---

Consolidated Financial Statements(In US dollars)HUDBAY MINERALS INC.Years ended December 31, 2016 and 2015


---

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, 2016 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, 2016.

The effectiveness of the Companys ICFR as at December 31, 2016
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, 2016.

|Alan Hair                             | David Bryson                                           
|------------------------------------- | -------------------------------------------------------
|President and Chief Executive Officer | Senior Vice President and Chief Financial
      Officer
|                                      |                                                        
|Toronto, Canada                       |                                                        
|February 22, 2017                     |                                                        

---

| | Deloitte LLP           
| | -----------------------
| | Bay Adelaide East      
| | 22 Adelaide Street West
| | Suite 200              
| | Toronto ON M5H 0A9     
| | Canada                 
| | Tel: 416-601-6150      
| | Fax: 416-601-6151      
| | www.deloitte.ca        

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of Hudbay
Minerals Inc.

We have audited the accompanying consolidated financial
statements of Hudbay Minerals Inc. and subsidiaries (the Company), which
comprise the consolidated balance sheets as at December 31, 2016 and December
31, 2015, and the consolidated income statements, consolidated statements of
comprehensive (loss) income, consolidated statements of changes in equity, and
consolidated statements of cash flows for the years then ended, and a summary of
significant accounting policies and other explanatory information.

Management's Responsibility for the Consolidated Financial
Statements

Management is responsible for the preparation and fair
presentation of these consolidated financial statements in accordance with
International Financial Reporting Standards as issued by the International
Accounting Standards Board, and for such internal control as management
determines is necessary to enable the preparation of consolidated financial
statements that are free from material misstatement, whether due to fraud or
error.

Auditor's Responsibility

Our responsibility is to express an opinion on these
consolidated financial statements based on our audits. We conducted our audits
in accordance with Canadian generally accepted auditing standards and the
standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we comply with ethical requirements and plan and
perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit
evidence about the amounts and disclosures in the consolidated financial
statements. The procedures selected depend on the auditor's judgment, including
the assessment of the risks of material misstatement of the consolidated
financial statements, whether due to fraud or error. In making those risk
assessments, the auditor considers internal control relevant to the entity's
preparation and fair presentation of the consolidated financial statements in
order to design audit procedures that are appropriate in the circumstances. An
audit also includes evaluating the appropriateness of accounting policies used
and the reasonableness of accounting estimates made by management, as well as
evaluating the overall presentation of the consolidated financial statements.

We believe that the audit evidence we have obtained in our
audits is sufficient and appropriate to provide a basis for our audit
opinion.

---

Opinion

In our opinion, the consolidated financial statements present
fairly, in all material respects, the financial position of Hudbay Minerals Inc.
and subsidiaries as at December 31, 2016 and December 31, 2015, and their
financial performance and their cash flows for the years then ended in
accordance with International Financial Reporting Standards as issued by the
International Accounting Standards Board.

Other Matter

We have also audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the Companys
internal control over financial reporting as of December 31, 2016, based on the
criteria established in Internal Control  Integrated Framework (2013) issued by
the Committee of Sponsoring Organizations of the Treadway Commission and our
report dated February 22, 2017 expressed an unqualified opinion on the Companys
internal control over financial reporting.

|                                  
|----------------------------------
|                                  
|Chartered Professional Accountants
|Licensed Public Accountants       
|February 22, 2017                 

---

| | Deloitte LLP           
| | -----------------------
| | Bay Adelaide East      
| | 22 Adelaide Street West
| | Suite 200              
| | Toronto ON M5H 0A9     
| | Canada                 
| | Tel: 416-601-6150      
| | Fax: 416-601-6151      
| | www.deloitte.ca        

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of Hudbay
Minerals Inc.

We have audited the internal control over financial reporting
of Hudbay Minerals Inc. and subsidiaries (the Company) as of December 31,
2016, based on the criteria established in Internal ControlIntegrated Framework
(2013) issued by the Committee of Sponsoring Organizations of the Treadway
Commission. 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 conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). 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.

A company's internal control over financial reporting is a
process designed by, or under the supervision of, the company's principal
executive and principal financial officers, or persons performing similar
functions, and effected by the company's board of directors, management, and
other personnel to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with International Financial Reporting Standards as
issued by the International Accounting Standards Board. 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 International
Financial Reporting Standards as issued by the International Accounting
Standards Board, 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 the inherent limitations of internal control over
financial reporting, including the possibility of collusion or improper
management override of controls, material misstatements due to error or fraud
may not be prevented or detected on a timely basis. Also, projections of any
evaluation of the effectiveness of the internal control over financial reporting
to future periods are subject to the risk that the controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.

In our opinion, the Company maintained, in all material
respects, effective internal control over financial reporting as of December 31,
2016, based on the criteria established in Internal Control  Integrated
Framework (2013) issued by the Committee of Sponsoring Organizations of the
Treadway Commission.

We have also audited, in accordance with Canadian generally
accepted auditing standards and the standards of the Public Company Accounting
Oversight Board (United States), the consolidated financial statements as of and
for the year ended December 31, 2016 of the Company and our report dated
February 22, 2017 expressed an unmodified / unqualified opinion on those
financial statements.

|                                  
|----------------------------------
|                                  
|Chartered Professional Accountants
|Licensed Public Accountants       
|February 22, 2017                 

---

|HUDBAY MINERALS INC.        
|----------------------------
|Consolidated Balance Sheets 
|(in thousands of US dollars)

|                                            |  |      |  |   | Dec. 31,  |   |   | Dec. 31,  |  
|------------------------------------------- |  | ---- |  | - | --------- | - | - | --------- | -
|                                            |  | Note |  |   | 2016      |   |   | 2015      |  
|                                            |  |      |  |   |           |   |   |           |  
|Assets                                      |  |      |  |   |           |   |   |           |  
|Current assets                              |  |      |  |   |           |   |   |           |  
|Cash and
      cash equivalents             |  | 9    |  | $ | 146,864   |   | $ | 53,852    |  
|Trade and other
      receivables           |  | 10   |  |   | 152,567   |   |   | 228,678   |  
|Inventories                                 |  | 11   |  |   | 112,464   |   |   | 120,186   |  
|Prepaid expenses                            |  | 12   |  |   | 3,992     |   |   | 8,979     |  
|Other
      financial assets                |  | 13   |  |   | 3,397     |   |   | 16,512    |  
|Taxes receivable                            |  |      |  |   | 17,319    |   |   | 6,971     |  
|                                            |  |      |  |   | 436,603   |   |   | 435,178   |  
|Receivables                                 |  | 10   |  |   | 32,648    |   |   | 26,223    |  
|Inventories                                 |  | 11   |  |   | 4,537     |   |   | 5,649     |  
|Other financial assets                      |  | 13   |  |   | 30,848    |   |   | 72,730    |  
|Intangible assets - computer
      software |  | 14   |  |   | 6,614     |   |   | 8,859     |  
|Property, plant and equipment               |  | 15   |  |   | 3,865,823 |   |   | 3,890,276 |  
|Deferred tax assets                         |  | 23b  |  |   | 79,483    |   |   | 40,670    |  
|                                            |  |      |  | $ | 4,456,556 |   | $ | 4,479,585 |  
|                                            |  |      |  |   |           |   |   |           |  
|Liabilities                                 |  |      |  |   |           |   |   |           |  
|Current liabilities                         |  |      |  |   |           |   |   |           |  
|Trade and other payables                    |  | 16   |  | $ | 169,662   |   | $ | 187,185   |  
|Taxes
      payable                         |  |      |  |   | 4,419     |   |   | 4,393     |  
|Other liabilities                           |  | 17   |  |   | 42,207    |   |   | 37,667    |  
|Other
      financial liabilities           |  |      |  |   | 16,667    |   |   | 10,195    |  
|Long-term debt                              |  | 18   |  |   | 16,490    |   |   | 69,875    |  
|Deferred revenue                            |  | 19   |  |   | 65,619    |   |   | 68,250    |  
|                                            |  |      |  |   | 315,064   |   |   | 377,565   |  
|Other financial liabilities                 |  |      |  |   | 38,103    |   |   | 27,635    |  
|Long-term debt                              |  | 18   |  |   | 1,215,674 |   |   | 1,205,005 |  
|Deferred revenue                            |  | 19   |  |   | 472,233   |   |   | 529,010   |  
|Provisions                                  |  | 20   |  |   | 179,702   |   |   | 143,596   |  
|Pension obligations                         |  | 21   |  |   | 28,379    |   |   | 34,260    |  
|Other employee benefits                     |  | 22   |  |   | 89,273    |   |   | 80,695    |  
|Deferred tax liabilities                    |  | 23b  |  |   | 354,916   |   |   | 294,529   |  
|                                            |  |      |  |   | 2,693,344 |   |   | 2,692,295 |  
|                                            |  |      |  |   |           |   |   |           |  
|Equity                                      |  |      |  |   |           |   |   |           |  
|Share capital                               |  | 24b  |  |   | 1,588,319 |   |   | 1,576,600 |  
|Reserves                                    |  |      |  |   | (42,040   | ) |   | (45,003   | )
|Retained earnings                           |  |      |  |   | 216,933   |   |   | 255,693   |  
|                                            |  |      |  |   | 1,763,212 |   |   | 1,787,290 |  
|                                            |  |      |  |   |           |   |   |           |  
|                                            |  |      |  | $ | 4,456,556 |   | $ | 4,479,585 |  
|Capital commitments (note
      29).        |  |      |  |   |           |   |   |           |  

1

---

|HUDBAY MINERALS INC.                 
|-------------------------------------
|Consolidated Statements of Cash Flows
|(in thousands of US dollars)         

|                                                                        |  |      |  |       | Year ended   |  
|----------------------------------------------------------------------- |  | ---- |  | ----- | ------------ | -
|                                                                        |  |      |  |       | December 31, |  
|                                                                        |  |      |  |       | 2016         |  
|                                                                        |  |      |  |       |              |  
|                                                                        |  | Note |  |       |              |  
|Cash generated from (used in)
      operating activities:               |  |      |  |       |              |  
|Loss for the year                                                       |  |      |  | **$** | (35,193      | )
|Tax expense (recovery)                                                  |  | 23a  |  |       | 40,798       |  
|Items not affecting cash:                                               |  |      |  |       |              |  
|Depreciation and amortization                                           |  | 7b   |  |       | 299,134      |  
|Share-based payment
      expense (recovery)                            |  | 7c   |  |       | 9,887        |  
|Net
      finance expense                                               |  | 7f   |  |       | 164,279      |  
|Change in fair value of
      derivatives                               |  |      |  |       | (1,238       | )
|Change in
      deferred revenue related to stream                      |  | 19   |  |       | (65,762      | )
|Change in taxes
      receivable/payable, net                           |  |      |  |       | (3,666       | )
|Unrealized loss (gain) on warrants                                      |  | 7f   |  |       | 2,111        |  
|Pension past service
      costs                                        |  |      |  |       | -            |  
|(Gain)
      loss on available-for-sale investments                     |  | 7f   |  |       | (373         | )
|Asset and goodwill
      impairment losses                              |  | 7g   |  |       | -            |  
|Gain on
      disposition of subsidiary                                 |  | 7h   |  |       | -            |  
|Pension and other
      employee benefit payments, net of accruals      |  |      |  |       | (11,120      | )
|Other and
      foreign exchange                                        |  |      |  |       | 2,625        |  
|Taxes paid                                                              |  |      |  |       | (13,614      | )
|Operating cash flow before
      change in non-cash working capital     |  |      |  |       | 387,868      |  
|Change in non-cash working capital                                      |  | 31a  |  |       | 87,206       |  
|                                                                        |  |      |  |       | 475,074      |  
|Cash generated from (used in) investing
      activities:               |  |      |  |       |              |  
|Acquisition of property, plant and equipment                            |  |      |  |       | (192,822     | )
|Acquisition of investments                                              |  |      |  |       | (359         | )
|Acquisition of subsidiary, net cash paid                                |  | 6    |  |       | -            |  
|Net
      cash received on disposition of subsidiaries                  |  |      |  |       | -            |  
|Release of (addition to) restricted cash                                |  |      |  |       | 45,913       |  
|Net
      Peruvian sales tax refunded on capital expenditures           |  |      |  |       | -            |  
|Net interest
      received (paid)                                      |  |      |  |       | 212          |  
|                                                                        |  |      |  |       | (147,056     | )
|Cash generated from (used in)
      financing activities:               |  |      |  |       |              |  
|Long-term debt borrowing, net of transaction costs paid                 |  |      |  |       | 62,247       |  
|Principal repayments                                                    |  | 18   |  |       | (176,490     | )
|Net
      refinancing of senior unsecured notes                         |  |      |  |       | 21,194       |  
|Interest paid                                                           |  |      |  |       | (126,520     | )
|Proceeds from exercise of stock options                                 |  |      |  |       | -            |  
|Financing costs                                                         |  |      |  |       | (21,763      | )
|Payment of finance lease                                                |  |      |  |       | (2,897       | )
|Net proceeds from issuance of equity                                    |  | 24b  |  |       | 11,719       |  
|Dividends paid                                                          |  | 24b  |  |       | (3,567       | )
|                                                                        |  |      |  |       | (236,077     | )
|Effect of movement in exchange rates on cash and cash
      equivalents |  |      |  |       | 1,071        |  
|Net increase (decrease) in
      cash and cash equivalents              |  |      |  |       | 93,012       |  
|Cash
      and cash equivalents, beginning of year                      |  |      |  |       | 53,852       |  
|Cash and cash equivalents, end of year                                  |  |      |  | **$** | 146,864      |  
|For supplemental information, see note 31.                              |  |      |  |       |              |  

2

---

|HUDBAY MINERALS INC.                                                  
|----------------------------------------------------------------------
|Consolidated Income Statements                                        
|(in thousands of US dollars, except share and per share
      amounts)

|                                                            |  |      |  |   | Year ended   |  
|----------------------------------------------------------- |  | ---- |  | - | ------------ | -
|                                                            |  |      |  |   | December 31, |  
|                                                            |  | Note |  |   | 2016         |  
|Revenue                                                     |  | 7a   |  | $ | 1,128,678    |  
|                                                            |  |      |  |   |              |  
|Cost of sales                                               |  |      |  |   |              |  
|Mine operating costs                                        |  |      |  |   | 607,170      |  
|Depreciation and amortization                               |  | 7b   |  |   | 298,630      |  
|                                                            |  |      |  |   | 905,800      |  
|Gross profit                                                |  |      |  |   | 222,878      |  
|Selling and administrative expenses                         |  |      |  |   | 37,774       |  
|Exploration and evaluation
      expenses                   |  |      |  |   | 4,742        |  
|Other operating expenses                                    |  | 7e   |  |   | 10,586       |  
|Asset and goodwill impairment
      loss                    |  | 7g   |  |   | -            |  
|Gain
      on disposal of subsidiary                        |  | 7h   |  |   | -            |  
|Results from operating activities                           |  |      |  |   | 169,776      |  
|Finance income                                              |  | 7f   |  |   | (2,792       | )
|Finance expenses                                            |  | 7f   |  |   | 167,071      |  
|Other finance gain                                          |  | 7f   |  |   | (108         | )
|Net finance expense                                         |  |      |  |   | 164,171      |  
|Profit (loss) before tax                                    |  |      |  |   | 5,605        |  
|Tax expense (recovery)                                      |  | 23a  |  |   | 40,798       |  
|                                                            |  |      |  |   |              |  
|Loss for the year                                           |  |      |  | $ | (35,193      | )
|                                                            |  |      |  |   |              |  
|Loss per share - basic and
      diluted                    |  |      |  | $ | (0.15        | )
|                                                            |  |      |  |   |              |  
|Weighted average number of
      common shares outstanding: |  | 26   |  |   |              |  
|Basic                                                       |  |      |  |   | 235,807,509  |  
|Diluted                                                     |  |      |  |   | 235,807,509  |  

3

---

|HUDBAY MINERALS INC.                                  
|------------------------------------------------------
|Consolidated Statements of Comprehensive (Loss) Income
|(in thousands of US dollars)                          

|                                                                             |   | Year ended   |  
|---------------------------------------------------------------------------- | - | ------------ | -
|                                                                             |   | December 31, |  
|                                                                             |   | 2016         |  
|Loss for the year                                                            | $ | (35,193      | )
|                                                                             |   |              |  
|Other comprehensive (loss)
      income:                                     |   |              |  
|Items that may be reclassified subsequently
      to profit or loss          |   |              |  
|Recognized directly in equity:                                               |   |              |  
|Net
      exchange gain (loss) on translation of foreign operations          |   | 8,301        |  
|Change in fair value of available-for-sale financial
      investments       |   | 3,598        |  
|Effect of foreign
      exchange on available-for-sale financial investments |   | 53           |  
|                                                                             |   | 11,952       |  
|                                                                             |   |              |  
|Items that will not be
      reclassified subsequently to profit or loss:    |   |              |  
|Recognized directly in
      equity:                                         |   |              |  
|Remeasurement - actuarial (loss) gain                                        |   | (11,252      | )
|Tax effect                                                                   |   | 2,198        |  
|                                                                             |   | (9,054       | )
|                                                                             |   |              |  
|Transferred to income
      statements:                                      |   |              |  
|Impairment of
      available-for-sale investments                           |   | 1,102        |  
|Sale of
      available-for-sale investments                                 |   | (1,037       | )
|Tax effect                                                                   |   | -            |  
|                                                                             |   | 65           |  
|                                                                             |   |              |  
|Other comprehensive income (loss), net of tax, for the
      year            |   | 2,963        |  
|                                                                             |   |              |  
|Total comprehensive loss for the year                                        | $ | (32,230      | )

4

---

|HUDBAY MINERALS INC.                        
|--------------------------------------------
|Consolidated Statements of Changes in Equity
|(in thousands of US dollars)                

Foreign currencyOther capital
    
    
    translation
    
    
    Available-for-sale
    
    
    Remeasurement
    
    
    RetainedShare capital
    
    
    reserves
    
    
    reserve
    
    
    reserve
    
    
    reserve
    
    
    earnings
    
    
    Total equityBalance, January 1, 2015
    $
    1,562,249
    
    $
    25,900
    
    $
    46,751
    
    $
    2,898
    
    $
    (119,465
    )
    $
    590,725
    
    $
    2,109,058Loss
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    (331,428
    )
    
    (331,428
    )Other comprehensive (loss) income
    
    -
    
    
    -
    
    
    (60,648
    )
    
    (1,589
    )
    
    58,213
    
    
    -
    
    
    (4,024
    )Total comprehensive (loss) income
    
    -
    
    
    -
    
    
    (60,648
    )
    
    (1,589
    )
    
    58,213
    
    
    (331,428
    )
    
    (335,452
    )Contributions by and
      distributions to owners:Stock options exercised
    
    1,152
    
    
    (343
    )
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    809Equity
      issuance (note 24b)
    
    13,199
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    13,199Reclassification of
      Augusta warrants
    
    -
    
    
    3,280
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    3,280Dividends (note 24b)
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    (3,604
    )
    
    (3,604
    )Total contributions by and distributions to owners
    
    14,351
    
    
    2,937
    
    
    -
    
    
    -
    
    
    -
    
    
    (3,604
    )
    
    13,684Balance, December 31, 2015
    $
    1,576,600
    
    $
    28,837
    
    $
    (13,897
    )
    $
    1,309
    
    $
    (61,252
    )
    $
    255,693
    
    $
    1,787,290Loss
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    (35,193
    )
    
    (35,193
    )Other comprehensive income (loss)
    
    -
    
    
    -
    
    
    8,301
    
    
    3,716
    
    
    (9,054
    )
    
    -
    
    
    2,963Total comprehensive income (loss)
    
    -
    
    
    -
    
    
    8,301
    
    
    3,716
    
    
    (9,054
    )
    
    (35,193
    )
    
    (32,230
    )Contributions by and
      distributions to owners:Equity issuance (note
      24b)
    
    11,814
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    11,814Share
      issue costs, net of tax (note 24b)
    
    (95
    )
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    (95
    )Dividends (note 24b)
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    (3,567
    )
    
    (3,567
    )Total contributions by and distributions to owners
    
    11,719
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    (3,567
    )
    
    8,152Balance, December 31, 2016
    $
    1,588,319
    
    **$**
    28,837
    
    **$**
    **(5,596**
    **)**
    **$**
    **5,025**
    
    $
    (70,306
    )
    **$**
    **216,933**
    
    **$**
    **1,763,212**


5

---

|HUDBAY MINERALS INC.                                      
|----------------------------------------------------------
|Notes to Consolidated Financial Statements                
|(in thousands of US dollars, except where otherwise noted)
|Years ended
      December 31, 2016 and 2015              

|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 years ended December 31, 2016 and 2015 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, 2016, include Hudson Bay Mining and Smelting Co., Limited (HBMS),
Hudson Bay Exploration and Development Company Limited (HBED), HudBay
Marketing & Sales Inc. (HMS), HudBay Peru Inc., HudBay Peru S.A.C.
("Hudbay Peru"), HudBay (BVI) Inc., Hudbay Arizona Corporation (formerly Augusta
Resource Corporation, Augusta or Hudbay Arizona) and Rosemont Copper Company
(Rosemont).

Hudbay is an integrated mining company
producing copper concentrate (containing copper, gold and silver) and zinc
metal. With assets in North and South America, the Group is focused on the
discovery, production and marketing of base and precious metals. Directly and
through its subsidiaries, Hudbay owns four polymetallic mines, four ore
concentrators and a zinc production facility in northern Manitoba and
Saskatchewan (Canada) and Cusco (Peru) and a copper project in Arizona (United
States). The Group also has equity investments in a number of junior exploration
companies. The Company is governed by the Canada Business Corporations Act and
its shares are listed under the symbol "HBM" on the Toronto Stock Exchange, New
York Stock Exchange and Bolsa de Valores de Lima. Hudbay also has warrants
listed under the symbol HBM.WT on the Toronto Stock Exchange and HBM/WS on
the New York Stock Exchange.

|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, 2016.

The Board of Directors approved these
consolidated financial statements on February 22, 2017.

| | (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 for HBMS, HBED and HMS, which have 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 at fair value through profit or loss ("FVTPL") and
      available-for-sale financial assets are measured at fair value;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | − | Liabilities for cash-settled share-based
      payment arrangements are measured at fair value; and                                                                                          

6

---

|HUDBAY MINERALS INC.                                      
|----------------------------------------------------------
|Notes to Consolidated Financial Statements                
|(in thousands of US dollars, except where otherwise noted)
|Years ended
      December 31, 2016 and 2015              

| | − | 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 significant
judgements and estimates impacting the consolidated financial statements:

| | − | Mineral reserves and resources(notes 3i, 3m and
      3o) - 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 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; and                                                                                                                  
| | − | the carrying value of deferred tax assets.                                                                                                                                                         

| | − | Property plant and equipment(notes 3i and 15) -
      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. In doing this, estimates such as number of tonnes of waste
      to be removed over the life of the mining area and economically
      recoverable reserves extracted as a result.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

7

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|HUDBAY MINERALS INC.                                      
|----------------------------------------------------------
|Notes to Consolidated Financial Statements                
|(in thousands of US dollars, except where otherwise noted)
|Years ended
      December 31, 2016 and 2015              

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 6) -
      during the acquisition of New Britannia Mine and Mill, judgement was
      required to determine if the acquisition represented a business
      combination or an asset purchase. More specifically, management concluded
      that the New Britannia Mine and Mill did not represent a business, as the
      assets acquired were not an integrated set of activities with inputs,
      processes and outputs. 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.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | − | Valuation of an acquired asset(note 6) - as the
      Group concluded that the acquisition of New Britannia Mine and Mill was an
      asset acquisition, an allocation of the purchase price to the individual
      identifiable assets acquired, including intangible assets, and liabilities
      assumed based on their relative fair values at the date of purchase was
      required. The fair values of the net assets acquired were calculated using
      significant estimates and judgements. If estimates or judgements differed,
      this could result in a materially different allocation of net assets on
      the consolidated balance sheets.                                              
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | − | Valuation and classification of the Peru sales tax
      receivable(note 10) - there is significant judgement involved when
      determining recoverability and timing of receipt of funds with governments
      of emerging markets. Based on a history of receipts from the government
      and positive audit compliance, management determined that the
      classification and the recoverability of the amounts recorded were
      reasonable. A change in government policies or fiscal stability may lead
      to a change in the recorded amount and may result in a re-classification
      of a greater portion of the receivable from current to non-current.                                    

8

---

|HUDBAY MINERALS INC.                                      
|----------------------------------------------------------
|Notes to Consolidated Financial Statements                
|(in thousands of US dollars, except where otherwise noted)
|Years ended
      December 31, 2016 and 2015              

| | − | Impairment of non-financial assets(notes 3h, 3j
      and 8) - there are significant 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 current life of mine
      (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 discount rates, future commodity prices, production based on
      current estimates of recoverable reserves, future operating and capital
      costs, future foreign exchange rates and the value of mineral resources
      not included in the Constancia 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 on a CGUs fair
      value as the assumptions are inextricably linked.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | − | Tax provisions(notes 3o and 23) - management
      makes estimates in determining the measurement and recognition of deferred
      tax assets and liabilities recorded on the consolidated balance sheets.
      The measurement of deferred tax assets and deferred tax liabilities is
      based on tax rates that are expected to apply in the period that the asset
      is realized or liability is settled based on tax rates that have been
      enacted or substantively enacted by the end of the reporting period.
      Deferred tax assets, including those arising from unutilized tax losses,
      require management to assess the likelihood of taxable income in 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 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.                                         
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | − | Timing of commercial production(note 3i) - during
      the year ended December 31, 2015, the Group determined that the Constancia
      project met the criteria required to be considered a commercial production
      mine. Judgement was applied to ascertain the point in time when the group
      of mine assets associated with each project were capable of being used in
      the manner intended by management. Amongst other quantitative and
      qualitative factors, throughput, mill grades and recoveries were assessed
      over a period of three months for Constancia to make this determination.
      Given the planned ramp-up of operations at Constancia, a factor of 60% of
      planned output and design capacity measures were utilized in determining
      the appropriate timing. A change in judgement regarding timing of
      commercial production could have material impacts on the amount of
      revenues and depreciation recorded in the consolidated income statements
      and the valuation of property, plant and equipment in the consolidated
      balance sheets.                                                                                                                                                                                                                                                                                                                                                                                                                                      

9

---

|HUDBAY MINERALS INC.                                      
|----------------------------------------------------------
|Notes to Consolidated Financial Statements                
|(in thousands of US dollars, except where otherwise noted)
|Years ended
      December 31, 2016 and 2015              

| | − | Functional currency(note 3b) - judgement was
      required in determining that the US dollar is the appropriate functional
      currency of certain entities of Hudbay. This was determined by assessing
      the currency which influences sales prices for concentrate and metals
      sales, labour and input costs, as well as the currency in which Hudbay
      finances its operations. The US dollar functional currency determination
      results in foreign exchange gains and losses being recorded on the
      consolidated income statements pertaining to the revaluation of non-US
      monetary assets and liabilities, most notably, the Canadian denominated
      trade receivables, cash, working capital and intercompany balances. If
      judgement was altered and a different functional currency was selected for
      certain entities of Hudbay, this could result in material differences in
      the amounts recorded in the consolidated income statements pertaining to
      foreign exchange gains or losses.                   
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | − | 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 20) - significant judgement and estimates are utilized in the
      determination of the decommissioning and restoration provisions in the
      consolidated balance sheets. Judgement is involved in determining the
      timing and extent of cash outflows required to satisfy constructive
      obligations based on the timing of site closures in the LOM plans,
      expected unit costs to determine cash obligations to remediate
      disturbances and regulatory and constructive requirements 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.                                                             
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | − | Accounting for stream transactions(note 19) -
      significant judgement was required in determining the appropriate
      accounting for the Silver Wheaton Corp. (Silver Wheaton) stream
      transactions that were entered into. The upfront cash deposit received
      from Silver Wheaton on the stream transactions have been accounted for as
      deferred revenue as management has determined that it is not a derivative
      as it 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.

10

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|HUDBAY MINERALS INC.                                      
|----------------------------------------------------------
|Notes to Consolidated Financial Statements                
|(in thousands of US dollars, except where otherwise noted)
|Years ended
      December 31, 2016 and 2015              

| | − | Pensions and other employee benefits(notes 3l, 21
      and 22) - the Groups post retirement obligations relate mainly to ongoing
      health care benefit 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 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.

11

---

|HUDBAY MINERALS INC.                                      
|----------------------------------------------------------
|Notes to Consolidated Financial Statements                
|(in thousands of US dollars, except where otherwise noted)
|Years ended
      December 31, 2016 and 2015              

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 issue 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.

12

---

|HUDBAY MINERALS INC.                                      
|----------------------------------------------------------
|Notes to Consolidated Financial Statements                
|(in thousands of US dollars, except where otherwise noted)
|Years ended
      December 31, 2016 and 2015              

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 differences arising on translation of available-for-sale
equity instruments, 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
and 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.

13

---

| | (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.

Sales revenue is recognized when the
significant risks and rewards of ownership have been transferred to the buyer,
the Group has insignificant continuing management involvement with the goods,
the amount of revenue can be measured reliably, recovery of the consideration is
probable and the associated costs and possible return of goods can be estimated
reliably. Transfers of risks and rewards vary depending on individual contract
terms and frequently occur at the time when title passes to the customer. For
medium and long-term contracts, revenue recognition criteria are assessed for
individual sales within the contracts. Revenue from the sale of by-products is
included within revenue.

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 met, using weight and assay
results and forward market prices to estimate the fair value of the total
consideration receivable. Such a provisional sale contains an embedded
derivative that must be separated from the host contract. At each reporting
date, provisionally priced metals sales are marked to market, with adjustments
(both gains and losses) recorded in revenue in the consolidated income
statements and in trade and other receivables on the consolidated balance
sheets.

The Group recognizes deferred revenue
in the event it receives payments from customers before a sale meets criteria
for revenue recognition.

Interest revenue is recognized in
finance income as it accrues, using the effective interest method.

Dividend revenue from investments is
recognized when the shareholders right to receive payment has been established
provided that it is probable that the economic benefits will flow to the Group
and the amount of revenue can be measured reliably.

| | (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.

14

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|HUDBAY MINERALS INC.                                      
|----------------------------------------------------------
|Notes to Consolidated Financial Statements                
|(in thousands of US dollars, except where otherwise noted)
|Years ended
      December 31, 2016 and 2015              

| | (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. Capitalized stripping costs related to
production are capitalized to inventory as incurred.

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.

15

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|HUDBAY MINERALS INC.                                      
|----------------------------------------------------------
|Notes to Consolidated Financial Statements                
|(in thousands of US dollars, except where otherwise noted)
|Years ended
      December 31, 2016 and 2015              

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.

16

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|HUDBAY MINERALS INC.                                      
|----------------------------------------------------------
|Notes to Consolidated Financial Statements                
|(in thousands of US dollars, except where otherwise noted)
|Years ended
      December 31, 2016 and 2015              

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.

17

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|HUDBAY MINERALS INC.                                      
|----------------------------------------------------------
|Notes to Consolidated Financial Statements                
|(in thousands of US dollars, except where otherwise noted)
|Years ended
      December 31, 2016 and 2015              

| | (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) | Depreciation rates of major categories of
  assets:
| | ---- | ---------------------------------------------------

| |  | Capital works in progress |      not depreciated                                            
| | - | ------------------------- | -----------------------------------------------------------------
| |  | Mining properties         |      unit-of-production                                         
| |  | Mining assets             |      unit-of-production                                         
| |  | Other plant assets        |      straight-line over 1 to 21 years /
      unit-of-production
| |  | Equipment                 |      straight-line over 1 to 21 years                           

The Group reviews its depreciation
methods, remaining useful lives and residual values at least annually and
accounts for changes in estimates prospectively.

| | (v) | 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.

| | (vi) | 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.

18

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|HUDBAY MINERALS INC.                                      
|----------------------------------------------------------
|Notes to Consolidated Financial Statements                
|(in thousands of US dollars, except where otherwise noted)
|Years ended
      December 31, 2016 and 2015              

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.

| | (vii) | 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 exploration and evaluation assets.

The Group allocates exploration and
evaluation assets to CGUs based on their operating segment, geographic location
and managements intended use for the property. Exploration and evaluation
assets are allocated to CGUs separate from those containing producing or
development-phase assets, except where 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.

19

---

|HUDBAY MINERALS INC.                                      
|----------------------------------------------------------
|Notes to Consolidated Financial Statements                
|(in thousands of US dollars, except where otherwise noted)
|Years ended
      December 31, 2016 and 2015              

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.

20

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|HUDBAY MINERALS INC.                                      
|----------------------------------------------------------
|Notes to Consolidated Financial Statements                
|(in thousands of US dollars, except where otherwise noted)
|Years ended
      December 31, 2016 and 2015              

| | (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 prorated 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                                                                                                                                                       

21

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|HUDBAY MINERALS INC.                                      
|----------------------------------------------------------
|Notes to Consolidated Financial Statements                
|(in thousands of US dollars, except where otherwise noted)
|Years ended
      December 31, 2016 and 2015              

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 immediately in
retained earnings 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.

22

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|HUDBAY MINERALS INC.                                      
|----------------------------------------------------------
|Notes to Consolidated Financial Statements                
|(in thousands of US dollars, except where otherwise noted)
|Years ended
      December 31, 2016 and 2015              

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.

23

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|HUDBAY MINERALS INC.                                      
|----------------------------------------------------------
|Notes to Consolidated Financial Statements                
|(in thousands of US dollars, except where otherwise noted)
|Years ended
      December 31, 2016 and 2015              

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:
| | --- | ----------------------

Financial assets, financial
liabilities, and non-financial derivative contracts are initially recognized at
fair value plus, in the case of a financial asset or financial liability not 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.

| | (i) | Non-derivative financial instruments 
    classification:
| | --- | ----------------------------------------------------------

Loans and receivables

Loans and receivables are
non-derivative financial assets with fixed or determinable payments that are not
quoted in an active market, other than those classified or designated as FVTPL
or available-for-sale. Subsequent to initial recognition, loans and receivables
are measured at amortized cost using the effective interest method, less any
impairment losses. Gains and losses are recorded in the consolidated income
statements when the loans and receivables are derecognized or impaired, and
through the amortization process.

Held-to-maturity investments

Non-derivative financial assets with
fixed or determinable payments and fixed maturity are classified as
held-to-maturity when the Group has the positive intention and ability to hold
to maturity, other than financial assets that meet the definition of loans and
receivables or that are designated as FVTPL or available-for-sale. Subsequent to
initial recognition, financial assets classified as held-to-maturity are held at
amortized cost using the effective interest method, less any impairment losses.
The Group does not currently have any financial assets classified as
held-to-maturity.

24

---

|HUDBAY MINERALS INC.                                      
|----------------------------------------------------------
|Notes to Consolidated Financial Statements                
|(in thousands of US dollars, except where otherwise noted)
|Years ended
      December 31, 2016 and 2015              

Available-for-sale financial
assets

Available-for-sale financial assets
are non-derivative financial assets that are designated as available-for-sale or
are not classified as loans and receivables, held-to-maturity, or FVTPL.
Subsequent to initial recognition, available-for-sale financial assets are
measured at fair value. Gains and losses are recorded in OCI and presented in
equity within the available-for-sale reserve, with the exception of impairment
losses, which are immediately recognized in the consolidated income statements.
When available-for-sale assets are derecognized or determined to be impaired,
the cumulative gain or loss previously recognized in the available-for-sale
reserve is transferred to the consolidated income statements. The Group has
classified investments in shares of Canadian metals and mining companies as
available-for-sale assets.

Financial assets and financial
liabilities at fair value through profit or loss

Financial assets and financial
liabilities at FVTPL consist of those classified as held-for-trading and those
designated as FVTPL on initial recognition. Financial instruments are classified
as held-for-trading if they are acquired for the purpose of selling or
repurchasing in the near term or if they are derivatives that are not designated
in effective hedging relationships. Upon initial recognition, transaction costs
are recognized in the consolidated income statements as incurred. Financial
assets and financial liabilities at FVTPL are measured at fair value, and
changes in fair value are recognized in other finance gains and losses except
gains and losses on the non-hedge financial derivatives related to customer
sales contracts are presented in revenue. The Groups FVTPL category currently
contains only derivatives and embedded derivatives. During the years ended
December 31, 2016 and December 31, 2015, the Groups financial assets and
liabilities at FVTPL consisted of derivatives, embedded derivatives and
investments in warrants classified as held-for-trading; the Group did not have
any financial assets or liabilities designated as FVTPL on initial recognition.

Financial liabilities at amortized
cost

Subsequent to initial recognition, the
Group measures financial liabilities, other than those at FVTPL and those that
are derivatives in designated hedging relationships, at amortized cost using the
effective interest method. Gains and losses on derecognition are recognized in
other finance gains and losses.

| | (ii) | 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.

| | (iii) | 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.

25

---

|HUDBAY MINERALS INC.                                      
|----------------------------------------------------------
|Notes to Consolidated Financial Statements                
|(in thousands of US dollars, except where otherwise noted)
|Years ended
      December 31, 2016 and 2015              

| | (iv) | Hedge accounting:
| | ---- | -----------------

The Group may use derivatives and
non-derivative financial instruments to manage exposures to interest, currency,
credit and other market risks. Where hedge accounting can be applied, a hedging
relationship is designated as a fair value hedge, a cash flow hedge or a hedge
of a net investment in a foreign operation. The purpose of hedge accounting is
to ensure that gains, losses, revenue and expenses from effective hedging
relationships are recorded in the consolidated income statements in the same
period.

At the inception of a hedge, the Group
formally documents the hedging relationship and the risk management objective
and strategy for undertaking the hedge. Such hedges are expected to be highly
effective in achieving offsetting changes in fair value or cash flows. The Group
tests effectiveness each period.

In a cash flow hedging relationship,
the effective portion of changes in the fair value of the hedging derivative is
recognized in OCI and presented in the hedging reserve in equity. The gain or
loss relating to the ineffective portion is recognized immediately in the
consolidated income statements and is included in other finance gains and
losses. Amounts previously recognized in OCI are reclassified to the
consolidated income statements in the same periods as the hedged cash flows
affect profit or loss and are presented on the same line of the consolidated
income statements as the recognized hedged item. When the hedged item is a
non-financial asset or liability, the amounts previously recognized in OCI are
reclassified to the carrying amount of the non-financial asset or liability.

Hedge accounting is discontinued
prospectively if the hedging instrument is sold, terminated or exercised, if the
hedge no longer meets criteria for hedge accounting, or if the Group revokes the
hedge designation. In these cases, any gain or loss accumulated in equity (in
the hedging reserve) remains in equity until the forecast transaction occurs, at
which time it is reclassified to the consolidated income statements. If the
forecast transaction is no longer expected to occur, any gain or loss
accumulated in equity is reclassified immediately from equity to the
consolidated income statements.

| | (v) | 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.

26

---

|HUDBAY MINERALS INC.                                      
|----------------------------------------------------------
|Notes to Consolidated Financial Statements                
|(in thousands of US dollars, except where otherwise noted)
|Years ended
      December 31, 2016 and 2015              

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 28.

| | (vi) | Impairment of financial
instruments:
| | ---- | ------------------------------------

Each reporting date, the Group
assesses financial assets not carried at FVTPL to determine whether there is
objective evidence of impairment. A financial asset or group of financial assets
is impaired if objective evidence indicates that one or more events occurred
after initial recognition of the asset that negatively affected the estimated
future cash flows of the financial asset or group of financial assets.

Objective evidence that financial
assets are impaired can include significant financial difficulty of the issuer
or debtor, default or delinquency in interest or principal payments,
restructuring of an amount due to the Group on terms that the Group would not
consider otherwise, indications that a debtor or issuer will enter bankruptcy,
or the disappearance of an active market for a security. For an investment in an
equity security, a significant or prolonged decline in the fair value of the
security below its cost is also objective evidence of impairment. Significant
decline is defined as 20% of the securitys cost base and prolonged is defined
as three consecutive quarters.

Impairment of financial assets
carried at amortized cost:

The Group considers evidence of
impairment for loans and receivables and any held-to-maturity investments at
both a specific asset and collective level. First, the Group specifically
assesses financial assets that are individually significant and groups of
financial assets that are not individually significant. If evidence of
impairment is not identified in the specific assessment, the Group then combines
assets based on similar credit risk characteristics (excluding any assets that
were specifically determined to be impaired) and collectively assesses them for
impairment. Objective evidence of impairment for a portfolio of receivables
could include the Groups past experience of collecting payments, an increase in
the number of delayed payments in the portfolio past the average credit period,
as well as observable changes in national or local economic conditions that
correlate with default on receivables.

If there is objective evidence that an
impairment loss has been incurred, the Group measures the amount of the loss as
the difference between the assets carrying amount and the present value of
estimated future cash flows (excluding future expected credit losses that have
not yet been incurred), discounted at the financial assets original effective
interest rate. In the case of collateralized financial assets, the Group
measures the amount of the loss as the difference between the assets carrying
amount and the greater of the present value of estimated future cash flows
(excluding future expected credit losses that have not yet been incurred),
discounted at the financial assets original effective interest rate and the
cash flows that may result from foreclosure less costs for obtaining and selling
the collateral, whether or not foreclosure is probable.

27

---

|HUDBAY MINERALS INC.                                      
|----------------------------------------------------------
|Notes to Consolidated Financial Statements                
|(in thousands of US dollars, except where otherwise noted)
|Years ended
      December 31, 2016 and 2015              

The Group recognizes any impairment
loss in the consolidated income statements and reduces the carrying amount of
the financial asset using an allowance account, unless the Group is satisfied
that no recovery of the amount owing is possible; at that point amounts are
considered unrecoverable and are written off against the financial asset
directly.

If, in a subsequent year, the amount
of the estimated impairment loss decreases as a result of an event occurring
after the impairment was recognized, the Group reverses all or a portion of the
previously recognized impairment loss by adjusting the asset carrying value or
the allowance account and recognizing the reversal in the consolidated income
statements in other finance gains and losses.

Impairment of available-for-sale
financial assets:

Impairment losses on
available-for-sale investments are recognized by transferring the cumulative
loss that has been recognized in OCI (and presented in the available-for-sale
reserve in equity) to the consolidated income statements. The amount of the
impairment loss is the difference between the investments acquisition costs,
net of any principal repayments, and its current fair value, less any impairment
loss previously recognized in the consolidated income statements.

Impairment losses recognized in the
consolidated income statements related to available-for-sale equity investments
are not subsequently reversed. Any subsequent increases in fair value of the
equity investments are recognized in OCI. However, impairment losses recognized
related to available-for-sale debt instruments are subsequently reversed, in
whole or in part, if the fair value of the debt instrument increases as a result
of an event occurring after the impairment loss was recognized, and the amount
of the reversal is recognized in the consolidated income statements in other
finance gains and losses.

The Group presents impairment losses
and reversals of impairment losses recognized in the consolidated income
statements in other finance gains and losses.

| | (vii) | 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.

| | (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.

28

---

|HUDBAY MINERALS INC.                                      
|----------------------------------------------------------
|Notes to Consolidated Financial Statements                
|(in thousands of US dollars, except where otherwise noted)
|Years ended
      December 31, 2016 and 2015              

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.

29

---

|HUDBAY MINERALS INC.                                      
|----------------------------------------------------------
|Notes to Consolidated Financial Statements                
|(in thousands of US dollars, except where otherwise noted)
|Years ended
      December 31, 2016 and 2015              

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.

Available-for-sale reserve

The available-for-sale reserve
contains the cumulative change in the fair value of available-for-sale
investments with the exception of impairment losses and foreign currency
differences on monetary available-for-sale assets. Gains and losses are
reclassified to the consolidated income statements when the available-for-sale
investments are impaired or derecognized.

30

---

|HUDBAY MINERALS INC.                                      
|----------------------------------------------------------
|Notes to Consolidated Financial Statements                
|(in thousands of US dollars, except where otherwise noted)
|Years ended
      December 31, 2016 and 2015              

| | (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 has options outstanding under
a stock option plan. These plans are included in provisions on the consolidated
balance sheets and further described in note 25. Changes in the fair value of
the liabilities are recorded in the consolidated income statements.

Cash-settled transactions, consisting
of DSUs 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. 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 currently consist 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.

31

---

|HUDBAY MINERALS INC.                                      
|----------------------------------------------------------
|Notes to Consolidated Financial Statements                
|(in thousands of US dollars, except where otherwise noted)
|Years ended
      December 31, 2016 and 2015              

| | (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 32.

| | (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. | Restatement of amounts within cash generated from
      operating activities
|-- | ----------------------------------------------------------------------------

Since the fourth quarter of 2015, the
Group has significantly increased the number of copper fixed for floating swaps
in order to manage the risk associated with provisional pricing terms in copper
concentrate sales agreements. As a result, starting in the first quarter of
2016, the Group had restated the presentation of the cash generated from
operating activities section of the statements of cash flow to present the
changes in the respective receivable and payable balances associated with these
items all within changes in non-cash working capital. In the past, the gains or
losses for the swaps were presented as a change in fair value of derivatives and
the associated mark-to-market adjustments were presented before changes in
non-cash working capital. The impact of this restatement for the year ended
December 31, 2015 is an increase in 'operating cash flows before change in
non-cash working capital' of $11,494, with an associated change in 'change in
non-cash working capital' with no change in the total of cash generated from
operating activities.

32

---

|HUDBAY MINERALS INC.                                      
|----------------------------------------------------------
|Notes to Consolidated Financial Statements                
|(in thousands of US dollars, except where otherwise noted)
|Years ended
      December 31, 2016 and 2015              

|5. | New standards
|-- | -------------

New standards and interpretations
adopted

As required by the IASB, effective
January 1, 2016 the Group adopted the following amendment to IFRS:

| | − | Amendments to IAS 16, Property, Plant and Equipment(IAS 16) and IAS 38, Intangible Assets(IAS 38) - the
      amendments to clarify that the use of revenue-based methods to calculate
      the depreciation of a tangible asset is not appropriate because revenue
      generated by an activity that includes the use of a tangible asset
      generally reflects factors other than the consumption of the economic
      benefits embodied in the asset. The IASB has also clarified that revenue
      is generally presumed to be an inappropriate basis for measuring the
      consumption of the economic benefits embodied in an intangible asset. This
      presumption for an intangible asset, however, can be rebutted in certain
      limited circumstances. The Groups adoption of this amendment did not have
      any impact on its method of calculating depreciation or amortization.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | − | Amendments to IAS 1, Presentation of Financial
      Statements(IAS 1) - the amendments clarify, rather than
      significantly change, the existing IAS 1 requirements related to
      materiality, order of notes, subtotals, accounting policies, and
      disaggregation and are designed to assist companies in applying
      professional judgement in determining what information to disclose in
      their financial statements. The Groups adoption of this amendment did not
      have any impact on its presentation of its financial statements.                                                                                                                                                                                                                                                                                                                                              

New standards and interpretations
not yet adopted

| | − | IFRS 9, Financial Instruments(IFRS 9) -issued on July 24, 2014 is the IASBs replacement of IAS 39,
      Financial Instruments: Recognition and Measurement(IAS 39). The
      standard includes requirements for recognition and measurement,
      impairment, derecognition and general hedge accounting. The IASB completed
      its project to replace IAS 39 in phases, adding to the standard as it
      completed each phase. The version of IFRS 9 issued in 2014 supersedes all
      previous versions and is mandatorily effective for periods beginning on or
      after January 1, 2018 with early adoption permitted (subject to local
      endorsement requirements). IFRS 9 does not replace the requirements for
      portfolio fair value hedge accounting for interest rate risk (often
      referred to as the macro hedge accounting requirements) since this phase
      of the project was separated from the IFRS 9 project due to the longer
      term nature of the macro hedging project which is currently at the
      discussion paper phase of the due process. The Group has not yet
      determined the effect of adoption of IFRS 9 on its consolidated financial
      statements.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | − | IFRS 15, Revenue from Contracts with Customers(IFRS 15) - in May 2014, the IASB issued this standard which is
      effective for periods beginning on or after January 1, 2018 and is to be
      applied retrospectively. IFRS 15 clarifies the principles for recognizing
      revenue from contracts with customers. IFRS 15 will also result in
      enhanced disclosures about revenue, provide guidance for transactions that
      were not previously addressed comprehensively (i.e. service revenue and
      contract modifications) and improve guidance for multiple-element
      arrangements. The Group intends to adopt IFRS 15 in its financial
      statements for the annual period beginning January 1, 2018. The Group has
      not yet determined the full effect of adoption of IFRS 15 on its
      consolidated financial statements, however, we expect the Groups deferred
      revenue balance associated with stream transactions will be adjusted to
      reflect a significant financing component.                                                                                                                                                                                        

33

---

|HUDBAY MINERALS INC.                                      
|----------------------------------------------------------
|Notes to Consolidated Financial Statements                
|(in thousands of US dollars, except where otherwise noted)
|Years ended
      December 31, 2016 and 2015              

| | − | IFRS 16, Leases(IFRS 16) - in January 2016, the
      IASB issued this standard which is effective for periods beginning on or
      after January 1, 2019, which replaces the current guidance in IAS 17,
      Leases (IAS 17), and is to be applied either retrospectively or a
      modified retrospective approach. Early adoption is permitted, but only in
      conjunction with IFRS 15. 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. The Group has not yet determined
      the effect of adoption of IFRS 16 on its consolidated financial
      statements.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|6. | Acquisition of New Britannia Mine and
  Mill
|-- | --------------------------------------------

On May 4, 2015, the Group acquired a
100% interest in the New Britannia Mine and Mill, located in Snow Lake,
Manitoba, for $12,302 in cash consideration, plus a contingent payment of
$5,000. In connection with the New Britannia acquisition, the Group entered into
a private placement agreement with a Canadian bank to sell 1,357,000 Hudbay
common shares for net proceeds of $13,040.

In accordance with IFRS 3, Business
Combinations, this transaction does not meet the definition of a business
combination as the assets acquired are not an integrated set of activities with
inputs, processes and outputs. New Britannia Mine and Mill is not a business.

The purchase price of $14,462 was
finalized and allocated to the assets acquired and the liabilities assumed based
on the fair value of the total consideration at the closing date of the
acquisition. All financial assets acquired and financial liabilities assumed
were recorded at their relative fair values. In addition, an option liability
was recorded for the fair value amount of $1,164 in connection with the
contingent consideration since it is an integral component of the consideration
paid and represents a financial instrument. The fair values were allocated to
the net assets on a relative fair value basis and the option liability was
valued using the Black-Scholes model.

Assets acquired and liabilities
assumed

The following summarizes the
acquisition date allocation of the relative fair values of the major classes of
assets and liabilities acquired:

| | Restricted cash                     | $ | 1,542  |  
| | ----------------------------------- | - | ------ | -
| | Machinery & equipment               |   | 10,410 |  
| | Mineral property                    |   | 2,890  |  
| | Net
      decommissioning liability |   | (380   | )
| |                                     |   |        |  
| | Total net assets acquired           | $ | 14,462 |  

The following summarizes consideration
for the purchase:

| | Cash                                   | $ | 12,302 | 
| | -------------------------------------- | - | ------ | 
| | Contingent payment - gold price option |   | 1,164  | 
| | Transaction costs                      |   | 996    | 
| |                                        |   |        | 
| | Total consideration                    | $ | 14,462 | 

34

---

|HUDBAY MINERALS INC.                                      
|----------------------------------------------------------
|Notes to Consolidated Financial Statements                
|(in thousands of US dollars, except where otherwise noted)
|Years ended
      December 31, 2016 and 2015              

|7. | Revenue and expenses
|-- | --------------------

| | (a) | Revenue
| | --- | -------

The Groups revenue by significant
product types:

| |                                      |   | Year ended   |  
| | ------------------------------------ | - | ------------ | -
| |                                      |   | December 31, |  
| |                                      |   | 2016         |  
| | Copper                               | $ | 835,470      |  
| | Zinc                                 |   | 236,971      |  
| | Gold                                 |   | 119,792      |  
| | Silver                               |   | 52,108       |  
| | Other                                |   | 2,719        |  
| |                                      |   | 1,247,060    |  
| | Treatment and refining
      charges |   | (118,382     | )
| | Pre-production revenue               |   | -            |  
| |                                      |   |              |  
| |                                      | $ | 1,128,678    |  

Pre-production revenue in 2015 relates
to revenue earned from production at Constancia. Revenue related to inventory
produced prior to commencement of commercial production is credited against
capital costs rather than recognized as revenue in the consolidated income
statements.

Included in revenue for the year ended
December 31, 2016 are losses related to unrealized non-hedge derivative
contracts of $19,180 (year ended December 31, 2015 - gains of $11,494).

| | (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, | 
| | ----------------------------------- | - | ----------------------- | 
| |                                     |   | 2016                    | 
| | Cost of sales                       | $ | 298,630                 | 
| | Selling and administrative expenses |   | 504                     | 
| |                                     |   |                         | 
| |                                     | $ | 299,134                 | 

35

---

|HUDBAY MINERALS INC.                                      
|----------------------------------------------------------
|Notes to Consolidated Financial Statements                
|(in thousands of US dollars, except where otherwise noted)
|Years ended
      December 31, 2016 and 2015              

| | (c) | Share-based payment expenses
  (recoveries)
| | --- | -------------------------------------------

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

| |                                           |   | Cash-settled |   |   | Total share-based |  
| | ----------------------------------------- | - | ------------ | - | - | ----------------- | -
| |                                           |   | RSUs         |   |   | DSUs              |  
| | Year ended December 31, 2016              |   |              |   |   |                   |  
| | Cost of
      sales                       | $ | 860          |   | $ | -                 |  
| | Selling and
      administrative expenses |   | 6,452        |   |   | 2,111             |  
| | Other operating expenses                  |   | 464          |   |   | -                 |  
| |                                           |   |              |   |   |                   |  
| |                                           | $ | 7,776        |   | $ | 2,111             |  
| | Year ended December 31, 2015              |   |              |   |   |                   |  
| | Cost of
      sales                       | $ | 209          |   | $ | -                 |  
| | Selling and
      administrative expenses |   | 1,023        |   |   | (1,437            | )
| | Other operating expenses                  |   | (114         | ) |   | -                 |  
| |                                           |   |              |   |   |                   |  
| |                                           | $ | 1,118        |   | $ | (1,437            | )

| | (d) | 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, | 
| |                                               |   | 2016         | 
| | Current employee benefits                     | $ | 136,299      | 
| | Profit-sharing plan expense                   |   | 5,064        | 
| | Share-based payments (notes
      7c, 20, 25) |   |              | 
| | Cash-settled restricted
      share units     |   | 7,776        | 
| | Cash-settled deferred share units             |   | 2,111        | 
| | Employee share purchase plan                  |   | 1,303        | 
| | Post-employment pension
      benefits        |   |              | 
| | Defined benefit plans                         |   | 12,121       | 
| | Defined
      contribution plans              |   | 1,061        | 
| | Past service costs                            |   | -            | 
| | Other post-retirement
      employee benefits |   | 7,406        | 
| | Termination benefits                          |   | 1,810        | 
| |                                               |   |              | 
| |                                               | $ | 174,951      | 

Manitoba has a profit sharing plan
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.

36

---

|HUDBAY MINERALS INC.                                      
|----------------------------------------------------------
|Notes to Consolidated Financial Statements                
|(in thousands of US dollars, except where otherwise noted)
|Years ended
      December 31, 2016 and 2015              

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 21 for a description of the
Group's pension plans and note 22 for the Group's other employee benefit
plans.

| | (e) | Other operating
expenses
| | --- | ------------------------

| |                |   | Year ended   | 
| | -------------- | - | ------------ | 
| |                |   | December 31, | 
| |                |   | 2016         | 
| | Regional costs | $ | 4,388        | 
| | Other expenses |   | 6,198        | 
| |                |   |              | 
| |                | $ | 10,586       | 

| | (f) | Finance income and
expenses
| | --- | ---------------------------

| |                                                                                                      |   | Year ended   |  
| | ---------------------------------------------------------------------------------------------------- | - | ------------ | -
| |                                                                                                      |   | December 31, |  
| |                                                                                                      |   | 2016         |  
| | Finance income                                                                                       | $ | (2,792       | )
| | Finance expense                                                                                      |   |              |  
| | Interest expense on long-term
      debt                                                             |   | 108,767      |  
| | Accretion on financial liabilities at
      amortized cost                                           |   | 1,316        |  
| | Unwinding of discounts on
      provisions                                                           |   | 2,586        |  
| | Tender premium on 9.50% senior unsecured
      notes (note 18a)                                      |   | 47,718       |  
| | Other finance expense                                                                                |   | 21,389       |  
| |                                                                                                      |   | 181,776      |  
| | Interest capitalized                                                                                 |   | (14,705      | )
| |                                                                                                      |   | 167,071      |  
| | Other finance (gains)
      losses                                                                   |   |              |  
| | Net foreign exchange (gain) loss                                                                     |   | (489         | )
| | Change in fair value of
      financial assets and liabilities at fair value through profit or loss: |   |              |  
| | Hudbay and Augusta warrants                                                                          |   | 2,111        |  
| | Prepayment
      option embedded derivative/gold option                                              |   | (1,238       | )
| | Investments classified as held-for-trading                                                           |   | (119         | )
| | Reclassified from other
      comprehensive income on disposal of available-for-sale investments     |   | (1,475       | )
| | Reclassified from other comprehensive income
      on impairment of available-for-sale investments   |   | 1,102        |  
| |                                                                                                      |   | (108         | )
| | Net finance expense                                                                                  | $ | 164,171      |  

Interest expense related to long-term
debt and accretion of financial liabilities at amortized cost has been
capitalized to the Constancia project until May 1, 2015 and to the Rosemont
project until commercial production is reached. Other finance expense relates
primarily to withholding taxes and non-interest facility fees on financing
instruments.

37

---

|HUDBAY MINERALS INC.                                      
|----------------------------------------------------------
|Notes to Consolidated Financial Statements                
|(in thousands of US dollars, except where otherwise noted)
|Years ended
      December 31, 2016 and 2015              

| | (g) | Impairment
| | --- | ----------

During the year ended December 31,
2016, no impairment losses were recorded. For the year ended December 31, 2015,
the Group recorded impairment losses of $251,799 for non-current assets and
$181,583 for goodwill. The following table summarizes these losses:

| |                                                          |   | Year ended   | 
| | -------------------------------------------------------- | - | ------------ | 
| |                                                          |   | December 31, | 
| |                                                          |   | 2016         | 
| | Property, plant &
      equipment 1                      | $ |              | 
| | Goodwill 1                                               |   | -            | 
| | Arizona purchased equipment
      and long lead deposits |   | -            | 
| | Lalor concentrator assets                                |   | -            | 
| |                                                          |   |              | 
| |                                                          | $ | -            | 

1Please see table below
for further details on after-tax impairment charges and the breakdown of
impairments recorded in each segment.

In the fourth quarter of 2015, the
Group recorded pre-tax impairment loss of $197,337 on property, plant and
equipment and $181,583 on goodwill. The following is a breakdown of these
expenses:

| |                                       |   | Peru    |   |   | Arizona |  |   | Total   |  
| | ------------------------------------- | - | ------- | - | - | ------- |  | - | ------- | -
| | Pre-tax impairment to:                |   |         |   |   |         |  |   |         |  
| | Goodwill                              | $ | 67,105  |   | $ | 114,478 |  | $ | 181,583 |  
| | Property, plant & equipment (note 15) |   | 197,337 |   |   | -       |  |   | 197,337 |  
| | Total Pre-tax impairment charge       |   | 264,442 |   |   | 114,478 |  |   | 378,920 |  
| | Tax
      impact - recovery           |   | (65,603 | ) |   | -       |  |   | (65,603 | )
| |                                       |   |         |   |   |         |  |   |         |  
| | After-tax impairment charge           | $ | 198,839 |   | $ | 114,478 |  | $ | 313,317 |  

As a result of the acquisition of
Augusta Resource Corporation, Hudbay acquired equipment previously purchased or
ordered by prior Augusta management. During the year ended December 31, 2015
Hudbay completed a value engineering process which deemed that some of the
equipment previously purchased or ordered by prior Augusta management is
unsuitable to achieve the design objectives for Rosemont, and different
equipment will better meet Rosemonts objectives while observing permitting
commitments. During the year ended December 31, 2015, the Group recognized an
impairment loss of $34,546 to reflect the orderly liquidation value of the
purchased equipment and certain long lead deposits.

As a result of the acquisition of the
New Britannia Mine and Mill, Hudbay no longer expects to construct a new
concentrator at Lalor. As a result, during the year ended December 31, 2015, the
Group recognized an impairment loss of $19,916 related to its concentrator
assets at Lalor in Snow Lake, Manitoba. The impairment was determined based on
the difference between carrying value and fair value less costs of disposal.

The Group presented the impairment
losses within the Manitoba, Peru and Arizona segments in note 32.

The fair value measurements for the
determination of impairment charges in their entirety are 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. For further details refer to note
8.

38

---

|HUDBAY MINERALS INC.                                      
|----------------------------------------------------------
|Notes to Consolidated Financial Statements                
|(in thousands of US dollars, except where otherwise noted)
|Years ended
      December 31, 2016 and 2015              

| | (h) | Gain on disposal of
subsidiary
| | --- | ------------------------------

On November 2, 2015, Hudbay sold
Balmat to Northern Zinc, LLC. Northern Zinc LLC was concurrently acquired by
Star Mountain Resources, Inc. (Star Mountain). On closing, Hudbay received
550,000 shares of Star Mountain common stock and $1,000 cash; Hudbay previously
received $500 in upfront deposit payments and is entitled to receive up to an
additional $15,500 in future cash payments. During the year ended December 31,
2015, the Group recognized a gain of $37,026 on the disposition of Balmat. This
mainly resulted from the derecognition of net liabilities and foreign currency
translation adjustments recorded in the entity.

|8. | Impairment triggers for non-current assets and
      goodwill
|-- | -------------------------------------------------------------

Given the existence of an impairment
indicator at December 31, 2016 and December 31, 2015, the Group performed a
quantitative impairment test for its Arizona CGU (CGU) and Peru CGU.

The impairment indicator as at December
31, 2016 for the Peru CGU was related to a newly issued technical report during
the fourth quarter of 2016. The impairment trigger for the Arizona CGU was
related to data from a draft technical report that is expected to be finalized
and issued in March 2017. Management determined that a detailed impairment
evaluation as at December 31, 2016, was required for the Arizona CGU and Peru
CGU.

For the impairment test, fair value
less costs 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 and future foreign exchange
rates. The cash flows are for periods up to the date that production is expected
to cease, which is 19 years for the Peru CGU and 23 years for the Arizona CGU,
including four years prior to assumed initial production (December 31, 2015  21
years for both the Peru and Arizona CGUs).

The discount rate was based on the
business unit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 segments
jurisdiction. A real discount rate of 7.50% (December 31, 2015  8.00%) for the
Peru CGU and 8.75% (December 31, 2015  9.75%) 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.

39

---

|HUDBAY MINERALS INC.                                      
|----------------------------------------------------------
|Notes to Consolidated Financial Statements                
|(in thousands of US dollars, except where otherwise noted)
|Years ended
      December 31, 2016 and 2015              

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 CGUs, the cash flow calculations were based
on estimates of future production levels applying forecasts for metal prices,
which included forecasts for each year from 2017 to 2021 and long-term forecasts
for years beginning in 2022. The cash flow calculations utilized a copper price
of $2.60/lb in 2017 and $2.75/lb in 2018, increasing to $3.00/lb in 2019. The
cash flow calculations utilized a long-term copper price of $3.00/lb (December
31, 2015  $3.00/lb), molybdenum long-term prices of $11.00/lb (December 31,
2015  $11.00/lb), and capital, operating and reclamation costs based on updated
LOM plans. For the Peru and Arizona CGUs, a value of $272,000 and $212,000
(December 31, 2015 - $205,000 and $48,100, respectively), respectively, 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 December 31, 2016, the estimated
recoverable amounts of the Peru and Arizona CGUs exceeded their carrying amount,
consequently no impairment was required. As at December 31, 2015, the carrying
amounts of the Peru and Arizona CGUs exceeded their estimated recoverable
amount, consequently the goodwill and property, plant and equipment balances
have been adjusted to their recoverable amounts. A breakdown of these amounts is
provided in note 7g.

Managements estimate of future net
cash flows is subject to risk and uncertainties. Therefore, it is reasonably
possible that changes could occur which may affect the recoverability of the
Groups long-lived assets and goodwill. This may have a material effect on the
Groups consolidated financial statements.

For the Peru CGU, a decrease of 10% in
the average LOM copper price or a 1.0 percentage point increase in the real
discount rate, in isolation of each other, would result in a decrease in FVLCD
of $381 million or $143 million (December 31, 2015  $340 million or $95
million, respectively), respectively.

For the Arizona CGU, a decrease of 10%
in the average LOM copper price or a 1.0 percentage point increase in the real
discount rate, in isolation of each other, would result in a decrease in FVLCD
of $312 million or $147 million (December 31, 2015  $230 million or $96
million, respectively), respectively.

As at December 31, 2016, the difference
between the FVLCD and the CGUs carrying value tested was $75 million for Peru
CGU and $102 million for the Arizona CGU, respectively.

|9. | Cash and cash
equivalents
|-- | -------------------------

| |                                                           |   | Dec. 31, 2016 |  |   | Dec. 31, 2015 | 
| | --------------------------------------------------------- | - | ------------- |  | - | ------------- | 
| | Cash on hand and demand
      deposits                    | $ | 129,850       |  | $ | 53,837        | 
| | Short-term money market instruments with
      maturities |   |               |  |   |               | 
| | of three months or less at acquisition
      date         |   | 17,014        |  |   | 15            | 
| |                                                           |   |               |  |   |               | 
| |                                                           | $ | 146,864       |  | $ | 53,852        | 

40

---

|HUDBAY MINERALS INC.                                      
|----------------------------------------------------------
|Notes to Consolidated Financial Statements                
|(in thousands of US dollars, except where otherwise noted)
|Years ended
      December 31, 2016 and 2015              

|10. | Trade and other
receivables
|--- | ---------------------------

| |                                                             |   | Dec. 31, 2016 |  |   | Dec. 31, 2015 |  
| | ----------------------------------------------------------- | - | ------------- |  | - | ------------- | -
| | Current                                                     |   |               |  |   |               |  
| | Trade receivables                                           | $ | 85,386        |  | $ | 85,373        |  
| | Embedded derivatives -
      provisional pricing (note 28c) |   | 12,538        |  |   | (13,653       | )
| | Statutory receivables                                       |   | 43,808        |  |   | 122,288       |  
| | Receivable from joint venture
      partners                |   | -             |  |   | 6,772         |  
| | Other receivables                                           |   | 10,835        |  |   | 27,898        |  
| |                                                             |   | 152,567       |  |   | 228,678       |  
| | Non-current                                                 |   |               |  |   |               |  
| | Taxes receivable                                            |   | 12,424        |  |   | 1,112         |  
| | Receivable from joint venture partners                      |   | 18,681        |  |   | 23,067        |  
| | Other receivables                                           |   | 1,543         |  |   | 2,044         |  
| |                                                             |   | 32,648        |  |   | 26,223        |  
| |                                                             |   |               |  |   |               |  
| |                                                             | $ | 185,215       |  | $ | 254,901       |  

As at December 31, 2016, $42,273
(December 31, 2015 - $111,991) of the current statutory receivables relates to
refundable sales taxes in Peru that Hudbay Peru has paid on capital expenditures
and operating expenses. Management expects to receive the amount within one
year.

The receivable from joint venture
partners are for the Groups joint venture partners for the Reed mine in
Manitoba and the Rosemont project in Arizona. As at December 31, 2016, the
balances of these receivables were $nil and $18,681, respectively (December 31,
2015 - $14,275 and $15,564, respectively). During the year ended December 31,
2016 the Groups joint venture partner for the Reed mine in Manitoba repaid
their loans.

|11. | Inventories
|--- | -----------

| |                        |   | Dec. 31, 2016 |  |   | Dec. 31, 2015 | 
| | ---------------------- | - | ------------- |  | - | ------------- | 
| | Current                |   |               |  |   |               | 
| | Stockpile              | $ | 9,368         |  | $ | 13,241        | 
| | Work in progress       |   | 9,100         |  |   | 6,200         | 
| | Finished goods         |   | 54,583        |  |   | 69,082        | 
| | Materials and supplies |   | 39,413        |  |   | 31,663        | 
| |                        |   | 112,464       |  |   | 120,186       | 
| | Non-current            |   |               |  |   |               | 
| | Materials and supplies |   | 4,537         |  |   | 5,649         | 
| |                        |   |               |  |   |               | 
| |                        | $ | 117,001       |  | $ | 125,835       | 

The cost of inventories recognized as an
expense, including depreciation, and included in cost of sales amounted to
$803,802 for the year ended December 31, 2016 (year ended December 31, 2015 - $648,967).

41

---

|HUDBAY MINERALS INC.                                      
|----------------------------------------------------------
|Notes to Consolidated Financial Statements                
|(in thousands of US dollars, except where otherwise noted)
|Years ended
      December 31, 2016 and 2015              

|12. | Prepaid expenses
|--- | ----------------

| |                                                      |   | Dec. 31, 2016 |  |   | Dec. 31, 2015 | 
| | ---------------------------------------------------- | - | ------------- |  | - | ------------- | 
| | Prepayments to suppliers
      related to operations | $ | 3,673         |  | $ | 8,177         | 
| | Prepaid insurance and other                          |   | 319           |  |   | 802           | 
| |                                                      |   |               |  |   |               | 
| |                                                      | $ | 3,992         |  | $ | 8,979         | 

|13. | Other financial assets
|--- | ----------------------

| |                                                        |   | Dec. 31, 2016 |  |   | Dec. 31, 2015 | 
| | ------------------------------------------------------ | - | ------------- |  | - | ------------- | 
| | Current                                                |   |               |  |   |               | 
| | Derivative assets                                      | $ | 3,397         |  | $ | 16,512        | 
| |                                                        |   |               |  |   |               | 
| | Non-current                                            |   |               |  |   |               | 
| | Available-for-sale
      investments                   |   | 13,508        |  |   | 9,206         | 
| | Investments at fair value through profit or
      loss |   | 192           |  |   | 59            | 
| | Restricted cash                                        |   | 17,148        |  |   | 63,465        | 
| |                                                        |   | 30,848        |  |   | 72,730        | 
| |                                                        |   |               |  |   |               | 
| |                                                        | $ | 34,245        |  | $ | 89,242        | 

Available-for-sale investments

Available-for-sale investments consist
of investments in Canadian metals and mining companies, most of which are
publicly traded. During the year ended December 31, 2016 and year ended December
31, 2015, the Group recognized impairment losses on investments in listed shares
and transferred pre-tax losses of $1,102 and $4,888, respectively, from the
available-for-sale reserve within equity to the consolidated income statements
(note 7f).

The following table summarizes the
change in available-for-sale investments:

| |                                                            |   | Dec. 31, 2016 |   |   | Dec. 31, 2015 |  
| | ---------------------------------------------------------- | - | ------------- | - | - | ------------- | -
| |                                                            |   |               |   |   |               |  
| | Balance, beginning of year                                 | $ | 9,206         |   | $ | 16,115        |  
| | Additions                                                  |   | 2,857         |   |   | 779           |  
| | Increase (decrease) from remeasurement to
      fair value |   | 3,598         |   |   | (5,287        | )
| | Disposals                                                  |   | (2,206        | ) |   | (92           | )
| | Effect of movements in exchange rates                      |   | 53            |   |   | (2,309        | )
| |                                                            |   |               |   |   |               |  
| | Balance, end of year                                       | $ | 13,508        |   | $ | 9,206         |  

42

---

|HUDBAY MINERALS INC.                                      
|----------------------------------------------------------
|Notes to Consolidated Financial Statements                
|(in thousands of US dollars, except where otherwise noted)
|Years ended
      December 31, 2016 and 2015              

|14. | Intangible assets - computer
  software
|--- | ---------------------------------------

| |                                       |   | Dec. 31, 2016 |  |   | Dec. 31, 2015 |  
| | ------------------------------------- | - | ------------- |  | - | ------------- | -
| |                                       |   |               |  |   |               |  
| | Cost                                  |   |               |  |   |               |  
| | Balance, beginning of year            | $ | 16,179        |  | $ | 16,004        |  
| | Additions                             |   | 407           |  |   | 2,750         |  
| | Effects of movement in exchange rates |   | 412           |  |   | (2,575        | )
| | Balance, end of year                  |   | 16,998        |  |   | 16,179        |  
| |                                       |   |               |  |   |               |  
| | Accumulated
      amortization        |   |               |  |   |               |  
| | Balance, beginning of year            |   | 7,320         |  |   | 5,606         |  
| | Amortization for the year             |   | 2,882         |  |   | 2,801         |  
| | Effects of movement in exchange rates |   | 182           |  |   | (1,087        | )
| | Balance, end of year                  |   | 10,384        |  |   | 7,320         |  
| |                                       |   |               |  |   |               |  
| | Net book value                        | $ | 6,614         |  | $ | 8,859         |  

43

---

|HUDBAY MINERALS INC.                                      
|----------------------------------------------------------
|Notes to Consolidated Financial Statements                
|(in thousands of US dollars, except where otherwise noted)
|Years ended
      December 31, 2016 and 2015              

|15. | Property, plant and
equipment
|--- | -----------------------------

Explorationand
    
    
    Capitalevaluation
    
    
    works
      in
    
    
    Mining
    
    
    Plant
      andDec. 31, 2016
    
    assets
    
    
    progress
    
    
    properties
    
    
    equipment
    
    
    TotalCostBalance, beginning of year
    $
    14,650
    
    $
    812,618
    
    $
    1,603,952
    
    $
    2,289,556
    
    $
    4,720,776Additions
    
    -
    
    
    87,505
    
    
    45,383
    
    
    15,445
    
    
    148,333Capitalized stripping and
      development
    
    -
    
    
    19,666
    
    
    48,886
    
    
    -
    
    
    68,552Decommissioning and restoration
    
    -
    
    
    (46
    )
    
    1,966
    
    
    23,036
    
    
    24,956Interest capitalized
    
    -
    
    
    14,705
    
    
    -
    
    
    -
    
    
    14,705Transfers and other movements
    
    -
    
    
    (89,506
    )
    
    56,848
    
    
    32,658
    
    
    -Disposals
    
    -
    
    
    (1,501
    )
    
    -
    
    
    (11,089
    )
    
    (12,590
    )Effects of movement in exchange rates
    
    365
    
    
    1,334
    
    
    18,382
    
    
    18,897
    
    
    38,978Other
    
    -
    
    
    (16
    )
    
    15
    
    
    155
    
    
    154Balance, end of year
    
    15,015
    
    
    844,759
    
    
    1,775,432
    
    
    2,368,658
    
    
    5,003,864Accumulated depreciationBalance, beginning of year
    
    -
    
    
    -
    
    
    394,098
    
    
    436,402
    
    
    830,500Depreciation for the year
    
    -
    
    
    -
    
    
    119,420
    
    
    178,175
    
    
    297,595Disposals
    
    -
    
    
    -
    
    
    -
    
    
    (9,160
    )
    
    (9,160
    )Effects of movement in exchange rates
    
    -
    
    
    -
    
    
    9,810
    
    
    9,076
    
    
    18,886Other
    
    -
    
    
    -
    
    
    132
    
    
    88
    
    
    220Balance, end of year
    
    -
    
    
    -
    
    
    523,460
    
    
    614,581
    
    
    1,138,041Net book value
    $
    15,015
    
    $
    844,759
    
    $
    1,251,972
    
    $
    1,754,077
    
    $
    3,865,823


44

---

|HUDBAY MINERALS INC.                                      
|----------------------------------------------------------
|Notes to Consolidated Financial Statements                
|(in thousands of US dollars, except where otherwise noted)
|Years ended
      December 31, 2016 and 2015              

Explorationand
    
    
    Capitalevaluation
    
    
    works in
    
    
    Mining
    
    
    Plant andDec. 31, 2015
    
    assets
    
    
    progress
    
    
    properties
    
    
    equipment
    
    
    TotalCostBalance, beginning of year
    $
    15,584
    
    $
    3,253,239
    
    $
    681,540
    
    $
    824,207
    
    $
    4,774,570Additions
    
    -
    
    
    321,474
    
    
    1,571
    
    
    4,281
    
    
    327,326Acquisition of New Britannia (note 6)
    
    2,890
    
    
    10,410
    
    
    -
    
    
    -
    
    
    13,300Capitalized development
    
    -
    
    
    -
    
    
    98,906
    
    
    -
    
    
    98,906Decommissioning and restoration
    
    -
    
    
    1,861
    
    
    7,502
    
    
    13,143
    
    
    22,506Interest capitalized
    
    -
    
    
    41,996
    
    
    -
    
    
    -
    
    
    41,996Transfers and other movements
    
    -
    
    
    (2,705,466
    )
    
    1,006,254
    
    
    1,699,212
    
    
    -Impairment
    
    -
    
    
    (54,462
    )
    
    (77,571
    )
    
    (119,766
    )
    
    (251,799
    )Disposals
    
    (1,095
    )
    
    -
    
    
    (812
    )
    
    (12,553
    )
    
    (14,460
    )Pre-production revenue
    
    -
    
    
    (56,218
    )
    
    -
    
    
    -
    
    
    (56,218
    )Effects of movement in exchange rates
    
    (2,729
    )
    
    (216
    )
    
    (113,438
    )
    
    (118,968
    )
    
    (235,351
    )Balance, end of year
    
    14,650
    
    
    812,618
    
    
    1,603,952
    
    
    2,289,556
    
    
    4,720,776Accumulated
      depreciationBalance, beginning of year
    
    -
    
    
    -
    
    
    354,491
    
    
    355,076
    
    
    709,567Depreciation for the year
    
    -
    
    
    -
    
    
    101,189
    
    
    148,998
    
    
    250,187Disposals
    
    -
    
    
    -
    
    
    -
    
    
    (10,272
    )
    
    (10,272
    )Effects of movement in exchange rates
    
    -
    
    
    -
    
    
    (61,582
    )
    
    (57,400
    )
    
    (118,982
    )Balance, end of year
    
    -
    
    
    -
    
    
    394,098
    
    
    436,402
    
    
    830,500Net book value
    $
    14,650
    
    $
    812,618
    
    $
    1,209,854
    
    $
    1,853,154
    
    $
    3,890,276


Refer to note 3i for a description of
depreciation methods used by the Group and note 3i(iv) for depreciation rates of
major classes of assets. Depreciation of property, plant and equipment and
intangible assets related to producing properties is initially recognized in
inventory and is then transferred to the cost of sales in the consolidated
income statements as sales occur. Refer to note 7b for amounts recognized in the
consolidated income statements.

During the year ended December 31,
2015, the Group recognized impairment losses on property, plant and equipment of
$251,799. A breakdown of those impairments is provided in note 7g.

The Group has determined that the level
of activity that represented commercial production for Constancia is production
of an average of 60% of design capacity over a three-month period. On April 30,
2015 the Constancia mine met the threshold. The Group concluded that commercial
production related to the Constancia mine commenced on May 1, 2015. At this
time, the carrying value of the related assets within capital works in progress
were reclassified to plant and equipment and mining properties, and depreciation
of the assets commenced.

45

---

|HUDBAY MINERALS INC.                                      
|----------------------------------------------------------
|Notes to Consolidated Financial Statements                
|(in thousands of US dollars, except where otherwise noted)
|Years ended
      December 31, 2016 and 2015              

|16. | Trade and other
payables
|--- | ------------------------

| |                                                             |   | Dec. 31, 2016 |  |   | Dec. 31, 2015 |  
| | ----------------------------------------------------------- | - | ------------- |  | - | ------------- | -
| | Trade payables                                              | $ | 80,509        |  | $ | 62,359        |  
| | Accruals and payables                                       |   | 78,154        |  |   | 93,797        |  
| | Accrued interest                                            |   | 4,300         |  |   | 23,267        |  
| | Exploration and evaluation payables                         |   | 64            |  |   | 153           |  
| | Embedded derivatives -
      provisional pricing (note 28c) |   | 86            |  |   | (118          | )
| | Statutory payables                                          |   | 6,549         |  |   | 7,727         |  
| |                                                             |   |               |  |   |               |  
| |                                                             | $ | 169,662       |  | $ | 187,185       |  

Accruals and payables include
operational and capital costs and employee benefit amounts owing.

|17. | Other liabilities
|--- | -----------------

| |                                   |   | Dec. 31, 2016 |  |   | Dec. 31, 2015 | 
| | --------------------------------- | - | ------------- |  | - | ------------- | 
| | Current                           |   |               |  |   |               | 
| | Provisions (note 20)              | $ | 14,367        |  | $ | 10,630        | 
| | Pension liability (note 21)       |   | 24,635        |  |   | 23,221        | 
| | Other employee benefits (note 22) |   | 2,356         |  |   | 2,107         | 
| | Unearned revenue                  |   | 849           |  |   | 1,709         | 
| |                                   |   |               |  |   |               | 
| |                                   | $ | 42,207        |  | $ | 37,667        | 

|18. | Long-term debt
|--- | --------------

Long-term debt is comprised of the
following:

| |                                                      |   | Dec. 31, 2016 |   |   | Dec. 31, 2015 |  
| | ---------------------------------------------------- | - | ------------- | - | - | ------------- | -
| | Senior unsecured notes (a)                           | $ | 986,574       |   | $ | 917,329       |  
| | Equipment finance facility (b)                       |   | 50,267        |   |   | 66,521        |  
| | Senior secured revolving
      credit facilities (c) |   | 195,323       |   |   | 291,030       |  
| |                                                      |   | 1,232,164     |   |   | 1,274,880     |  
| | Less: current portion                                |   | (16,490       | ) |   | (69,875       | )
| |                                                      |   |               |   |   |               |  
| |                                                      | $ | 1,215,674     |   | $ | 1,205,005     |  

46

---

|HUDBAY MINERALS INC.                                      
|----------------------------------------------------------
|Notes to Consolidated Financial Statements                
|(in thousands of US dollars, except where otherwise noted)
|Years ended
      December 31, 2016 and 2015              

| | (a) | Senior unsecured notes
| | --- | ----------------------

| | Balance, January 1, 2015                                                            | $ | 915,846  |  
| | ----------------------------------------------------------------------------------- | - | -------- | -
| | Change in fair value of
      embedded derivative (prepayment option)               |   | 1,049    |  
| | Accretion of transaction costs                                                      |   | 434      |  
| | Balance, December 31, 2015                                                          | $ | 917,329  |  
| | Addition to Principal, net of $12,329 in transaction costs                          |   | 987,671  |  
| | Payments made                                                                       |   | (920,000 | )
| | Change
      in fair value of the New Notes embedded derivative (prepayment option) |   | (1,146   | )
| | Write-down of
      unamortized transaction costs                                   |   | 2,216    |  
| | Accretion of transaction costs and
      premiums                                   |   | 504      |  
| |                                                                                     |   |          |  
| | Balance, December 31, 2016                                                          | $ | 986,574  |  

On December 12, 2016 and December 28,
2016, the Group redeemed for cash all of its outstanding $920,000 aggregate
principal amount of 9.50% senior unsecured notes due 2020.

The unamortized transaction costs of
$2,216 were expensed upon extinguishment of the Groups 9.50% senior unsecured
notes. The early redemption of the Groups 9.50% senior unsecured notes resulted
in a charge of $47,718, which was recorded on the consolidated income
statements.

On December 12, 2016, the Group
completed an offering of $1,000,000 aggregate principal amount of senior notes
in two series: (i) a series of 7.25% senior notes due 2023 in an aggregate
principal amount of $400,000 (the 2023 Notes) and (ii) a series of 7.625%
senior notes due 2025 in an aggregate principal amount of $600,000 (together
with the 2023 Notes, the New Notes). The New Notes are guaranteed on a senior
unsecured basis by HBMS, HBED, HMS and Hudbay Peru (note 33).

| | (b) | Equipment finance
facility
| | --- | --------------------------

| | Balance, January 1, 2015                              | $ | 71,221  |  
| | ----------------------------------------------------- | - | ------- | -
| | Addition to Principal,
      net of transaction costs |   | 10,092  |  
| | Payments
      made                                   |   | (15,902 | )
| | Accretion of transaction costs                        |   | 1,110   |  
| | Balance, December 31, 2015                            | $ | 66,521  |  
| | Transaction costs                                     |   | (1,013  | )
| | Payments made                                         |   | (16,490 | )
| | Accretion of transaction costs                        |   | 1,249   |  
| |                                                       |   |         |  
| | Balance, December 31, 2016                            | $ | 50,267  |  

The equipment finance facility is
reflected in the consolidated balance sheets as follows:

| |             |   | Dec. 31, 2016 |  |   | Dec. 31, 2015 | 
| | ----------- | - | ------------- |  | - | ------------- | 
| | Current     | $ | 16,490        |  | $ | 16,490        | 
| | Non-current |   | 33,777        |  |   | 50,031        | 
| |             |   |               |  |   |               | 
| |             | $ | 50,267        |  | $ | 66,521        | 

47

---

|HUDBAY MINERALS INC.                                      
|----------------------------------------------------------
|Notes to Consolidated Financial Statements                
|(in thousands of US dollars, except where otherwise noted)
|Years ended
      December 31, 2016 and 2015              

| | (c) | Senior secured revolving credit
  facilities
| | --- | --------------------------------------------

| | Balance, January 1, 2015                              | $ | -        |  
| | ----------------------------------------------------- | - | -------- | -
| | Addition to Principal,
      net of transaction costs |   | 304,374  |  
| | Payments
      made                                   |   | (14,925  | )
| | Accretion of transaction costs                        |   | 1,581    |  
| | Balance, December 31, 2015                            | $ | 291,030  |  
| | Addition to Principal,
      net of transaction costs |   | 60,021   |  
| | Payments made                                         |   | (160,000 | )
| | Accretion of transaction costs                        |   | 4,272    |  
| |                                                       |   |          |  
| | Balance, December 31, 2016                            | $ | 195,323  |  

The senior secured credit facilities
are reflected in the consolidated balance sheets as follows:

| |                            |   | Dec. 31, 2016 |  |   | Dec. 31, 2015 | 
| | -------------------------- | - | ------------- |  | - | ------------- | 
| | Current                    | $ | -             |  | $ | 53,385        | 
| | Non-current                |   | 195,323       |  |   | 237,645       | 
| |                            |   |               |  |   |               | 
| | Balance, December 31, 2016 | $ | 195,323       |  | $ | 291,030       | 

On March 30, 2016, the Group completed
a restructuring of its two senior credit facilities. The two facilities now
share substantially similar terms and conditions, except that the $350,000
Canada facility is secured by the Groups Manitoba assets and the $200,000 Peru
facility is secured by the Groups Peru assets. The facilities mature on March
31, 2019, and bear interest at LIBOR plus 4.50% .

|19. | Deferred revenue
|--- | ----------------

On August 8, 2012 and November 4, 2013,
the Group entered into precious metals stream transactions with Silver 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 Silver Wheaton, the Group receives cash payments
equal to the lesser of (i) the market price and (ii) $400 per ounce (for gold)
and $5.90 per ounce (for silver), subject to 1% annual escalation after three
years.

The Group recorded the deposits
received as deferred revenue and recognizes amounts in revenue as gold and
silver are delivered to Silver 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
Silver Wheaton over the life of the 777 and Constancia operations. The Group
estimates the current portion of deferred revenue based on deliveries
anticipated over the next twelve months.

48

---

|HUDBAY MINERALS INC.                                      
|----------------------------------------------------------
|Notes to Consolidated Financial Statements                
|(in thousands of US dollars, except where otherwise noted)
|Years ended
      December 31, 2016 and 2015              

In February 2010, Hudbay Arizona
entered into a precious metals stream transaction with Silver Wheaton whereby
the Group will receive deposit payments of $230,000 against delivery of 100% of
the payable silver and gold from the Rosemont project. The deposit will be
payable upon the satisfaction of certain conditions precedent, including the
receipt of permits for the Rosemont project and the commencement of
construction. In addition to the deposit payments, as gold and silver is
delivered to Silver Wheaton, the Group receives cash payments equal to the
lesser of (i) the market price and (ii) $450 per ounce (for gold) and $3.90 per
ounce (for silver), subject to 1% annual escalation after three years. To date,
no such deposit has been received under the terms of this contract.

The following table summarizes changes
in deferred revenue:

| | Balance, January 1, 2015                     | $ | 688,125 |  
| | -------------------------------------------- | - | ------- | -
| | Recognition of revenue                       |   | (51,860 | )
| | Effects of changes in foreign exchange       |   | (39,005 | )
| | Balance, December 31, 2015                   | $ | 597,260 |  
| | Recognition of revenue                       |   | (65,762 | )
| | Effects of changes in foreign
      exchange |   | 6,354   |  
| |                                              |   |         |  
| | Balance, December 31, 2016                   | $ | 537,852 |  

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

| |             |   | Dec. 31, 2016 |  |   | Dec. 31, 2015 | 
| | ----------- | - | ------------- |  | - | ------------- | 
| | Current     | $ | 65,619        |  | $ | 68,250        | 
| | Non-current |   | 472,233       |  |   | 529,010       | 
| |             |   |               |  |   |               | 
| |             | $ | 537,852       |  | $ | 597,260       | 

49

---

|HUDBAY MINERALS INC.                                      
|----------------------------------------------------------
|Notes to Consolidated Financial Statements                
|(in thousands of US dollars, except where otherwise noted)
|Years ended
      December 31, 2016 and 2015              

|20. | Provisions
|--- | ----------

Decommis-sioning,restoration
    
    
    Deferred
    
    
    Restrictedand similar
    
    
    share units
    
    
    share
      units1liabilities
    
    
    (note 25
    )
    
    (note 25
    )
    
    Other
    
    
    TotalBalance, January 1, 2016
    $
    147,035
    
    $
    2,803
    
    $
    4,388
    
    $
    -
    
    $
    154,226Net additional provisions made
    
    30,038
    
    
    1,018
    
    
    6,348
    
    
    1,922
    
    
    39,326Amounts used
    
    (894
    )
    
    (1,078
    )
    
    (2,736
    )
    
    (430
    )
    
    (5,138
    )Unwinding of discount (note 7f)
    
    2,586
    
    
    -
    
    
    -
    
    
    -
    
    
    2,586Effect of change in discount
      rate
    
    (4,189
    )
    
    -
    
    
    -
    
    
    -
    
    
    (4,189
    )Effect of foreign exchange
    
    2,720
    
    
    97
    
    
    (47
    )
    
    20
    
    
    2,790Effect of change in share price
    
    -
    
    
    1,093
    
    
    3,099
    
    
    276
    
    
    4,468Balance, December 31, 2016
    $
    177,296
    
    $
    3,933
    
    $
    11,052
    
    $
    1,788
    
    $
    194,069


1Certain amounts relating
to the Arizona segment are capitalized.

Provisions are reflected in the
consolidated balance sheets as follows:

Current (note 17)
    $
    1,054
    
    $
    3,933
    
    $
    8,451
    
    $
    929
    
    $
    14,367Non-current
    
    176,242
    
    
    -
    
    
    2,601
    
    
    859
    
    
    179,702$
    177,296
    
    $
    3,933
    
    $
    11,052
    
    $
    1,788
    
    $
    194,069


50

---

|HUDBAY MINERALS INC.                                      
|----------------------------------------------------------
|Notes to Consolidated Financial Statements                
|(in thousands of US dollars, except where otherwise noted)
|Years ended
      December 31, 2016 and 2015              

| |                                       |   | Decommis-   |   |   |             |   |   |              |   |   |         |  
| | ------------------------------------- | - | ----------- | - | - | ----------- | - | - | ------------ | - | - | ------- | -
| |                                       |   | sioning,    |   |   |             |   |   |              |   |   |         |  
| |                                       |   | restoration |   |   | Deferred    |   |   | Restricted   |   |   |         |  
| |                                       |   | and similar |   |   | share units |   |   | share units1 |   |   |         |  
| |                                       |   | liabilities |   |   | (note 25    | ) |   | (note 25     | ) |   | Total   |  
| | Balance, January 1, 2015              | $ | 159,809     |   | $ | 5,084       |   | $ | 9,179        |   | $ | 174,072 |  
| | Net additional provisions made        |   | 16,700      |   |   | 1,065       |   |   | 9,645        |   |   | 27,410  |  
| | Amounts used                          |   | (1,682      | ) |   | -           |   |   | (4,798       | ) |   | (6,480  | )
| | Unused amounts reversed               |   | (157        | ) |   | -           |   |   | -            |   |   | (157    | )
| | Acquisition of New Britannia          |   | 1,861       |   |   | -           |   |   | -            |   |   | 1,861   |  
| | Disposal of Balmat                    |   | (20,112     | ) |   | -           |   |   | -            |   |   | (20,112 | )
| | Unwinding of discount (note
      7f) |   | 2,811       |   |   | -           |   |   | -            |   |   | 2,811   |  
| | Effect of change in discount rate     |   | 4,612       |   |   | -           |   |   | -            |   |   | 4,612   |  
| | Effect of foreign exchange            |   | (16,807     | ) |   | (844        | ) |   | (987         | ) |   | (18,638 | )
| | Effect of change in share price       |   |             |   |   | (2,502      | ) |   | (8,651       | ) |   | (11,153 | )
| |                                       |   |             |   |   |             |   |   |              |   |   |         |  
| | Balance, December 31, 2015            | $ | 147,035     |   | $ | 2,803       |   | $ | 4,388        |   | $ | 154,226 |  

1Certain amounts relating
to the Arizona segment are capitalized.

Provisions reflected in the
consolidated balance sheets as follows:

| | Current (note 17) | $ | 4,270   |  | $ | 2,803 |  | $ | 3,557 |  | $ | 10,630  | 
| | ----------------- | - | ------- |  | - | ----- |  | - | ----- |  | - | ------- | 
| | Non-current       |   | 142,765 |  |   | -     |  |   | 831   |  |   | 143,596 | 
| |                   |   |         |  |   |       |  |   |       |  |   |         | 
| |                   | $ | 147,035 |  | $ | 2,803 |  | $ | 4,388 |  | $ | 154,226 | 

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 the year ended December 31, 2016
additional provisions were recognized as a result of an increased pit footprint,
as per mine plan, at the Constancia operation and an updated closure plan for a
site in the Manitoba business unit. In addition, updates to certain closure
plans in Manitoba resulted in increases in expected cash outflows.

The Group's decommissioning and
restoration liabilities relate mainly to its Manitoba operations. Management
anticipates that significant decommissioning and restoration activities will
take place near the time closure of the mining and processing facilities,
anticipated to occur from 2019 for Flin Flon operations and up to 2032 for Snow
Lake operations (including the Lalor mine). However, these provisions also
reflect estimated post-closure cash flows that extend to 2099 for ongoing
monitoring and water treatment requirements. Management anticipates most
decommissioning and restoration activities for the Constancia operation will
occur from 2033 to 2040.

51

---

|HUDBAY MINERALS INC.                                      
|----------------------------------------------------------
|Notes to Consolidated Financial Statements                
|(in thousands of US dollars, except where otherwise noted)
|Years ended
      December 31, 2016 and 2015              

These estimates have been discounted to
their present value at rates ranging from 0.63% to 3.07% per annum (2015 - 0.47%
to 2.94%), using pre-tax risk-free interest rates that reflect the estimated
maturity of each specific liability.

|21. | 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 2016 using data as at December 31, 2015. For these plans, the next
actuarial valuation required for funding purposes will be performed during 2017
as at December 31, 2016.

Movements in the present value of the
defined benefit obligation in the current and previous years were as follows:

| |                                                                            |   | Year ended   |  
| | -------------------------------------------------------------------------- | - | ------------ | -
| |                                                                            |   | December 31, |  
| |                                                                            |   | 2016         |  
| | Opening defined benefit
      obligation                                   | $ | 337,004      |  
| | Current service cost                                                       |   | 10,768       |  
| | Past
      service cost related to the new collective bargaining agreement |   | -            |  
| | Other past service cost                                                    |   | -            |  
| | Interest
      cost                                                        |   | 13,415       |  
| | Benefits paid from plan                                                    |   | (32,644      | )
| | Benefits
      paid from employer                                          |   | (1,424       | )
| | Participant contributions                                                  |   | 93           |  
| | Effects
      of movements in exchange rates                               |   | 10,348       |  
| | Remeasurement actuarial
      (gains)/losses:                              |   |              |  
| | Arising from changes in demographic assumptions                            |   | -            |  
| | Arising from changes in financial assumptions                              |   | 14,955       |  
| | Arising from
      experience adjustments                                  |   | (3,350       | )
| |                                                                            |   |              |  
| | Closing defined benefit obligation                                         | $ | 349,165      |  

The defined benefit obligation closing
balance, by member group, is as follows:

| |                                    |   | Dec. 31, 2016 |  |   | Dec. 31, 2015 | 
| | ---------------------------------- | - | ------------- |  | - | ------------- | 
| | Active
      members               | $ | 235,815       |  | $ | 235,877       | 
| | Deferred members                   |   | 3,636         |  |   | 3,225         | 
| | Retired
      members              |   | 109,714       |  |   | 97,902        | 
| |                                    |   |               |  |   |               | 
| | Closing defined benefit obligation | $ | 349,165       |  | $ | 337,004       | 

52

---

|HUDBAY MINERALS INC.                                      
|----------------------------------------------------------
|Notes to Consolidated Financial Statements                
|(in thousands of US dollars, except where otherwise noted)
|Years ended
      December 31, 2016 and 2015              

Movements in the fair value of the
pension plan assets in the current and previous years were as follows:

| |                                                                                  |   | Year ended   |  
| | -------------------------------------------------------------------------------- | - | ------------ | -
| |                                                                                  |   | December 31, |  
| |                                                                                  |   | 2016         |  
| | Opening fair value of plan
      assets:                                         | $ | 279,523      |  
| | Interest income                                                                  |   | 11,634       |  
| | Remeasurements (gains)/losses:                                                   |   |              |  
| | Return on plan
      assets (excluding amounts included in net interest expense) |   | 2,905        |  
| | Contributions from the employer                                                  |   | 26,198       |  
| | Employer direct benefit
      payments                                           |   | 1,424        |  
| | Contributions from plan participants                                             |   | 93           |  
| | Benefit payment from
      employer                                              |   | (1,424       | )
| | Administrative expenses paid from plan assets                                    |   | (77          | )
| | Benefits paid                                                                    |   | (32,644      | )
| | Effects of changes in foreign exchange
      rates                               |   | 8,519        |  
| |                                                                                  |   |              |  
| | Closing fair value of plan assets                                                | $ | 296,151      |  

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, 2016 |   |   | Dec. 31, 2015 |  
| | ----------------------------------------------------------- | - | ------------- | - | - | ------------- | -
| | Present value of funded
      defined benefit obligation    | $ | 333,720       |   | $ | 322,769       |  
| | Fair value of plan assets                                   |   | (296,151      | ) |   | (279,523      | )
| | Present value of unfunded defined benefit obligation        |   | 15,445        |   |   | 14,235        |  
| |                                                             |   |               |   |   |               |  
| | Net liability arising from defined benefit
      obligation | $ | 53,014        |   | $ | 57,481        |  

Reflected in the consolidated balance
sheets as follows:

| |                                              |   | Dec. 31, 2016 |  |   | Dec. 31, 2015 | 
| | -------------------------------------------- | - | ------------- |  | - | ------------- | 
| | Pension obligation - current
      (note 17) | $ | 24,635        |  | $ | 23,221        | 
| | Pension obligation - non-current             |   | 28,379        |  |   | 34,260        | 
| |                                              |   |               |  |   |               | 
| | Total pension obligation                     | $ | 53,014        |  | $ | 57,481        | 

53

---

|HUDBAY MINERALS INC.                                      
|----------------------------------------------------------
|Notes to Consolidated Financial Statements                
|(in thousands of US dollars, except where otherwise noted)
|Years ended
      December 31, 2016 and 2015              

Pension expense is as follows:

| |                                                   |   | Dec. 31, 2016 |  |   | Dec. 31, 2015 | 
| | ------------------------------------------------- | - | ------------- |  | - | ------------- | 
| | Service costs:                                    |   |               |  |   |               | 
| | Current service cost                              | $ | 10,768        |  | $ | 11,727        | 
| | Past service cost and loss from
      settlements |   | -             |  |   | 17,064        | 
| | Total service cost                                |   | 10,768        |  |   | 28,791        | 
| | Net interest expense                              |   | 1,781         |  |   | 2,302         | 
| | Administration cost                               |   | 77            |  |   | 78            | 
| |                                                   |   |               |  |   |               | 
| | Defined benefit pension expense                   | $ | 12,626        |  | $ | 31,171        | 
| |                                                   |   |               |  |   |               | 
| |                                                   |   |               |  |   |               | 
| | Defined contribution pension expense              | $ | 829           |  | $ | 824           | 

Remeasurement on the net defined
benefit liability:

| |                                                                                         |   | Dec. 31, 2016 |   |   | Dec. 31, 2015 |  
| | --------------------------------------------------------------------------------------- | - | ------------- | - | - | ------------- | -
| | (Return)/loss on plan assets
      (excluding amounts included in net interest expense) | $ | (2,905        | ) | $ | 1,698         |  
| | Actuarial gains arising from changes in
      demographic assumptions                   |   | -             |   |   | (3,052        | )
| | Actuarial losses/(gains)
      arising from changes in financial assumptions            |   | 14,955        |   |   | (1,305        | )
| | Actuarial gains arising from experience
      adjustments                               |   | (3,350        | ) |   | (1,701        | )
| |                                                                                         |   |               |   |   |               |  
| | Defined benefit loss/(gain) related to remeasurement                                    | $ | 8,700         |   | $ | (4,360        | )
| |                                                                                         |   |               |   |   |               |  
| |                                                                                         |   |               |   |   |               |  
| | Total pension cost                                                                      | $ | 22,155        |   | $ | 27,635        |  

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.

Past service costs in 2015 related to
the new collective bargaining agreements in Manitoba.

54

---

|HUDBAY MINERALS INC.                                      
|----------------------------------------------------------
|Notes to Consolidated Financial Statements                
|(in thousands of US dollars, except where otherwise noted)
|Years ended
      December 31, 2016 and 2015              

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:

| |                                                                  |  | 2016   |  |  | 2015  | 
| | ---------------------------------------------------------------- |  | ------ |  |  | ----- | 
| | Defined benefit cost:                                            |  |        |  |  |       | 
| | Discount rate - benefit
      obligations                        |  | 4.08 % |  |  | 3.97% | 
| | Discount
      rate - service cost                               |  | 4.25 % |  |  | 3.97% | 
| | Expected rate of salary
      increase1                          |  | 3.00 % |  |  | 3.00% | 
| | Average
      longevity at retirement age for current pensioners |  |        |  |  |       | 
| | (years)2:                                                        |  |        |  |  |       | 
| | Males                                                            |  | 20.8   |  |  | 21.5% | 
| | Females                                                          |  | 23.3   |  |  | 24.0% | 

| |                                                                                                     |  | 2016   |  |  | 2015  | 
| | --------------------------------------------------------------------------------------------------- |  | ------ |  |  | ----- | 
| | Defined benefit
      obligation:                                                                   |  |        |  |  |       | 
| | Discount
      rate                                                                                 |  | 3.69 % |  |  | 4.08% | 
| | Expected
      rate of salary increase1                                                             |  | 2.75 % |  |  | 3.00% | 
| | Average longevity at
      retirement age for current pensioners (years)2:                          |  |        |  |  |       | 
| | Males                                                                                               |  | 20.9   |  |  | 20.8  | 
| | Females                                                                                             |  | 23.3   |  |  | 23.3  | 
| | Average longevity at
      retirement age for current employees (future pensioners)
      (years)2: |  |        |  |  |       | 
| | Males                                                                                               |  | 22.2   |  |  | 22.2  | 
| | Females                                                                                             |  | 24.5   |  |  | 24.5  | 

1Plus merit and promotional
scale based on member's age 2 CPM2014 Priv with CPM-B projection
scale.

55

---

|HUDBAY MINERALS INC.                                      
|----------------------------------------------------------
|Notes to Consolidated Financial Statements                
|(in thousands of US dollars, except where otherwise noted)
|Years ended
      December 31, 2016 and 2015              

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 $25,104
      (increase by $28,263).                      
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | - | If the expected salary growth increases
      (decreases) by 1%, the defined benefit obligation would increase by $3,955
      (decrease $3,606).                        
| | - | If the life expectancy increases (decreases) by
      one year for both men and women, the defined benefit obligation would
      increase by $4,980 (decrease by $7,032)

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, 2017 is $24,635.

The average duration of the pension
obligation at December 31, 2016 is 15.7 years (2015  14.9 years). This number
can be broken down as follows:

| | - | Active members: 17.1 years (2015: 16.2 years)  
| | - | -----------------------------------------------
| | - | Deferred members: 23.5 years (2015: 18.5 years)
| | - | Retired members: 12.4 years (2015: 11.7 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
2016 was 5.01 % (2015: 3.42%)

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.

56

---

|HUDBAY MINERALS INC.                                      
|----------------------------------------------------------
|Notes to Consolidated Financial Statements                
|(in thousands of US dollars, except where otherwise noted)
|Years ended
      December 31, 2016 and 2015              

The following is a summary of the fair
value classification levels for investment:

| | December 31, 2016            |   | Level 1 |  |   | Level 2 |  |   | Level 3 |  |   | Total   | 
| | ---------------------------- | - | ------- |  | - | ------- |  | - | ------- |  | - | ------- | 
| | Investments:                 |   |         |  |   |         |  |   |         |  |   |         | 
| | Money market instruments     | $ | 4,515   |  | $ | -       |  | $ | -       |  | $ | 4,515   | 
| | Pooled
      equity funds    |   | 121,103 |  |   | -       |  |   | -       |  |   | 121,103 | 
| | Pooled fixed income funds    |   | -       |  |   | 143,489 |  |   | -       |  |   | 143,489 | 
| | Alternative investment funds |   | -       |  |   | 26,404  |  |   | -       |  |   | 26,404  | 
| | Balanced funds               |   | -       |  |   | 640     |  |   | -       |  |   | 640     | 
| |                              |   |         |  |   |         |  |   |         |  |   |         | 
| |                              | $ | 125,618 |  | $ | 170,533 |  | $ | -       |  | $ | 296,151 | 

| | December 31, 2015            |   | Level 1 |  |   | Level 2 |  |   | Level 3 |  |   | Total   | 
| | ---------------------------- | - | ------- |  | - | ------- |  | - | ------- |  | - | ------- | 
| | Investments:                 |   |         |  |   |         |  |   |         |  |   |         | 
| | Money market instruments     | $ | 4,387   |  | $ | -       |  | $ | -       |  | $ | 4,387   | 
| | Pooled
      equity funds    |   | 110,853 |  |   | -       |  |   | -       |  |   | 110,853 | 
| | Pooled fixed income funds    |   | -       |  |   | 140,949 |  |   | -       |  |   | 140,949 | 
| | Alternative investment funds |   | -       |  |   | 22,797  |  |   | -       |  |   | 22,797  | 
| | Balanced funds               |   | -       |  |   | 537     |  |   | -       |  |   | 537     | 
| |                              |   |         |  |   |         |  |   |         |  |   |         | 
| |                              | $ | 115,240 |  | $ | 164,283 |  | $ | -       |  | $ | 279,523 | 

57

---

|HUDBAY MINERALS INC.                                      
|----------------------------------------------------------
|Notes to Consolidated Financial Statements                
|(in thousands of US dollars, except where otherwise noted)
|Years ended
      December 31, 2016 and 2015              

|22. | 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 as follows:

| |                                                 |   | Year ended   |  
| | ----------------------------------------------- | - | ------------ | -
| |                                                 |   | December 31, |  
| |                                                 |   | 2016         |  
| | Opening defined benefit
      obligation        | $ | 80,259       |  
| | Current service
      cost1                     |   | 2,579        |  
| | Interest
      cost                             |   | 3,367        |  
| | Effects of movements in
      exchange rates    |   | 2,197        |  
| | Remeasurement actuarial (gains)/losses:         |   |              |  
| | Arising from changes in demographic assumptions |   | -            |  
| | Arising from changes in financial assumptions   |   | 2,712        |  
| | Arising from experience adjustments             |   | (160         | )
| | Benefits paid                                   |   | (1,949       | )
| |                                                 |   |              |  
| | Closing defined benefit obligation              | $ | 89,005       |  

1Includes remeasurement of
other long term employee benefits

The defined benefit obligation closing
balance, by group member, is as follows:

| |                                    |   | Dec 31, 2016 |  |   | Dec 31, 2015 | 
| | ---------------------------------- | - | ------------ |  | - | ------------ | 
| | Active members                     | $ | 52,611       |  | $ | 47,267       | 
| | Inactive members                   |   | 36,394       |  |   | 32,992       | 
| |                                    |   |              |  |   |              | 
| | Closing defined benefit obligation | $ | 89,005       |  | $ | 80,259       | 

58

---

|HUDBAY MINERALS INC.                                      
|----------------------------------------------------------
|Notes to Consolidated Financial Statements                
|(in thousands of US dollars, except where otherwise noted)
|Years ended
      December 31, 2016 and 2015              

Movements in the fair value of defined
benefit amounts in the current and previous years were as follows:

| |                              |   | Dec. 31, 2016 |   |   | Dec. 31, 2015 |  
| | ---------------------------- | - | ------------- | - | - | ------------- | -
| | Employer contributions       | $ | 1,949         |   | $ | 1,947         |  
| | Benefits paid                |   | (1,949        | ) |   | (1,947        | )
| |                              |   |               |   |   |               |  
| | 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, |  |   | Dec. 31, | 
| | ---------------------------------------- | - | -------- |  | - | -------- | 
| |                                          |   | 2016     |  |   | 2015     | 
| | Unfunded benefit obligation              | $ | 89,005   |  | $ | 80,259   | 
| | Vacation accrual and other - non-current |   | 2,624    |  |   | 2,543    | 
| |                                          |   |          |  |   |          | 
| | Net
      liability                      | $ | 91,629   |  | $ | 82,802   | 

Reflected in the consolidated balance
sheets as follows:

| |                                                             |   | Dec. 31, |  |   | Dec. 31, | 
| | ----------------------------------------------------------- | - | -------- |  | - | -------- | 
| |                                                             |   | 2016     |  |   | 2015     | 
| | Other employee benefits
      liability - current (note 17) | $ | 2,356    |  | $ | 2,107    | 
| | Other employee benefits liability - non-current             |   | 89,273   |  |   | 80,695   | 
| |                                                             |   |          |  |   |          | 
| | Net liability                                               | $ | 91,629   |  | $ | 82,802   | 

59

---

|HUDBAY MINERALS INC.                                      
|----------------------------------------------------------
|Notes to Consolidated Financial Statements                
|(in thousands of US dollars, except where otherwise noted)
|Years ended
      December 31, 2016 and 2015              

Other employee future benefit expense
includes the following:

| |                                            |   | Dec. 31, 2016 |  |   | Dec. 31, 2015 | 
| | ------------------------------------------ | - | ------------- |  | - | ------------- | 
| | Current service
      cost1                | $ | 2,579         |  | $ | 4,091         | 
| | Net
      interest cost                    |   | 3,367         |  |   | 5,465         | 
| |                                            |   |               |  |   |               | 
| | Components recognized in income statements | $ | 5,946         |  | $ | 9,556         | 

1 Includes remeasurement of
other long term employee benefits

| |                                                                                |   | Dec. 31, 2016 |   |   | Dec. 31, 2015 |  
| | ------------------------------------------------------------------------------ | - | ------------- | - | - | ------------- | -
| | Remeasurement on the net
      defined benefit liability:                      |   |               |   |   |               |  
| | Actuarial (gains)/losses arising from changes
      in demographic assumptions | $ | -             |   | $ | (52,089       | )
| | Actuarial (gains)/losses
      arising from changes in financial assumptions   |   | 2,712         |   |   | (622          | )
| | Actuarial gains arising from changes experience adjustments                    |   | (160          | ) |   | (2,195        | )
| |                                                                                |   |               |   |   |               |  
| | Components recognized in statements of comprehensive
      income              | $ | 2,552         |   | $ | (54,906       | )
| |                                                                                |   |               |   |   |               |  
| |                                                                                |   |               |   |   |               |  
| | Total other employee future benefit cost                                       | $ | 8,498         |   | $ | (45,350       | )

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.

60

---

|HUDBAY MINERALS INC.                                      
|----------------------------------------------------------
|Notes to Consolidated Financial Statements                
|(in thousands of US dollars, except where otherwise noted)
|Years ended
      December 31, 2016 and 2015              

2016
    
    
    2015Defined benefit cost:Discount
      rate
    
    4.19
      %
    
    
    4.09
      **%**Initial
      weighted average health care trend rate
    
    6.28
      **%**
    
    
    6.83
      **%**Ultimate
      weighted average health care trend rate
    
    4.00
      **%**
    
    
    4.00
      **%**Average longevity at
      retirement age for current pensioners (years)1:Males
    
    21.6
      **%**
    
    
    21.5Females
    
    24.0 **%**
    
    
    24.0


2016
    
    
    2015Defined benefit
      obligation:Discount
      rate
    
    4.03
      **%**
    
    
    4.19
      **%**Initial
      weighted average health care trend rate
    
    6.13
      **%**
    
    
    6.28
      **%**Ultimate
      weighted average health care trend rate
    
    4.00
      **%**
    
    
    4.00
      **%**Average
      longevity at retirement age for current pensioners (years):Males
    
    21.6
    
    
    21.6Females
    
    24.1
    
    
    24.0Average longevity at
      retirement age for current employees (future pensioners) (years):Males
    
    23.0
    
    
    22.9Females
    
    25.3
    
    
    25.2


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 $7,190 (increase by
      $8,208).                          
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | - | If the health care cost assumption increases (decreases)
      by 1%, the defined benefit obligation would increase by $16,939 (decrease
      by $13,257).                
| | - | If the life expectancy increases (decreases) by one year
      for both men and women, the defined benefit obligations would increase by
      $3,237 (decrease by $3,217).

61

---

|HUDBAY MINERALS INC.                                      
|----------------------------------------------------------
|Notes to Consolidated Financial Statements                
|(in thousands of US dollars, except where otherwise noted)
|Years ended
      December 31, 2016 and 2015              

The average duration of the non pension
post employment obligation at December 31, 2016 is 18.1 year (2015: 18.1 years).
This number can be broken down as follows:

| | - | Active members: 22.1 years (2015: 22.1 years)  
| | - | -----------------------------------------------
| | - | Inactive members: 12.7 years (2015: 12.8 years)

|23. | Income and mining
taxes
|--- | -----------------------

| | (a) | Tax expense (recovery):
| | --- | -----------------------

The tax expense (recovery) is
applicable as follows:

| |                                                                                 |   | Year ended   |  
| | ------------------------------------------------------------------------------- | - | ------------ | -
| |                                                                                 |   | December 31, |  
| |                                                                                 |   | 2016         |  
| | Current:                                                                        |   |              |  
| | Income taxes                                                                    | $ | 7,000        |  
| | Mining
      taxes                                                              |   | 10,280       |  
| | Adjustments in respect of prior years                                           |   | -            |  
| |                                                                                 |   | 17,280       |  
| | Deferred:                                                                       |   |              |  
| | Income taxes - origination
      and reversal of temporary differences          |   | 20,954       |  
| | Canadian mining
      taxes - origination and reversal of temporary differences |   | 3,739        |  
| | Peruvian mining tax -
      origination and reversal of temporary difference    |   | (1,441       | )
| | Adjustments in respect of prior years                                           |   | 266          |  
| |                                                                                 |   | 23,518       |  
| |                                                                                 |   |              |  
| |                                                                                 | $ | 40,798       |  

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:
| | --- | --------------------------------------

| |                                              |   | Dec. 31,
      2016 |   |   | Dec. 31, 2015 |  
| | -------------------------------------------- | - | ------------------- | - | - | ------------- | -
| | Deferred income tax asset                    | $ | 79,483              |   | $ | 40,670        |  
| |                                              |   |                     |   |   |               |  
| | Deferred income tax liability                |   | (338,330            | ) |   | (280,432      | )
| | Deferred mining tax liability
      - Canada |   | (4,706              | ) |   | (775          | )
| | Deferred mining tax liability - Peru         |   | (11,880             | ) |   | (13,322       | )
| |                                              |   | (354,916            | ) |   | (294,529      | )
| |                                              |   |                     |   |   |               |  
| | Net deferred tax liability balance           | $ | (275,433            | ) | $ | (253,859      | )

62

---

|HUDBAY MINERALS INC.                                      
|----------------------------------------------------------
|Notes to Consolidated Financial Statements                
|(in thousands of US dollars, except where otherwise noted)
|Years ended
      December 31, 2016 and 2015              

| | (c) | Changes in deferred tax assets and
    liabilities:
| | --- | ---------------------------------------------------

| |                                                               |   | Year ended    |   |   | Year ended    |  
| | ------------------------------------------------------------- | - | ------------- | - | - | ------------- | -
| |                                                               |   | Dec. 31, 2016 |   |   | Dec. 31, 2015 |  
| | Net deferred tax liability
      balance, beginning of period | $ | (253,859      | ) | $ | (339,290      | )
| | Deferred tax (expense) recovery                               |   | (23,518       | ) |   | 83,513        |  
| | OCI transactions                                              |   | 2,198         |   |   | (1,053        | )
| | Foreign currency translation on the deferred tax liability    |   | (254          | ) |   | 2,971         |  
| |                                                               |   |               |   |   |               |  
| | Net deferred tax liability balance, end of year               | $ | (275,433      | ) | $ | (253,859      | )

| | (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, 2016 and 2015 is as follows:

| |                                                                             |   | Year ended   |  
| | --------------------------------------------------------------------------- | - | ------------ | -
| |                                                                             |   | December 31, |  
| |                                                                             |   | 2016         |  
| | Statutory tax rate                                                          |   | 27.00%       |  
| |                                                                             |   |              |  
| | Tax expense (recovery) from
      continuing operations at statutory rate   | $ | 1,513        |  
| | Effect of:                                                                  |   |              |  
| | Deductions related to mining taxes                                          |   | (3,223       | )
| | Adjusted income taxes                                                       |   | (1,710       | )
| | Mining tax expense (recovery)                                               |   | 12,771       |  
| |                                                                             |   | 11,061       |  
| | Temporary income tax
      differences not recognized                       |   | 8,598        |  
| | Permanent differences related to:                                           |   |              |  
| | Capital
      items                                                         |   | 401          |  
| | Other income tax
      permanent differences                                |   | 262          |  
| | Impact of Manitoba
      remeasurement on decommissioning liability         |   | 13,803       |  
| | Impact of statutory tax rate outside Peruvian
      Tax Stability agreement |   | 7,960        |  
| | Impact related to differences
      in tax rates in foreign operations      |   | 2,250        |  
| | Impact related to tax assessments and tax
      return amendments           |   | (104         | )
| | Foreign exchange on non-monetary items                                      |   | (3,433       | )
| |                                                                             |   |              |  
| | Tax expense (recovery)                                                      | $ | 40,798       |  

63

---

|HUDBAY MINERALS INC.                                      
|----------------------------------------------------------
|Notes to Consolidated Financial Statements                
|(in thousands of US dollars, except where otherwise noted)
|Years ended
      December 31, 2016 and 2015              

| | (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, 2016 and 2015 are as follows:

| |                                                                 |   | Balance sheet |   |   | Income Statement |  
| | --------------------------------------------------------------- | - | ------------- | - | - | ---------------- | -
| |                                                                 |   |               |   |   |                  |  
| |                                                                 |   | Dec. 31,      |   |   | Dec. 31,         |  
| |                                                                 |   | 2016          |   |   | 2015             |  
| | Deferred income tax asset
      (liability)/ expense (recovery) |   |               |   |   |                  |  
| | Property, plant and equipment                                   | $ | 1,163         |   | $ | 908              |  
| | Pension obligation                                              |   | 942           |   |   | 727              |  
| | Other employee benefits                                         |   | 2,972         |   |   | 1,501            |  
| | Non-capital losses                                              |   | 59,034        |   |   | 34,936           |  
| | Share issue and debt costs                                      |   | 16,319        |   |   | 1,461            |  
| | Other                                                           |   | (947          | ) |   | 1,137            |  
| | Deferred income tax asset / (recovery) expense                  |   | 79,483        |   |   | 40,670           |  
| | Deferred income tax liability
      (asset)/ expense (recovery) |   |               |   |   |                  |  
| | Property, plant and equipment                                   |   | 417,060       |   |   | 394,250          |  
| | Pension obligation                                              |   | (12,150       | ) |   | (14,508          | )
| | Other employee benefits                                         |   | (14,806       | ) |   | (12,695          | )
| | Asset retirement obligations                                    |   | (11,357       | ) |   | (16,058          | )
| | Non-capital losses                                              |   | (46,500       | ) |   | (68,067          | )
| | Other                                                           |   | 6,083         |   |   | (2,490           | )
| | Deferred income tax liability/ expense (recovery)               |   | 338,330       |   |   | 280,432          |  
| | Deferred income tax liability/ expense
      (recovery)         | $ | (258,847      | ) | $ | (239,762         | )

The above reconciling items are
disclosed at the tax rates that apply in the jurisdiction where they have
arisen.

64

---

|HUDBAY MINERALS INC.                                      
|----------------------------------------------------------
|Notes to Consolidated Financial Statements                
|(in thousands of US dollars, except where otherwise noted)
|Years ended
      December 31, 2016 and 2015              

| | (f) | Income tax temporary differences - not
      recognized:
| | --- | --------------------------------------------------------

The Group has not recognized a
deferred tax asset in respect of the following deductible income tax temporary
differences:

| |                                      |   | Dec. 31, |  |   | Dec. 31, | 
| | ------------------------------------ | - | -------- |  | - | -------- | 
| |                                      |   | 2016     |  |   | 2015     | 
| | Property, plant and equipment        | $ | 16,690   |  | $ | 71,212   | 
| | Capital losses                       |   | 109,670  |  |   | 133,832  | 
| | Other employee benefits              |   | 52,093   |  |   | 51,984   | 
| | Asset retirement obligations         |   | 135,481  |  |   | 44,728   | 
| | Non-capital losses                   |   | 99,737   |  |   | 95,186   | 
| | Other                                |   | -        |  |   | 3,540    | 
| |                                      |   |          |  |   |          | 
| | Temporary differences not recognized | $ | 413,671  |  | $ | 400,482  | 

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 2016 and expire between 2026 and 2036. The Group
incurred United States net operating losses between 2004 and 2016 which have a
twenty year carry forward period. Peruvian net operating losses were incurred
from 2013 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, 2016 and December 31, 2015 are as
follows:

| |                               |   | Dec. 31, |   |   | Dec. 31, |  
| | ----------------------------- | - | -------- | - | - | -------- | -
| | Canada                        |   | 2016     |   |   | 2015     |  
| |                               |   |          |   |   |          |  
| | Property, plant and equipment | $ | (4,706   | ) | $ | (775     | )
| |                               |   |          |   |   |          |  
| |                               |   | Dec. 31, |   |   | Dec. 31, |  
| | Peru                          |   | 2016     |   |   | 2015     |  
| |                               |   |          |   |   |          |  
| | Property, plant and equipment | $ | (11,880  | ) | $ | (13,322  | )

For the year ended December 31, 2016,
the Group had unrecognized deferred mining tax assets of approximately $7,610
(December 31, 2015 - $5,641)

| | (h) | Unrecognized taxable temporary differences associated
      with investments:
| | --- | -----------------------------------------------------------------------------

There are no taxable temporary
differences associated with investments in subsidiaries, associates and joint
ventures, for which a deferred tax liability has not been recognized.

| | (i) | Taxes receivable/payable:
| | --- | -------------------------

The timing of payments results in
significant variances in period-to-period comparisons of the tax receivable and
tax payable balances.

65

---

|HUDBAY MINERALS INC.                                      
|----------------------------------------------------------
|Notes to Consolidated Financial Statements                
|(in thousands of US dollars, except where otherwise noted)
|Years ended
      December 31, 2016 and 2015              

| | (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.

|24. | 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    |  |   | Year ended    |  
| | ----------------------------- |  | ------------- |  | - | ------------- | -
| |                               |  | Dec. 31, 2016 |  |   | Dec. 31, 2015 |  
| |                               |  | Common        |  |   |               |  
| |                               |  | shares        |  |   | Amount        |  
| | Balance, beginning of year    |  | 235,231,688   |  | $ | 1,576,600     |  
| | Exercise of stock options     |  | -             |  |   | -             |  
| | Equity issuance               |  | 2,039,500     |  |   | 11,814        |  
| | Share issue costs, net of tax |  | -             |  |   | (95           | )
| |                               |  |               |  |   |               |  
| | Balance, end of year          |  | 237,271,188   |  | $ | 1,588,319     |  

During the year, the Company issued
1,000,000 Hudbay common shares for net proceeds of $4,958 in connection with the
vesting of restricted share units. On December 12, 2016 the Company issued
1,039,500 Hudbay common shares and 561,000 Hudbay warrants for net proceeds of
$6,761 upon the exercise of 3,300,000 Augusta warrants which were assumed as
part of the acquisition of Hudbay Arizona and which entitled the holder to
acquire 0.315 of a Hudbay common share and 0.17 of a Hudbay warrant for each
Augusta warrant (note 28e).

During the year, the Company paid two
semi-annual dividends of C$0.01 per share each. The Company paid $1,773 and
$1,794 on March 31, 2016 and September 30, 2016 to shareholders of record as of
March 11, 2016 and September 9, 2016, respectively.

In 2015, the Company paid $1,842 and
$1,762 on March 31, 2015 and September 30, 2015 to shareholders of record as of
March 13, 2015 and September 11, 2015, respectively.

The Company declared a semi-annual
dividend of C$0.01 per share on February 22, 2017. The dividend will be paid on
March 31, 2017 to shareholders of record as of March 10, 2017 and is expected to
total C$2,373.

66

---

|HUDBAY MINERALS INC.                                      
|----------------------------------------------------------
|Notes to Consolidated Financial Statements                
|(in thousands of US dollars, except where otherwise noted)
|Years ended
      December 31, 2016 and 2015              

|25. | Share-based payments
|--- | --------------------

| | (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, 2016, the carrying
amount and the intrinsic value of the outstanding liability related to the DSU
plan was $3,933 (December 31, 2015 - $2,803) (note 20). The following table
outlines information related to DSUs granted, expenses recognized and payments
made during the year.

| |                                                                     |   | Year ended    | 
| | ------------------------------------------------------------------- | - | ------------- | 
| |                                                                     |   | Dec. 31, 2016 | 
| | Granted during the year:                                            |   |               | 
| | Number of units                                                     |   | 231,867       | 
| | Weighted
      average price (C$/unit)                              | $ | 5.81          | 
| | Expenses (recovery) recognized during the
      year1(notes 7c, 20) | $ | 2,111         | 
| | Payments made during the year (note 20)                             | $ | 1,078         | 

1This expense (recovery)
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.

67

---

|HUDBAY MINERALS INC.                                      
|----------------------------------------------------------
|Notes to Consolidated Financial Statements                
|(in thousands of US dollars, except where otherwise noted)
|Years ended
      December 31, 2016 and 2015              

At December 31, 2016, the carrying
amount of the outstanding liability related to the RSU plan was $11,052
(December 31, 2015 - $4,388) (note 20). The following table outlines information
related to RSUs granted, expenses recognized and payments made in the year.

| |                                                  |   | Year ended    |  
| | ------------------------------------------------ | - | ------------- | -
| |                                                  |   | Dec. 31, 2016 |  
| | Number of units, beginning of
      year         |   | 1,943,507     |  
| | Number of units granted
      during the year    |   | 2,576,957     |  
| | Credits
      for dividends                      |   | 14,776        |  
| | Number of units forfeited
      during the year  |   | (133,329      | )
| | Number of units vested 1                         |   | (909,503      | )
| |                                                  |   |               |  
| | Number of units, end of year                     |   | 3,492,408     |  
| |                                                  |   |               |  
| | Weighted average price -
      granted (C$/unit) | $ | 4.01          |  
| | Expenses recognized during the year2(note 7c)    | $ | 7,776         |  
| | Payments made during the year (note 20)          | $ | 2,736         |  

1Includes 453,277 units
that have vested; however, are unreleased and unpaid as of December 31,
2016.2This 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. Options granted under the amended Plan have a maximum term of five
years and become exercisable as follows: the first 33 1/3% are exercisable after
one year, the next 33 1/3% are exercisable after two years, and the last 33 1/3%
are exercisable after three years. Except in specified circumstances, options
are not assignable and terminate upon, or within a specified time following, the
optionee ceasing to be employed by or associated with the Group. The Plan
further provides that the price at which common shares may be issued under the
Plan cannot be less than the market price of the common shares on the last
trading date before the relevant options are approved by the Board.

Prior to the May 2008 amendment, the
Plan approved in June 2005 allowed the Group to grant options up to 10% (to a
maximum of 8 million issued outstanding options) of the issued and outstanding
common shares of the Group to employees, officers, and directors of the Group
for a maximum term of ten years. Of the common shares covered by the stock
option plan, the first 33 1/3% were exercisable immediately, the next 33 1/3%
were exercisable after one year, and the last 33 1/3% were exercisable after two
years.

The Boards current policy is to not
make share option grants to our executives and directors. No options were
granted under the Plan during the years ended December 31, 2016 and December 31,
2015, and none have been granted since 2010.

The Group estimates expected life of
options and expected volatility based on historical data, which may differ from
actual outcomes.

68

---

|HUDBAY MINERALS INC.                                      
|----------------------------------------------------------
|Notes to Consolidated Financial Statements                
|(in thousands of US dollars, except where otherwise noted)
|Years ended
      December 31, 2016 and 2015              

| |                            |  | Year ended    |   |   | Year ended    | 
| | -------------------------- |  | ------------- | - | - | ------------- | 
| |                            |  | Dec. 31, 2016 |   |   | Dec. 31, 2015 | 
| |                            |  | Number        |   |   | Weighted      | 
| |                            |  | of shares     |   |   | average       | 
| |                            |  | subject       |   |   | exercise      | 
| |                            |  | to option     |   |   | price         | 
| |                            |  |               |   |   | C$            | 
| | Balance, beginning of year |  | 1,904,185     |   | $ | 17.57         | 
| | Exercised                  |  | -             |   |   | -             | 
| | Forfeited                  |  | (125,677      | ) |   | 17.52         | 
| | Expired                    |  | (308,131      | ) |   | 9.70          | 
| |                            |  |               |   |   |               | 
| | Balance, end of year       |  | 1,470,377     |   | $ | 19.24         | 

For stock options exercised during
2015, the weighted average share price at the exercise date was C$11.29.

The following table summarizes the
options outstanding:

Dec. 31, 2016Weighted-
    
    
    Weighted-
    
    
    
    
    
    Weighted-average
    
    
    average
    
    
    Number of
    
    
    averageRange of
    
    
    Number of
    
    
    remaining
    
    
    exercise
    
    
    options
    
    
    exerciseexercise prices
    
    
    options
    
    
    contractual life
    
    
    price
    
    
    exercisable
    
    
    priceC$
    
    
    outstanding
    
    
    (years)
    
    
    C$
    
    
    
    
    
    C$$
    15.86
      - 18.33
    
    
    543,354
    
    
    1.2
    
    $
    15.86
    
    
    543,354
    
    $
    15.8618.34 -
      21.28
    
    
    757,023
    
    
    0.2
    
    
    20.80
    
    
    757,023
    
    
    20.8021.29
      - 21.98
    
    
    10,000
    
    
    0.1
    
    
    21.75
    
    
    10,000
    
    
    21.7521.99 -
      22.97
    
    
    60,000
    
    
    0.9
    
    
    22.20
    
    
    60,000
    
    
    22.2022.98 - 23.74
    
    
    100,000
    
    
    0.6
    
    
    23.74
    
    
    100,000
    
    
    23.74$
    15.86 - 23.74
    
    
    1,470,377
    
    
    0.6
    
    $
    19.24
    
    
    1,470,377
    
    $
    19.24


Dec. 31, 2015Weighted-
    
    
    Weighted-
    
    
    Number of
    
    
    Weighted-average
    
    
    average
    
    
    options
    
    
    averageRange of exercise
    
    
    Number of
    
    
    remaining
    
    
    exercise price
    
    
    exercisable
    
    
    exercise priceprices
    
    
    options
    
    
    contractual lifeC$
    
    
    outstanding
    
    
    (years)
    
    
    C$
    
    
    
    
    
    C$$
    9.70 - 12.78
    
    
    320,465
    
    
    0.2
    
    $
    9.70
    
    
    320,465
    
    $
    9.7012.79 - 18.33
    
    
    603,359
    
    
    2.2
    
    
    15.86
    
    
    603,359
    
    
    15.8618.34 - 21.28
    
    
    810,361
    
    
    1.2
    
    
    20.80
    
    
    810,361
    
    
    20.8021.29 - 22.97
    
    
    70,000
    
    
    1.8
    
    
    22.14
    
    
    70,000
    
    
    22.1422.98 - 23.74
    
    
    100,000
    
    
    1.6
    
    
    23.74
    
    
    100,000
    
    
    23.74$
    9.70 - 23.74
    
    
    1,904,185
    
    
    1.4
    
    $
    17.57
    
    
    1,904,185
    
    $
    17.57


69

---

|HUDBAY MINERALS INC.                                      
|----------------------------------------------------------
|Notes to Consolidated Financial Statements                
|(in thousands of US dollars, except where otherwise noted)
|Years ended
      December 31, 2016 and 2015              

|26. | Loss per share data
|--- | -------------------

| |                                                                  |  | Year ended   | 
| | ---------------------------------------------------------------- |  | ------------ | 
| |                                                                  |  | December 31, | 
| |                                                                  |  | 2016         | 
| |                                                                  |  |              | 
| | Basic & diluted weighted average common shares
      outstanding |  | 235,807,509  | 

For periods where Hudbay records a
loss, the Group calculates diluted loss per share using the basic weighted
average number of shares. If the diluted weighted average number of shares was
used, the result would be a reduction in the loss, which would be anti-dilutive.
Consequently, for the year ended December 31, 2016, the Group calculated diluted
loss per share using 235,807,509 common shares. For the year ended December 31,
2015, the Group calculated diluted loss per share using 234,675,080 common
shares.

|27. | 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, 2016 was $1,215,674 (December 31, 2015  $1,205,005).

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 $146,864 as at December 31, 2016 (2015 - $53,852),
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 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 18). As part of the Groups capital management activities, the Group
monitors interest coverage ratios and leverage ratios.

70

---

|HUDBAY MINERALS INC.                                      
|----------------------------------------------------------
|Notes to Consolidated Financial Statements                
|(in thousands of US dollars, except where otherwise noted)
|Years ended
      December 31, 2016 and 2015              

|28. | Financial instruments
|--- | ---------------------

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

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

| |                                                           |   | Dec. 31,
      2016 |   |   | Dec. 31, 2015 |  
| | --------------------------------------------------------- | - | ------------------- | - | - | ------------- | -
| |                                                           |   | Fair                |   |   | Carrying      |  
| | Recurring measurements                                    |   | Value               |   |   | Value         |  
| | Loans and receivables                                     |   |                     |   |   |               |  
| | Cash and cash
      equivalents 1                         | $ | 146,864             |   | $ | 146,864       |  
| | Restricted cash1                                          |   | 17,148              |   |   | 17,148        |  
| | Trade and other
      receivables1,2                      |   | 116,445             |   |   | 116,445       |  
| | Fair value through profit or
      loss                   |   |                     |   |   |               |  
| | Trade and other
      receivables - embedded derivatives3 |   | 12,538              |   |   | 12,538        |  
| | Non-hedge derivative assets3                              |   | 3,397               |   |   | 3,397         |  
| | Prepayment option
      - embedded derivative7            |   | 4,430               |   |   | 4,430         |  
| | Investments at FVTPL4                                     |   | 192                 |   |   | 192           |  
| | Available-for-sale investments4                           |   | 13,508              |   |   | 13,508        |  
| | Total financial assets                                    |   | 314,522             |   |   | 314,522       |  
| | Financial liabilities at amortized cost                   |   |                     |   |   |               |  
| | Trade and other payables1, 2                              |   | 163,027             |   |   | 163,027       |  
| | Finance leases                                            |   | 12,932              |   |   | 12,932        |  
| | Other financial liabilities5                              |   | 17,231              |   |   | 22,998        |  
| | Senior unsecured
      notes6                             |   | 1,040,178           |   |   | 991,004       |  
| | Equipment finance facility8                               |   | 50,267              |   |   | 50,267        |  
| | Senior secured
      revolving credit facilities8         |   | 195,323             |   |   | 195,323       |  
| | Fair value through profit or
      loss                   |   |                     |   |   |               |  
| | Trade and other
      payables - embedded derivatives3    |   | 86                  |   |   | 86            |  
| | Warrant liabilities3                                      |   | 7,588               |   |   | 7,588         |  
| | Option
      liabilities3                                 |   | 570                 |   |   | 570           |  
| | Non-hedge derivative
      liabilities3                   |   | 10,681              |   |   | 10,681        |  
| | Total financial liabilities                               |   | 1,497,883           |   |   | 1,454,476     |  
| | Net financial liability                                   | $ | (1,183,361          | ) | $ | (1,139,954    | )

| | 1 | Cash and cash equivalents, restricted cash, trade and
      other receivables and trade and other payables are recorded at carrying
      value, which approximates fair value due to their short-term nature and
      generally negligible credit losses.                                                                                                                                                                                                                                                  
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 2 | Excludes embedded provisional pricing derivatives, as
      well as tax and other statutory amounts.                                                                                                                                                                                                                                                                                                                                                                                                         
| | 3 | Derivatives and embedded provisional pricing derivatives
      are carried at their fair value, which is determined based on internal
      valuation models that reflect observable forward market commodity prices,
      currency exchange rates, and discount factors based on market US dollar
      interest rates adjusted for credit risk. For the warrant and option
      liabilities, fair value is determined based on quoted market closing price
      or the Black-Scholes model.             
| | 4 | Available-for-sale investments are carried at their fair
      value, which is determined using quoted market bid prices in active
      markets for listed shares and determined using valuation models for shares
      of private companies. Investments at FVTPL consist of warrants to purchase
      listed shares, which are carried at fair value as determined using
      available market closing prices.                                                                                         
| | 5 | These financial liabilities relate to agreements with
      communities near the Constancia operation in Peru which allow Hudbay to
      extract minerals over the useful life of the Constancia operation, carry
      out exploration and evaluation activities in the area and provide Hudbay
      with community support to operate in the region. Fair values have been
      determined using a discounted cash flow analysis based on expected cash
      flows and a credit adjusted discount rate.
| | 6 | Fair value of the senior unsecured notes (note 18) has
      been determined using the quoted market price at the period end.                                                                                                                                                                                                                                                                                                                                                                                
| | 7 | Fair value of the prepayment option embedded derivative
      related to the long-term debt has been determined using a binomial
      tree/lattice approach based on the Hull-White single factor interest rate
      term structure model.                                                                                                                                                                                                                                                                 
| | 8 | The carrying value of the facilities approximates the
      fair value as the facilities are based on floating interest
  rates.                                                                                                                                                                                                                                                                                                                                                                             

71

---

|HUDBAY MINERALS INC.                                      
|----------------------------------------------------------
|Notes to Consolidated Financial Statements                
|(in thousands of US dollars, except where otherwise noted)
|Years ended
      December 31, 2016 and 2015              

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, 2016                                  |   | Level 1 |  |   | Level 2  |   |       | Level 3 |  |   | Total   |  
| | -------------------------------------------------- | - | ------- |  | - | -------- | - | ----- | ------- |  | - | ------- | -
| | Financial assets measured at fair
      value      |   |         |  |   |          |   |       |         |  |   |         |  
| | Financial assets at FVTPL:                         |   |         |  |   |          |   |       |         |  |   |         |  
| | Embedded derivatives                               | $ | -       |  | $ | 12,538   |   | $     | -       |  | $ | 12,538  |  
| | Non-hedge
      derivatives                        |   | -       |  |   | 3,397    |   |       | -       |  |   | 3,397   |  
| | Investments at FVTPL                               |   | -       |  |   | 192      |   |       | -       |  |   | 192     |  
| | Prepayment option embedded
      derivative        |   | -       |  |   | 4,430    |   |       | -       |  |   | 4,430   |  
| | Available-for-sale investments                     |   | 12,018  |  |   | -        |   |       | 1,490   |  |   | 13,508  |  
| |                                                    |   |         |  |   |          |   |       |         |  |   |         |  
| |                                                    | $ | 12,018  |  | $ | 20,557   |   | $     | 1,490   |  | $ | 34,065  |  
| | Financial liabilities
      measured at fair value |   |         |  |   |          |   |       |         |  |   |         |  
| | Financial liabilities at FVTPL:                    |   |         |  |   |          |   |       |         |  |   |         |  
| | Embedded
      derivatives                         | $ | -       |  | $ | 86       |   | $     | -       |  | $ | 86      |  
| | Non-hedge derivatives                              |   | -       |  |   | 10,681   |   |       | -       |  |   | 10,681  |  
| | Option
      liability                             |   | -       |  |   | 570      |   |       | -       |  |   | 570     |  
| | Warrant liabilities                                |   | 7,588   |  |   | -        |   |       | -       |  |   | 7,588   |  
| |                                                    |   |         |  |   |          |   |       |         |  |   |         |  
| |                                                    | $ | 7,588   |  | $ | 11,337   |   | $     | -       |  | $ | 18,925  |  
| |                                                    |   |         |  |   |          |   |       |         |  |   |         |  
| | December 31, 2015                                  |   | Level 1 |  |   | Level 2  |   |       | Level 3 |  |   | Total   |  
| | Financial assets measured at
      fair value      |   |         |  |   |          |   |       |         |  |   |         |  
| | Financial assets at FVTPL:                         |   |         |  |   |          |   |       |         |  |   |         |  
| | Embedded
      derivatives                         | $ | -       |  | $ | (13,653) |   | **$** | -       |  | $ | (13,653 | )
| | Non-hedge derivatives                              |   | -       |  |   | 16,512   |   |       | -       |  |   | 16,512  |  
| | Investments at FVTPL                               |   | -       |  |   | 59       |   |       | -       |  |   | 59      |  
| | Available-for-sale investments                     |   | 7,761   |  |   | -        |   |       | 1,445   |  |   | 9,206   |  
| |                                                    |   |         |  |   |          |   |       |         |  |   |         |  
| |                                                    | $ | 7,761   |  | $ | 2,918    |   | $     | 1,445   |  | $ | 12,124  |  
| | Financial liabilities
      measured at fair value |   |         |  |   |          |   |       |         |  |   |         |  
| | Financial liabilities at FVTPL:                    |   |         |  |   |          |   |       |         |  |   |         |  
| | Embedded
      derivatives                         | $ | -       |  | $ | (118     | ) | $     | -       |  | $ | (118    | )
| | Non-hedge derivatives                              |   | -       |  |   | 4,426    |   |       | -       |  |   | 4,426   |  
| | Option
      liability                             |   | -       |  |   | 653      |   |       | -       |  |   | 653     |  
| | Warrant liabilities                                |   | 5,047   |  |   | -        |   |       | -       |  |   | 5,047   |  
| |                                                    |   |         |  |   |          |   |       |         |  |   |         |  
| |                                                    | $ | 5,047   |  | $ | 4,961    |   | $     | -       |  | $ | 10,008  |  

72

---

|HUDBAY MINERALS INC.                                      
|----------------------------------------------------------
|Notes to Consolidated Financial Statements                
|(in thousands of US dollars, except where otherwise noted)
|Years ended
      December 31, 2016 and 2015              

The Group's Level 3 investment relates
to a minority investment in an unlisted junior mining company. As no observable
inputs exist, the Group measures the Level 3 investment at the cost of the
investment. The Group monitors business developments and the financial position
of the investee to evaluate whether the fair value of the investment has changed
significantly. Factors that could result in a significantly lower fair value
measurement include poor exploration results or inadequate liquidity to continue
as a going concern, among other factors. Factors that would result in a
significantly higher fair value measurement include positive exploration
results, among other factors.

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, 2016, 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, 2016, the Group
had 41,000 tonnes of copper fixed for floating swaps outstanding at an effective
average price of $2.42/lb, which settle across February to June 2017. At
December 31, 2015, the Group had 77,111 tonnes of copper fixed for floating
swaps outstanding at an average fixed receivable price $2.37/lb, which settled
across January 2016 through March 2016. The aggregate fair value of the
transactions at December 31, 2016 was a liability position of $8,657 (December
31, 2015 - an asset position of $16,436).

Non-hedge derivative gold and
silver contracts

From time to time, the Group enters
into gold and silver forward sales contracts to hedge the commodity price risk
associated with the future settlement of provisionally priced deliveries. At
December 31, 2016, the Group held no gold or silver forward sales contracts. At
December 31, 2015 the Group held 151,327 ounces of silver forward sales
contracts and prices ranged from $14.17 to $15.21. The aggregate fair value of
the transactions at December 31, 2015 was an asset position of $86.

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, 2016, the Group held contracts for forward zinc purchased of 2,644
tonnes (December 31, 2015  16,438 tonnes) that related to forward customer
sales of zinc. Prices range from $1,514 to $2,783 per tonne (December 31, 2015 
$1,497 to $2,343) and settlement dates extend to November 2017. The aggregate
fair value of the transactions at December 31, 2016 was a net asset position of
$1,373 (December 31, 2015  a net liability position of $4,386).

73

---

|HUDBAY MINERALS INC.                                      
|----------------------------------------------------------
|Notes to Consolidated Financial Statements                
|(in thousands of US dollars, except where otherwise noted)
|Years ended
      December 31, 2016 and 2015              

| | (c) | Embedded derivatives
| | --- | --------------------

Provisional pricing embedded
derivatives

The Group records embedded derivatives
related to provisional pricing in concentrate purchase, concentrate sale and
certain other sale contracts. Under the terms of these contracts, prices are
subject to final adjustment at the end of a future period after title transfers
based on quoted market prices during the quotation period specified in the
contract. The period between provisional pricing and final pricing is typically
up to three months.

Provisional pricing embedded
derivatives are presented in trade and other receivables when they relate to
sales contracts and in trade and other payables when they relate to purchase
contracts. At each reporting date, provisionally priced metals are
marked-to-market based on the forward market price for the quotation period
stipulated in the contract, with changes in fair value recognized in revenue for
sales contracts and in cost of sales for purchase concentrate contracts. Cash
flows related to provisional pricing embedded derivatives are classified in
operating activities.

As at December 31, 2016, the Groups
net position consisted of contracts awaiting final pricing for sales of 32,750
tonnes of copper (December 31, 2015  79,033 tonnes). In addition, at December
31, 2016, the Groups net position consisted of contracts awaiting final pricing
for sales of 13,827 ounces of gold and 116,912 ounces of silver (December 31,
2015  10,506 ounces of gold and 66,131 ounces of silver).

As at December 31, 2016, the Groups
provisionally priced copper, gold and silver sales subject to final settlement
were recorded at average prices of $2.51/lb (December 31, 2015  $2.14/lb),
$1,151/oz (December 31, 2015  $1,060/oz) and $15.96/oz (December 31, 2015 
$13.78/oz), respectively.

The aggregate fair value of the
embedded derivatives within the copper concentrate sales contracts at December
31, 2016, was an asset position of $12,538 (December 31, 2015  a liability
position of $13,653). The aggregate fair value of other embedded derivatives at
December 31, 2016, was a liability position of $86 (December 31, 2015  an asset
position of $118).

Prepayment option embedded
derivative

The senior unsecured notes (note 18)
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 7f). The fair value of the embedded
derivative at December 31, 2016 was an asset of $4,430 (December 31, 2015 -
$nil).

| | (d) | Restricted cash
| | --- | ---------------

Hudbay Peru has $68,581 in letters of
credit issued to support its reclamation obligations; these letters of credit
had previously been cash collateralized. During the year ended December 31,
2016, Hudbay Peru reissued these letters of credit under the Peru facility and
released the associated restricted cash, which in turn was utilized to repay
indebtedness under the senior secured revolving credit facilities.

The restricted cash balance primarily
relates to the Manitoba business unit which holds a cash-collateralized letter
of credit to support its pension obligations. As at December 31, 2016, the
restricted cash amount was $16,951 (December 31, 2015 - nil).

74

---

|HUDBAY MINERALS INC.                                      
|----------------------------------------------------------
|Notes to Consolidated Financial Statements                
|(in thousands of US dollars, except where otherwise noted)
|Years ended
      December 31, 2016 and 2015              

| | (e) | Warrants and option
liabilities
| | --- | -------------------------------

A total of 22,391,490 warrants were
issued as a result of the acquisition of Hudbay Arizona which entitle the holder
to acquire a common share of the Company at a price of C$15.00 per share on, but
not prior to, July 20, 2018. The Company, may, at its option, upon written
notice to the warrant holders, settle the exercise of warrants for the
in-the-money value, in cash, shares or a combination thereof.

The purchase price of the acquisition
of New Britannia Mine and Mill contained an option (European) that pays the
seller $5,000 if the price of gold is equal to or above $1,400/oz on May 4,
2018.

| | (f) | Financial risk management
| | --- | -------------------------

The Groups financial risk management
activities are governed by Board-approved policies addressing risk
identification, hedging authorization procedures and limits and reporting.
Hudbay's policy objective, when hedging activities are undertaken, is to reduce
the volatility of future profit and cash flow within the strategic and economic
goals of the Group. The Group from time to time employs derivative financial
instruments, including forward and option contracts, to manage risk originating
from exposures to commodity price risk, foreign exchange risk and interest rate
risk. Significant derivative transactions are approved by the Board of
Directors, and hedge accounting is applied when certain criteria have been met.
The Group does not use derivative financial instruments for trading or
speculation purposes.

The following is a discussion of the
Groups risk exposures.

| |  | (i) | Market risk
| |  | --- | -----------

Market risk is the risk that changes
in market prices, including foreign exchange rates, commodity prices and
interest rates will cause fluctuations in the fair value or future cash flows of
a financial instrument.

Foreign currency risk

The Groups primary exposure to
foreign currency risk arises from:

| | - | Translation of Canadian dollar denominated costs and, to
      a lesser extent, Peruvian Nuevo soles cost into US dollars. Substantially
      all of the Groups revenue are denominated in US dollars, while less than
      half of its costs are denominated in Canadian dollars. 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 Nuevo soles cash and cash equivalents, trade and other payables and
other financial liabilities.

75

---

|HUDBAY MINERALS INC.                                      
|----------------------------------------------------------
|Notes to Consolidated Financial Statements                
|(in thousands of US dollars, except where otherwise noted)
|Years ended
      December 31, 2016 and 2015              

As a result of the Companys change in
functional currency on July 1, 2015 to US dollars, the primary financial
instrument foreign currency exposure for the Corporate and other activities
segment has changed. The Corporate and other activities segments primary
financial instrument foreign currency exposure is now on Canadian denominated
cash and cash equivalents and trade and other payables.

The Groups exposure to foreign
currency risk was as follows based on notional financial instruments amounts
stated in US equivalent dollars:

| |                             |       | Dec. 31,
      2016 |   |       | Dec. 31, 2015 |   |   |         |  
| | --------------------------- | ----- | ------------------- | - | ----- | ------------- | - | - | ------- | -
| |                             |       | CAD1                |   |       | USD2          |   |   | PEN3    |  
| | Cash and cash equivalents   | **$** | 4,759               |   | $     | 8,121         |   | $ | 3,440   |  
| | Trade and other receivables |       | 720                 |   |       | 28,639        |   |   | 2,503   |  
| | Other financial assets      |       | 13,279              |   |       | -             |   |   | -       |  
| | Trade and other payables    |       | (20,014             | ) |       | (4,303        | ) |   | (17,145 | )
| | Other financial liabilities |       | (7,588              | ) |       | -             |   |   | (22,998 | )
| |                             | **$** | (8,844              | ) | **$** | 32,457        |   | $ | (34,200 | )

1HMI is exposed to foreign
currency risk on CAD.2The Manitoba segment is exposed to foreign
currency risk on USD. 3The 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, 2015 and does not reflect the overall effect
that changes in market variables would have on the Group's results of
operations.

| |                              |  |             |  |  | Would have changed          |  |  | Would have changed     | 
| | ---------------------------- |  | ----------- |  |  | --------------------------- |  |  | ---------------------- | 
| | December 31, 2016            |  | Change of:  |  |  | 2016 after-tax profit by:   |  |  | 2016 after-tax OCI by: | 
| | USD/CAD exchange
      rate1 |  | +
      10% |  |  | 3.9
      million           |  |  | **(1.2)** **million**  | 
| | USD/CAD exchange rate1       |  | - 10%       |  |  | **(4.9)**
      **million** |  |  | 1.5 million            | 
| | USD/PEN exchange
      rate2 |  | +
      10% |  |  | 2.0
      million           |  |  | -
      million        | 
| | USD/PEN exchange rate2       |  | - 10%       |  |  | **(2.5)** **million**       |  |  | - million              | 

| |                              |  |            |  |   | Would have changed        |  |   | Would have changed     | 
| | ---------------------------- |  | ---------- |  | - | ------------------------- |  | - | ---------------------- | 
| | December 31, 2015            |  | Change of: |  |   | 2015 after-tax profit by: |  |   | 2015 after-tax OCI by: | 
| | USD/CAD exchange
      rate1 |  | + 10%      |  | $ | 1.7
      million         |  | $ | (0.8)
      million    | 
| | USD/CAD exchange rate1       |  | - 10%      |  |   | (1.7) million             |  |   | 1.0 million            | 
| | USD/PEN exchange
      rate2 |  | + 10%      |  |   | 1.3 million               |  |   | - million              | 
| | USD/PEN exchange rate2       |  | - 10%      |  |   | (1.6) million             |  |   | - million              | 

1Effect on profit due to
foreign currency remeasurements of balances denominated in a currency different
from a Hudbay subsidiary's functional currency; effect on OCI due to
remeasurement of available-for-sale investments.2Effect 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.

76

---

|HUDBAY MINERALS INC.                                      
|----------------------------------------------------------
|Notes to Consolidated Financial Statements                
|(in thousands of US dollars, except where otherwise noted)
|Years ended
      December 31, 2016 and 2015              

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, 2016 and does not reflect the overall effect
that changes in market variables would have on the Groups results of
operations.

| |                             |  |               |  |   | Would have changed        |  |   | Would have changed     | 
| | --------------------------- |  | ------------- |  | - | ------------------------- |  | - | ---------------------- | 
| | December 31, 2016           |  | Change of:    |  |   | 2016 after-tax profit by: |  |   | 2016 after-tax OCI by: | 
| | Copper prices
      ($/lb)3 |  | +
      $0.30 |  | $ | **(4.8)** **million**     |  | $ | -
      million        | 
| | Copper prices ($/lb)3       |  | - $0.30       |  |   | 4.7 million               |  |   | - million              | 
| | Zinc prices
      ($/lb)4   |  | +
      $0.10 |  |   | 0.3
      million         |  |   | -
      million        | 
| | Zinc
      prices ($/lb)4   |  | - $0.10       |  |   | **(0.3)** **million**     |  |   | - million              | 

| |                             |  |            |  |   | Would have changed        |  |   | Would have changed     | 
| | --------------------------- |  | ---------- |  | - | ------------------------- |  | - | ---------------------- | 
| | December 31, 2015           |  | Change of: |  |   | 2015 after-tax profit by: |  |   | 2015 after-tax OCI by: | 
| | Copper prices
      ($/lb)3 |  | + $0.30    |  | $ | 1.5
      million         |  | $ | - million              | 
| | Copper prices ($/lb)3       |  | - $0.30    |  |   | (1.0) million             |  |   | - million              | 
| | Zinc prices
      ($/lb)4   |  | + $0.10    |  |   | 3.0 million               |  |   | - million              | 
| | Zinc
      prices ($/lb)4   |  | - $0.10    |  |   | (2.3) million             |  |   | - million              | 

3Effect on profit due to
embedded provisional pricing derivatives (note 28c) and copper fixed for
floating swaps (note28b). 4Effect on profit due to embedded
provisional pricing derivatives (note 28c) and non-hedge zinc derivatives (note
28b).

Share price risk

Hudbay is exposed to market risk from
share prices for the Groups investments in listed Canadian metals and mining
companies. These investments are made to foster strategic relationships, in
connection with joint venture agreements and for investment purposes. Management
monitors the value of these investments for the purposes of determining whether
to add or reduce the Groups positions.

The following sensitivity analysis for
share price risk relates solely to financial instruments and non financial
derivatives that were outstanding as at the year-end date; each sensitivity
calculation assumes all other variables are held constant. This analysis is
based on values as at December 31, 2016 and does not reflect the overall effect
that changes in market variables would have on the Groups finance expenses.

| |                   |  |            |  |   | Would have changed        |  |   | Would have changed     | 
| | ----------------- |  | ---------- |  | - | ------------------------- |  | - | ---------------------- | 
| | December 31, 2016 |  | Change of: |  |   | 2016 after-tax profit by: |  |   | 2016 after-tax OCI by: | 
| | Share prices5     |  | + 25%      |  | $ | -
      million           |  | $ | 4.5
      million      | 
| | Share prices5     |  | - 25%      |  |   | **(0.8)** **million**     |  |   | **(3.7)** **million**  | 

| |                   |  |            |  |   | Would have changed        |  |   | Would have changed     | 
| | ----------------- |  | ---------- |  | - | ------------------------- |  | - | ---------------------- | 
| | December 31, 2015 |  | Change of: |  |   | 2015 after-tax profit by: |  |   | 2015 after-tax OCI by: | 
| | Share prices5     |  | + 25%      |  | $ | - million                 |  | $ | 2.3
      million      | 
| | Share prices5     |  | - 25%      |  |   | (1.1) million             |  |   | (1.2) million          | 

5Effect on OCI due to
mark-to-market and effect on profit due to impairment on available-for-sale
investments in listed shares (note 13).

77

---

|HUDBAY MINERALS INC.                                      
|----------------------------------------------------------
|Notes to Consolidated Financial Statements                
|(in thousands of US dollars, except where otherwise noted)
|Years ended
      December 31, 2016 and 2015              

Interest rate risk

The group is exposed to cash flow
interest rate risk on its cash and cash equivalents, fair value interest rate
risk on its embedded derivative associated with its Notes, and interest rate
risk on its senior secured revolving credit facilities.

This analysis is based on values at
December 31, 2016 and does not reflect the overall effect that changes in market
variables would have on the groups finance expenses.

| |                   |  |               |  |   | Would have changed        |  |   | Would have changed     | 
| | ----------------- |  | ------------- |  | - | ------------------------- |  | - | ---------------------- | 
| | December 31, 2016 |  | Change of:    |  |   | 2016 after-tax profit by: |  |   | 2016 after-tax OCI by: | 
| | Interest rates    |  | +
      2.00% |  | $ | **(5.0)** **million**     |  | $ | -
      million        | 
| | Interest rates    |  | - 2.00%       |  |   | 0.7 million               |  |   | - million              | 

| |                   |  |            |  |   | Would have changed        |  |   | Would have changed     | 
| | ----------------- |  | ---------- |  | - | ------------------------- |  | - | ---------------------- | 
| | December 31, 2015 |  | Change of: |  |   | 2015 after-tax profit by: |  |   | 2015 after-tax OCI by: | 
| | Interest rates    |  | + 2.00%    |  | $ | (5.1)
      million       |  | $ | - million              | 
| | Interest rates    |  | - 2.00%    |  |   | 1.6 million               |  |   | - million              | 

At December 31, 2016 and 2015,the
effect of interest rate changes on the Group's cash equivalents would not have
resulted in a significant tax impact on profit.

Refer to note 9 for information about
the Groups cash and cash equivalents.

| | (ii) | Credit risk
| | ---- | -----------

Credit risk is the risk of financial
loss to the Group if a customer or counterparty to a financial instrument fails
to meet its obligations. The Groups maximum exposure to credit risk at the
reporting date is represented by the carrying amount, net of any impairment
losses recognized, of financial assets and non financial derivative assets
recorded on the consolidated balance sheets. Refer to note 28a.

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
87% of total cash and cash equivalents as at December 31, 2016 (2015  90%). The
Groups investment policy requires it to comply with a list of approved
investment, concentration and maturity limits, as well as credit quality. Credit
concentrations in the groups short term investments are monitored on an ongoing
basis.

Transactions involving derivatives are
with counterparties the Group believes to be creditworthy.

Management has a credit policy in
place that requires the Group to obtain credit insurance from an investment
grade credit insurance provider to mitigate exposure to credit risk in its
receivables. At December 31, 2016, approximately 79% of the Groups trade
receivables were insured or payable by letters of credit (2015 - 44% were
insured or payable by letters of credit). Insured receivables have a credit
insurance deductible of 10%. The deductible and any additional exposure to
credit risk is monitored and approved on an ongoing basis.

Five customers accounted for
approximately 79% of total trade receivables as at December 31, 2016 (2015  six
customers accounted for approximately 85%). Credit risk for these customers is
assessed as medium to low risk.

78

---

|HUDBAY MINERALS INC.                                      
|----------------------------------------------------------
|Notes to Consolidated Financial Statements                
|(in thousands of US dollars, except where otherwise noted)
|Years ended
      December 31, 2016 and 2015              

As at December 31, 2016, none of the
Groups trade receivables was aged more than 30 days (2015  nil).

| | (iii) | Liquidity risk
| | ----- | --------------

Liquidity risk is the risk that the
Group will not be able to meet its obligations associated with financial
liabilities. Hudbay's objective is to maintain sufficient liquid resources to
meet operational and investing requirements.

The following summarizes the
contractual undiscounted cash flows of the Groups non-derivative and derivative
financial liabilities, including any interest payments, by remaining contractual
maturity. The table includes all instruments held at the reporting date for
which payments had been contractually agreed at the reporting date. The
undiscounted amounts shown are gross amounts, unless the liabilities will be
settled net. Amounts in foreign currency are translated at the closing rate at
the reporting date. When a counterparty has a choice of when an amount is paid,
the liability is allocated to the earliest possible time period.

| |                                                                       |   |            |   |   |             |   |   |           |   |   |             |   |   |             |   |   |              |  
| | --------------------------------------------------------------------- | - | ---------- | - | - | ----------- | - | - | --------- | - | - | ----------- | - | - | ----------- | - | - | ------------ | -
| |                                                                       |   | Carrying   |   |   | Contractual |   |   | 12 months |   |   |             |   |   |             |   |   | Maturing in  |  
| | Dec. 31, 2016                                                         |   | amount     |   |   | cash flows  |   |   | or less   |   |   | 1 - 2 years |   |   | 2 - 5 years |   |   | over 5 years |  
| | Assets used to manage
      liquidity risk                            |   |            |   |   |             |   |   |           |   |   |             |   |   |             |   |   |              |  
| | Cash and cash equivalents                                             | $ | 146,864    |   | $ | 146,864     |   | $ | 146,864   |   | $ | -           |   | $ | -           |   | $ | -            |  
| | Trade and other receivables                                           |   | 116,445    |   |   | 116,445     |   |   | 96,221    |   |   | 1,543       |   |   | 18,681      |   |   | -            |  
| | Non-hedge derivative asset                                            |   | 3,397      |   |   | 3,397       |   |   | 3,397     |   |   | -           |   |   | -           |   |   | -            |  
| |                                                                       | $ | 266,706    |   | $ | 266,706     |   | $ | 246,482   |   | $ | 1,543       |   | $ | 18,681      |   | $ | -            |  
| | Non-derivative financial liabilities                                  |   |            |   |   |             |   |   |           |   |   |             |   |   |             |   |   |              |  
| | Trade and other payables,
      including embedded derivative         | $ | (163,113   | ) | $ | (163,113    | ) | $ | (163,113  | ) | $ | -           |   | $ | -           |   | $ | -            |  
| | Other financial liabilities                                           |   | (22,998    | ) |   | (35,392     | ) |   | (4,025    | ) |   | (3,303      | ) |   | (4,616      | ) |   | (23,448      | )
| | Long-term debt, including prepayment option embedded
      derivative |   | (1,232,164 | ) |   | (1,946,925  | ) |   | (105,278  | ) |   | (105,278    | ) |   | (544,957    | ) |   | (1,191,412   | )
| | Finance lease liabilities                                             |   | (12,932    | ) |   | (13,720     | ) |   | (3,508    | ) |   | (3,338      | ) |   | (6,874      | ) |   | -            |  
| |                                                                       | $ | (1,431,207 | ) | $ | (2,159,150  | ) | $ | (275,924  | ) | $ | (111,919)   |   | $ | (556,447    | ) | $ | (1,214,860   | )
| | Derivative financial liabilities                                      |   |            |   |   |             |   |   |           |   |   |             |   |   |             |   |   |              |  
| | Warrant liabilities                                                   | $ | (7,588     | ) | $ | (7,588      | ) | $ | -         |   | $ | -           |   | $ | (7,588      | ) | $ | -            |  
| | Gold option                                                           |   | (570       | ) |   | (570        | ) |   | -         |   |   | -           |   |   | (570        | ) |   | -            |  
| | Non-hedge derivative contracts                                        |   | (10,681    | ) |   | (10,681     | ) |   | (10,681   | ) |   | -           |   |   | -           |   |   | -            |  
| |                                                                       | $ | (18,839    | ) | $ | (18,839     | ) | $ | (10,681   | ) | $ | -           |   | $ | (8,158      | ) | $ | -            |  

79

---

|HUDBAY MINERALS INC.                                      
|----------------------------------------------------------
|Notes to Consolidated Financial Statements                
|(in thousands of US dollars, except where otherwise noted)
|Years ended
      December 31, 2016 and 2015              

| |                                                                       |   |            |   |   |             |   |   |              |   |   |             |   |   |             |   |   |           |  
| | --------------------------------------------------------------------- | - | ---------- | - | - | ----------- | - | - | ------------ | - | - | ----------- | - | - | ----------- | - | - | --------- | -
| |                                                                       |   |            |   |   |             |   |   |              |   |   |             |   |   |             |   |   | Maturing  |  
| |                                                                       |   | Carrying   |   |   | Contractual |   |   | 12 months or |   |   |             |   |   |             |   |   | in over 5 |  
| | Dec.
      31, 2015                                                   |   | amount     |   |   | cash flows  |   |   | less         |   |   | 1 - 2 years |   |   | 2 - 5 years |   |   | years     |  
| | Assets used to manage liquidity risk                                  |   |            |   |   |             |   |   |              |   |   |             |   |   |             |   |   |           |  
| | Cash and cash equivalents                                             | $ | 53,852     |   | $ | 53,852      |   | $ | 53,852       |   | $ | -           |   | $ | -           |   | $ | -         |  
| | Trade and other receivables                                           |   | 145,154    |   |   | 145,154     |   |   | 120,043      |   |   | 9,547       |   |   | 15,564      |   |   | -         |  
| | Non-hedge derivative assets                                           |   | 16,512     |   |   | 16,512      |   |   | 16,512       |   |   | -           |   |   | -           |   |   | -         |  
| |                                                                       | $ | 215,518    |   | $ | 215,518     |   | $ | 190,407      |   | $ | 9,547       |   | $ | 15,564      |   | $ | -         |  
| | Non-derivative financial
      liabilities                            |   |            |   |   |             |   |   |              |   |   |             |   |   |             |   |   |           |  
| | Trade and other payables, including embedded
      derivatives        | $ | (179,458   | ) | $ | (179,458    | ) | $ | (179,458     | ) | $ | -           |   | $ | -           |   | $ | -         |  
| | Other financial liabilities                                           |   | (24,479    | ) |   | (37,721     | ) |   | (7,037       | ) |   | (1,516      | ) |   | (4,548      | ) |   | (24,620   | )
| | Long-term debt, including prepayment option
      embedded derivative |   | (1,274,880 | ) |   | (1,734,695  | ) |   | (165,026     | ) |   | (406,040    | ) |   | (1,163,629  | ) |   | -         |  
| | Finance lease liabilities                                             |   | (3,225     | ) |   | (3,533      | ) |   | (728         | ) |   | (728        | ) |   | (2,077      | ) |   | -         |  
| |                                                                       |   |            |   |   |             |   |   |              |   |   |             |   |   |             |   |   |           |  
| |                                                                       | $ | (1,482,042 | ) | $ | (1,955,407  | ) | $ | (352,249     | ) | $ | (408,284)   |   | $ | (1,170,254) |   | $ | (24,620   | )
| | Derivative financial liabilities                                      |   |            |   |   |             |   |   |              |   |   |             |   |   |             |   |   |           |  
| | Warrant liabilities                                                   | $ | (5,047     | ) | $ | (5,047      | ) | $ | -            |   | $ | -           |   | $ | (5,047      | ) | $ | -         |  
| | Gold option                                                           |   | (653       | ) |   | (653        | ) |   | -            |   |   | -           |   |   | (653        | ) |   | -         |  
| | Non-hedge derivative contracts                                        |   | (4,426     | ) |   | (4,426      | ) |   | (4,426       | ) |   | -           |   |   | -           |   |   | -         |  
| |                                                                       | $ | (10,126    | ) | $ | (10,126     | ) | $ | (4,426       | ) | $ | -           |   | $ | (5,700      | ) | $ | -         |  

80

---

|HUDBAY MINERALS INC.                                      
|----------------------------------------------------------
|Notes to Consolidated Financial Statements                
|(in thousands of US dollars, except where otherwise noted)
|Years ended
      December 31, 2016 and 2015              

|29. | Commitments and
contingencies
|--- | -----------------------------

| | (a) | Operating lease
commitments
| | --- | ---------------------------

The Group has entered into various
lease commitments for facilities and equipment. The leases expire in periods
ranging from one to eight years. There are no restrictions placed on the Group
by entering into these leases. Future minimum lease payments under
non-cancelable operating leases recognized in operating expenses at December 31
are:

| |                                                   |   | 2016   |  |   | 2015   |  
| | ------------------------------------------------- | - | ------ |  | - | ------ | -
| | Within one year                                   | $ | 5,591  |  | $ | 5,454  |  
| | After one year but not more
      than five years |   | 12,606 |  |   | 13,151 |  
| | More
      than five years                        |   | 442    |  |   | 2,042  |  
| |                                                   |   |        |  |   |        |  
| |                                                   | $ | 18,639 |  | $ | 20,647 |  
| |                                                   |   |        |  |   |        |  
| | Payments recognized in operating expenses:        |   |        |  |   |        |  
| |                                                   |   |        |  |   |        |  
| |                                                   |   | 2016   |  |   | 2015   |  
| | Minimum lease payments                            | $ | 4,575  |  | $ | 4,953  |  
| | Sub-lease payments received                       |   | -      |  |   | (536   | )
| |                                                   |   |        |  |   |        |  
| |                                                   | $ | 4,575  |  | $ | 4,417  |  

| | (b) | Capital commitments
| | --- | -------------------

As at December 31, 2016, the Group had
outstanding capital commitments in Canada of approximately $534 primarily
related to equipment on order, of which approximately $186 cannot be terminated
by the Group; approximately $44,598 in Peru, related to ongoing sustaining
capital, of which all can be terminated by the Group, and approximately
$163,030, primarily related to its Rosemont project, of which approximately
$77,889 cannot 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 judgement 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.

81

---

|HUDBAY MINERALS INC.                                      
|----------------------------------------------------------
|Notes to Consolidated Financial Statements                
|(in thousands of US dollars, except where otherwise noted)
|Years ended
      December 31, 2016 and 2015              

As part of the streaming agreement
with Silver Wheaton for the 777 mine, the Group must repay, with precious metals
credits, the legal deposit provided by Silver 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 Silver
Wheatons legal deposit may not be repaid by means of 777 mines precious metals
credits over its expected remaining mine life. Given that reserve estimates,
production timing and precious metals prices are subject to uncertainty,
management has concluded that a cash payment at the expiry of the agreement with
Silver Wheaton is unlikely. As at December 31, 2016 the fair value of the cash
payment is not material to the consolidated financial statements.

Contingent assets

There were no significant contingent
assets at December 31, 2016 or December 31, 2015.

82

---

|HUDBAY MINERALS INC.                                      
|----------------------------------------------------------
|Notes to Consolidated Financial Statements                
|(in thousands of US dollars, except where otherwise noted)
|Years ended
      December 31, 2016 and 2015              

|30. | Related parties
|--- | ---------------

| | (a) | Group companies
| | --- | ---------------

The financial statements include the
financial statements of the Company and the following significant subsidiaries:

| |                                                              |                        |                                  |                                         | Beneficial                
| | ------------------------------------------------------------ | ---------------------- | -------------------------------- | --------------------------------------- | --------------------------
| |                                                              |                        |                                  |                                         | ownership of              
| |                                                              |                        |                                  |                                         | ultimate
      controlling
| |                                                              |                        |                                  |                                         | party (HudBay             
| |                                                              |                        |                                  |                                         | Minerals Inc.)            
| |                                                              |                        |                                  | Entity's                                |                           
| | Name                                                         | Jurisdiction           | Business                         | Parent                                  | 2016                      
| |                                                              |                        |                                  |                                         |                           
| | Hudson Bay Mining and
      Smelting Co., Limited            | Canada                 | Zinc and copper
      production | HMI                                     | 100%                      
| | Hudson Bay Exploration and Development
      Company Limited | Canada                 | Exploration and development      | HBMS                                    | 100%                      
| | HudBay Marketing & Sales
      Inc.                          | Canada                 | Marketing and
      sales        | HBMS                                    | 100%                      
| | HudBay Peru Inc.                                             | British Columbia       | Holding company                  | HMI                                     | 100%                      
| | HudBay Peru S.A.C.                                           | Peru                   | Exploration/
      development   | Peru Inc.                               | 100%                      
| | HudBay (BVI) Inc.                                            | British Virgin Islands | Precious metals sales            | Peru Inc.                               | 100%                      
| | HudBay Arizona Corporation                                   | Canada                 | Holding company                  | 8988277 Canada
      Inc.               | 100%                      
| | Rosemont Copper Company 1                                    | Arizona                | Exploration/ development         | HudBay Arizona (US) Holding Corporation | 100%                      

1Rosemont Copper Company
currently owns a 92.05% interest in the Rosemont project; its interest is
subject to an earn-in agreement with United Copper & Moly LLC ("UCM"),
pursuant to which UCM has earned a 7.95% interest in the project and may earn up
to a 20% interest.

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.

83

---

|HUDBAY MINERALS INC.                                      
|----------------------------------------------------------
|Notes to Consolidated Financial Statements                
|(in thousands of US dollars, except where otherwise noted)
|Years ended
      December 31, 2016 and 2015              

| | (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:

| |                                     |   | 2016   |  |   | 2015   | 
| | ----------------------------------- | - | ------ |  | - | ------ | 
| | Short-term employee
      benefits1 | $ | 8,470  |  | $ | 7,755  | 
| | Post-employment benefits            |   | 594    |  |   | 1,050  | 
| | Long-term share-based awards        |   | 5,479  |  |   | 3,350  | 
| |                                     |   |        |  |   |        | 
| |                                     | $ | 14,543 |  | $ | 12,155 | 

1Such as
salaries and social security contributions, paid annual leave and paid sick
leave, profit-sharing and bonuses (fully vested and payable in cash (2015) or
share units (2016)) and non-monetary benefits (such as medical care, housing,
cars and free or subsidized goods or services) for current
employees.

|31. | Supplementary cash flow
  information
|--- | -------------------------------------

| | (a) | Change in non-cash working
  capital:
| | --- | -------------------------------------

| |                                                 |   | Year ended   |  
| | ----------------------------------------------- | - | ------------ | -
| |                                                 |   | December 31, |  
| |                                                 |   | 2016         |  
| |                                                 |   |              |  
| |                                                 |   |              |  
| | Change in:                                      |   |              |  
| | Trade and
      other receivables               | $ | 68,270       |  
| | Other financial
      assets/liabilities        |   | 19,181       |  
| | Inventories                                     |   | 2,653        |  
| | Prepaid expenses and
      other current assets |   | 3,646        |  
| | Trade and
      other payables                  |   | (8,339       | )
| | Changes in taxes
      payable/receivable       |   | 3,666        |  
| | Other                                           |   | (1,871       | )
| |                                                 |   |              |  
| |                                                 | $ | 87,206       |  

84

---

|HUDBAY MINERALS INC.                                      
|----------------------------------------------------------
|Notes to Consolidated Financial Statements                
|(in thousands of US dollars, except where otherwise noted)
|Years ended
      December 31, 2016 and 2015              

| | (b) | Non-cash transactions:
| | --- | ----------------------

During the year ended December 31,
2016, the Group entered into the following non-cash investing and financing
activities which are not reflected in the consolidated statements of cash flows:

| | − | Remeasurements of the Group's decommissioning and
      restoration liabilities for the year ended December 31, 2016 led to a net
      increase in related property, plant and equipment assets of $24,956 mainly
      as a result of increased disturbance at Constancia and a revised closure
      plan for a Manitoba site, offset by increased discount rates. For the year
      ended December 31, 2015, such remeasurements led to increases in property,
      plant and equipment assets of $22,506 mainly as a result of the increased
      disturbance in Peru and the acquisition of New Britannia Mine and Mill
      (note 6).
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | − | Property, plant and equipment included an immaterial
      amount of additions which were not yet paid for as at December 31, 2016
      and December 31, 2015. These purchases will be reflected in the
      consolidated statements of cash flows in the periods payments are made.
      Property, plant and equipment also included $12,932 of additions related
      to capital additions under finance lease (December 31, 2015 - nil).                                                                                                                                                                                                 

|32. | 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. 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 as well as the former Balmat segment, which
consisted of a zinc mine and concentrator that was on care and maintenance and
was sold on November 2, 2015. 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. Segment profit or loss 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.

85

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|HUDBAY MINERALS INC.                                      
|----------------------------------------------------------
|Notes to Consolidated Financial Statements                
|(in thousands of US dollars, except where otherwise noted)
|Years ended
      December 31, 2016 and 2015              

| | Year ended December 31,
      2016    |  
| | ------------------------------------- | -
| |                                       |  
| |                                       |  
| |                                       |  
| | Revenue from external
      customers | $
| | Cost of sales                         |  
| | Mine
      operating costs            |  
| | Depreciation
      and amortization   |  
| | Gross profit                          |  
| | Selling and administrative expenses   |  
| | Exploration and evaluation            |  
| | Other operating expenses and income   |  
| | Results from operating activities     | $
| | Finance income                        |  
| | Finance expenses                      |  
| | Other finance gains                   |  
| | Profit before tax                     |  
| | Tax expense                           |  
| | Loss for the year                     |  

| | December 31,
      2016       |  
| | ----------------------------- | -
| |                               |  
| |                               |  
| |                               |  
| | Total assets                  | $
| | Total liabilities             |  
| | Property, plant and equipment |  

| | Year ended December
      31, 2016               |  
| | ------------------------------------------------ | -
| |                                                  |  
| |                                                  |  
| |                                                  |  
| | Additions to property, plant
      and equipment | $

86

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|HUDBAY MINERALS INC.                                      
|----------------------------------------------------------
|Notes to Consolidated Financial Statements                
|(in thousands of US dollars, except where otherwise noted)
|Years ended
      December 31, 2016 and 2015              

| | Year ended December 31, 2015            |  
| | --------------------------------------- | -
| |                                         |  
| |                                         |  
| |                                         |  
| | Revenue from external
      customers   | $
| | Cost of sales                           |  
| | Mine
      operating costs              |  
| | Depreciation and amortization           |  
| | Gross profit                            |  
| | Selling and administrative expenses     |  
| | Exploration and evaluation              |  
| | Other operating expenses                |  
| | Asset and goodwill impairment           |  
| | Gain
      on disposition of subsidiary |  
| | Results from operating activities       | $
| | Finance income                          |  
| | Finance expenses                        |  
| | Other finance gains                     |  
| | Loss before tax                         |  
| | Tax recovery                            |  
| | Loss for the year                       |  

| | December 31,
      2015       |  
| | ----------------------------- | -
| |                               |  
| |                               |  
| |                               |  
| | Total assets                  | $
| | Total liabilities             |  
| | Property, plant and equipment |  

| | Year ended December 31,
      2015         |  
| | ------------------------------------------ | -
| |                                            |  
| |                                            |  
| |                                            |  
| | Additions to property, plant and equipment | $

87

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|HUDBAY MINERALS INC.                                      
|----------------------------------------------------------
|Notes to Consolidated Financial Statements                
|(in thousands of US dollars, except where otherwise noted)
|Years ended
      December 31, 2016 and 2015              

Geographical Segments

The following tables represent revenue
information regarding the Groups geographical segments for the years ended
December 31:

| |                               |   | 2016      |  |   | 2015    |  
| | ----------------------------- | - | --------- |  | - | ------- | -
| | Revenue by customer location1 |   |           |  |   |         |  
| | Canada                        | $ | 372,439   |  | $ | 353,339 |  
| | United States                 |   | 146,419   |  |   | 77,673  |  
| | Switzerland                   |   | 256,377   |  |   | 264,468 |  
| | Germany                       |   | 39,703    |  |   | 94,114  |  
| | China                         |   | 139,200   |  |   | 108,388 |  
| | Peru                          |   | 68,964    |  |   | -       |  
| | Philippines                   |   | 70,933    |  |   | -       |  
| | Other                         |   | 34,643    |  |   | 44,287  |  
| |                               |   | 1,128,678 |  |   | 942,269 |  
| | Pre-production revenue        |   | -         |  |   | (56,218 | )
| |                               |   |           |  |   |         |  
| |                               | $ | 1,128,678 |  | $ | 886,051 |  

1Presented 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,
2016, five customers accounted for approximately 27%, 22%, 13%, 12%, and 6%,
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, 2015, six customers accounted for approximately 20%, 19%,
12%, 11%, 10% and 8%, respectively, of total revenue during the year. Revenue
from these customers has been presented in the Manitoba and Peru operating
segment.

|33. | Subsequent event
|--- | ----------------

Amalgamation of HudBay Minerals
Inc. and certain Manitoba subsidiaries

Effective January 1, 2017, HBMS and
HBED amalgamated with HudBay Minerals Inc. As a result of the amalgamation, the
name of the Company changed from HudBay Minerals Inc. to Hudbay Minerals
Inc..

88

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