EX-99.2 3 dex992.htm INTERIM CONSOLIDATED FINANCIAL STATEMENTS Interim Consolidated Financial Statements

 

Exhibit 99.2

Interim Consolidated Financial Statements

(In Canadian dollars)

HUDBAY MINERALS INC.

For the three and nine months ended September 30, 2010

 

HUDBAY MINERALS INC.

Consolidated Balance Sheets

(Unaudited and in thousands of Canadian dollars)

 

     September 30, 2010      December 31, 2009  

Assets

      

Current assets

      

Cash and cash equivalents (note 4)

    $ 851,739       $ 886,814   

Accounts receivable

      63,618         40,187   

Income taxes receivable

      64         14,894   

Inventories (note 5)

      98,557         131,128   

Prepaid expenses and other current assets

      3,754         7,990   

Future income and mining tax assets (note 10b)

      15,595         23,152   

Current portion of fair value of derivatives (note 13c)

      2,082         1,106   
                 
     1,035,409         1,105,271   

Property, plant and equipment (note 6)

      865,338         818,634   

Available-for-sale investments (notes 12, 13)

      78,255         27,249   

Other assets (note 7)

      86,594         81,113   
                 
   $ 2,065,596       $ 2,032,267   
                 

Liabilities and Equity

      

Current liabilities

      

Accounts payable and accrued liabilities

    $ 112,409       $ 114,204   

Taxes payable

      32,135         1,250   

Current portion of other liabilities (note 8)

      24,253         40,228   
                 
     168,797         155,682   

Pension obligations

      2,366         516   

Other employee future benefits and stock-based compensation (note 11d)

      87,020         81,287   

Asset retirement obligations

      54,120         49,133   

Future income tax liabilities (note 10b)

      37,118         34,927   

Fair value of derivatives (note 13c)

      502         7,068   
                 
     349,923         328,613   
                 

Equity

      

Share capital (note 11b)

      626,009         644,127   

Contributed surplus (note 11e)

      24,469         26,717   

Retained earnings

      1,022,888         1,025,060   

Accumulated other comprehensive income (note 12)

      29,768         6,445   
                 
     1,703,134         1,702,349   

Non-controlling interest (note 11f)

      12,539         1,305   
                 
     1,715,673         1,703,654   
                 
   $ 2,065,596       $ 2,032,267   
                 

Subsequent Event (note 18)

 

1

 

HUDBAY MINERALS INC.

Consolidated Statements of Earnings

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

 

     Three months ended
September 30		     Nine months ended
September 30		  
     2010     2009     2010     2009  

Revenue (note 15)

    $ 163,367      $ 194,608      $ 595,538      $ 554,049   
                                

Expenses

         

Operating

      92,652        119,169        355,805        399,794   

Depreciation and amortization

      25,267        28,822        82,618        73,078   

General and administrative

      7,370        7,437        19,114        27,770   

Stock-based compensation (note 11c, d, e)

      2,980        793        4,103        3,523   

Accretion of asset retirement obligations

      1,295        1,113        3,715        3,339   

Foreign exchange loss

      3,605        6,895        4,306        16,313   
                                
     133,169        164,229        469,661        523,817   
                                

Earnings before the following:

      30,198        30,379        125,877        30,232   

Exploration

      (5,868 )      (983 )      (18,868 )      (3,615 ) 

Interest and other income (note 16)

      3,133        3,329        6,117        106,235   

Gain (loss) on derivative instruments

      2,109        222        3,373        (462 ) 

Earnings before tax and non-controlling interest

      29,572        32,947        116,499        132,390   

Tax expense (note 10a)

      17,902        12,836        68,118        26,804   
                                

Net earnings before non-controlling interest

      11,670        20,111        48,381        105,586   

Less: non-controlling interest

      (10 )      (136 )      111        (154 ) 
                                

Net earnings attributable to common shareholders

    $ 11,660      $ 19,975      $ 48,492      $ 105,432   
                                

Earnings per share:

         

Basic

    $ 0.08      $ 0.13      $ 0.32      $ 0.68   

Diluted

    $ 0.08      $ 0.13      $ 0.32      $ 0.68   

Weighted average number of common shares outstanding (note 17):

         

Basic

      148,949,050        153,443,348        151,114,563        153,432,764   

Diluted

      149,688,010        154,065,095        151,799,167        153,948,342   

 

2

 

HUDBAY MINERALS INC.

Consolidated Statements of Cash Flows

(Unaudited and in thousands of Canadian dollars)

 

     Three months ended
September 30		     Nine months ended
September 30		  
     2010     2009     2010     2009  

Cash provided by (used in):

         

Operating activities

         

Net earnings before non-controlling interest

    $ 11,670      $ 20,111      $ 48,381      $ 105,586   

Reclamation payments

      (1,606 )      (966 )      (1,861 )      (1,049 ) 

Items not affecting cash:

         

Depreciation and amortization

      25,267        28,822        82,618        73,078   

Stock-based compensation (note 11c, d, e)

      2,980        793        4,103        3,523   

Accretion on asset retirement obligations

      1,295        1,113        3,715        3,339   

Foreign exchange loss

      2,411        4,944        1,770        8,495   

Change in fair value of derivatives

      (1,547 )      (248 )      (2,050 )      (268 ) 

Future tax expense (note 10a)

      5,141        2,508        13,746        13,679   

Net gains reclassified from OCI (note 12)

      (2,591 )      (1,770 )      (4,943 )      (106,372 ) 

Other

      (3,195 )      (7,093 )      (5,556 )      (8,960 ) 

Change in non-cash working capital (note 14a)

      (7,892 )      8,381        50,803        (24,489 ) 
                                
     31,933        56,595        190,726        66,562   
                                

Investing activities

         

Additions to property, plant and equipment

      (43,149 )      (16,180 )      (116,433 )      (63,772 ) 

Proceeds from sale of investments

      6,030        —          8,051        235,704   

Purchase of other non-current investments

      (38,348 )      (2,521 )      (40,278 )      (3,338 ) 

Additions to restricted cash

      (580 )      702        (2,512 )      (53,864 ) 

Release of cash held in trust

      —          —          —          3,885   

Sale of short-term investments

      —          —          —          478,941   
                                
     (76,047 )      (17,999 )      (151,172 )      597,556   
                                

Financing activities

         

Repayment of Senior Secured Notes

      —          —          —          (3,764 ) 

Repayment of obligations under capital leases

      —          (161 )      —          (365 ) 

Repurchase of common shares (note 11b)

      —          —          (60,309 )      —     

Dividends paid (note 11b)

      (14,901 )      —          (14,901 )      —     

Proceeds on exercise of stock options

      1,387        845        2,351        2,628   
                                
     (13,514 )      684        (72,859 )      (1,501 ) 
                                

Effect of exchange rate changes on cash and cash equivalents

      (2,411 )      (4,944 )      (1,770 )      (8,052 ) 
                                

Change in cash and cash equivalents

      (60,039 )      34,336        (35,075 )      654,565   

Cash and cash equivalents, beginning of period

      911,778        845,956        886,814        225,727   
                                

Cash and cash equivalents, end of period (note 4)

    $ 851,739      $ 880,292      $ 851,739      $ 880,292   
                                

For supplemental information, see note 14.

 

3

 

HUDBAY MINERALS INC.

Consolidated Statements of Retained Earnings

(Unaudited and in thousands of Canadian dollars)

 

     Three months ended
September 30		      Nine months ended
September 30		  
     2010     2009      2010     2009  

Retained earnings, beginning of period

    $ 1,026,129      $ 997,746       $ 1,025,060      $ 912,289   

Net earnings attributable to common shareholders

      11,660        19,975         48,492        105,432   

Share repurchases (note 11b)

      —          —           (35,763 )      —     

Dividends paid (note 11b)

      (14,901 )      —           (14,901 )      —     
                                 

Retained earnings, end of period

    $ 1,022,888      $ 1,017,721       $ 1,022,888      $ 1,017,721   
                                 

Consolidated Statements of Comprehensive Income

(Unaudited and in thousands of Canadian dollars)

 

     Three months ended
September 30		     Nine months ended
September 30		  
     2010     2009     2010     2009  

Net earnings before non-controlling interest

    $ 11,670      $ 20,111      $ 48,381      $ 105,586   
                                

Other comprehensive income (loss), net of tax (note 12):

         

Cash flow hedges

      (5,069 )      —          7,262        —     

Amounts reclassified to earnings on realization of cash flow hedges

      (1,072 )      (1,232 )      (1,939 )      (4,611 ) 

Net gains on available-for-sale investments

      25,792        3,417        19,467        112,269   

Amounts reclassified to earnings on disposal of available-for-sale investments

      (517 )      —          (1,467 )      (79,970 ) 

Currency translation adjustments

      —          —          —          (23 ) 
                                
     19,134        2,185        23,323        27,665   

Comprehensive income attributable to non-controlling interest

      (10 )      (136 )      111        (154 ) 
                                

Comprehensive income attributable to common shareholders

    $ 30,794      $ 22,160      $ 71,815      $ 133,097   
                                

 

4

 

HUDBAY MINERALS INC.

Notes to Interim Consolidated Financial Statements

(Unaudited and in thousands of Canadian dollars, except where otherwise noted)

For the three and nine months ended September 30, 2010

 

 

1. Nature of business

HudBay Minerals Inc. (the “Company” or “HudBay”) is a Canadian company continued under the Canada Business Corporations Act on October 25, 2005. HudBay is a Canadian-based, integrated base metals mining, metallurgical processing and refining company with assets in North and Central America. HudBay owns zinc and copper mines, concentrators and metal production facilities in northern Manitoba and Saskatchewan, a zinc oxide production facility in Ontario, a copper refinery in Michigan and a nickel project in Guatemala. In addition to its primary products, zinc and copper, HudBay also produces gold, silver and zinc oxide.

 

2. Basis of presentation and principles of consolidation

Management has prepared these interim consolidated financial statements in accordance with Canadian generally accepted accounting principles (“GAAP”) following the same accounting policies as disclosed in the audited consolidated financial statements for the year ended December 31, 2009, except as indicated in note 3.

These unaudited interim consolidated financial statements do not include all of the information and disclosures required by Canadian GAAP for audited annual financial statements. In the opinion of management, all adjustments considered necessary for fair presentation have been included in these unaudited interim consolidated financial statements. These unaudited interim consolidated financial statements should be read in conjunction with the most recent audited annual consolidated financial statements of the Company, including the notes thereto.

 

3. Adoption of new accounting standards

 

  (a) Adopted in 2010:

Effective January 1, 2010, the Company early adopted the following Canadian Institute of Chartered Accountants (“CICA”) recommendations:

Business Combinations, Consolidated Financial Statements and Non-Controlling Interests

In January 2009, the CICA issued Handbook Section 1582, Business Combinations, replacing Section 1581 of the same name. Section 1582 establishes standards for the accounting for business combinations that are equivalent to the business combination accounting standards under International Financial Reporting Standards (“IFRS”). Prospective application of Section 1582 is required for the Company’s business combinations with acquisition dates on or after January 1, 2011 with early adoption permitted. Section 1582 requires business acquisitions to be measured at the acquisition-date fair value, generally requires acquisition-related costs to be expensed, requires gains from bargain purchases to be recorded in earnings (loss), and expands the definition of a business to include certain development stage entities. It also requires the acquirer to measure any non-controlling interest either at fair value or at the non-controlling interest’s proportionate share of the acquirer’s identifiable net assets. Adoption of Section 1582 did not have an effect on the Company’s consolidated financial statements.

 

5

HUDBAY MINERALS INC.

Notes to Interim Consolidated Financial Statements

(Unaudited and in thousands of Canadian dollars, except where otherwise noted)

For the three and nine months ended September 30, 2010

 

 

 

The CICA concurrently issued Section 1601, Consolidated Financial Statements, and Section 1602, Non-controlling Interests, which together replace the existing Section 1600, Consolidated Financial Statements. Sections 1601 and 1602 apply to the Company’s interim and annual consolidated financial statements for its fiscal year beginning January 1, 2011, unless they are early adopted at the same time as Section 1582. Sections 1601 and 1602 establish standards equivalent to those under IFRS for the preparation of consolidated financial statements and the accounting for non-controlling interests in consolidated financial statements, including accounting for non-controlling interests upon a change in ownership interest or loss of control of a subsidiary. Section 1602 requires attribution of comprehensive income to owners of the parent entity and to non-controlling interests, even if it results in the non-controlling interests having a deficit balance. The Company applied these sections prospectively, except for presentation and disclosure requirements, which were applied retrospectively. As a result of adopting these sections, the Company has presented non-controlling interests as a separate component of equity on the balance sheet.

 

(b) Future accounting changes:

International Financial Reporting Standards

The Canadian Accounting Standards Board (“AcSB”) has confirmed that Canadian publicly accountable entities will be required to prepare their financial statements in accordance with IFRS for fiscal years beginning on or after January 1, 2011. As a result, IFRS will be adopted by the Company on January 1, 2011, and its first set of IFRS compliant financial statements will be for the quarter ending March 31, 2011, with comparative information presented on an IFRS basis. The Company is currently assessing the impact the adoption of IFRS will have on its consolidated financial statements.

 

4. Cash and cash equivalents

 

     September 30, 2010      December 31, 2009  

Cash and cash equivalents:

      

Cash on hand and demand deposits

    $ 826,705       $ 76,297   

Short-term money market instruments with original maturities of three months or less

      25,034         810,517   
                 
   $ 851,739       $ 886,814   
                 

 

6

HUDBAY MINERALS INC.

Notes to Interim Consolidated Financial Statements

(Unaudited and in thousands of Canadian dollars, except where otherwise noted)

For the three and nine months ended September 30, 2010

 

 

 

5. Inventories

 

     September 30, 2010      December 31, 2009  

Work-in-process

    $ 18,501       $ 51,250   

Finished goods

      60,507         59,595   

Materials and supplies

      19,549         20,283   
                 
   $ 98,557       $ 131,128   
                 

The cost of inventories included in operating expenses during the nine months ended September 30, 2010 was $308,803 (2009 - $343,297).

 

6. Property, plant and equipment

 

September 30, 2010

    Cost      Accumulated
depreciation and
amortization		      Net book
value		  

Buildings and equipment

    $ 513,331       $ 204,570       $ 308,761   

Mine development

      356,911         258,674         98,237   

Mineral properties

      458,340         —           458,340   
                          
   $ 1,328,582       $ 463,244       $ 865,338   
                          

December 31, 2009

    Cost      Accumulated
depreciation and
amortization		      Net book
value		  

Buildings and equipment

    $ 470,350       $ 161,622       $ 308,728   

Mine development

      326,011         219,427         106,584   

Mineral properties

      403,322         —           403,322   
                          
   $ 1,199,683       $ 381,049       $ 818,634   
                          

 

7

HUDBAY MINERALS INC.

Notes to Interim Consolidated Financial Statements

(Unaudited and in thousands of Canadian dollars, except where otherwise noted)

For the three and nine months ended September 30, 2010

 

 

 

7. Other assets

 

     September 30, 2010      December 31, 2009  

Restricted cash

    $ 61,542       $ 59,031   

Computer software

      4,836         1,966   

Long-term portion of future tax asset (note 10b)

      13,697         19,720   

Long-term portion of fair value of derivatives (note 13c)

      560         258   

Investments, at fair value through earnings

      5,959         138   
                 
   $ 86,594       $ 81,113   
                 

 

8. Current portion of other liabilities

 

     September 30, 2010      December 31, 2009  

Current portion of:

      

Pension obligation

    $ 14,687       $ 28,447   

Asset retirement obligation

      5,079         5,327   

Other employee future benefits

      3,065         2,876   

Fair value of derivatives (note 13c)

      1,352         3,503   

Future tax liabilities (note 10b)

      70         75   
                 
   $ 24,253       $ 40,228   
                 

 

9. Pension and other employee future benefit expense

 

     Three months ended
September 30		      Nine months ended
September 30		  
     2010      2009      2010      2009  

Defined benefit pension

    $ 2,391       $ 2,433       $ 8,547       $ 7,261   

Other employee future benefits

      1,857         1,836         5,571         5,508   

Defined contribution pension

      173         161         511         520   
                                   
   $ 4,421       $ 4,430       $ 14,629       $ 13,289   
                                   

 

8

HUDBAY MINERALS INC.

Notes to Interim Consolidated Financial Statements

(Unaudited and in thousands of Canadian dollars, except where otherwise noted)

For the three and nine months ended September 30, 2010

 

 

 

10. Income and mining taxes

 

  (a) Tax expense:

 

     Three months ended
September 30		     Nine months ended
September 30		  
     2010      2009     2010      2009  

Current         -     income taxes

    $ 7,222       $ 9,381      $ 33,266       $ 13,278   

            -     mining taxes

      5,539         947        21,106         (153 ) 
                                  
     12,761         10,328        54,372         13,125   
                                  

Future           -     income taxes

      3,093         2,929        8,483         3,860   

            -     mining taxes

      2,048         (421 )      5,263         9,819   
                                  
     5,141         2,508        13,746         13,679   
                                  
   $ 17,902       $ 12,836      $ 68,118       $ 26,804   
                                  

 

  (b) Future tax assets and liabilities as represented on the balance sheet:

 

     September 30, 2010     December 31, 2009  

Future tax assets

     

Current portion

    $ 15,595      $ 23,152   

Long-term portion (note 7)

      13,697        19,720   
                
     29,292        42,872   
                

Future tax liabilities

     

Current portion (note 8)

      70        75   

Long-term portion

      37,118        34,927   
                
     37,188        35,002   
                
   $ (7,896 )    $ 7,870   
                

 

  (c) Changes in future tax assets and liabilities:

 

     Three months ended
September 30		     Nine months ended
September 30		  
     2010     2009     2010     2009  

Balance, beginning of period

    $ 424      $ 163      $ 7,870      $ 12,359   

Future tax expense

      (5,141 )      (2,508 )      (13,746 )      (13,679 ) 

OCI (loss) transactions

      (3,179 )      (652 )      (2,020 )      (1,704 ) 

Other

      —          69        —          96   
                                

Balance, end of period

    $ (7,896 )    $ (2,928 )    $ (7,896 )    $ (2,928 ) 
                                

 

9

HUDBAY MINERALS INC.

Notes to Interim Consolidated Financial Statements

(Unaudited and in thousands of Canadian dollars, except where otherwise noted)

For the three and nine months ended September 30, 2010

 

 

 

The future income tax assets are net of a valuation allowance that represents management’s estimate of the allowance necessary to recognize the future tax assets at an amount that the Company considers is more likely than not to be realized.

 

11. Share capital

 

  (a) Preference shares:

Authorized:     Unlimited preference shares

Issued:             none

 

  (b) Common shares:

Authorized:     Unlimited common shares

Issued:

 

     Three months ended
September 30, 2010		      Nine months ended
September 30, 2010		  
     Common
shares		      Amount      Common
shares		     Amount  

Balance, beginning of period

      148,908,687       $ 624,155         153,854,655      $ 644,127   

Exercise of options

      147,541         1,854         248,673        3,029   

Shares repurchased

      —           —           (5,047,100 )      (21,147 ) 
                                  

Balance, end of period

      149,056,228       $ 626,009         149,056,228      $ 626,009   
                                  

During the nine months ended September 30, 2010, the Company repurchased for cancellation 5,047,100 common shares at a cost of $60,309. The Company recorded a reduction in share capital of $21,147 for the nine months ended September 30, 2010. The excess cost over the average book value of the shares was recorded as a reduction to contributed surplus of $3,399 and a reduction to retained earnings of $35,763.

The Company paid dividends of $0.10 per share on September 30, 2010 to shareholders of record as of September 15, 2010.

 

10

HUDBAY MINERALS INC.

Notes to Interim Consolidated Financial Statements

(Unaudited and in thousands of Canadian dollars, except where otherwise noted)

For the three and nine months ended September 30, 2010

 

 

 

  (c) Stock option plan:

 

     Three months ended
September 30, 2010		      Nine months ended
September 30, 2010		  
     Number
of shares
subject
to option		     Weighted
average
exercise
price		      Number
of shares
subject
to option		     Weighted
average
exercise
price		  

Balance, beginning of period

      4,035,797      $ 14.25         4,637,113      $ 14.25   

Granted

      900,000        12.17         900,000        12.17   

Exercised

      (147,541 )      9.40         (248,673 )      9.45   

Forfeited/cancelled

      —          —           (143,334 )      10.26   

Expired

      (28,304 )      17.95         (385,154 )      17.26   
                                 

Balance, end of period

      4,759,952      $ 13.98         4,759,952      $ 13.98   
                                 

The weighted average fair value of options granted during the nine months ended September 30, 2010 was $12.17 per option at the grant date. The fair value of the options has been estimated at the date of grant using a Black-Scholes option pricing model with the following weighted average assumptions: risk-free interest rate of 1.8%; dividend yield of 0%; volatility factor of 67%; and expected life of 3 years. The first 33 1/3% are exercisable immediately at the date of grant, the next 33 1/3% are exercisable after one year and the last 33 1/3% are exercisable after two years.

The following table summarizes the options outstanding at September 30, 2010:

 

       Options outstanding      Options exercisable  

Range of exercise
prices

      Number of
options
outstanding		      Weighted-
average
remaining
contractual life
(years)		      Weighted-
average
exercise
price		      Number of
options
exercisable		      Weighted-
average
exercise
price		  
$   2.59   -    7.33         526,697         4.6       $ 2.62         526,697       $ 2.62   
    7.34   -  11.03         923,111         4.5         9.54         709,776         9.81   
  11.04   -  15.86        1,687,948         5.5         13.89         1,087,948         14.84   
  15.87   -  17.95         339,950         3.9         17.13         336,617         17.13   
  17.96   -  23.74         1,282,246         6.4         21.14         1,282,246         21.14   
                                                  
$   2.59   -  23.74         4,759,952         5.34       $ 13.98         3,943,284       $ 14.55   
                                                  

 

  (d) Other stock-based compensation plans:

The Company offers a deferred share unit (“DSU”) plan for non-employee members of the Board of Directors and a restricted share unit (“RSU”) plan for employees. Share units under these plans are notional shares; the value of one share unit represents the value of one HudBay common share. DSU and RSU liabilities are presented in other employee future benefits and stock-based compensation on the balance sheet. Changes in the liabilities are recognized in the income statement and presented in stock-based compensation expense.

 

11

HUDBAY MINERALS INC.

Notes to Interim Consolidated Financial Statements

(Unaudited and in thousands of Canadian dollars, except where otherwise noted)

For the three and nine months ended September 30, 2010

 

 

 

DSU plan

DSUs vest on the grant date and are redeemable with a cash payment 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. DSUs are initially measured at their issue price and recognized as a liability at the grant date. The liability is revalued, based on the change in the Company’s share price, at each reporting date up to and including the settlement date. During the nine months ended September 30, 2010, the Company granted 89,657 DSUs at a weighted average issue price of $12.57 (three months ended September 30, 2010 - 30,995 granted). As at September 30, 2010, 177,380 DSUs at a weighted average price of $14.65 were outstanding, 1,111 of which related to additional units issued to DSU holders to reflect dividends paid on September 30, 2010.

At September 30, 2010, the Company’s DSU liability was $ 2,600 (December 31, 2009 - $1,190). During the nine months ended September 30, 2010, the Company recognized stock-based compensation expense related to the DSU plan of $1,410 (three months ended September 30, 2010 - $964).

RSU plan

RSUs, which are granted under the Company’s long-term equity plan, vest on the third anniversary of the grant date, subject to the Board’s discretion to set other terms. On the vest date, the Company has the option to settle RSUs either in common shares of the Company or with a cash payment based on the closing price of the Company’s common shares for the last trading date before the vest date. Under the long-term equity plan, a maximum of one million common shares of the Company may be issued from treasury. Management expects RSUs will be settled in cash. Effective July 2010, RSUs are issued under the Company’s Share Unit Plan, which has similiar terms but requires settlement in cash. Except in specified circumstances, RSUs terminate when an employee ceases to be employed by the Company.

RSUs are measured at each reporting date, up to and including the settlement date, based on the closing price of the Company’s common shares, adjusted to reflect estimated forfeitures and to reflect the portion of the service period that had been performed by the end of the reporting date. During the nine months ended September 30, 2010, the Company granted 435,880 RSUs at a weighted average price of $13.02 at the grant date (three months ended September 30, 2010 - 155,783 RSUs), including additional units issued to holders to reflect dividends paid on September 30, 2010. No RSUs were granted or outstanding in 2009.

At September 30, 2010, the Company’s RSU liability was $864 (December 31, 2009: $0). During the nine months ended September 30, 2010, the Company recognized stock-based compensation expense related to the RSU plan of $864 (three months ended September 30, 2010 - $570).

 

12

HUDBAY MINERALS INC.

Notes to Interim Consolidated Financial Statements

(Unaudited and in thousands of Canadian dollars, except where otherwise noted)

For the three and nine months ended September 30, 2010

 

 

 

  (e) Contributed surplus:

 

     Three months ended
September 30		     Nine months ended
September 30		  
     2010     2009     2010     2009  

Balance, beginning of period

    $ 23,491      $ 33,799      $ 26,717      $ 32,345   

Stock-based compensation (note 11c)

      1,446        792        1,833        3,522   

Transfer to common shares on exercise of stock options

      (468 )      (1,163 )      (682 )      (2,458 ) 

Share repurchases (note 11b)

      —          —          (3,399 )      —     

Warrants forfeited

      —          —          —          19   
                                

Balance, end of period

    $ 24,469      $ 33,428      $ 24,469      $ 33,428   
                                

 

  (f) Non-controlling interest

On August 31, 2010, pursuant to the terms of a Subscription, Option and Joint Venture Agreement with Aquila Resources Inc. (“Aquila”), the Company earned a 51% ownership interest in Aquila’s Back Forty Project.

On July 5, 2010, pursuant to the terms of a joint venture agreement with VMS Ventures Inc. (“VMS”), the Company acquired a 70% ownership interest in the Reed Lake property and the two claims immediately to the south.

The Company accounted for its acquisition of control over the Back Forty and Reed Lake projects as asset acquisitions and has consolidated the projects in its consolidated financial statements, including Aquila’s and VMS’s shares of the mineral property assets as non-controlling interests of $10,222 and $1,123, respectively.

The remaining amounts in non-controlling interest represents the third party’s 1.8% interest in CGN.

 

13

HUDBAY MINERALS INC.

Notes to Interim Consolidated Financial Statements

(Unaudited and in thousands of Canadian dollars, except where otherwise noted)

For the three and nine months ended September 30, 2010

 

 

 

12. Accumulated other comprehensive income (loss) (“OCI”)

 

     Three months ended
September 30		     Nine months ended
September 30		  
     2010     2009     2010     2009  

Accumulated OCI (loss), beginning of period:

         

Cash flow hedge gains (losses) (net of tax of ($2,712), ($1,675), $2,169, ($2,954))

    $ 6,683      $ 3,766      $ (4,782 )    $ 7,145   

Gains (losses) on investments (net of tax of ($1,221), ($1,065), ($2,379), $0)

      3,951        3,380        11,227        (25,502 ) 

Currency translation adjustments (net of tax of $0, $0, $0, ($13))

      —          —          —          23   
                                
     10,634        7,146        6,445        (18,334 ) 

OCI (loss) for the period:

         

Effective portion of changes in fair value of cash flow hedges

      (7,237 )      —          10,367        —     

Less: reclassified to earnings

      (1,523 )      (1,769 )      (2,781 )      (6,427 ) 

Changes in fair value of investments

      29,521        4,069        22,181        133,924   

Less: reclassified to earnings

      (1,068 )      —          (2,162 )      (99,908 ) 

Currency translation adjustments

         

Less: reclassified to earnings

      —          —          —          (36 ) 
                                

OCI (loss), before tax

      19,693        2,300        27,605        27,553   

Income tax (expense) benefit related to OCI

      (559 )      (115 )      (4,282 )      112   
                                

OCI (loss) for the period, net of tax

      19,134        2,185        23,323        27,665   
                                

Accumulated OCI, end of period:

         

Cash flow hedge gains (net of tax of ($93), ($1,138), ($93), ($1,138))

      542        2,534        542        2,534   

Gains on investments (net of tax of ($4,399), ($1,717), ($4,399), ($1,717))

      29,226        6,797        29,226        6,797   
                                

Accumulated OCI, end of period

      29,768        9,331        29,768        9,331   

Retained earnings

      1,022,888        1,017,721        1,022,888        1,017,721   
                                
   $ 1,052,656      $ 1,027,052      $ 1,052,656      $ 1,027,052   
                                

 

14

HUDBAY MINERALS INC.

Notes to Interim Consolidated Financial Statements

(Unaudited and in thousands of Canadian dollars, except where otherwise noted)

For the three and nine months ended September 30, 2010

 

 

 

13. Financial instruments

 

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

The following presents the fair value and carrying value of the Company’s financial instruments and non-financial derivatives:

 

    

Classification

    September 30, 2010      December 31, 2009  

Financial assets

         

Cash and cash equivalents 1

    FV through earnings    $ 851,739       $ 886,814   

Accounts receivable

         

Trade and other receivables 1

    Loans & receivables      59,545         39,978   

Embedded derivatives 2

    FV through earnings      4,073         209   

Derivative assets

         

Hedging derivatives 2

    Hedging derivatives      983         390   

Non-hedge derivative assets 2

    FV through earnings      1,659         974   

Available-for-sale investments 3

    Available-for-sale      78,255         27,249   

Investments at fair value through earnings 3

    FV through earnings      5,959         138   

Restricted cash 1

    FV through earnings      61,542         59,031   
                    
      $ 1,063,755       $ 1,014,783   
                    

Financial liabilities

         

Accounts payable

         

Trade payables & accrued liabilities 1

    Other financial liabilities    $ 112,158       $ 113,647   

Embedded derivatives 2

    FV through earnings      251         557   

Derivative liabilities

         

Hedging derivatives 2

    Hedging derivatives      293         9,823   

Non-hedge derivative liabilities 2

    FV through earnings      1,561         748   
                    
      $ 114,263       $ 124,775   
                    

Net financial assets

       $ 949,492       $ 890,008   
                    

 

1

Carrying values of cash and cash equivalents and restricted cash, which are classified as held-for-trading and measured at fair value, have been classified as Level 1 in the fair value hierarchy. The carrying values of accounts receivable, accounts payable and accrued liabilities approximate their fair values due to their short-term nature and thus have not been classified within the fair value hierarchy.

2

Derivatives and embedded provisional pricing derivatives are measured using Level 2 fair value measurements and are carried at their fair value. These are determined based on internal valuation models that reflect observable forward commodity prices and exchange rates, currency exchange rates and discount factors based on market US dollar interest rates. Transactions involving derivatives are with counterparties the Company believes to be creditworthy.

3

Available-for-sale investments are measured using Level 1 fair value measurements and are listed shares carried at their fair values, which are determined using quoted market bid prices in active markets. Investments at fair value through earnings are measured at fair value using Level 2 inputs and consist of warrants to purchase common shares, which are carried at their fair value as determined using a Black-Scholes model.

 

  (b) Credit risk:

The Company’s credit risk is the risk of financial loss to the Company if a customer or counterparty to a financial instrument fails to meet its obligations. The Company’s maximum exposure to credit risk is represented by the carrying amount of each financial asset, including derivative assets, on the balance sheet.

 

15

HUDBAY MINERALS INC.

Notes to Interim Consolidated Financial Statements

(Unaudited and in thousands of Canadian dollars, except where otherwise noted)

For the three and nine months ended September 30, 2010

 

 

 

The Company has a credit policy in place that requires it to obtain credit insurance from an investment grade credit insurance provider to mitigate exposure to credit risk in its receivables. The deductible and any additional exposure to credit risk is monitored and approved on an ongoing basis. Transactions involving derivatives are with counterparties the Company believes to be creditworthy. Adverse economic conditions could cause an increase in the rate of customer bad debts relative to historical experience, although this may be mitigated by the credit insurance described above. The Company uses an allowance to provide for doubtful accounts receivable. During the nine months ended September 30, 2010, the allowance decreased by $35. As at September 30, 2010, none of the Company’s trade accounts receivable was past due.

Three customers accounted for approximately 16%, 10% and 4%, respectively, of total revenue during the nine months ended September 30, 2010 (three months ended September 30, 2010 - approximately 39%, 5% and 3%, respectively, of total revenue).

 

  (c) Derivatives:

Fair value of derivatives, as presented on the balance sheet:

 

September 30, 2010

    Non-hedge
derivative zinc
contracts		      Cash flow
hedging
derivatives		      Total  

Derivative assets:

         

Current portion

    $ 1,443       $ 639       $ 2,082   

Long-term portion (note 7)

      216         344         560   
                          
     1,659         983         2,642   
                          

Derivative liabilities:

         

Current portion (note 8)

      1,345         7         1,352   

Long-term portion

      216         286         502   
                          
     1,561         293         1,854   
                          

Net derivative asset

    $ 98       $ 690       $ 788   
                          

 

16

HUDBAY MINERALS INC.

Notes to Interim Consolidated Financial Statements

(Unaudited and in thousands of Canadian dollars, except where otherwise noted)

For the three and nine months ended September 30, 2010

 

 

 

December 31, 2009

    Non-hedge
derivative zinc
contracts		      Cash flow
hedging
derivatives		     Total  

Derivative assets:

        

Current portion

    $ 974       $ 132      $ 1,106   

Long-term portion (note 7)

      —           258        258   
                         
     974         390        1,364   
                         

Derivative liabilities:

        

Current portion (note 8)

      748         2,755        3,503   

Long-term portion

      —           7,068        7,068   
                         
     748         9,823        10,571   
                         

Net derivative asset (liability)

    $ 226       $ (9,433 )    $ (9,207 ) 
                         

Non-hedge derivative zinc contracts

HudBay enters into fixed price sales contracts with zinc and zinc oxide customers and, to ensure the Company continues to receive a floating or unhedged realized zinc price, enters into forward zinc purchase contracts that effectively offset the fixed price sales contracts. Forward purchases and forward customer sales of zinc are recorded as derivatives. Gains and losses on these contracts are recorded in revenues, and cash flows are classified in operating activities. However, forward customer sales of zinc oxide do not qualify as derivatives.

At September 30, 2010, the Company held contracts for forward zinc purchases of 658 tonnes that related to non-derivative forward customer sales of zinc oxide. Prices ranged from US$1,722 to US$2,430 per tonne, and settlement dates extended out to one year in the future. In addition, the Company held contracts for forward zinc purchases of 7,757 tonnes that substantially offset forward customer zinc sales of 7,757 tonnes, which have been recorded as derivatives.

Embedded provisional pricing derivatives

The Company records embedded derivatives (presented in accounts receivable and accounts payable) related to provisional pricing in concentrate purchase, concentrate sale, anode 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 based on quoted market prices during the quotational period specified in the contract. The period between provisional pricing and final pricing is typically up to three months. At each reporting date, provisionally priced metals are marked to market based on the forward market price for the quotational period stipulated in the contract, with changes in fair value recognized in revenues for sales contracts and in operating expenses for purchase concentrate contracts. Cash flows are classified in operating activities. At September 30, 2010, the Company’s net position consisted of contracts awaiting final pricing for purchases of 4,835 tonnes of zinc, sales of 6,338 tonnes of copper, sales of 16,295 ounces of gold and sales of 142,936 ounces of silver.

 

17

HUDBAY MINERALS INC.

Notes to Interim Consolidated Financial Statements

(Unaudited and in thousands of Canadian dollars, except where otherwise noted)

For the three and nine months ended September 30, 2010

 

 

 

Cash flow hedges

During 2009, the Company entered into a foreign exchange swap contract to hedge foreign exchange risk for future receipts of US dollars and commodity swap contracts to hedge prices for a portion of future sales of zinc. These contracts will expire in mid-2012. The risk management objective for these hedging relationships is to mitigate the impact on the Company of fluctuating zinc prices and exchange rates. Cash flow hedge accounting has been applied to the hedging relationships. As at September 30, 2010, the zinc swap contracts have been recorded as hedging net derivative liabilities at their fair value of $182 and the foreign exchange swap contract has been recorded as a hedging net derivative asset at its fair value of $872.

For the nine months ended September 30, 2010, the Company recorded pre-tax net gains of $10,367 (three months ended September 30, 2010 - losses of $7,237) to OCI for the effective portion of the cash flow hedges and recorded pre-tax net gains of $954 (three months ended September 30, 2010 - losses of $71) in earnings for the ineffective portion. Ineffective gains and losses are included in gain (loss) on derivative instruments. The Company also reclassified pre-tax net gains of $1,234 from OCI to earnings as hedged anticipated zinc sales occurred (three months ended September 30, 2010 - $994).

In 2007, the Company applied hedge accounting to commodity swap contracts used to hedge prices for a portion of future sales of zinc and copper. During 2008, the Company terminated its remaining zinc and copper commodity swap contracts. The related hedging relationships were discontinued prospectively, and related gains and losses in AOCI are reclassified to earnings when the remaining hedged anticipated future zinc sales occur. For the nine months ended September 30, 2010, the Company reclassified pre-tax net gains of $1,547 from OCI to earnings (presented in revenue) as hedged anticipated zinc sales occurred (three months ended September 30, 2010 - $529).

Of the $635 pre-tax gains in AOCI at September 30, 2010, pre-tax gains of $1,176 will be reclassified to earnings in the next twelve months. The remaining pre-tax losses of $541 will be reclassified to earnings in 2011 and 2012.

 

  (d) Financial instruments at fair value through earnings – changes in value:

Financial instruments and non-financial derivatives classified as fair value through earnings include non-hedge derivative zinc contracts, embedded derivatives relating to provisional pricing, and investments at fair value through earnings. For the nine months ended September 30, 2010, the total amount of change in fair value that has been recognized in earnings for these items was a net gain of $11,158 (2009 - net loss of $403) (three months ended September 30, 2010 - net gain of $7,768).

 

18

HUDBAY MINERALS INC.

Notes to Interim Consolidated Financial Statements

(Unaudited and in thousands of Canadian dollars, except where otherwise noted)

For the three and nine months ended September 30, 2010

 

 

 

14. Supplementary cash flow information

 

  (a) Change in non-cash working capital:

 

     Three months ended
September 30		     Nine months ended
September 30		  
     2010     2009     2010     2009  

Accounts receivable

    $ (13,780 )    $ (1,689 )    $ (23,433 )    $ 3,122   

Income taxes receivable

      (63 )      5,183        14,831        —     

Inventories

      (13,132 )      2,957        32,572        33,136   

Prepaid expenses and other current assets

      2,382        2,736        4,415        4,404   

Accounts payable and accrued liabilities

      11,088        (5,009 )      (6,205 )      (49,285 ) 

Taxes payable

      5,613        4,203        28,623        (15,866 ) 
                                
   $ (7,892 )    $ 8,381      $ 50,803      $ (24,489 ) 
                                

 

  (b) Non-cash investing activities:

 

     Three months ended
September 30		      Nine months ended
September 30		  
     2010      2009      2010      2009  

Non-cash additions to intangible assets and property, plant and equipment

    $ 1,428       $ 9,632       $ 4,414       $ 10,588   

 

  (c) Interest and taxes paid:

 

     Three months ended
September 30		      Nine months ended
September 30		  
     2010      2009      2010      2009  

Interest paid

    $ 254       $ 74       $ 264       $ 273   

Taxes paid

      6,619         2,024         8,857         26,400   

 

15. Segmented information

HudBay is a Canadian-based, integrated base metals mining, metallurgical processing and refining company. When making decisions on expansions, opening or closing mines, as well as day-to-day operations, management evaluates profitability by operating segment described below. Included in “HBMS” are the Company’s mines and metallurgical facilities in Manitoba, Saskatchewan, Michigan and Ontario. The HMI Nickel segment relates mainly to the Fenix nickel project. The “Other” segment consists of our Balmat operations, now on care and maintenance, and our HudBay Michigan subsidiary. Accounting policies for all segments are the same as those described in note 2.

 

19

HUDBAY MINERALS INC.

Notes to Interim Consolidated Financial Statements

(Unaudited and in thousands of Canadian dollars, except where otherwise noted)

For the three and nine months ended September 30, 2010

 

 

 

     Three months ended
September 30, 2010		  
     HBMS     HMI
Nickel		     Other     Corporate     Total  

Revenue from external customers

    $ 163,367      $ —        $ —        $ —        $ 163,367   

Operating

      88,933        3,157        564        (2 )      92,652   

Depreciation and amortization

      25,171        33        —          63        25,267   

Other expense1

      6,324        259        260        8,407        15,250   
                                        

Earnings (loss) before the following

      42,939        (3,449 )      (824 )      (8,468 )      30,198   

Exploration

      (3,902 )      (288 )      (1,672 )      (6 )      (5,868 ) 

Other income (expenses)

      303        14        (6 )      3,445        3,756   
                                        

Earnings (loss) before interest and taxes

      39,340        (3,723 )      (2,502 )      (5,029 )      28,086   

Interest income

              1,486   

Tax expense

              (17,902 ) 
                

Net earnings before non-controlling interest

              11,670   
                

Total assets2

      881,510        384,608        17,874        781,604        2,065,596   

Property, plant and equipment3

      477,268        377,398        14,877        631        870,174   

Additions to property, plant and equipment4

      39,971        403        2,762        13        43,149   

 

1

Includes foreign exchange gains and losses, which fluctuate from period to period.

2

Total assets do not reflect intercompany balances, which have been eliminated on consolidation.

3

Includes intangible assets which have been classified in “other assets”.

4

Represents cash additions to property, plant and equipment and intangible assets. For non-cash additions, see note 14.

 

     Three months ended September 30, 2009  
     HBMS     HMI
Nickel		     Other     Corporate     Total  

Revenue from external customers

    $ 194,589      $ (202 )    $ 221      $ —        $ 194,608   

Operating

      117,210        1,365        619        (25 )      119,169   

Depreciation and amortization

      28,712        70        —          40        28,822   

Other expense1

      7,697        379        306        7,856        16,238   
                                        

Earnings (loss) before the following

      40,970        (2,016 )      (704 )      (7,871 )      30,379   

Exploration

      (517 )      (42 )      (409 )      (15 )      (983 ) 

Other income (expenses)

      252        206        2,155        133        2,746   
                                        

Earnings (loss) before interest and taxes

      40,705        (1,852 )      1,042        (7,753 )      32,142   

Interest income

              805   

Tax expense

              (12,836 ) 
                

Net earnings before non-controlling interest

              20,111   
                

Total assets2

      860,324        384,622        6,788        749,042        2,000,776   

Property, plant and equipment3

      441,516        375,514        270        780        818,080   

Additions to property, plant and equipment4

      16,609        (558 )      —          129        16,180   

 

1

Includes foreign exchange gains and losses, which fluctuate from period to period.

2

Total assets do not reflect intercompany balances, which have been eliminated on consolidation.

3

Includes intangible assets which have been classified in “other assets”.

4

Represents cash additions to property, plant and equipment and intangible assets. For non-cash additions, see note 14.

 

20

HUDBAY MINERALS INC.

Notes to Interim Consolidated Financial Statements

(Unaudited and in thousands of Canadian dollars, except where otherwise noted)

For the three and nine months ended September 30, 2010

 

 

 

     Nine months ended
September 30, 2010		  
     HBMS     HMI
Nickel		     Other     Corporate
activities		     Total  

Revenue from external customers

    $ 595,538      $ —        $ —        $ —        $ 595,538   

Operating

      341,985        8,577        5,199        44        355,805   

Depreciation and amortization

      82,382        95        —          141        82,618   

Other expense1

      13,099        752        560        16,827        31,238   
                                        

Earnings (loss) before the following:

      158,072        (9,424 )      (5,759 )      (17,012 )      125,877   

Exploration

      (9,650 )      (1,555 )      (7,626 )      (37 )      (18,868 ) 

Other income (expenses)

      1,617        —          —          4,537        6,154   
                                        

Earnings (loss) before interest and taxes

      150,039        (10,979 )      (13,385 )      (12,512 )      113,163   
                                  

Interest income

              3,336   

Tax expense

              (68,118 ) 
                

Net earnings before non-controlling interest

              48,381   
                

Additions to property, plant and equipment2

      111,248        1,828        3,334        23        116,433   

 

1

Includes foreign exchange gains and losses, which fluctuate from period to period.

2

Represents cash additions to property, plant and equipment and intangible assets. For non-cash additions, see note 14.

 

     Nine months ended
September 30, 2009		  
     HBMS     HMI
Nickel		     Other     Corporate
Activities		     Total  

Revenue from external customers

    $ 553,053      $ —        $ 996      $ —        $ 554,049   

Operating

      389,874        6,187        3,733        —          399,794   

Depreciation and amortization

      72,684        232        —          162        73,078   

Other expenses1

      19,983        1,975        633        28,354        50,945   
                                        

Earnings (loss) before the following:

      70,512        (8,394 )      (3,370 )      (28,516 )      30,232   

Exploration

      (2,548 )      (169 )      (749 )      (149 )      (3,615 ) 

Other income (expenses)

      (52 )      206        2,161        99,857        102,172   
     —          —          —          —          —     
                                        

Earnings (loss) before interest and tax

      67,912        (8,357 )      (1,958 )      71,192        128,789   
                                  

Interest income

              3,601   

Tax expense

              (26,804 ) 
                

Net earnings before non-controlling interest

              105,586   
                

Additions to property, plant and equipment2

      58,481        5,033        —          258        63,772   

 

1

Includes foreign exchange gains and losses, which fluctuate from period to period.

2

Represents cash additions to property, plant and equipment and intangible assets. For non-cash additions, see note 14.

 

21

HUDBAY MINERALS INC.

Notes to Interim Consolidated Financial Statements

(Unaudited and in thousands of Canadian dollars, except where otherwise noted)

For the three and nine months ended September 30, 2010

 

 

 

The Company’s revenue by significant product types:

 

     Three months ended
September 30		      Nine months ended
September 30		  
     2010      2009      2010      2009  

Copper

    $ 70,996       $ 101,044       $ 287,161       $ 287,391   

Zinc

      39,244         48,979         134,206         118,591   

Gold

      22,745         22,798         80,521         80,760   

Silver

      2,971         7,854         15,612         26,272   

Other

      27,411         13,933         78,038         41,035   
                                   
   $ 163,367       $ 194,608       $ 595,538       $ 554,049   
                                   

The above revenues include revenues from the sale of metal produced from purchase of concentrates of:

 

     Three months ended
September 30		      Nine months ended
September 30		  
     2010      2009      2010      2009  

Copper

    $ —         $ 12,802       $ 305       $ 54,888   

Zinc

      9,710         17,026         28,419         37,980   

Gold

      —           39         —           389   

Silver

      —           3,368         —           14,144   

 

16. Interest and other income

 

     Three months ended
September 30		     Nine months ended
September 30		  
     2010     2009     2010     2009  

Interest income

    $ 1,785      $ 889      $ 3,646      $ 3,719   

Interest expense

      (300 )      (74 )      (312 )      (118 ) 

Gain on disposal of investments

      1,030        309        2,124        100,217   

Other income

      618        2,205        659        2,417   
                                
   $ 3,133      $ 3,329      $ 6,117      $ 106,235   
                                

 

22

HUDBAY MINERALS INC.

Notes to Interim Consolidated Financial Statements

(Unaudited and in thousands of Canadian dollars, except where otherwise noted)

For the three and nine months ended September 30, 2010

 

 

 

17. Earnings per share data:

 

     Three months ended
September 30		      Nine months ended
September 30		  
     2010      2009      2010      2009  

Weighted average common shares outstanding

      148,949,050         153,443,348         151,114,563         153,432,764   

Plus net incremental shares from assumed conversions:

            

- Warrants

      —           508         —           421   

- Stock options

      738,960         621,239         684,604         515,157   
                                   

Diluted weighted average common shares

      149,688,010         154,065,095         151,799,167         153,948,342   
                                   

 

18. Subsequent Event

On November 3, 2010, the Company arranged a new US$300 million revolving credit facility with a syndicate of lenders. The facility has an initial term of four years and is secured by a pledge of assets of the parent company and is unconditionally guaranteed by the Company’s material subsidiaries. Upon closing, restricted cash on deposit to support letters of credit was reclassified to cash and cash equivalents.

 

23