Audited Consolidated Financial Statements
(In US dollars)
HUDBAY MINERALS INC.
Years ended December 31, 2019 and 2018
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management of HudBay Minerals Inc. ("Hudbay" or the "Company") is responsible for establishing and maintaining internal control over financial reporting ("ICFR").
Under the supervision of and with the participation of the Chief Executive Officer and the Chief Financial Officer, Hudbay's management assessed the effectiveness of the Company's ICFR as at December 31, 2019 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, 2019.
The effectiveness of the Company's ICFR as of December 31, 2019 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, 2019.
| Peter Kukielski | David Bryson |
| President and Chief Executive Officer | Senior Vice President and Chief Financial Officer |
Toronto, Canada
February 20, 2020
 | Deloitte Canada
Bay Adelaide Centre
8 Adelaide Street West
Suite 200
Toronto, ON. M5H 0A9
Canada
Tel: +1 (416) 601 6150
Fax: +1 (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, 2019 and 2018, the related consolidated income statements, consolidated statements of comprehensive loss, changes in equity and cash flows for each of the two years in the period ended December 31, 2019, 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, 2019 and 2018, and its financial performance and its cash flows for each of the two years in the period ended December 31, 2019, in conformity 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, 2019, 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 20, 2020, 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 Notes 2d, 3j and 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") 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 a fair value specialist.
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.
• With the assistance of a fair value specialist:
◦ 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 change in discount rate by testing the source information underlying the determination of the discount rate.
Impairment - Testing of Impairment of Non-Financial Assets - Arizona CGU - Refer to Notes 6e and 12 to the financial statements
Critical Audit Matter Description
The Company identified an indicator of impairment for the Arizona CGU as a result of a legal ruling in Arizona related to the Rosemont project and the subsequent impact to the Company's market capitalization deficiency. To test for impairment, the Company uses fair value less cost of disposal to determine the recoverable amount of the CGU. It was determined that the recoverable amount of the CGU was lower than its carrying value, causing the Company to recognize an impairment loss.
While there are several assumptions that go into determining the recoverable amount, the judgments with the highest degree of subjectivity in the valuation model are:
• Future long-term copper price
• Discount rate
• Value of mineral resources not included in the life of mine ("LOM") plan (based on the implied per tonne value for the Arizona resources adjusted for characteristics of the resources multiplied by the resources tonnage)
• Beginning date of project cash flows incorporating permit related project delays in relation to commencement of initial construction of the Rosemont project
Changes in these assumptions could have a significant impact on the recoverable amount of the CGU, thereby also having a significant effect on the conclusion surrounding whether an impairment loss exists and if so, the potential quantum of the loss. Auditing the assumptions surrounding the future long-term copper price, discount rate, the value of mineral resources not included in the LOM plan, and the beginning date of project cash flows incorporating permit related project delays to commence initial construction used in the valuation model 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 a fair value specialist.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the future long-term copper price, the discount rate, the value of mineral resources not included in the LOM plan, and the beginning date of project cash flows incorporating permit related project delays to commence initial construction used in the valuation models to determine the recoverable amount of the CGU included the following, among others:
• Evaluated the effectiveness of the controls surrounding the future long-term copper price, the discount rate, the value of mineral resources not included in the LOM plan, and the beginning date of project cash flows incorporating permit related project delays to commence initial construction used in the valuation models.
• Assessed the information received from internal and external legal counsel to understand developments in legal matters in order to evaluate the beginning date of project cash flows incorporating permit related project delays to commence initial construction.
• Analyzed the probability that management would proceed with extraction of resources, which is an assumption management assigned against the value per pound of resources used in the determination of the value of mineral resources not included in the LOM plan.
• With the assistance of a fair value specialist:
◦ Evaluated the future long-term copper price by comparing management forecasts to third party forecasts,
◦ Evaluated the discount rate by testing the source information underlying the determination of the discount rate, and developing a range of independent estimates and comparing those to the discount rate used, and
◦ Evaluated the value of mineral resources not included in the LOM plan by (1) estimating the value per pound of resources and compared it to management's estimate, and (2) assessing market transactions to determine the range of exploration value per pound observed and compared against management's estimate of the value per pound of resources.
/s/ Deloitte LLP
Chartered Professional Accountants
Licensed Public Accountants
Toronto, Canada
February 20, 2020
We have served as the Company's auditor since 2005.
| Deloitte Canada
Bay Adelaide Centre
8 Adelaide Street West
Suite 200
Toronto, ON. M5H 0A9
Canada
Tel: +1 (416) 601 6150
Fax: +1 (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, 2019, 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, 2019, 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, 2019, of the Company and our report dated February 20, 2020, 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 20, 2020
HUDBAY MINERALS INC. |
Consolidated Balance Sheets |
(in thousands of US dollars) |
| | | | Dec. 31, | | | Dec. 31, | |
| | Note | | 2019 | | | 2018 | |
| Assets | | | | | | | |
| Current assets | | | | | | | |
| Cash and cash equivalents | 7 | $ | 396,146 | | $ | 515,497 | |
| Trade and other receivables | 8 | | 105,994 | | | 117,153 | |
| Inventories | 9 | | 138,820 | | | 118,474 | |
| Prepaid expenses and other current assets | | | 12,737 | | | 8,894 | |
| Other financial assets | 10 | | 2,049 | | | 10,366 | |
| Taxes receivable | | | 7,289 | | | 2,008 | |
| | | | 663,035 | | | 772,392 | |
| Receivables | 8 | | 19,264 | | | 39,121 | |
| Inventories | 9 | | 19,455 | | | 19,476 | |
| Other financial assets | 10 | | 11,287 | | | 15,159 | |
| Intangibles and other assets | 11 | | 10,411 | | | 4,162 | |
| Property, plant and equipment | 12 | | 3,662,559 | | | 3,819,812 | |
| Deferred tax assets | 22b | | 69,950 | | | 15,513 | |
| | | $ | 4,455,961 | | $ | 4,685,635 | |
| Liabilities | | | | | | | |
| Current liabilities | | | | | | | |
| Trade and other payables | 13 | $ | 192,404 | | $ | 171,952 | |
| Taxes payable | | | 2,146 | | | 5,508 | |
| Other liabilities | 14 | | 49,411 | | | 30,551 | |
| Other financial liabilities | 15 | | 28,076 | | | 12,425 | |
| Lease liabilities | 16 | | 32,781 | | | 20,472 | |
| Deferred revenue | 18 | | 86,933 | | | 86,256 | |
| | | | 391,751 | | | 327,164 | |
| Other financial liabilities | 15 | | 39,784 | | | 18,771 | |
| Lease liabilities | 16 | | 49,166 | | | 53,763 | |
| Long-term debt | 17 | | 985,255 | | | 981,030 | |
| Deferred revenue | 18 | | 476,823 | | | 479,822 | |
| Provisions | 19 | | 280,850 | | | 204,648 | |
| Pension obligations | 20 | | 29,599 | | | 23,863 | |
| Other employee benefits | 21 | | 116,778 | | | 93,628 | |
| Deferred tax liabilities | 22b | | 237,832 | | | 324,090 | |
| | | | 2,607,838 | | | 2,506,779 | |
| Equity | | | | | | | |
| Share capital | 23b | | 1,777,340 | | | 1,777,340 | |
| Reserves | | | (24,250 | ) | | (41,254 | ) |
| Retained earnings | | | 95,033 | | | 442,770 | |
| | | | 1,848,123 | | | 2,178,856 | |
| | | $ | 4,455,961 | | $ | 4,685,635 | |
| Commitments (note 27) | |
HUDBAY MINERALS INC. |
Consolidated Statements of Cash Flows |
(in thousands of US dollars) |
| | Note | | Year ended December 31, | |
| | 2019 | | | 2018
(Note 29a) | |
| Cash generated from operating activities: | | | | | | |
| (Loss) profit for the year | | $ | (343,810 | ) | $ | 85,416 | |
| Tax (recovery) expense | 22a | | (108,953 | ) | | 85,421 | |
| Items not affecting cash: | | | | | | | |
| Depreciation and amortization | 6b | | 346,634 | | | 333,144 | |
| Share-based payment expenses (recoveries) | 6c | | 2,714 | | | (2,373 | ) |
| Finance expense, net | 6g | | 154,361 | | | 143,550 | |
| Change in fair value of derivatives | 6g | | 3,708 | | | (1,514 | ) |
| Impairment loss | 6e | | 322,249 | | | - | |
| Amortization of deferred revenue | 18 | | (76,103 | ) | | (93,382 | ) |
| Unrealized gain on warrants | 6g | | - | | | (6,748 | ) |
| Loss on investments | 6g | | 4,539 | | | 3,798 | |
| Pension and other employee benefit payments, net of accruals | | | 2,148 | | | (94 | ) |
| Write down of UCM receivable | 6d | | 25,978 | | | - | |
| Other and foreign exchange | | | 672 | | | (8,571 | ) |
| Taxes paid | | | (26,853 | ) | | (37,295 | ) |
| Operating cash flow before change in non-cash working capital | | | 307,284 | | | 501,352 | |
| Change in non-cash working capital | 29a | | 3,572 | | | (21,800 | ) |
| | | | 310,856 | | | 479,552 | |
| Cash used in investing activities: | | | | | | |
| Acquisition of property, plant and equipment | | | (259,202 | ) | | (190,899 | ) |
| Proceeds from disposal of investments | | | - | | | 53 | |
| Acquisition of Mason | | | - | | | (19,050 | ) |
| Acquisition of subsidiary, net of cash acquired | 5 | | (44,688 | ) | | 4,224 | |
| Change in restricted cash | | | 3,401 | | | (3,196 | ) |
| Net interest received | | | 8,119 | | | 6,732 | |
| | | | (292,370 | ) | | (202,136 | ) |
| Cash used in financing activities: | | | | | | |
| Interest paid on long-term debt | | | (74,750 | ) | | (74,750 | ) |
| Financing costs | | | (26,149 | ) | | (20,564 | ) |
| Lease payments | | | (32,952 | ) | | (20,926 | ) |
| Net proceeds from equity transactions | | | - | | | (69 | ) |
| Dividends paid | 23b | | (3,927 | ) | | (4,045 | ) |
| | | | (137,778 | ) | | (120,354 | ) |
| Effect of movement in exchange rates on cash and cash equivalents | | | (59 | ) | | 1,936 | |
| Net (decrease) increase in cash and cash equivalents | | | (119,351 | ) | | 158,998 | |
| Cash and cash equivalents, beginning of the year | | | 515,497 | | | 356,499 | |
| Cash and cash equivalents, end of the year | | $ | 396,146 | | $ | 515,497 | |
| For supplemental information, see note 29. | |
HUDBAY MINERALS INC. |
Consolidated Income Statements |
(in thousands of US dollars) |
| | Note | Year ended December 31, | |
| | | 2019 | | | 2018 | |
| Revenue | 6a | | $ |
1,237,439 | | $ |
1,472,366 | |
| Cost of sales | | | | | | | | |
| Mine operating costs | | | | 741,342 | | | 765,959 | |
| Depreciation and amortization | 6b | | | 344,555 | | | 332,667 | |
| | | | | 1,085,897 | | | 1,098,626 | |
| Gross profit | | | | 151,542 | | | 373,740 | |
| Selling and administrative expenses | | | | 36,170 | | | 27,243 | |
| Exploration and evaluation expenses | | | | 30,774 | | | 28,570 | |
| Other operating expenses | 6d | | | 51,116 | | | 19,071 | |
| Impairment loss | 6e | | | 322,249 | | | - | |
| Results from operating activities | | | | (288,767 | ) | | 298,856 | |
| Finance income | 6g | | | (8,527 | ) | | (8,450 | ) |
| Finance expenses | 6g | | | 162,888 | | | 152,000 | |
| Other finance loss (gains) | 6g | | | 9,635 | | | (15,531 | ) |
| Net finance expense | | | | 163,996 | | | 128,019 | |
| | | | | | | | | |
| (Loss) profit before tax | | | | (452,763 | ) | | 170,837 | |
| Tax (recovery) expense | 22a | | | (108,953 | ) | | 85,421 | |
| (Loss) profit for the year | | | $ |
(343,810 | ) | $ |
85,416 | |
| | | | | | | | | |
| (Loss) earnings per share | | | | | | | | |
| Basic and diluted | | | $ | (1.32 | ) | $ | 0.33 | |
| | | | | | | | | |
| Weighted average number of common shares outstanding: | |
| Basic and diluted | | | | 261,272,151 | | | 261,271,621 | |
HUDBAY MINERALS INC. |
Consolidated Statements of Comprehensive Loss |
(in thousands of US dollars) |
| | | Year ended December 31, | |
| | | 2019 | | | 2018 | |
| (Loss) profit for the year | $ | (343,810 | ) | $ | 85,416 | |
| | | | | | | |
| Other comprehensive (loss) income: | | | | | | |
| Item that will be reclassified subsequently to profit or loss: | | | | | | |
| Recognized directly in equity: | | | | | | |
| Net gain (loss) on translation of foreign currency balances | | 9,220 | | | (24,371 | ) |
| | | 9,220 | | | (24,371 | ) |
| | | | | | | |
| Items that will not be reclassified subsequently to profit or loss: | | | | | | |
| Recognized directly in equity: | | | | | | |
| Remeasurement - actuarial (loss) gain | | (20,072 | ) | | 9,060 | |
| Tax effect | | 1,878 | | | 520 | |
| | | (18,194 | ) | | 9,580 | |
| | | | | | | |
| Other comprehensive loss net of tax, for the year | | (8,974 | ) | | (14,791 | ) |
| Total comprehensive loss for the year | $ | (352,784 | ) | $ | 70,625 | |
HUDBAY MINERALS INC. |
Consolidated Statements of Changes in Equity |
(in thousands of US dollars) |
| | | Share capital
(note 23) | | | Other capital reserves | | | Foreign currency translation reserve | | | Remeasurement reserve | | | Retained earnings | | | Total equity | |
| Balance, January 1, 2018 | $ | 1,777,409 | | $ | 28,837 | | $ | 12,552 | | $ | (67,852 | ) | $ | 361,399 | | $ | 2,112,345 | |
| Profit | | - | | | - | | | - | | | - | | | 85,416 | | | 85,416 | |
| Other comprehensive (loss) income | | - | | | - | | | (24,371 | ) | | 9,580 | | | - | | | (14,791 | ) |
| Total comprehensive (loss) income | | - | | | - | | | (24,371 | ) | | 9,580 | | | 85,416 | | | 70,625 | |
| Contributions by and distributions to owners: | | | | | | | | | | | | | | | | | | |
| Stock options exercised | | (80 | ) | | - | | | - | | | - | | | - | | | (80 | ) |
| Warrants exercised | | 11 | | | | | | | | | | | | | | | 11 | |
| Dividends (note 23b) | | - | | | - | | | - | | | - | | | (4,045 | ) | | (4,045 | ) |
| Total contributions by and distributions to owners | | (69 | ) | | - | | | - | | | - | | | (4,045 | ) | | (4,114 | ) |
| Balance, December 31, 2018 | $ | 1,777,340 | | $ | 28,837 | | $ | (11,819 | ) | $ | (58,272 | ) | $ | 442,770 | | $ | 2,178,856 | |
HUDBAY MINERALS INC. |
Consolidated Statements of Changes in Equity |
(in thousands of US dollars) |
| | | Share capital
(note 23) | | | Other capital reserves | | | Foreign currency translation reserve | | | Remeasurement reserve | | | Retained earnings | | | Total equity | |
| Balance, January 1, 2019 | $ | 1,777,340 | | $ | 28,837 | | $ | (11,819 | ) | $ | (58,272 | ) | $ | 442,770 | | $ | 2,178,856 | |
| Loss | | - | | | - | | | - | | | - | | | (343,810 | ) | | (343,810 | ) |
| Other comprehensive income (loss) | | - | | | - | | | 9,220 | | | (18,194 | ) | | - | | | (8,974 | ) |
| Total comprehensive income (loss) | | - | | | - | | | 9,220 | | | (18,194 | ) | | (343,810 | ) | | (352,784 | ) |
| Dilution of Partner's interest in Rosemont (note 5) | | | | | 25,978 | | | | | | | | | | | | 25,978 | |
| Contributions by and distributions to owners: | | | | | | | | | | | | | | | | | | |
| Dividends (note 23b) | | - | | | - | | | - | | | - | | | (3,927 | ) | | (3,927 | ) |
Total contributions by and distributions
to owners | | - | | | - | | | - | | | - | | | (3,927 | ) | | (3,927 | ) |
| Balance, December 31, 2019 | $ | 1,777,340 | | $ | 54,815 | | $ | (2,599 | ) | $ | (76,466 | ) | $ | 95,033 | | $ | 1,848,123 | |
HUDBAY MINERALS INC. |
Notes to Audited Consolidated Financial Statements |
(in thousands of US dollars, except where otherwise noted) |
Years ended December 31, 2019 and 2018 |
1. Reporting entity
On January 1, 2017, Hudbay Minerals Inc. amalgamated under the Canada Business Corporations Act with its subsidiaries Hudson Bay Mining and Smelting Co., Limited and Hudson Bay Exploration and Development Company Limited to form Hudbay Minerals Inc. ("HMI" or the "Company").The address of the Company's principal executive office is 25 York Street, Suite 800, Toronto, Ontario. The consolidated financial statements of the Company for the year ended December 31, 2019 and 2018 represent the financial position and the financial performance of the Company and its subsidiaries (together referred to as the "Group" or "Hudbay" and individually as "Group entities").
Wholly owned subsidiaries as at December 31, 2019 include HudBay Marketing & Sales Inc. ("HMS"), HudBay Peru Inc., HudBay Peru S.A.C. ("Hudbay Peru"), HudBay (BVI) Inc., Hudbay Arizona Inc, Rosemont Copper Company ("Rosemont") and Mason Resources (US) Inc ("Mason").
Hudbay is an integrated mining company primarily producing copper concentrate (containing copper, gold and silver), molybdenum concentrate and zinc metal. With assets in North and South America, the Group is focused on the discovery, production and marketing of base and precious metals. Directly and through its subsidiaries, Hudbay owns three polymetallic mines, four ore concentrators and a zinc production facility in northern Manitoba and Saskatchewan (Canada) and Cusco (Peru) and copper projects in Arizona and Nevada (United States). The Group also has equity investments in a number of junior exploration companies. The Company is governed by the Canada Business Corporations Act and its shares are listed under the symbol "HBM" on the Toronto Stock Exchange, New York Stock Exchange and Bolsa de Valores de Lima.
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, 2019.
The Board of Directors approved these consolidated financial statements on February 20, 2020.
(b) Functional and presentation currency:
The Group's consolidated financial statements are presented in US dollars, which is the Company's and all material subsidiaries' functional currency, except the Company's Manitoba business unit, which has a functional currency of Canadian dollars. All values are rounded to the nearest thousand ($000) except where otherwise indicated.
(c) Basis of measurement:
The consolidated financial statements have been prepared on the historical cost basis except for the following items in the consolidated balance sheets:
- Derivatives, embedded derivatives, other financial instruments, and financial assets measured at fair value through profit or loss ("FVTPL");
- Liabilities for cash-settled share-based payment 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.
(d) Use of judgements and estimates:
The preparation of the consolidated financial statements in conformity with IFRS requires the Group to make judgements, estimates and assumptions that affect the application of accounting policies, reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and reported amounts of revenue and expenses during the reporting period. Actual results may differ from these estimates.
The Group reviews these estimates and underlying assumptions on an ongoing basis, based on experience and other factors, including expectations of future events that the Group believe to be reasonable under the circumstances. Revisions to accounting estimates are recognized prospectively in the period in which the estimates are revised and in any future periods affected.
The following are critical and significant judgements and estimates impacting the consolidated financial statements:
- Indicators and testing of impairment (reversal of impairment) of non-financial assets (note 3h, 3j 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 the Group'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, 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"). Recoverable amounts are calculated using discounted after-tax cash flows based on cash flow projections and assumptions in the Group'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 Constancia and Arizona LOM plan, 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 Constancia and Arizona LOM plan. Expected future cash flows used to determine the recoverable amount during impairment testing are inherently uncertain and could materially change over time. Should management's estimate of the future not reflect actual events, impairments may be identified, which could have a material effect on the Group's consolidated financial statements. Although it is reasonably possible for a change in key assumptions to occur, the possible effects of a change in any single assumption may not fairly reflect the impact of CGU's fair value as the assumptions are inextricably linked.
- IFRS 15 - Revenue - adoption for stream transactions (note 18) - The Group has determined that the precious metals stream contracts are subject to variable consideration and contain a significant financing component. As such, the Group started recognizing a financing charge at each reporting period and will gross up the deferred revenue balance to recognize the significant financing element that is part of these contracts. Critical judgements were required in the adoption of IFRS 15 for stream accounting in determining appropriate discount rates for the significant financing component, assessing variable consideration as to its impact on the amortization of deferred revenue and determining the extent and nature the restatement would have on previous impairments and the capitalization of borrowing costs. In addition, significant judgement was required in determining if the stream transactions were to be accounted for as deferred revenue. Management has determined that the stream transactions are not derivatives as such obligations will be satisfied through the delivery of non-financial items (i.e., gold and silver credits) rather than cash or financial assets. It is management's intention to settle the obligations under the stream transactions through its own production and if this is not possible, this would lead to the stream transactions becoming a derivative since a cash settlement payment may be required. This would cause a change to the accounting treatment, resulting in the revaluation of the fair value of the agreement through the income statement on a recurring basis.
- Mineral reserves and resources (notes 3i, 3m, 3o and 18) - the Group estimates mineral reserves and resources to determine future recoverable mine production based on assessment of geological, engineering and metallurgical analyses, estimates of future production costs, capital costs and reclamation costs, as well as long term commodity prices and foreign exchange rates. There are numerous uncertainties inherent in estimating mineral reserves and resources, including many factors beyond the Group's control. The estimates are based on information compiled by appropriately qualified persons relating to the geological data on the size, depth and shape of the ore body and interpreting this data requires complex geological judgements. Changes in assumptions, including economic assumptions such as metals prices and market conditions, could have a material effect on the financial position and results of operations.
Changes in the mineral reserve or resource estimates may affect:
- the carrying value of exploration and evaluation of assets, capital works in progress, mining properties and plant and equipment;
- depreciation expense for assets depreciated either on a unit-of- production basis or on a straight line basis where useful lives are restricted by the life of the related mine or plan;
- the provision for decommissioning, restoration and similar liabilities;
- the carrying value of deferred tax assets; and
- the amortization of deferred revenue.
- Property plant and equipment (notes 3i and 12) - the carrying amounts of property, plant and equipment and exploration and evaluation assets on the Group's consolidated balance sheets are significant and reflect multiple estimates and applications of judgement. Management exercises judgement in determining whether the costs related to exploration and evaluation are eligible for capitalization and whether they are likely to be recoverable by future exploration, which may be based on assumptions about future events and circumstances. Judgement and estimates are used when determining whether exploration and evaluation assets should be transferred to capital works in progress within property, plant and equipment. For mines in the production stage, management applies judgement to determine development costs to be capitalized based on the extent they are incurred in order to access reserves mineable over more than one year. For depreciable property, plant and equipment assets, management makes estimates to determine depreciation. For assets depreciated using the straight line method, residual value and useful lives of the assets or components are estimated. A significant estimate is required to determine the total production basis for units-of-production depreciation. The most currently available reserve and resource report is utilized in determining the basis which has material impacts on the amount of depreciation recorded through inventories and the consolidated income statements. There are numerous uncertainties inherent in estimating mineral reserves, and assumptions that were valid at the reporting date may change when new information becomes available. The actual volume of ore extracted and any changes in these assumptions could affect prospective depreciation rates and carrying values.
In determining whether stripping costs incurred during the production phase of a mining property relate to mineral reserves and mineral resources that will be mined in a future period and therefore should be capitalized, the Group makes estimates of the proportion of stripping activity which relates to extracting current ore and the proportion which relates to obtaining access to ore reserves which will be mined in the future.
- Acquisition method accounting (notes 3a and 5) - during the acquisition of UCM's 7.95% interest in the Rosemont project, judgement was required to determine if the acquisition represented a business combination or an asset purchase. Since it was concluded that the acquisition represented the purchase of assets, there was no goodwill generated on the transaction and acquisition costs were capitalized to the assets purchased rather than expensed.
- Tax provisions (notes 3o and 22) - 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 the 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.
- Decommissioning and restoration obligations (notes 3m and 19) - significant judgement and estimates are utilized in the determination of the decommissioning and restoration provisions in the consolidated balance sheets. Judgement is involved in determining the timing and extent of cash outflows required to satisfy constructive obligations based on the timing of site closures in the LOM plans, expected unit costs to determine cash obligations to remediate disturbances and regulatory and constructive requirements to determine the extent of the remediation required. The timing of cash outflows and discount rates associated with discounting the provision are also key estimates. Changes in these estimates may result in a change in classification of the provision between non-current and current as well as material differences in the total provision recorded in the consolidated balance sheets.
- Pensions and other employee benefits (notes 3I, 20 and 21) - the Group's post retirement obligations relate mainly to ongoing health care benefits plans. The Group estimates obligations related to the pension and other employee benefits plans using actuarial determinations that incorporate assumptions using management's best estimates of factors including plan performance, salary escalation, retirement dates of employees and drug cost escalation rates. Due to the complexity of the valuation, the underlying assumptions and its long term nature, a defined benefit obligation is highly sensitive to changes in these assumptions. Management reviews all assumptions at each reporting date. In determining the appropriate discount rate, the Group considers the interest rates on corporate bonds in the respective currency with at least an AA rating, with extrapolated maturities corresponding to the expected duration of the defined benefit obligation. The mortality rate is based on publicly available mortality tables for the specific country, and the Group bases future salary increases and pension increases on expected future inflation rates for the respective country.
3. Significant accounting policies
The accounting policies set out below have been applied consistently to all periods presented in these consolidated financial statements and by all Group entities.
(a) Basis of consolidation:
Intercompany balances and transactions are eliminated upon consolidation. When a Group entity transacts with an associate or jointly controlled entity of the Group, unrealized profits and losses are eliminated to the extent of the Group's interest in the relevant associate or joint venture. The accounting policies of Group entities are changed when necessary to align them with the policies adopted by the Company.
Subsidiaries
A subsidiary is an entity controlled by the Group. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases.
Business combinations and goodwill
When the Group makes an acquisition, it first determines whether the assets acquired and liabilities assumed constitute a business, in which case the acquisition requires accounting as a business combination. Management applies judgement in determining whether the acquiree is capable of being conducted and managed for the purpose of providing a return, considering the inputs of the acquiree and processes applied to those inputs that have the ability to create outputs.
The Group applies the acquisition method of accounting to business combinations, whereby the goodwill is measured at the acquisition date as the fair value of the consideration transferred including the recognized amount of any non-controlling interests in the acquiree. When the excess is negative, a bargain purchase gain is recognized immediately in the consolidated income statements. The assessment of fair values on acquisition includes those mineral reserves and resources that are able to be reliably measured. In determining these fair values, management must also apply judgement in areas including future cash flows, metal prices, exchange rates and appropriate discount rates. Changes in such estimates and assumptions could result in significant differences in the amount of goodwill recognized.
The consideration transferred is the aggregate of the fair values at the date of acquisition of the sum of the assets transferred, the liabilities incurred or assumed, and the equity instruments issued by the acquirer in exchange for control of the acquiree. Acquisition-related costs are recognized in the consolidated income statements as incurred, unless they relate to 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 Group's previously held interests in the acquired entity are remeasured to fair value at the acquisition date, which is the date the Group attains control, and any resulting gain or loss is recognized in the consolidated income statements. Amounts previously recognized in other comprehensive income ("OCI") related to interests in the acquiree prior to the acquisition date are reclassified to the consolidated income statements, where such treatment would be appropriate if that interest were disposed of.
After initial recognition, goodwill is measured at cost less any accumulated impairment losses. For the purpose of impairment testing, goodwill acquired in a business combination is, from the acquisition date, allocated to each of the Group's CGUs that are expected to benefit from the synergies of the combination, irrespective of whether other assets or liabilities of the acquiree are assigned to those units. Goodwill is allocated to the lowest level at which it is monitored for internal management purposes and is not larger than an operating segment before aggregation. Where goodwill forms part of a CGU and part of the operation within that unit is disposed of, the goodwill associated with the disposed operation is included in the determination of any gain or loss on disposal.
Goodwill is not amortized and is tested for impairment annually and whenever there is an indication of impairment. If any such indication exists, the recoverable amount of the CGU is estimated in order to determine the extent of the impairment, if any. The recoverable amount is determined as the higher of fair value less direct costs to sell and the CGU's value in use. An impairment loss in respect of goodwill is not reversed.
Fair value for mineral interests and related goodwill is generally determined as the present value of the estimated future cash flows expected to arise from the continued use of the asset, including any expansion prospects, and its eventual disposal, using assumptions that an independent market participant may take into account.
Value in use is determined as the present value of the estimated future cash flows expected to arise from the continued use of the asset in its present form and its eventual disposal. Value in use is determined by applying assumptions specific to the Group's continued use and cannot take into account future development.
The weighted average cost of capital of the Group or comparable market participants is used as a starting point for determining the discount rates, with appropriate adjustments for the risk profile of the countries in which the individual CGUs operate and the specific risks related to the development of the project.
Where the asset does not generate cash flows that are independent of other assets, the Group estimates the recoverable amount of the CGU to which the asset belongs. If the carrying amount of an asset or CGU exceeds its recoverable amount, the carrying amount of the asset or CGU is reduced to its recoverable amount. An impairment loss is recognized as an expense in the consolidated income statements.
(b) Translation of foreign currencies:
Management determines the functional currency of each Group entity as the currency of the primary economic environment in which the entity operates.
Foreign currency transactions
Transactions in foreign currencies are translated to the respective functional currencies of Group entities at exchange rates in effect at the transaction dates.
At the end of each reporting period, monetary assets and liabilities denominated in foreign currencies are translated to the functional currency using the noon exchange rate. Non-monetary assets and liabilities measured at fair value are translated using the exchange rates at the date when fair value was determined. Non-monetary assets and liabilities measured at historical cost in a foreign currency are translated using exchange rates that were in effect at the transaction dates. The same translations are applied when an entity prepares its financial statements from books and records maintained in a currency other than its functional currency, except revenue and expenses may be translated at monthly average exchange rates that approximate those in effect at the transaction dates.
Foreign currency gains and losses arising on period-end revaluations are recognized in the consolidated income statements, except for 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 Group entities that have functional currencies other than the US dollar are translated to US dollars at the reporting date using the noon exchange rate. Revenue and expenses are translated at monthly average exchange rates that approximate those in effect at the transaction dates. Differences arising from these foreign currency translations are recognized in OCI and presented within equity in the foreign currency translation reserve. When a foreign operation is disposed, the relevant exchange differences accumulated in the foreign currency translation reserve are transferred to the consolidated income statements as part of the profit or loss on disposal. On the partial disposal of a subsidiary that includes a foreign operation, the relevant proportion of such amount is reattributed to non-controlling interests. On disposal of a partial investment in an associate or joint venture that includes a foreign operation while retaining significant influence or joint control, the relevant proportion is reclassified to profit or loss.
Net investment in a foreign operation
Foreign currency gains and losses arising on translation of a monetary item receivable from or payable to a foreign operation for which settlement is neither planned nor likely to occur in the foreseeable future are considered to form part of a net investment in the foreign operation. Such gains and losses are recognized in OCI and presented within equity in the foreign currency translation reserve.
c) Revenue recognition:
Revenue from the sale of goods is measured at the fair value of the consideration received or receivable, net of treatment and refining charges and pre-production revenue. Revenue from the sale of by-products is included within revenue.
Sales revenue is recognized when control of the goods sold has been transferred to the buyer. Control is deemed to have passed to the customer when significant risk and reward of the product has passed to the buyer, Hudbay has a present right to payment and physical possession of the product has been transferred to the buyer. 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.
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 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, 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 may revisit its revenue recognition policy.
The Group 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 stand alone selling basis to any separate performance obligations and are recognized over the period of time the goods sold are shipped, on a gross basis.
The Group recognizes deferred revenue in the event it receives payments from customers before a sale meets criteria for revenue recognition. There is a significant financing component associated with the Group's precious metal streaming arrangements 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 payments and other indirect expenses related to producing operations.
(e) Cash and cash equivalents:
Cash and cash equivalents include cash, demand deposits and short-term, highly liquid investments that are readily convertible to known amounts of cash and are subject to an insignificant risk of changes in value. Cash equivalents have maturities of three months or less at the date of acquisition. Interest earned is included in finance income on the consolidated income statements and in investing activities on the consolidated statements of cash flows.
Amounts that are restricted from being used for at least twelve months after the reporting date are classified as non-current assets and presented in restricted cash on the consolidated balance sheets. Changes in restricted cash balances are classified as investing activities on the consolidated statements of cash flows.
(f) Inventories:
Inventories consist of stockpiles, in-process inventory (concentrates and metals), metal products and supplies. Concentrates, metals and all other saleable products are valued at the lower of cost and estimated net realizable value. Net realizable value represents the estimated selling price for inventories less all estimated costs of completion and costs necessary to make the sale. Where the net realizable value is less than cost, the difference is charged to the consolidated income statements as an impairment charge in cost of sales. Costs associated with stripping activities in an open pit mine are capitalized to inventory and recorded through cost of sales unless the stripping activity can be shown to improve access to further quantities of ore that will be mined in future periods, in which case, the stripping costs are capitalized.
Cost of production of concentrate inventory is determined on a weighted average cost basis and the cost of production of finished metal inventory is determined using the first in first out basis. The cost of production includes direct costs associated with conversion of production inventory: material, labour, contractor expenses, purchased concentrates, and an attributable portion of production overheads and depreciation of all property, plant and equipment involved with the mining and production process. Hudbay measures in-process inventories based on assays of material received at metallurgical plants and estimates of recoveries in the production processes. Due to significant uncertainty associated with volume and metal content, immaterial costs are not allocated to routine operating levels of stockpiled ore. Estimates and judgements are required to assess the nature of any significant changes to levels of ore stockpiles and determining whether allocation of costs is required.
Supplies are valued at the lower of average cost and net realizable value. A regular review is undertaken to determine the extent of any provision for obsolescence.
(g) Intangible assets:
Computer software is measured at cost less accumulated amortization and accumulated impairment losses. Costs include all directly attributable costs necessary to create, produce and prepare the asset to be capable of operating it in the manner intended by management.
Amortization methods, useful lives, and residual values if any, are reviewed at each year end and adjusted prospectively, if required. When an intangible asset is disposed of, or when no further economic benefits are expected, the asset is derecognized, and any resulting gain or loss is recorded in the consolidated income statements.
Currently, the Group's intangible assets relate primarily to enterprise resource planning ("ERP") information systems, which are amortized over their estimated useful lives.
(h) Exploration and evaluation expenditures:
Exploration and evaluation activity begins when the Group obtains legal rights to explore a specific area and involves the search for mineral reserves, the determination of technical feasibility, and the assessment of commercial viability of an identified resource. Expenditures incurred in the exploration and evaluation phase include the cost of acquiring interests in mineral rights, licenses and properties and the costs of the Group's exploration activities, such as researching and analyzing existing exploration data, gathering data through geological studies, exploratory drilling, trenching, sampling, and certain feasibility studies.
The Group expenses the cost of its exploration and evaluation activities and capitalizes the cost of acquiring interests in mineral rights, licenses and properties in business combinations, asset acquisitions or option agreements. Amounts capitalized are recognized as exploration and evaluation assets and presented in property, plant and equipment. Exploration and evaluation assets acquired as a result of an asset acquisition or option agreement are initially recognized at cost, and those acquired in a business combination are recognized at fair value on the acquisition date. They are subsequently carried at cost less accumulated impairment. No depreciation is charged during the exploration and evaluation phase. The Group expenses the cost of subsequent exploration and evaluation activity related to acquired exploration and evaluation assets. Cash flows associated with acquiring exploration and evaluation assets are classified as investing activities in the consolidated statements of cash flows; those associated with exploration and evaluation expenses are classified as operating activities.
Judgement is required in determining whether the respective costs are eligible for capitalization where applicable, and whether they are likely to be recoverable, which may be based on assumptions about future events and circumstances. Estimates and assumptions made may change if new information becomes available.
The Group monitors exploration and evaluation assets for factors that may indicate their carrying amounts are not recoverable. If such indicators are identified, the Group tests the exploration and evaluation assets or their CGUs, as applicable, for impairment. The Group also tests impairment when assets reach the end of the exploration and evaluation phase.
Exploration and evaluation assets are transferred to capital works in progress within property, plant and equipment once the Group determines that probable future economic benefits will be generated as a result of the expenditures. The Group's determination of probable future economic benefit is based on management's evaluation of the technical feasibility and commercial viability of the geological properties of a given ore body based on information obtained through evaluation activities, including metallurgical testing, resource and reserve estimates and the economic assessment of whether the ore body can be mined economically. Tools that may be used to determine this include a preliminary feasibility study, confidence in converting resources into reserves and the probability that the property could be developed into a mine site. At that time, the property is considered to enter the development phase, and subsequent evaluation costs are capitalized.
(i) Property, plant and equipment:
The Group measures items of property, plant and equipment at cost less accumulated depreciation and any accumulated impairment losses.
The initial cost of an item of property, plant and equipment includes its purchase price or construction costs, including import duties and non-refundable purchase taxes, any costs directly attributable to bringing the asset into operation, and for qualifying assets, borrowing costs. The initial cost of property, plant and equipment also includes the initial estimate of the cost of dismantling and removing the item and restoring the site on which it is located, the obligation for which the Group incurs either when the item is acquired or as a consequence of having used the item during a particular period for purposes other than to produce inventories during that period.
Capitalization of costs ceases once an asset is in the location and condition necessary for it to be capable of operating in the manner intended by management. At this time, depreciation commences. For a new mine, this occurs upon commencement of commercial production. Any revenue earned in the process of preparing an asset to be capable of operating in the manner intended by management is included in the cost of the constructed asset. Any other incidental revenue earned prior to commencement of commercial production is recognized in the consolidated income statements.
Carrying amounts of property, plant and equipment, including assets under finance leases, are depreciated to their estimated residual value over the estimated useful lives of the assets or the estimated life of the related mine or plant, if shorter. Where components of an asset have different useful lives, depreciation is calculated on each separate component. Components may be physical or non-physical, including the cost of regular major inspections and overhauls required in order to continue operating an item of property, plant and equipment.
Certain items of property, plant and equipment are depreciated on a unit-of-production basis. The unit-of-production method is based on proven and probable tonnes of ore reserves. There are numerous uncertainties inherent in estimating ore reserves, and assumptions that were valid at the reporting date may change when new information becomes available. The actual volume of ore extracted and any changes in these assumptions could affect prospective depreciation rates and carrying values.
The carrying amount of an item of property, plant and equipment is derecognized on disposal or when no future economic benefits are expected from its use or disposal. Upon derecognition of an item of property, plant and equipment, the difference between its carrying value and net sales proceeds, if any, is presented as a gain or loss in other operating income or expense in the consolidated income statements.
(i) Capital works in progress:
Capital works in progress consist of items of property, plant and equipment in the course of construction or mineral properties in the course of development, including those transferred upon completion of the exploration and evaluation phase. On completion of construction or development, costs are transferred to plant and equipment and/or mining properties as appropriate. Capital works in progress are not depreciated.
(ii) Mining properties:
Mining properties consist of costs transferred from capital works in progress when a mining property reaches commercial production, costs of subsequent mine and exploration development, and acquired mining properties in the production stage.
Mining properties include costs directly attributable to bringing a mineral asset into the state where it is capable of operating in the manner intended by management and includes such costs as the cost of shafts, ramps, track haulage drifts, ancillary drifts, pumps, electrical substations, refuge stations, ventilation raises, permanent manways, and ore and waste pass raises. The determination of development costs to be capitalized during the production stage of a mine operation requires the use of judgements and estimates such as estimates of tonnes of waste to be removed over the life of the mining area and economically recoverable reserves extracted as a result.
A mining property is considered to be capable of operating in a manner intended by management when it commences commercial production. Upon commencement of commercial production, a mining property is depreciated on a unit-of-production method. Unit-of-production depreciation rates are determined based on the related proven and probable mineral reserves and associated future development costs.
Subsequent mine development costs are capitalized to the extent they are incurred in order to access reserves mineable over more than one year. Ongoing maintenance and development expenditures are expensed as incurred and included in cost of sales in profit or loss. These include ore stope access drifts, footwall and hangingwall drifts in stopes, drawpoints, drill drifts, sublevels, slots, drill raises, stope manway access raises and definition diamond drilling.
(iii) Plant and equipment:
Plant and equipment consists of buildings and fixtures, surface and underground fixed and mobile equipment and assets under finance lease.
Plant and equipment are depreciated on either unit-of-production or straight-line basis based on factors including the production life of assets and mineable reserves. In general, mining assets are depreciated using a unit-of-production method; equipment is depreciated using the straight-line method, based on the shorter of its useful life and that of the related mine or facility; and plants are depreciated using the straight-line method, with useful lives limited by those of related mining assets.
(iv) Right-of-use ("ROU") lease assets:
The Group has applied IFRS 16 using the modified retrospective approach. The impact of the changes in disclosed in Note 4.
At inception of a contract, the Group 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 group 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;
• The Group has the right to obtain substantially all of the economic benefits from use of the asset throughout the period of use; and
• The Group 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 assets purpose is predetermined, the Group is determined to have the right to direct the use of the asset if either:
• the Group has the right to operate the asset;
• or the Group designed the asset in a way that predetermines how and for what purpose it will be used.
The Group has applied this approach to contracts entered into or changed on or after January 1, 2019. The Group's approach to other contracts is explained in Note 4.
The Group recognizes a right-of-use ("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, the Group's incremental borrowing rate. Generally, the Group uses its incremental borrowing rate as the discount rate.
Lease payments included in the measurement of the lease liability comprise fixed payments including insubstance 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 the Group reasonably expects to incur due to purchase options, extension options and termination options reasonably expected to be exercised.
The lease liability is measured at amortised 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.
The Group 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 Group has elected not to recognise 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. The Group recognizes the lease payments associated with these leases as an expense on a straight-line basis over the lease term.
The Group does not enter into transactions where the Group acts as a lessor.
The incremental borrowing rate used for new ROU leases as at January 1, 2019 and going forward which are required to incorporate assessments of asset specific attributes such as quality and location 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 assets - unit-of-production
• Plant and Equipment
• Equipment - straight-line over 1 to 20 years
• Other plant assets - straight-line over 1 to 20 years / unit-of-production
• ROU Assets - straight-line over 1 to 23 years
The Group 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. The Group considers a range of factors when determining the level of activity that represents commercial production for a particular project, including a pre-determined percentage of design capacity for the mine and mill; achievement of continuous production, ramp-ups, or other output; or specific factors such as recoveries, grades, or inventory build-ups. In a phased mining approach, management may consider achievement of specific milestones at each phase of completion. In a non-phased mining approach, management considers average actual metrics that are at least 60% of average design capacity or plan over a continuous period. Management assesses the operation's ability to sustain production over a period of approximately one to three months, depending on the complexity related to the stability of continuous operation. Commercial production is considered to have commenced, and depreciation expense is recognized, at the beginning of the month after criteria have been met.
(vii) Capitalized borrowing costs:
The Group capitalizes borrowing costs that are directly attributable to the acquisition, construction or production of qualifying assets, which are assets that necessarily take a substantial period of time to get ready for their intended use or sale. Capitalization of borrowing costs ceases once the qualifying assets commence commercial production or are otherwise ready for their intended use or sale.
Where funds are borrowed specifically to finance a project, the amount capitalized represents the actual borrowing costs incurred. Where the funds used to finance a project form part of general borrowings, the amount capitalized is calculated using a weighted average of interest rates applicable to relevant general borrowings of the Group during the period, to a maximum of actual borrowing costs incurred. Investment income earned by temporarily investing specific borrowings pending their expenditure on qualifying assets is deducted from the borrowing costs eligible for capitalization. Capitalization of interest is suspended during extended periods in which active development is interrupted.
All other borrowing costs are recognized in the consolidated income statements in the period in which they are incurred.
(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. Capitalized stripping costs are included in "mining properties" within property, plant and equipment.
Capitalized stripping costs are depreciated using a units-of-production method over the expected reserves within a given phase of mine development.
(j) Impairment of non-financial assets:
At the end of each reporting period, the Group reviews the carrying amounts of property, plant and equipment, exploration and evaluation assets and intangible assets - computer software to determine whether there is any indication of impairment. If any such indication exists, the Group estimates the recoverable amount of the asset in order to determine the extent of the impairment loss, if any. The Group generally assesses impairment at the level of CGUs, which are the smallest identifiable groups of assets that generate cash inflows that are largely independent of cash inflows from other assets.
The Group's CGUs consist of Manitoba, Peru, Arizona and greenfield exploration and evaluation assets.
The Group 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.
- Value in use is determined as the present value of the estimated future cash flows expected to arise from the continued use of the asset or CGU in its present form and its eventual disposal, discounted using a pre-tax rate that reflects current market assessments of the time value of money and risks specific to the asset for which estimates of future cash flows have not been adjusted. Value in use calculations apply assumptions specific to the Group's continued use and cannot take into account future development. These assumptions are different to those used in calculating fair value, and consequently the value in use calculation is likely to give a different result to a fair value calculation.
The Group estimates future cash flows based on estimated future recoverable mine production, expected sales prices (considering current and historical commodity prices, price trends and related factors), production levels and cash costs of production, all based on detailed engineering LOM plans. Future recoverable mine production is determined from reserves and resources after taking into account estimated dilution and recoveries during mining, and estimated losses during ore processing and treatment. Estimates of recoverable production from measured, indicated and inferred mineral resources not included in the LOM plan are assessed for economic recoverability and may also be included in the valuation of fair value less costs of disposal. Gains from the expected disposal of assets are not included in estimated future cash flows. Assumptions underlying future cash flow estimates are subject to risks and uncertainties. Changes in estimates may affect the expected recoverability of the Group's investments in mining properties.
If the carrying amount of an asset or CGU exceeds its recoverable amount, the carrying amount is reduced to the recoverable amount, and an impairment loss is recognized in the consolidated income statements in the expense category consistent with the function of the impaired asset or CGU. The Group presents impairment losses on the consolidated income statements as part of results from operating activities. Impairment losses recognized in respect of a CGU are allocated first to reduce the carrying amount of any goodwill allocated to the CGU and then to reduce the carrying amounts of other assets in the CGU on a pro-rata basis for depreciable assets.
The Group assesses previously recognized impairment losses each reporting date for any indications that the losses have decreased or no longer exist. Such an impairment loss is reversed, in full or in part, if there has been significant changes with a positive effect on the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset's carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortization, if no impairment loss had been recognized for the asset in prior years. Such reversals of impairment losses are recognized in the consolidated income statements. An impairment loss recognized in relation to goodwill is not reversed for subsequent increases in the recoverable amount.
(k) Assets held for sale:
The Group classifies non-current assets, or disposal groups consisting of assets and liabilities, as held for sale when it expects to recover their carrying amounts primarily through sale rather than through continuing use. To meet criteria to be held for sale, the sale must be highly probable, and the assets or disposal groups must be available for immediate sale in their present condition. The Group must be committed to a plan to sell the assets or disposal group, and the sale should be expected to qualify for recognition as a completed sale within one year from the date of classification.
The Group measures assets or disposal groups at the lower of their carrying amount and fair value less costs of disposal. Impairment losses on initial classification as held for sale and subsequent gains and losses on remeasurement are recognized in the consolidated income statements; however, gains are not recognized in excess of any cumulative impairment loss. Any impairment loss on a disposal group first is allocated to goodwill, and then to remaining assets and liabilities on pro rata basis, except that no loss is allocated to inventories, financial assets, deferred tax assets, employee benefit assets or investment property. Upon classifying assets or disposal groups as held for sale, the Group presents the assets separately as a single amount and the liabilities separately as a single amount on the consolidated balance sheets. When an asset no longer meets the criteria for classification as an asset held for sale, the Group records the asset at the lower of its recoverable amount and the carrying amount before the asset was classified as held for sale.
(l) Pension and other employee benefits:
The Group has non-contributory and contributory defined benefit programs for the majority of its Canadian employees. The defined benefit pension benefits are based on years of service and final average salary for the salaried plans and are based on a flat dollar amount combined with years of service for the hourly plans. The Group provides non pension health and other post employment benefits to certain active employees and pensioners (post employment benefits) and also provides disability income, health benefits and other post employment benefits to hourly and salaried disabled employees (other long-term employee benefits).
The Group accrues its obligations under the defined benefit plans as the employees render the services necessary to earn the pension and post employment benefits. The actuarial determination of the accrued benefit obligations for pensions and post employment benefits uses the projected benefit method pro-rated on service (which incorporates management's best estimate of future salary levels, other cost escalation, retirement ages of employees and other actuarial factors). For other long-term employee benefits, the Group recognizes the full cost of the benefit obligation at the time the employee becomes disabled. Actuarial advice is provided by external consultants.
For the funded defined benefit plans, the Group recognizes the deficit or excess of the fair value of plan assets over the present value of the defined benefit obligation as a liability or an asset in the consolidated balance sheets. However, the Group recognizes an excess of assets only to the extent that it represents a future economic benefit which is available in the form of refunds from the plan or reductions in future contributions to the plan. When these criteria are not met, it is not recognized but is disclosed in the notes to the consolidated financial statements. Impacts of minimum funding requirements in relation to past service are considered when determining the balance sheet position.
Defined benefit costs are categorized as follows:
- Service costs (including current service cost, past service cost, as well as gains and losses on curtailments and settlements and administration costs),
- Net interest expense or income, and
- Remeasurement
The first two components of defined benefit costs shown above are recognized in the consolidated income statements. Past service cost is recognized in the consolidated income statements in the period of a plan amendment. Net interest is calculated by applying the discount rate at the beginning of the period to the net defined benefit liability or asset.
Remeasurement, comprising actuarial gains and losses, the effect of changes to the asset ceiling (if applicable) and the return on plan assets (excluding interest), is reflected immediately in the consolidated balance sheets with a gain or loss recognised in OCI in the period in which they occur. Remeasurement recognised in OCI is reflected in the remeasurement reserve and will not be reclassified to the consolidated income statements. For the other long-term employee benefits plan, remeasurments are recognized immediately in the consolidated income statements.
Actuarial determinations used in estimating obligations relating to these plans incorporate assumptions using management's best estimates of factors including plan performance, salary escalation, retirement dates of employees and healthcare cost escalation rates. Due to the complexity of the valuation, the underlying assumptions and its long-term nature, a defined benefit obligation is highly sensitive to changes in these assumptions. All assumptions are reviewed at each reporting date. In determining the appropriate discount rate, management considers the interest rates on corporate bonds in the respective currency with at least an AA rating, with extrapolated maturities corresponding to the expected duration of the defined benefit obligation. The mortality rate is based on publicly available mortality tables for the specific country. Future salary increases and pension increases are based on expected future inflation rates for the respective country.
The Group also has defined contribution plans providing pension benefits for certain of its salaried employees and certain of its US employees utilizing 401K plans. The Group recognizes the cost of the defined contribution plans based on the contributions required to be made during each period.
Termination benefits are recognized as an expense when the Group is committed demonstrably, without realistic possibility of withdrawal, to a formal detailed plan to either terminate employment before the normal retirement date, or to provide termination benefits as a result of an offer made to encourage voluntary redundancy. Termination benefits for voluntary redundancies are recognized as an expense if the Group has made an offer of voluntary redundancy, it is probable that the offer will be accepted, and the number of acceptances can be estimated reliably. Benefits that are payable more than one year after the reporting period are discounted to their present value.
(m) Provisions:
Provisions are recognized when the Group has a present obligation (legal or constructive) as a result of a past event, it is probable that an outflow of resources will be required to settle the obligation, and a reliable estimate can be made. The provisions are recorded as management's best estimate of the amount required to settle an obligation.
Provisions are stated at their present value, which is determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the liability.
Decommissioning, restoration and similar liabilities
Provisions are recorded for legal and constructive obligations associated with the future costs of rehabilitating the Group's current and previous operating and development sites. Such costs are associated with decommissioning and restoration activities such as dismantling and removing structures, rehabilitating mines and tailings, and reclamation and re-vegetation of affected areas.
The present value of estimated costs is recorded in the period in which the asset is installed or the environment is disturbed and a reasonable estimate of future costs and discount rates can be made. The provision is discounted using a risk-free rate, and estimates of future cash flows are adjusted to reflect risk.
Subsequent to the initial measurement, the obligation is adjusted to reflect the passage of time and changes in the estimated future cash flows underlying the obligation. The increase in the provision due to the passage of time is recognized as finance expense, whereas increases and decreases due to changes in the estimated future cash flows, which are not the result of current inventory production, are capitalized and depreciated over the life of the related asset. Actual costs incurred upon settlement of the site restoration obligation are charged against the provision to the extent the provision was established for those costs. Upon settlement of the liability, a gain or loss may be recorded. For closed sites, changes to estimated costs are recognized immediately in the consolidated income statements within other operating expenses.
The Group assesses the reasonableness of its estimates and assumptions each year and when conditions change and the estimates are revised accordingly. Judgement is required to determine the scope of future decommissioning and restoration activities, as well as such estimates and assumptions including discount rates, expected timing of decommissioning and restoration costs, inflationary factors and market risks. Changes in cost estimates, which may arise from changes in technology and pricing of the individual components of the cost may result in offsetting changes to the asset and liability and corresponding changes to the associated depreciation and finance costs. In view of the uncertainties concerning these future obligations, the ultimate timing and cost of reclamation and mine closure may differ materially from these estimates.
If the change in estimate results in a significant increase in the decommissioning liability and therefore an addition to the carrying value of the asset, the Group considers whether this is an indication of impairment of the asset as a whole and, if so, tests for impairment in accordance with IAS 36, Impairment of Assets. If, for mature mines, the revised mine assets net of decommissioning and restoration liabilities exceeds the recoverable value, that portion of the increase is charged directly to expense as an impairment loss.
In view of the uncertainties concerning environmental remediation, the ultimate cost of decommissioning and restoration liabilities could differ materially from the estimated amounts provided. The estimate of the total liability is subject to change based on amendments to laws and regulations and as new information concerning the Group's operations becomes available. Future changes, if any, to the estimated total liability as a result of amended requirements, laws, regulations and operating assumptions, as well as discount rates, may be significant and would be recognized prospectively as a change in accounting estimate, when applicable. Environmental laws and regulations are continually evolving in all regions in which the Group operates. The Group is not able to determine the impact, if any, of environmental laws and regulations that may be enacted in the future on its results of operations or financial position due to the uncertainty surrounding the ultimate form that such future laws and regulations may take.
Onerous contracts
A contract is considered to be onerous when the unavoidable costs of meeting obligations under the contract exceed the economic benefits expected to be received under it. The Group records a provision for any onerous contracts at the lesser of costs to comply with a contract and costs to terminate it.
Restructuring provisions
A provision for restructuring is recognized when management, with appropriate authority within the Group, has approved a detailed and formal restructuring plan, and the restructuring has either commenced or has been announced publicly. Future operating costs are not provided for.
(n) 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. The Group uses trade date accounting for regular way purchases or sales of financial assets. The Group determines the classification of its financial instruments and non-financial derivatives at initial recognition.
Financial assets and liabilities are offset and the net amount presented in the consolidated balance sheets when, and only when, the Group has a legal right to offset the amounts and intends either to settle on a net basis or to realize the asset and settle the liability simultaneously.
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 sales receivables, warrants, investments in securities of junior mining companies and the Group's joint venture receivables are classified as financial assets at fair value through profit or loss and are measured at fair value. The unrealized gains or losses related to changes in fair value are reported in other finance income/expense in the consolidated income statements.
Amortized cost
Cash and cash equivalents 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 recognised 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.
(i) Derivatives:
Derivatives are initially recognized at fair value when the Group becomes a party to the derivative contract and are subsequently re-measured to fair value at the end of each reporting period. The resulting gain or loss is recognized in the consolidated income statements immediately unless the derivative is designated and effective as a hedging instrument. Derivatives with positive fair value are recognized as assets; derivatives with negative fair value are recognized as liabilities.
Contracts to buy or sell non-financial items that meet the definition of a derivative but were entered into and are held in accordance with the Group's expected purchase, sale or usage requirements are not recognized as derivatives. Such contracts are recorded as non-derivative purchases and sales.
(ii) Embedded derivatives:
The Group considers whether a contract contains an embedded derivative when it becomes a party to the contract. Derivatives embedded in other financial instruments or other host contracts are treated as separate derivatives when their risks and characteristics are not closely related to those of the host contracts and the host contracts are not measured at FVTPL.
(iii) Fair values of financial instruments:
The fair value of a financial instrument is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm's-length transaction.
Fair values of financial instruments traded in active markets are determined based on quoted market prices, where available. Bid prices are generally used for assets held or liabilities to be issued; asking prices are generally used for assets to be acquired or liabilities held.
For financial instruments not traded in an active market, fair values are determined based on appropriate valuation techniques. Such techniques may include discounted cash flow analysis, using recent arm's-length market transactions, reference to the current fair value of another instrument that is substantially the same, and other valuation models.
The Group applies a hierarchy to classify valuation methods used to measure financial instruments carried at fair value. Levels 1 to 3 are defined based on the degree to which fair value inputs are observable and have a significant effect on the recorded fair value, as follows:
- Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities;
- Level 2: Valuation techniques use significant observable inputs, either directly (i.e., as prices) or indirectly (i.e., derived from prices), or valuations are based on quoted prices for similar instruments; and
- Level 3: Valuation techniques use significant inputs that are not based on observable market data (unobservable inputs).
An analysis of fair values of financial instruments is provided in note 26.
(iv) Impairment of financial instruments:
The Group 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 and measured as at the present value of all cash shortfalls including the impact of forward looking information.
The Company 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.
The loss allowance is presented as a deduction to trade receivables in the balance sheets.
(v) Derecognition of financial instruments:
The Group derecognizes financial assets when the contractual rights to the cash flows from the assets expire, or when the Group transfers the rights to receive the contractual cash flows on the financial assets in a transaction in which substantially all the risks and rewards of ownership of the financial asset are transferred. Any interest in transferred financial assets that is created or retained by the Group is recognized as a separate asset or liability.
The Group derecognizes financial liabilities when its contractual obligations are discharged, cancelled or expire or when its terms are modified and the cash flows of the modified liability are substantially different.
(o) Taxation:
Current Tax
Current income tax assets and liabilities for the current and prior periods are measured at the amount expected to be recovered from or paid to the taxation authorities. The tax rates and tax laws used to compute the amount are those that are enacted or substantively enacted by the balance sheet date.
Hudbay is subject to income taxes in numerous jurisdictions. Significant judgement is required in determining the worldwide provision for income taxes due to the complexity of legislation. There are many transactions and calculations for which the ultimate tax determination is uncertain during the ordinary course of business. The Group recognizes liabilities for anticipated tax issues based on estimates of whether additional taxes will be due. Where the final tax outcome of these matters is different from the amounts that were initially recorded, such differences will affect the income tax and deferred tax provisions in the period in which such determination is made.
Additionally, future changes in tax laws in the jurisdictions in which the Group operates could limit the ability of the Group to obtain tax deductions in future periods.
Deferred Tax
Deferred tax is recognized using the balance sheet method in respect of temporary differences at the balance sheet date between the tax basis of assets and liabilities, and their carrying amounts for financial reporting purposes.
Deferred income tax liabilities are recognized for all taxable temporary differences, except:
- where the deferred income tax liability arises from the initial recognition of goodwill, or the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and
- in respect of taxable temporary differences associated with investments in subsidiaries, associates and interests in joint ventures, where the timing of the reversal of the temporary differences can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future.
Deferred income tax assets are recognized for all deductible temporary differences, carry-forward of unused tax assets and unused tax losses, to the extent that it is probable that taxable profit will be available against which the deductible temporary differences, and the carry-forward of unused tax assets and unused tax losses can be utilized, except:
- where the deferred income tax asset relating to the deductible temporary difference arises from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and
- in respect of deductible temporary differences associated with investments in subsidiaries, associates and interests in joint ventures, deferred tax assets are recognized only to the extent that it is probable that the temporary differences will reverse in the foreseeable future and taxable profit will be available against which the temporary differences can be utilized.
To the extent that it is probable that taxable profit will be available to offset the deductible temporary differences, the Group recognizes the deferred tax asset regarding the temporary difference on decommissioning, restoration and similar liabilities and recognizes the corresponding deferred tax liability regarding the temporary difference on the related assets.
The carrying amount of deferred income tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred income tax asset to be utilized. Unrecognized deferred income tax assets are reassessed at each balance sheet date and are recognized to the extent that it has become probable that future taxable profit will be available to allow the deferred tax asset to be recovered.
Judgement is required in determining whether deferred tax assets are recognized on the consolidated balance sheets. Deferred tax assets, including those arising from unutilized tax losses, require management to assess the likelihood of taxable profit in future periods in order to utilize recognized deferred tax assets. Estimates of future taxable income are based on forecast cash flows from operations and the application of existing tax laws in each jurisdiction. To the extent that future cash flows and taxable income differ significantly from estimates, the ability to realize the net deferred tax assets recorded at the balance sheet date could be affected.
Deferred tax is measured on an undiscounted basis at the tax rates that are expected to apply in the periods in which the asset is realized or the liability is settled, based on tax rates and tax laws enacted or substantively enacted at the balance sheet date.
Deferred income tax assets and deferred income tax liabilities are offset if a legally enforceable right exists to offset current tax assets against current tax liabilities and the deferred income taxes relate to the same taxable entity and the same taxation authority.
Current and deferred taxes relating to items recognized outside profit or loss (whether in other comprehensive income or directly in equity) are recognized outside profit or loss and not in the consolidated income statements. Mining taxes and royalties are treated and disclosed as current and deferred taxes if they have the characteristics of an income tax.
(p) Share capital and reserves:
Transaction costs
Transaction costs directly attributable to equity transactions are recognized as a deduction from equity.
Other capital reserve
The other capital reserve is used for equity-settled share-based payments and includes amounts for stock options granted and not exercised.
Foreign currency translation reserve
The foreign currency translation reserve is used to record exchange differences arising from the translation of the financial statements of foreign operations. Exchange differences arising from the translation of the financial statements of foreign operations form part of the net investment in the foreign operation. Translation gains and losses remain in the reserve until disposal of all or a portion of the foreign operation.
(q) Share-based payments:
Hudbay offers a Deferred Share Unit ("DSU") plan for non-employee members of the Board of Directors and a Restricted Share Unit ("RSU") plan for employees. Hudbay also had options outstanding under a stock option plan. These plans are included in provisions on the consolidated balance sheets and further described in note 24. Changes in the fair value of the liabilities are recorded in the consolidated income statements.
Cash-settled transactions, consisting of DSUs and RSUs, are initially measured at fair value and recognized as an obligation at the grant date. The liabilities are remeasured to fair value at each reporting date up to and including the settlement date, with changes in fair value recognized in the consolidated income statements. The Group values the liabilities based on the change in the Company's share price. Additional DSUs and RSUs are credited to reflect dividends paid on Hudbay common shares over the vesting period. The current portion of the liability reflects those grants that have vested or that are expected to vest within twelve months.
DSUs vest on the grant date and are redeemable when a participant is no longer a member of the Board of Directors. Issue and redemption prices of DSUs are based on the average closing price of the Company's common shares for the five trading days prior to issuance or redemption.
RSUs are generally issued under Hudbay's Long Term Equity Plan ("LTEP Plan") and vest on or before December 31st of the third calendar year after the year in which the services corresponding to such share unit award were performed. As RSUs are typically granted in the first quarter of each year, their vesting period is typically slightly less than three years. RSUs granted under the LTEP Plan may be settled in the form of Hudbay common shares or, at the option of Hudbay, the cash equivalent based on the market price of the common shares as of the vesting date. Hudbay has historically settled RSUs in cash. Except in specified circumstances, RSUs terminate when an employee ceases to be employed by the Group. Valuations of RSUs reflect estimated forfeitures.
Equity-settled transactions with employees relate to stock options and are measured by reference to the fair value at the earlier of the grant date and the date that the employees unconditionally became entitled to the awards. Fair value is determined using a Black-Scholes option pricing model, which relies on estimates of the future risk-free interest rate, future dividend payments, future share price volatility and the expected average life of the options. The Group believes this model adequately captures the substantive features of the option awards and is appropriate to calculate their fair values. The fair value determined at the grant date is recognized over the vesting period in accordance with vesting terms and conditions, with a corresponding increase to other capital reserves. The amount recognized as an expense is adjusted to reflect the number of awards for which the related service and non-market vesting conditions are expected to be met.
(r) Earnings per share:
The Company presents basic and diluted earnings (loss) per share ("EPS") data for its common shares. Basic EPS is calculated by dividing the profit or loss attributable to common shareholders of the Company by the weighted average number of common shares outstanding during the period. Diluted EPS is determined by adjusting the profit or loss attributable to common shareholders and the weighted average number of common shares outstanding for the effects of all dilutive potential common shares, which previously consisted of stock options granted to employees and warrants.
When calculating earnings per share for periods where the Group has a loss, Hudbay's calculation of diluted earnings per share excludes any incremental shares from the assumed conversion of stock options as they would be anti-dilutive.
(s) Leases:
Finance leases, under which substantially all the risks and rewards incidental to ownership of the leased item are transferred to the Group, are capitalized as assets at the inception of the lease at the lower of fair value or the present value of the minimum lease payments. Lease payments are apportioned between finance charges and the reduction of the liability so as to achieve a constant periodic rate of interest on the remaining balance of the liability. Finance charges are reflected in the consolidated income statements as finance costs.
Under operating lease arrangements, the risks and rewards incidental to ownership are not transferred to the Group. Operating lease payments are recognized as an expense in the consolidated income statements on a straight-line basis over the lease term.
(t) Segment reporting:
An operating segment is a component of the Group that engages in business activities from which it may earn revenue and incur expenses and for which discrete financial information is available. The Group's chief executive officer regularly reviews the operating results of each operating segment to make decisions about resources to be allocated to the segment and assess its performance. In determining operating segments, the Group considers location and decision-making authorities. Refer to note 30.
(u) Statements of cash flows:
The Group presents interest paid and dividends paid as financing activities, except if the interest is related to capitalized borrowing costs, and interest received is presented as an investing activity in the consolidated statements of cash flow. The Group presents the consolidated statements of cash flows using the indirect method.
4. New standards
New standards and interpretations adopted
(a) IFRS 16, Leases ("IFRS 16")
In January 2016, the IASB issued this standard which is effective for periods beginning on or after January 1, 2019, replaces the current guidance in IAS 17, Leases ("IAS 17"), and is to be applied either retrospectively or using a modified retrospective approach. Under IAS 17, lessees were required to make a distinction between a finance lease (on balance sheet) and an operating lease (off balance sheet). IFRS 16 now requires lessees to recognize a lease liability reflective of future lease payments and a "right-of-use asset" for virtually all lease contracts, which has caused, with limited exceptions, most leases to be recorded on balance sheet.
The Group has selected the modified retrospective approach. Therefore, the cumulative effect of adopting IFRS 16 has been recognized as an adjustment to the January 1, 2019 balance for property, plant and equipment and lease liabilities. There was no retained earnings impact , as the Group elected to set the re-valued ROU assets equal to their lease liabilities.
The Group applied the practical expedient to grandfather the definition of a lease on transition. This means that it will apply IFRS 16 to all contracts entered into before January 1, 2019 and identified as leases in accordance with IAS 17 and IFRIC 4.
On the transition date of January 1, 2019, former operating leases have been recognized on the consolidated balance sheet, which has increased liabilities and property, plant and equipment balances. As a result of recognizing the former operating leases, this has reduced cost of sales, as previously recorded operating lease expense has been replaced by depreciation expense and finance expense.
.
(b) Lease standard adopted - Impact Summary
Consolidated Balance Sheet
| | | As reported
December 31, 2018 | | | Adjustment | | | Revised opening
balance, January 1,
2019 | |
| Property, plant & equipment, carrying value | $ | 3,819,812 | | $ | 14,980 | | $ | 3,834,792 | |
| Lease Liability (current) | | 20,472 | | | 4,949 | | | 25,421 | |
| Lease Liability (non-current) | | 53,763 | | | 10,031 | | | 63,794 | |
On transition to IFRS 16, the Group recognized an additional $14,980 of right of use assets and lease liabilities. When measuring lease liabilities, the Group discounted lease payments using the incremental borrowing rate at January 1, 2019. The range of interest rates utilized for discounting varies depending mostly on the Hudbay Group entity acting as lessee and duration of the lease; rates ranged from 1.95% to 5.13%, per annum.
For the transition to IFRS 16, effective January 1, 2019, for previous operating leases which were not capitalized, the lease liability is initially measured at the present value of the future lease payments discounted using the Company's incremental borrowing rate. Subsequently, the lease liability is adjusted for interest and lease payments, as well as the impact of lease modifications, amongst others. Since the Company elected not to apply the general requirements of IFRS 16 to short-term leases (i.e. one that does not include a purchase option and has a lease term at commencement date of 12 months or less) and leases of low value assets, the Company recognizes the lease payments associated with those leases as an expense on either a straight-line basis over the lease term or another systematic basis if that basis is representative of the pattern of the lessee's benefits, similar to the previous accounting for operating leases.
The Group used the following practical expedients/elections when applying IFRS 16:
- Applied a single discount rate to a portfolio of leases with similar characteristics using a risk adjusted rate
- Adjusted the right of use assets by the amount of IAS 37 onerous contract provision immediately before the date of initial application, as an alternative to an impairment review
- Applied the exemption to not recognize right of use assets and liabilities for leases with less than 12 months of lease term
- Excluded initial direct costs from measuring the right of use asset at the date of initial application
- Used hindsight when determining the lease term if the contract contains options to extend or terminate a lease
- An election was made to include non-lease components to leases which contain multiple payment components.
Change in opening lease liability balances:
| | | Jan. 1, 2019 | |
| Total minimum lease payments - lease liabilities, Dec, 31, 2018 | $ | 78,174 | |
| Newly capitalized leases, IFRS 16 | | 17,708 | |
| Total minimum lease payments - lease liabilities, Jan. 1, 2019 | | 95,882 | |
| Effect of discounting | | (6,667 | ) |
| Present value of minimum lease payments | | 89,215 | |
| Less: current portion | | (25,421 | ) |
| | $ | 63,794 | |
Reconciliation of operating leases in IAS 17 to IFRS 16:
| Operating lease commitments, Dec. 31, 2018 | $ | 63,448 | |
| Less: short term leases - expedient | | (3,663 | ) |
| Less: low value leases - expedient | | (10 | ) |
| Less: variable consideration leases1 | | (46,120 | ) |
| Add: inclusion of non - lease components (election) and expected term extensions | | 4,053 | |
| Lease commitments - capitalizable leases, Jan. 1, 2019 | | 17,708 | |
| Effect of discounting | | (2,728 | ) |
| Newly capitalized leases at January 1, 2019 | $ | 14,980 | |
| 1 Variable consideration leases include equipment used for heavy civil works at Constancia. | | | |
(c) IFRIC 23 Uncertainty over Income Tax Treatment
The Company adopted Interpretation IFRIC 23 Uncertainty over Income Tax Treatments, which was effective for accounting periods beginning on or after January 1, 2019. The impact of adoption was not significant to the Company's financial statements.
New standards and interpretations not yet adopted
(c) Amendment to IFRS 3 - Business Combinations
The amendment to IFRS 3 clarifies the definition of a business and includes an optional concentration test to determine whether an acquired set of activities and assets is a business. This amendment is in effect January 1, 2020 and will be treated prospectively. The Group will apply these amendments to future acquisition transactions.
5. Acquisition of remaining interest in the Rosemont project
In March 2019, the Company entered into an agreement with United Copper & Moly LLC ("UCM") to purchase UCM's remaining 7.95% interest in the Rosemont project, and to terminate all of UCM's remaining earn-in and off-take rights. The acquisition was completed on April 25, 2019.
Upfront cash consideration of $45,000 was paid on April 25, 2019, and the Company also committed to pay three annual installments of $10,000 per year, commencing July 1, 2022.
To facilitate an orderly acquisition of UCM's interest in Rosemont, the Group, immediately prior to closing the acquisition, agreed to release UCM from repayment obligations under an intercompany Rosemont project loan in exchange for an increase in equity interest in Rosemont. As a result, the loan receivable balance of $25,978 was written off. The Group recognized the loss on the loan receivable in the income statement (refer to Note 6d). In addition, in order to recognize previously unfunded contributions to the Rosemont Project due from UCM, the Group recognized an increase to other capital reserves, a component of shareholder's equity.
The acquisition provides Hudbay with 100% ownership of Rosemont, allowing greater strategic flexibility with respect to capital structure and project financing alternatives. In exchange for acquiring the percentage ownership not already owned by Hudbay, the Group paid:
| | | | |
| Cash | $ | 45,000 | |
| Present value of future cash installments | | 23,557 | |
| Total consideration | $ | 68,557 | |
As part of the increase in ownership of the Rosemont Project, Hudbay acquired and assumed the following assets and liabilities, which represented the fair value of the assets and liabilities not already owned by Hudbay at the time of transaction:
| | | | |
| Current assets | $ | 343 | |
| Non-current assets | | 68,904 | |
| Liabilities | | (690 | ) |
| Net assets acquired | $ | 68,557 | |
6. Revenue and expenses
(a) Revenue
The Group's revenue by significant product types:
| | | Year ended December 31, | |
| | | 2019 | | | 2018 | |
| Copper | $ | 786,332 | | $ | 963,063 | |
| Zinc | | 284,897 | | | 357,396 | |
| Gold | | 152,394 | | | 149,043 | |
| Silver | | 89,685 | | | 85,808 | |
| Molybdenum | | 31,270 | | | 20,995 | |
| Other | | 4,760 | | | 4,726 | |
| | | 1,349,338 | | | 1,581,031 | |
| Variable consideration adjustments 1 | | (16,295 | ) | | (2,655 | ) |
| Pricing and volume adjustments 2 | | (12,123 | ) | | (4,101 | ) |
| | | 1,320,920 | | | 1,574,275 | |
| Treatment and refining charges | | (83,481 | ) | | (101,909 | ) |
| | $ | 1,237,439 | | $ | 1,472,366 | |
| 1See note 18. | |
| 2Pricing and volume adjustments represent mark-to-market adjustments on initial estimate of provisionally priced sales, realized and unrealized changes to fair value for non-hedge derivative contracts and adjustments to originally invoiced weights and assays. | |
(b) Depreciation and amortization
Depreciation of property, plant and equipment and amortization of intangible assets are reflected in the consolidated income statements as follows:
| | | Year ended December 31, | |
| | | 2019 | | | 2018 | |
| Cost of sales | $ | 344,555 | | $ | 332,667 | |
| Selling and administrative expenses | | 2,079 | | | 477 | |
| | $ | 346,634 | | $ | 333,144 | |
(c) Share-based Expense (recoveries) expenses
Share-based Expense (recoveries) expenses are reflected in the consolidated income statements as follows:
| | | Cash-settled | | | Total share-based
payment expense | |
| | RSUs | | | DSUs | | | | |
| Year ended December 31, 2019 | | | | | | | | | |
| Cost of sales | $ | 400 | | $ | - | | $ | 400 | |
| Selling and administrative | | 928 | | | 1,157 | | | 2,085 | |
| Other operating | | 229 | | | - | | | 229 | |
| | $ | 1,557 | | $ | 1,157 | | $ | 2,714 | |
| Year ended December 31, 2018 | | | | | | | | | |
| Cost of sales | $ | 160 | | $ | - | | $ | 160 | |
| Selling and administrative | | (702 | ) | | (1,877 | ) | | (2,579 | ) |
| Other operating | | 46 | | | - | | | 46 | |
| | $ | (496 | ) | $ | (1,877 | ) | $ | (2,373 | ) |
(d) Other operating expenses
| | | Year ended December 31, | |
| | | 2019 | | | 2018 | |
| Write down of UCM receivable (note 5) | $ | 25,978 | | $ | - | |
| Regional costs | | 3,780 | | | 4,673 | |
| Pampacancha delivery obligation | | 7,499 | | | 7,218 | |
| Pension settlement loss (note 20) | | 96 | | | 2,163 | |
| Loss on disposal of property,plant & equipment | | 4,807 | | | 7,189 | |
| Closure cost adjustment | | 2,289 | | | (425 | ) |
| Allocation of community costs | | 2,216 | | | - | |
| Other | | 4,451 | | | (1,747 | ) |
| | $ | 51,116 | | $ | 19,071 | |
During the first quarter of 2019, the Group recognized an obligation to deliver additional precious metal credits to Wheaton Precious Metals ("Wheaton") as a result of the Group's expectation that mining at the Pampacancha deposit will not begin until 2020. The obligation is to be paid in four quarterly installments, the first to be paid on March 31, 2020.
A similar obligation was recorded in the first quarter of 2018, as a result of the Pampacancha deposit not being mined in 2018.
The Group realized a loss on the settlement of the sale of a portion of its net pension liability.
(e) Impairment
During 2019, the Group recorded impairment losses of $322,249 for non-current assets relating to the Arizona cash generating units ("CGU").
| | | Arizona | |
| Pre-tax impairment to: | | | |
| Property, plant & equipment (note 12) | | 322,249 | |
| Tax impact - (recovery) | | (80,143 | ) |
| After-tax impairment charge | $ | 242,106 | |
On July 31, 2019, the U.S. District Court for the District of Arizona ("Court") issued a ruling in the lawsuits challenging the U.S. Forest Service's issuance of the Final Record of Decision ("FROD") for the Rosemont project in Arizona. The Court ruled to vacate and remand the FROD thereby delaying the expected start of construction of Rosemont. The Court's ruling and the subsequent impact to the Company's market capitalization gave rise to an indicator of impairment. Following an impairment test conducted as of September 30, 2019, it was determined that the recoverable amount of the Arizona CGU was lower than its carrying value, causing the Group to recognize an impairment loss related to these assets. See note 12.
(f) Employee benefits expense
This table presents employee benefit expense recognized in the Group's consolidated income statements, including amounts transferred from inventory upon sale of goods:
| | | Year ended December 31, | |
| | | 2019 | | | 2018 | |
| Current employee benefits | $ | 169,663 | | $ | 176,571 | |
| Profit-sharing plan expense | | 1,510 | | | 9,228 | |
| Share-based payments (notes 6c, 19, 24) | | | | | | |
| Cash-settled restricted share units | | 1,557 | | | (496 | ) |
| Cash-settled deferred share units | | 1,157 | | | (1,877 | ) |
| Employee share purchase plan | | 1,645 | | | 1,533 | |
| Post-employee pension benefits | | | | | | |
| Defined benefit plans | | 10,643 | | | 12,295 | |
| Defined contribution plans | | 1,635 | | | 1,511 | |
| Past service costs | | - | | | 383 | |
| Other post-retirement employee benefits | | 8,457 | | | 9,248 | |
| Termination benefits | | 628 | | | 1,206 | |
| | $ | 196,895 | | $ | 209,602 | |
Manitoba has a profit sharing plan required by the collective bargaining agreement whereby 10% of Manitoba's after tax profit (excluding provisions or recoveries for deferred income tax and deferred mining tax) for any given fiscal year will be distributed to all eligible employees in the Flin Flon/Snow Lake operations, with the exception of executive officers and key management personnel.
Peru has a profit sharing plan required by Peruvian law whereby 8% of Peru's taxable income will be distributed to all employees within Peru's operations.
The Group has an employee share purchase plan for executives and other eligible employees where participants may contribute between 1% and 10% of their pre-tax base salary to acquire Hudbay shares. The Group makes a matching contribution of 75% of the participant's contribution.
See note 20 for a description of the Group's pension plans and note 21 for the Group's other employee benefit plans.
(g) Finance income and expenses
| | | Year ended December 31, | |
| | | 2019 | | | 2018 | |
| Finance income | $ | (8,527 | ) | $ | (8,450 | ) |
| Finance expenses | | | | | | |
| Interest expense on long-term debt | | 78,265 | | | 77,783 | |
| Accretion on financial liabilities at amortized cost | | 1,222 | | | 1,244 | |
| Finance costs on deferred revenue (note 18) | | 69,772 | | | 64,921 | |
| Unwinding of discounts on provisions | | 4,392 | | | 4,684 | |
| Withholding taxes | | 8,100 | | | 9,424 | |
| Other finance expense | | 11,027 | | | 7,116 | |
| | | 172,778 | | | 165,172 | |
| Interest capitalized | | (9,890 | ) | | (13,172 | ) |
| | | 162,888 | | | 152,000 | |
| Other finance losses (gains) | | | | | | |
| Net foreign exchange losses (gains) | | 1,388 | | | (11,067 | ) |
Change in fair value of financial assets
and liabilities at fair value through profit or loss: | | | | | | |
| Hudbay warrants | | - | | | (6,748 | ) |
| Embedded derivatives | | 3,708 | | | (1,514 | ) |
| Investments | | 4,539 | | | 3,798 | |
| | | 9,635 | | | (15,531 | ) |
| Net finance expense | $ | 163,996 | | $ | 128,019 | |
Until October 1, 2019, interest expense related to certain long-term debt had been capitalized to the Rosemont project. Following the Court ruling to vacate and remand the FROD for the Rosemont project during the third quarter of 2019, the Group ceased capitalization effective October 1, 2019. The capitalization of this interest expense will resume upon the reinstatement of permits and will continue from that point until commercial production is reached.
Other finance expense relates primarily to fees on the Group's revolving credit facilities and capitalized leases.
7. Cash and cash equivalents
| | | Dec. 31, 2019 | | | Dec. 31, 2018 | |
| | | | | | | |
| Cash on hand and demand deposits | $ | 396,146 | | $ | 515,497 | |
Short-term money market instruments with maturities of
of three months or less at acquisition date | | - | | | - | |
| | $ | 396,146 | | $ | 515,497 | |
8. Trade and other receivables
| | | Dec. 31, 2019 | | | Dec. 31, 2018 | |
| Current | | | | | | |
| Trade receivables | $ | 87,332 | | $ | 102,112 | |
| Statutory receivables | | 16,543 | | | 12,764 | |
| Other receivables | | 2,119 | | | 2,277 | |
| | | 105,994 | | | 117,153 | |
| Non-current | | | | | | |
| Taxes receivable | | 17,669 | | | 17,199 | |
| Receivable from joint venture partners (note 5) | | - | | | 20,404 | |
| Other receivables | | 1,595 | | | 1,518 | |
| | | 19,264 | | | 39,121 | |
| | $ | 125,258 | | $ | 156,274 | |
9. Inventories
| | | Dec. 31, 2019 | | | Dec. 31, 2018 | |
| Current | | | | | | |
| Stockpile | $ | 10,396 | | $ | 5,463 | |
| Work in progress | | 14,420 | | | 1,762 | |
| Finished goods | | 62,230 | | | 62,546 | |
| Materials and supplies | | 51,774 | | | 48,703 | |
| | | 138,820 | | | 118,474 | |
| Non-current | | | | | | |
| Stockpile | | 14,626 | | | 14,730 | |
| Materials and supplies | | 4,829 | | | 4,746 | |
| | | 19,455 | | | 19,476 | |
| | $ | 158,275 | | $ | 137,950 | |
The cost of inventories recognized as an expense, including depreciation, and included in cost of sales amounted to $978,810 for the year ended December 31, 2019 (year ended December 31, 2018 - $975,354).
10. Other financial assets
| | | Dec. 31, 2019 | | | Dec. 31, 2018 | |
| Current | | | | | | |
| Derivative assets | $ | 1,712 | | $ | 6,628 | |
| Restricted cash | | 337 | | | 3,738 | |
| | | 2,049 | | | 10,366 | |
| | | | | | | |
| Non-current | | | | | | |
| Investments at fair value through profit or loss | | 11,287 | | | 15,159 | |
| | $ | 13,336 | | $ | 25,525 | |
Investments at fair value through profit or loss consist of securities in Canadian metals and mining companies, all of which are publicly traded. The change in investments at fair value through profit or loss is mostly attributed to fluctuations in market price and foreign exchange impact.
11. Intangibles and other assets
Intangibles and other assets of $10,411 includes $5,384 of other assets (December 31, 2018 - nil) and $5,027 of intangibles (December 31, 2018 - $4,162).
Intangibles mainly represent computer software costs.
| | | Dec. 31, 2019 | | | Dec. 31, 2018 | |
| Cost | | | | | | |
| Balance, beginning of year | | 18,557 | | $ | 19,169 | |
| Additions | | 2,325 | | | 590 | |
| Disposals | | (96 | ) | | - | |
| Effects of movement in exchange rates | | 752 | | | (1,202 | ) |
| Balance, end of year | | 21,538 | | | 18,557 | |
| | | | | | | |
| Accumulated amortization | | | | | | |
| Balance, beginning of year | | 14,395 | | | 13,594 | |
| Additions | | 1,606 | | | 1,793 | |
| Disposals | | (96 | ) | | - | |
| Effects of movement in exchange rates | | 606 | | | (992 | ) |
| Balance, end of year | | 16,511 | | | 14,395 | |
| Intangibles, net book value | $ | 5,027 | | $ | 4,162 | |
Other assets represent the carrying value of certain future community costs. The liability remaining for these agreements is recorded in Other financial liabilities at amortized cost (note 15). Amortization of the carrying amount is recorded in the consolidated income statements within other operating expenses (note 6d).
12. Property, plant and equipment
| Dec. 31, 2019 | | Exploration and evaluation assets | | | Capital works in progress | | | Mining properties | | | Plant and equipment | | | Plant and equipment- ROU assets | | | Total | |
| Balance, Jan. 1, 2019 | $ | 52,206 | | $ | 873,781 | | $ | 1,998,439 | | $ | 2,473,176 | | $ | 180,151 | | $ | 5,577,753 | |
| Additions | | 17,016 | | | 109,372 | | | - | | | 33,309 | | | 22,158 | | | 181,855 | |
| Acquisition (note 5) | | - | | | 91,332 | | | 3,157 | | | - | | | 373 | | | 94,862 | |
| Capitalized stripping and development | | - | | | - | | | 103,108 | | | - | | | - | | | 103,108 | |
| Decommissioning and restoration | | - | | | 41 | | | 3,314 | | | 86,053 | | | - | | | 89,408 | |
| Interest capitalized | | - | | | 9,890 | | | - | | | - | | | - | | | 9,890 | |
| Transfers and other movements | | - | | | (30,000 | ) | | 642 | | | 30,406 | | | (1,048 | ) | | - | |
| Impairment (note 6e) | | - | | | (322,249 | ) | | - | | | - | | | - | | | (322,249 | ) |
| Disposals | | - | | | (2,029 | ) | | - | | | (10,747 | ) | | (1,533 | ) | | (14,309 | ) |
| Effects of movements in exchange rates | | 681 | | | 1,528 | | | 41,080 | | | 38,452 | | | 1,793 | | | 83,534 | |
| Other | | - | | | 2,208 | | | (3,157 | ) | | 3,103 | | | 78 | | | 2,232 | |
| Balance, Dec. 31, 2019 | | 69,903 | | | 733,874 | | | 2,146,583 | | | 2,653,752 | | | 201,972 | | | 5,806,084 | |
| | | | | | | | | | | | | | | | | | | |
| Accumulated depreciation | | | | | | | | | | | | | | | | | | |
| Balance, Jan. 1, 2019 | | - | | | - | | | 780,754 | | | 872,330 | | | 89,877 | | | 1,742,961 | |
| Depreciation for the year | | - | | | - | | | 154,970 | | | 179,062 | | | 19,850 | | | 353,882 | |
| Disposals | | - | | | - | | | - | | | (6,675 | ) | | - | | | (6,675 | ) |
| Effects of movement in exchange rates | | - | | | - | | | 27,806 | | | 24,970 | | | 581 | | | 53,357 | |
| Balance, Dec. 31, 2019 | | - | | | - | | | 963,530 | | | 1,069,687 | | | 110,308 | | | 2,143,525 | |
| Net book value | $ | 69,903 | | $ | 733,874 | | $ | 1,183,053 | | $ | 1,584,065 | | $ | 91,664 | | $ | 3,662,559 | |
| Dec. 31, 2018 | | Exploration and evaluation assets | | | Capital works in progress | | | Mining properties | | | Plant and equipment | | | Plant and equipment- ROU assets1 | | | Total | |
| Balance, Dec. 31, 2017 | $ | 23,010 | | $ | 933,531 | | $ | 1,975,061 | | $ | 2,536,019 | | $ | - | | $ | 5,467,621 | |
| Additions | | 9,950 | | | 88,920 | | | - | | | 16,689 | | | - | | | 115,559 | |
| Acquisitions | | 21,654 | | | - | | | - | | | - | | | - | | | 21,654 | |
| Capitalized stripping and development | | - | | | - | | | 84,023 | | | - | | | - | | | 84,023 | |
| Decommissioning and restoration | | - | | | 15 | | | 1,711 | | | 7,272 | | | - | | | 8,998 | |
| Interest capitalized | | - | | | 13,172 | | | - | | | - | | | - | | | 13,172 | |
| Transfers and other movements | | - | | | (152,781 | ) | | 2,132 | | | 150,649 | | | - | | | - | |
| Disposals | | (1,208 | ) | | (4,034 | ) | | - | | | (9,749 | ) | | - | | | (14,991 | ) |
| Effects of movements in exchange rates | | (1,197 | ) | | (3,873 | ) | | (65,434 | ) | | (62,757 | ) | | - | | | (133,261 | ) |
| Other | | (3 | ) | | (1,169 | ) | | 946 | | | 224 | | | - | | | (2 | ) |
| Balance, Dec. 31, 2018 | | 52,206 | | | 873,781 | | | 1,998,439 | | | 2,638,347 | | | - | | | 5,562,773 | |
| IFRS 16 Adjustments1 | | - | | | - | | | - | | | (165,171 | ) | | 180,151 | | | 14,980 | |
| Balance, Jan. 1, 2019 | | 52,206 | | | 873,781 | | | 1,998,439 | | | 2,473,176 | | | 180,151 | | | 5,577,753 | |
| | | | | | | | | | | | | | | | | | | |
| Accumulated depreciation | | | | | | | | | | | | | | | | | | |
| Balance, Dec. 31, 2017 | | - | | | - | | | 683,183 | | | 820,205 | | | - | | | 1,503,388 | |
| Depreciation for the year | | - | | | - | | | 141,218 | | | 189,354 | | | - | | | 330,572 | |
| Disposals | | - | | | - | | | - | | | (6,780 | ) | | - | | | (6,780 | ) |
| Effects of movement in exchange rates | | - | | | - | | | (43,469 | ) | | (40,211 | ) | | - | | | (83,680 | ) |
| Other | | - | | | - | | | (178 | ) | | (361 | ) | | - | | | (539 | ) |
| Balance, Dec. 31, 2018 | | - | | | - | | | 780,754 | | | 962,207 | | | - | | | 1,742,961 | |
IFRS 16 Adjustments1
| | - | | | - | | | - | | | (89,877 | ) | | 89,877 | | | - | |
| Balance, Jan. 1, 2019 | | - | | | - | | | 780,754 | | | 872,330 | | | 89,877 | | | 1,742,961 | |
| Net book value, Dec.31, 2018 | | 52,206 | | | 873,781 | | | 1,217,685 | | | 1,676,140 | | | - | | | 3,819,812 | |
| Net book value, Jan.1, 2019 | $ | 52,206 | | $ | 873,781 | | $ | 1,217,685 | | $ | 1,600,846 | | $ | 90,274 | | $ | 3,834,792 | |
| 1 IFRS 16 is effective January 1, 2019 for prospective periods. For further information about the adoption of IFRS 16, refer to Note 4. | |
Capital works in progress decreased compared to December 31, 2018 as a result of the impairment charge of $322,249 (pre-tax) related to the Arizona CGU (see note 6e), partially offset by fixed asset additions.
For non-financial assets, management examines internal and external indicators of impairment or reversals of impairments on a quarterly basis.
Management identified an increase in market capitalization deficiency as at September 30, 2019 which has been attributed to the Arizona CGU. Management determined that the increase in the market capitalization deficiency was related to a Court issued ruling in the lawsuits challenging the U.S. Forest Service's issuance of the FROD for the Rosemont project in Arizona.
For the impairment test completed at September 30, 2019, Fair Value Less Cost of Disposal, ("FVLCD") was used to determine the recoverable amount since it is higher than value in use. FVLCD was calculated using discounted after-tax cash flows based on cash flow projections and assumptions in the Group's most current life of mine ("LOM") plans. The fair value measurement in its entirety is categorized as Level 3 based on the degree to which fair value inputs are observable and have a significant effect on the recorded fair value.
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 are discount rates, future commodity prices, production based on current estimates of recoverable reserves, future operating and capital costs, value of mineral resources not included in the LOM plan, beginning date of project cash flows incorporating permit related project delays and future foreign exchange rates. As of September 30, 2019, for purposes of the impairment test, initial construction of the Rosemont project was estimated to commence in approximately three years (December 31, 2018 - approximately one year) and cash flows are for periods up to the date that production is expected to cease, which is in 24 years (December 31, 2018 - 22 years).
The discount rate was based on the CGU's weighted average cost of capital, of which the two main components are the cost of equity and the after-tax cost of debt. Cost of equity was calculated based on the capital asset pricing model, incorporating the risk-free rate of return based on the US Government's marketable bond yields as at the valuation date, the Company's beta coefficient adjustment to the market equity risk premium based on the volatility of the Company's return in relation to that of a comparable market portfolio, plus a country risk premium, size premium and company-specific risk factor. Cost of debt was determined by applying an appropriate market indication of the Company's borrowing capabilities and the corporate income tax rate applicable to the Arizona CGU. As at September 30, 2019, a real discount rate of 9.50% (December 31, 2018 - 7.50%) for the Arizona CGU was used to calculate the estimated after-tax discounted future net cash flows, commensurate with its individual estimated level of risk.
Commodity prices used in the impairment assessment were determined by reference to external market participant sources. The key commodity price for this assessment is the price of copper. Where applicable to each of the Group's CGUs, the cash flow calculations were based on estimates of future production levels applying forecasts for metal prices, which included forecasts for long-term prices. As at September 30, 2019, for the Arizona CGU, the cash flow calculations utilized a long-term copper price of $3.10/lb (December 31, 2018 - $3.10/lb), molybdenum long-term prices of $11.00/lb (December 31, 2018 - $11.00/lb) and capital, operating and reclamation costs based on the most current LOM plans. As at September 30, 2019 for the Arizona CGU, a value of $74,969 (December 31, 2018 - $287,900) was utilized to estimate the value of mineral resources not included in the LOM plan.
Expected future cash flows used to determine the FVLCD used in the 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. This may have a material effect on the Company's consolidated financial statements. Although it is reasonably possible for a change in key assumptions to occur, the possible effects of a change in any single assumption may not fairly reflect the impact on a CGU's fair value as the assumptions are inextricably linked. For example, a decrease in the assumed price of long-term copper could result in amendments to the mine plans which would partially offset the effect of lower prices. It is difficult to determine how all of these factors would interrelate; however, in deriving a recoverable amount, management believes all of these factors need to be considered.
As at September 30, 2019, the carrying value of the Arizona CGU exceeded the estimated recoverable amount of $615,368 by $242,106 (after-tax), leading to the impairment charge recorded (Note 6e).
For the Arizona CGU, the following changes in key assumptions, in isolation of each other, would result in the following decreases in FVLCD.
| | | Decrease in FVLCD as at | |
| Change in key assumption | | Sep. 30, 2019 | |
| Decrease of 10% in the average LOM copper prices | $ | 308,148 | |
| 1.0 percentage point increase in the real discount rate | | 135,733 | |
| One year additional delay in the start of project construction | | 76,921 | |
13. Trade and other payables
| | | Dec. 31, 2019 | | | Dec. 31, 2018 | |
| Trade payables | $ | 68,742 | | $ | 61,395 | |
| Accruals and payables | | 80,375 | | | 68,386 | |
| Accrued interest | | 34,603 | | | 34,662 | |
| Exploration and evaluation payables | | 884 | | | 185 | |
| Statutory payables | | 7,800 | | | 7,324 | |
| | $ | 192,404 | | $ | 171,952 | |
Accruals and payables include operational and capital costs and employee benefit amounts owing.
14. Other liabilities
| | | Dec. 31, 2019 | | | Dec. 31, 2018 | |
| Current | | | | | | |
| Provisions (note 19) | $ | 33,575 | | $ | 14,276 | |
| Pension liability (note 20) | | 12,015 | | | 11,854 | |
| Other employee benefits (note 21) | | 2,806 | | | 2,564 | |
| Unearned revenue | | 1,015 | | | 1,857 | |
| | $ | 49,411 | | $ | 30,551 | |
15. Other financial liabilities
| | | Dec. 31, 2019 | | | Dec. 31, 2018 | |
| Current | | | | | | |
| Derivative liabilities | $ | 10,295 | | $ | 2,634 | |
| Other financial liabilities at amortized cost | | 8,707 | | | 2,590 | |
| Embedded derivatives (note 26c) | | 9,074 | | | 7,201 | |
| | | 28,076 | | | 12,425 | |
| | | | | | | |
| Non-current | | | | | | |
| Deferred Rosemont acquisition consideration (note 5) | | 24,491 | | | - | |
| Other financial liabilities at amortized cost | | 15,293 | | | 18,771 | |
| | | 39,784 | | | 18,771 | |
| | $ | 67,860 | | $ | 31,196 | |
The derivative liabilities include derivative and hedging transactions. Derivative liabilities are carried at their fair value with changes in fair value recorded to the consolidated income statements. The fair value adjustments for hedging type derivatives are recorded in revenue. Fair value adjustments for embedded derivatives are recorded in other finance (gain) loss.
Other financial liabilities at amortized cost relate to agreements with communities near the Constancia operation which allow Hudbay to extract minerals over the useful life of the Constancia operation, carry out exploration and evaluation activities in the area and provide Hudbay with community support to operate in the region.
16. Lease Liability
| | | Dec. 31, 2019 | | | Dec. 31, 2018 | |
| Total minimum lease payments - lease liabilities | $ | 88,096 | | $ | 78,174 | |
| Effect of discounting | | (6,149 | ) | | (3,939 | ) |
| Present value of minimum lease payments | | 81,947 | | | 74,235 | |
| Less: current portion | | (32,781 | ) | | (20,472 | ) |
| | $ | 49,166 | | $ | 53,763 | |
| | | | | | | |
| Minimum payments under leases: | | | | | | |
| Less than 12 months | $ | 27,557 | | $ | 18,448 | |
| 13 - 36 months | | 48,503 | | | 40,615 | |
| 37 - 60 months | | 7,798 | | | 19,111 | |
| More than 60 months | | 4,238 | | | - | |
| | $ | 88,096 | | $ | 78,174 | |
The Group has entered into leases for its Peru, Manitoba and Arizona business units which expire between 2020 and 2043. The interest rates on leases which were capitalized have implicit interest rates between 1.95% to 5.13%, per annum. The range of interest rates utilized for discounting varies depending mostly on the Hudbay Group entity acting as lessee and duration of the lease. For certain leases, the Group has the option to purchase the equipment and vehicles leased at the end of the terms of the leases. The Group's obligations under these leases are secured by the lessor's title to the leased assets. The present value of applicable lease payments has been recognized as a ROU asset, which was included as a non-cash addition to property, plant and equipment, and a corresponding amount as a lease liability.
There are no restrictions placed on the Group by entering into these leases.
The following outlines expenses recognized within the Company's consolidated income statement for the periods ended December 31, 2019, relating to leases for which a recognition exemption was applied.
| | | Year ended
Dec. 31, 2019 | |
| Short-term leases | $ | 45,745 | |
| Low value leases | | 92 | |
| Variable leases | | 56,152 | |
| Total | $ | 101,989 | |
Payments made for short term, low value and variable leases would mostly be captured as expenses in the consolidated income statements, however, certain amounts may be capitalized to PP&E for the Arizona business unit during its development phase and certain amounts may be reported in inventories given the timing of sales. Variable consideration leases include equipment used for heavy civil works at Constancia.
17. Long-term debt
Long-term debt is comprised of the following:
| | | Dec. 31, 2019 | | | Dec. 31, 2018 | |
| Senior unsecured notes (a) | $ | 991,558 | | $ | 989,306 | |
Less: Unamortized transaction costs -
revolving credit facilities (b) | | (6,303 | ) | | (8,276 | ) |
| | $ | 985,255 | | $ | 981,030 | |
(a) Senior unsecured notes
| Balance, January 1, 2018 | $ | 987,903 | |
| Change in fair value of embedded derivative (prepayment option) | | 316 | |
| Accretion of transaction costs and premiums | | 1,087 | |
| Balance, December 31, 2018 | $ | 989,306 | |
| Change in fair value of embedded derivative (prepayment option) | | 1,079 | |
| Accretion of transaction costs and premiums | | 1,173 | |
| Balance, December 31, 2019 | $ | 991,558 | |
The $1,000,000 aggregate principal amount of senior notes are comprised of two series: (i) a series of 7.25% senior notes due 2023 in an aggregate principal amount of $400,000 and (ii) a series of 7.625% senior notes due 2025 in an aggregate principal amount of $600,000.
The senior notes are guaranteed on a senior unsecured basis by substantially all of the Company's subsidiaries, other than HudBay (BVI) Inc. and certain excluded subsidiaries, which include the Company's subsidiaries that own an interest in the Rosemont project and any newly formed or acquired subsidiaries that primarily hold or may develop non-producing mineral assets that are in the pre-construction phase of development. The Group's revolving credit facilities are secured against substantially all of the Group's assets, other than those associated with the Arizona business unit.
(b) Unamortized transaction costs - revolving credit facilities
| Balance, January 1, 2018 | $ | 8,328 | |
| Accretion of transaction costs | | (1,946 | ) |
| Transaction costs | | 1,894 | |
| Balance, December 31, 2018 | $ | 8,276 | |
| Accretion of transaction costs | | (2,342 | ) |
| Transaction costs | | 369 | |
| Balance, December 31, 2019 | $ | 6,303 | |
As at December 31, 2019, the Peru business unit had $40,000 in surety bonds issued to support its reclamation obligations. The Arizona business unit had $8,591 in surety bonds issued to support future reclamation and closure obligations. No cash collateral is required to be posted. The Peru business unit had $43,509 in letters of credit issued under the Peru facility to support its reclamation obligations and the Manitoba business unit had $85,927 in letters of credit issued under the Canada facility to support its reclamation and pension obligations. Given that these letters of credit are issued under the senior credit facilities, no cash collateral is required to be posted. Lastly, the Peru business unit had $45,000 in letters of credit issued with various Peruvian financial institutions.
18. Deferred revenue
On August 8, 2012 and November 4, 2013, the Group entered into precious metals stream transactions with Wheaton whereby the Group has received aggregate deposit payments of $885,000 against delivery of (i) 100% of payable gold and silver from the 777 mine until the end of 2016, and delivery of 50% of payable gold and 100% of payable silver for the remainder of the 777 mine life; and (ii) 100% of payable silver and 50% of payable gold from the Constancia mine.
In addition to the deposit payments, as gold and silver is delivered to Wheaton, the Group receives cash payments equal to the lesser of (i) the market price and (ii) $400 per ounce (for gold) and $5.90 per ounce (for silver), subject to 1% annual escalation after three years, from the inception of the agreement.
The Group recorded the deposits received as deferred revenue and recognizes amounts in revenue as gold and silver are delivered to Wheaton. The Group determines the amortization of deferred revenue to the consolidated income statements on a per unit basis using the estimated total number of gold and silver ounces expected to be delivered to Wheaton over the life of the 777 and Constancia life-of-mine plans. The Group estimates the current portion of deferred revenue based on deliveries anticipated over the next twelve months.
The Group has determined that precious metals stream contracts are subject to variable consideration and contain a significant financing component. As such, the Company recognizes a financing charge at each reporting period and will gross up the deferred revenue balance to recognize the significant financing element that is part of these contracts. The Group's streaming arrangements are secured against the mining properties and other business unit assets associated with the applicable stream.
The Group expects that the remaining performance obligations for the 777 and Constancia streams will be settled by the expiry of their respective stream agreements, which is no earlier than 2036.
The following table summarizes changes in deferred revenue:
| Balance, January 1, 2018 | $ | 601,930 | |
| Amortization of deferred revenue | | | |
| Liability drawdown | | (96,038 | ) |
| Variable consideration adjustment | | 2,655 | |
| Finance costs | | 64,921 | |
| Effects of changes in foreign exchange | | (7,390 | ) |
| Balance, December 31, 2018 | $ | 566,078 | |
| Amortization of deferred revenue | | | |
| Liability drawdown | | (92,398 | ) |
| Variable consideration adjustment | | 16,295 | |
| Finance costs (note 6g) | | | |
| Current year additions | | 63,725 | |
| Variable consideration adjustment | | 6,047 | |
| Effects of changes in foreign exchange | | 4,009 | |
| Balance, December 31, 2019 | $ | 563,756 | |
Consideration from the Company's stream agreement is considered variable. Gold and silver revenue can be
subject to cumulative adjustments when the number of ounces to be delivered under the contract changes. During the year ended December 31, 2018, and first quarter of 2019, the Company recognized an adjustment to gold and silver revenue and finance costs due to a net increase in the Company's reserve and resource estimates.
Deferred revenue is reflected in the consolidated balance sheets as follows:
| | | Dec. 31, 2019 | | | Dec. 31, 2018 | |
| Current | $ | 86,933 | | $ | 86,256 | |
| Non-current | | 476,823 | | | 479,822 | |
| | $ | 563,756 | | $ | 566,078 | |
19. Provisions
| | | Decommis-sioning, restoration and similar liabilities | | | Deferred share units (note 24a) | | | Restricted share units1 (note 24a) | | | Other | | | Total | |
| Balance, January 1, 2019 | $ | 202,024 | | $ | 4,288 | | $ | 12,201 | | $ | 411 | | $ | 218,924 | |
| Net additional provisions made | | 68,881 | | | 1,479 | | | 2,885 | | | 2,882 | | | 76,127 | |
| Amounts used | | (4,136 | ) | | (1,668 | ) | | (9,380 | ) | | (341 | ) | | (15,525 | ) |
| Unwinding of discount (note 6g) | | 4,392 | | | - | | | - | | | - | | | 4,392 | |
| Effect of change in discount rate | | 23,635 | | | - | | | - | | | - | | | 23,635 | |
| Effect of foreign exchange | | 7,320 | | | 99 | | | 225 | | | 4 | | | 7,648 | |
| Effect of change in share price | | - | | | (322 | ) | | (454 | ) | | - | | | (776 | ) |
| Balance, December 31, 2019 | $ | 302,116 | | $ | 3,876 | | $ | 5,477 | | $ | 2,956 | | $ | 314,425 | |
1 Certain amounts relating to the Arizona segment are capitalized.
Provisions are reflected in the consolidated balance sheets as follows:
| December 31, 2019 | | Decommis-sioning, restoration and similar liabilities | | | Deferred share units (note 24a) | | | Restricted share units1 (note 24a) | | | Other | | | Total | |
| Current (note 14) | $ | 23,621 | | $ | 3,876 | | $ | 4,468 | | $ | 1,610 | | $ | 33,575 | |
| Non-current | | 278,495 | | | - | | | 1,009 | | | 1,346 | | | 280,850 | |
| | $ | 302,116 | | $ | 3,876 | | $ | 5,477 | | $ | 2,956 | | $ | 314,425 | |
| | | Decommis-sioning, restoration and similar liabilities | | | Deferred share units (note 24a) | | | Restricted share units1 (note 24a) | | | Other | | | Total | |
| Balance, January 1, 2018 | $ | 200,041 | | $ | 6,623 | | $ | 19,409 | | $ | 1,435 | | $ | 227,508 | |
| Net additional provisions made | | 9,031 | | | 973 | | | 7,493 | | | - | | | 17,497 | |
| Amounts used | | (188 | ) | | - | | | (6,435 | ) | | (770 | ) | | (7,393 | ) |
| Unwinding of discount (note 6g) | | 4,684 | | | - | | | - | | | - | | | 4,684 | |
| Effect of change in discount rate | | (462 | ) | | - | | | - | | | - | | | (462 | ) |
| Effect of foreign exchange | | (11,082 | ) | | (458 | ) | | (973 | ) | | (74 | ) | | (12,587 | ) |
| Effect of change in share price | | - | | | (2,850 | ) | | (7,293 | ) | | (180 | ) | | (10,323 | ) |
| Balance, December 31, 2018 | $ | 202,024 | | $ | 4,288 | | $ | 12,201 | | $ | 411 | | $ | 218,924 | |
1 Certain amounts relating to the Arizona segment are capitalized.
| December 31, 2018 | | Decommis-sioning, restoration and similar liabilities | | | Deferred share units (note 24a) | | | Restricted share units1 (note 24a) | | | Other | | | Total | |
| Current (note 14) | $ | 1,234 | | $ | 4,288 | | $ | 8,412 | | $ | 342 | | $ | 14,276 | |
| Non-current | | 200,790 | | | - | | | 3,789 | | | 69 | | | 204,648 | |
| | $ | 202,024 | | $ | 4,288 | | $ | 12,201 | | $ | 411 | | $ | 218,924 | |
Decommissioning, restoration and similar liabilities are remeasured at each reporting date to reflect changes in discount rates, which can significantly affect the liabilities.
Decommissioning, restoration and similar liabilities
The Group's decommissioning, restoration and similar liabilities relate to the rehabilitation and closure of currently operating mines and metallurgical plants, development-phase properties and closed properties. The amount of the provision has been recorded based on estimates and assumptions that management believes are reasonable; however, actual decommissioning and restoration costs may differ from expectations.
During 2019, additional provisions were recognized as a result of higher estimates for closure activities of tailings facilities at the Manitoba operations to ensure compliance with higher industry-wide standards for tailings management safety and, to a lesser extent, increased mine activity footprints and the resulting higher disturbance at the Constancia operation.
During the year ended December 31, 2018 additional provisions were recognized as a result of increased mine activity footprints and the resulting higher disturbance at the Constancia operation.
The Group's decommissioning and restoration liabilities relate mainly to its Manitoba operations. Management anticipates that the assets in Flin Flon will be placed on care and maintenance once mining activities are completed at 777 mine in order to maintain optionality for restart should a new mine be found in the Flin Flon area. The majority of closure activities will occur once all mining activities in Manitoba are completed, which is currently anticipated in 2028. These provisions also reflect estimated post-closure cash flows that extend to 2100 for ongoing monitoring and water treatment requirements. Management anticipates most decommissioning and restoration activities for the Constancia operation will occur from 2035 to 2070, which include ongoing monitoring and water treatment requirements.
These estimates have been discounted to their present value at rates ranging from 1.59% to 2.39% per annum (2018 - 1.80% to 3.02%), using pre-tax risk-free interest rates that reflect the estimated maturity of each specific liability.
20. Pension obligations
The Group maintains non-contributory and contributory defined benefit pension plans for certain of its employees.
The Group uses a December 31 measurement date for all of its plans. For the Group's significant plans, the most recent actuarial valuations filed for funding purposes were performed during 2019 using data as at December 31, 2018. For these plans, the next actuarial valuation required for funding purposes will be performed during 2020 using data as at December 31, 2019.
During the year ended December 31, 2018, an annuity purchase transaction was entered into in which the defined benefit obligations associated with certain defined benefit plan members were assumed by a third party insurer in exchange for a lump sum payment of $120,018 from plan assets.
Movements in the present value of the defined benefit obligation in the current and previous years were as follows:
| | | Year ended | |
| | | Dec. 31, 2019 | | | Dec. 31, 2018 | |
| Opening defined benefit obligation: | $ | 211,512 | | $ | 383,054 | |
| Current service costs | | 9,880 | | | 11,032 | |
Past service cost related to the new collective bargaining agreement
| | - | | | 383 | |
| Interest cost | | 7,156 | | | 12,009 | |
| Benefits paid from plan | | (16,745 | ) | | (29,499 | ) |
| Benefits paid from employer | | (934 | ) | | (1,998 | ) |
| Participant contributions | | 64 | | | 98 | |
| Effects of movements in exchange rates | | 10,814 | | | (32,015 | ) |
| Remeasurement actuarial (gains)/losses: | | | | | | |
| Arising from changes in demographic assumptions | | - | | | - | |
| Arising from changes in financial assumptions | | 30,455 | | | (11,585 | ) |
| Arising from experience adjustments | | (2,258 | ) | | (2,112 | ) |
| Settlement payments from plan assets | | (6,307 | ) | | (120,018 | ) |
| Loss on settlement (note 6d) | | 96 | | | 2,163 | |
| Closing defined benefit obligation | $ | 243,733 | | $ | 211,512 | |
The defined benefit obligation closing balance, by member group, is as follows:
| | | Dec. 31, 2019 | | | Dec. 31, 2018 | |
| Active members | $ | 231,959 | | $ | 200,591 | |
| Deferred members | | 1,555 | | | 723 | |
| Retired members | | 10,219 | | | 10,198 | |
| Closing defined benefit obligation | $ | 243,733 | | $ | 211,512 | |
Movements in the fair value of the pension plan assets in the current and previous years were as follows:
| | | Year ended | |
| | | Dec. 31, 2019 | | | Dec. 31, 2018 | |
| Opening fair value of plan assets: | $ | 175,795 | | $ | 341,432 | |
| Interest income | | 6,170 | | | 11,033 | |
| Remeasurements losses: | | | | | | |
| Return on plan assets (excluding amounts included in net interest expense) | | 21,460 | | | (15,296 | ) |
| Contributions from the employer | | 11,952 | | | 17,020 | |
| Employer direct benefit payments | | 934 | | | 1,998 | |
| Contributions from plan participants | | 64 | | | 98 | |
| Benefit payment from employer | | (934 | ) | | (1,998 | ) |
| Administrative expenses paid from plan assets | | (82 | ) | | (83 | ) |
| Benefits paid | | (16,745 | ) | | (29,499 | ) |
| Settlement payments from plan assets | | (6,307 | ) | | (120,018 | ) |
| Effects of changes in foreign exchange rates | | 9,812 | | | (28,892 | ) |
| Closing fair value of plan assets | $ | 202,119 | | $ | 175,795 | |
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, 2019 | | | Dec. 31, 2018 | |
| Present value of funded defined benefit obligation | $ | 224,364 | | $ | 195,283 | |
| Fair value of plan assets | | (202,119 | ) | | (175,795 | ) |
| Present value of unfunded defined benefit obligation | | 19,369 | | | 16,229 | |
| Net liability arising from defined benefit obligation | $ | 41,614 | | $ | 35,717 | |
Reflected in the consolidated balance sheets as follows:
| | | Dec. 31, 2019 | | | Dec. 31, 2018 | |
| Pension obligation - current (note 14) | $ | 12,015 | | $ | 11,854 | |
| Pension obligation - non-current | | 29,599 | | | 23,863 | |
| Total pension obligation | $ | 41,614 | | $ | 35,717 | |
Pension expense is as follows:
| | | Dec. 31, 2019 | | | Dec. 31, 2018 | |
| Service costs: | | | | | | |
| Current service cost | $ | 9,880 | | $ | 11,032 | |
| Past service cost | | - | | | 383 | |
| Loss on settlement (note 6d) | | 96 | | | 2,163 | |
| Total service cost | | 9,976 | | | 13,578 | |
| Net interest expense | | 986 | | | 976 | |
| Administration cost | | 82 | | | 83 | |
| Defined benefit pension expense | $ | 11,044 | | $ | 14,637 | |
| | | | | | | |
| Defined contribution pension expense | $ | 1,639 | | $ | 1,469 | |
Remeasurement on the net defined benefit liability:
| | | Dec. 31, 2019 | | | Dec. 31, 2018 | |
| (Return)/loss on plan assets (excluding amounts included in net interest expense) | $ | (21,460 | ) | $ | 15,296 | |
| Actuarial gains arising from changes in demographic assumptions | | - | | | - | |
| Actuarial losses/(gains) arising from changes in financial assumptions | | 29,609 | | | (11,585 | ) |
| Actuarial gains arising from experience adjustments | | (2,258 | ) | | (2,112 | ) |
| Defined benefit loss/(gain) related to remeasurement | $ | 5,891 | | $ | 1,599 | |
| | | | | | | |
| Total pension cost | $ | 18,574 | | $ | 17,705 | |
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.
The defined benefit pension plans typically expose the Group to actuarial risks such as: investment risk, interest rate risk, longevity risk and salary risk.
| Investment risk | The present value of the liabilities for the defined benefit plans is calculated using a discount rate determined by reference to high quality corporate bond yields; if the return on plan assets is below this rate, it will create a plan deficit. The Group's primary quantitative investment objectives are maximization of the long term real rate of return, subject to an acceptable degree of investment risk and preservation of principal. Risk tolerance is established through consideration of several factors including past performance, current market condition and the funded status of the plan. |
| Interest risk | A decrease in the bond interest rate will increase the pension plan liabilities; however, this will be partially offset by an increase in the return on the plan's debt investments |
| Longevity risk | The present value of the defined benefit plans liabilities is calculated by reference to the best estimate of the mortality of plan participants both during and after their employment. An increase in the life expectancy of the plan participants will increase the pension plans liabilities. |
| Salary risk | The present value of the defined benefit plans liabilities for some of the pension plans is calculated by reference to the future salaries of plan participants. As such, an increase in the salary of the plan participants will increase the plans' liabilities. |
The principal assumptions used for the purposes of the actuarial valuations were as follows:
| | | 2019 | | | 2018 | |
| Defined benefit cost: | | | | | | |
| Discount rate - benefit obligations | | 3.73 % | | | 3.45 % | |
| Discount rate - service cost | | 3.75 % | | | 3.50 % | |
| Expected rate of salary increase1 | | 2.75 % | | | 2.75 % | |
| Average longevity at retirement age for current pensioners (years)2 : | | | | | | |
| Males | | 21.1 | | | 21.0 | |
| Females | | 23.9 | | | 23.7 | |
| Defined benefit obligation: | | | | | | |
| Discount rate | | 3.08 % | | | 3.73 % | |
| Expected rate of salary increase1 | | 2.75 % | | | 2.75 % | |
| Average longevity at retirement age for current pensioners (years)2 : | | | | | | |
| Males | | 21.2 | | | 21.1 | |
| Females | | 23.9 | | | 23.9 | |
| Average longevity at retirement age for current employees (future pensioners) (years)2 : | | | | | | |
| Males | | 23.0 | | | 23.0 | |
| Females | | 25.6 | | | 25.6 | |
| 1 Plus merit and promotional scale based on member's age | |
| 2 CPM2014 Priv with CPM-B projection scale. | |
The Group reviews the assumptions used to measure pension costs (including the discount rate) on an annual basis. Economic and market conditions at the measurement date affect these assumptions from year to year. In determining the discount rate, the Group considers the duration of the pension plan liabilities.
Significant actuarial assumptions for the determination of the defined benefit obligation are discount rate, expected salary increase and mortality. The sensitivity analysis below has been determined based on reasonably possible changes of the respective assumptions occurring at the end of the reporting periods, while holding other assumptions constant:
- If the discount rate is 50 basis points higher (lower), the defined benefit obligation would decrease by $21,290 (increase by $24,435).
- If the expected salary growth increases (decreases) by 1%, the defined benefit obligation would increase by $3,476 (decrease $3,125).
- If the life expectancy increases (decreases) by one year for both men and women, the defined benefit obligation would increase by $2,386 (decrease by $2,446).
The sensitivity analysis presented above may not be representative of the actual change in the defined benefit obligation as it is unlikely that the change in assumptions would occur in isolation of one another as some of the assumptions may be correlated.
Furthermore, in presenting the above sensitivity analysis, the present value of the defined benefit obligation has been calculated using the projected unit credit method at the end of the reporting period, which is the same as that applied in calculating the defined benefit obligation liability recognised in the consolidated balance sheets.
The Group's main pension plans are registered federally with the Office of the Superintendent of Financial Institution and with the Canada Revenue Agency. The registered pension plans are governed in accordance with the Pension Benefits Standards Act and the Income Tax Act. The sponsor contributes the amount needed to maintain adequate funding as dictated by the prevailing regulations.
Expected employer contribution to the pension plans for the fiscal year ending December 31, 2020 is $12,070.
The average duration of the pension obligation at December 31, 2019 is 19.3 years (2018 - 17.3 years). This number can be broken down as follows:
- Active members: 19.7 years (2018: 17.6 years)
- Deferred members: 22.0 years (2018: 14.0 years)
- Retired members: 10.5 years (2018: 10.4 years)
Asset-Liability-Matching studies are performed periodically to analyse the investment policies in terms of risk and-return profiles.
The actual return on plan assets in 2019 was 15.1% (2018: negative 2.6%).
The pension plans do not invest directly in either securities or property/real estate of the Group.
With the exception of fixed income investments, the plan assets are actively managed by investment managers, with the goal of attaining returns that potentially outperform passively managed investments. Within appropriate limits, the actual composition of the invested funds may vary from the prescribed investment mix.
The following is a summary of the fair value classification levels for investment:
| December 31, 2019 | | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
| Investments: | | | | | | | | | | | | |
| Money market instruments | $ | 1,588 | | $ | - | | $ | - | | $ | 1,588 | |
| Pooled equity funds | | 76,680 | | | - | | | - | | | 76,680 | |
| Pooled fixed income funds | | - | | | 103,646 | | | - | | | 103,646 | |
| Alternative investment funds | | - | | | 19,438 | | | - | | | 19,438 | |
| Balanced funds | | - | | | 767 | | | - | | | 767 | |
| | $ | 78,268 | | $ | 123,851 | | $ | - | | $ | 202,119 | |
| December 31, 2018 | | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
| Investments: | | | | | | | | | | | | |
| Money market instruments | $ | 3,072 | | $ | - | | $ | - | | $ | 3,072 | |
| Pooled equity funds | | 53,329 | | | - | | | - | | | 53,329 | |
| Pooled fixed income funds | | - | | | 91,854 | | | - | | | 91,854 | |
| Alternative investment funds | | - | | | 26,871 | | | - | | | 26,871 | |
| Balanced funds | | - | | | 669 | | | - | | | 669 | |
| | $ | 56,401 | | $ | 119,394 | | $ | - | | $ | 175,795 | |
21. Other employee benefits
The Group sponsors both other long-term employee benefit plans and non-pension post-employment benefits plans and uses a December 31 measurement date. These obligations relate mainly to commitments for post-retirement health benefits. Information about the Group's post-employment and other long-term employee benefits is as follows:
Movements in the present value of the defined benefit obligation in the current and previous years were:
| | | Year ended | |
| | | Dec. 31, 2019 | | | Dec. 31, 2018 | |
| Opening defined benefit obligation | $ | 93,528 | | $ | 107,829 | |
| Current service cost1 | | 3,060 | | | 3,455 | |
| Past service cost | | - | | | 255 | |
| Interest cost | | 3,600 | | | 3,683 | |
| Effects of movements in exchange rates | | 4,864 | | | (8,587 | ) |
| Remeasurement actuarial (gains)/losses: | | | | | | |
| Arising from changes in demographic assumptions | | - | | | (9,996 | ) |
| Arising from changes in financial assumptions | | 14,094 | | | 2,809 | |
| Arising from experience adjustments | | 87 | | | (3,472 | ) |
| Benefits paid | | (2,537 | ) | | (2,448 | ) |
| Closing defined benefit obligation | $ | 116,696 | | $ | 93,528 | |
1 Includes remeasurement of other long term employee benefits
The defined benefit obligation closing balance, by group member, is as follows:
| | | Dec. 31, 2019 | | | Dec. 31, 2018 | |
| Active members | $ | 60,801 | | $ | 47,249 | |
| Inactive members | | 55,895 | | | 46,279 | |
| Closing defined benefit obligation | $ | 116,696 | | $ | 93,528 | |
Movements in the fair value of defined benefit amounts in the current and previous years were as follows:
| | | Dec. 31, 2019 | | | Dec. 31, 2018 | |
| Employer contributions | $ | 2,537 | | $ | 2,448 | |
| Benefits paid | | (2,537 | ) | | (2,448 | ) |
| Closing fair value of assets | $ | - | | $ | - | |
The non-pension employee benefit plan obligations are unfunded.
Reconciliation of assets and liabilities recognized in the consolidated balance sheets:
| | | Dec. 31, 2019 | | | Dec. 31, 2018 | |
| Unfunded benefit obligation | $ | 116,696 | | $ | 93,528 | |
| Vacation accrual and other - non-current | | 2,888 | | | 2,664 | |
| Net liability | $ | 119,584 | | $ | 96,192 | |
Reflected in the consolidated balance sheets as follows:
| | | Dec. 31, 2019 | | | Dec. 31, 2018 | |
| Other employee benefits liability - current (note 14) | $ | 2,806 | | $ | 2,564 | |
| Other employee benefits liability - non-current | | 116,778 | | | 93,628 | |
| Net liability | $ | 119,584 | | $ | 96,192 | |
Other employee future benefit expense includes the following
| | | Dec. 31, 2019 | | | Dec. 31, 2018 | |
| Current service cost 1 | $ | 3,060 | | $ | 3,710 | |
| Net interest cost | | 3,600 | | | 3,683 | |
| Components recognized in consolidated income statements | $ | 6,660 | | $ | 7,393 | |
1 Includes remeasurement of other long term employee benefit
| | | Dec. 31, 2019 | | | Dec. 31, 2018 | |
| Remeasurement on the net defined benefit liability: | | | | | | |
| Actuarial (gains)/losses arising from changes in demographic assumptions | $ | - | | $ | (9,996 | ) |
| Actuarial (gains)/losses arising from changes in financial assumptions | | 14,094 | | | 2,809 | |
| Actuarial gains arising from changes experience adjustments | | 87 | | | (3,472 | ) |
Components recognized in statements of comprehensive income
| $ | 14,181 | | $ | (10,659 | ) |
| Total other employee future benefit cost | $ | 20,841 | | $ | (3,266 | ) |
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.
| | | Dec. 31, 2019 | | | Dec. 31, 2018 | |
| Defined benefit cost: | | | | | | |
| Discount rate | | 3.88 % | | | 3.64 % | |
| Initial weighted average health care trend rate | | 5.74 % | | | 5.97 % | |
| Ultimate weighted average health care trend rate | | 4.00 % | | | 4.00 % | |
| Average longevity at retirement age for current pensioners (years)1 : | | | | | | |
| Males | | 21.1 | | | 21.0 | |
| Females | | 23.9 | | | 23.7 | |
| | | Dec. 31, 2019 | | | Dec. 31, 2018 | |
| Defined benefit obligation: | | | | | | |
| Discount rate | | 3.17 % | | | 3.88 % | |
| Initial weighted average health care trend rate | | 5.68 % | | | 5.74 % | |
| Ultimate weighted average health care trend rate | | 4.00 % | | | 4.00 % | |
| Average longevity at retirement age for current pensioners (years)1 : | | | | | | |
| Males | | 21.2 | | | 21.1 | |
| Females | | 23.9 | | | 23.9 | |
| Average longevity at retirement age for current employees (future pensioners) (years)1 : | | | | | | |
| Males | | 23.1 | | | 23.0 | |
| Females | | 25.6 | | | 25.6 | |
1 CPM2014 Priv with CPM-B projection scale
The Group reviews the assumptions used to measure other employee benefit costs (including the discount rate) on an annual basis.
The other employee benefit costs typically expose the Group to actuarial risks such as: interest rate risk, health care cost inflation risk and longevity risk.
Interest risk | A decrease in the bond interest rate will increase the plan liabilities. |
Health care cost inflation risk | The majority of the plan's benefit obligations are linked to health care cost inflation and higher inflation will lead to higher liabilities. |
Longevity risk | The majority of the plans' benefit liability is calculated by reference to the best estimate of the mortality of plan participants both during and after their employment. An increase in the life expectancy of the plan participants will increase the plans liabilities. This is particularly significant for benefits subject to health care cost inflation where increases in inflation result in higher sensitivity to changes in life expectancy. |
The sensitivity analyses below have been determined based on reasonably possible changes of the respective assumptions occurring at the end of the reporting period, while holding other assumptions constant:
- If the discount rate is 50 basis points higher (lower), the defined benefit obligation would decrease by $10,259 (increase by $11,831).
- If the health care cost assumption increases (decreases) by 1%, the defined benefit obligation would increase by $24,123 (decrease by $18,581).
- If the life expectancy increases (decreases) by one year for both men and women, the defined benefit obligations would increase by $4,556 (decrease by $4,498).
The average duration of the non-pension post employment obligation at December 31, 2019 is 19.6 years (2018: 18.6 years).
This number can be broken down as follows:
- Active members: 24.9 years (2018: 23.7 years)
- Inactive members: 13.9 years (2018: 13.4 years)
22. Income and mining taxes
(a) Tax expense:
The tax expense (recoveries) is applicable as follows:
| | | Year ended December 31, | |
| | | 2019 | | | 2018 | |
| Current: | | | | | | |
| Income taxes | | | | | | |
| Canada | $ | 11,196 | | $ | 5,251 | |
| Peru | | 13,723 | | | 19,103 | |
| Mining taxes | | | | | | |
| Canada | | 341 | | | 9,085 | |
| Peru | | 4,379 | | | 11,030 | |
| Adjustments in respect of prior years | | 6,273 | | | 707 | |
| | | 35,912 | | | 45,176 | |
| Deferred: | | | | | | |
Income taxes (recoveries) - origination, revaluation
and/or and reversal of temporary differences | | | | | | |
| Canada | | (59,082 | ) | | 25,811 | |
| Peru | | (6,280 | ) | | 10,780 | |
| United States | | (68,106 | ) | | 3,170 | |
Mining taxes (recoveries) - origination, revaluation and/or
reversal of temporary difference | | | | | | |
| Canada | | (10,266 | ) | | 414 | |
| Peru | | (1,948 | ) | | (621 | ) |
| Adjustments in respect of prior years | | 817 | | | 691 | |
| | | (144,865 | ) | | 40,245 | |
| | $ | (108,953 | ) | $ | 85,421 | |
Adjustments in respect of prior years refers to amounts changing due to the filing of tax returns and assessments from government authorities.
(b) Deferred tax assets and liabilities as represented on the consolidated balance sheets:
| | | Dec. 31, 2019 | | | Dec. 31, 2018 | |
| Deferred income tax asset | | | | | | |
| Canada | $ | 69,950 | | $ | 15,513 | |
| | | | | | | |
| Deferred income tax liability | | | | | | |
| Peru | | (191,611 | ) | | (196,452 | ) |
| United States | | (41,607 | ) | | (110,861 | ) |
| Deferred mining tax asset (liability) | | | | | | |
| Canada | | 5,095 | | | (5,119 | ) |
| Peru | | (9,709 | ) | | (11,658 | ) |
| | | (237,832 | ) | | (324,090 | ) |
| Net deferred tax liability balance, end of year | $ | (167,882 | ) | $ | (308,577 | ) |
(c) Changes in deferred tax assets and liabilities:
| | | Year ended
Dec. 31, 2019 | | | Year ended
Dec. 31, 2018 | |
| Net deferred tax liability balance, beginning of year | $ | (308,577 | ) | $ | (277,466 | ) |
| Deferred tax recovery (expense) | | 144,865 | | | (40,245 | ) |
| OCI transactions | | 1,878 | | | 520 | |
| Foreign currency translation on the deferred tax liability | | (6,048 | ) | | 8,614 | |
| Net deferred tax liability balance, end of year | $ | (167,882 | ) | $ | (308,577 | ) |
(d) Reconciliation to statutory tax rate:
As a result of its mining operations, the Group is subject to both income and mining taxes. Generally, most expenditures incurred are deductible in computing income tax, whereas mining tax legislation, although based on a measure of profitability from carrying on mining operations, is more restrictive in respect of the deductions permitted in computing income subject to mining tax. These restrictions include costs unrelated to mining operations as well as deductions for financing expenses, such as interest and royalties. In addition, income unrelated to carrying on mining operations is not subject to mining tax.
A reconciliation between tax expense and the product of accounting profit multiplied by the Group's statutory income tax rate for the years ended December 31, 2019 and 2018 is as follows:
| | | Year ended December 31, | |
| | | 2019 | | | 2018 | |
| | | | | | | |
| Statutory tax rate | | 27.00 % | | | 27.00 % | |
| | | | | | | |
| Tax expense at statutory rate | $ | (122,246 | ) | $ | 46,126 | |
| Effect of: | | | | | | |
| Deductions related to mining taxes | | (1,493 | ) | | (5,976 | ) |
| Adjusted income taxes | | (123,739 | ) | | 40,150 | |
| Mining tax (recovery) expense | | (6,674 | ) | | 19,214 | |
| | | (130,413 | ) | | 59,364 | |
| | | | | | | |
| Permanent differences related to: | | | | | | |
| Capital items | | 3,270 | | | (2,903 | ) |
| Other income taxes permanent differences | | 1,747 | | | (454 | ) |
| Impact of remeasurement on decommissioning liability | | (16,265 | ) | | 3,898 | |
| Temporary income tax differences not recognized | | 6,219 | | | 4,449 | |
| Non-deductible impairment on UCM receivable | | 7,041 | | | - | |
| Withholding tax on dividend | | 6,826 | | | - | |
| Impact related to differences in tax rates in foreign operations | | 20,338 | | | 9,594 | |
| Impact of changes in statutory tax rates | | (259 | ) | | 45 | |
| Foreign exchange on non-monetary items | | (6,633 | ) | | 11,408 | |
| Impact related to tax assessment and tax return amendments | | (824 | ) | | 20 | |
| Tax (recovery) expense | $ | (108,953 | ) | $ | 85,421 | |
(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, 2019 and 2018 are as follows:
| | | Balance sheet | | | Income Statement | |
| | | Dec.31,
2019 | | | Dec. 31,
2018 | | | Dec.31,
2019 | | | Dec. 31,
2018 | |
| Deferred income tax (liability) asset/expense (recovery) | | | | | | | | | | | | |
| Property, plant and equipment | $ | (96,841 | ) | $ | (83,407 | ) | $ | 13,434 | | $ | (18,646 | ) |
| Pension obligation | | 11,332 | | | 7,817 | | | (1,115 | ) | | 2,739 | |
| Other employee benefits | | 16,837 | | | 13,488 | | | (3,349 | ) | | 3,254 | |
| Decommissioning and restoration obligation | | 41,208 | | | 7,817 | | | (33,391 | ) | | (2,055 | ) |
| Non-capital losses | | 90,446 | | | 72,470 | | | (17,976 | ) | | 19,025 | |
| Share issuance and debt costs | | 6,540 | | | 10,896 | | | 4,361 | | | 4,807 | |
| Deferred revenue | | (112 | ) | | (7,622 | ) | | (7,510 | ) | | 5,096 | |
| Other | | 540 | | | (5,946 | ) | | (12,839 | ) | | 4,640 | |
| Deferred income tax asset/expense (recovery) | | 69,950 | | | 15,513 | | | (58,385 | ) | | 18,860 | |
| Deferred income tax liability (assets)/(recovery) expense | | | | | | | | | | | | |
| Property, plant and equipment | | 259,145 | | | 339,037 | | | (79,892 | ) | | 25,456 | |
| Other employee benefits | | (80 | ) | | 240 | | | (320 | ) | | 48 | |
| Asset retirement obligations | | (833 | ) | | (918 | ) | | 85 | | | (129 | ) |
| Non-capital losses | | (28,643 | ) | | (27,374 | ) | | (1,269 | ) | | 165 | |
| Other | | 3,629 | | | (3,672 | ) | | 7,302 | | | (3,439 | ) |
| Deferred income tax liability/(recovery) expense | | 233,218 | | | 307,313 | | | (74,094 | ) | | 22,101 | |
| Deferred income tax liability/(recovery) expense | $ | (163,268 | ) | $ | (291,800 | ) | $ | (132,479 | ) | $ | 40,961 | |
The above reconciling items are disclosed at the tax rates that apply in the jurisdiction where they have arisen. The Other category in the above table includes the effect of foreign exchange fluctuations.
(f) Income tax temporary differences - not recognized:
The Group has not recognized deferred tax asset in respect of the following deductible income tax temporary differences:
| | | Dec. 31, 2019 | | | Dec. 31, 2018 | |
| Property, plant and equipment | $ | 33,269 | | $ | - | |
| Capital losses | | 159,545 | | | 200,455 | |
| Other employee benefits | | 68,866 | | | 77,166 | |
| Asset retirement obligations | | 146,679 | | | 175,091 | |
| Non-capital losses | | 122,979 | | | 116,542 | |
| Temporary differences not recognized | $ | 531,338 | | $ | 569,254 | |
The deductible temporary differences excluding non-capital losses do not expire under current tax legislation.
The Canadian non-capital losses were incurred between 2006 and 2019 and expire between 2026 and 2039.
The Group incurred United Stated net operating losses between 2004 and 2019 which have a twenty year carry forward period. Peruvian net operating losses were incurred from 2014 to 2016 which have a four year carry forward period.
(g) Mining tax effect of temporary differences:
The tax effects of temporary differences that give rise to significant portions of the deferred mining tax assets and liabilities at December 31, 2019 and December 31, 2018 are as follows:
| | | Dec. 31, 2019 | | | Dec. 31, 2018 | |
| Canada | | | | | | |
| Property, plant and equipment | $ | 5,095 | | $ | (5,119 | ) |
| | | Dec. 31, 2019 | | | Dec. 31, 2018 | |
| Peru | | | | | | |
| Property, plant and equipment | $ | (9,710 | ) | $ | (11,658 | ) |
For the year ended December 31, 2019, the Group had unrecognized deferred mining tax assets of approximately $5,361 (December 31, 2018 - $8,469).
(h) Unrecognized taxable temporary differences associated with investments:
There are no taxable temporary differences associated with investments in subsidiaries, associated and joint ventures, for which a deferred tax liability has not been recognized.
(i) Tax receivable/payable:
The timing of payments results in significant variances in period-to-period comparison 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 Group may be subject in the future to a review of its historic income and other tax filings and, in connection with such reviews disputes can arise with the taxing authorities over the interpretation or application of certain tax rules and regulations in respect of the Group's business. These reviews may alter the timing or amount of taxable income or deductions. The amount ultimately reassessed upon resolution of issues raised may differ from the amount accrued.
23. Share capital
(a) Preference shares:
Authorized: Unlimited preference shares without par value
(b) Common shares:
Authorized: Unlimited common shares without par value
Issued and fully paid:
| | | Year ended
Dec. 31, 2019 | | | Year ended
Dec. 31, 2018 | |
| | | Common shares | | | Amount | | | Common shares | | | Amount | |
| Balance, beginning of year | | 261,272,151 | | $ | 1,777,340 | | | 261,271,188 | | $ | 1,777,409 | |
| Share issue costs, net of tax | | - | | | - | | | - | | | (80 | ) |
| Warrants exercised | | - | | | - | | | 963 | | | 11 | |
| Balance, end of year | | 261,272,151 | | $ | 1,777,340 | | | 261,272,151 | | $ | 1,777,340 | |
During the year ended December 31, 2019, the Company declared two semi-annual dividends of C$0.01 per share each. The Company paid $1,955 and $1,972 in dividends on March 29, 2019 and September 27, 2019 to shareholders of record as of March 8, 2019 and September 6, 2019.
During the year ended December 31, 2018 , the Company paid $2,026 and $2,019 on March 29, 2018 and September 28, 2018 to shareholders of record as of March 9, 2018 and September 7, 2018, respectively.
The Company declared a semi-annual dividend of C$0.01 per share on February 20, 2020. The dividend will be paid on March 27, 2020 to shareholders of record as of March 10, 2020 and is expected to total C$2,613.
24. Share-based payment
(a) Cash-settled share-based payments:
The Group has two cash-settled share-based payment plans, as described below.
Deferred Share Units (DSU)
At December 31, 2019, the carrying amount and the intrinsic value of the outstanding liability related to the DSU plan was $3,876 (December 31, 2018 - $4,288) (note 19). The following table outlines information related to DSUs granted, expenses recognized and payments made during the year.
| | | Year ended | |
| | | Dec. 31, 2019 | | | Dec. 31, 2018 | |
| Granted during the year: | | | | | | |
| Number of units | | 337,999 | | | 158,886 | |
| Weighted average price (C$/unit) | $ | 5.89 | | $ | 7.91 | |
| Expenses (gain) recognized during the year1 (notes 6c) | $ | 1,157 | | $ | (1,877 | ) |
| Payments made during the year (note 19) | $ | 1,668 | | $ | - | |
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.
Restricted Share Units (RSU)
RSUs granted under the LTEP Plan may be settled in the form of Hudbay common shares or, at the option of Hudbay, the cash equivalent based on the market price of the common shares as of the vesting date. RSUs may also be granted under Hudbay's Share Unit Plan, however; the RSUs granted under the Share Unit Plan may only be settled in cash. Hudbay has historically settled all RSUs in cash. The Company has determined that the appropriate accounting treatment is to classify the RSUs as cash settled transactions.
At December 31, 2019, the carrying amount of the outstanding liability related to the RSU plan was $5,477 (December 31, 2018 - $12,201) (note 19). The following table outlines information related to RSUs granted, expenses recognized and payments made in the year.
| | | Year ended | |
| | | Dec. 31, 2019 | | | Dec. 31, 2018 | |
| Number of units, beginning of year | | 3,666,867 | | | 3,405,713 | |
| Number of units granted during the year | | 1,080,741 | | | 1,031,701 | |
| Credits for dividends | | 7,554 | | | 9,724 | |
| Number of units forfeited during the year | | (573,914 | ) | | (21,190 | ) |
| Number of units vested | | (1,957,249 | ) | | (759,081 | ) |
| Number of units, end of year1 | | 2,223,999 | | | 3,666,867 | |
| Weighted average price - granted (C$/unit) | $ | 8.98 | | $ | 10.33 | |
| Expenses (gain) recognized during the year2 (note 6c) | $ | 1,557 | | $ | (496 | ) |
| Payments made during the year (note 19) | $ | 9,380 | | $ | 6,435 | |
1 Includes 616,397 and 1,842,837 units that have vested; however, are unreleased and unpaid as of December 31, 2019 and December 31, 2018, respectively.
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.
(b) Equity-settled share-based payment - stock options:
The Group's stock option plan was approved in June 2005 and amended in May 2008 (the "Plan").
Under the amended Plan, the Group may grant to employees, officers, directors or consultants of the Group or its affiliates options to purchase up to a maximum of 13 million common shares of the Group. As of December 31, 2018, all options had either been exercised, or expired.
No options were granted under the Plan during the years ended December 31, 2019 and December 31, 2018.
The Group estimates expected life of options and expected volatility based on historical data, which may differ from actual outcomes.
| | | Year ended | | | Year ended | |
| | | Dec. 31, 2019 | | | Dec. 31, 2018 | |
| | | 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 | | - | | $ | - | | | 523,352 | | $ | 15.86 | |
| Forfeited | | - | | $ | - | | | - | | $ | - | |
| Expired | | - | | $ | - | | | (523,352 | ) | $ | 15.86 | |
| Balance, end of year | | - | | $ | - | | | - | | $ | - | |
25. Capital management
The Group's definition of capital includes total equity and long-term debt. The Group's long-term debt balance as at December 31, 2019 was $985,255 (December 31, 2018 - $981,030).
The Group's objectives when managing capital are to maintain a strong capital base in order to:
- Advance the Group's corporate strategies to create long-term value for its stakeholders; and
- Sustain the Group's operations and growth throughout metals and materials cycles
Hudbay monitors its capital and capital structure on an ongoing basis to ensure they are sufficient to achieve the Group's short-term and long-term strategic objectives in a capital intensive industry. The Group faces several risks, including volatile metals prices, access to capital, and risk of delays and cost escalation associated with major capital projects. The Group continually assesses the adequacy of its capital structure to ensure its objectives are met. Hudbay monitors its cash and cash equivalents, which were $396,146 as at December 31, 2019 (2018 - $515,497), together with availability under its committed credit facilities. The Group invests its cash and cash equivalents primarily in Canadian bankers' acceptances, deposits at major Canadian and Peruvian banks, or treasury bills issued by the federal or provincial governments. In addition to the requirement to maintain sufficient cash balances to fund continuing operations, the Group must maintain sufficient cash to fund the interest expense on the long-term debt outstanding (note 17). As part of the Group's capital management activities, the Group monitors interest coverage ratios and leverage ratios.
26. Financial instruments
(a) Fair value and carrying value of financial instruments:
The following presents the fair value ("FV") and carrying value ("CV") of the Group's financial instruments and non-financial derivatives:
| | | Dec. 31, 2019 | | | Dec. 31, 2018 | |
| | | FV | | | CV | | | FV | | | CV | |
| Financial assets at amortized cost | | | | | | | | | | | | |
| Cash and cash equivalents 1 | $ | 396,146 | | $ | 396,146 | | $ | 515,497 | | $ | 515,497 | |
| Restricted cash1 | | 337 | | | 337 | | | 3,738 | | | 3,738 | |
| Fair value through profit or loss | | | | | | | | | | | | |
| Trade and other receivables1, 2 | | 91,046 | | | 91,046 | | | 126,311 | | | 126,311 | |
| Non-hedge derivative assets3 | | 1,712 | | | 1,712 | | | 6,628 | | | 6,628 | |
| Prepayment option - embedded derivatives7 | | 2,585 | | | 2,585 | | | 3,664 | | | 3,664 | |
| Investments at FVTPL4 | | 11,287 | | | 11,287 | | | 15,159 | | | 15,159 | |
| Total financial assets | | 503,113 | | | 503,113 | | | 670,997 | | | 670,997 | |
| Financial liabilities at amortized cost | | | | | | | | | | | | |
| Trade and other payables1, 2 | | 184,604 | | | 184,604 | | | 164,628 | | | 164,628 | |
| Deferred Rosemont acquisition consideration8 | | 24,491 | | | 24,491 | | | - | | | - | |
| Other financial liabilities5 | | 21,338 | | | 24,000 | | | 17,425 | | | 21,361 | |
| Senior unsecured notes6 | | 1,050,126 | | | 994,143 | | | 988,294 | | | 992,970 | |
| Fair value through profit or loss | | - | | | - | | | - | | | - | |
| Embedded derivatives3 | | 9,074 | | | 9,074 | | | 7,201 | | | 7,201 | |
| Non-hedge derivative liabilities3 | | 10,295 | | | 10,295 | | | 2,634 | | | 2,634 | |
| Total financial liabilities | | 1,299,928 | | | 1,246,607 | | | 1,180,182 | | | 1,188,794 | |
| Net financial liability | $ | (796,815 | ) | $ | (743,494 | ) | $ | (509,185 | ) | $ | (517,797 | ) |
| 1Cash and cash equivalents, restricted cash, trade and other receivables and trade and other payables are recorded at carrying value, which approximates fair value due to their short-term nature and generally negligible credit losses. | |
| 2Excludes tax and other statutory amounts. | |
| 3Derivatives 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. | |
| 4All investments are carried at their fair value, which is determined using quoted market bid prices in active markets for listed shares. | |
| 5These 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. | |
| 6Fair value of the senior unsecured notes (note 17) has been determined using the quoted market price at the year end. | |
| 7Fair value of the prepayment option embedded derivative related to the long-term debt (note 17) has been determined using a binomial tree/lattice approach based on the Hull-White single factor interest rate term structure model. | |
| 8Discounted value based on a risk adjusted discount rate. | |
Fair value hierarchy
The table below provides an analysis by valuation method of financial instruments that are measured at fair value subsequent to recognition. Levels 1 to 3 are defined based on the degree to which fair value inputs are observable and have a significant effect on the recorded fair value, as follows:
- Level 1: Quoted prices in active markets for identical assets or liabilities;
- Level 2: Valuation techniques use significant observable inputs, either directly or indirectly, or valuations are based on quoted prices for similar instruments; and
- Level 3: Valuation techniques use significant inputs that are not based on observable market data.
| December 31, 2019 | | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
| Financial assets measured at fair value | | | | | | | | | | | | |
| Financial assets at FVTPL: | | | | | | | | | | | | |
| Non-hedge derivatives | $ | - | | $ | 1,712 | | $ | - | | $ | 1,712 | |
| Investments at FVTPL | | 11,287 | | | - | | | - | | | 11,287 | |
| Prepayment option embedded derivative | | - | | | 2,585 | | | - | | | 2,585 | |
| | $ | 11,287 | | $ | 4,297 | | $ | - | | $ | 15,584 | |
| Financial liabilities measured at fair value | | | | | | | | | | | | |
| Financial liabilities at FVTPL: | | | | | | | | | | | | |
| Embedded derivatives | $ | - | | $ | 9,074 | | $ | - | | $ | 9,074 | |
| Non-hedge derivatives | | - | | | 10,295 | | | - | | | 10,295 | |
| | $ | - | | $ | 19,369 | | $ | - | | $ | 19,369 | |
| December 31, 2018 | | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
| Financial assets measured at fair value | | | | | | | | | | | | |
| Financial assets at FVTPL: | | | | | | | | | | | | |
| Non-hedge derivatives | $ | - | | $ | 6,628 | | $ | - | | $ | 6,628 | |
| Investments at FVTPL | | 15,159 | | | - | | | - | | | 15,159 | |
| Prepayment option embedded derivative | | - | | | 3,664 | | | - | | | 3,664 | |
| | $ | 15,159 | | $ | 10,292 | | $ | - | | $ | 25,451 | |
| Financial liabilities measured at fair value | | | | | | | | | | | | |
| Financial liabilities at FVTPL: | | | | | | | | | | | | |
| Embedded derivatives | $ | - | | $ | 7,201 | | $ | - | | $ | 7,201 | |
| Non-hedge derivatives | | - | | | 2,634 | | | - | | | 2,634 | |
| | $ | - | | $ | 9,835 | | $ | - | | $ | 9,835 | |
The Group's policy is to recognize transfers into and transfers out of fair value hierarchy levels as of the date of the event or change in circumstances that caused the transfer. During the year ended December 31, 2019 and 2018 the Group did not make any transfers.
(b) Derivatives and hedging:
Copper fixed for floating swaps
Hudbay enters into copper fixed for floating swaps in order to manage the risk associated with provisional pricing terms in copper concentrate sales agreements. As at December 31, 2019, the Group had 30,000 tonnes of net copper swaps outstanding at an effective average price of $2.67/lb and settling across January to April 2020. The aggregate fair value of the transactions at December 31, 2019 was a liability position of $8,362 (December 31, 2018 was an asset position of $4,171).
Non-hedge derivative zinc contracts
Hudbay enters into fixed price sales contracts with zinc customers and, to ensure that the Group continues to receive a floating or unhedged realized zinc price, Hudbay enters into forward zinc purchase contracts that effectively offset the fixed price sales contracts. At December 31, 2019, the Group held contracts for forward zinc purchased of 5,755 tonnes (December 31, 2018 - 2,925 tonnes) that related to forward customer sales of zinc. Prices range from $1.00/lb to $1.15/lb (December 31, 2018 - $1.09/lb to $1.45/lb) and settlement dates extend to December 2020. The aggregate fair value of the transactions at December 31, 2019 was a net liability position of $221 (December 31, 2018 - a net liability position of $177).
(c) Embedded derivatives
Changes in fair value of provisionally priced receivables
The Group records changes in fair value of provisionally priced receivables related to provisional pricing in concentrate purchase, concentrate sale and certain other sale contracts. Under the terms of these contracts, prices are subject to final adjustment at the end of a future period after title transfers based on quoted market prices during the quotation period specified in the contract. The period between provisional pricing and final pricing is typically up to three months.
Changes in fair value of provisionally priced receivables are presented in trade and other receivables when they relate to sales contracts and in trade and other payables when they relate to purchase contracts. At each reporting date, provisionally priced metals are marked-to-market based on the forward market price for the quotation period stipulated in the contract, with changes in fair value recognized in revenue for sales contracts and in cost of sales for purchase concentrate contracts. Cash flows related to changes in fair value of provisionally priced receivables are classified in operating activities.
As at December 31, 2019 and 2018, the Group's net position consisted of contracts awaiting final pricing which are as indicated below:
| | | | Sales awaiting final pricing | | | Average YTD price ($/unit) | |
| Metal in concentrate | Unit | | Dec. 31, 2019 | | | Dec. 31, 2018 | | | Dec. 31, 2019 | | | Dec. 31, 2018 | |
| Copper | tonnes | | 33,102 | | | 30,519 | | | 2.80 | | | 2.69 | |
| Zinc | tonnes | | - | | | 199 | | | - | | | 1.13 | |
| Gold | oz | | 16,152 | | | 15,528 | | | 1,522 | | | 1,279 | |
| Silver | oz | | 124,371 | | | 96,646 | | | 17.86 | | | 15.45 | |
| | | | | | | | | | | | | | |
The aggregate changes in fair value of provisionally priced receivables within the copper and zinc concentrate sales contracts at December 31, 2019, was an asset position of $10,165 (December 31, 2018 - a liability position of $6,351).
Prepayment option embedded derivative
The senior unsecured notes (note 17) contain prepayment options, which represent embedded derivatives that require bifurcation from the host contract. The prepayment options are measured at fair value, with changes in the fair value being recognized as unrealized gains or losses in finance income and expense (note 6g). The fair value of the embedded derivative at December 31, 2019 was an asset of $2,585 (December 31, 2018 - an asset of $3,664).
Pampacancha delivery obligation-embedded derivative
The Group has recognized an obligation to deliver additional precious metal credits to Wheaton as a result of the Pampacancha deposit not being mined until 2020. The fair value of the embedded derivative at December 31, 2019 was a liability of $9,074 (December 31, 2018 - $7,201).
(d) Financial risk management
The Group's financial risk management activities are governed by Board-approved policies addressing risk identification, hedging authorization procedures and limits and reporting. Hudbay's policy objective, when hedging activities are undertaken, is to reduce the volatility of future profit and cash flow within the strategic and economic goals of the Group. The Group from time to time employs derivative financial instruments, including forward and option contracts, to manage risk originating from exposures to commodity price risk, foreign exchange risk and interest rate risk. Significant derivative transactions are approved by the Board of Directors, and hedge accounting is applied when certain criteria have been met. The Group does not use derivative financial instruments for trading or speculation purposes. The following is a discussion of the Group's risk exposures.
(i) Market risk
Market risk is the risk that changes in market prices, including foreign exchange rates, commodity prices, share prices, and interest rates will cause fluctuations in the fair value or future cash flows of a financial instrument.
Foreign currency risk
The Group's primary exposure to foreign currency risk arises from:
- Translation of Canadian dollar denominated costs and, to a lesser extent, Peruvian soles cost into US dollars. Substantially all of the Group's revenue are denominated in US dollars, while the majority of its operating costs are denominated in either the Canadian dollar or Peruvian sol. Generally, with gross profit, appreciation of the US dollar relative to the Canadian dollar will increase the Group's profit.
- Translation of foreign currency denominated cash and cash equivalents, trade and other receivables, trade and other payables, as well as other financial liabilities. Appreciation of the US dollar relative to a foreign currency will decrease the net asset value of these balances once they have been translated to US dollars, resulting in foreign currency translation losses on foreign currency denominated assets and gains on foreign currency denominated liabilities.
The Manitoba segment's primary financial instrument foreign currency exposure is on US denominated cash and cash equivalents, trade and other receivables and other financial liabilities. The Peru segment's primary financial instrument foreign currency exposure is on Peruvian soles cash and cash equivalents, trade and other payables and other financial liabilities.
The Group's exposure to foreign currency risk was as follows based on notional financial instruments amounts stated in US equivalent dollars:
| | | Dec. 31, 2019 | | | Dec. 31, 2018 | |
| | | CAD1 | | | USD2 | | | PEN3 | | | CAD1 | | | USD2 | | | PEN3 | |
| Cash and cash equivalent | $ | 8,394 | | $ | 21,217 | | $ | 7,617 | | $ | 11,498 | | $ | 29,740 | | $ | 13,934 | |
| Trade and other receivables | | 374 | | | 56,998 | | | 25,413 | | | 711 | | | 42,056 | | | 1,272 | |
| Other financial assets | | 11,287 | | | - | | | - | | | 15,159 | | | - | | | - | |
| Trade and other payables | | (5,719 | ) | | (435 | ) | | (22,618 | ) | | (5,341 | ) | | (3,133 | ) | | (19,513 | ) |
| Other financial liabilities | | - | | | - | | | (24,000 | ) | | - | | | - | | | (21,361 | ) |
| | $ | 14,336 | | $ | 77,780 | | $ | (13,588 | ) | $ | 22,027 | | $ | 68,663 | | $ | (25,668 | ) |
| 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, 2019 and does not reflect the overall effect that changes in market variables would have on the Group's results of operations.
| December 31, 2019 | | Change of: | | Would have changed 2019 after-tax profit by: | |
| USD/CAD exchange rate1 | | + 10% | | $ | 3.4 | | | million | |
| USD/CAD exchange rate1 | | - 10% | | (4.1 | ) | | million | |
| USD/PEN exchange rate2 | | + 10% | | 0.8 | | | million | |
| USD/PEN exchange rate2 | | - 10% | | (1.0 | ) | | million | |
| December 31, 2018 | | Change of: | | Would have changed 2018 after-tax profit by: | |
| USD/CAD exchange rate1 | | + 10% | | $ | 5.0 | | | million | |
| USD/CAD exchange rate1 | | - 10% | | (6.0 | ) | | million | |
| USD/PEN exchange rate2 | | + 10% | | 1.5 | | | million | |
| USD/PEN exchange rate2 | | - 10% | | (1.8 | ) | | 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 Group produces and sells, such as copper, zinc, gold and silver. From time to time, the Group maintains price protection programs and conducts commodity price risk management through the use of derivative contracts. The following sensitivity analysis for commodity price risk relates solely to financial instruments and non financial derivatives that were outstanding as at the year end date; each sensitivity calculation assumes all other variables are held constant. This analysis is based on values as at December 31, 2019 and does not reflect the overall effect that changes in market variables would have on the Group's results of operations.
| December 31, 2019 | | Change of: | | | Would have changed 2019 after-tax profit by: | |
| Copper prices ($/lb)3 | | + $ 0.30 | | $ | (2.0) million | |
| Copper prices ($/lb)3 | | - $ 0.30 | | | 2.0 million | |
| Zinc prices ($/lb)4 | | + $ 0.10 | | | 1.0 million | |
| Zinc prices ($/lb)4 | | - $ 0.10 | | | (1.0) million | |
| December 31, 2018 | | Change of: | | | Would have changed 2018 after-tax profit by: | |
| Copper prices ($/lb)3 | | + $ 0.30 | | $ | (3.1) million | |
| Copper prices ($/lb)3 | | - $ 0.30 | | | 3.1 million | |
| Zinc prices ($/lb)4 | | + $ 0.10 | | | 0.5 million | |
| Zinc prices ($/lb)4 | | - $ 0.10 | | | (0.5) million | |
| 3 Effect on profit due to embedded provisional pricing derivatives (note 26c) and copper fixed for floating swaps (note 26b). | |
| 4 Effect on profit due to embedded provisional pricing derivatives (note 26c) and non-hedge zinc derivatives (note 26b). | |
Share price risk
Hudbay is exposed to market risk from share prices for the Group's investments in listed Canadian metals and mining companies. These investments are made to foster strategic relationships, in connection with joint venture agreements and for investment purposes. Management monitors the value of these investments for the purposes of determining whether to add or reduce the Group's positions. The following sensitivity analysis for share price risk relates solely to financial instruments 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, 2019 and does not reflect the overall effect that changes in market variables would have on the Group's finance expenses.
| December 31, 2019 | | Change of: | | | Would have changed 2019 after-tax profit by: | |
| Share prices | | + 25% | | $ | 2.8 million | |
| Share prices | | - 25% | | | (2.8) million | |
| December 31, 2018 | | Change of: | | | Would have changed 2018 after-tax profit by: | |
| Share prices | | + 25% | | $ | 3.8 million | |
| Share prices | | - 25% | | | (3.8) million | |
Interest rate risk
The Group is exposed to the following interest rate risks:
- cash flow interest rate risk on its cash and cash equivalents;
- fair value interest rate risk on its embedded derivative associated with its Notes; and
- interest rate risk on its senior secured revolving credit facilities.
The most material of these risks is the embedded derivative associated with its Notes. This analysis is based on values at December 31, 2019 and does not reflect the overall effect that changes in market variables would have on the group's finance expenses.
| December 31, 2019 | | Change of: | | | Would have changed 2019 after-tax profit by: | |
| Interest rates | | + 2.00% | | $ | 2.3 million | |
| Interest rates | | - 2.00% | | | (2.6) million | |
| December 31, 2018 | | Change of: | | | Would have changed 2018 after-tax profit by: | |
| Interest rates | | + 2.00% | | $ | (3.3) million | |
| Interest rates | | - 2.00% | | | 3.2 million | |
Refer to note 7 for information on the Group's cash and cash equivalents.
(ii) Credit risk
Credit risk is the risk of financial loss to the Group if a customer or counterparty to a financial instrument fails to meet its obligations. The Group's maximum exposure to credit risk at the reporting date is represented by the carrying amount, net of any impairment losses recognized, of financial assets and non financial derivative assets recorded on the consolidated balance sheets. Refer to note 26a.
A large portion of the Group's cash and cash equivalents are represented by deposits with major Schedule 1 Canadian banks. Deposits and other investments with Schedule 1 Canadian banks represented 92% of total cash and cash equivalents as at December 31, 2019 (2018 - 74%). The Group's investment policy requires it to comply with a list of approved investment, concentration and maturity limits, as well as credit quality. Credit concentrations in the Group's short term investments are monitored on an ongoing basis.
Transactions involving derivatives are with counterparties the Group believes to be credit worthy.
Management has a credit policy in place that requires the Group to obtain credit insurance from an investment grade credit insurance provider to mitigate exposure to credit risk in its receivables. At December 31, 2019, approximately 96% of the Group's trade receivables were insured or payable by letters of credit (2018 - 95% were insured or payable by letters of credit). Insured receivables have a credit insurance deductible of 10%. The deductible and any additional exposure to credit risk is monitored and approved on an ongoing basis.
Two customers accounted for approximately 63% of total trade receivables as at December 31, 2019 (2018 - four customers accounted for approximately 78%). Credit risk for these customers is assessed as medium to low risk. As at December 31, 2019, none of the Group's trade receivables was aged more than 30 days (2018 - nil).
(iii) Liquidity risk
Liquidity risk is the risk that the Group will not be able to meet its obligations associated with financial liabilities. Hudbay's objective is to maintain sufficient liquid resources to meet operational and investing requirements.
The following summarizes the contractual undiscounted cash flows of the Group's non-derivative and derivative financial liabilities, including any interest payments, by remaining contractual maturity 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.
| Dec. 31, 2019 | | 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 and cash equivalents | $ | 396,146 | | $ | 396,146 | | $ | 396,146 | | $ | - | | $ | - | | $ | - | |
| Restricted cash | | 337 | | | 337 | | | 337 | | | - | | | - | | | - | |
Trade and other
receivables | | 91,046 | | | 91,046 | | | 89,451 | | | - | | | - | | | 1,595 | |
| Non-hedge derivative assets | | 1,712 | | | 1,712 | | | 1,712 | | | - | | | - | | | - | |
| | $ | 489,241 | | $ | 489,241 | | $ | 487,646 | | $ | - | | $ | - | | $ | 1,595 | |
| Non-derivative financial liabilities | | | | | | | | | | | | | |
| Trade and other payables, including embedded derivatives | $ | (184,604 | ) | $ | (184,604 | ) | $ | (184,604 | ) | $ | - | | $ | - | | $ | - | |
Other financial
liabilities | | (24,000 | ) | | (33,723 | ) | | (6,672 | ) | | (4,811 | ) | | (4,734 | ) | | (17,506 | ) |
| Deferred Rosemont acquisition consideration | | (24,491 | ) | | (30,000 | ) | | - | | | (10,000 | ) | | (20,000 | ) | | - | |
| Long-term debt, including embedded derivatives | | (991,558 | ) | | (1,350,540 | ) | | (72,165 | ) | | (149,500 | ) | | (1,128,875 | ) | | - | |
| | $ | (1,224,653 | ) | $ | (1,598,867 | ) | $ | (263,441 | ) | $ | (164,311 | ) | $ | (1,153,609 | ) | $ | (17,506 | ) |
| Derivative financial liabilities | | | | | | | | | | | | | |
| Embedded derivative | | (9,074 | ) | | (9,074 | ) | | (9,074 | ) | | - | | | - | | | - | |
| Non hedge derivative contracts | | (10,295 | ) | | (10,295 | ) | | (10,295 | ) | | - | | | - | | | - | |
| | | (19,369 | ) | | (19,369 | ) | | (19,369 | ) | | - | | | - | | | - | |
| Dec. 31, 2018 | | 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 and cash equivalents | $ | 515,497 | | $ | 515,497 | | $ | 515,497 | | $ | - | | $ | - | | $ | - | |
Trade and other
receivables | | 126,311 | | | 136,913 | | | 112,258 | | | 11,440 | | | 13,215 | | | - | |
| Non-hedge derivative assets | | 6,628 | | | 6,628 | | | 6,628 | | | - | | | - | | | - | |
| | $ | 648,436 | | $ | 659,038 | | $ | 634,383 | | $ | 11,440 | | $ | 13,215 | | $ | - | |
| Non-derivative financial liabilities | | | | | | | | | | | | | | | | | | |
| Trade and other payables, including embedded derivatives | $ | (164,628 | ) | $ | (164,628 | ) | $ | (164,628 | ) | $ | - | | $ | - | | $ | - | |
Other financial
liabilities | | (21,361 | ) | | (31,854 | ) | | (3,719 | ) | | (4,757 | ) | | (3,068 | ) | | (20,310 | ) |
| Long-term debt, including embedded derivatives | | (981,030 | ) | | (1,439,821 | ) | | (79,263 | ) | | (156,933 | ) | | (535,000 | ) | | (668,625 | ) |
| | $ | (1,167,019 | ) | $ | (1,636,303 | ) | $ | (247,610 | ) | $ | (161,690 | ) | $ | (538,068 | ) | $ | (688,935 | ) |
| Derivative financial liabilities | | | | | | | | | | | | | | | | | | |
| Non-hedge derivative contracts | | (2,634 | ) | | (2,634 | ) | | (2,634 | ) | | - | | | - | | | - | |
| | $ | (2,634 | ) | $ | (2,634 | ) | $ | (2,634 | ) | $ | - | | $ | - | | $ | - | |
27. Commitments and contingencies
(a) Non-capitalized lease commitments
The Group has entered into various non-capitalized lease commitments for facilities and equipment. The leases expire in periods ranging from one to three years. There are no restrictions placed on the Group by entering into these leases. Future minimum lease payments under such cancelable leases recognized in operating expenses at December 31 are:
| | | 2019 | |
| Within one year | $ | 57,860 | |
| After one year but not more than five years | | 26,395 | |
| More than five years | | - | |
| | $ | 84,255 | |
(b) Capital commitments
As at December 31, 2019, the Group had outstanding capital commitments in Canada of approximately $3,681, of which $1,897 can be terminated, approximately $34,617 in Peru, all of which can be terminated, and approximately $180,440 in Arizona, primarily related to the Rosemont project, of which approximately $89,370 can be terminated by the Group.
(c) Contingent liabilities
Contingent liabilities
The Group is involved in various claims, litigation and other matters arising in the ordinary course and conduct of business. While it is not possible to determine the ultimate outcome of such actions at this time, and inherent uncertainties exist in predicting such outcomes, it is the Group's belief that the ultimate resolution of such actions is not reasonably likely to have a material adverse effect on its consolidated financial position or results of operations. The assessment of contingencies inherently involves the exercise of significant judgment and estimates of the outcome of future events. As a result of the assessment, no significant contingent liabilities have been recorded in these consolidated financial statements.
As part of the streaming agreement with Wheaton for the 777 mine, the Group must repay, with precious metals credits, the legal deposit provided by Wheaton by August 1, 2052, the expiry date of the agreement. If the legal deposit is not fully repaid with precious metals credits related to 777 production by the expiry date, a cash payment for the remaining amount will be due at the expiry date of the agreement. As a result of changes in the remaining 777 mine reserves and lower precious metals prices, there is a possibility that an amount of Wheaton's legal deposit may not be repaid by means of 777 mine's precious metals credits over its expected remaining mine life.
Contingent assets
There were no significant contingent assets to disclose at December 31, 2019 or December 31, 2018.
28. Related parties
(a) Group companies
The financial statements include the financial statements of the Company and the following significant subsidiaries:
| | | | Beneficial ownership of ultimate controlling party (Hudbay Minerals Inc.) |
Name | Jurisdiction | Business | Entity's Parent | 2019 | 2018 |
HudBay Marketing & Sales Inc | Canada | Marketing and sales | HMI | 100% | 100% |
HudBay Peru Inc | British Columbia | Holding company | HMI | 100% | 100% |
HudBay Peru S.A.C. | Peru | Exploration/development | Peru Inc. | 100% | 100% |
HudBay (BVI) Inc. | British Virgin Islands | Precious metals sales | Peru Inc. | 100% | 100% |
Hudbay Arizona Inc. | British Columbia | Holding company | HMI | 100% | 100% |
Rosemont Copper Company | Arizona | Exploration/development | HudBay Arizona (US) Holding Corporation | 100% | 100% |
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.
(b) Compensation of key management personnel
The Group's key management includes members of the Board of Directors, the Group's Chief Executive Officer, the Group's senior vice presidents and vice presidents. Total compensation to key management personnel was as follows:
| | | 2019 | | | 2018 | |
| Short-term employee benefits1 | $ | 8,319 | | $ | 8,652 | |
| Post-employment benefits | | 762 | | | 762 | |
| Long-term share-based awards | | 6,966 | | | 5,970 | |
| | $ | 16,047 | | $ | 15,384 | |
1 Such as salaries and social security contributions, paid annual leave and paid sick leave, profit-sharing and bonuses and nonmonetary benefits (such as medical care, housing, cars and free or subsidized goods or services) for current employees.
29. Supplementary cash flow information
(a) Change in non-cash working capital:
| | | | Year ended December 31, | |
| | | | 2019 | | | 2018 | |
| Change in: | | | | | | | |
| Trade and other receivables | | $ | 3,252 | | $ | 16,198 | |
| Other financial assets/liabilities | | | 12,540 | | | (17,290 | ) |
| Inventories | | | (11,759 | ) | | (32 | ) |
| Prepaid expenses | | | (3,484 | ) | | (38 | ) |
| Trade and other payables | | | 5,613 | | | (19,608 | ) |
| Provisions and other liabilities | | | (2,591 | ) | | (1,030 | ) |
| | | $ | 3,572 | | $ | (21,800 | ) |
The Group has retroactively changed its presentation of changes in taxes payable/receivable in the statements of cash flows to report all changes in taxes payable/receivable within the operating cash flow before changes in non-cash working capital. There is no net impact to cash flows from operating activities. All comparative periods have been revised.
(b) Non-cash transactions:
During the year ended December 31, 2019, the Group entered into the following non-cash investing and financing activities which are not reflected in the consolidated statements of cash flows:
- Remeasurement of the Group's decommissioning and restoration liabilities for the year ended December 31, 2019 led to a net increase in related property, plant and equipment assets of $89,408 (year ended December 31, 2018 - increase of $8,998) mainly from additional provisions recognized as a result of higher estimates for closure activities of tailings facilities at the Manitoba operations to ensure compliance with higher industry-wide standards for tailings management safety and, to a lesser extent, increased mine activity footprints and the resulting higher disturbance at the Constancia operation.
- Property, plant and equipment included $22,158 of net additions related to capital additions due to the recognition of ROU assets.
- The Group, immediately prior to closing the acquisition, agreed to release UCM from repayment obligations under a Rosemont project loan in exchange for an increase in equity in Rosemont. As a result, the loan receivable balance of $25,978 was written off. The Group recognized the loss on write-off of the loan receivable in the income statement (refer to Note 6d). In addition, in order to recognize previously unfunded contributions to the Rosemont Project due from UCM, the Group recognized an increase to other capital reserves, a component of shareholder's equity.
30. Segmented information
The Group is an integrated metals producer. When making decisions on expansions, opening or closing mines, as well as day to day operations, management evaluates the profitability of the overall operation of the Group. The Group's main mining operations are located in Manitoba and Saskatchewan (Canada) and Cusco (Peru) and are included in the Manitoba segment and Peru segment, respectively. The Manitoba and Peru segments generate the Group's revenue. The Manitoba segment sells copper concentrate (containing copper, gold and silver), zinc metal and other products. The Peru segment consists of the Group's Constancia operation and sells copper concentrate and molybdenum concentrate. The Group's Arizona segment consists of the Group's Rosemont project in Arizona. Corporate and other activities include the Group's exploration activities in Chile, 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 the Company. Results from operating activities represents the profit earned by each segment without allocation of corporate costs. This is the measure reported to the chief operating decision-maker, the Group's President and Chief Executive Officer, for the purposes of resource allocation and the assessment of segment performance. Total assets and liabilities do not reflect intercompany balances, which have been eliminated on consolidation.
| Year ended December 31, 2019 | |
| | | Manitoba | | | Peru | | | Arizona | | | Corporate and other activities | | | Total | |
| Revenue from external customers | $ | 537,421 | | $ | 700,018 | | $ | - | | $ | - | | $ | 1,237,439 | |
| Cost of sales | | | | | | | | | | | | | | | |
| Mine operating costs | | 385,159 | | | 356,183 | | | - | | | - | | | 741,342 | |
| Depreciation and amortization | | 135,429 | | | 209,126 | | | - | | | - | | | 344,555 | |
| Gross profit | | 16,833 | | | 134,709 | | | - | | | - | | | 151,542 | |
| Selling and administrative expenses | | - | | | - | | | - | | | 36,170 | | | 36,170 | |
| Exploration and evaluation expenses | | 18,476 | | | 5,804 | | | - | | | 6,494 | | | 30,774 | |
| Other operating expenses | | 8,201 | | | 14,022 | | | 28,149 | | | 744 | | | 51,116 | |
| Impairment loss | | - | | | - | | | 322,249 | | | - | | | 322,249 | |
| Results from operating activities | $ | (9,844 | ) | $ | 114,883 | | $ | (350,398 | ) | $ | (43,408 | ) | $ | (288,767 | ) |
| Finance income | | | (8,527 | ) |
| Finance expenses | | | 162,888 | |
| Other finance losses | | | 9,635 | |
| Loss before tax | | | (452,763 | ) |
| Tax recovery | | | (108,953 | ) |
| Loss for the year | | $ | (343,810 | ) |
| Year ended December 31, 2018 | |
| | | Manitoba | | | Peru | | | Arizona | | | Corporate and other activities | | | Total | |
| Revenue from external customers | $ | 667,322 | | $ | 805,044 | | $ | - | | $ | - | | $ | 1,472,366 | |
| Cost of sales | | | | | | | | | | | | | | | |
| Mine operating costs | | 412,760 | | | 353,199 | | | - | | | - | | | 765,959 | |
| Depreciation and amortization | | 121,515 | | | 211,152 | | | - | | | - | | | 332,667 | |
| Gross profit | | 133,047 | | | 240,693 | | | - | | | - | | | 373,740 | |
| Selling and administrative expenses | | - | | | - | | | - | | | 27,243 | | | 27,243 | |
| Exploration and evaluation expenses | | 12,302 | | | 5,640 | | | - | | | 10,628 | | | 28,570 | |
| Other operating expenses | | 5,433 | | | 11,739 | | | 539 | | | 1,360 | | | 19,071 | |
| Results from operating activities | $ | 115,312 | | $ | 223,314 | | $ | (539 | ) | $ | (39,231 | ) | $ | 298,856 | |
| Finance income | | | (8,450 | ) |
| Finance expenses | | | 152,000 | |
| Other finance gain | | | (15,531 | ) |
| Profit before tax | | | 170,837 | |
| Tax expense | | | 85,421 | |
| Profit for the year | | $ | 85,416 | |
| December 31, 2019 | |
| | | Manitoba | | | Peru | | | Arizona | | | Corporate and other activities | | | Total | |
| Total assets | $ | 774,800 | | $ | 2,556,895 | | $ | 700,799 | | $ | 423,467 | | $ | 4,455,961 | |
| Total liabilities | | 551,171 | | | 926,642 | | | 78,988 | | | 1,051,037 | | | 2,607,838 | |
| Property, plant and equipment1 | | 684,679 | | | 2,253,404 | | | 691,538 | | | 32,938 | | | 3,662,559 | |
| 1Included in Corporate and Other activities is $27.3 million of property, plant and equipment that is located in Nevada. | |
| December 31, 2019 | |
| | | Manitoba | | | Peru | | | Arizona | | | Corporate and other activities | | | Total | |
| Additions to property, plant and equipment | $ | 143,418 | | $ | 101,717 | | $ | 38,923 | | $ | 905 | | $ | 284,963 | |
| December 31, 2018 | |
| | | Manitoba | | | Peru | | | Arizona | | | Corporate and other activities | | | Total | |
| Total assets | $ | 621,253 | | $ | 2,751,525 | | $ | 896,693 | | $ | 416,164 | | $ | 4,685,635 | |
| Total liabilities | | 424,576 | | | 921,773 | | | 115,470 | | | 1,044,960 | | | 2,506,779 | |
| Property, plant and equipment | | 572,947 | | | 2,353,229 | | | 868,921 | | | 24,715 | | | 3,819,812 | |
| December 31, 2018 | |
| | | Manitoba | | | Peru | | | Arizona | | | Corporate and other activities | | | Total | |
| Additions to property, plant and equipment | $ | 123,896 | | $ | 55,818 | | $ | 19,846 | | $ | 22 | | $ | 199,582 | |
Geographical Segments
The following tables represent revenue information regarding the Group's geographical segments for the years ended December 31:
| | | 2019 | | | 2018 | |
| Revenue by customer location 1 | | | | | | |
| Canada | $ | 418,636 | | $ | 553,411 | |
| United States | | 209,382 | | | 211,681 | |
| Switzerland | | 162,167 | | | 253,165 | |
| Germany | | 10,731 | | | 52,530 | |
| China | | 158,795 | | | 140,440 | |
| Peru | | 110,411 | | | 65,721 | |
| Philippines | | 71,506 | | | 84,687 | |
| United Kingdom | | 62,462 | | | 68,346 | |
| Other | | 33,349 | | | 42,385 | |
| | $ | 1,237,439 | | $ | 1,472,366 | |
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, 2019, six customers accounted for approximately 24%, 9%, 9%, 8%, 5% and 5%, respectively, of total revenue during the year. Revenue from these customers has been presented in the Manitoba and Peru operating segments.
During the year ended December 31, 2018, six customers accounted for approximately 26%, 9%, 8%, 7%, 5% and 5%, respectively, of total revenue during the year. Revenue from these customers has been presented in the Manitoba and Peru operating segments.
