses the projected benefit method pro-rated on service (which incorporates management's best estimate of future salary levels, other cost escalation, retirement ages of employees and other actuarial factors). For other long-term employee benefits, the Company recognizes the full cost of the benefit obligation at the time the employee becomes disabled. Actuarial advice is provided by external consultants.
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For the funded defined benefit plans, Hudbay recognizes the deficit or excess of the fair value of plan assets over the present value of the defined benefit obligation as a liability or an asset in the consolidated balance sheets. However, the Company recognizes an excess of assets only to the extent that it represents a future economic benefit which is available in the form of refunds from the plan or reductions in future contributions to the plan. When these criteria are not met, it is not recognized but is disclosed in the notes to the consolidated financial statements. Impacts of minimum funding requirements in relation to past service are considered when determining the balance sheet position.
Defined benefit costs are categorized as follows:
- Service costs (including current service cost, past service cost, as well as gains and losses on curtailments and settlements and administration costs),
- Net interest expense or income; and,
- Remeasurement.
The first two components of defined benefit costs shown above are recognized in the consolidated income statements. Past service cost as well as curtailment gains are recognized in the consolidated income statements in the period of a plan amendment. Net interest is calculated by applying the discount rate at the beginning of the period to the net defined benefit liability or asset.
Purchases and sales of plan assets are recorded on settlement date.
Remeasurement, comprising actuarial gains and losses, the effect of changes to the asset ceiling (if applicable) and the return on plan assets (excluding interest), is reflected immediately in the consolidated balance sheets with a gain or loss recognized in OCI in the period in which they occur. Remeasurement recognized in OCI is reflected in the remeasurement reserve and will not be reclassified to the consolidated income statements. For the other long-term employee benefits plan, remeasurements are recognized immediately in the consolidated income statements.
Actuarial determinations used in estimating obligations relating to these plans incorporate assumptions using management's best estimates of factors including plan performance, salary escalation, retirement dates of employees and healthcare cost escalation rates. Due to the complexity of the valuation, the underlying assumptions and its long-term nature, a defined benefit obligation is highly sensitive to changes in these assumptions. All assumptions are reviewed at each reporting date. In determining the appropriate discount rate, management considers the interest rates on corporate bonds in the respective currency with at least an AA rating, with extrapolated maturities corresponding to the expected duration of the defined benefit obligation. The mortality rate is based on publicly available mortality tables for the specific country. Future salary increases and pension increases are based on expected future inflation rates for the respective country.
Hudbay also has defined contribution plans providing pension benefits for certain of its salaried employees and certain of its US employees utilizing 401K plans. The Company recognizes the cost of the defined contribution plans based on the contributions required to be made during each period.
Termination benefits are recognized as an expense when Hudbay is committed demonstrably, without realistic possibility of withdrawal, to a formal detailed plan to either terminate employment before the normal retirement date, or to provide termination benefits as a result of an offer made to encourage voluntary redundancy. Termination benefits for voluntary redundancies are recognized as an expense if the Company has made an offer of voluntary redundancy, it is probable that the offer will be accepted, and the number of acceptances can be estimated reliably. Benefits that are payable more than one year after the reporting period are discounted to their present value.
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(k) Environmental and other provisions:
Provisions are recognized when Hudbay has a present obligation (legal or constructive) as a result of a past event, it is probable that an outflow of resources will be required to settle the obligation, and a reliable estimate can be made. The provisions are recorded as management's best estimate of the amount required to settle an obligation.
Provisions are stated at their present value, which is determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the liability.
Decommissioning, restoration and similar liabilities
Provisions are recorded for legal and constructive obligations associated with the future costs of rehabilitating the Company's current and previous operating and development sites. Such costs are associated with decommissioning and restoration activities such as dismantling and removing structures, rehabilitating mines and tailings, and reclamation and re-vegetation of affected areas.
The present value of estimated costs is recorded in the period in which the asset is installed or the environment is disturbed and a reasonable estimate of future costs and discount rates can be made. The provision is discounted using a risk-free rate, and estimates of future cash flows are adjusted to reflect risk.
Subsequent to the initial measurement, the obligation is adjusted to reflect the passage of time and changes in the estimated future cash flows underlying the obligation. The increase in the provision due to the passage of time is recognized as finance expense, whereas increases and decreases due to changes in the estimated future cash flows, which are not the result of current inventory production, are capitalized and depreciated over the life of the related operating asset. Actual costs incurred upon settlement of the site restoration obligation are charged against the provision to the extent the provision was established for those costs. Upon settlement of the liability, a gain or loss may be recorded. For closed sites, changes to estimated costs are recognized immediately in the consolidated income statements within other expenses.
Hudbay assesses the reasonableness of its estimates and assumptions each year and when conditions change, the estimates are revised accordingly. Judgement is required to determine the scope and timing of future decommissioning and restoration activities, as well as best available estimates and assumptions including discount rates, expected timing of decommissioning and restoration costs, inflationary factors and market risks. Changes in cost estimates, which may arise from changes in technology and pricing of the individual components of the cost may result in offsetting changes to the asset and liability and corresponding changes to the associated depreciation and finance costs. In view of the uncertainties concerning these future obligations, the ultimate timing and cost of reclamation and mine closure may differ materially from these estimates.
If the change in estimate results in a significant increase in the decommissioning liability and therefore an addition to the carrying value of the asset, the Company considers whether this is an indication of impairment of the asset as a whole and, if so, tests for impairment in accordance with IAS 36, Impairment of non-financial assets. If, for mature mines, the revised mine assets net of decommissioning and restoration liabilities exceeds the recoverable value, that portion of the increase is charged directly to expense as an impairment loss, within the gross profit / (loss) line.
In view of the uncertainties concerning environmental remediation, the ultimate cost of decommissioning and restoration liabilities could differ materially from the estimated amounts provided. The estimate of the total liability is subject to change based on amendments to laws and regulations and as new information concerning Hudbay's operations becomes available. Future changes, if any, to the estimated total liability as a result of amended requirements, laws, regulations and operating assumptions, as well as discount rates, may be significant and would be recognized prospectively as a change in accounting estimate, when applicable. Environmental laws, regulations and technology are continually evolving in all regions in which the Company operates. Hudbay is not able to determine the impact, if any, of environmental laws, regulations and technology that may be enacted in the future on its results of operations or financial position due to the uncertainty surrounding the ultimate form that such future laws and regulations may take.
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Onerous contracts
A contract is considered to be onerous when the unavoidable costs of meeting obligations under the contract exceed the economic benefits expected to be received under it. Hudbay records a provision for any onerous contracts at the lesser of costs to comply with a contract and costs to terminate it.
Restructuring provisions
A provision for restructuring is recognized when management, with appropriate authority within Hudbay, has approved a detailed and formal restructuring plan, and the restructuring has either commenced or has been announced publicly. Future operating costs are not provided for.
(l) Financial instruments:
Non-derivative financial instruments are initially recognized at fair value plus, in the case of a financial asset or financial liability not measured at fair value through profit or loss, directly attributable transaction costs. Measurement in subsequent periods depends on the financial instrument's classification. Hudbay uses trade date accounting for regular way purchases or sales of financial assets. The Company determines the classification of its financial instruments and non-financial derivatives at initial recognition.
Financial assets and liabilities are offset and the net amount presented in the consolidated balance sheets when, and only when, Hudbay has a legal right to offset the amounts and intends either to settle on a net basis or to realize the asset and settle the liability simultaneously.
The classification of financial assets is based on the results of the contractual characteristics test and the business model assessment which will result in the financial asset being classified as either: amortized cost, fair value through profit or loss ("FVTPL") or fair value through other comprehensive income ("FVTOCI").
i. Non-derivative financial instruments - classification:
Financial assets at fair value through profit or loss
Provisionally priced copper and zinc concentrate sales receivables, warrants and investments in securities of junior mining companies are classified as financial assets at fair value through profit or loss and are measured at fair value. The gains or losses related to changes in fair value are reported in the consolidated income statements.
Amortized cost
Cash, certain receivables, other assets related to agreements with communities near the Peru operations, trade and other payables, long-term debt and restricted cash are classified as and measured at amortized cost and are carried at amortized cost using the effective interest rate method, less impairment losses, if any.
Non-derivative financial liabilities
Accounts payable and senior unsecured notes are initially recognized at fair value and subsequently accounted for at amortized cost, using the effective interest method. The amortization of senior unsecured notes issue costs is calculated using the effective interest rate method.
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ii. Derivatives:
Derivatives are initially recognized at fair value when Hudbay becomes a party to the derivative contract and are subsequently re-measured to fair value at the end of each reporting period. The resulting gain or loss is recognized in the consolidated income statements immediately unless the derivative is designated and effective as a hedging instrument. Derivatives with positive fair value are recognized as assets; derivatives with negative fair value are recognized as liabilities.
Derivatives contracts that are entered to economically hedge a risk exposure but are not designated as a hedging instrument for hedge accounting purposes, and are physically settled, are initially and subsequently measured at fair value. Subsequent movements in fair value are recognized within the revenue line item in the consolidated income statements.
iii. Embedded derivatives:
Hudbay considers whether a contract contains an embedded derivative when it becomes a party to the contract. Derivatives embedded in other financial liabilities or other non-financial host contracts are treated as separate derivatives when their risks and characteristics are not closely related to those of the host contracts and the host contracts are not measured at FVTPL.
iv. Fair value of financial instruments:
The fair value of a financial instrument is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm's length transaction.
Fair values of financial instruments traded in active markets are determined based on quoted market prices, where available. Bid prices are generally used for assets held or liabilities to be issued; asking prices are generally used for assets to be acquired or liabilities held.
For financial instruments not traded in an active market, fair values are determined based on appropriate valuation techniques. Such techniques may include discounted cash flow analysis, using recent arm's length market transactions, reference to the current fair value of another instrument that is substantially the same, and other valuation models.
The Company applies a hierarchy to classify valuation methods used to measure financial instruments carried at fair value. Levels 1 to 3 are defined based on the degree to which fair value inputs are observable and have a significant effect on the recorded fair value, as follows:
- Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities;
- Level 2: Valuation techniques use significant observable inputs, either directly (i.e. as prices) or indirectly (i.e. derived from prices), or valuations are based on quoted prices for similar instruments; and,
- Level 3: Valuation techniques use significant inputs that are not based on observable market data (unobservable inputs).
An analysis of fair values of financial instruments is provided in note 28.
v. Impairment of financial instruments:
Hudbay recognizes loss allowances for Expected Credit Losses ("ECL") for trade receivables not measured at FVTPL.
Loss allowances for trade receivables are measured at an amount equal to lifetime ECL. ECL is a probability-weighted estimate measured at the present value of all cash shortfalls including the impact of forward-looking information.
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Hudbay has established a provision based on the Company's historical credit loss experience, adjusted for forward-looking factors specific to the debtors and the economic environment.
vi. Derecognition of financial instruments:
Hudbay derecognizes financial assets when the contractual rights to the cash flows from the assets expire, or when the Company transfers the rights to receive the contractual cash flows on the financial assets in a transaction in which substantially all the risks and rewards of ownership of the financial asset are transferred. Any interest in the transferred financial assets that is created or retained by Hudbay is recognized as a separate asset or liability.
Hudbay derecognizes financial liabilities when its contractual obligations are discharged, cancelled or expire or when its terms are modified and the cash flows of the modified liability are substantially different.
(m) Taxation:
Current Tax
Current income tax assets and liabilities for the current and prior periods are measured at the amount expected to be recovered from or paid to the taxation authorities. The tax rates and tax laws used to compute the amount are those that are enacted or substantively enacted by the balance sheet date.
Hudbay is subject to income taxes in numerous jurisdictions. Significant judgement is required in determining the worldwide provision for income taxes due to the complexity of legislation. There are many transactions and calculations for which the ultimate tax determination is uncertain during the ordinary course of business. The Company recognizes liabilities for anticipated tax issues based on estimates of whether additional taxes will be due. Where the final tax outcome of these matters is different from the amounts that were initially recorded, such differences will affect the income tax and deferred tax provisions in the period in which such determination is made.
Additionally, future changes in tax laws in the jurisdictions in which Hudbay operates could limit the ability of the Company to obtain tax deductions in future periods.
Deferred Tax
Deferred tax is recognized using the balance sheet method in respect of temporary differences at the balance sheet date between the tax basis of assets and liabilities, and their carrying amounts for financial reporting purposes.
Deferred income tax liabilities are recognized for all taxable temporary differences, except:
- where the deferred income tax liability arises from the initial recognition of goodwill, or the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and
- in respect of taxable temporary differences associated with investments in subsidiaries, associates and interests in joint ventures, where the timing of the reversal of the temporary differences can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future.
Deferred income tax assets are recognized for all deductible temporary differences, carry-forward of unused tax assets and unused tax losses, to the extent that it is probable that taxable profit will be available against which the deductible temporary differences, and the carry-forward of unused tax assets and unused tax losses can be utilized, except:
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- where the deferred income tax asset relating to the deductible temporary difference arises from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and
- in respect of deductible temporary differences associated with investments in subsidiaries, associates and interests in joint ventures, deferred tax assets are recognized only to the extent that it is probable that the temporary differences will reverse in the foreseeable future and taxable profit will be available against which the temporary differences can be utilized.
To the extent that it is probable that taxable profit will be available to offset the deductible temporary differences, Hudbay recognizes the deferred tax asset regarding the temporary difference on decommissioning, restoration and similar liabilities and recognizes the corresponding deferred tax liability regarding the temporary difference on the related assets.
The carrying amount of deferred income tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred income tax asset to be utilized. Unrecognized deferred income tax assets are reassessed at each balance sheet date and are recognized to the extent that it has become probable that future taxable profit will be available to allow the deferred tax asset to be recovered.
Judgement is required in determining whether deferred tax assets are recognized on the consolidated balance sheets. Deferred tax assets, including those arising from unutilized tax losses, require management to assess the likelihood of taxable profit in future periods in order to utilize recognized deferred tax assets. Estimates of future taxable income are based on forecast cash flows from operations and the application of existing tax laws in each jurisdiction. To the extent that future cash flows and taxable income differ significantly from estimates, the ability to realize the net deferred tax assets recorded at the balance sheet date could be affected.
Deferred tax is measured on an undiscounted basis at the tax rates that are expected to apply in the periods in which the asset is realized or the liability is settled, based on tax rates and tax laws enacted or substantively enacted at the balance sheet date.
Deferred income tax assets and deferred income tax liabilities are offset if a legally enforceable right exists to offset current tax assets against current tax liabilities and the deferred income taxes relate to the same taxable entity and the same taxation authority.
Current and deferred taxes relating to items recognized outside profit or loss (whether in other comprehensive income or directly in equity) are recognized outside profit or loss and not in the consolidated income statements. Mining taxes and royalties are treated and disclosed as current and deferred taxes if they have the characteristics of an income tax.
(n) Share capital and reserves:
Transaction costs
Transaction costs directly attributable to equity transactions are recognized as a deduction from equity.
Other capital reserve
The other capital reserve is used for equity-settled share-based compensation and includes amounts for stocks options granted and not exercised.
Foreign currency translation reserve
The foreign currency translation reserve is used to record exchange differences arising from the translation of the financial statements of foreign operations. Exchange differences arising from the translation of the financial statements of foreign operations form part of the net investment in the foreign operation. Translation gains and losses remain in the reserve until disposal of all or a portion of the foreign operation.
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(o) Share-based compensation:
Hudbay compensates its employees in part through the use of a Deferred Share Unit ("DSU") plan for non-employee members of the Board of Directors, a Restricted Share Unit ("RSU") plan for employees, a Performance Share Unit ("PSU") plan for employees and a stock option plan for employees. These plans are included in provisions on the consolidated balance sheets and further described in note 25. Changes in the fair value of the liabilities are recorded in the consolidated income statements.
Cash-settled transactions, consisting of DSUs, RSUs and PSUs, are initially measured at fair value and recognized as an obligation at the grant date. The liabilities are remeasured to fair value at each reporting date up to and including the settlement date, with changes in fair value recognized in the consolidated income statements. Hudbay values the liabilities based on the change in the Company's share price. Additional DSUs, RSUs and PSUs are credited to reflect dividends paid on Hudbay common shares over the vesting period. The current portion of the liability reflects those grants that have vested or that are expected to vest within twelve months.
DSUs vest on the grant date and are redeemable when a participant is no longer a member of the Board of Directors. Issue and redemption prices of DSUs are based on the average closing price of the Company's common shares for the five trading days prior to issuance or redemption.
RSUs and PSUs are issued under Hudbay's Long Term Equity Plan ("LTEP Plan") and vest on or before the third anniversary of the grant. RSUs and PSUs granted under the LTEP Plan may be settled in the form of the Company's common shares or, at the option of Hudbay, the cash equivalent based on the market price of the common shares as of the vesting date. Hudbay has historically settled RSUs in cash. Except in specified circumstances, RSUs and PSUs terminate when an employee ceases to be employed by the Company. Valuations of RSUs and PSUs reflect estimated forfeitures.
Equity-settled transactions with employees relate to stock options and are measured by reference to the fair value at the earlier of the grant date and the date that the employee unconditionally became entitled to the award. Fair value is determined using a Black-Scholes option pricing model, which relies on estimates of the future risk-free interest rate, future dividend payments, future share price volatility and the expected average life of the options. Hudbay believes this model adequately captures the substantive features of the option awards and is appropriate to calculate their fair values. The fair value determined at the grant date is recognized over the vesting period in accordance with vesting terms and conditions, with a corresponding increase to other capital reserves. The amount recognized as an expense is adjusted to reflect the number of awards for which the related service and non-market vesting conditions are expected to be met.
(p) Earnings per share:
The Company presents basic and diluted earnings (loss) per share ("EPS") data for its common shares. Basic EPS is calculated by dividing the profit or loss attributable to common shareholders of the Company by the weighted average number of common shares outstanding during the period. Diluted EPS is determined by adjusting the profit or loss attributable to common shareholders and the weighted average number of common shares outstanding for the effects of all dilutive potential common shares, which previously consisted of stock options granted to employees and warrants.
When calculating earnings per share for periods where the Company has a loss, Hudbay's calculation of diluted earnings per share excludes any incremental shares from the assumed conversion of stock options as they would be anti-dilutive.
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(q) Leases:
Leases, under which substantially all the risks and rewards incidental to ownership of the leased item are transferred to Hudbay, are capitalized as assets at the inception of the lease at the lower of fair value or the present value of the minimum lease payments. Lease payments are apportioned between finance charges and the reduction of the liability so as to achieve a constant periodic rate of interest on the remaining balance of the liability. Finance charges are reflected in the consolidated income statements as finance costs.
Non-ROU lease payments are recognized as an expense in the consolidated income statements on a straight-line basis over the lease term.
(r) Segment reporting:
An operating segment is a component of the Company that engages in business activities from which it may earn revenue and incur expenses and for which discrete financial information is available. Hudbay's chief executive officer regularly reviews the operating results of each operating segment to make decisions about resources to be allocated to the segment and assess its performance. In determining operating segments, Hudbay considers location and decision-making authorities. Refer to note 32.
4. New standards
New standards issued but not yet effective
Amendment to IAS 1 - Presentation of Financial Statements
The amendments to IAS 1 clarify that only covenants with which an entity is required to comply on or before the reporting date affect the classification of a liability as current or non-current. In addition, an entity has to disclose information in the notes that enables users of financial statements to understand the risk that non-current liabilities with covenants could become repayable within twelve months. Classification is unaffected by the expectations that the entity will exercise its right to defer settlement of a liability. Lastly, the amendments clarify that settlement refers to the transfer to the counterparty of cash, equity instruments, other assets. The amendments are effective for annual periods beginning on or after January 1, 2024. Earlier application is permitted. The Company has not yet determined the effect of adoption of this amendment on its consolidated financial statements.
5. Reclassification of comparative amounts
Certain prior period amounts have been reclassified for consistency with the current period presentation. The gold prepayment liability (note 16) has been reclassified to its own financial statement line item within the consolidated balance sheet due to the size of the balance. The balance was previously included in other financial liabilities. Re-evaluation adjustment - environmental provision has been reclassified to its own financial statement line item within the consolidated income statements due to the significant increases in this balance. This balance was previously included in other expenses. Evaluation expense has been reclassified and presented within other expenses on the consolidated income statement. This balance was previously included within exploration and evaluation expenses as well as other expenses (note 6f). Environmental obligation adjustment was previously included within Other in the operating activities section of the consolidated statements of cash flows and has now been reclassified to its own line within operating activities. Community agreement payments were previously included within acquisition of property, plant and equipment in the investing activities section of the consolidated statements of cash flows and has now been reclassified to its own line within investing activities. These reclassifications had no effect on the previous reported net loss and net equity.
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6. Revenue and expenses
(a) Revenue
Hudbay's revenue by significant product types:
| Year ended December 31, | ||||||
| 2022 | 2021 | |||||
| Copper | $ | $ | ||||
| Zinc | ||||||
| Gold | ||||||
| Silver | ||||||
| Molybdenum | ||||||
| Other | ||||||
| Revenue from contracts | ||||||
| Non-cash streaming arrangement items 1 | ||||||
| Amortization of deferred revenue - gold | ||||||
| Amortization of deferred revenue - silver | ||||||
| Amortization of deferred revenue - variable consideration adjustments - prior periods | ||||||
| Pricing and volume adjustments 2 | ( |
) | ( |
) | ||
| Treatment and refining charges | ( |
) | ( |
) | ||
| $ | $ | |||||
| 1 See note 19. | ||||||
| 2 Pricing and volume adjustments represent mark-to-market adjustments on initial estimate of provisionally priced sales, realized and unrealized changes to fair value for fixed for floating swaps, non-hedge derivative contracts and adjustments to originally invoiced weights and assays. |
Consideration from the Company's stream agreements is considered variable (note 19). Gold and silver stream revenue can be subject to cumulative adjustments when the amount of precious metals to be delivered under the contract changes. As a result of changes in the Company's mineral reserve and resource estimate in the first quarter of 2022, the amortization rate by which deferred revenue is drawn down into income was adjusted and, as required, a variable consideration adjustment was made for all prior year stream revenues since the stream agreement inception date. A variable consideration adjustment was also recorded on September 30, 2022 in Manitoba following a revised forecast for 777 in the third quarter of 2022, which indicated that substantially all of 777's precious metals reserves and inventory levels have been depleted. These variable consideration adjustments resulted in an increase of revenue of $
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(b) Mine operating costs
During the year ended December 31, 2022, Hudbay recognized a recovery of $
During 2022, as a result of the closure of the Flin Flon operations, certain employees retired or left employment with the Company. Upon reflecting the reductions in the number of employees accruing services for both the defined benefit pension and for other employee benefit plans, this resulted in a gain of $
During 2021, the Company recognized a past service cost provision adjustment related to pensions for certain Manitoba employees of $
(c) Depreciation and amortization
Depreciation of PP&E and amortization of intangible assets are reflected in the consolidated income statements as follows:
| Year ended December 31, | ||||||
| 2022 | 2021 | |||||
| Cost of sales | $ | $ | ||||
| Selling and administrative expenses | ||||||
| $ | $ | |||||
(d) Share-based compensation expenses
Share-based compensation expenses are reflected in the consolidated income statements as follows:
| Cash-settled | Total share- based compensation expense |
||||||||||||||
| RSUs | DSUs | PSUs | Stock options |
||||||||||||
| Year ended December 31, 2022 | |||||||||||||||
| Cost of sales | $ | $ | $ | $ | $ | ||||||||||
| Selling and administrative | ( |
) | ( |
) | |||||||||||
| Other expenses | |||||||||||||||
| $ | $ | ( |
) | $ | ( |
) | $ | $ | |||||||
| Year ended December 31, 2021 | |||||||||||||||
| Cost of sales | $ | $ | $ | $ | $ | ||||||||||
| Selling and administrative | |||||||||||||||
| Other expenses | |||||||||||||||
| $ | $ | $ | $ | $ | |||||||||||
During the year ended December 31, 2022, the Company granted
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(e) Employee benefits expense
This table presents employee benefit expense recognized in the consolidated income statements, including amounts transferred from inventory upon sale of goods:
| Year ended December 31, | ||||||
| 2022 | 2021 | |||||
| Current employee benefits | $ | $ | ||||
| Profit-sharing plan expense | ||||||
| Share-based compensation (notes 6d, 20, 25) | ||||||
| Equity settled stock options | ||||||
| Cash-settled restricted share units | ||||||
| Cash-settled deferred share units | ( |
) | ||||
| Cash-settled performance share units | ( |
) | ||||
| Employee share purchase plan | ||||||
| Post-employee pension benefits | ||||||
| Defined benefit plans | ||||||
| Defined contribution plans | ||||||
| Post-employment plan curtailment (note 6b, 21, 22) | ( |
) | ||||
| Past service costs (note 6b, 21) | ||||||
| Post-employment plan attribution changes (note 22) | ( |
) | ||||
| Other post-retirement employee benefits | ||||||
| Termination benefits | ||||||
| $ | $ | |||||
Manitoba has a profit sharing plan required by the collective bargaining agreement whereby
Peru has a profit sharing plan required by Peruvian law whereby
The Company has an employee share purchase plan for executives and other eligible employees where participants may contribute between
See note 21 for a description of Hudbay's pension plans and note 22 for Hudbay's other employee benefit plans.
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(f) Other expenses
| Year ended December 31, | ||||||
| 2022 | 2021 | |||||
| Regional costs | $ | $ | ||||
| (Gain) loss on disposal of PP&E and non-current assets | ( |
) | ||||
| Amortization of community costs (other assets) | ||||||
| Restructuring - Manitoba | ||||||
| Care & maintenance - Manitoba | ||||||
| Evaluation costs | ||||||
| Insurance recovery | ( |
) | ||||
| Change in other provisions (non-capital) | ||||||
| Other | ||||||
| $ | $ | |||||
During the year ended December 31, 2022, there were costs incurred related to the restructuring of the Manitoba operations in preparation for the closure of 777 mine, zinc plant and Flin Flon mill of $
During the year ended December 31, 2022, gains on the disposition of property, plant and equipment and other non-current assets includes the disposition of Mason's Lordsburg property, along with dispositions of non-current assets as a result of the closure of our Flin Flon operations.
During the year ended December 31, 2022, a gain of $
The Flin Flon concentrator and tailings impoundment has been shifted to care and maintenance to provide optionality should another mineral discovery occur in the Flin Flon area. During the year ended December 31, 2022, care & maintenance costs were $
Evaluation expenses incurred in the first half of 2022 relate primarily to preliminary economic assessment ("PEA") study costs of Arizona's Copper World Complex.
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HUDBAY MINERALS INC.
|
(g) Net finance expense
| Year ended December 31, | ||||||
| 2022 | 2021 | |||||
| Net interest expense on long-term debt | ||||||
| Interest expense on long-term debt | $ | $ | ||||
| Accretion on streaming arrangements (note 19) | ||||||
| Additions | ||||||
| Variable consideration adjustments - prior periods | ( |
) | ||||
| Change in fair value of financial assets and liabilities at fair value through profit or loss | ||||||
| Embedded derivatives (note 18) | ||||||
| Gold prepayment liability (note 16) | ||||||
| Investments | ( |
) | ||||
| Other net finance costs | ||||||
| Net foreign exchange (gain) loss | ( |
) | ||||
| Accretion on community agreements measured at amortized cost | ||||||
| Accretion on environmental provisions (note 20) | ||||||
| Accretion on Wheaton refund liability | ||||||
| Withholding taxes | ||||||
| Premium paid on redemption of notes (note 18) | ||||||
| Write-down of unamortized transaction costs (note 18) | ||||||
| Loss (gain) on disposal of investments | ( |
) | ||||
| Other finance expense | ||||||
| Interest income | ( |
) | ( |
) | ||
| Net finance expense | $ | $ | ||||
Other finance expense relates primarily to fees on Hudbay's revolving credit facilities and leases.
33 |
HUDBAY MINERALS INC.
|
(h) Impairment - Arizona
As a result of the PEA released for the Copper World Complex during the second quarter of 2022, which contemplates the mining of the recently discovered Copper World deposits and the East deposit (formerly referred to as the Rosemont deposit) in a two-phase mine plan, it was determined that certain capitalized costs and assets associated with the previous stand-alone development plan for the East deposit are no longer recoverable. As a result, during the second quarter of 2022, the Company recognized a pre-tax impairment loss of $
(i) Impairment - Environmental Provision
During the third quarter and fourth of 2021, an impairment indicator was identified in relation to a revised Flin Flon closure plan. The revised closure plan, reflecting higher cost estimates, led to a large increase in the environmental reclamation provision and a corresponding increase to Flin Flon reclamation assets, which is recorded within PP&E. The increase in Flin Flon PP&E prompted an impairment test of these assets since the Flin Flon operation was expected to close mid-2022. Hudbay recorded an impairment to PP&E by comparing the carrying value of the Flin Flon operation to its recoverable amount using the value-in-use method for future cash flows associated with the operation until closure. The value-in-use recoverable amount is considered a level 3 valuation method incorporating assumptions for commodity prices, foreign exchange rates, remaining reserves, timing of extraction and operating costs. This resulted in an impairment loss of $
7. Cash
Cash balances represent demand deposits and deposits with an original maturity date of less than 3 months.
8. Trade and other receivables
| Dec. 31, 2022 | Dec. 31, 2021 | |||||
| Current | ||||||
| Trade receivables | $ | $ | ||||
| Statutory receivables | ||||||
| Other receivables | ||||||
| Non-current | ||||||
| Taxes receivable | ||||||
| $ | $ |
The decrease in trade receivables during the year ended December 31, 2022 primarily relates to the receipt of payment for three shipments in early 2022 which were sold in 2021, representing
34 |
HUDBAY MINERALS INC.
|
9. Inventories
| Dec. 31, 2022 | Dec. 31, 2021 | |||||
| Current | ||||||
| Stockpile | $ | $ | ||||
| Work in progress | ||||||
| Finished goods | ||||||
| Materials and supplies | ||||||
| Non-current | ||||||
| Stockpile | ||||||
| Materials and supplies | ||||||
| $ | $ |
The cost of inventories recognized as an expense, including depreciation, and included in cost of sales amounted to $
During the year ended December 31, 2022, Hudbay recognized a recovery of $
During the year ended December 31, 2022, Hudbay recognized an expense of $
10. Other financial assets
| Dec. 31, 2022 | Dec. 31, 2021 | |||||
| Current | ||||||
| Derivative assets | $ | $ | ||||
| Restricted cash | ||||||
| Non-current | ||||||
| Investments at fair value through profit or loss | ||||||
| $ | $ |
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HUDBAY MINERALS INC.
|
11. Intangibles and other assets
Intangibles and other assets of $
Other assets represent the carrying value of certain future community costs that relate to agreements with communities near the Peru operations which allow Hudbay to extract or explore minerals over the useful life of Peru operations. The liability remaining for these costs is recorded in agreements with communities recorded at amortized cost (note 15). Amortization of the carrying amount is recorded in the consolidated income statements within other expenses (note 6f) or exploration expenses, depending on the nature of the agreement.
The increase in agreements with communities recorded at amortized cost during the year ended December 31, 2022 primarily relates to the execution of the exploration agreement with the community of Uchucarcco which provides surface rights to the Maria Reyna and Caballito satellite properties located near the Constancia operation, partially offset by amortization of the carrying amount.
Intangibles mainly represent computer software costs. The following table summarizes changes in intangibles:
| Dec. 31, 2022 | Dec. 31, 2021 | |||||
| Cost | ||||||
| Balance, beginning of year | $ | $ | ||||
| Additions | ||||||
| Disposals | ( |
) | ||||
| Effects of movement in exchange rates | ||||||
| Balance, end of year | ||||||
| Accumulated amortization | ||||||
| Balance, beginning of year | ||||||
| Additions | ||||||
| Disposals | ( |
) | ||||
| Effects of movement in exchange rates | ||||||
| Balance, end of year | ||||||
| Intangibles, net book value | $ | $ |
36 |
HUDBAY MINERALS INC.
|
12. Property, plant and equipment
| Dec. 31, 2022 | Exploration and evaluation assets |
Capital works in progress |
Mining properties |
Plant and equipment |
Plant and equipment - ROU assets1 |
Total | ||||||||||||
| Balance, Jan. 1, 2022 | $ | $ | $ | $ | $ | $ | ||||||||||||
| Additions | ||||||||||||||||||
| Capitalized stripping and development | ||||||||||||||||||
| Decommissioning and restoration | ( |
) | ( |
) | ( |
) | ||||||||||||
| Derecognition of assets - cost | ( |
) | ( |
) | ( |
) | ( |
) | ||||||||||
| Capitalized accretion and depreciation | ( |
) | ||||||||||||||||
| Transfers and other movements | ( |
) | ( |
) | ( |
) | ||||||||||||
| Disposals | ( |
) | ( |
) | ( |
) | ( |
) | ( |
) | ||||||||
| Impairment (Note 6h) | ( |
) | ( |
) | ||||||||||||||
| Effects of movements in exchange rates | ( |
) | ( |
) | ( |
) | ( |
) | ( |
) | ( |
) | ||||||
| Balance, Dec. 31, 2022 | ||||||||||||||||||
| Accumulated depreciation | ||||||||||||||||||
| Balance, Jan. 1, 2022 | ||||||||||||||||||
| Depreciation for the year | ||||||||||||||||||
| Derecognition of assets - accumulated depreciation | ( |
) | ( |
) | ( |
) | ( |
) | ||||||||||
| Transfers and other movements | ( |
) | ||||||||||||||||
| Disposals | ( |
) | ( |
) | ( |
) | ||||||||||||
| Effects of movement in exchange rates | ( |
) | ( |
) | ( |
) | ( |
) | ||||||||||
| Balance, Dec. 31, 2022 | ||||||||||||||||||
| Net book value | $ | $ | $ | $ | $ | $ |
| 1 Includes $ |
37 |
HUDBAY MINERALS INC.
|
| Dec. 31, 2021 | Exploration and evaluation assets |
Capital works in progress |
Mining properties |
Plant and equipment |
Plant and equipment- ROU assets1 |
Total | ||||||||||||
| Balance, Jan. 1, 2021 | $ | $ | $ | $ | $ | $ | ||||||||||||
| Additions | ||||||||||||||||||
| Capitalized stripping and development | ||||||||||||||||||
| Decommissioning and restoration | ( |
) | ||||||||||||||||
| Transfers and other movements | ( |
) | ( |
) | ||||||||||||||
| Impairment (Note 6i) | ( |
) | ( |
) | ( |
) | ||||||||||||
| Disposals | ( |
) | ( |
) | ( |
) | ( |
) | ||||||||||
| Effects of movements in exchange rates | ( |
) | ||||||||||||||||
| Balance, Dec. 31, 2021 | ||||||||||||||||||
| Accumulated depreciation | ||||||||||||||||||
| Balance, Jan. 1, 2021 | ||||||||||||||||||
| Depreciation for the year | ||||||||||||||||||
| Disposals | ( |
) | ( |
) | ( |
) | ||||||||||||
| Effects of movement in exchange rates | ||||||||||||||||||
| Balance, Dec. 31, 2021 | ||||||||||||||||||
| Net book value | $ | $ | $ | $ | $ | $ |
1 Includes $
At December 31, 2022, capital works in progress decreased compared to December 31, 2021 as a result of a pre-tax impairment charge of $
The closure of the Flin Flon operations in the second quarter of 2022 has led to the derecognition of fully depreciated assets. This resulted in a decrease in both the cost and accumulated depreciation of the Mining Properties and Plant and Equipment categories.
An indicator of impairment was identified in the second quarter of 2022 as a result of the recently released PEA and new mine plan for the Copper World Complex in Arizona. As such, management determined that a detailed impairment evaluation as at June 30, 2022 was required for the Arizona CGU. Management determined that the fair value less cost to dispose exceeded the carrying value of the Arizona CGU, accordingly no impairment was recorded.
During the third and fourth quarter of 2021, an impairment indicator was identified in relation to a revised Flin Flon closure plan. The revised closure plan, reflecting higher cost estimates, led to a large increase in the environmental reclamation provision (note 20) and a corresponding increase to Flin Flon PP&E. The increase in Flin Flon PP&E prompted an impairment test of these assets since the Flin Flon operation was expected to close mid-2022. Hudbay recorded an impairment to PP&E by comparing the carrying value of the Flin Flon operation to its recoverable amount using the value-in-use method for future cash flows associated with the operation until closure. The value-in-use recoverable amount is considered a level 3 valuation method. This resulted in an impairment loss of $
38 |
HUDBAY MINERALS INC.
|
13. Trade and other payables
| Dec. 31, 2022 | Dec. 31, 2021 | |||||
| Trade payables | $ | $ | ||||
| Accruals and payables | ||||||
| Accrued interest | ||||||
| Exploration and evaluation payables | ||||||
| Statutory payables | ||||||
| $ | $ |
Accruals and payables include operational and capital costs and employee benefit amounts owing.
14. Other liabilities
| Dec. 31, 2022 | Dec. 31, 2021 | |||||
| Unearned revenue | $ | $ | ||||
| Environmental and other provisions (note 20) | ||||||
| Pension liability (note 21) | ||||||
| Other employee benefits (note 22) | ||||||
| $ | $ |
15. Other financial liabilities
| Dec. 31, 2022 | Dec. 31, 2021 | |||||
| Current | ||||||
| Derivative liabilities | $ | $ | ||||
| Deferred Rosemont acquisition consideration | ||||||
| Agreements with communities recorded at amortized cost | ||||||
| Non-current | ||||||
| Deferred Rosemont acquisition consideration | ||||||
| Agreements with communities recorded at amortized cost | ||||||
| Wheaton refund liability (note 19) | ||||||
| $ | $ |
39 |
HUDBAY MINERALS INC.
|
Agreements with communities recorded 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 changes in agreements with communities recorded at amortized cost during the year ended December 31, 2022 primarily relates to the execution of the exploration agreement with the community of Uchucarcco which provides surface rights to the Maria Reyna and Caballito satellite properties located near the Constancia operation, partially offset by disbursements, which was primarily all paid during the year. The changes in agreements with communities recorded at amortized cost during the year ended December 31, 2021 primarily relates to the execution of the remaining land user agreements with certain community members, changes in estimates, the accretion of the liability offset by disbursements.
The following table summarizes changes in agreements with communities recorded at amortized cost:
| Balance, January 1, 2021 | $ | ||
| Net additions | |||
| Disbursements | ( |
) | |
| Accretion | |||
| Effects of changes in foreign exchange | ( |
) | |
| Balance, December 31, 2021 | $ | ||
| Net additions | |||
| Disbursements | ( |
) | |
| Accretion | |||
| Effects of changes in foreign exchange | |||
| Balance, December 31, 2022 | $ |
40 |
HUDBAY MINERALS INC.
|
16. Gold prepayment liability
Gold prepayment liabilities are reflected in the consolidated balance sheets as follows:
| Dec. 31, 2022 | Dec. 31, 2021 | |||||
| Current | $ | $ | ||||
| Non-current | ||||||
| $ | $ |
The following table summarizes changes in the gold prepayment liability:
| Balance, January 1, 2021 | $ | ||
| Change in fair value recorded in profit or loss | |||
| Change in fair value recorded in other comprehensive income | |||
| Balance, December 31, 2021 | $ | ||
| Change in fair value recorded in income statement (note 6g) | |||
| Change in fair value recorded in other comprehensive income | ( |
) | |
| Repayments | ( |
) | |
| Balance, December 31, 2022 | $ |
17. Lease liability
| Balance, January 1, 2021 | $ | ||
| Additional capitalized leases | |||
| Lease payments | ( |
) | |
| Accretion and other movements 1 | |||
| Balance, December 31, 2021 | $ | ||
| Additional capitalized leases | |||
| Lease payments | ( |
) | |
| Derecognized leases | ( |
) | |
| Accretion and other movements | ( |
) | |
| Balance, December 31, 2022 | $ |
1 Includes $
Lease liabilities are reflected in the consolidated balance sheets as follows:
| Dec. 31, 2022 | Dec. 31, 2021 | |||||
| Current | $ | $ | ||||
| Non-current | ||||||
| $ | $ |
41 |
HUDBAY MINERALS INC.
|
Hudbay has entered into leases which expire between 2023 and 2033. The interest rates on leases which were capitalized have interest rates between
There are no restrictions placed on Hudbay by entering into these leases.
The following outlines expenses recognized within the Company's consolidated income statements, relating to leases for which a recognition exemption was applied.
| Year ended December 31, | ||||||
| 2022 | 2021 | |||||
| Short-term leases | $ | $ | ||||
| Low value leases | ||||||
| Variable leases | ||||||
| Total | $ | $ | ||||
18. Long-term debt
Long-term debt is comprised of the following:
| Dec. 31, 2022 | Dec. 31, 2021 | |||||
| Senior unsecured notes (a) | $ | $ | ||||
| Less: Unamortized transaction costs - revolving credit facilities (b) | ( |
) | ( |
) | ||
| $ | $ |
42 |
HUDBAY MINERALS INC.
|
(a) Senior unsecured notes
| Balance, January 1, 2021 | $ | ||
| Addition to Principal, net of $ |
|||
| Principal repayments | ( |
) | |
| Write-down of fair value of embedded derivative (prepayment option) | |||
| Write-down of unamortized transaction costs | |||
| Accretion of transaction costs and premiums | |||
| Balance, December 31, 2021 | $ | ||
| Accretion of transaction costs and premiums | |||
| Balance, December 31, 2022 | $ |
As at December 31, 2022, $
2026 Notes
On March 8, 2021, Hudbay completed an offering of $
Hudbay used the proceeds of the offering, together with available cash on hand, to satisfy and discharge all of its obligations with respect to its then outstanding $
Upon extinguishment of the 2025 Notes, the unamortized transaction costs of $
The early redemption of the 2025 Notes also resulted in a call premium of $
2029 Notes
On September 23, 2020, Hudbay completed an offering of $
Hudbay used the proceeds of the offering to satisfy and discharge all of its obligations with respect to its then outstanding $
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 Copper World deposit, East deposit and Mason project and any newly formed or acquired subsidiaries that primarily hold or may develop non-producing mineral assets that are in the pre-construction phase of development. Hudbay's revolving credit facilities are secured against substantially all of the Company's assets, other than those associated with the Arizona business unit.
43 |
HUDBAY MINERALS INC.
|
(b) Unamortized transaction costs - revolving credit facilities
| Balance, January 1, 2021 | $ | ||
| Accretion of transaction costs | ( |
) | |
| Transaction costs | |||
| Balance, December 31, 2021 | $ | ||
| Accretion of transaction costs | ( |
) | |
| Transaction costs | |||
| Balance, December 31, 2022 1 | $ |
1 Balance, representing deferred transaction costs, is in an asset position.
As at December 31, 2022, the Peru segment had nil in letters of credit issued under the Peru revolving credit facility to support its reclamation obligations and the Manitoba segment had $
Surety bonds
The Arizona segment had $
Other letters of credit
The Peru segment had $
On August 22, 2022, Hudbay closed a C$
44 |
HUDBAY MINERALS INC.
|
19. Deferred revenue
777 Stream Agreement
For the year ended December 31, 2022, the drawdown rates for the 777 stream agreement for gold and silver were C$
As part of the streaming agreement for the 777 mine, Hudbay must repay, with precious metals credits, the stream deposit by August 1, 2052, the expiry date of the agreement. If the stream deposit is not fully repaid with precious metals credits from 777 production by the expiry date, a payment for the remaining amount will be due at the expiry date of the agreement. As the 777 mine has concluded all mining activities following the depletion of reserves and finalized the sales of produced concentrate, Hudbay concluded that a portion of the stream deposit will not be repaid by means of precious metals credits from 777 production. The repayment amount is recorded as a refund liability (note 15), which is and will be discounted at the
Peru Stream Agreement
During the second quarter of 2021, an amendment to the Peru gold stream was signed with Wheaton.
As a result of the contract modification, the transaction price has been redetermined and the discount rate used to compute the significant financing component has been reassessed as of May 1, 2021. Under IFRS 15, the significant financing component is recognized as a financing charge at each reporting period and grosses up the deferred revenue balance to recognize the significant financing element that is inherent in the contract. Discount rates are significantly lower than compared to when the original contract was initiated which has resulted in lower amortized revenues and lower interest accretion expense from the date of modification.
As at December 31, 2021 Hudbay had mined and processed four million tonnes of ore from the Pampacancha deposit and, as such, Hudbay received an additional deposit payment of $
For the year ended December 31, 2022, the drawdown rates for the Peru stream agreement for gold and silver were $
45 |
HUDBAY MINERALS INC.
|
The following table summarizes changes in deferred revenue:
| Balance, January 1, 2021 | $ | ||
| Amortization of deferred revenue | |||
| Liability drawdown | ( |
) | |
| Variable consideration adjustments - prior periods | ( |
) | |
| Accretion on streaming arrangements | |||
| Current year additions | |||
| Variable consideration adjustments - prior periods | |||
| Reclass of refund liability (note 15) | ( |
) | |
| Stream deposit | |||
| Effects of changes in foreign exchange | |||
| Balance, December 31, 2021 | $ | ||
| Amortization of deferred revenue (note 6a) | |||
| Liability drawdown | ( |
) | |
| Variable consideration adjustments - prior periods | ( |
) | |
| Accretion on streaming arrangements (note 6g) | |||
| Current year-to-date additions | |||
| Variable consideration adjustments - prior periods | ( |
) | |
| Effects of changes in foreign exchange | ( |
) | |
| Balance, December 31, 2022 | $ |
Consideration from the Company's stream agreement is considered variable. Gold and silver stream revenue can be subject to cumulative adjustments when the number of ounces to be delivered under the contract changes. As a result of changes in the Company's mineral reserve and resource estimate in the first quarter of 2022 the amortization rate by which deferred revenue is drawn down into income was adjusted and, as required, a current period catch up adjustment was made for all prior period stream revenues since the stream agreement inception date. A variable consideration adjustment was also recorded on September 30, 2022 in Manitoba following a revised forecast for 777 in the third quarter of 2022, which indicated that substantially all of 777's precious metals reserves and inventory levels have been depleted. These variable consideration adjustments resulted in an increase in revenue of $
Deferred revenue is reflected in the consolidated balance sheets as follows:
| Dec. 31, 2022 | Dec. 31, 2021 | |||||
| Current | $ | $ | ||||
| Non-current | ||||||
| $ | $ |
46 |
HUDBAY MINERALS INC.
|
| Decommissioning, restoration and similar liabilities |
Deferred share units3 |
Restricted share units1, 3 |
Performance share units3 |
Other2 | Total | |||||||||||||
| Balance, January 1, 2022 | $ | $ | $ | $ | $ | $ | ||||||||||||
| Net additional provisions made | ||||||||||||||||||
| Disbursements | ( |
) | ( |
) | ( |
) | ( |
) | ( |
) | ||||||||
| Unwinding of discount (note 6g) | ||||||||||||||||||
| Effect of change in discount rate | ( |
) | ( |
) | ||||||||||||||
| Effect of foreign exchange | ( |
) | ( |
) | ( |
) | ( |
) | ( |
) | ( |
) | ||||||
| Effect of change in share price | ( |
) | ( |
) | ( |
) | ( |
) | ||||||||||
| Balance, December 31, 2022 | $ | $ | $ | $ | $ | $ |
1 Certain amounts relating to the Arizona segment are capitalized.
2 Relates primarily to restructuring costs and other non-capital provisions.
3 Please refer to note 25a for further information.
Provisions are reflected in the consolidated balance sheets as follows:
| December 31, 2022 | Decommissioning, restoration and similar liabilities |
Deferred share units |
Restricted share units1 |
Performance share units |
Other | Total | ||||||||||||
| Current (note 14) | $ | $ | $ | $ | $ | $ | ||||||||||||
| Non-current | ||||||||||||||||||
| $ | $ | $ | $ | $ | $ |
| Decommissioning, restoration and similar liabilities |
Deferred share units (note 25a) |
Restricted share units1 (note 25a) |
Performance share units (note 25a) |
Other2 | Total | |||||||||||||
| Balance, January 1, 2021 | $ | $ | $ | $ | $ | $ | ||||||||||||
| Net additional provisions made | ||||||||||||||||||
| Disbursements | ( |
) | ( |
) | ( |
) | ( |
) | ( |
) | ||||||||
| Unwinding of discount (note 6g) | ||||||||||||||||||
| Effect of change in estimate to inflation rates3 | ( |
) | ( |
) | ||||||||||||||
| Effect of change in discount rate | ( |
) | ( |
) | ||||||||||||||
| Effect of foreign exchange | ( |
) | ( |
) | ( |
) | ||||||||||||
| Effect of change in share price | ||||||||||||||||||
| Balance, December 31, 2021 | $ | $ | $ | $ | $ | $ |
1 Certain amounts relating to the Arizona segment are capitalized.
2 Relates primarily to restructuring costs.
3 Represents changes in estimates of inflation rates applied to expected undiscounted cash flows.
47 |
HUDBAY MINERALS INC.
|
| December 31, 2021 | Decommissioning, restoration and similar liabilities |
Deferred share units (note 25a) |
Restricted share units1 (note 25a) |
Performance share units (note 25a) |
Other | Total | ||||||||||||
| Current (note 14) | $ | $ | $ | $ | $ | $ | ||||||||||||
| Non-current | ||||||||||||||||||
| $ | $ | $ | $ | $ | $ |
Decommissioning, restoration and similar liabilities are remeasured at each reporting date to reflect changes in discount rates, which can significantly affect the liabilities.
Decommissioning, restoration and similar liabilities ("DRO")
Hudbay's decommissioning, restoration and similar liabilities relate to the rehabilitation and closure of currently operating mines and metallurgical plants, development-phase properties and closed properties. The amount of the provision has been recorded based on estimates and assumptions that management believes are reasonable; however, actual decommissioning and restoration costs may differ from expectations.
DRO are remeasured at each reporting date to reflect changes in discount rates, inflation, exchange rates, and timing and extent of cash outflows which can significantly affect the liabilities. The amount of this provision has been recorded based on estimates and assumptions that management believes are reasonable; however, actual decommissioning and restoration costs may differ from expectations.
During the year ended December 31, 2022, the Company recorded a non-cash gain of $
During the third quarter of 2021, following a comprehensive update to the Flin Flon closure plan, additional provisions were recognized to reflect higher estimates for closure activities in Flin Flon through to the year 2122. The increase in the environmental reclamation provision resulted in a corresponding increase in the Flin Flon reclamation asset, which is recorded within PP&E. However, in 2021, as the Flin Flon operation was approaching closure, an impairment indicator was identified in the third and fourth quarter of 2021 which led to an impairment loss of $
During the year ended December 31, 2021, additional provisions were recognized mostly as a result of the aforementioned impact in Flin Flon and changes to discount rates.
Hudbay's decommissioning and restoration liabilities relate mainly to its Manitoba operations. Management has placed the remaining Flin Flon assets on care and maintenance. The majority of closure activities will occur once all mining activities in Manitoba are completed. These provisions also reflect estimated post-closure cash flows that extend to the year 2122 for ongoing monitoring and water treatment requirements. Management anticipates most decommissioning and restoration activities for the Constancia operation will occur from 2035 to 2103, which include ongoing monitoring and water treatment requirements.
These estimates have been discounted to their present value at rates ranging from
48 |
HUDBAY MINERALS INC.
|
21. Pension obligations
Hudbay maintains non-contributory and contributory defined benefit pension plans for certain of its employees.
The Company uses a December 31 measurement date for all of its plans. For Hudbay's significant plans, the most recent actuarial valuations filed for funding purposes were performed during 2022 using the latest data available as at December 31, 2021, with the exception of more recently available data related to certain Manitoba plan members impacted by the Flin Flon closure. For these plans, the next actuarial valuation required for funding purposes will be performed during 2023 using the data as of December 31, 2022.
Movements in the present value of the defined benefit obligation in the current and previous years were as follows:
| Year ended | ||||||
| Dec. 31, 2022 | Dec. 31, 2021 | |||||
| Opening defined benefit obligation: | $ | $ | ||||
| Current service costs | ||||||
| Curtailment (note 6b, 6e) | ( |
) | ||||
| Past service cost (note 6b, 6e) | ||||||
| Interest cost | ||||||
| Benefits paid from plan | ( |
) | ( |
) | ||
| Benefits paid from employer | ( |
) | ( |
) | ||
| Participant contributions | ||||||
| Effects of movements in exchange rates | ( |
) | ||||
| Remeasurement actuarial losses/(gains): | ||||||
| Arising from changes in demographic assumptions | ||||||
| Arising from changes in financial assumptions | ( |
) | ( |
) | ||
| Arising from experience adjustments | ( |
) | ||||
| Closing defined benefit obligation | $ | $ | ||||
The defined benefit obligation closing balance, by member group, is as follows:
| Dec. 31, 2022 | Dec. 31, 2021 | |||||
| Active members | $ | $ | ||||
| Deferred members | ||||||
| Retired members | ||||||
| Closing defined benefit obligation | $ | $ |
49 |
HUDBAY MINERALS INC.
|
Movements in the fair value of the pension plan assets in the current and previous years were as follows:
| Year ended | ||||||
| Dec. 31, 2022 | Dec. 31, 2021 | |||||
| Opening fair value of plan assets: | $ | $ | ||||
| Interest income | ||||||
| Remeasurement adjustment: | ||||||
| Loss on plan assets (excluding amounts included in net interest expense) | ( |
) | ( |
) |
||
| Contributions from the employer | ||||||
| Employer direct benefit payments | ||||||
| Contributions from plan participants | ||||||
| Benefit payment from employer | ( |
) | ( |
) | ||
| Administrative expenses paid from plan assets | ( |
) | ( |
) | ||
| Benefits paid | ( |
) | ( |
) | ||
| Effects of changes in foreign exchange rates | ( |
) |
||||
| Closing fair value of plan assets | $ | $ | ||||
The amount included in the consolidated balance sheets arising from the entity's obligation in respect of its defined benefit plans is as follows:
| Dec. 31, 2022 | Dec. 31, 2021 | |||||
| Present value of funded defined benefit obligation | $ | $ | ||||
| Fair value of plan assets | ( |
) | ( |
) | ||
| Present value of unfunded defined benefit obligation | ||||||
| Net liability arising from defined benefit obligation | $ | $ |
Reflected in the consolidated balance sheets as follows:
| Dec. 31, 2022 | Dec. 31, 2021 | |||||
| Pension obligation - current (note 14) | $ | $ | ||||
| Pension obligation - non-current | ||||||
| Total pension obligation | $ | $ |
50 |
HUDBAY MINERALS INC.
|
Pension expense is as follows:
| Dec. 31, 2022 | Dec. 31, 2021 | |||||
| Service costs: | ||||||
| Current service cost | $ | $ | ||||
| (Curtailment) / past service cost | ( |
) |
||||
| Total service cost | ||||||
| Net interest expense | ||||||
| Administration cost | ||||||
| Defined benefit pension expense | $ | $ | ||||
| Defined contribution pension expense | $ | $ |
Remeasurement on the net defined benefit liability:
| Dec. 31, 2022 | Dec. 31, 2021 | |||||
| Loss on plan assets (excluding amounts included in net interest expense) | $ | $ | ||||
| Actuarial losses arising from changes in demographic assumptions | ||||||
| Actuarial gains arising from changes in financial assumptions | ( |
) | ( |
) |
||
| Actuarial losses (gains) arising from experience adjustments | ( |
) | ||||
| Defined benefit gain related to remeasurement | $ | ( |
) | $ | ( |
) |
| Total pension cost | $ | $ | ( |
) |
Pension amounts recognized include those directly related to production of inventory; such amounts are recognized initially as costs of inventory and are expensed in the consolidated income statements within cost of sales upon sale of the inventory.
The current service cost, the interest cost and administration cost for the year are included in the employee benefits expense. The remeasurement of the net defined benefit liability is included in OCI.
51 |
HUDBAY MINERALS INC.
|
The defined benefit pension plans typically expose Hudbay to actuarial risks such as: investment risk, interest rate risk, longevity risk and salary risk.
|
Investment risk |
The present value of the liabilities for the defined benefit plans is calculated using a discount rate determined by reference to high quality corporate bond yields; if the return on plan assets is below this rate, it will create a plan deficit. Hudbay's primary quantitative investment objectives are maximization of the long term real rate of return, subject to an acceptable degree of investment risk and preservation of principal. Risk tolerance is established through consideration of several factors including past performance, current market condition and the funded status of the plan. |
|
Interest risk |
A decrease in the bond interest rate will increase the pension plan liabilities; however, this will be partially offset by an increase in the return on the plan's debt investments. |
|
Longevity risk |
The present value of the defined benefit plans liabilities is calculated by reference to the best estimate of the mortality of plan participants both during and after their employment. An increase in the life expectancy of the plan participants will increase the pension plans liabilities. |
|
Salary risk |
The present value of the defined benefit plans liabilities for some of the pension plans is calculated by reference to the future salaries of plan participants. As such, an increase in the salary of the plan participants will increase the plans' liabilities. |
The principal assumptions used for the purposes of the actuarial valuations were as follows:
| 2022 | 2021 | |
| Defined benefit cost: | ||
| Discount rate - benefit obligations | ||
| Discount rate - service cost | ||
| Expected rate of salary increase1 | ||
| Average longevity at retirement age for current pensioners (years)2 : | ||
| Males | ||
| Females | ||
| Defined benefit obligation: | ||
| Discount rate | ||
| Expected rate of salary increase1 | ||
| Average longevity at retirement age for current pensioners (years)2 : | ||
| Males | ||
| Females | ||
| Average longevity at retirement age for current employees (future pensioners) (years)2 : | ||
| Males | ||
| Females |
| 1 Plus merit and promotional scale based on member's age | ||
| 2 Revised retirement pension plan only - CPM2014 Priv with MI-2017 projection scale with loading of 1.25 and 1.15 for males and females |
52 |
HUDBAY MINERALS INC.
|
Hudbay reviews the assumptions used to measure pension costs (including the discount rate) on an annual basis. Economic and market conditions at the measurement date affect these assumptions from year to year. In determining the discount rate, Hudbay considers the duration of the pension plan liabilities.
Significant actuarial assumptions for the determination of the defined benefit obligation are discount rate, expected salary increase and mortality. The sensitivity analysis below has been determined based on reasonably possible changes of the respective assumptions occurring at the end of the reporting periods, while holding other assumptions constant:
- If the discount rate is
- If the expected salary growth increases (decreases) by
- If the life expectancy increases (decreases) by
The sensitivity analysis presented above may not be representative of the actual change in the defined benefit obligation as it is unlikely that the change in assumptions would occur in isolation of one another as some of the assumptions may be correlated.
Furthermore, in presenting the above sensitivity analysis, the present value of the defined benefit obligation has been calculated using the projected unit credit method at the end of the reporting period, which is the same as that applied in calculating the defined benefit obligation liability recognized in the consolidated balance sheets.
The Company's main pension plans are registered federally with the Office of the Superintendent of Financial Institution and with the Canada Revenue Agency. The registered pension plans are governed in accordance with the Pension Benefits Standards Act and the Income Tax Act. The sponsor contributes the amount needed to maintain adequate funding as dictated by the prevailing regulations.
Expected employer contribution to the pension plans for the fiscal year ending December 31, 2022 is $
The average duration of the pension obligation at December 31, 2022 is
- Active members:
- Deferred members:
- Retired members:
Asset-Liability-Matching studies are performed periodically to analyze the investment policies in terms of risk and-return profiles.
The pension plans do not invest directly in either securities or property/real estate of the Company.
With the exception of fixed income investments and certain equity instruments, the plan assets are actively managed by investment managers, with the goal of attaining returns that potentially outperform passively managed investments. Within appropriate limits, the actual composition of the invested funds may vary from the prescribed investment mix.
53 |
HUDBAY MINERALS INC.
|
The following is a summary of the fair value classification levels for investment:
| December 31, 2022 | Level 1 | Level 2 | Level 3 | Total | ||||||||
| Investments: | ||||||||||||
| Money market instruments | $ | $ | $ | $ | ||||||||
| Pooled equity funds | ||||||||||||
| Pooled fixed income funds | ||||||||||||
| Alternative investment funds | ||||||||||||
| Balanced funds | ||||||||||||
| $ | $ | $ | $ |
| December 31, 2021 | Level 1 | Level 2 | Level 3 | Total | ||||||||
| Investments: | ||||||||||||
| Money market instruments | $ | $ | $ | $ | ||||||||
| Pooled equity funds | ||||||||||||
| Pooled fixed income funds | ||||||||||||
| Alternative investment funds | ||||||||||||
| Balanced funds | ||||||||||||
| $ | $ | $ | $ |
54 |
HUDBAY MINERALS INC.
|
22. Other employee benefits
Hudbay sponsors both other long-term employee benefit plans and non-pension post-employment benefits plans and uses a December 31 measurement date. These obligations relate mainly to commitments for post-retirement health benefits. Information about Hudbay's post-employment and other long-term employee benefits is as follows:
Movements in the present value of the defined benefit obligation in the current and previous years were:
| Year ended | ||||||
| Dec. 31, 2022 | Dec. 31, 2021 | |||||
| Opening defined benefit obligation | $ | $ | ||||
| Current service cost1 | ||||||
| Past service cost | ||||||
| Curtailment (note 6e) | ( |
) | ||||
| Interest cost | ||||||
| Attribution period changes (note 6e) | ( |
) | ||||
| Effects of movements in exchange rates | ( |
) | ||||
| Remeasurement actuarial losses/(gains): | ||||||
| Arising from changes in demographic assumptions | ||||||
| Arising from changes in financial assumptions | ( |
) | ( |
) | ||
| Arising from experience adjustments | ( |
) | ( |
) | ||
| Benefits paid | ( |
) | ( |
) | ||
| Closing defined benefit obligation | $ | $ | ||||
1 Includes remeasurement of other long term employee benefits
The defined benefit obligation closing balance, by group member, is as follows:
| Dec. 31, 2022 | Dec. 31, 2021 | |||||
| Active members | $ | $ | ||||
| Inactive members | ||||||
| Closing defined benefit obligation | $ | $ |
Movements in the fair value of defined benefit amounts in the current and previous years were as follows:
| Dec. 31, 2022 | Dec. 31, 2021 | |||||
| Employer contributions | $ | $ | ||||
| Benefits paid | ( |
) | ( |
) | ||
| Closing fair value of assets | $ | $ |
The non-pension employee benefit plan obligations are unfunded.
55 |
HUDBAY MINERALS INC.
|
Reconciliation of assets and liabilities recognized in the consolidated balance sheets:
| Dec. 31, 2022 | Dec. 31, 2021 | |||||
| Unfunded benefit obligation | $ | $ | ||||
| Vacation accrual and other - non-current | ||||||
| Net liability | $ | $ |
Reflected in the consolidated balance sheets as follows:
| Dec. 31, 2022 | Dec. 31, 2021 | |||||
| Other employee benefits liability - current (note 14) | $ | $ | ||||
| Other employee benefits liability - non-current | ||||||
| Net liability | $ | $ |
Other employee future benefit expense includes the following:
| Dec. 31, 2022 | Dec. 31, 2021 | |||||
| Current service cost 1 | $ | $ | ||||
| Net interest cost | ||||||
| Components recognized in consolidated income statements | $ | $ |
| 1 Includes remeasurement of other long term employee benefit and curtailment | ||||||
| Dec. 31, 2022 | Dec. 31, 2021 | |||||
| Remeasurement on the net defined benefit liability: | ||||||
| Actuarial losses arising from changes in demographic assumptions | $ | $ | ||||
| Actuarial gains arising from changes in financial assumptions | ( |
) | ( |
) | ||
| Actuarial gains arising from changes experience adjustments | ( |
) | ( |
) | ||
| Components recognized in statements of comprehensive income | $ | ( |
) | $ | ( |
) |
| Total other employee future benefit cost | $ | $ |
Other employee benefit amounts recognized include those directly related to production of inventory; such amounts are recognized initially as costs of inventory and are expensed in the consolidated income statements within cost of sales upon sale of the inventory.
56 |
HUDBAY MINERALS INC.
|
| Dec. 31, 2022 | Dec. 31, 2021 | |
| Defined benefit cost: | ||
| Discount rate | ||
| Initial weighted average health care trend rate | ||
| Ultimate weighted average health care trend rate | ||
| Average longevity at retirement age for current pensioners (years)1 : | ||
| Males | ||
| Females |
| Dec. 31, 2022 | Dec. 31, 2021 | |
| Defined benefit obligation: | ||
| Discount rate | ||
| Initial weighted average health care trend rate | ||
| Ultimate weighted average health care trend rate | ||
| Average longevity at retirement age for current pensioners (years)1 : | ||
| Males | ||
| Females | ||
| Average longevity at retirement age for current employees (future pensioners) (years)1 : | ||
| Males | ||
| Females |
1 CPM2014 Priv with CPM-B projection scale
Hudbay reviews the assumptions used to measure other employee benefit costs (including the discount rate) on an annual basis.
The other employee benefit costs typically expose Hudbay to actuarial risks such as: interest rate risk, health care cost inflation risk and longevity risk.
| Interest risk | A decrease in the bond interest rate will increase the plan liabilities. |
| Health care cost inflation risk | The majority of the plan's benefit obligations are linked to health care cost inflation and higher inflation will lead to higher liabilities. |
| Longevity risk | The majority of the plans' benefit liability is calculated by reference to the best estimate of the mortality of plan participants both during and after their employment. An increase in the life expectancy of the plan participants will increase the plans' liabilities. This is particularly significant for benefits subject to health care cost inflation where increases in inflation result in higher sensitivity to changes in life expectancy. |
57 |
HUDBAY MINERALS INC.
|
The sensitivity analyses below have been determined based on reasonably possible changes of the respective assumptions occurring at the end of the reporting period, while holding other assumptions constant:
- If the discount rate is
- If the health care cost assumption increases (decreases) by
- If the life expectancy increases (decreases) by
The average duration of the non-pension post-employment obligation at December 31, 2022 is
This number can be broken down as follows:
- Active members:
- Inactive members:
23. Income and mining taxes
(a) Tax recoveries:
The tax expense (recoveries) is applicable as follows:
| Year ended December 31, |
||||||
| 2022 | 2021 | |||||
| Current: | ||||||
| Income taxes | $ | $ | ||||
| Mining taxes | ||||||
| Adjustments in respect of prior years | ( |
) | ||||
| Deferred: | ||||||
| Income tax expense (recoveries) - origination, revaluation and/or reversal of temporary differences | ( |
) | ||||
| Mining tax expense - origination, revaluation and/or reversal of temporary difference | ||||||
| Adjustments in respect of prior years | ( |
) | ||||
| ( |
) | |||||
| $ | $ | |||||
Adjustments in respect of prior years refers to amounts changing due to the filing of tax returns and assessments from government authorities as well as any change identified that would result in a difference to our current or deferred tax balances as reported in the prior fiscal year end.
58 |
HUDBAY MINERALS INC.
|
(b) Deferred tax assets and liabilities as represented on the consolidated balance sheets:
| Dec. 31, 2022 | Dec. 31, 2021 | |||||
| Deferred income tax asset | $ | $ | ||||
| Deferred income tax liability | ( |
) | ( |
) | ||
| Deferred mining tax liability | ( |
) | ( |
) | ||
| ( |
) | ( |
) | |||
| Net deferred tax liability balance, end of year | $ | ( |
) | $ | ( |
) |
(c) Changes in deferred tax assets and liabilities:
| Year ended Dec. 31, 2022 |
Year ended Dec. 31, 2021 |
|||||
| Net deferred tax liability balance, beginning of year | $ | ( |
) | $ | ( |
) |
| Deferred tax (expense) recovery (note 23a) | ( |
) | ||||
| OCI transactions | ( |
) | ( |
) | ||
| Foreign currency translation on the deferred tax liability | ||||||
| Net deferred tax liability balance, end of year | $ | ( |
) | $ | ( |
) |
59 |
HUDBAY MINERALS INC.
|
(d) Reconciliation to statutory tax rate:
As a result of its mining operations, the Company is subject to both income and mining taxes. Generally, most expenditures incurred are deductible in computing income tax, whereas mining tax legislation, although based on a measure of profitability from carrying on mining operations, is more restrictive in respect of the deductions permitted in computing income subject to mining tax. These restrictions include costs unrelated to mining operations as well as deductions for financing expenses, such as interest and royalties. In addition, income unrelated to carrying on mining operations is not subject to mining tax.
A reconciliation between tax expense and the product of accounting profit multiplied by the Company's statutory income tax rate for the years ended December 31, 2022 and 2021 is as follows:
| Year ended December 31, | ||||||
| 2022 | 2021 | |||||
| Statutory tax rate | ||||||
| Tax expense (recovery) at statutory rate | $ | $ | ( |
) | ||
| Effect of: | ||||||
| Deductions related to mining taxes | ( |
) | ( |
) | ||
| Adjusted income taxes | ( |
) | ||||
| Mining tax expense | ||||||
| ( |
) | |||||
| Permanent differences related to: | ||||||
| Capital items | ( |
) | ||||
| Other income tax permanent differences | ||||||
| Impact of remeasurement on decommissioning liability | ( |
) | ||||
| Temporary income tax differences not recognized | ( |
) | ||||
| Recognition of previously unrecognized deferred tax assets | ( |
) | ||||
| Impact related to differences in tax rates in foreign operations | ||||||
| Impact of changes to statutory tax rates | ( |
) | ||||
| Foreign exchange on non-monetary items | ||||||
| Impact related to tax assessments and tax return amendments | ( |
) | ||||
| Tax expense | $ | $ | ||||
60 |
HUDBAY MINERALS INC.
|
(e) Income tax effect of temporary differences - recognized:
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2022 and 2021 are as follows:
| Balance sheet | ||||||
| Dec. 31, 2022 | Dec. 31, 2021 | |||||
| Deferred income tax (liability) asset | ||||||
| Property, plant and equipment | $ | ( |
) | $ | ( |
) |
| Pension obligation | ||||||
| Other employee benefits | ||||||
| Decommissioning and restoration provision | ||||||
| Non-capital losses | ||||||
| Share issuance and debt cost | ||||||
| Deferred revenue | ||||||
| Other | ( |
) | ||||
| Deferred income tax asset | ||||||
| Deferred income tax liability (asset) | ||||||
| Property, plant and equipment | ||||||
| Other employee benefits | ( |
) | ( |
) | ||
| Decommissioning and restoration provision | ( |
) | ( |
) | ||
| Non-capital losses | ( |
) | ( |
) | ||
| Other | ( |
) | ||||
| Deferred income tax liability | ||||||
| Deferred income tax liability | $ | ( |
) | $ | ( |
) |
The above reconciling items are disclosed at the tax rates that apply in the jurisdiction where they have arisen.
(f) Income tax temporary differences - not recognized:
61 |
HUDBAY MINERALS INC.
|
(g) Mining tax effect of temporary differences:
The tax effects of temporary differences that give rise to significant portions of the deferred mining tax assets and liabilities at December 31, 2022 and 2021 are as follows:
| Canada | Dec. 31, 2022 | Dec. 31, 2021 | ||||
| Property, plant and equipment | $ | ( |
) | $ | ( |
) |
| Peru | Dec. 31, 2022 | Dec. 31, 2021 | ||||
| Property, plant and equipment | $ | ( |
) | $ | ( |
) |
For the year ended December 31, 2022, Hudbay had unrecognized deferred mining tax assets of approximately $
(h) Unrecognized taxable temporary differences associated with investments:
There are no taxable temporary differences associated with investments in subsidiaries, associates and joint ventures, for which a deferred tax liability has not been recognized.
(i) Taxes receivable/payable:
The timing of payments results in significant variances in period-to-period comparisons of the tax receivable and tax payable balances.
(j) Other disclosure:
The tax rules and regulations applicable to mining companies are highly complex and subject to interpretation. The Company may be subject in the future to a review of its historic income and other tax filings and, in connection with such reviews, disputes can arise with tax authorities over the interpretation or application of certain tax rules and regulations in respect of the Company's business. These reviews may alter the timing or amount of taxable income or deductions. The amount ultimately reassessed upon resolution of issues raised may differ from the amount accrued.
62 |
HUDBAY MINERALS INC.
|
24. Share capital
(a) Preference shares:
Authorized: Unlimited preference shares without par value.
Issued and fully paid: Nil.
(b) Common shares:
Authorized: Unlimited common shares without par value.
Issued and fully paid:
| Year ended Dec. 31, 2022 |
Year ended Dec. 31, 2021 |
|||||||||||
| Common shares | Amount | Common shares | Amount | |||||||||
| Balance, beginning of year | $ | $ | ||||||||||
| Exercise of options | ||||||||||||
| Balance, end of year | $ | $ | ||||||||||
During the year ended December 31, 2022, the Company declared two semi-annual dividends of C$
During the year ended December 31, 2021, the Company declared two semi-annual dividends of C$
25. Share-based compensation
(a) Cash-settled share-based compensation:
Hudbay has three cash-settled share-based compensation plans, as described below.
Deferred Share Units (DSU)
At December 31, 2022, the carrying amount and the intrinsic value of the outstanding liability related to the DSU plan was $
| Year ended | ||||||
| Dec. 31, 2022 | Dec. 31, 2021 | |||||
| Granted during the year: | ||||||
| Number of units | ||||||
| Weighted average price (C$/unit) | $ | $ | ||||
| Expenses recognized during the year1 (notes 6d) | $ | $ | ||||
| Payments made during the year (note 20) | $ | $ | ||||
1 This expense relates to the grant of DSUs, as well as mark-to-market adjustments, and is presented within selling and administrative expenses on the consolidated income statements.
63 |
HUDBAY MINERALS INC.
|
Restricted Share Units (RSU)
RSUs granted under the LTEP Plan may be settled in the form of Hudbay common shares or, at the option of the Company, the cash equivalent based on the market price of the common shares as of the vesting date. RSUs may also be granted under Hudbay's Share Unit Plan, however; the RSUs granted under the Share Unit Plan may only be settled in cash. Hudbay has historically settled all RSUs in cash. The Company has determined that the appropriate accounting treatment is to classify the RSUs as cash settled transactions.
At December 31, 2022, the carrying amount of the outstanding liability related to the RSU plan was $
| Year ended | ||||||
| Dec. 31, 2022 | Dec. 31, 2021 | |||||
| Number of units, beginning of year | ||||||
| Number of units granted during the year | ||||||
| Credits for dividends | ||||||
| Number of units forfeited during the year | ( |
) | ( |
) | ||
| Number of units vested | ( |
) | ( |
) | ||
| Number of units, end of year 1 | ||||||
| Weighted average price - granted (C$/unit) | $ | $ | ||||
| Expenses recognized during the year2 (note 6d) | $ | $ | ||||
| Payments made during the year (note 20) | $ | $ | ||||
1 Includes
2 This net expense reflects recognition of RSU expense over the service period, as well as mark-to-market adjustments, and is presented mainly within cost of sales and selling and administrative expenses. Certain amounts related to the Arizona segment are capitalized.
64 |
HUDBAY MINERALS INC.
|
Performance Share Units (PSU)
PSUs granted under the LTEP Plan may be settled in the form of Hudbay common shares or, at the option of the Company, the cash equivalent based on the market price of the common shares as of the vesting date. Hudbay has historically settled similar share-based compensation units in cash. The Company has determined that the appropriate accounting treatment is to classify the PSUs as cash settled transactions. The PSUs contain a performance based multiplier element which will be computed upon vesting.
At December 31, 2022, the carrying amount of the outstanding liability related to PSU plan was $
| Year ended | ||||||
| Dec. 31, 2022 | Dec. 31, 2021 | |||||
| Number of units, beginning of year | ||||||
| Number of units granted during the year | ||||||
| Credits for dividends | ||||||
| Number of units forfeited during the year | ( |
) | ||||
| Number of units vested | ( |
) | ||||
| Number of units, end of year | ||||||
| Weighted average price - granted (C$/unit) | $ | $ | ||||
| (Recovery) expense recognized during the year (note 6d) | $ | ( |
) | $ | ||
| Payments made during the year (note 20) | $ | $ | ||||
(b) Equity-settled share-based compensation - stock options:
During the year ended December 31, 2022, the Company granted
The following table outlines the changes in the number of stock options outstanding:
| Year ended | Year ended | |||||||||||
| Dec. 31, 2022 | Dec. 31, 2021 | |||||||||||
| Number of shares subject to option |
Weighted- average exercise price C$ |
Number of shares subject to option |
Weighted average exercise price C$ |
|||||||||
| Balance, beginning of year | $ | $ | ||||||||||
| Number of units granted during the year | $ | $ | ||||||||||
| Exercised | ( |
) | $ | ( |
) | $ | ||||||
| Forfeited | ( |
) | $ | ( |
) | $ | ||||||
| Balance, end of year | $ | $ | ||||||||||
65 |
HUDBAY MINERALS INC.
|
The following table presents the weighted average fair value assumptions used in the Black-Scholes valuation of these options:
| For options granted during the year ended | Dec. 31, 2022 | Dec. 31, 2021 | ||||
| Weighted average share price at grant date (CAD) | $ | $ | ||||
| Risk-free rate | ||||||
| Expected dividend yield | ||||||
| Expected stock price volatility (based on historical volatility) | ||||||
| Expected life of option (months) | ||||||
| Weighted average per share fair value of stock options granted (CAD) | $ | $ |
The following table outlines stock options outstanding and exercisable:
| Dec. 31, 2022 | |||||||||||||||
| Range of exercise prices C$ |
Number of options outstanding |
Weighted average remaining contractual life (years) |
Weighted average exercise price C$ |
Number of options exercisable |
Weighted average share price at exercise date C$ |
||||||||||
| $ |
$ | $ | |||||||||||||
| $ |
$ | $ | |||||||||||||
| $ |
$ | $ | |||||||||||||
| $ |
$ | $ | |||||||||||||
| Dec. 31, 2021 | |||||||||||||||
| Range of exercise prices C$ |
Number of options outstanding |
Weighted average remaining contractual life (years) |
Weighted average exercise price C$ |
Number of options exercisable |
Weighted average share price at exercise date C$ |
||||||||||
| $ |
$ | $ | |||||||||||||
| $ |
$ | $ | |||||||||||||
Hudbay estimates expected life of options and expected volatility based on historical data, which may differ from actual outcomes.
66 |
HUDBAY MINERALS INC.
|
26. Earnings per share
| Year ended December 31, | ||||||
| 2022 | 2021 | |||||
| Weighted average common shares outstanding | ||||||
| Basic | ||||||
| Plus net incremental shares from: | ||||||
| Assumed conversion: stock options | ||||||
| Diluted weighted average common shares outstanding | ||||||
For periods where Hudbay records a loss, Hudbay calculates diluted loss per share using the basic weighted average number of shares. If the diluted weighted average number of shares were used, the result would be a reduction in the loss, which would be anti-dilutive.
The determination of the diluted weighted-average number of common shares excludes the impact of
27. Capital management
The Company's definition of capital includes total equity and long-term debt. Hudbay's long-term debt balance as at December 31, 2022 was $
The Company's objectives when managing capital are to maintain a strong capital base in order to:
- Advance Hudbay's corporate strategies to create long-term value for its stakeholders; and,
- Sustain Hudbay's operations and growth throughout metals and materials cycles.
Hudbay monitors its capital and capital structure on an ongoing basis to ensure they are sufficient to achieve the Company's short-term and long-term strategic objectives in a capital intensive industry. Hudbay faces several risks, including volatile metals prices, inflationary pressures on costs, access to capital, and risk of delays and cost escalation associated with major capital projects. The Company continually assesses the adequacy of its capital structure to ensure its objectives are met. Hudbay monitors its cash, which were $
67 |
HUDBAY MINERALS INC.
|
28. Financial instruments
(a) Fair value and carrying value of financial instruments:
The following presents the fair value ("FV") and carrying value ("CV") of Hudbay's financial instruments and non-financial derivatives:
| Dec. 31, 2022 | Dec. 31, 2021 | |||||||||||
| FV | CV | FV | CV | |||||||||
| Financial assets at amortized cost | ||||||||||||
| Cash1 | $ | $ | $ | $ | ||||||||
| Restricted cash1 | ||||||||||||
| Fair value through profit or loss | ||||||||||||
| Trade and other receivables 1, 2, 3 | ||||||||||||
| Non-hedge derivative assets 4 | ||||||||||||
| Investments 5 | ||||||||||||
| Total financial assets | $ | $ | $ | $ | ||||||||
| Financial liabilities at amortized cost | ||||||||||||
| Trade and other payables1, 2 | ||||||||||||
| Deferred Rosemont acquisition consideration 8 | ||||||||||||
| Agreements with communities 6 | ||||||||||||
| Wheaton refund liability10 | ||||||||||||
| Senior unsecured notes 7 | ||||||||||||
| Fair value through profit or loss | ||||||||||||
| Gold prepayment liability 9 | ||||||||||||
| Non-hedge derivative liabilities 4 | ||||||||||||
| Total financial liabilities | $ | $ | $ | $ | ||||||||
1 Cash, 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 tax and other statutory amounts.
3 Trade and other receivables contain receivables including provisionally priced receivables classified as FVTPL and various other items at amortized cost. The fair value of provisionally priced receivables is determined using forward metals prices which is a level 2 valuation method.
4 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.
5 All investments are carried at their fair value, which is determined using quoted market bid prices in active markets for listed shares.
6 These financial liabilities relate to agreements with communities near the Constancia project in Peru (note 15). Fair values have been determined using a discounted cash flow analysis based on expected cash flows and a credit adjusted discount rate.
7 Fair value of the senior unsecured notes (note 18) has been determined using the quoted market price at period end.
8 Discounted value based on a risk adjusted discount rate.
9 The gold prepayment liability (note 16) is designated as fair value through profit or loss under the fair value option. Gains and losses related to the Company's own credit risk have been recorded at fair value through other comprehensive income. The fair value adjustment recorded in other comprehensive income for the year ended December 31, 2022 was a gain of $
10 Discounted value based on a market rate at inception of the applicable Wheaton contract for carrying value (note 19) and current market rate at period end for fair value.
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Fair value hierarchy
The table below provides an analysis by valuation method of financial instruments that are measured at fair value subsequent to recognition as well as financial instruments not measured at fair value but for which a fair value is disclosed. 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, 2022 | Level 1 | Level 2 | Level 3 | Total | ||||||||
| Financial assets measured at fair value | ||||||||||||
| Financial assets at FVTPL: | ||||||||||||
| Non-hedge derivatives | $ | $ | $ | $ | ||||||||
| Investments | ||||||||||||
| $ | $ | $ | $ | |||||||||
| Financial liabilities measured at fair value | ||||||||||||
| Financial liabilities at FVTPL: | ||||||||||||
| Non-hedge derivatives | $ | $ | $ | $ | ||||||||
| Gold prepayment liability | ||||||||||||
| Financial liabilities at amortized cost: | ||||||||||||
| Agreements with communities | ||||||||||||
| Wheaton refund liability | ||||||||||||
| Senior unsecured notes | ||||||||||||
| $ | $ | $ | $ |
| December 31, 2021 | Level 1 | Level 2 | Level 3 | Total | ||||||||
| Financial assets measured at fair value | ||||||||||||
| Financial assets at FVTPL: | ||||||||||||
| Non-hedge derivatives | $ | $ | $ | $ | ||||||||
| Investments | ||||||||||||
| $ | $ | $ | $ | |||||||||
| Financial liabilities measured at fair value | ||||||||||||
| Financial liabilities at FVTPL: | ||||||||||||
| Non-hedge derivatives | $ | $ | $ | $ | ||||||||
| Gold prepayment liability | ||||||||||||
| Financial liabilities at amortized cost: | ||||||||||||
| Agreements with communities | ||||||||||||
| Wheaton refund liability | ||||||||||||
| Senior unsecured notes | ||||||||||||
| $ | $ | $ | $ |
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The Company'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, 2022 and December 31, 2021, Hudbay did not make any such transfers.
The following valuation techniques are used for instruments categorized in Levels 2 and 3:
- Non-hedge derivatives (Level 2) - These contracts have been fair valued using observable forward commodity prices corresponding to the maturity of the contract.
- Gold prepayment liability (Level 2) - This contract have been fair valued using observable gold forward prices corresponding to the delivery date of gold ounces in the contract along with an estimate of credit risk for similar instruments.
- Agreements with communities (Level 3) - These contracts have been fair valued using an applicable credit-risk adjusted discount rate and foreign exchange rates.
- Wheaton refund liability (Level 3) - This liability has been fair valued using an applicable credit-risk adjusted discount rate.
Reasonable changes to inputs of financial instruments categorized as Level 3 were insignificant.
(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, 2022, Hudbay had
Zinc fixed for floating swaps
Hudbay enters into zinc fixed for floating swaps in order to manage the risk associated with provisional pricing terms in zinc concentrate sales agreements. As at December 31, 2022, Hudbay had
Transactions involving derivatives are with large multi-national financial institutions that Hudbay believes to be credit worthy.
Non-hedge derivative zinc contracts
In the past, Hudbay entered into future dated fixed price sales contracts with refined zinc customers and, to ensure that the Company continued to receive a floating or unhedged realized zinc price, Hudbay entered into forward zinc purchase contracts that effectively offset the fixed price sales contracts. Hudbay held no forward zinc purchase contracts as at December 31, 2022. As at December 31, 2021, Hudbay held
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(c) Provisionally priced receivables
Changes in fair value of provisionally priced receivables
Hudbay 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 inventory or 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 December 31, 2022 and 2021, Hudbay's net position consisted of contracts awaiting final pricing which are as indicated below:
| Metal in concentrate |
Sales awaiting final pricing | Average YTD price ($/unit) | |||||||||||
| Unit | Dec. 31, 2022 | Dec. 31, 2021 | Dec. 31, 2022 | Dec. 31, 2021 | |||||||||
| Copper | pounds (in thousands) |
||||||||||||
| Gold | troy ounces | ||||||||||||
| Silver | troy ounces | ||||||||||||
| Zinc Concentrate |
pounds (in thousands) |
||||||||||||
The aggregate fair value of provisionally priced receivables within the copper and zinc concentrate and refined zinc sales contracts at December 31, 2022, was an asset position of $
(d) Other financial liabilities
Gold prepayment liability
The gold prepayment liability (note 16) requires settlement by physical delivery of gold ounces or equivalent gold credits. The fair value of the financial liability at December 31, 2022 was a liability of $
(e) Financial risk management
Hudbay's financial risk management activities are governed by Board-approved policies addressing risk identification, hedging authorization procedures and limits and reporting. The Company'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 Hudbay. From time to time, the Company 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. Hudbay does not use derivative financial instruments for trading or speculation purposes. The following is a discussion of the Company's risk exposures.
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(i) Market risk
Market risk is the risk that changes in market prices, including foreign exchange rates, commodity prices, share prices, and interest rates will cause fluctuations in the fair value or future cash flows of a financial instrument.
Foreign currency risk
Hudbay'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 Company'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 Hudbay's profit.
- Translation of foreign currency denominated cash, 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, trade and other receivables and other financial liabilities. The Peru segment's primary financial instrument foreign currency exposure is on Peruvian soles cash, trade and other payables and other financial liabilities.
The Company's exposure to foreign currency risk was as follows based on notional financial instrument amounts stated in US equivalent dollars:
| Dec. 31, 2022 | Dec. 31, 2021 | |||||||||||||||||
| CAD1 | USD2 | PEN3 | CAD1 | USD2 | PEN3 | |||||||||||||
| Cash | $ | $ | $ | $ | $ | $ | ||||||||||||
| Trade and other receivables | ||||||||||||||||||
| Other financial assets | ||||||||||||||||||
| Trade and other payables | ( |
) | ( |
) | ( |
) | ( |
) | ( |
) | ( |
) | ||||||
| Other financial liabilities | ( |
) | ( |
) | ||||||||||||||
| $ | $ | $ | ( |
) | $ | $ | $ | ( |
) | |||||||||
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, 2022 and does not reflect the overall effect that changes in market variables would have on the Company's operating results.
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HUDBAY MINERALS INC.
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| December 31, 2022 | Change of: | Would have changed 2022 after-tax profit by: |
|||||
| USD/CAD exchange rate1 | + |
$ | million | ||||
| USD/CAD exchange rate1 | - |
( |
) | million | |||
| USD/PEN exchange rate2 | + |
million | |||||
| USD/PEN exchange rate2 | - |
( |
) | million | |||
| December 31, 2021 | Change of: | Would have changed 2021 after-tax profit by: |
|||||
| USD/CAD exchange rate1 | + |
$ | million | ||||
| USD/CAD exchange rate1 | - |
( |
) | million | |||
| USD/PEN exchange rate2 | + |
million | |||||
| USD/PEN exchange rate2 | - |
( |
) | million | |||
1 Effect on profit due to foreign currency remeasurements of balances denominated in a currency different from a Hudbay subsidiary's functional currency.
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 Company produces and sells, such as copper, zinc, gold and silver. From time to time, Hudbay 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, 2022 and does not reflect the overall effect that changes in market variables would have on the Company's operating results.
| December 31, 2022 | Change of: | Would have changed 2022 after-tax profit by: |
|||||||||
| Copper prices ($/lb)1 |
+ |
$ |
$ | ( |
) |
million | |||||
| Copper prices ($/lb)1 |
- |
$ |
million | ||||||||
| Zinc prices ($/lb)2 |
+ |
$ |
million | ||||||||
| Zinc prices ($/lb)2 |
- |
$ |
million | ||||||||
| December 31, 2021 | Change of: | Would have changed 2021 after-tax profit by: |
|||||||||
| Copper prices ($/lb)1 |
+ |
$ |
$ | million | |||||||
| Copper prices ($/lb)1 |
- |
$ |
( |
) |
million | ||||||
| Zinc prices ($/lb)2 |
+ |
$ |
million | ||||||||
| Zinc prices ($/lb)2 |
- |
$ |
( |
) | million | ||||||
1 Effect on profit due to provisional pricing derivatives (note 28c) and copper fixed for floating swaps (note 28b).
2 Effect on profit due to provisional pricing derivatives (note 28c), non-hedge zinc derivatives and zinc fixed for floating swaps (note 28b).
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HUDBAY MINERALS INC.
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Share price risk
Hudbay is exposed to market risk from share prices of the Company's investments in listed Canadian metals and mining entities. 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 Hudbay's positions. The following sensitivity analysis of share price risk relates solely to financial instruments 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, 2022 and does not reflect the overall effect that changes in market variables would have on the Company's finance expenses.
| December 31, 2022 | Change of: | Would have changed 2022 after-tax profit by: |
||||||||
| Share prices |
+ |
$ | million | |||||||
| Share prices |
- |
|
( |
) | million | |||||
| December 31, 2021 | Change of: | Would have changed 2021 after-tax profit by: |
||||||||
| Share prices |
+ |
|
$ | million | ||||||
| Share prices |
- |
( |
) | million | ||||||
Interest rate risk
Hudbay is exposed to the following interest rate risks:
- cash flow interest rate risk on its cash and cash equivalents; and,
- interest rate risk on its senior secured revolving credit facilities.
The only relevant risks at December 31, 2022 is interest rate risk on cash. The senior secured revolving credit facilities remain undrawn as at December 31, 2022. Neither the 2026 Notes nor the 2029 Notes contain embedded derivatives that require bifurcation from the host contract.
This analysis only quantifies the impact of the interest rate risk on cash based on balances held as at December 31, 2022 and 2021 and does not reflect the overall effect that changes in market variables would have on the Company's finance expenses.
| December 31, 2022 | Change of: | Would have changed 2022 after-tax profit by: |
||||||||
| Interest rates |
+ |
$ | million | |||||||
| Interest rates |
- |
|
( |
) | million | |||||
| December 31, 2021 | Change of: | Would have changed 2021 after-tax profit by: |
||||||||
| Interest rates |
+ |
|
$ | million | ||||||
| Interest rates |
- |
( |
) |
million | ||||||
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HUDBAY MINERALS INC.
|
(ii) Credit risk
Credit risk is the risk of financial loss to Hudbay if a customer or counterparty to a financial instrument fails to meet its obligations. The Company'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 28a.
A large portion of Hudbay's cash are on deposits with major Schedule 1 Canadian banks. Deposits with Schedule 1 Canadian banks represented
Transactions involving derivatives are with counterparties Hudbay believes to be creditworthy.
At December 31, 2022, approximately
Two customers accounted for approximately
(iii) Liquidity risk
Liquidity risk is the risk that the Company 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 Company's non-derivative and derivative financial liabilities, including any interest payments, by remaining contractual maturity and financial assets used to manage liquidity risk. 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.
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HUDBAY MINERALS INC.
|
| Dec. 31, 2022 | Carrying amount |
Contractual cash flows |
12 months or less |
13 - 36 months |
37 - 60 months |
More than 60 months |
||||||||||||
| Assets used to manage liquidity risk | ||||||||||||||||||
| Cash | $ | $ | $ | $ | $ | $ | ||||||||||||
| Restricted cash | ||||||||||||||||||
| Trade and other receivables | ||||||||||||||||||
| Non-hedge derivative assets | ||||||||||||||||||
| $ | $ | $ | $ | $ | $ | |||||||||||||
| Non-derivative financial liabilities | ||||||||||||||||||
| Trade and other payables, including embedded derivatives | $ | ( |
) | $ | ( |
) | $ | ( |
) | $ | $ | $ | ||||||
| Agreements with communities 1 | ( |
) | ( |
) | ( |
) | ( |
) | ( |
) | ( |
) | ||||||
| Deferred Rosemont acquisition consideration | ( |
) | ( |
) | ( |
) | ( |
) | ||||||||||
| Long-term debt | ( |
) | ( |
) | ( |
) | ( |
) | ( |
) | ||||||||
| Gold prepayment obligation 2 | ( |
) | ( |
) | ( |
) | ||||||||||||
| Wheaton refund liability | ( |
) | ( |
) | ||||||||||||||
| $ | $ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
) | |||
| Derivative financial liabilities | ||||||||||||||||||
| Non hedge derivative contracts | $ | ( |
) | $ | ( |
) | $ | ( |
) | $ | $ | $ | ||||||
| $ | ( |
) | $ | ( |
) | $ | ( |
) | $ | $ | $ | |||||||
1 Represents the Peru community agreement obligation, excluding interest.
2 Discounted.
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HUDBAY MINERALS INC.
|
| Dec. 31, 2021 | Carrying amount |
Contractual cash flows |
12 months or less |
13 - 36 months |
37 - 60 months |
More than 60 months |
||||||||||||
| Assets used to manage liquidity risk | ||||||||||||||||||
| Cash | $ | $ | $ | $ | $ | $ | ||||||||||||
| Restricted cash | ||||||||||||||||||
| Trade and other receivables | ||||||||||||||||||
| Non-hedge derivative assets | ||||||||||||||||||
| $ | $ | $ | $ | $ | $ | |||||||||||||
| Non-derivative financial liabilities | ||||||||||||||||||
| Trade and other payables, including embedded derivatives | $ | ( |
) | $ | ( |
) | $ | ( |
) | $ | $ | $ | ||||||
| Agreements with communities 1 | ( |
) | ( |
) | ( |
) | ( |
) | ( |
) | ( |
) | ||||||
| Deferred Rosemont acquisition consideration | ( |
) | ( |
) | ( |
) | ( |
) | ||||||||||
| Long-term debt, including embedded derivatives | ( |
) | ( |
) | ( |
) | ( |
) | ( |
) | ( |
) | ||||||
| Gold prepayment obligation 2 | ( |
) | ( |
) | ( |
) | ( |
) | ||||||||||
| Wheaton refund liability | ( |
) | ( |
) | ( |
) | ||||||||||||
| $ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
) | |
| Derivative financial liabilities | ||||||||||||||||||
| Non-hedge derivative contracts | $ | ( |
) | $ | ( |
) | $ | ( |
) | $ | $ | $ | ||||||
| $ | ( |
) | $ | ( |
) | $ | ( |
) | $ | $ | $ | |||||||
1 Represents the Peru community agreement obligation, excluding interest.
2 Discounted.
29. Commitments
(a) Capital commitments
As at December 31, 2022, Hudbay had outstanding capital commitments in Canada of approximately $
(b) Non capitalized lease commitments
Hudbay has entered into various non-capitalized lease commitments for facilities and equipment. The leases expire in periods ranging from one to two years. There are no restrictions placed on the Company by entering into these leases. Future minimum lease payments under such cancellable leases recognized within results from operating activities at December 31 are:
| 2022 | 2021 | |||||
| Within one year | $ | $ | ||||
| After one year but not more than five years | ||||||
| More than five years | ||||||
| $ | $ |
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HUDBAY MINERALS INC.
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(c) Contingent liabilities
Hudbay is involved in various claims, litigation and other matters arising in the ordinary course and conduct of business. While it is not possible to determine the ultimate outcome of such actions at this time, and inherent uncertainties exist in predicting such outcomes, it is Hudbay's belief that the ultimate resolution of such actions is not reasonably likely to have a material adverse effect on its consolidated financial position or results of operations. The assessment of contingencies inherently involves the exercise of significant judgment and estimates of the outcome of future events. As a result of the assessment, management believes that no significant contingent liabilities exist.
30. Related parties
(a) Group companies
The financial statements include the financial statements of the Company and the following significant subsidiaries:
| Beneficial ownership of ultimate controlling party (Hudbay Minerals Inc.) |
|||||
| Name | Jurisdiction | Business | Entity's Parent | 2022 | 2021 |
| HudBay Marketing & Sales Inc. | Canada | Marketing and sales | HMI | ||
| HudBay Peru Inc. | British Columbia | Holding company | HMI | ||
| HudBay Peru S.A.C. | Peru | Exploration/development | HudBay Peru Inc. | ||
| HudBay (BVI) Inc. | British Virgin Islands | Precious metals sales | HudBay Peru Inc. | ||
| Hudbay Arizona Inc. | British Columbia | Holding company | HMI | ||
| Copper World, Inc. | Arizona | Exploration/development | HudBay Arizona (US) Holding Corporation | ||
Transactions between the Company and its subsidiaries, which are related parties of the Company, have been eliminated on consolidation and are not disclosed in this note.
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HUDBAY MINERALS INC.
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(b) Compensation of key management personnel
The Company's key management includes members of the Board of Directors, Hudbay's Chief Executive Officer, Hudbay's senior vice presidents and vice presidents. Total compensation to key management personnel was as follows:
| Year ended December 31, | ||||||
| 2022 | 2021 | |||||
| Short-term employee benefits1 | $ | $ | ||||
| Post-employment benefits | ||||||
| Termination benefits | ||||||
| Long-term share-based awards | ||||||
| $ | $ | |||||
1 Such as salaries and social security contributions, paid annual leave and paid sick leave, profit-sharing, termination benefits, bonuses and non-monetary benefits (such as medical care, housing, cars and free or subsidized goods or services) for current employees.
31. Supplementary cash flow information
(a) Other cash (used in) / generated from operating activities:
| Year ended December 31, | ||||||
| 2022 | 2021 | |||||
| Changes in non-current assets | $ | ( |
) | $ | ||
| Amortization of community agreements | ||||||
| Share based compensation paid | ( |
) | ( |
) | ||
| Restructuring - Manitoba | ( |
) | ||||
| Other | ||||||
| $ | ( |
) | $ | |||
(b) Change in non-cash working capital:
| Year ended December 31, | ||||||
| 2022 | 2021 | |||||
| Change in: | ||||||
| Trade and other receivables | $ | $ | ( |
) | ||
| Other financial assets/liabilities | ( |
) | ||||
| Inventories | ( |
) | ( |
) | ||
| Prepaid expenses | ( |
) | ||||
| Trade and other payables | ( |
) | ||||
| Provisions and other liabilities | ||||||
| $ | $ | ( |
) | |||
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HUDBAY MINERALS INC.
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(c) Non-cash transactions:
During the year ended December 31, 2022 and 2021, Hudbay entered into the following non-cash investing and financing activities which are not reflected in the consolidated statements of cash flows:
- Remeasurement of Hudbay's decommissioning and restoration liabilities led to a net decrease in related property, plant and equipment assets of $
- Property, plant and equipment included $
80 |
HUDBAY MINERALS INC.
|
32. Segmented information
Hudbay is an integrated metals producer. When making decisions on expansions, opening or closing mines, as well as day to day operations, management evaluates the results from operating activities of the Company. Hudbay's main mining operations are located in Manitoba and Saskatchewan (Canada) and Cusco (Peru) and are included in the Manitoba segment and Peru segment, respectively. The Manitoba and Peru segments generate Hudbay's revenue. The Manitoba segment sells copper concentrate (containing copper, gold and silver), silver/gold doré, zinc concentrate (containing zinc and gold) and other products. The Peru segment consists of Hudbay's Constancia operation and sells copper concentrate and molybdenum concentrate. Hudbay's Arizona segment consists of the Copper World project located in Arizona. Corporate and other activities include the Company's exploration activities in Chile and Nevada. The exploration entities are not individually significant, as they do not meet the minimum quantitative thresholds. Corporate activities are not considered a segment and are included as a reconciliation to total consolidated results. Accounting policies for each reported segment are the same as those of the Company. Results from operating activities represents the profit earned by each segment without allocation of corporate costs. This is the measure reported to the chief operating decision-maker, Hudbay's President and Chief Executive Officer, for the purposes of resource allocation and the assessment of segment performance. Total assets and liabilities do not reflect intercompany balances, which have been eliminated on consolidation.
| Year ended December 31, 2022 | |||||||||||||||
| Manitoba | Peru | Arizona | Corporate and other activities |
Total | |||||||||||
| Revenue from external customers | $ | $ | $ | $ | $ | ||||||||||
| Cost of sales | |||||||||||||||
| Mine operating costs | |||||||||||||||
| Depreciation and amortization | |||||||||||||||
| Gross profit | |||||||||||||||
| Selling and administrative expenses | |||||||||||||||
| Exploration expenses | |||||||||||||||
| Other expenses (income) | ( |
) | |||||||||||||
| Re-evaluation adjustment - environmental provision | ( |
) | ( |
) | |||||||||||
| Impairment - Arizona | |||||||||||||||
| Results from operating activities | $ | $ | $ | ( |
) | $ | ( |
) | $ | ||||||
| Net interest expense on long term debt | |||||||||||||||
| Accretion on streaming arrangements | |||||||||||||||
| Change in fair value of financial instruments | |||||||||||||||
| Other net finance costs | |||||||||||||||
| Profit before tax | |||||||||||||||
| Tax expense | |||||||||||||||
| Profit for the year | $ | ||||||||||||||
81 |
HUDBAY MINERALS INC.
|
| Year ended December 31, 2021 | |||||||||||||||
| Manitoba | Peru | Arizona | Corporate and other activities |
Total | |||||||||||
| Revenue from external customers | $ | $ | $ | $ | $ | ||||||||||
| Cost of sales | |||||||||||||||
| Mine operating costs | |||||||||||||||
| Depreciation and amortization | |||||||||||||||
| Impairment - environmental provision | |||||||||||||||
| Gross (loss) profit | ( |
) | |||||||||||||
| Selling and administrative expenses | |||||||||||||||
| Exploration expenses | |||||||||||||||
| Other expenses (income) | ( |
) | |||||||||||||
| Re-evaluation adjustment - environmental provision | ( |
) | ( |
) | |||||||||||
| Results from operating activities | $ | ( |
) | $ | $ | ( |
) | $ | ( |
) | $ | ||||
| Net interest expense on long term debt | |||||||||||||||
| Accretion on streaming arrangements | |||||||||||||||
| Change in fair value of financial instruments | |||||||||||||||
| Other net finance costs | |||||||||||||||
| Loss before tax | ( |
) | |||||||||||||
| Tax expense | |||||||||||||||
| Loss for the year | $ | ( |
) | ||||||||||||
| December 31, 2022 | |||||||||||||||
| Manitoba | Peru | Arizona | Corporate and other activities |
Total | |||||||||||
| Total assets | $ | $ | $ | $ | $ | ||||||||||
| Total liabilities | |||||||||||||||
| Property, plant and equipment1 | |||||||||||||||
| 1Included in Corporate and Other activities is $ |
|||||||||||||||
| December 31, 2022 | |||||||||||||||
| Manitoba | Peru | Arizona | Corporate and other activities |
Total | |||||||||||
| Additions to property, plant and equipment | $ | $ | $ | $ | $ | ||||||||||
82 |
HUDBAY MINERALS INC.
|
| December 31, 2021 | |||||||||||||||
| Manitoba | Peru | Arizona | Corporate and other activities |
Total | |||||||||||
| Total assets | $ | $ | $ | $ | $ | ||||||||||
| Total liabilities | |||||||||||||||
| Property, plant and equipment1 | |||||||||||||||
1Included in Corporate and Other activities is $
| December 31, 2021 | |||||||||||||||
| Manitoba | Peru | Arizona | Corporate and other activities |
Total | |||||||||||
| Additions to property, plant and equipment | $ | $ | $ | $ | $ | ||||||||||
83 |
HUDBAY MINERALS INC.
|
Geographical Segments
The following tables represent revenue information regarding Hudbay's geographical segments for the years ended December 31, 2022 and 2021:
| 2022 | 2021 | |||||
| Revenue by customer location 1 | ||||||
| Canada | $ | $ | ||||
| Switzerland | ||||||
| China | ||||||
| United States | ||||||
| Singapore | ||||||
| Hong Kong | ||||||
| Philippines | ||||||
| Chile | ||||||
| United Kingdom | ||||||
| Japan | ||||||
| Peru | ||||||
| Germany | ||||||
| Other | ||||||
| $ | $ |
1 Presented based on the ultimate destination of the product if known. If the eventual destination of the product sold through traders is not known then revenue is allocated to the location of the customer's business office and not the ultimate destination of the product.
During the year ended December 31, 2022, five customers accounted for approximately
During the year ended December 31, 2021, five customers accounted for approximately
84