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Welcome to the Hochschild Mining Q1 2018 Production Results Conference. [Operator Instructions] Just to remind you, this conference is being recorded.Today, I'm pleased to present Ignacio Bustamante, CEO. Please begin.
Thank you, Mike. Good morning from Lima, and welcome to our first quarter production conference call. I'm Ignacio Bustamante, CEO, and with me is Ramón Barúa, our CFO; and in London, it's Charlie Gordon, our Head of Investor Relations.I will give you a few summary words on this morning's announcement, and then I will open up for any questions.I am pleased to report that we have delivered a strong start to the year, with Inmaculada particularly robust and all other mines in line with expectations. We have also made a solid start to our brownfield program, with a comprehensive drilling campaign begun already in Peru and Argentina.Let's look a little -- in a little more detail at the operational performance. First quarter attributable production was 69,000 ounces of gold and 4.7 million ounces of silver, which combined makes 132,000 gold equivalent ounces or 9.8 million silver equivalent ounces. This was a strong result in a seasonally smaller quarter and almost 14% up on the same period of 2017. Of course, this leaves us firmly on track to meet our production target of 514,000 ounces of gold equivalent or 38 million silver equivalent ounces. As I mentioned, Inmaculada has had a good start to the year, with grades better than expected in the first quarter as well as an improvement in dilution controls. Additionally, we have some ounces which were in the processing stage as the year turned, which also boosted production, helping output to almost 50,000 ounces of gold and 1.7 million ounces of silver. This amounts to total gold equivalent production of around 72,000 ounces, a record quarterly result for this operation. Over at the Pallancata mine, production from the new Pablo vein increased in the period and is on schedule to reach approximately 2,200 tonnes per day by the end of the first half. Average grades coming from a mix of veins were higher than planned, but this is expected to be already a seasonal effect. Production was 1.4 million ounces of silver and 5,300 ounces of gold, which gives a silver equivalent figure of 1.8 million ounces, which is a 44% rise on the corresponding figure from last year.San Jose delivered a robust start to 2018, despite the customary annual leave taken in February, with 22,000 ounces of gold and 1.4 million ounces of silver produced, bringing the silver equivalent total to just over 3 million ounces, which is in line with the result from this time last year.These results reflected slightly higher tonnage, offset by moderately lower silver grades. The $14 million hydraulic backfill project at the mine, which we first discussed in January, is on time and on budget and will be completed by the end of this quarter.Just to remind you, the previous method utilized crushed waste rock obtained from the mining process, and this will now be replaced with hydraulic backfill using tailings. This will result in a reduction in mine development, dilution, contamination and faster mining cycles and is expected to generate annual savings of approximately $14 million.Arcata is, of course, currently experiencing challenging mining conditions, but the mine delivered in line with expectations in the first quarter, producing 1.1 million silver equivalent ounces, with lower tonnage offset by solid silver grades. And we are well on track to keep its annual forecast of just over 4 million ounces. As I have stated before, we will be making every effort to prove the mine's cost position through efficiencies and through our aggressive drilling program scheduled for the year.Turning to our brownfield program, we have made an encouraging start to the year to what will be a very busy drilling campaign. As you may remember, before November last year, we had not actually drilled from surface at Inmaculada for 6 years but have always been excited by the potential in the area surrounding the Angela vein.The intercepts we have received towards the end of Q4 and in the first quarter of this year have confirmed the presence of 11 new veins close to the current mine infrastructure. This district is already proving to be rich. And with the campaign continuing throughout 2018, we are confident that we will soon be able to report significant resource additions.We will also be, once again, carrying out some camera drill holes from underground, as we did in the first half of 2017, which will aim to confirm the presence of a structure parallel to the Angela vein but this time to the west of the current mining area.Finally, it is encouraging that this current program has a lot of reinterpretation of approximately 50 older drill holes, which will add additional resources, and we should be able to give you an update on that in the third quarter of the year.Programs have also started at Arcata and San Jose. At Arcata, we are concentrating on an area to the north of current mine -- of the current mine infrastructure, which we believe has a strong potential to be able to quickly add to the short-term mine plan despite a rainy season in the first quarter. And we already have started to reap some decent results from some areas of the mine, particularly the Ruby and Pablito veins. We will be continuing in the second quarter with some 15,000 meters of drilling in that same area. Meanwhile, we have made a start at San Jose and have once again delivered some positive results from close to the current mine. Furthermore, we are also in the middle of exploring the polymetallic Aguas Vivas area to the northwest of the current operations.On the financial side, as we reported at the annual results, we have significantly improved our financial position recently by redeeming our remaining senior notes in January. This was financed by some much lower rate debt from local institutions in Peru and leaves us with a cash balance at the end of March of $109 million and net debt at almost exactly $100 million.Turning to the outlook. As I've stated with this first quarter performance, we are firmly on track to deliver production this year of 514,000 gold equivalent ounces or 38 million silver equivalent ounces at an all-in sustaining cash cost of between $960 and $990 per gold equivalent ounce, which is between 13 to 13.4 silver equivalent ounces.And with this, I would like to open up for any questions that you may have.
[Operator Instructions] Our first question comes from Luke Nelson of JPMorgan.
Just two questions from me. Firstly on the brownfield program, obviously you're talking about the potential or potential update at Inmaculada in H2. But elsewhere, can you just give us an idea of your internal targets for building additional ounces at your remaining assets, particularly about how you message that to the market? Should we be looking at based on the quarterly updates for additional information on how the building of ounces is going? Or are you envisaging an exploration update? Or tentatively, should we just look to an updated resource statement early next year to see how that's going? And then secondly, can you just reiterate what the exit run rates were -- was kind of coming out of Q1 and the current run rate you're hitting just to get a bit of a handle of the upside/downside risk to that 2,200 tonnes per day that you talked about?
Sure. Look, let me just start with the Pallancata question. So basically, we ended up the quarter with a run rate of around 750 tonnes per day in the case of Pallancata. We expect that to be increased to 2,200 tonnes by the end of the second quarter, and then start achieving, also by the end of the third quarter, around the run rate of 2,800 tonnes per day, with the fourth quarter at the full run rate of 2,800 tonnes per day. That's the plan, and we're really on the right track to achieve that. And talking about exploration, even though we have given the most detail in Inmaculada because this is the one that is showing the highest potential so far in terms of the materiality of the ounces that we can find there, we are very excited about the potential in all of our mines. Typically, what we do is we just give an updated resource at the end of every year, unless what we end up finding is so material that it deserves to be put in a separate statement, as was the case with the Pablo resource in Pallancata. So what we are -- what we're trying to do is to look for, in all of our operations, for both potential and inferred resources and the potential we're going to be updating in every quarter statement. And in terms of the inferred resources, that is to start building up inferred resources so that we can come up with an updated resource model a year from now when we announce the full 2018 year -- yearly results. However, if one of those finance or in one of those operations becomes so material that we cannot wait until the end of the year, then we will present a separate resource statement.
[Operator Instructions] And we have a few more questions coming through. The first is from Ian Rossouw of Barclays.
Just to follow-up on that updated resource statement, I mean, maybe just sort of update us on your thinking around when do you actually start making this decision to ramp up? I mean, obviously, you wouldn't just wait until the resources are in the bag. Or you obviously have a clear idea sometime during the year when to start sort of planning to ramp up the operations or to go ahead with some of the expansions and if you can just give us an update on that.
Sure, Ian. So what we are envisioning in the case of Inmaculada is right now, we have 11 drilling machines drilling as much as we can in the key structures of the 11 we have found to the east side of the Angela vein. So we would expect that drilling campaign in those structures is going to be pretty much finished between June and July of this year. After that, we need to have the lab results, and we need to do an updated geological model. So we would expect that by the end of Q3 of this year. We should have already an updated resource model for Inmaculada that should lead us to a potential evaluation of a ramp up in the capacity of the operation. So we would say that probably we are going to have some indications by the end -- some important indications, I would say, by the end of Q2. But most likely, the resource model, as I said, with full lab results and geological reinterpretations is going to be more for the Q3 of 2018.
And the other operations? Is that [indiscernible]?
In the other operations? Yes, in the other operations, I would say in the case of Pallancata, what we're looking for is mostly potential resources. Remember that we did a big increase in inferred resources with the Pablo restructure. So we're looking more for potential resources. We are targeting all these new Farallon area, the Cochaloma area, all the resources to the south of Pablo, which are the actually that called division of the regional Pallancata and Luisa veins. So we're looking at many areas from a potential standpoint. If we become successful in those, then we're going to be quickly turning those into resources. But I would say, what you should be looking for in the next 1 or 2 quarters in the case of Pallancata is data on potential resources, not on an inferred resource. If we are successful by the end of Q2 and Q3 on that inferred -- potential resource plan, then we're going to start building our resource. Those, I will say, in the case of Pallancata, you shouldn't expect anything, I would say, in Q2 or Q3 in terms of resource but merely -- for resource but mostly in terms of potential news, which could be attractive based on the very prospective areas that we are targeting. In the case of San Jose and Arcata, I would say we are pretty much focusing on building inferred resources and potential resources at the same time. So you should expect news on both fronts. So but I will say in terms of a potential updated resource model, I will say most likely scenario based on the way that we are targeting it is that it's going to be by the end of 2018 but with some updates on how we see the potential and the inferred as the quarters progress during the year.
Our next question comes from Ryan Thompson of BMO Capital Markets.
Just wondering if you could elaborate a little bit on sort of the grades and width that you've been seeing at Inmaculada with your drilling work that you've done to date and just how that would compare to the reserves that you -- that you're mining right now.
Sure. Actually, let me give a little bit of detail on this answer. So in the case of Inmaculada, as you may recall, pretty much all the resources and all the reserves that we have are coming from one structure, which is the Angela vein. The Angela vein is a structure that has the direction of going northeast, okay? So most of these structures that we have found, the 11 structures that we are referring to are what we call the east-west structures so have a sort of like a perpendicular cut to the Angela vein, all of them to the east side of Angela. So what we are noticing, particularly in the case of Millet, is that it's a vein that in some cases shows widths of around, I would say, 4 meters or so, which are a little bit narrower than those in the Angela vein. But in some other cases, in some other particular areas, the width goes to 10, 15 meters and in some other areas, goes all the way -- go all the way up to 35 meters, which is significantly wider that what we are seeing in Angela. So we have one interpretation, and it's part of the things that we're trying to test with this -- in this drilling campaign is that in those areas where the vein gets wider, it's because it is being intercepted by other northeast structures similar to Angela, okay? So we believe that in those intersection points, the vein gets significantly wider and provides for a very, very attractive resource. So we're going to be targeting those potential intersection areas. We're looking for areas in which these east-west structures intercept other potential northeast structures, similar or parallel to Angela. So that's one of the scenes that we're trying to see. So we're seeing some areas that are a little bit lower and some areas that are slightly better and some areas that are significantly better than Angela in terms of width. In terms of grades, that also varies depending on the area where we intercept. But we would expect that the grades, I mean, should be relatively similar to those that we are seeing at the Angela vein as well. That's in the case of Millet. Some other structure, we're not seeing those big widths, such as, for instance, a Lola or Alessandra or Thalia, we're seeing lower widths, but we have not targeted, particularly the intersection areas with potential northeast structures. So we will -- we are going to be targeting all those in those intersections, and we should have a much better picture in the upcoming months of that. Barbara, for instance, is also narrower, but the grades are even better than in the Angela vein. Also, we're seeking an early stage to determine, but we have very good expectations, and we see a very rich area to date. Very important points to be aware of is that we have been also made some work in the interception of these east-west structures with the Angela vein, and we believe that there is a potential that those areas in which these east-west structures intercept with Angela, that the continuation of those veins could be also to the west side of Angela, which is completely underexplored. We have not even started drilling or prospecting that area. But based on that interpretation, we believe that there's potential that those structures, the east-west, could also go to the west side of Angela. So another work that we're going to be doing during the first half of this year is to build drilling cameras inside the mine and target their continuation on those east-west structures to the west to see if that hypothesis is true. If that is true, I mean, that could open up to a whole new set of new possibilities for Inmaculada, in addition to the very encouraging ones that we're seeing to date. So I would say, to give you a shorter answer, this is still early stage, but we are seeing very, very encouraging results and potential geological interpretations in the area that keeps us very enthusiastic about the geological potential of Inmaculada.
[Operator Instructions] As there are no further questions coming through, I'll hand back to our speakers for the closing comments.
Thank you, Mike. Thank you very much, everybody, for attending the call. As you have seen, this has been a very encouraging first quarter with solid production results and very encouraging geological work. So we are happy to continue conversations. If you have any questions, please feel free to contact us directly through Charlie Gordon at our London office. Thank you very much, and have a great day. Goodbye.
That does conclude the conference. Thank you all very much for attending. You may now disconnect.