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Exhibit 4.3    
    

	
 Consolidated Financial Statements

(In Canadian dollars)
	
HUDBAY MINERALS INC.
 (FORMERLY ONTZINC CORPORATION)
	
 Years ended December 31, 2004, 2003 and 2002

AUDITORS' REPORT TO THE SHAREHOLDERS  

We
have audited the balance sheets of HudBay Minerals Inc. (formerly ONTZINC Corporation) as at December 31, 2004 and 2003 and the statements of operations and deficit and cash flows for
each of the years in the three-year period ended December 31, 2004. These financial statements are the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits. 

We
conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance whether the
financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. 

In
our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the Company as at December 31, 2004 and 2003, the results of its
operations and cash flows for each of the years in the three-year period ended December 31, 2004 in accordance with Canadian generally accepted accounting principles. 

/s/
KPMG LLP

Chartered Accountants 

Toronto,
Canada 

March 30,
2005 

  

 
 
 

HUDBAY MINERALS INC.
  (FORMERLY ONTZINC CORPORATION)    
    
    CONSOLIDATED BALANCE SHEETS
  (In thousands of Canadian dollars)    
    
    December 31, 2004 and 2003    

	 
	 	2004
	 	2003

	 
	 	 
	 	(Restated —

note 2)

	Assets	 	 	 	 	 	 
	
 Current assets:	
 	
 	

 	
 	
 	

 
	 	Cash and cash equivalents	 	$	64,553	 	$	2,114
	 	Accounts receivable, net of allowance for doubtful accounts of nil (2003 — nil)	 	 	73,210	 	 	89
	 	Debentures subscription receivable (note 10(a))	 	 	—	 	 	2,000
	 	Inventories (note 4)	 	 	100,282	 	 	—
	 	Prepaid expenses and other	 	 	3,496	 	 	554
	 	Current portion of fair value of derivatives (note 17)	 	 	3,418	 	 	—
	 	Future income taxes (note 16)	 	 	12,900	 	 	—
	 	 	
	 	

	 	 	 	257,859	 	 	4,757
	
 Investments (note 5)	
 	
 	

463	
 	
 	

—
	Property, plant and equipment (note 6)	 	 	358,662	 	 	5,351
	Deferred financing costs (notes 10(a) and (c))	 	 	9,600	 	 	169
	Intangible assets (note 7)	 	 	552	 	 	—
	Environmental deposits (note 8)	 	 	1,789	 	 	1,588
	Restricted cash (note 20(c)(v))	 	 	13,000	 	 	—
	Fair value of derivatives (note 17)	 	 	772	 	 	—
	 	 	
	 	

	 	 	$	642,697	 	$	11,865
	 	 	
	 	

1

 

	 
	 	2004
	 	2003
	 
	 
	 	 
	 	(Restated —

note 2)

	 
	Liabilities and Shareholders' Equity	 	 	 	 	 	 	 
	
 Current liabilities:	
 	
 	

 	
 	
 	

 	
 
	 	Accounts payable	 	$	64,491	 	$	533	 
	 	Accrued liabilities	 	 	26,548	 	 	492	 
	 	Interest payable on long-term debt	 	 	563	 	 	—	 
	 	Current portion of obligations under capital leases (note 9)	 	 	3,338	 	 	—	 
	 	Current portion of long-term debt (note 10)	 	 	2,000	 	 	—	 
	 	Current portion of pension obligation (note 11)	 	 	12,650	 	 	—	 
	 	Current portion of other employee future benefits (note 12)	 	 	2,012	 	 	—	 
	 	Current portion of fair value of derivatives (note 17)	 	 	178	 	 	—	 
	 	 	
	 	
	 
	 	 	 	111,780	 	 	1,025	 
	Obligations under capital leases (note 9)	 	 	11,719	 	 	—	 
	Long-term debt (note 10)	 	 	223,529	 	 	1,039	 
	Pension obligation (note 11)	 	 	57,437	 	 	—	 
	Other employee future benefits (note 12)	 	 	57,929	 	 	—	 
	Asset retirement obligations (note 13)	 	 	27,120	 	 	769	 
	Other non-current liabilities	 	 	417	 	 	—	 
	Shareholders' equity:	 	 	 	 	 	 	 
	 	Share capital:	 	 	 	 	 	 	 
	 	 	Common shares (note 14(a))	 	 	120,138	 	 	21,379	 
	 	 	Share subscription receivable	 	 	—	 	 	(250	)
	 	 	Shares to be issued	 	 	—	 	 	47	 
	 	Warrants (note 14(b))	 	 	35,850	 	 	4,433	 
	 	Warrants to be issued	 	 	—	 	 	50	 
	 	Contributed surplus (note 14(c))	 	 	3,288	 	 	2,096	 
	 	Equity component of convertible debentures (note 10(a))	 	 	—	 	 	962	 
	 	Cumulative translation adjustment	 	 	(24	)	 	—	 
	 	Deficit	 	 	(6,486	)	 	(19,685	)
	 	 	
	 	
	 
	 	 	 	152,766	 	 	9,032	 
	Contingencies (notes 13 and 15)	 	 	 	 	 	 	 
	Commitments (notes 17 and 20)	 	 	 	 	 	 	 
	Subsequent events (note 23)	 	 	 	 	 	 	 
	 	 	
	 	
	 
	 	 	$	642,697	 	$	11,865	 
	 	 	
	 	
	 

See accompanying notes to consolidated financial statements.

On
behalf of the Board: 

	
 	
 	

 
	"Allen J. Palmiere"

"Peter R. Jones"	 	Director

Director

2

 
 
 
 

HUDBAY MINERALS INC.
  (FORMERLY ONTZINC CORPORATION)    
    
    CONSOLIDATED STATEMENTS OF OPERATIONS AND DEFICIT
  (In thousands of Canadian dollars, except share and per share amounts)    
    

  Years ended December 31, 2004, 2003 and 2002    
    

	 
	 	2004
	 	2003
	 	2002
	 
	 
	 	 
	 	(Restated — note 2)

	 
	Sales	 	$	13,327	 	$	—	 	$	—	 
	Expenses:	 	 	 	 	 	 	 	 	 	 
	 	Operating	 	 	14,081	 	 	1,501	 	 	148	 
	 	General and administrative	 	 	3,934	 	 	2,390	 	 	564	 
	 	Stock option compensation	 	 	1,193	 	 	1,463	 	 	—	 
	 	Depreciation and amortization	 	 	1,443	 	 	5	 	 	2	 
	 	Accretion	 	 	138	 	 	34	 	 	10	 
	 	Exploration	 	 	1,734	 	 	277	 	 	487	 
	 	 	
	 	
	 	
	 
	 	 	 	22,523	 	 	5,670	 	 	1,211	 
	 	 	
	 	
	 	
	 
	Operating loss	 	 	(9,196	)	 	(5,670	)	 	(1,211	)
	
 Other income	
 	
 	

103	
 	
 	

8	
 	
 	

2	
 
	Gain on derivative instruments	 	 	78	 	 	—	 	 	—	 
	Write-off of deferred charges	 	 	(620	)	 	—	 	 	—	 
	Premium on debenture prepayment (note 10(a))	 	 	(761	)	 	—	 	 	—	 
	Foreign exchange gain (loss)	 	 	1,562	 	 	207	 	 	(4	)
	Interest expense	 	 	(1,559	)	 	—	 	 	—	 
	 	 	
	 	
	 	
	 
	Loss before income taxes	 	 	(10,393	)	 	(5,455	)	 	(1,213	)
	
 Income tax recovery (note 16)	
 	
 	

473	
 	
 	

—	
 	
 	

—	
 
	 	 	
	 	
	 	
	 
	Loss for the year	 	 	(9,920	)	 	(5,455	)	 	(1,213	)
	
 Deficit, beginning of year:	
 	
 	

 	
 	
 	

 	
 	
 	

 	
 
	 	As previously stated	 	 	(19,052	)	 	(13,908	)	 	(12,958	)
	 	Changes in accounting policies (note 2):	 	 	 	 	 	 	 	 	 	 
	 	 	Asset retirement obligations	 	 	(43	)	 	(10	)	 	—	 
	 	 	Exploration costs	 	 	(590	)	 	(312	)	 	(59	)
	 	 	
	 	
	 	
	 
	 	As restated	 	 	(19,685	)	 	(14,230	)	 	(13,017	)
	
 Realization of equity component of debenture (note 10(a))	
 	
 	

1,140	
 	
 	

—	
 	
 	

—	
 
	
 Reduction of stated capital (note 14(e))	
 	
 	

21,979	
 	
 	

—	
 	
 	

—	
 
	 	 	
	 	
	 	
	 
	Deficit, end of year	 	$	(6,486	)	$	(19,685	)	$	(14,230	)
	 	 	
	 	
	 	
	 
	
 Basic and diluted loss per share	
 	
$	

(1.12	
)	
$	

(1.45	
)	
$	

(0.53	
)
	
 Basic and diluted weighted average number of common shares outstanding	
 	
 	

8,894,235	
 	
 	

3,769,526	
 	
 	

2,282,518	
 
	 	 	
	 	
	 	
	 

See accompanying notes to consolidated financial statements.

3

 
 
 
 

HUDBAY MINERALS INC.
  (FORMERLY ONTZINC CORPORATION)    
    
    CONSOLIDATED STATEMENTS OF CASH FLOWS
  (In thousands of Canadian dollars)    
    
    Years ended December 31, 2004, 2003 and
2002    
    

	 
	 	2004
	 	2003
	 	2002
	 
	 
	 	 
	 	(Restated — note 2)

	 
	Cash provided by (used in):	 	 	 	 	 	 	 	 	 	 
	
 Operating activities:	
 	
 	

 	
 	
 	

 	
 	
 	

 	
 
	 	Loss for the year	 	$	(9,920	)	$	(5,455	)	$	(1,213	)
	 	Items not affecting cash:	 	 	 	 	 	 	 	 	 	 
	 	 	Depreciation and amortization	 	 	1,227	 	 	5	 	 	2	 
	 	 	Amortization of deferred financing costs	 	 	216	 	 	—	 	 	—	 
	 	 	Provision for bad debts	 	 	52	 	 	711	 	 	—	 
	 	 	Accretion expense on reclamation liabilities	 	 	73	 	 	34	 	 	10	 
	 	 	Accretion of debt component of convertible debentures	 	 	638	 	 	—	 	 	—	 
	 	 	Stock option compensation	 	 	1,193	 	 	1,463	 	 	—	 
	 	 	Loss (gain) on sale of assets and settlement of liabilities	 	 	761	 	 	(90	)	 	(10	)
	 	 	Unrealized foreign exchange gain	 	 	(2,980	)	 	—	 	 	—	 
	 	 	Unrealized portion of change in fair value of derivative	 	 	(78	)	 	—	 	 	—	 
	 	 	Future income taxes	 	 	(397	)	 	—	 	 	—	 
	 	Other	 	 	(286	)	 	—	 	 	—	 
	 	Change in non-cash working capital (note 21)	 	 	2,273	 	 	(121	)	 	(4	)
	 	 	
	 	
	 	
	 
	 	 	 	(7,228	)	 	(3,453	)	 	(1,215	)
	Financing activities:	 	 	 	 	 	 	 	 	 	 
	 	Decrease in loans payable	 	 	—	 	 	(5	)	 	(196	)
	 	Issuance of common shares net of costs	 	 	139,484	 	 	8,628	 	 	—	 
	 	Proceeds of exercise of stock options	 	 	64	 	 	—	 	 	—	 
	 	Proceeds on exercise of warrants	 	 	117	 	 	9	 	 	—	 
	 	Decrease in debenture subscription receivable	 	 	2,000	 	 	—	 	 	—	 
	 	Issuance of convertible debenture	 	 	600	 	 	—	 	 	—	 
	 	Repayment of convertible debenture	 	 	(2,860	)	 	—	 	 	—	 
	 	Issuance of Senior Secured Notes (note 10(c))	 	 	214,112	 	 	—	 	 	—	 
	 	Advance from Hudson Bay Mining and Smelting Co., Ltd. prior to acquisition	 	 	540	 	 	—	 	 	—	 
	 	Deferred financing cost	 	 	(9,600	)	 	(165	)	 	(8	)
	 	Repayments of obligations under capital leases	 	 	(17	)	 	—	 	 	—	 
	 	 	
	 	
	 	
	 
	 	 	 	344,440	 	 	8,467	 	 	(204	)
	Investing activities:	 	 	 	 	 	 	 	 	 	 
	 	Proceeds received from (additions to) property, plant and equipment	 	 	(5,180	)	 	(1,507	)	 	1,186	 
	 	Additions to environmental deposits	 	 	(294	)	 	(1,588	)	 	—	 
	 	Cash acquired with property acquisitions	 	 	—	 	 	—	 	 	409	 
	 	Acquisition of Hudson Bay Mining and Smelting Co., Ltd., net of cash acquired (note 3)	 	 	(255,610	)	 	—	 	 	—	 
	 	Increase in restricted cash	 	 	(13,000	)	 	—	 	 	—	 
	 	 	
	 	
	 	
	 
	 	 	
	 	
	 	
	 
	 	 	 	(274,084	)	 	(3,095	)	 	1,595	 
	Foreign exchange loss on cash held in foreign currency	 	 	(689	)	 	—	 	 	—	 
	 	 	
	 	
	 	
	 
	Increase in cash and cash equivalents	 	 	62,439	 	 	1,919	 	 	176	 
	Cash and cash equivalents, beginning of year	 	 	2,114	 	 	195	 	 	19	 
	 	 	
	 	
	 	
	 
	Cash and cash equivalents, end of year	 	$	64,553	 	$	2,114	 	$	195	 
	 	 	
	 	
	 	
	 

4

 
 
 
 

HUDBAY MINERALS INC.
  (FORMERLY ONTZINC CORPORATION)    
    
    CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
  (In thousands of Canadian dollars)    
    
    Years ended December 31,
2004, 2003 and 2002    
    

	 
	 	2004
	 	2003
	 	2002

	Supplementary cash flow information:	 	 	 	 	 	 	 	 	 
	 	Interest paid	 	$	309	 	$	—	 	$	—
	
 Supplemental disclosure of non-cash financing and investing activities:	
 	
 	

 	
 	
 	

 	
 	
 	

 
	 	Issuance of convertible debentures	 	 	—	 	 	2,000	 	 	—
	 	Share subscription receivable	 	 	—	 	 	250	 	 	—
	 	Shares issued in settlement of amounts due to companies related by common directors	 	 	—	 	 	363	 	 	—
	 	Shares issued in settlement of other indebtedness	 	 	40	 	 	35	 	 	—
	 	Shares and warrants issued in connection with the acquisition of Hudson Bay Mining and Smelting Co., Ltd.	 	 	13,000	 	 	—	 	 	—

See accompanying notes to consolidated financial statements.

5

  

 
 
 

HUDBAY MINERALS INC.
  (FORMERLY ONTZINC CORPORATION)    
    
    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  (Amounts in thousands of Canadian dollars, except share and per share data)    
    

Years ended December 31, 2004, 2003 and 2002    
    

HudBay Minerals Inc. (the "Company") changed its name from ONTZINC Corporation by way of Articles of Amendment dated December 21, 2004. The Company is
incorporated under the Ontario Business Corporations Act. Prior to December 21, 2004, the Company was engaged in the business of evaluation, acquisition and exploration of mineral properties.
Substantially all of the efforts of the Company were devoted to these business activities. Prior to that date, the Company had not earned significant revenue and was considered to be in the
development stage. 

On
December 21, 2004, the Company completed a public offering of common shares and warrants raising gross proceeds of $143,813 and also completed an offering of U.S.$175,000 Senior Secured
Notes. The Company then utilized the proceeds from these financings to complete the acquisition from Anglo American International, S.A. ("Anglo American") of all of the outstanding shares of
152640 Canada Inc., which held all of the outstanding shares of Hudson Bay Mining and Smelting Co., Ltd. ("HBMS"). As a result, the Company's primary business activity is now base
metals production with facilities consisting of mines, mills and a metallurgical complex for the extraction of copper and zinc in the Provinces of Manitoba and Saskatchewan. 

Also
on December 21, 2004, the Company completed a 30 for 1 common share consolidation which has been retroactively reflected as if the common share consolidation had occurred on
January 1, 2002. All references to common shares within these consolidated financial statements reflect the consolidation. 

	1.
	SIGNIFICANT ACCOUNTING POLICIES

	(a)
	Basis
of presentation: 

These
consolidated financial statements are prepared in accordance with accounting principles generally accepted in Canada ("Canadian GAAP") and are presented in Canadian dollars. These principles
conform in all material respects with generally accepted accounting principles in the United States ("U.S. GAAP"), except as described in note 22. 

These
consolidated financial statements include the financial statements of the Company and its wholly owned subsidiaries. Intercompany accounts and transactions have been eliminated on consolidation. 

The
financial position of HBMS as at December 31, 2004 and its results of operations and cash flows from the date of acquisition on December 21, 2004 to December 31, 2004 have
been included in these consolidated financial statements. The proportionate share of the assets and liabilities of any joint ventures in which HBMS shares joint control has also been included.
Summarized financial information in respect of HBMS is presented in note 10(c). 

	(b)
	Use
of estimates: 

The
preparation of financial statements requires the use of management estimates and assumptions that affect the amounts reported in the consolidated financial statements and related notes.
Significant areas where management's judgment is applied include ore reserve determinations, in-process inventory quantities, plant and equipment estimated economic lives and salvage
values, contingent liabilities, future income tax valuation reserves, asset retirement obligation, pension obligations and other employee future benefits. Actual results could differ from those
estimates by material amounts. 

	(c)
	Translation
of foreign currencies: 

Monetary
assets and liabilities are translated at year-end exchange rates and other assets and liabilities are translated at historical rates. Gains and losses on translation of monetary
assets and monetary liabilities are charged to earnings. 

6

 

The
assets and liabilities of self-sustaining foreign operations are translated at year-end exchange rates, and revenue and expenses are translated at monthly average exchange
rates. Differences arising from these foreign currency translations are recorded in shareholders' equity as a cumulative translation adjustment until they are realized by a reduction in the
investment. 

	(d)
	Revenue
recognition: 

Prior
to December 21, 2004, the Company had not earned significant revenue and was considered to be in the development stage. 

Sales
are recognized and revenue is recorded at market prices when title and the rights and obligations of ownership pass to the customer, collection is reasonably assured and the price is reasonably
determinable. A number of the Company's products are sold under pricing arrangements where final prices are determined by quoted market prices in a period subsequent to the date of sale. Subsequent
variations in the final determination of metal weights, assay and price are recognized as revenue adjustments as they occur until the price is finalized. 

	(e)
	Cash
and cash equivalents: 

Cash
and short-term investments with a remaining maturity of three months or less at the date of acquisition are classified as cash and cash equivalents. 

	(f)
	Inventories:

Inventories
consist substantially of 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. Cost includes material, labour and amortization of all property, plant and equipment directly involved with the mining and production process.
In-process inventories represent materials that are currently in the process of being converted to a saleable product. Conversion processes vary depending on the nature of the concentrate
or metal. In-process inventory is measured based on assays of the material fed to the processing plants and the projected recoveries of the respective plants and is valued at cost. Cost of
finished metal inventory represent the average cost of the in-process inventory incurred prior to the refining and casting process, plus applicable refining and casting costs. 

Supplies
are valued at the lower of cost, replacement and value in use. Cost is determined on an average basis. 

	(g)
	Investments: 

Investments
include marketable securities recorded at the lower of cost and market. 

	(h)
	Property,
plant and equipment:

	(i)
	Mineral
properties: 

Mineral
exploration costs are expensed as incurred. When management's evaluation indicates that the property is capable of economical commercial production, as a result of establishing proven and
probable resources, future costs are capitalized as mine development expenditures. 

	(ii)
	Mine
development expenditures: 

Exploration
and development costs for properties deemed capable of economical commercial production are capitalized and amortized using the unit-of-production method. The
unit-of-production amortization is based on the related proven and probable tons of ore reserves 

7

 

and
associated future development costs. The cost of underground development to provide access to a reserve at an operating mine is capitalized where that portion of the development is necessary to
access more than one workplace or stope. Capital development includes shafts, ramps, track haulage drifts, ancillary drifts, sumps, electrical substations, refuge stations, ventilation raises,
permanent manways, and ore and waste pass raises. 

Ongoing
repairs, maintenance and development expenditures are charged to operations as incurred. 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. 

No
amortization is provided in respect of mine development expenditures until commencement of economical commercial production. Commercial production occurs when an asset or property is substantially
complete and ready for its intended use. Any production revenue prior to commercial production, net of related costs, is offset against the development costs. 

	(iii)
	Plant
and equipment: 

Expenditures
for plant and equipment additions, major replacements and improvements are capitalized at cost, net of applied investment tax credits. Plant and equipment, including assets under capital
lease, are depreciated on either unit-of-production or straight-line basis. The unit-of-production method is based on proven and probable
tons of ore reserves. The assets using the straight-line method are depreciated over the estimated useful lives of the assets, which range from one to 15 years. The Company also
includes future estimated residual values in its determination of depreciation. 

	(iv)
	Capitalized
interest: 

Interest
on borrowings related to the financing of major capital projects under construction is capitalized during the construction phase as part of the cost of the project. 

	(v)
	Impairment
of long-lived assets: 

The
Company reviews and evaluates the carrying value of its operating mines and development properties annually for impairment, or when events or changes in circumstances indicate that the carrying
amounts of related assets or groups of assets may not be recoverable. If the total estimated future cash flows on an undiscounted basis are less than the carrying amount of the asset, an impairment
loss is measured and assets are written down to fair value, which is normally the discounted value of future cash flows. Future cash flows are estimated based on estimated future recoverable mine
production, expected sales prices (considering current and historical prices, price trends and related factors), production levels, cash costs of production, capital and reclamation costs, all based
on detailed engineering life-of-mine plans. Future recoverable mine production is determined from proven and probable reserves and measured, indicated and inferred mineral
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 are considered economically mineable and are based on management's confidence in converting such resources to proven and probable reserves. All
long-lived assets are considered together for purposes of estimating future cash flows. Assumptions underlying future cash flow estimates are subject to risks and uncertainties. It is
possible that changes in estimates could occur which may affect the expected recoverability of the Company's investments in mineral properties. 

8

 

	(i)
	Pension
and other employee future benefits: 

The
Company has non-contributory and contributory defined benefit pension plans for its employees. The benefits are based on years of service and final average salary for the salary plan,
and flat dollar amount combined with years of service for the hourly. The Company provides long-term disability income, health benefits and other post-employment benefits to
hourly employees and long-term disability health benefits to salaried employees. The Company also provides ongoing health care benefits to certain pensioners known as "Special Category
Members." 

The
Company accrues its obligations under the defined benefit plans as the employees render the services necessary to earn the pension and other retirement benefits. The actuarial determination of the
accrued benefit obligations for pensions and other retirement 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). The measurement date of the plan assets and accrued benefit obligation coincides with the Company's fiscal year. The
most recent actuarial valuation of the pension plans for funding purposes was as of December 31, 2003, and the next required valuation required for funding purposes will be performed at
December 31, 2004. 

Actuarial
gains (losses) on plan assets arise from the difference between the actual return on plan assets for a period and the expected return on plan assets for that period. For the purpose of
calculating the expected return on plan assets, those assets are valued at fair value. Actuarial gains (losses) on the accrued benefit obligation arise from differences between actual and expected
experience and from changes in the actuarial assumptions used to determine the accrued benefit obligation. The average remaining service period of the
active employees covered by the pension plan is 12 years. The average remaining service period of the active employees covered by the other retirement benefits plan is 13.7 years. 

The
Company also has defined contribution plans providing pension benefits for its salaried employees. The cost of the defined contribution plans is recognized based on the contributions required to
be made during each period. 

	(j)
	Financial
instruments and commodity contracts: 

The
carrying value of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities, current portion of long-term debt and current portion of obligations under
capital leases approximate their fair value due to their short-term nature. The fair value of long-term debt has been determined using discounted cash flows at current market
rates. Derivative financial instruments have been valued at current fair values using quoted market prices or accepted valuation methodologies. 

The
Company employs derivative financial instruments, including forwards and option contracts, to manage risk originating from actual exposures to commodity price risk, foreign exchange risk and
interest rate risk. 

In
management's opinion, the contracts continue to be effective in mitigating the Company's exposure to commodity and foreign exchange risk, the Company's management elected not to designate some of
its price risk management activities as accounting hedges under The Canadian Institute of Chartered Accountants' ("CICA") Accounting Guideline 13 ("AcG-13"), Hedging Relationships, and,
accordingly, account for some of these derivative instruments using the fair value accounting method. Management may evaluate, from time to time, its hedge accounting policies and practices and may
elect to designate and document contracts as hedges in the future. 

9

 

The
estimated fair value of all derivative financial instruments is based on quoted market prices or, in their absence, third party market indications and forecasts. Unrealized gains or losses and
realized gains or losses are recorded as a separate element of earnings. 

	(k)
	Stock-based
compensation plans: 

The
Company's stock-based compensation plan is described in note 14(c). The Company accounts for all stock-based payments using the fair value-based method. Under this method, compensation cost
attributable to options granted is measured at fair value at the grant date. Any consideration paid on exercise of stock options or purchase of stock is credited to share capital. 

Prior
to January 1, 2003, the Company did not recognize any compensation cost when options were issued. Any consideration paid on the exercise of options was recorded as share capital. All
stock options issued in 2002 were related to the acquisition of the Gay's River property and have been capitalized as such. 

	(l)
	Income
taxes: 

The
Company accounts for income and mining taxes under the asset and liability method. Under this method of tax allocation, future income and mining tax assets and liabilities are determined based on
differences between the financial statement carrying values and their respective income tax basis (temporary differences). Future income tax assets and liabilities are measured using the enacted tax
rates expected to be in effect when the temporary differences are likely to reverse. The effect on future income tax assets and liabilities of a change in tax rates is included in income in the year
in which the change is enacted or substantively enacted. The amount of future income tax assets recognized is limited to the amount that is more likely than not to be realized. 

	(m)
	Flow-through
shares: 

The
Company financed a portion of its exploration and development activities through the issue of flow-through shares. Under the terms of these share issues, the tax attributes of the
related expenditures are renounced to subscribers. Share capital is reduced and future income tax liabilities are increased by the estimated income tax benefits renounced by the Company to the
subscribers. 

	(n)
	Loss
per share: 

Basic
loss per share is computed by dividing loss for the year by the weighted average number of common shares outstanding for the year. Shares held in escrow are included in the weighted average
number of common shares when they are released from escrow. Diluted loss per share is similar to basic earnings per share, except that the denominator is increased to include the number of additional
common shares that would have been outstanding if the dilutive potential common shares had been issued using the treasury stock method. 

	2.
	CHANGES IN ACCOUNTING POLICIES

	(a)
	Asset
retirement obligations: 

Effective
January 1, 2004, the Company adopted the recommendations under Section 3110, Asset Retirement Obligations ("Section 3110"), of the CICA Handbook on a retroactive basis.
Section 3110 applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and/or normal operation of
a long-lived asset. 

These
recommendations require that the fair value of a liability for an asset retirement obligation be recorded in the period in which it is incurred. When the liability is initially recorded, the
cost is 

10

 

capitalized
by increasing the carrying amount of the related long-lived asset. Upon settlement of the liability, a gain or loss is recorded. This differs from the prior practice that
involved accruing for the estimated reclamation and closure liability through charges to the consolidated statements of operations over the life of the mine. The Company has recorded asset retirement
obligations primarily associated with decommissioning and restoration costs. As required under the standard, the Company will make periodic assessments as to the reasonableness of its asset retirement
obligation estimates and revise those estimates accordingly. The respective asset and liability balances will be adjusted, which will correspondingly increase or decrease the amounts expensed in
future periods. 

The
long-term asset retirement obligation is based on environmental plans, in compliance with the current environmental and regulatory requirements. Accretion expense is charged to the
consolidated statements of operations and deficit based on application of an interest component to the existing liability. 

The
prior period financial statements have been restated retroactively for this change in accounting policy. The adoption of this standard had no impact on the opening balance sheet at
January 1, 2002. The effect on the loss in 2003 was an increase of $34 ($0.01 per share). The effect on the loss in 2002 was an increase of $10 (nil per share). 

	(b)
	Exploration
costs: 

The
Company changed its accounting policy for exploration expenditures effective January 1, 2004. The change in the accounting policy is to only capitalize those exploration costs when
management's evaluation indicates that the property is capable of economical commercial production. This policy change has been applied retroactively with restatement of prior periods. This policy
change had the following impact on the opening balance sheet at January 1, 2002: decreased property, plant and equipment by $59 and increased deficit by $59. The effect on the loss in 2003 was
an increase of $277 ($0.07 per share). The effect on the loss in 2002 was an increase of $254 ($0.11 per share). 

	3.
	ACQUISITION OF HUDSON BAY MINING AND SMELTING CO., LTD.

On
December 21, 2004, the Company acquired all of the outstanding common shares of HBMS for total purchase consideration of $315,790, plus $4,324 of corporate transaction costs. The total
purchase consideration of $315,790 was satisfied by cash of $302,790 and by the issuance to Anglo of 5,777,777 common shares and 86,666,667 share purchase warrants, where every 30 share purchase
warrants are exercisable for one common share at an exercise price of $3.15 per common share. The value of the common share consideration of $11,700 has been determined based on the average of the
closing price of the Company's common shares for the two days before and after the date of announcement of the transaction on October 7, 2004. The value of the warrant consideration of $1,300
has been based on a similar method to the valuation of the warrants issued in the public offering as described in note 14(b). The acquisition has been accounted for by the purchase method and
the result of operations and cash flows have been included within these consolidated financial statements from December 21, 2004. 

11

 

The
following table summarizes the preliminary allocation of the purchase consideration based on management's current best estimate of the fair value of the assets and liabilities acquired on the date
of acquisition: 

	Current assets (including cash of $51,504)	 	$	229,601	 
	Investments (note 5)	 	 	463	 
	Property, plant and equipment (note 6)	 	 	349,358	 
	Intangible assets (note 7)	 	 	552	 
	Current liabilities	 	 	(72,665	)
	Debt obligations (note 10)	 	 	(15,179	)
	Pensions and post-retirement benefit obligations (notes 11 and 12)	 	 	(130,353	)
	Asset retirement obligations (note 13)	 	 	(26,213	)
	Obligations under capital leases (note 9)	 	 	(15,074	)
	Other non-current liabilities	 	 	(376	)
	 	 	
	 
	 	 	$	320,114	 
	 	 	
	 

Management
expects to obtain additional information in 2005, including independent valuations, that may require additional adjustments to amounts shown above for property, plant and equipment,
intangible assets and asset retirement obligations, and these potential adjustments may be material. 

	4.
	INVENTORIES

	 
	 	2004
	 	2003

	Work in process	 	$	72,061	 	$	—
	Finished goods	 	 	14,639	 	 	—
	Material and supplies	 	 	13,582	 	 	—
	 	 	
	 	

	 	 	$	100,282	 	$	—
	 	 	
	 	

	5.
	INVESTMENTS

	 
	 	2004
	 	2003

	Marketable securities, which approximates market value	 	$	463	 	$	—

	6.
	PROPERTY, PLANT AND EQUIPMENT

	2004 
	 	Cost
	 	Accumulated

depreciation

and

amortization
	 	Net book

value

	Property, plant and equipment	 	$	203,705	 	$	418	 	$	203,287
	Mine development	 	 	156,189	 	 	814	 	 	155,375
	 	 	
	 	
	 	

	 	 	$	359,894	 	$	1,232	 	$	358,662
	 	 	
	 	
	 	

	 

	2003 
	 	Cost
	 	Accumulated

depreciation

and

amortization
	 	Net book

value

	Property, plant and equipment	 	$	5,358	 	$	7	 	$	5,351

12

 

Included
in the property, plant and equipment are the following: 

	 
	 	2004
	 	2003

	Property, plant and equipment under construction or development	 	$	6,753	 	$	—
	 	 	
	 	

	Equipment under capital leases:	 	 	 	 	 	 
	 	Cost	 	$	15,521	 	$	—
	 	Less accumulated depreciation	 	 	39	 	 	—
	 	 	
	 	

	 	 	$	15,482	 	$	—
	 	 	
	 	

	Amortization expense related to equipment under capital leases	 	$	39	 	$	—
	 	 	
	 	

	7.
	INTANGIBLE ASSETS

Intangible
assets include zinc process licensing agreements and are amortized over the estimated life of the zinc plant facility, being 13 years. 

	 
	 	Cost
	 	Accumulated

depreciation

and

amortization
	 	Net book

value

	Zinc process licencing agreements	 	$	552	 	$	—	 	$	552

	8.
	ENVIRONMENTAL DEPOSITS

The
Company has deposited various amounts with government agencies in the Province of Nova Scotia, Canada and in New York State, United States, in connection with the acquisitions of the
Gay's River and Balmat mine properties. 

	9.
	OBLIGATIONS UNDER CAPITAL LEASES

The
Company has entered into capital lease obligations for equipment. 

	 
	 	2004
	 	2003

	Lease obligations	 	$	15,057	 	$	—
	Less current portion of obligations	 	 	3,338	 	 	—
	 	 	
	 	

	 	 	$	11,719	 	$	—
	 	 	
	 	

13

 

The
following represents the minimum lease payments for equipment used in operations for the next five years: 

	2005	 	$	4,076
	2006	 	 	4,053
	2007	 	 	4,046
	2008	 	 	3,357
	2009	 	 	1,335
	 	 	

	 	 	 	16,867
	Less imputed interest	 	 	1,810
	 	 	

	 	 	$	15,057
	 	 	

The
interest rate averages 5.4% and is fixed for the term of the leases that expire in 2007, 2008 and 2009. 

	10.
	LONG-TERM DEBT

	 
	 	2004
	 	2003

	Convertible debentures (a)	 	$	—	 	$	1,039
	Province of Manitoba (b)	 	 	15,179	 	 	—
	Senior Secured Notes (c)	 	 	210,350	 	 	—
	 	 	
	 	

	 	 	 	225,529	 	 	1,039
	Less current portion of long-term debt	 	 	2,000	 	 	—
	 	 	
	 	

	 	 	$	223,529	 	$	1,039
	 	 	
	 	

	(a)
	Convertible
debentures: 

On
December 19, 2003, the Company completed a private placement of $2,000 principal amount of secured convertible debentures. The proceeds were received in January 2004. In
January 2004, an additional $600 of secured convertible debentures were issued. The debentures were to mature on December 19, 2005 and bore interest at a rate of 12% per annum, payable
semi-annually. Proceeds of the placement were received in January 2004. Commissions and legal costs of $216 (2003 — $165) were incurred on the
placement of the debentures and were recorded as deferred financing costs. Up to December 23, 2004, the deferred financing costs were being amortized over the life of the debenture, being two
years. 

The
debentures were repaid in the amount of $2,860 on December 23, 2004. After application of a Black-Scholes model to value the holder conversion option at that date, it was determined that
$2,743 of the repayment amount related to the extinguishment of the liability. At December 23, 2004, the balance sheet liability in respect of the debentures, representing the fair value at
date of issuance plus accretion to date of repayment, was $1,982. The difference of $761 has been recorded as debt settlement expense. 

At
December 23, 2004, the equity component of the debentures, representing the fair value of the holder conversion option at date of issuance, was $1,250. The difference between this and the
fair value of the holder conversion option, or $110 as at December 23, 2004, has been credited to retained earnings and the carrying value of the equity component has been eliminated. 

Interest
expense amounted to $941 for 2004 (2003 — nil). 

14

 

The
unamortized amount of deferred financing costs relating to the debentures at December 23, 2004 of $108 has been written off as a component of financing costs for the year. 

	(b)
	Province
of Manitoba: 

The
interest-free loan from the Province of Manitoba is secured by an irrevocable standby letter of credit issued by a Canadian chartered bank and is due in instalments of
$2 million on June 14, 2005, $4 million on June 14, 2006 and 2007 and $7.5 million on June 14, 2008. As at December 21, the fair value of the loan was
determined using the net present value of the interest-free component of the loan, assuming a discount rate of 6%. 

	(c)
	Senior
Secured Notes: 

On
December 21, 2004, a subsidiary of the Company issued U.S. $175,000 Senior Secured Notes ("Notes") bearing interest at 9.625% per annum with interest payable semi-annually
in arrears on January 15 and July 15 of each year, commencing on July 15, 2005. The Notes will mature on January 15, 2012. Subsequent to the issuance of the Notes, the
subsidiary which issued the Notes amalgamated with HBMS. Financing costs amounting to $9,600 were incurred in connection with the issuance of the Notes and will be amortized into income on a
straight-line basis over the term of the Notes. 

HBMS
may redeem up to 35% of the aggregate principal amount of the Notes at any time prior to January 15, 2008 with the net proceeds from certain equity offerings at a price equal to 109.625%
of the principal amount of the Notes plus accrued and unpaid interest. After January 15, 2009, HBMS may redeem some or all of the Notes at the redemption prices of 104.813% in 2009, 102.406% in
2010 and 100% thereafter. In addition, if HBMS undergoes a change of control or if it sells certain of its assets, it may be required to offer to purchase the Notes at specified redemption prices.
HBMS also has the right to redeem all of the Notes if at any time Canadian law changes to require it to withhold taxes from payments on the Notes. 

The
Notes are HBMS's senior obligations and will rank equally in right of payment with all of its existing and future senior indebtedness and rank senior to all of its existing and future subordinated
indebtedness. The Notes are guaranteed on a senior basis by the Company's subsidiary, Hudson Bay Exploration and Development Company Limited, and will be guaranteed by any future domestic restricted
subsidiaries. Subsequent to December 31, 2004, the Notes are also guaranteed by the Company. The Company's guarantee of the Notes will terminate on the date upon which it owns less than a
majority of the voting shares of HBMS. The Notes and the subsidiary guarantee are secured by first priority liens on HBMS's real property, mineral claims and leases in the Provinces of Manitoba and
Saskatchewan and second priority liens on HBMS's and the subsidiary guarantor's accounts receivable and inventories, which may be used to secure, on a first-priority basis, HBMS's obligations under
any future credit facility. 

The
Company's interest expense on the Notes and weighted average interest rate is as follows: 

	Interest expense	 	$	608
	Weighted average interest rate	 	 	9.625%

15

 

Summarized
financial information for HBMS as at December 31, 2004 and for the period ended December 31, 2004 is as follows: 

	Assets	 	 	 	 
	Current assets	 	$	239,846	 
	Due from Hudbay Minerals Inc.	 	 	210,350	 
	Non-current assets	 	 	375,664	 
	 	 	
	 
	 	 	$	825,860	 
	 	 	
	 
	
Liabilities and Shareholder's Equity	
 	
 	

 	
 
	Current liabilities	 	$	93,046	 
	Due to Hudbay Minerals Inc.	 	 	22,059	 
	Other long-term liabilities	 	 	168,444	 
	Debt obligations	 	 	223,529	 
	Shareholder's equity	 	 	318,782	 
	 	 	
	 
	 	 	$	825,860	 
	 	 	
	 
	Sales	 	$	13,327	 
	Operating and other expenses	 	 	(14,239	)
	Other income	 	 	57	 
	Gain on derivative instruments	 	 	78	 
	Interest expense	 	 	(608	)
	Income taxes	 	 	76	 
	 	 	
	 
	Loss for the ten day period ended December 31, 2004	 	$	1,309	 
	 	 	
	 

	11.
	PENSION OBLIGATION

Prior
to December 21, 2004, the Company did not sponsor any pension plans. HBMS maintains several non-contributory and contributory defined benefit pension plans for its employees. 

The
Company uses a December 31 measurement date for all of its plans. For the Company's significant plans, the most recent actuarial valuations filed for funding purposes were performed as at
December 31, 2003. For these plans, the next actuarial valuation required for funding purposes will be performed at December 31, 2004. 

16

 

Information
about the Company's non-contributory and contributory defined benefit plan is as follows: 

	Obligations and funded status:	 	 	 	 
	 	Change in pension obligation:	 	 	 	 
	 	 	Obligation, at December 21, 2004	 	$	217,432	 
	 	 	Service cost	 	 	607	 
	 	 	Interest cost	 	 	345	 
	 	 	Benefits paid	 	 	(572	)
	 	 	
	 
	 	Obligation, at December 31, 2004	 	 	217,812	 
	 	
 Change in pension plan assets:	
 	
 	

 	
 
	 	 	Fair value of plan assets, at December 21, 2004	 	 	146,942	 
	 	 	Actual return on plan assets	 	 	283	 
	 	 	Employer contributions	 	 	1,072	 
	 	 	Benefits paid	 	 	(572	)
	 	 	
	 
	 	Fair value of plan assets, at December 31, 2004	 	 	147,725	 
	 	 	
	 
	Pension obligation, at December 31, 2004	 	$	(70,087	)
	 	 	
	 

As
a result of the closure of the Ruttan mine, the Company plans to settle its obligations under the pension plans for the former employees of the Ruttan mine through the purchase of insurance
contracts by which the insurer assumes all of the Company's risks and obligations under the plans. Finalization of the settlements will occur in the future. 

Pension
expense includes the following components: 

	Service cost	 	$	607	 
	Interest cost	 	 	345	 
	Expected return on plan assets	 	 	(283	)
	 	 	
	 
	 	 	 	669	 
	Defined contribution pension	 	 	5	 
	 	 	
	 
	 	 	$	674	 
	 	 	
	 

	(a)
	Additional
information: 

The
weighted average assumptions used in the determination of the accrued benefit expense and obligations were as follows: 

	Discount rate	 	5.8%
	Expected return on plan assets	 	7.0%
	Rate of compensation increase	 	4.7%

The
Company's pension cost is materially affected by the discount rate used to measure obligations, the level of plan assets available to fund those obligations and the expected long-term
rate of return on plan assets. 

17

 

The
Company reviews the assumptions used to measure pension costs (including the discount rate) on an annual basis. Economic and market conditions at the measurement date impact these assumptions from
year to year. 

Establishing
the expected future rate of return on pension assets is a judgmental matter. The Company considers the following factors in determining this assumption: 

	(i)
	Duration
of pension plan liabilities; and

	(ii)
	Types
of investment classes in which the plan assets are invested and the expected compound return on those investment classes.

	(b)
	Plan
assets: 

The
pension plan weighted average asset allocations, by asset category, are as follows: 

	Equity securities	 	59%
	Debt securities	 	41%
	 	 	

	 	 	100%
	 	 	

The
target asset allocation is as follows: 

	Equity securities	 	57%
	Debt securities	 	43%
	 	 	

	 	 	100%
	 	 	

The
Company's primary quantitative investment objective is to maximize the long-term real rate of return, subject to an acceptable degree of investment risk. Risk tolerance is established
through consideration of several factors, including past performance, current market conditions and the funded status of the plan. 

With
the exception of fixed income investments, the plan assets are actively managed by investment managers, with the goal of attaining returns that are in excess of that which could be realized with
passively managed investments. Although the actual composition of the invested funds will vary from the prescribed investment mix, the investment managers have a responsibility to bring items back to
the appropriate mix. 

	(c)
	Expected
cash flows: 

Expected
employer contributions (or benefit payments in respect of the supplementary plan) and expected benefit payments for fiscal year ending December 31, 2005 amount to $12,650 and $9,031,
respectively. 

18

  

	12.
	OTHER EMPLOYEE FUTURE BENEFITS

Prior
to December 21, 2004, the Company did not sponsor any post-employment benefit plans. HBMS sponsors several such plans and uses a December 31 measurement date.
Information about the Company's post-retirement and other post-employment benefits is as follows: 

	Obligations and funded status:	 	 	 	 
	 	Change in other employee future benefits:	 	 	 	 
	 	 	Obligation, at December 21, 2004	 	$	59,870	 
	 	 	Service cost	 	 	22	 
	 	 	Interest cost	 	 	104	 
	 	 	Benefits paid	 	 	(55	)
	 	 	
	 
	Obligation, at December 31, 2004	 	$	59,941	 
	 	 	
	 

Other
employee future benefits expense includes the following components: 

	Service cost	 	$	22
	Interest cost	 	 	104
	 	 	

	Other employee future benefit expense	 	$	126
	 	 	

	(a)
	Additional
information: 

The
weighted average assumptions used in the determination of other employee future benefits expense and obligations are as follows: 

	Discount rate	 	6.0%
	Weighted average health care trend rate	 	4.6%

The
health care cost trend rate used in measuring other employee future benefits was assumed to begin at 9.2% in 2005, gradually declining to 4.6% by 2015 and remaining at those levels thereafter. 

If
the health care cost trend rate was increased by one percentage point, the accumulated post-retirement benefit obligation and the aggregate service and interest cost would have
increased as follows: 

	Accumulated post-retirement benefit obligation	 	$	12,558
	Aggregate of service and interest cost	 	 	38

If
the health care cost trend rate was decreased by one percentage point, the accumulated post-retirement benefit obligation and the aggregate service and interest cost would have
decreased as follows: 

	Accumulated post-retirement benefit obligation	 	$	9,749
	Aggregate of service and interest cost	 	 	28

	(b)
	Expected
cash flow: 

Expected
employer contributions and expected benefit payments for fiscal year ending December 31, 2005 amount to $2,012 and $2,012, respectively. 

19

 

	13.
	ASSET RETIREMENT OBLIGATIONS

The
following additional disclosure is provided concerning the Company's asset retirement obligation. The Company's asset retirement obligations relate to the final reclamation and closure of
currently operating mines, mines under care and maintenance, and closed properties. 

	 
	 	2004
	 	2003

	Balance, beginning of year	 	$	769	 	$	248
	Liability in respect of mineral property acquired	 	 	—	 	 	487
	Liability assumed through acquisition of HBMS	 	 	26,213	 	 	—
	Accretion expense	 	 	138	 	 	34
	 	 	
	 	

	Balance, end of year	 	$	27,120	 	$	769
	 	 	
	 	

Total
undiscounted future cash flows required to settle the decommissioning and restoration asset retirement obligations are estimated to be $53.9 million. A credit adjusted
risk-free rate of 9.625% has been utilized to determine the obligation recorded in the consolidated balance sheets. Management anticipates that such obligations will substantially be
settled at or near the closure of the mining and processing facilities. The current mine plan based on known reserves and resources extends to 2018. 

In
view of the uncertainties concerning environmental remediation, the ultimate cost of asset retirement obligations could differ materially from the estimated amounts provided. The estimate of the
total liability for asset retirement obligation costs is subject to change based on amendments to laws and regulations and as new information concerning the Company's operations becomes available.
Future changes, if any, to the estimated total liability as a result of amended requirements, laws, regulations and operating assumptions 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 Company operates. The Company 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. 

The
Company is undertaking an independent review of its asset retirement obligations assumed through its acquisition of HBMS as described in note 3, with additional information to be made
available during 2005. Should estimates change, the purchase price allocation would be changed at that time. 

20

 
	14.
	SHARE CAPITAL

	(a)
	Common
shares: 

Authorized: 

Unlimited
common shares 

Issued:

	 
	 	2004
	 	2003
	 
	 
	 	Common shares
	 	Amount
	 	Common shares
	 	Amount
	 
	Balance, beginning of year	 	5,661,592	 	$	21,379	 	2,955,666	 	$	16,626	 
	Issued for debt	 	5,334	 	 	40	 	112,423	 	 	398	 
	Issued on private placements, net	 	2,382,466	 	 	7,817	 	2,581,837	 	 	9,666	 
	Issued pursuant to public offering	 	69,694,778	 	 	156,813	 	—	 	 	—	 
	Cancellation of repurchase shares	 	(340,000	)	 	(336	)	—	 	 	—	 
	Exercise of warrants	 	28,030	 	 	160	 	11,666	 	 	52	 
	Exercise of options	 	19,334	 	 	64	 	—	 	 	—	 
	Value attributed to warrants issued	 	—	 	 	(29,465	)	—	 	 	(4,484	)
	Tax effect of flow-through shares	 	—	 	 	(397	)	—	 	 	—	 
	Share issue costs	 	—	 	 	(13,958	)	—	 	 	(879	)
	Elimination of fractional shares	 	(906	)	 	—	 	—	 	 	—	 
	Stated capital reduction	 	—	 	 	(21,979	)	—	 	 	—	 
	 	 	
	 	
	 	
	 	
	 
	Balance, end of year	 	77,450,628	 	$	120,138	 	5,661,592	 	$	21,379	 
	 	 	
	 	
	 	
	 	
	 

On
December 21, 2004, the Company completed an offering of 63,917,000 subscription receipts at a price of $2.25 per subscription receipt pursuant to a final prospectus dated December 14,
2004, for gross proceeds of $143,813. Net proceeds of the issuance were approximately $133,005. Each subscription receipt entitled the holder to receive one common share and 15 common share purchase
warrants. Every 30 common share purchase warrants entitles the holder thereof to acquire one common share for a period of 5 years from the date of issuance, exercisable at a price of $3.15 per
share. The gross proceeds of $2.25 per subscription receipt was allocated on the basis of $2.025 as to each common share and $0.225 as to each one-half of one share purchase warrant. 

In
connection with the offering, the agents for the offering were issued broker warrants to acquire 3,835,020 common shares at a price equal to 115% of the offering price of the subscription receipts,
or $2.589 per warrant, for a period of 24 months to December 21, 2006. 

Under
the terms of the agreement for the acquisition of HBMS from Anglo American on December 21, 2004, the Company issued to Anglo American 5,777,778 common shares and 86,666,667 warrants for
consideration of $13,000. 

On
December 21, 2004, the Company completed a 30 for 1 common share consolidation which has been retroactively reflected as if the share consolidation had occurred on January 1, 2002 and
is reflected in the following disclosures. The warrants outstanding at the time of the share consolidation were not consolidated. 

	(i)
	In
addition, the Company completed the following private placements during 2004:

	(a)
	In
September 2004, 1,105,666 units at a price of $1.50 per unit for gross proceeds of $1,726. Each unit consists of one common share and 15 common share purchase warrants. Each
30 common share purchase warrants entitles the holder thereof to acquire one common share for a period of two years from the date of issuance, exercisable at a price of $1.80 per share. 

In
addition, the broker was issued 3,452,000 broker warrants, with each 30 broker warrants exercisable at a price of $1.50 per share for a period of two years from the closing date and paid a 

21

 

commission
of $117. An over-allotment option was provided to the broker to purchase up to 15% of the number of broker units issued at closing at the issue price of $2.70 at any time prior
to November 30, 2004. On November 30, 2004, the broker exercised its over-allotment option and purchased an additional 172,600 units at a price of $2.70 per unit. Upon
exercise of the over-allotment option, the broker was issued an additional 517,800 broker warrants, with each 30 broker warrants exercisable at a price of $2.70 per unit. Each broker unit
is comprised of one common share and 15 broker common share purchase warrants. Every 30 broker common share purchase warrants is exercisable for one common share at an exercise price of $3.60 for a
period of two years from the date of issue. 

The
former Chairman and Chief Executive Officer of the Company and the former Corporate Secretary purchased 333,333 and 6,667 of these units, respectively. Subsequent to September 30, 2004, the
Company and these officers agreed to unwind these transactions, so that the securities comprising the units have been returned to the Company and the Company has returned the purchase price paid for
the units. 

	(b)
	In
June 2004, 1,036,920 units at a price of $5.40 per unit for gross proceeds of $5,599. Each unit consists of one common share and 15 common share purchase warrants. Every 30
warrants entitled the holder thereof to acquire one common share for a period of two years from the date of issuance, exercisable at a price of $6.00 per share. Certain former officers and directors
of the Company purchased an aggregate of 795,986 of these units.

	(ii)
	The
Company completed the following private placements during 2003:

	(a)
	In
May 2003, 233,333 units at a price of $3.00 per unit for gross proceeds of $700. Each unit consists of one common share and 30 common share purchase warrants. Every 30
warrants can be exercised to purchase one common share for a price of $3.90 for a period of 24 months from the date of closing.

	(b)
	In
June 2003, 164,355 units at a price of $3.00 per unit for gross proceeds of $493. Each unit consists of one common share and 30 common share purchase warrants. Every 30
warrants entitles the holder thereof to acquire one common share for a period of two years from the date of issuance, exercisable at a price of $3.90 per share.

	(c)
	In
September 2003, 909,091 units at a price of $3.30 per unit for gross proceeds of $3,000. Each unit consists of one common share and 30 common share purchase warrants. Every
30 warrants entitled the holder thereof to acquire one common share for a period of two years from the date of issuance, exercisable at a price of $4.20 per share.

	(d)
	In
October 2003, 1,125,613 units at a price of U.S. $3.00 per unit for gross proceeds of $4,273 (U.S. $3,377). Each unit consists of one common share and 30
common share purchase warrants, every 30 warrants entitling the holder to acquire one common share for a period of two years from the date of issuance exercisable at a price of U.S. $3.60 per
share. Of the 1,125,613 units subscribed, 25,613 were issued to the subscriber after December 31, 2003. The related value of these units has been classified as shares to be issued and warrants
to be issued.

	(e)
	In
November 2003, 39,444 common shares at a price of U.S. $4.50 per share for gross proceeds of $230 (U.S. $178).

	(f)
	In
December 2003, 135,613 units at a price of $7.50 per unit for gross proceeds of $1,017. Each unit consists of one flow-through common share and 15 share purchase
warrants. Every 30 warrants entitles the holder to acquire one flow-through common share for a period of two years from the date of issuance exercisable at a price of $9.00 per share. In
addition, 406,840 warrants valued at $55 and every 30 warrants exercisable at a price of $7.50 per share were issued to brokers and have been accounted for as issue costs. 

The
tax benefit to be renounced to the holders of the flow-through common shares was charged to capital stock when the renouncement was made in 2004. 

22

 

In
2003, the Company settled $363 of related party debts through the issuance of 100,756 common shares and $35 of other amounts payable through the issuance of 11,667 units of the Company, each unit
being one common share and 30 common share purchase warrants, every 30 warrants exercisable at a price of $3.90 per share for two years from the date of closing. In addition, the Company issued
250,000 warrants, every 30 warrants exercisable at a price of $3.00 per share for two years in settlement of a debt to a supplier. 

	(b)
	Warrants:

	 
	 	Number
	 	Amount
	 
	Warrants outstanding, January 1, 2003	 	—	 	$	—	 
	Issued on private placements	 	75,244,424	 	 	4,451	 
	Exercised	 	(350,000	)	 	(18	)
	 	 	
	 	
	 
	Warrants outstanding, December 31, 2003	 	74,894,424	 	 	4,433	 
	Issued on private placements	 	40,140,997	 	 	2,380	 
	Issued pursuant to public offering	 	1,045,421,667	 	 	27,181	 
	Issued to agents for public offering	 	115,050,600	 	 	2,078	 
	Warrants repurchased	 	(5,100,000	)	 	(173	)
	Exercised	 	(840,909	)	 	(43	)
	Cancelled	 	(88,456	)	 	(6	)
	 	 	
	 	
	 
	Warrants outstanding, December 31, 2004	 	1,269,478,323	 	$	35,850	 
	 	 	
	 	
	 

Warrants
outstanding to acquire common shares (30 warrants required to acquire one common share) of the Company at December 31, 2004 are as follows: 

	Warrants outstanding 
	 	Exercise price
	 	Expiry date

	350,000	 	$	0.13	 	February 24, 2005
	6,650,000	 	 	0.13	 	May 30, 2005
	2,805,650	 	 	0.13	 	June 25, 2005
	2,086,544	 	 	0.13	 	August 25, 2005
	250,000	 	 	0.10	 	October 3, 2005
	26,431,825	 	 	0.14	 	September 8 - 23, 2005
	33,000,000	 	 	U.S. 0.12	 	October 9 - 21, 2005
	768,400	 	 	U.S. 0.12	 	January 13, 2006
	1,984,200	 	 	0.30	 	December 23 - 31, 2005
	406,840	 	 	0.25	 	December 30, 2005
	15,553,797	 	 	0.20	 	March 31, 2006
	12,160,000	 	 	0.06	 	September 28, 2006
	3,452,000	 	 	0.05	 	September 28, 2006
	2,589,000	 	 	0.12	 	November 30, 2006
	517,800	 	 	0.09	 	November 30, 2006
	1,045,421,667	 	 	0.105	 	December 21, 2009
	115,050,600	 	 	0.086	 	December 21, 2006
	
	 	 	 	 	 
	1,269,478,323	 	 	 	 	 
	
	 	 	 	 	 

For
purposes of valuation, the fair value of warrants issued prior to December 21, 2004 was estimated on the date of grant using the Black-Scholes option pricing model with the following
assumptions: dividend yield of 0%; expected volatility of 100% for the year ended December 31, 2003 and 125% for the year ended December 31, 2004; risk-free interest rate of
4.5%; and an expected life of two years. 

The
fair value of the listed warrants and the broker warrants issued on December 21, 2004 was estimated on the date of issuance using the Black-Scholes option model with the following 

23

 

assumptions:
dividend yield of 0%; expected volatility of 40%; risk-free interest rate of 4.25%; and an expected life of five and two years, respectively. 

	(c)
	Stock
option plan: 

Under
the Company's stock option plan, the Company may grant options up to 10% of the issued and outstanding common shares of the Company to employees, officers, directors and consultants of the
Company and its affiliates and other designated persons for a maximum term of five years. The options vest immediately and the option price may not be less than the market price of the shares at the
time the option is granted. The maximum number of shares that may be issued to any optionee is 5% of the shares outstanding at the time of the grant. 

	 
	 	2004
	 	2003
	 	2002

	 
	 	Number of shares
	 	Weighted average exercise price
	 	Number of shares
	 	Weighted average exercise price
	 	Number of shares
	 	Weighted average exercise price

	Balance, beginning of year	 	550,000	 	$	5.08	 	142,500	 	$	5.89	 	70,833	 	$	5.54
	Cancelled	 	(334,167	)	 	4.80	 	—	 	 	—	 	(13,333	)	 	4.50
	Expired	 	—	 	 	—	 	—	 	 	—	 	(24,167	)	 	7.50
	Granted	 	466,667	 	 	3.60	 	407,500	 	 	4.80	 	109,167	 	 	6.30
	Exercised	 	(19,333	)	 	3.30	 	—	 	 	—	 	—	 	 	—
	 	 	
	 	
	 	
	 	
	 	
	 	

	Outstanding, end of year	 	663,167	 	 	3.60	 	550,000	 	 	5.08	 	142,500	 	 	5.89
	 	 	
	 	
	 	
	 	
	 	
	 	

On
July 5, 2004, the Company repriced an aggregate of 85,833 previously granted options to $3.00. The options were previously exercisable at prices ranging from $3.30 to $7.20 per share with
expiry dates from June 13, 2006 to November 27, 2008. 

The
following table summarizes the options outstanding at December 31, 2004: 

	Number of options outstanding and currently exercisable 
	 	Exercise price
	 	Weighted average remaining contractual life (years)

	116,500	 	$	3.30	 	3.4
	30,000	 	 	4.50	 	1.4
	30,833	 	 	7.50	 	2.4
	85,833	 	 	3.00	 	3.6
	266,667	 	 	3.60	 	4.6
	133,334	 	 	4.80	 	4.9
	
	 	 	 	 	 
	663,167	 	 	 	 	 
	
	 	 	 	 	 

The
fair value of the options granted during 2003 and 2004 has been estimated at the date of grant using a Black-Scholes option pricing model with the following assumptions: risk-free
interest rate of 4.50%; dividend yield of 0%; volatility factor of the expected market price of the Company's common stock of 100% for the year ended December 31, 2003 and 125% for the year
ended December 31, 2004; and a weighted average expected life of these options of 4.0 years. 

Stock-based
compensation amounted to $1,192 and $1,463 for the years ended December 31, 2004 and 2003, respectively. In 2002, all options granted were in connection with the acquisition of a
property and have been capitalized as such. 

	(d)
	Loss
per share: 

As
a result of net losses in each of the years, the potential effect of exercising stock options, warrants and convertible debentures has not been included in the calculation of diluted loss per share
because to do so would be anti-dilutive. 

24

 

	(e)
	Stated
capital reduction: 

On
December 8, 2004, a special resolution was passed by the Company's shareholders to eliminate the deficit of the Company at June 30, 2004 by reducing the stated capital by $21,979.
This deficit was accumulated in connection with the Company's historical operations and does not relate to the Company's current business mandate. 

	15.
	CONTINGENCIES

The
Company and its subsidiaries are involved in various claims and litigation arising in the ordinary course and conduct of their business. Since the outcome is uncertain, no amount has been recorded
in these consolidated financial statements. 

The
significant claims and litigation matters are as follows: 

	(a)
	Statements
of claim were filed against Saskatchewan Power Corporation ("SaskPower"), the Company and Churchill River Power Company Limited ("CRP") on February 10, 1995, seeking
an aggregate of $1 billion in compensatory damages and in excess of $100 million in punitive damages. These claims were filed in connection with the use and operation of the Whitesand
Dam and the Island Falls Hydro Electric Station in Saskatchewan which were transferred by CRP, formerly a wholly owned subsidiary of the Company, to SaskPower in 1981. Based on the current knowledge
of management, in management's opinion, the ultimate resolution of the claims will not be material to the consolidated financial position.

	(b)
	In
May 2004, a number of plaintiffs initiated an action, in the State of North Carolina, against Zochem, Considar Metal Marketing Inc. ("CMM") and a number of other
defendants seeking damages in an unspecified amount and alleging that they had been injured as a result of an explosion that occurred at a pharmaceutical plant. The plaintiffs have alleged that Zochem
and/or CMM designed, manufactured, sold and supplied chemicals used in the manufacture of a rubber compound that were dangerous, defective and susceptible to causing explosions. HBMS has retained
legal counsel in North Carolina and cannot currently assess its potential liability in relation to this claim.

	(c)
	On
April 21, 2004, Novawest Resources Inc. issued a claim in the British Columbia Supreme Court seeking unspecified damages, including against Hudson Bay Exploration and
Development Company Limited, a subsidiary of the Company. The claim alleges a breach of confidence and claims damages as a result of such breach. The defendants have retained counsel to defend the
claim and liability is denied. The likelihood of success of the claim cannot be determined at this time. Based on the current knowledge of management, in management's opinion, the ultimate resolution
of the claim will not be material to the consolidated financial position.

 

	16.
	INCOME TAXES

Income
tax expense differs from the amount that would be computed by applying the statutory income tax rates to income before income taxes. A reconciliation of income taxes calculated at the statutory
rates to the actual tax provision is as follows: 

	 
	 	2004
	 	2003
	 	2002
	 
	Statutory tax rate	 	 	38%	 	 	40%	 	 	40%	 
	 	 	
	 	
	 	
	 
	Tax benefit at statutory rate	 	$	(3,921	)	$	(2,202	)	$	(485	)
	Resource and depletion allowance, net of resource tax recovery	 	 	(18	)	 	—	 	 	—	 
	Benefit of current tax losses not recognized	 	 	3,205	 	 	1,632	 	 	485	 
	Benefit of other timing differences not recognized	 	 	405	 	 	—	 	 	—	 
	Other permanent differences	 	 	329	 	 	570	 	 	—	 
	Reduction in valuation allowance	 	 	(473	)	 	—	 	 	—	 
	 	 	
	 	
	 	
	 
	 	 	$	(473	)	$	—	 	$	—	 
	 	 	
	 	
	 	
	 

25

 

The
tax recovery consists largely of a reduction of the valuation allowance arising from the renunciation of the income tax benefits associated with a flow-through share issuance in
December 2003. 

The
tax effects of temporary differences that give rise to significant portions of the future tax assets at December 31, 2004 and 2003 are presented below: 

	 
	 	2004
	 	2003

	Property, plant and equipment	 	$	265,675	 	$	1,633
	Pension obligation	 	 	26,016	 	 	—
	Other employee future benefits	 	 	22,405	 	 	—
	Asset retirement obligations	 	 	9,184	 	 	—
	Non-capital losses	 	 	58,252	 	 	3,108
	Share issue costs	 	 	3,744	 	 	312
	Other	 	 	—	 	 	131
	 	 	
	 	

	 	 	 	385,276	 	 	5,184
	Less valuation allowance	 	 	372,376	 	 	5,184
	 	 	
	 	

	Net future tax asset	 	$	12,900	 	$	—
	 	 	
	 	

The
non-capital losses on a pretax basis expire as follows: 

	2005	 	$	404
	2006	 	 	282
	2007	 	 	279
	2008	 	 	39,515
	2009	 	 	82,141
	2010	 	 	29,921
	2011	 	 	4,402

The
tax benefit of approximately $113.7 million of the non-capital losses has not been recognized in the financial statements. 

	17.
	RISK MANAGEMENT USING FINANCIAL INSTRUMENTS

	(a)
	Foreign
currency risk management: 

The
Company uses forward exchange or currency collar contracts to limit the effects of movements in exchange rates on foreign currency-denominated assets and liabilities and future anticipated
transactions. 

The
Company paid U.S. $1.2 million to purchase an option giving it the right, but not the obligation, to pay an additional U.S. $2.9 million to purchase U.S. dollar
put options. The put options secure the right, but not the obligation, to sell U.S. $4.375 million per quarter at $1.20482 starting in April 2005 and continuing to
January 2009. The fair value at December 31, 2004 approximates its carrying value as its carrying value was adjusted to fair value on December 31, 2004. 

	(b)
	Credit
risk: 

The
Company provides credit to its customers in the normal course of its operations. It carries out, on a continuing basis, credit checks on its customers and maintains provisions for contingent
credit losses. Substantially all of the Company's accounts receivable are with CMM, a joint venture. 

The
Company is exposed to credit risk in the event of non-performance by counterparties in connection with its derivative contracts. The Company does not obtain collateral or other
security to support financial instruments subject to credit risk but mitigates this risk by dealing only with financially sound counterparties and, accordingly, does not anticipate loss for
non-performance. 

26

 

	(c)
	Commodity
price risk management: 

From
time to time, the Company maintains price protection programs and conducts commodity price risk management through the use of forward sales contracts, spot deferred contracts, option contracts
and commodity collar contracts. 

Through
its joint venture interest in CMM, the Company manages the risk associated with forward physical sales that are made on a fixed price basis regarding zinc and zinc oxide and, accordingly,
enters into forward zinc purchase contracts. At December 31, 2004, the joint venture had outstanding forward contracts to purchase 31,091 tonnes of zinc at prices ranging from U.S. $814
to U.S. $1,241 per tonne with settlement dates in the next three years. The fair value at December 31, 2004 approximates its carrying value as its carrying value was adjusted to fair
value on December 21, 2004. 

	18.
	RELATED PARTY INFORMATION

	(a)
	In
order to close the acquisition of the Balmat mine, the Company received financial assistance from Frame Mining Company ("Framco"), a company controlled by a former officer and
director of the Company. Framco advanced U.S. $1 million to the Company in order for the Company to assume an environmental bond. In addition, Framco agreed to provide security on a
proposed U.S. $4 million project loan to the Company. As security for these debts, the Company agreed to pledge a 51% interest in the Company. Under the terms of the agreement, 26% of
the ownership interest held as security was released to the Company subsequent to the repayment of the U.S. $1 million advanced by Framco and an additional payment of U.S. $200.
The remaining 25% ownership interest was released upon the final repayment of U.S. $800 to Framco. The amounts paid to Framco have been included in the acquisition cost of the Balmat mine.

	(b)
	During
2003, two individuals who were former officers of the Company, advanced $110 to the Company for operating purposes. The advances were repaid through the issuance of 36,667 of
the units issued in May 2003.

	(c)
	During
the years ended December 31, 2004 and 2003, the Company paid $2,317 and $428, respectively, to two law firms which were associated with two individuals who were former
directors of the Company at the time. The payments in 2004 were substantially in respect of services in connection with the acquisition of HBMS and the related financings.

	(d)
	In
June 2004, certain individuals who were former officers and directors of the Company at the time purchased an aggregate of 795,986 units in connection with a private
placement completed by the Company (note 14(a)(i)(b)).

	(e)
	In
September 2004, the former Chairman of the Company acquired 333,333 units and the then corporate secretary acquired 6,667 units in connection with a private placement
completed by the Company (note 14(a)(i)(a)). In December 2004, these transactions were reversed.

 

	19.
	INVESTMENT IN JOINT VENTURES

Considar
Metal Marketing SA ("CMMSA"), an entity incorporated under the laws of the Grand Duchy of Luxembourg, is a joint venture in which the Company holds a 50% interest. The joint venture,
together with its wholly owned subsidiary, CMM, carries on the business of providing metal marketing to customers in various metal-related industries. 

27

 

The
following is a summary of the Company's 50% pro rata share of the book value of the assets, liabilities, revenue and expenses of the CMMSA joint venture. Substantially all of the Company's
sales are transacted with the joint venture. Such information is presented prior to intercompany eliminations. 

	Assets	 	 	 	 
	Current assets	 	$	52,535	 
	Unrealized fair value derivative	 	 	772	 
	Property, plant and equipment	 	 	112	 
	 	 	
	 
	
Liabilities	
 	
 	

 	
 
	Current liabilities	 	$	49,264	 
	Future income taxes payable	 	 	1,290	 
	 	 	
	 
	Sales	 	$	6,898	 
	
 Costs and expenses:	
 	
 	

 	
 
	 	Operating, general and administrative	 	 	7,053	 
	 	Depreciation and amortization	 	 	2	 
	 	Gain on derivative instruments	 	 	(78	)
	 	 	
	 
	 	 	 	6,977	 
	 	 	
	 
	Loss before income taxes	 	$	(79	)
	 	 	
	 
	Cash flows:	 	 	 	 
	 	Operating activities	 	$	106	 
	 	Investing activities	 	 	(5	)
	 	 	
	 

	20.
	COMMITMENTS

	(a)
	Operating
lease commitments: 

The
Company has entered into various lease commitments for facilities and equipment. The leases expire in periods ranging from one to four years. The aggregate remaining minimum annual lease payments
required for the next four years are as follows: 

	2005	 	$	3,469
	2006	 	 	2,424
	2007	 	 	549
	2008	 	 	12

Through
its joint venture interest in CMMSA, as at December 31, 2004, the Company has various lease commitments for facilities and equipment which expire in periods ranging from one to eight
years. The aggregate remaining minimum annual lease payments, representing 100% of CMMSA's commitment, required for the next five years are as follows: 

	2005	 	$	212
	2006	 	 	223
	2007	 	 	218
	2008	 	 	216
	2009 and thereafter	 	 	503

The
Company has recorded operating lease expense of $94. 

	(b)
	Buy-sell
commitments: 

The
Company has entered into a commitment to deliver 85,000 tonnes of copper anodes for refining during the next year, with the option to extend for an additional year, each year. In the event that
the 

28

 

Company
is unable to meet the terms of the contract, it would be required to make a payment of U.S. $0.04 per pound of copper anode not delivered. 

The
Company has a commitment to purchase copper concentrate for payment based on a deemed delivery rather than a required physical delivery. The contract requires delivery of 72,000 tonnes annually
from 2005 to 2008. 

Payment
is based on the market price of contained metal during a quotational period following delivery of the concentrate, less a fixed treatment and refining credit. If the Company cannot process the
deemed tonnage in a timely manner, management believes the Company will be able to negotiate alternate arrangements for the sale or diversion of the tonnage. 

The
Company has a commitment to purchase 40,000 DMT per year of copper concentrate through 2008. Payment is made 45 days after the date of the bill of lading, and is based on the market
price of contained metal during a quotational period following delivery of the concentrate, less a treatment, refining and freight credit. Management intends to seek opportunities to swap the tonnage
with other smelters (where a freight advantage exists). If the Company cannot process the concentrate or swap tonnage in a timely manner, management believes that alternate arrangements can be
negotiated for the sale or diversion of the tonnage. 

The
Company relies partly on processing purchased concentrates to achieve a portion of profits. The continued availability of such concentrates at economic terms beyond the expiry of current existing
contracts cannot be determined at this time. 

	(c)
	Other
commitments and agreements

	(i)
	The
Company has provided housing loss guarantees for employees who were required to move out of Company-owned housing due to demolition. As of December 31, 2004,
management believes the market value of the new homes purchased exceeds the related guarantee amounts.

	(ii)
	Under
a Purchase and Sale Agreement made between CMM, Considar WP Acquisition Corp. ("Considar WP") and White Pine Copper Refinery Inc. ("White Pine"), dated
June 4, 2000 and amended on May 16, 2001, CMM has a right to acquire all of the issued and outstanding shares of White Pine from Considar WP by giving notice to Considar WP at certain
dates in 2004, 2005 or 2006. In addition, Considar WP has the right to require that CMM purchase such shares by giving notice to CMM in September 2005. 

CMM
is a wholly owned subsidiary of CMMSA. HBMS and Considar, Inc. ("Considar") are the holders of all of the issued and outstanding shares of CMMSA. Pursuant to a letter agreement between HBMS
and Considar, dated June 4, 2000, if HBMS and Considar cannot agree on some alternate form of financing for the acquisition of the shares of White Pine by CMM, each of HBMS and Considar has
agreed to make available to CMM sufficient funds to pay one-half of the purchase price of U.S. $13 million for such shares and for all other amounts payable by CMM under the
Purchase and Sale Agreement at and after the closing of the transaction. 

	(iii)
	On
the majority of the Callinan/777 mine, the Company is subject to a royalty payment of $0.25 per ton of ore milled and a net profits interest of 62/3%
of the net proceeds of production if cumulative and aggregate cash flow for the year is positive. To date, the aggregate cash flow has been negative.

	(iv)
	HBMS
has a profit-sharing plan, whereby 10% of the Company's after-tax earnings (excluding provisions for future income tax) calculated in accordance with
U.K. generally accepted accounting principles for any given fiscal year will be distributed to all employees in the Flin Flon/Snow Lake operations, with the exception of executive officers and
key management personnel.

	(v)
	The
Company entered into a security agreement dated March 31, 1999 in favour of the Province of Saskatchewan in respect of its reclamation undertakings in
Saskatchewan. As security for the implementation of decommissioning plans in respect of its undertakings in Saskatchewan, the 

29

 

Company
has granted to the Province of Saskatchewan a first priority security interest in its mining equipment, buildings and fixtures and a first charge on all proceeds derived from any dealings with
such mining equipment, buildings and fixtures. In addition, the Company has a security agreement dated May 7, 2004 in favour of the Province of Manitoba in respect of its reclamation
undertakings in Manitoba. As security for the implementation of a decommissioning plan in respect of its undertakings in Manitoba, the Company has granted to the Province of Manitoba a first priority
security interest in its mining equipment, buildings and fixtures owned by the Company and located on the lands and a first charge on all proceeds derived from any dealings with such mining equipment,
buildings and fixtures. The security interests granted to the Provinces of Saskatchewan and Manitoba rank pari passu. 

The
Company has commenced a study of reclamation costs, to a level of confidence greater than that of the existing conceptual study, to more accurately determine the estimated reclamation costs. The
study is expected to be completed during 2005. 

The
Company believes its current reclamation cost estimate of approximately $51.6 million, for the HBMS properties, is adequate and is sufficiently secured by the existing security. However,
the Company has provided additional security to the provinces in the form of restricted cash in the amount of $13 million during the period of preparation of the study. Upon completion of the
study, the appropriate security will be determined by the provinces. 

	(vi)
	In
the normal course of operations, the Company provides indemnifications that are often standard contractual terms to counterparties in transactions, such as purchase
and sale contracts, service agreements and leasing transactions. These indemnification agreements may require the Company to compensate the counterparties for costs incurred as a result of various
events, including environmental liabilities, changes in (or in the interpretation of) laws and regulations, or as a result of litigation claims or statutory sanctions that may be suffered by the
counterparty as a consequence of the transaction. The terms of these indemnification agreements will vary based upon the contract, the nature of which prevents the Company from making a reasonable
estimate of the maximum potential amount that could be required to pay to counterparties. Historically, the Company has not made any significant payments under such indemnifications. Management
estimates that there are no significant liabilities with respect to these indemnification guarantees.

	(vii)
	The
Company has outstanding letters of credit in the amount of $22.8 million that are secured by an equal amount of restricted cash.

 

	21.
	CHANGE IN NON-CASH WORKING CAPITAL

	 
	 	2004
	 	2003
	 	2002
	 
	Accounts receivable	 	$	(8,285	)	$	—	 	$	(153	)
	Inventories	 	 	(11,843	)	 	—	 	 	—	 
	Accounts payable and accrued liabilities	 	 	17,565	 	 	442	 	 	222	 
	Prepaid expenses and other assets	 	 	4,328	 	 	(563	)	 	(73	)
	Interest payable	 	 	508	 	 	—	 	 	—	 
	 	 	
	 	
	 	
	 
	 	 	$	2,273	 	$	(121	)	$	(4	)
	 	 	
	 	
	 	
	 

	22.
	RECONCILIATION OF CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES

The
consolidated financial statements of the Company have been prepared in accordance with Canadian GAAP which differ in certain material respects from U.S. GAAP. 

30

 

If
U.S. GAAP were employed, the net loss for the years would be adjusted as follows: 

	 
	 	2004
	 	2003
	 	2002
	 
	Loss for the year based on Canadian GAAP	 	$	(9,920	)	$	(5,455	)	$	(1,213	)
	Impact on loss of U.S. GAAP adjustments:	 	 	 	 	 	 	 	 	 	 
	 	Depreciation and amortization (a)	 	 	(142	)	 	—	 	 	—	 
	 	Accretion of convertible debentures (b)	 	 	632	 	 	—	 	 	—	 
	 	Debt settlement expense (b)	 	 	508	 	 	—	 	 	—	 
	 	SFAS 143 cumulative adjustment (d)	 	 	—	 	 	(10	)	 	10	 
	 	 	
	 	
	 	
	 
	Loss for the year under U.S. GAAP	 	$	(8,922	)	$	(5,465	)	$	(1,203	)
	 	 	
	 	
	 	
	 
	Basic and diluted loss per share under U.S. GAAP, before cumulative impact of change in accounting policy	 	$	(1.00	)	$	(1.45	)	$	(0.53	)
	 	 	
	 	
	 	
	 
	Basic and diluted loss per share under U.S. GAAP	 	$	(1.00	)	$	(1.45	)	$	(0.53	)
	 	 	
	 	
	 	
	 

The
following summarizes the Company's adjusted consolidated balance captions conforming to U.S. GAAP: 

	 
	 	2004
	 	2003
	 
	Assets:	 	 	 	 	 	 	 
	 	Property, plant and equipment (a)	 	$	368,120	 	$	5	 
	Liabilities:	 	 	 	 	 	 	 
	 	Convertible debentures (b)	 	 	—	 	 	2,000	 
	Shareholder's deficiency:	 	 	 	 	 	 	 
	 	Common shares	 	 	154,936	 	 	21,379	 
	 	Deficit	 	 	(28,607	)	 	(19,685	)
	 	Currency translation adjustment	 	 	—	 	 	—	 
	 	Accumulated other comprehensive loss	 	 	(24	)	 	—	 
	 	Equity component of convertible debenture	 	 	—	 	 	—	 

	(a)
	Depreciation
and amortization: 

Under
Canadian GAAP, amortization of mine development costs using the units of production method is calculated using historical costs plus estimated future underground development costs required to
access proven and probable reserves. For U.S. GAAP purposes, amortization of mine development costs is calculated using historical capitalized costs incurred. Mine development costs which
benefit the entire mine life are amortized over proven and probable reserves and the remainder of the mine development costs are amortized over the currently accessible proven and probable reserves to
which these costs relate. 

	(b)
	Convertible
debentures: 

Under
Canadian GAAP, the Company accounts for the convertible debentures in accordance with their substance and, as such, they are presented in the consolidated financial statements in their liability
and equity component parts. The debt component is accreted over the life of the debt by way of a charge to interest expense. Under U.S. GAAP, the entire face value of the convertible debentures
is treated as debt and interest is based on the coupon rate of 12%. 

Under
Canadian GAAP, the premium on redemption is calculated by reference to the carrying value of the debt component only and the residual equity component is credited to shareholders' equity. Under
U.S. GAAP, the premium on redemption is calculated by reference to the entire face value of the debentures. 

31

 

	(c)
	Flow-through
shares: 

Under
U.S. GAAP, when flow-through shares are issued, the proceeds are allocated between the issue of shares and the sale of tax benefits. The allocation is made based on the
difference between the quoted price of the existing shares and the amount that the investor pays for the shares. The shareholders' equity is reduced and a liability is recognized for this difference.
Since the Company did not receive any premium over the market value of the shares at the time of the issuance, the premium amounted to nil for the flow-through shares issued in
December 2003 (note 14(a)(ii)(f)). 

	(d)
	Asset
retirement obligations: 

Under
U.S. GAAP, the Company adopted SFAS 143, Accounting for Asset Retirement Obligations, on January 1, 2003. Under Canadian GAAP, the Company adopted Section 3110, Asset
Retirement Obligations, on January 1, 2004, which is consistent with SFAS 143. The Company retroactively adjusted their financial statements to reflect the adoption of
Section 3110. 

	(e)
	Stated
capital reduction: 

Canadian
GAAP allows for the reduction of the stated capital of outstanding common shares with a corresponding offset to deficit. This reclassification, which the Company made in 2004, is not
permitted by U.S. GAAP and would result in an increase in both share capital and deficit of $21,979 at December 31, 2004. 

	(f)
	Comprehensive
income: 

Comprehensive
income is recognized and measured under U.S. GAAP pursuant to SFAS 130, Reporting Comprehensive Income. This standard defines comprehensive income as all changes in equity
other than those resulting from investments by owners and distributions to owners. Comprehensive income is comprised of two components, net income and OCI. OCI refers to amounts that are recorded as
an element of shareholders' equity but are excluded from net income because these transactions or events were attributed to changes from non-owner sources. The following is a summary of
the Company's comprehensive income as measured under SFAS 130: 

	 
	 	2004
	 	2003
	 	2002
	 
	Loss under U.S. GAAP	 	$	(8,922	)	$	(5,465	)	$	(1,203	)
	Other comprehensive income (loss):	 	 	 	 	 	 	 	 	 	 
	 	Change in cumulative translation adjustments	 	 	(24	)	 	—	 	 	—	 
	 	 	
	 	
	 	
	 
	Comprehensive loss based on U.S. GAAP	 	$	(8,946	)	$	(5,465	)	$	(1,203	)
	 	 	
	 	
	 	
	 

	(g)
	Joint
ventures: 

U.S. GAAP
requires investments in joint ventures to be accounted for under the equity method, while under Canadian GAAP, the accounts in joint ventures are proportionately consolidated.
However, under rules promulgated by the Securities and Exchange Commission, a foreign registrant may, subject to the provision of additional information, continue to follow proportionate consolidation
for the purposes of registration and other filings notwithstanding the departure from U.S. GAAP. Consequently, the consolidated balance sheets have not been adjusted to restate the accounting
for joint venture under U.S. GAAP. Additional information concerning the Company's interests in joint ventures is presented in note 19. 

32

 

	(h)
	Other
supplemental information provided for U.S. GAAP purposes: 

	 
	 	2004
	 	2003

	Accounts receivable less allowance for doubtful accounts:	 	 	 	 	 	 
	 	Trade	 	$	67,005	 	$	—
	 	Related parties	 	 	263	 	 	—
	 	Other	 	 	5,942	 	 	89
	 	 	
	 	

	 	 	$	73,210	 	$	89
	 	 	
	 	

	Accounts payable:	 	 	 	 	 	 
	 	Trade	 	$	58,538	 	$	533
	 	Other	 	 	5,953	 	 	—
	 	 	
	 	

	 	 	$	64,491	 	$	533
	 	 	
	 	

	Accrued liabilities:	 	 	 	 	 	 
	 	HBMS acquisition and related financing costs	 	$	1,634	 	$	—
	 	Hydro	 	 	2,367	 	 	—
	 	Profit-sharing and employee bonuses	 	 	5,590	 	 	—
	 	Vacation pay	 	 	10,896	 	 	—
	 	Other	 	 	6,061	 	 	492
	 	 	
	 	

	 	 	$	26,548	 	$	492
	 	 	
	 	

The
Company includes shipping and handling costs in operating costs: 

	Shipping and handling	 	$	52	 	$	—

	(i)
	Recent
accounting pronouncements:

	(i)
	SFAS 123R,
Accounting for Stock-based Compensation ("SFAS 123R"): 

In
December 2004, the FASB issued SFAS 123R. SFAS 123R is applicable to transactions in which an entity exchanges its equity instruments for goods and services. It focuses
primarily on transactions in which an entity obtains employee services in share-based payment transactions. SFAS 123R requires that the fair value of such equity instruments is recorded as an
expense as services are performed. Prior to SFAS 123R, only certain pro forma disclosures of accounting for these transactions at fair value were required. SFAS 123R will be
effective for the Company's 2005 consolidated financial statements, and permits varying transition methods including: retroactive adjustment of prior periods as far back as 1995 to give effect to the
fair value based method of accounting for awards granted in those prior periods; retrospective application to all interim periods in 2005; or prospective application to future periods beginning in
third quarter 2005. The Company is presently evaluating the effect of the varying methods of adopting SFAS 123R. 

	(ii)
	SFAS 151,
Inventory Costs ("SFAS 151") 

SFAS 151
was issued in November 2004 as an amendment to ARB No. 43. SFAS 151 specifies the general principles applicable to the pricing and allocation of certain costs to
inventory. Under SFAS 151, abnormal amounts of idle facility expense, freight, handling costs and wasted materials are recognized as current period charges rather than capitalized to inventory.
SFAS 151 also requires that the allocation of fixed production overhead to the cost of inventory be based on the normal capacity of production facilities. SFAS 151 will be effective for
inventory costs incurred beginning in the Company's 2006 fiscal year. The Company is presently evaluating the impact of SFAS 151 on the Company's consolidated financial statements. 

	(iii)
	SFAS 153,
Exchanges of Non-Monetary Assets ("SFAS 153") 

SFAS 153
was issued in December 2004 as an amendment to APB Opinion No. 29. SFAS 153 provides guidance on the measurement of exchanges of non-monetary assets,
with exceptions for 

33

 

exchanges
that do not have commercial substance. Under SFAS 153, a non-monetary exchange has commercial substance if, as a result of the exchange, the future cash flows of an entity
are expected to change significantly. 

Under
SFAS 153, a non-monetary exchange is measured based on the fair values of the assets exchanged. If fair value is not determinable, the exchange lacks commercial substance or
the exchange is to facilitate sales to customers, a non-monetary exchange is measured based on the recorded amount of the non-monetary asset relinquished. SFAS 153 will
be effective for non-monetary exchanges that occur in fiscal periods beginning after June 15, 2005. 

	23.
	SUBSEQUENT EVENTS

	(a)
	On
February 22, 2005, the Company completed a private placement of 806,452 flow-through common shares at a price of $3.10 per share for aggregate gross proceeds of
approximately $2,500. Commission of 5% of the gross proceeds of the offering was paid to the underwriters and net proceeds were $2,373. The proceeds will be used to incur Canadian exploration expenses
which will be renounced in favour of the holders for the 2005 taxation year.

	(b)
	Broker
warrants issued in connection with the Company's offering of subscription receipts on December 21, 2004 have been exercised subsequent to December 31, 2004,
aggregating the following amounts: 70,950,678 warrants to purchase 2,365,022 common shares for proceeds of $6,119.

	(c)
	Effective
March 24, 2005, the Company agreed to guarantee HBMS's U.S. $175,000 Notes. The Company guarantee is unsecured and ranks subordinate in right of payment to all
senior indebtedness of the Company. The Company guarantee will terminate on the date upon which it owns less than a majority of the voting shares of HBMS (note 10(c)). 

34

QuickLinks

Exhibit 4.3

CONSOLIDATED BALANCE SHEETS

CONSOLIDATED STATEMENTS OF OPERATIONS AND DEFICIT

CONSOLIDATED STATEMENTS OF CASH FLOWS

CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTSQuickLinks
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Exhibit 4.4    
    

HUDBAY MINERALS INC.  

Management's Discussion and Analysis of

Results of Operations and Financial Condition

Year Ended December 31, 2004  

  

 
 

MANAGEMENT'S DISCUSSION AND ANALYSIS
  OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION    
    

        Unless the context otherwise suggests, references to "we", "us", "our" and similar terms, as well as references to the "Company", refer to
HudBay Minerals Inc.

        You
should read this Management's Discussion and Analysis ("MD&A") in conjunction with our consolidated financial statements for the year ended December 31, 2004 and related notes
thereto, which have been prepared in accordance with Canadian generally accepted accounting principles (GAAP). Our consolidated financial statements include the results of Hudson Bay Mining and
Smelting Co., Limited ("HBMS") for only the ten-day period ended December 31, 2004. Included herein is unaudited information relating to HBMS results of operations for the
twelve-month period ended December 31, 2004. All figures are in Canadian dollars unless otherwise noted. 

        This
MD&A contains certain forward-looking statements. All statements, other than statements of historical fact, included herein, including without limitation, statements regarding our
future plans and objectives are forward-looking statements that involve various risks and uncertainties. There can be no assurance that such statements will prove accurate, and actual results and
future events could differ materially from those anticipated in such statements. Important factors that could cause actual results to differ materially from our expectations are disclosed in documents
that we have filed from time to time with the Toronto Stock Exchange and other regulatory authorities. 

        Additional
information regarding the Company, including our Annual Information Form, is available on SEDAR at www.sedar.com and on our website at www.hudbayminerals.com. 

Overview  

        We are an integrated mining and metal processing company that operates mines and concentrators in Northern Manitoba and Saskatchewan, Canada and a metal
processing complex in Flin Flon, Manitoba. 

        On
December 21, 2004, we acquired indirectly all of the outstanding shares of HBMS, realizing our strategy of acquiring high-quality mining assets at an advanced stage
of development or in production. 

Nature of HBMS Business  

        Through HBMS we undertake exploration and development activities, primarily within economic transportation distance of our metal processing complex located in
Flin Flon, Manitoba. Our production facilities consist of four operating mines, two concentrators and metallurgical facilities consisting of a zinc plant and copper smelter complex for the extraction
of zinc and copper with gold and silver by-products. The Trout Lake, Konuto and 777 mines are located in the Flin Flon area, and ore from these mines is processed through the Flin
Flon concentrator. The Chisel North mine and concentrator are located in the Snow Lake area. A downstream operating division of HBMS, Zochem, consumes on average between 25% and 30% of HBMS' zinc
production to produce zinc oxide. 

        Between
1998 and 2004, HBMS invested approximately $435 million executing the 777 Project, which involved construction of the new 777 mine in Flin Flon, development
of the Chisel North mine near Snow Lake, expansion of the Flin Flon concentrator capacity from 1.81 million to 2.18 million tonnes per year, and expansion of the Flin Flon zinc plant,
including construction of a state-of-the-art electrolytic cellhouse with capacity to support annual production of 115,000 tonnes of cast zinc. 

        In
1998, and in support of the 777 Project, HBMS entered into an amending agreement in respect of certain of its collective bargaining agreements. The amending agreement prohibits
strikes and lockouts through 2012 and provides for binding arbitration in the event that negotiated contract settlements are not achieved. 

        The
777 Project, the labour amending agreement, closure of the Ruttan mine and a labour restructuring and efficiency improvement project in 2003 have resulted in a smaller
workforce, higher labour productivity, lower unit operating costs, and improved zinc and copper grades. 

1

 

        Our
objective is to operate the HBMS zinc plant and copper smelter at full capacity at all times. We use purchased concentrate to fill excess plant capacity not utilized in the
processing of concentrate produced from HBMS mines. As such, requirements for purchased concentrate are determined by plant capacity and production capability at our mines. For the period
January 1, 2002 to December 31, 2004, 53.2% of HBMS copper production came from HBMS mines, while the remaining 46.8% came from purchased concentrate. During the same period, HBMS mines
contributed 90.3% of total zinc production with only 9.7% being sourced from purchased concentrate. The contribution to income earned from processing purchased concentrate is dependent upon the
treatment and refining charges (TC/RCs), as well as the freight cost (net of any credit from the vendor) of transporting the concentrate to Flin Flon. TC/RCs are set by the
market on the basis of supply and demand for concentrate. Freight credits are generally set at parity with transport cost to a major world port. Fluctuations in TC/RCs and ocean freight costs can
affect the extent to which economic purchased concentrate is available to us. As well, purchased concentrate availability can also be affected by operational changes at the concentrate supplier's
mines. 

        Metal
sales volumes for any given period are affected by the volume and grade of ore mined, metal recovery through the concentrator and grade of purchased concentrate. HBMS sells
substantially all of its copper anode, cast zinc and zinc oxide to Considar Metal Marketing Inc. ("CMM"), a wholly-owned subsidiary of Considar Metal Marketing S.A. ("CMMSA"), which is a
joint venture company that is 50% owned by HBMS. CMM contracts with the White Pine copper refinery and other third parties to refine copper anodes into market-standard cathodes, and to simultaneously
extract the contained precious metals from the anodes. The copper cathodes and precious metals are sold at market prices. Cast zinc slabs and blocks and zinc oxide are sold by CMM to customers in
Eastern Canada and the United States. Sales of zinc oxide typically generate less than 10% of our revenues. The financial results of CMMSA are proportionately consolidated in our financial
statements with effect from December 21, 2004. 

Other Activities  

        In addition to HBMS' operations and exploration activities, we own 100% of four projects: 

	•
	the
Balmat Mine, a development zinc property in New York State, which is currently being evaluated for possible restart of mining operations;

	•
	the
Gay's River Mine, a development zinc/lead/gypsum property in Nova Scotia, Canada, which is currently being evaluated for future mining operations;

	•
	the
Southwestern Ontario Project, a zinc exploration project comprised of mineral leases covering approximately 10,500 hectares; and

	•
	the
San Antonio Project, an exploration project in Chile. 

2

 

Summarized Financial Results  

        The following table sets out summary consolidated financial information for us as at and for the years ended December 31, 2004, 2003 and 2002. 

	 
	 	Year ended December 31,
	 
	 
	 	2004(1)
	 	2003(2)
	 	2002(2)
	 
	 
	 	(thousands, except loss per share information)

	 
	Statement of Operations	 	 	 	 	 	 	 	 	 	 
	 	Sales	 	$	13,327	 	$	—	 	$	—	 
	 	Net loss	 	 	(9,920	)	 	(5,455	)	 	(1,213	)
	Per Common Share:	 	 	 	 	 	 	 	 	 	 
	 	Basic and diluted loss	 	$	(1.12	)	$	(1.45	)	$	(0.53	)
	Balance Sheet:	 	 	 	 	 	 	 	 	 	 
	 	Cash and cash equivalents	 	$	64,553	 	$	2,114	 	$	195	 
	 	Total assets	 	 	642,697	 	 	11,865	 	 	4,333	 
	 	Total long-term debt and capital leases, excluding current portion	 	 	235,248	 	 	1,039	 	 	—	 
	 	Shareholders' equity	 	 	152,766	 	 	9,032	 	 	3,029	 

Note: 

	(1)
	Includes
ten days of HBMS reporting only.

	(2)
	Restated
to give effect to the change in accounting policy relating to exploration costs. 

Quarterly Information  

        The following table sets forth our selected consolidated financial information for each of the eight most recently completed quarters. 

	 
	 	2004
	 	2003(1)
	 
	 
	 	Q4
	 	Q3(1)
	 	Q2(1)
	 	Q1(1)
	 	Q4
	 	Q3
	 	Q2
	 	Q1
	 
	 
	 	(in thousands, except per share information)

	 
	For the period:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	Net revenue	 	$	13,308	 	$	6	 	$	7	 	$	6	 	$	3	 	$	5	 	$	—	 	$	—	 
	 	Net loss	 	 	(2,891	)	 	(3,282	)	 	(2,083	)	 	(1,664	)	 	(3,429	)	 	(1,359	)	 	(365	)	 	(302	)
	Per Common Share	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	Basic and diluted loss	 	 	(0.18	)	 	(0.45	)	 	(0.30	)	 	(0.29	)	 	(0.65	)	 	(0.38	)	 	(0.11	)	 	(0.10	)

Note: 

	(1)
	Restated
to give effect to the change in accounting policy relating to exploration costs 

3

 

Results of Operations  

        The following table sets out the contribution of HBMS to our operating results in the year ended December 31, 2004: 

	 
	 	HudBay

(excluding HBMS)

Year ended December 31, 2004
	 	HBMS

Ten-day period ended

December 31, 2004
	 	Consolidated

Year ended

December 31, 2004
	 
	 
	 	(thousands)

	 
	Sales	 	$	—	 	$	13,327	 	$	13,327	 
	Operating costs	 	 	(3,457	)	 	(10,624	)	 	(14,081	)
	General and administrative	 	 	(3,609	)	 	(325	)	 	(3,934	)
	Stock option compensation	 	 	(1,193	)	 	—	 	 	(1,193	)
	Write off of deferred charges	 	 	(620	)	 	—	 	 	(620	)
	Depreciation and amortization	 	 	(241	)	 	(1,202	)	 	(1,443	)
	Accretion	 	 	(69	)	 	(69	)	 	(138	)
	Exploration	 	 	(1,734	)	 	—	 	 	(1,734	)
	Debenture prepayment premium	 	 	(761	)	 	—	 	 	(761	)
	Foreign exchange gain (loss)	 	 	3,581	 	 	(2,019	)	 	1,562	 
	Other income	 	 	46	 	 	57	 	 	103	 
	Gain on derivative instruments	 	 	—	 	 	78	 	 	78	 
	Interest expense	 	 	(951	)	 	(608	)	 	(1,559	)
	Income tax recovery	 	 	397	 	 	76	 	 	473	 
	 	 	
	 	
	 	
	 
	Loss for the period	 	$	(8,611	)	$	(1,309	)	$	(9,920	)
	 	 	
	 	
	 	
	 

The Company (excluding HBMS)  

Year Ended December 31, 2004 Compared to Year Ended December 31, 2003 

        We
incurred a loss of $8.6 million for the year ended December 31, 2004, compared to a loss of $5.5 million for the year ended December 31, 2003. 

        Operating
costs increased to $3.5 million for the year ended December 31, 2004, from $1.5 million for the year ended December 31, 2003, principally because of
costs associated with the Balmat Mine, which we acquired in September 2003 and is currently held on a care and maintenance basis. The costs of maintaining the Gay's River Mine property are also
included. 

        General
and administrative expenses increased to $3.6 million for the year ended December 31, 2004 from $2.4 million for the year ended December 31, 2004. The
increase primarily reflects the addition of senior management, and increased operating, acquisition and financing activities. A severance payment and retention payments arising out of the acquisition
of HBMS are also included in 2004. Costs for 2003 included a provision for bad debt expense of $0.7 million in connection with the sale of the San Antonio property, and there was no comparable
provision in 2004. We regained control of the San Antonio property following the failure of the purchaser to complete scheduled payments. 

        We
recorded stock option compensation of $1.2 million during the year ended December 31, 2004, primarily in relation to the expense of 466,667 options granted to our
former executive officers in July and November 2004. The expense of $1.5 million in 2003 relates primarily to grants of options to individuals who were, at that time, executive officers
and directors. 

        During
2004 we incurred costs of $0.6 million in connection with plans to list our common shares on the London Stock Exchange's Alternative Investment Market. We abandoned the
listing during the third quarter of 2004 and all related costs were written off. There was no comparable expense in 2003. 

        As
a result of the issuance of US$175 million senior secured notes by HBMS in December 2004, we were required to repay the $2.6 million principal amount of secured
convertible debentures issued in December 2003 and January 2004. Depreciation and amortization expense for the year ended December 31, 2004 of $0.2 million 

4

 

includes
the amortization and write-off of $0.2 million of issue costs relating to these debentures. A further amount of $0.8 million has been recorded as debt settlement
expense in connection with repayment of the debentures. For accounting purposes under GAAP, we segregated the debentures into their debt and equity components: interest expense for the year ended
December 31, 2004 of $1.0 million includes $0.3 million interest paid on the debentures plus $0.6 million accreted interest in respect of the equity component of the
debentures that was established as $1.2 million at the date of issuance. The difference of $1.1 million between the $1.2 million carrying value of the equity component and the
fair value of $0.1 million as at December 23, 2004, has been credited to retained earnings. 

        A
foreign exchange gain of $3.6 million was recorded for the year ended December 31, 2004. This includes a gain of $3.8 million arising from the revaluation of our
senior secured notes in the amount of US$175 million, at the December 31, 2004 rate of exchange. 

Year Ended December 31, 2003 Compared to Year Ended December 31, 2002 

        During
2003 and 2002, we did not have any revenue other than interest earned. Our loss increased during 2003 to $5.5 million from $1.2 million during 2002. The increased
loss resulted from, among other things, increased care and maintenance expenses arising in connection with the acquisition of the Balmat Mine, increased costs associated with various other acquisition
projects, write-down of accounts receivable and stock option compensation expense. 

        Operating
costs for the year ended December 31, 2003 increased to $1.5 million from $0.1 million in 2002, principally because of the costs associated with the Balmat
Mine. Expenditures in 2002 primarily related to the Gay's River Mine. 

        General
and administrative expenses for the year ended December 31, 2003 were $2.4 million compared with $0.6 million in the previous year. This increase primarily
relates to professional fees and travel expenses associated with several initiatives to acquire major zinc operations and fees paid with respect to financings that did not materialize. In addition
during 2003, we made a $0.7 million provision for bad debts reflecting the write-down of the receivable arising from the sale of the San Antonio Project in Chile in 2002. 

        A
foreign exchange gain of $0.2 million was recorded for the year ended December 31, 2003, primarily on account of the translation of the financial statements of our
U.S. subsidiary, St. Lawrence Zinc Company LLC, into Canadian currency. A loss of $4,000 was recorded in 2002. 

        Stock
option compensation expense of $1.5 million charged in 2003 reflects the application of the fair value method of accounting for stock options granted to employees and
consultants during the year. In 2002, all options granted were capitalized to exploration and development projects. 

HBMS  

Period from December 21, 2004 to December 31, 2004 

        Our
consolidated statement of operations includes the operating results of HBMS for the ten-day period ended December 31, 2004. For this period, sales were
$13.3 million, operating costs were $10.6 million and general and administrative costs were $0.3 million. Including an exchange loss of $2.0 million arising from
U.S. denominated net assets and interest of $0.6 million, the net loss for the period was $1.3 million. The results of HBMS operations prior to December 21, 2004 are not
audited and not included in our consolidated financial statements. Information on the results of HBMS' operations for the twelve-month period ended December 31, 2004 is provided below under the
heading entitled "Supplemental Information on HBMS Results for the full year 2004". 

5

 

Cash Flows, Liquidity and Capital Resources  

        The following table sets out the contribution of HBMS to our cash flows from operating activities for the year ended December 31, 2004: 

	 
	 	HudBay

(excluding HBMS)

Year ended December 31, 2004
	 	HBMS

Ten-day period ended

December 31, 2004
	 	Consolidated

Year ended December 31, 2004
	 
	 
	 	(thousands)

	 
	Operating activities	 	 	 	 	 	 	 	 	 	 
	 	Loss for the period	 	$	(8,611	)	$	(1,309	)	$	(9,920	)
	 	Items not affecting cash	 	 	(1,108	)	 	1,813	 	 	705	 
	 	Change in non-cash working capital and other	 	 	2,218	 	 	(231	)	 	1,987	 
	 	 	
	 	
	 	
	 
	Cash generated by (required for) operating activities	 	 	(7,501	)	 	273	 	 	(7,228	)
	Cash generated by (required for) financing activities	 	 	344,457	 	 	(17	)	 	344,440	 
	Cash required for investing activities	 	 	(270,961	)	 	(3,123	)	 	(274,084	)
	Foreign exchange loss on cash held in foreign currency	 	 	—	 	 	(689	)	 	(689	)
	 	 	
	 	
	 	
	 
	Increase (decrease) in cash and cash equivalents	 	 	65,995	 	 	(3,556	)	 	62,439	 
	 	 	
	 	
	 	
	 

Year Ended December 31, 2004 Compared to Year Ended December 31, 2003 

        As
of December 31, 2004, we had cash and cash equivalents of $64.6 million compared to $2.1 million at December 31, 2003. 

        Our
liquidity requirements arise primarily from the need to fund capital expenditures for the maintenance and development of our mines and facilities, to fund working capital needs, and
to meet our debt service requirements. Our primary sources of liquidity are cash generated from operating activities and amounts available to us under our line of credit. During 2004 HBMS generated
sufficient cash flow from operations to meet all of its operating and capital requirements. 

        We
have an interest free loan from the Province of Manitoba that is secured by an irrevocable standby letter of credit. In June, 2004, 2003 and 2002, HBMS made repayments of
$2 million in accordance with the terms of the loan agreement. The undiscounted balance at December 31, 2004 was $17.5 million. Under the terms of the agreement with the Province,
the loan is repayable in installments of $2 million in 2005, $4 million in each of 2006 and 2007 and $7.5 million in 2008. 

        Cash
required for our operating purposes (not including HBMS) was $7.5 million during the year ended December 31 2004, compared with $3.5 million in the same
period in 2003. The increased requirement for cash reflects the greater operating loss for the period, attributable primarily to increases in management fees, mine care and maintenance, and debenture
interest. HBMS contributed cash from operations of $0.3 million for the ten-day period from December 21, 2004 to December 31, 2004. 

        Financing
activities on a consolidated basis generated $344.5 million during the year ended December 31, 2004, compared with $8.5 million during the previous year.
We raised $6.7 million, net of costs, by way of private placements of shares and warrants and $132.8 million, net of costs, by way of a public issue of subscription receipts in
December 2004. In addition we raised $205.1 million, net of costs, through the issuance of US$175.0 million principal amount of 95/8% senior secured notes in
December 2004. 

        Investing
activities used cash of $274.1 million in the year ended December 31, 2004 compared to $3.1 million in the previous year. Of this, $255.6 million
relates to the acquisition of HBMS. In addition, during 2004, we invested $5.2 million in mineral properties and capital equipment, including $2.0 million paid to Pasminco Resources
Canada Company in satisfaction of the final cash purchase price outstanding in respect of the Gay's River Mine. Environmental deposits paid to governmental agencies after adjustment for currency
translation were $0.3 million during 2004. 

6

 

Year Ended December 31, 2003 Compared to Year Ended December 31, 2002 

        As
of December 31, 2003, we had cash and cash equivalents of $2.1 million compared to $0.2 million at December 31, 2002. 

        Cash
required for operating activities in 2003 was $3.5 million compared with $1.2 million in the previous year. The increase in operating costs resulted from increased
mine care and maintenance fees, professional fees and travel costs. 

        In
2003, we raised $8.5 million through financing activities. In contrast, we incurred a cash requirement of $0.2 million in 2002. During 2003, we completed several private
placements of securities for aggregate net proceeds of $8.6 million. We did not complete any financing during 2002. 

        Investing
activities in 2003 required funding of $3.1 million compared with cash received from such activities of $1.6 million in 2002. The major items in 2003 were costs
of $1.6 million associated with the acquisition of the Balmat Mine, and environmental deposits with government agencies in respect of the Balmat and Gay's
River mine properties totaling $1.6 million. In 2002, we recorded $1.2 million proceeds in respect of the sale of the San Antonio Project assets. 

Contractual Obligations  

        The following table summarizes, as at December 31, 2004, certain of our contractual obligations for the period specified. 

	 
	 	Payments Due by Period

	Contractual Obligations

(as at December 31, 2004)
 
	 	Total
	 	Less than

1 Year
	 	1-3

Years
	 	3-5

Years
	 	After

5 Years

	 
	 	($000)

	Long-term debt obligations	 	$	227,850	 	$	2,000	 	$	15,500	 	$	—	 	$	210,350
	Capital lease obligations	 	 	15,057	 	 	3,338	 	 	10,384	 	 	1,335	 	 	—
	Operating lease obligations(1)	 	 	6,454	 	 	3,469	 	 	2,985	 	 	—	 	 	—
	Purchase obligations	 	 	10,299	 	 	10,299	 	 	—	 	 	—	 	 	—
	Pension and other employee future benefits obligations	 	 	14,662	 	 	14,662	 	 	—	 	 	—	 	 	—
	Asset retirement obligations	 	 	52,247	 	 	1,093	 	 	8,154	 	 	2,108	 	 	40,892
	Other long-term liabilities and contractual obligations	 	 	417	 	 	417	 	 	—	 	 	—	 	 	—
	 	 	
	 	
	 	
	 	
	 	

	Total	 	$	326,986	 	$	35,278	 	$	37,023	 	$	3,443	 	$	251,242
	 	 	
	 	
	 	
	 	
	 	

Note: 

	(1)
	Does
not include our share of the lease obligations of our joint venture, CMM. 

Purchase Obligations  

        Copper Refinery Obligation. We have entered into a commitment to deliver 85,000 tons of copper anodes annually for refining during the next year, with the
option to extend for an additional year, each year. In the event that we are unable to meet the terms of the contract, we would be required to make a payment of US$0.04 per pound of copper anode not
delivered. The approximate amount of this obligation is C$8.2 million. 

        Copper
Concentrate Purchase Obligation. We have a commitment to purchase copper concentrate for payment based on a deemed delivery rather than a required physical delivery. The contract
requires delivery of 72,000 tonnes annually for years 2004 to 2008. Payment is based on the market price of contained metal during a quotational period following delivery of the concentrate,
less a fixed treatment and refining credit. If we cannot process the deemed tonnage in a timely manner, management believes that we will be able to negotiate alternate arrangements for the sale or
diversion of the tonnage. 

        We
have a commitment to purchase 40,000 dry metric tonnes per year of copper concentrate from Compania Minera Dona Ines de Collahuasi through 2008. Management intends to seek
opportunities to swap 

7

 

the
tonnage with other smelters. If we cannot process the concentrate or swap tonnage in a timely manner, management believes that alternate arrangements can be negotiated for the sale of the tonnage. 

        No
amount is included in the table due to the fact that price is dependent on future market prices. 

        Routine
orders to purchase goods and services comprise the remainder of our purchase obligations. 

Pension and Other Employee Future Benefits Obligations  

        Pension and other employee future benefits obligations comprise our contractual funding requirements in respect of pension plan and other employee future benefits
in the twelve months ending December 2005. The obligatory funding requirements for the pension plan and other employee future benefits are actuarially determined and are subject to future
uncertainties, including the expected rate of return on plan assets, and the discount rate on pension obligations, each of which may change over time. 

Asset Retirement Obligation  

        The amounts included in the asset retirement obligation represent the estimated fair value of our present legal obligation for closure and related costs at all of
our existing operating and non-operating mines and properties based upon the closure plans applicable to those mines and properties. The Provinces of Saskatchewan and Manitoba have
recently informed us that, in their view, our current estimate of reclamation costs may be too low and the security for the reclamation obligations may not be sufficient. We have commenced a study of
reclamation costs to more accurately determine the estimated reclamation costs. The study will be awarded to an engineering firm and is expected to be completed by the end of June 2005. 

        We
believe our current reclamation cost estimate of approximately $51.6 million, for the HBMS properties, is adequate and is sufficiently secured by the existing security.
However, we have provided additional security to the Provinces in the form of restricted cash in the amount of $13.0 million during the period of preparation of the study. Upon completion of
the study, the appropriate security will be determined in consultation with the Provinces. 

Other Commitments and Agreements  

        We have certain other commitments and agreements that are not included in the table above, including a profit sharing plan whereby 10% of our after tax earnings
for any given fiscal year will be distributed to all employees in the Flin Flon/Snow Lake operations, with the exception of executive officers and key management personnel. 

Share Capital  

        As of March 29, 2005, we have 80,714,692 common shares outstanding. In addition, as of the same date, we have 663,167 options outstanding
under our share option plan and 1,171,556,075 share purchase warrants
outstanding. An aggregate of 39,715,036 common shares are issuable upon exercise of these options and warrants. 

Off-Balance Sheet Arrangements  

        We are not involved in any off-balance sheet transactions. 

8

  

Risk Profile  

Overview  

        We are subject to various risks in our day-to-day operations. The likelihood and severity of these risks are mitigated by application of
high standards in the planning, construction and operation of our facilities. In addition, we place emphasis on hiring and retaining competent personnel and developing their skills through training in
safety and loss control. We have a solid track record of developing and operating base metal mines, and our safety record, as expressed by the widely-used frequency measure of lost time
accidents per 200,000 hours worked, has improved from 16.2 accidents in 1994 to consistently in the 0.8 range over the three years ended December 31, 2004. 

        Business
risk is also mitigated through the purchase of insurance coverage, including coverage for property damage, business interruption and liability. 

Financial Risk and Financial Instruments  

        Our net income is sensitive to fluctuations in metal prices. Further, the market prices of all of our metal products are U.S. dollar based and our net
income is therefore sensitive to fluctuations in the US$/Cdn$ exchange rate. The approximate sensitivities of 2004 net income to movements in metal prices and exchange rates, using 2004 as a basis,
are shown in the following table. 

	 
	 	Change
	 	Earnings Impact

	Zinc	 	US$0.01 per pound	 	Cdn$3.1 million
	Copper	 	US$0.01 per pound	 	Cdn$1.3 million
	Gold	 	US$10.00 per ounce	 	Cdn$1.0 million
	Silver	 	US$1.00 per ounce	 	Cdn$0.9 million
	Exchange Rate	 	Cdn$0.01 per US$1.00	 	Cdn$0.7 million(1)

Note: 

	(1)
	Following
the issuance of the Senior Secured Notes, prior to which the earnings impact was Cdn.$2.5 million. 

        In order to mitigate the impact of fluctuating metal prices and exchange rates, from time to time we enter into derivative transactions pursuant
to our Risk Management Policies and Procedures. These policies prohibit us from implementing uncovered commodity and currency positions and we do not use complex derivatives to manage our exposures.
We do not hold commodity and currency positions for speculative purposes. 

Credit Risk  

        Substantially all of our sales are to CMM. CMM's financial results are proportionately consolidated into our financial statements through CMMSA. All of our
accounts receivable from metal sales are with CMM. CMM provides credit to its customers in the normal course of its operations. It carries out, on a continuing basis,
credit checks on its customers and maintains provisions for contingent credit losses. CMM mitigates its credit risk by carrying out credit evaluations on its customers, by making a significant portion
of its sales on a cash basis and by maintaining insurance on its accounts receivable. 

        We
are exposed to credit risk in the event of non-performance by counterparties in connection with our derivative contracts. We do not obtain collateral or other security to
support financial instruments subject to credit risk but mitigate this risk by trying to deal only with financially sound counterparties and, accordingly, do not anticipate loss for
non-performance. 

Operational Risk  

        The business of metals mining and processing is generally subject to certain types of risks and hazards including industrial accidents such as
cave-ins, rock bursts, rock falls and flooding, unusual or unexpected rock formations, vessel or other structural failure, changes in the regulatory environment and metal losses. Such
occurrences could result in damage to, or destruction of, mineral properties or production facilities, personal 

9

 

injury
or death, environmental damage, delays in mining or processing, monetary losses and possible legal liability. As a result we could be required to incur significant costs that could have a
material adverse effect on our financial performance, liquidity and results of operations. 

        Our
estimates of mineral reserves and mineral resources are estimates only and there can be no assurance that anticipated tonnage and grade can be achieved. To maintain or grow
production levels over the long term, we must continually replace mineral reserves depleted by production by upgrading mineral resources to reserves, expanding known ore bodies or locating new ones.
Success in mineral exploration is highly uncertain and there is a risk that future depletion of mineral reserves, through normal mining operations, will not be adequately replaced. 

Environmental Risk  

        Our activities are subject to extensive federal, provincial and local laws and regulations governing environmental protection and employee health and safety. We
are required to obtain governmental permits and to comply with applicable decommissioning and reclamation rules. Although we make provision for reclamation costs, there can be no assurance that these
provisions will be adequate to discharge the obligations associated with these regulations. Failure to comply with applicable environmental and health and safety laws can result in injunctions,
damages or revocation of permits and imposition of penalties. There can be no assurance that we have been or will be at all times in compliance with such laws and regulations or that the costs of
complying will not have a material adverse effect on our financial performance, liquidity and results of operations. 

Transactions with Related Parties  

        Details of related party transactions are set out in Note 18 to the financial statements. 

Critical Accounting Estimates  

        The preparation of the financial statements in accordance with Canadian GAAP requires management to make estimates and judgements that affect the reported amounts
of assets, liabilities, revenues and expenses. We evaluate the estimates periodically, including those relating to mineral reserve determinations, asset impairment, in-process inventory
quantities, future income tax valuation reserves, asset retirement obligations, pension obligations and other employee future benefits. Actual results could differ from these estimates by material
amounts. 

Mineral Reserves  

        Mineral reserves are estimated 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 metal prices. The costs of mineral properties and mine development are capitalized and amortized by the
unit-of-production basis based on related proven and probable mineral reserves. 

Impairment  

        The carrying value of our operating mines and plant and equipment is periodically reviewed for impairment when events or changes in circumstances indicate that
the carrying amounts of related assets or groups of assets may not be recoverable. If total estimated future cash flows on an undiscounted basis are less than the carrying amount of the asset, an
impairment loss is measured and recorded to write down the asset to its fair value. 

In-Process Inventories  

        In-process concentrates and metal inventory quantities comprise the majority of our inventories by value, and represent materials that are in the
process of being converted into saleable product. Measurement of in-process inventories is based on assays of material received at our metallurgical plants and estimates of recoveries in
the production processes. Realizable value of in-process inventories is estimated at financial statement dates and inventories are carried at the lower of cost and net realizable value. 

10

 

Future Tax Assets and Liabilities  

        We use the liability method of tax allocation for accounting for income taxes. Under the liability method, future tax assets and liabilities are determined based
on differences between the financial reporting and tax bases of assets and liabilities. Future tax assets are reduced by a valuation allowance if it is more likely than not that some or all of the
future tax assets will not be realized. We evaluate the carrying value of our future tax assets periodically by assessing its valuation allowance and by adjusting the amount of such valuation
allowance, if necessary. The factors used to assess the likelihood of realization are forecasts of future taxable income and available tax planning strategies that could be implemented to realize
future tax assets. 

Asset Retirement Obligations  

        Asset retirement obligations are estimated based on environmental plans, in compliance with current environmental and regulatory requirements. Decommissioning
costs are estimated and provided for, along with an identical decommissioning asset, when a new mine or plant is placed into commercial production. The decommissioning asset is amortized on a
straight-line basis over the life of the mine or plant. Restoration costs are estimated and accrued over the life of each operating mine. The accrued amounts are increased by an annual
interest component such that at the end of the asset life the provision is equal to the balance estimated to be paid at that date. 

        In
view of the uncertainties concerning these future obligations, the ultimate timing and cost of reclamation and mine closure may differ materially from our estimates. 

Pensions and Other Employee Future Benefits  

        Our on-going health care benefit plans comprise the majority of post-retirement obligations. The obligations relating to these plans,
together with pension plans maintained by us, are estimated based on actuarial determinations, which incorporate assumptions using management's best estimates of factors including plan performance,
salary escalation, retirement dates of employees and drug cost escalation rates. 

Changes in Accounting Policies  

Asset Retirement Obligations  

        Effective January 1, 2004, we adopted the recommendations under Section 3110, Asset Retirement Obligations, of the Canadian Institute of Chartered
Accountants Handbook ("Section 3110") on a retroactive basis. Section 3110 applies to legal obligations associated with the retirement of long-lived assets that result from
the acquisition, construction, development and/or normal operation of a long-lived asset. These recommendations require that the fair value of a liability for an asset retirement
obligation be recorded in the period in which it is incurred. When the liability is initially recorded, the cost is capitalized by increasing the carrying amount of the related long-lived
asset. Upon settlement of the liability, a gain or loss is recorded. This differs from the prior practice that involved accruing for the estimated reclamation and closure liability through charges to
the statement of operations over the life of the mine. We have recorded asset retirement obligations primarily associated with decommissioning and restoration costs. As required under the standard, we
will make periodic assessments as to the reasonableness of its asset retirement obligation estimates and revise those estimates accordingly. The respective asset and liability balances will be
adjusted, which will correspondingly increase or decrease the amounts expensed in future periods. 

        The
long-term asset retirement obligation is based on environmental plans, in compliance with the current environmental and regulatory requirements. Accretion expense is
charged to the Consolidated Statement of Operations and Deficit based on application of an interest component to the existing liability. 

Exploration Costs  

        Prior to December 21, 2004, we were in the development stage and considered our exploration costs to have the characteristics of property, plant and
equipment. As such, we deferred all exploration costs, including acquisition costs, field exploration and field supervisory costs relating to specific properties until those properties were brought
into production, at which time, they would be amortized on a unit-of-production basis 

11

 

based
on proven and probable mineral reserves or until the properties were abandoned, sold or considered to be impaired in value, at which time, an appropriate charge would be made. 

        In
connection with the acquisition of HBMS on December 21, 2004, we have adopted the accounting policy of HBMS regarding exploration costs with effect from January 1, 2004.
As a result of the adoption of the change in accounting policy regarding exploration costs, certain financial statement balances were restated. 

 
 

MANAGEMENT'S DISCUSSION AND ANALYSIS
  Supplemental Information on HBMS Results for the full year 2004    
    

        The following information is provided for HBMS for the twelve-month periods ending December 31, 2004 (unaudited) and 2003 (audited). 

	 
	 	For the year ended December 31
	 	 

	 
	 	2004
	 	2003
	 	 

	 
	 	(Unaudited)

	 	(Audited)

	 	 

	 
	 	(thousands)

	 	 

	Revenue	 	$	527,354	 	$	417,914	 	 
	Operating Costs	 	 	(479,302	)	 	(511,626	)	 
	Asset Impairment	 	 	—	 	 	(269,000	)	 
	 	 	
	 	
	 	 
	Operating Earnings	 	 	48,052	 	 	(362,712	)	(1)
	Net Earnings	 	 	50,132	 	 	(330,103	)	 
	Cash Flow from Operations	 	 	93,836	 	 	(3,739	)	 
	Investing Activities	 	 	(85,081	)	 	(118,366	)	 
	Financing Activities	 	 	35,666	 	 	121,629	 	 
	Net Cash Flow	 	 	44,421	 	 	(476	)	 

	(1)
	Includes
asset impairment of $269,000 in 2003. 

        In 2004, HBMS achieved operating cash costs of US$0.16 per pound of zinc, net of by-product credits. The US$0.28 per pound improvement
over 2003 was primarily related to an impairment in 2003 in realized metal prices as well as completion of the $435 million capital expenditure on the 777 group of projects, which were
all in full production during 2004. 

12

 

Non GAAP Reconciliation  

        Non GAAP Reconciliation of Cash Cost per pound of Zinc, Net of By-Product credits. 

	 
	 	For the year ended December 31
	 	 

	 
	 	2004
	 	2003
	 	 

	 
	 	(Unaudited)

	 	(Audited)

	 	 

	 
	 	(thousands)

	 	 

	Operating Costs per financial statements	 	$479,302	 	$511,626	 	(1)
	Non-cash operating costs	 	 	 	 	 	 
	 	Depreciation and amortization(1)	 	(52,100	)	(70,700	)	 
	 	Accretion and other non-cash	 	(4,578	)	(2,078	)	 
	 	 	
	 	
	 	 
	 	 	422,624	 	438,848	 	 
	Less: By-product credits(2)	 	(372,514	)	(277,261	)	 
	 	 	
	 	
	 	 
	Cash cost net of by-products	 	C$50,110	 	C$161,587	 	 
	Exchange rate (C$/US$)	 	1.30	 	1.40	 	 
	 	 	
	 	
	 	 
	Cash cost net of by-products	 	US$38,546	 	US$115,419	 	 
	Zinc sales (000 lbs)	 	245,347	 	261,444	 	 
	Cash cost per pound of zinc, net of by-product credits	 	US$0.16	 	US$0.44	 	 
	 	 	
	 	
	 	 

	(1)
	Excluding
asset impairment.

	(2)
	By-product
credits include the Company's proportionate share of by-product sales by CMM (2004: $21.6 million, 2003: $19.6 million) and the
premium on zinc oxide sales (2004: $17.8 million, 2003: $10.24 million). 

        Cash cost per pound of zinc, net of by-product credits, is furnished to provide additional information and is
a non-GAAP measure that does not have a standardized meaning and is therefore unlikely to be comparable to similar measures presented by other issuers. This measure should not be considered in
isolation as a substitute for measures of performance prepared in accordance with generally accepted accounting principles and is not necessarily indicative of operating expenses as determined under
generally accepted accounting principles. This measure is intended to provide investors with information about the cash generating capabilities of HBMS' operations. HBMS uses this information for the
same purpose. Mining operations are capital intensive. This measure excludes capital expenditures. Capital expenditures are discussed throughout the MD&A and the consolidated financial
statements.

Revenue  

        HBMS earned revenues of approximately $527.4 million for the year ended December 31, 2004 from sales of approximately 73,900 tonnes of
copper, 111,300 tonnes of zinc (including sales to Zochem), 38,700 tonnes of zinc oxide, 75,600 ounces of gold, and 1,055,000 ounces of silver. For the year, realized metal
prices averaged US$1.35/lb copper, US$0.49/lb zinc, US$387/troy oz gold, and US$6.66/troy oz silver. The Canadian to US dollar exchange rate averaged 1.30 for the year. 

        Compared
to 2003, total sales revenue in 2004 increased by 26%, largely related to improved realized metal prices for copper and zinc, in US$, which improved by approximately 57% and 26%
respectively over 2003. Average realized gold and silver prices also improved by 14% and 38% respectively. The impact of improved metal prices was partly offset as the Canadian to US exchange
rate strengthened from an average of 1.40 in 2003 to 1.30 in 2004. 

        Copper
and zinc sales quantities in 2004 were approximately 92% and 94%, respectively, compared to sales quantities in 2003 reflecting the metallurgical treatment of greater quantities
of concentrates from HBMS owned mines and a planned maintenance summer shutdown of the copper smelter. 

13

 

Operating Earnings  

        Operating earnings for the year ended December 31, 2004 was approximately $48.1 million. Compared to 2003, operating earnings in 2004 increased by
$411 million, of which $269 million relates to an asset impairment charge in 2003. 

        HBMS
mined a total of 2.55 million tonnes of ore in 2004 and tonnage mined increased at all mines compared to 2003, with the largest increase at the new 777 Mine which
reached commercial production as of January 1, 2004. In total, tonnage mined was up by 15% in 2004 and both copper and zinc grade improved by 16% and 4% respectively compared to 2003. 

        During
2004, the Copper Smelter processed a total of 284,100 tonnes of copper concentrates, producing 76,900 tonnes of copper metal. For the same period, the Zinc Plant
processed a total of 223,000 tonnes of zinc concentrates, producing 110,200 tonnes of zinc metal. In addition to the concentrates produced from HBMS owned mines, the Flin Flon
metallurgical plants processed some 98,700 tonnes of copper concentrate and 3,500 tonnes of zinc concentrate purchased from third parties. 

        Improved
production from our mines in 2004 reduced our requirement for purchased concentrate, and, as a result, processing of copper and zinc concentrate purchased from third parties
decreased by some 10,100 and 42,800 tonnes respectively compared to 2003. Production of copper metal in 2004 was approximately 92% of 2003 largely from processing greater volumes of
concentrate from HBMS mines and a planned summer maintenance shut down. Cast zinc metal production in 2004 was approximately 94% compared to 2003 primarily due to a drawdown of cathode inventory in
2003 which boosted cast metal by some 3,400 tonnes, and by the deferral of the bi-annual maintenance shutdown from 2003 into 2004. 

        Depreciation
and amortization totaled $52.1 million in 2004 compared to $70.7 million in 2003, with the decrease relating primarily to the impairment charge taken at the
end of 2003. 

Net Earnings  

        Net earnings for the year ended December 31, 2004 was approximately $50.1 million compared to a loss of $330.1 million for 2003. Excluding
the impact of the asset impairment in 2003, net earnings for 2004 increased by $111.3 million over 2003. The increase is comprised of $141.8 million in operating profit net of
$30.5 million additional expense, which is essentially the absence of a foreign exchange gain that was realized in 2003. 

Cash Flow from Operations  

        Cash flow from operations in 2004 increased by approximately $97.5 million compared to 2003, primarily as a result of improved metal prices and the
commencement of commercial production at the 777 Mine. 

Investing Activities  

        HBMS capital expenditure for 2004 totaled $69.5 million, with $15.7 million of the total required to complete the 777 group of projects,
$40.7 million for mine development, and the balance required for various stay-in-business projects. This represents a decrease of 41% compared to 2003, which included
$65.5 million for the 777 projects, $28.4 million mine development, and the balance for stay-in-business. 

        In
December 2004, $13 million was placed in trust for the governments of Manitoba and Saskatchewan as financial assurance for our asset retirement obligations. The
requirement to maintain this trust value will be determined from the outcome of a study to be completed during 2005. 

Financing Activities  

        In 2004, HBMS entered into capital leasing (sales and leaseback) arrangements that contributed $14.4 million to financing cash flow. On December 21,
2004, HBMS issued US $175 million Senior Secured Notes bearing interest at 9.625% per annum with interest payable semi-annually in arrears on January 15 and
July 15 of each year, commencing on July 15, 2005. The Notes will mature on January 15, 2012. 

14

 

        As
of March 24, 2005, HudBay agreed to guarantee HBMS' Notes. The HudBay guarantee is unsecured and ranks subordinate in right of payment to all senior indebtedness of HudBay. The
guarantee will terminate on the date upon which HudBay owns less than a majority of the voting shares of HBMS. 

        The
net inflow from financing activities is the net result of the above, offset by amounts advanced to HudBay in connection with the acquisition. 

March 30,
2005 

15

QuickLinks

Exhibit 4.4

MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION

MANAGEMENT'S DISCUSSION AND ANALYSIS Supplemental Information on HBMS Results for the full year 2004

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