Hochschild Mining PLC
LSE:HOC
Earnings Call Analysis
Summary
Q2-2023
Hochschild Mining's first half of 2023 faced hurdles with a profit fall, recording a $1.9 million loss, despite robust operational performance. Revenues dipped by 10% to $314 million compared to H1 2022, primarily due to lower production and a delayed permit. The all-in sustaining cost guidance increased to $1,490-$1,580 per ounce of gold. Despite challenges, the Inmaculada MEIA was approved, ensuring 20 years of exploration potential. Hochschild focuses on its sustainable growth trajectory, readying the Mara Rosa project for H1 2024 production and nurturing the new discovery at Royropata. Investment and exploration in these projects are pivotal to the company's strategy, aiming to present a comprehensive plan at the November capital market day.
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Good morning everyone. Here is Eduardo Landin, and I am the new CEO of Hochschild Mining. Let me say that I have been in the role for 10 days now. First of all I would like to thank Ignacio Bustamante for his contribution to the company in the last 32 years. I’m also fully transition period that has been very positive for the company and for me.
Today’s presentation, I’m going to give you some highlights of the H1 results. First of all we have a robust operational and financial performance, revenues of $340 million EBITDA around $100 million. Our cash balance is $94 million – the only sustaining cash cost of beating $172 per ounce of gold. We have presented our revised 2023 production target it will be between 209,000 and 303,000 ounces of gold and our revised wholly sustaining cash cost target will be between $1490 and $1580 per ounce.
The good news is that Inmaculada MEIA was approved on the 1st of August. Mara Rosa is progressing on time and budget. Once we got the Inmaculada permit, we have restarted the Brownfield exploration program at San Jose at also the Inmaculada and as I said at the beginning the leadership transaction is complete. So, we consider that we are in a position ready to deliver a sustainable growth.
If we can go to page number four please. We have a very strong half ESG scorecard. I would like to remark the historical low in the last time accident -- I mean, we got we got a 0.84 which for underground mines is a world class level. On the Severity Index is also very, very low is around 32.
I would also mention that our ECO Score is at a very good level 5.89 out of 6. And also, we are still working with the communities 53% of the workforce are coming to local communities. And we have spent $190 million on 2022 on local on the local procurement.
As you can see, on the right hand side of the page, we have been increasing the latest score on the rating agencies. I mean, 5 out of 6 has improved. So this is a significant progress on the ESG.
Now I'm going to pass the presentation to Eduardo Noriega for the financial results. Thanks a lot.
Thank you, Eduardo. On page 6, we’re having here the result of H1 2023, a robust set of results given the challenging environment we had in the period due to a delay on the approval of a Inmaculada MEIA.
Revenues were $314 million and we recorded a dual net loss of $1.9 million and an adjusted EBITDA of $99.5 million. Variations versus the previous period, H1 2022 start with revenues being 10% lower than the previous period, mainly as a result of the scheduled lower production, but also lay on the approval of the MEIA Inmaculada. And lower silver prices which effects were partially offset by higher gold prices.
Cost of sales increased by 4%, mainly due to a temporary changes in inventory, higher depreciation and lower production as explained in the revenue line. Exploration was lower, mainly due to the cash optimization measures that we took regarding the delay of Inmaculada MEIA. But also we didn't have a expenses in Snip which were accounted in 2022.
Net interests were lower, mainly due to lower FX transaction costs in Argentina. And also I would like to highlight in the income tax, a line that it includes the special mining tax and royalties in Peru both accounting for $2.7 million. And we also have a an FX impact on the deferred income tax from the valuation of the Mainland Argentinian peso of $1.9 million.
We also recorded exceptional items in the period for $48.3 million mainly in our non-core assets. Azuca & Crespo for $42.3 million associated to market conditions and inflation. Also in San Jose regarding an impairment of $17.4 million due to inflation, local inflation and increasing country risk in Argentina. The -- and we recorded an impairment in Aclara due to the higher perceived risk due to the permit delay and impairment was $7.2 million. But then we had a positive effect from tax of $18.6 million.
If we can go please to page 7. The cash recorded by the end of the period was $94 million starting from $144 million. As you will see here, we have strong generation from Inmaculada with $63 million. San Jose contributed with $11 million of cash generation. In Pallancata we use $9 million. Brownfield programs accounted for $11 million and corporate expenses $80 million.
We pay a $5 million of taxes mainly royalties and corporate social responsibility taxes in Argentina. Under current maintenance and closure, we used $8 million $9 million of net interest and we had a positive working capital and orders variation of $2 million. As you will see, most of the cash was used to develop the Mara Rosa project, a project in which we invested $67 million in the period.
On page eight our all-in sustaining costs for H1 was $1,572 per ounce of gold. And we are increasing our guidance a as shown in this slide from a 1370 to 100 from I mean the range is increased from 1370 to 1450, no that's the original range, and the new range is $1490 to $1,580 per ounce of gold. This increase is mainly a result of the delay in the approval of Inmaculada MEIA but also we decided to accelerate the mine development CapEx in San Jose by $11 million this year.
As you can see Inmaculada, in Inmaculada’s all-in sustaining post is impacted by lower production, which dilutes our fixed cost among low lower ounces. And this effect is partially offset by lower CapEx that we expect for the year.
In San Jose, we had $21.5 per ounce of silver, and in and we expect that in the second half of the year, we expect to have a lower all-in sustaining goals than what we had in H1. In Pallancata, also for in the second half of the year, we're going to have a lower all-in sustaining costs and the revised guidance is showing this in the last column of each of the mines presented in the slide.
If we move to page 9, our capital expenditure for the period was $62 million in order operations. And we're increasing our guidance from 125 from the range 125 to 135 to revise guidance of $131 million to $140 million. The CapEx in general, the CapEx has been increased mainly associated to the accelerated CapEx in San Jose for $11 million. And this effect was partially offset by lower CapEx in Inmaculada a CapEx that will not be we will not be able to execute the full amount originally scheduled due to delay in the Inmaculada permit.
In H1 as you will see our all-in -- our CapEx sorry is lower than what we will have in our in the second half of the year, mainly due to a MEIA delay but we have a plan to recover most of CapEx originally scheduled. The Mara Rosa construction CapEx is has not changed; it remains at between $100 million and $110 million for the year. And for the period the total CapEx recorded was $65 million. These capital expenditures do not include the exploration our exploration budget, which is around $20 million for the year.
If we go to page 10 the company continues using its balance sheet to finance it’s near term growth. The – in Mara Rosa we have excluded -- we have executed $127 million of CapEx, and there's $73 million remaining CapEx for completion. We have $94 million of cash. And we have an existing debt of $300 million as of June 2023. We have an additional $200 million debt facility, which gives us flexibility to keep a to complete the construction Inmaculada of Mara Rosa. I have to say that in August 2003, we brought down $60 million from this facility, which is a five year facility with two years of grace period at the rate of software plus 2.05%.
We also executed hedges for that, that will support the future cash flow of the company, those represent close to 10% of our total production per year. At a very interesting prices you will see there a that our hedge prices go from for gold go from $2,047 per ounce of gold, all the way up to $2,206 per ounce of gold.
On page 11, we have our 2023 revised guidance I referred in our previous slides. As you will see more most of the changes have to do with the delay on the MEIA affecting our production and therefore our only sustaining cost in Inmaculada and our decision to accelerate the development CapEx in San Jose.
With that I return I return to Eduardo Landin.
Thank you, Eduardo. Okay, we're going to page 13 please, what we have in front of us is an exciting future for the company with Inmaculada may have been approved for the next 20 years that represent a huge, huge potential to explore in a very impressive area. Then we have Mara Rosa first production in H1 2024 on time on budget. And of course we have Royropata a new discovery. This is a fantastic big discovery, totally open -- I'm waiting for further permits to be drilled in the new area. I will say that this is undervalued near term growth story that I'm going to tell you in the next slides.
For first of all, we have Inmaculada page 14 please. We have Inmaculada MEIA approved for the for the next 20 years. As you know Inmaculada is our flagship assets. It's been producing a stable since 2015 with a production record. As Eduardo Noriega mentioned 2023 was impacted by the permit delay. And as a reason we have already presented our revised guidance. The good thing is that we have a strong potential to increase production and reduce costs with high grades resources.
If we go to the next page, we can see the other operating mines. We have Pallancata. I mean Pallancata as I said, the future of Pallancata is Royropata. We will be working to get that permits. And the idea is to put this unit on car maintenance, probably on Q4.
In San Jose, as you know, we have been operating that mine since 2007 with a very very impressive A grades. And there is an upside in Argentina now that with the Argentinian elections, we will have an improvement of the economic conditions i.e. devaluation and reduction of inflation.
If we go to page 16, please we have the Mara Rosa Gold Project, which is close to production. Let me give you some highlights. The Mara Rosa project is located in Goiás Brazil, is a very mining friendly jurisdiction. The project has very robust economics, especially at these prices. We are planning the first production in H1 2024. Also we have I mean we have a very big land package. And the idea is to optimize, explore to extend the life of mine and also improve the project economics.
To give you some life of mine details, the initial life of mine is 10 years, will be producing an average of 80,000 ounces of gold. But on years, I mean from year one to year four, we will be producing 100,000. The early sustaining cash costs average for the I mean for the life of mine is $1,000 per ounce. We have an initial CapEx of $200 million. And as I said, we'll be on time and budget, and a sustaining CapEx of $40 million.
The NPV, 1600 gold is between $150 million and $160 million. And the IRR up though at that price is between 18% and 20% so a very impressive project economics. And talking about reserves and resources, in reserves we have 24 million tonnes with 1.2 average grade, which represent nearly 1000 ounces of gold up sorry, 1 million ounces of gold.
If we can go to page number 17, the current progress of the Mara Rosa project is 92%. As I said we are progressing on time on budget. We have all the equipment at the site, we have a study, the pre, the Pre-stripping, the dry the dry stack construction is already started also. The good thing is that on health and safety we have been able to accomplish 3 million hours without one loss time accident that really for our project is very, very impressive.
And we have our ESG program. I have to say that we will have 320 people employed from Mara Rosa and Amaralina towns which are the closest towns to the project. At the end of this presentation, I'm going to show you a video on the progress of the project. So you will see how advance it is.
If we go to the next page, page 18 please and you can see the impact in the portfolio that Mara Rosa represents. In terms of reserves, we nearly doubled our reserves that represent an increase of 75%. If we compare production, I mean the estimate production on 2023. And we consider that we will have on 2024 the same production in theory, our production with Mara Rosa will be around 395,000 ounces of gold. The only sustaining cash cost at the moment is around 1500 Mara Rosa, will have this production with a all-in sustaining cash cost of 1000. So it’s very good news in every sense.
And we go to page 19. I would like to read you some color on our exploration in the Southwest Peru cluster. As you can see on the map on the right hand side is that Geophysics map. That map represent a 30 miles per 30 miles area. So it is a very big area. We have been producing from this district from 2003. We have produced 3.4 million ounces of gold from the Inmaculada, Pallancata & Selene. We have a very strong potential to discourage significant additional ounces. I mean, Royropata has already 0.6 million ounces of gold. And we have further targets like Eduardo Belt, San Francisco Royropata and Condorillo. So this is a great district and it's a real strength on the wholesale portfolio.
If we go to page 20, we you can see there the potential exploration areas for Inmaculada. We have the Eduardo Belts, which if you can see on the map, we have the full Eduardo on the full Lita. We have already discovered the Angela Northeast resources and we know that we can have Josefa, Lia, Luz, Laura and Mila as additional belts similar to the one that we found in [Indiscernible]. So just to give you an idea during 2019 to 2021, we have discovered 1 million ounces of gold in this area. So plenty of potential targets for 2023 and it’s something that we have already started. Yes.
If we go to page 21 we have a Royropata discovery at Pallancata. I mean, it looks like a long-term area. And this area has already 51 million ounces, but we consider silver. But we can see that we have minimum, another 50 million ounces of silver. So we expect to get the drilling permits on May 2024 here to start doing exploration and try to bring more resources to the area. Also, we have another structure called Bolsa, which is on the left hand side of the map. And that's a new area west to the Royropata and that's also has very impressive potential.
If we go to page 22, we can get in the detail of Royropata. As I said, we have already 50 51 million ounces of silver equivalent that's already in place. That means that we will increase Pallancata resources by 108%. The mineralization at Royropata is very impressive. We have a five meters width and nearly 900 grams of silver in that area, at that mean, is a fantastic rate. That could lead us to use massive mining methods with very, very low cost.
At the moment, we are doing the permit. Yes, I have to say that if we compare this permit with the one at Inmaculada, this area is smaller. We have in place a PMO structure. So project management office to deal with this permit. And also all the lessons learned that we I mean, learn from Inmaculada we have already implemented on the strategy to get this permit. One of them is that we should work with what with only one consultant for the environmental alone, and also for the engineering studies. And in this case, we chose Ausenco, which is a very well-known international engineering company.
As you can see on the graph on the right hand side, from 26, 27, we could restart the Pallancata operation, accounting with Selene plant. And now that we're going to go care maintenance, of course, we are going to maintain the mine the watering the mine all the time and to try to keep that in order.
Down the page, you have the resources, I’m not going to get in that detail but I mean there is an increase in the resources with an average grade with much better average grade, which is the result of the discovery.
Finishing with the Peruvian mines, we can go to Volcan. As you know Volcan is located at the Maricunga Belt in Chile. I mean it's a place where I mean there -- it has been producing 100 million ounces of gold in the past. There is several operating mines. There is some support on the infrastructure. We believe the Volcan is a really good opportunity is a I mean we have a Volcan project 9 million ounces of gold with a average grade of 0.6. We recently finished PEA. And a 43-101 updated of our resources. The result is good. Yes, but the CapEx is around $900 million. So we believe that is not the opportunity right for us based on our capital allocation and that's the reason we decide to look for strategic alternatives through M&A, or to sell the product or to do an IPO [Ph], the things that we are looking for.
If we go to page 24, look in this page, we can see that the valuation of the Hochschild share at the moment is very low. And here we can compare ourselves the enterprise value versus EBITDA is 2.4 for us, as you can see, Fortuna Centiman Coeur, Fresnillo has bigger rate ratio. Price to NAV exactly saying, we are 0.7 there is plenty of mines, I mean, -- companies that has better. Free cash flow, we have 18.6 and there is companies that has, I mean, Fortuna has higher.
So with Mara Rosa a completion, we believe that there is the opportunity to reiterate the value of the company. I mean, at the end of the day, we have the MEIA approval, we have a Mara Rosa that is close to production, and then we have Royropata and that's three excellent opportunities to develop the growth strategy of the company.
In summary Inmaculada MEIA 20 years ahead to do exploration in a very impressive land package. Mara Rosa close to completion. Royropata set to deliver a medium term growth we believe that we are on the borders of the mineralization so there is a huge potential there. At the moment highly compelling evaluation, the leadership transition has been complete I feel ready for the role. And also we will have a capital market day in November where we will present the strategy of the company and of course we will try to present some projections that we know that the market desire. That's all for me. We will now play the video of Mara Rosa and of course we are available for any questions that you might have. Thank you very much for your attendance.
[Video presentation]
[Operator Instructions] Now the first question comes from Richard Hatch from Berenberg. Please go ahead.
Thank you MJ. Good morning, Eduardo and Eduardo, and thanks for your time. A few questions. First one, are you able to give us any kind of steer on 2024 volumes at this point, just given the fact that you've given us updated guidance for the balance of 23? And are you able just to give us a bit of a steer on that? That's the first one.
Well, the thing is that we are planning to present that in the capital market day in November. At the moment we are working on our budget on also on the strategy development. So I will not be able to give you that data at the moment. But saying that, I mean, I will say that production wise, Inmaculada will be more or less at the same level. Mara Rosa is really depends on which state it will be able to start production during H1. But, I mean, let's say that we'll be able to produce around 6000, 7000 ounces of gold per month. Yes. So it really depends on when we finish the project. Pallancata will be on current maintenance. On San Jose and San Jose, we expect to be at the same level of today.
Okay, that's really, really helpful color. And the second one is, it's just on the permitting at Royropata I mean, it sounds like you've kind of learned your lessons from Inmaculada. I mean, are you confident of the timeframe of what you've put down, just given the sort of the challenges that you've had with Inmaculada -- you've and also the kind of steer of volumes from sort of 2026 is that again, something which you feel sort of confident that you can deliver to the market?
Yes, let me say something. First of all, the Inmaculada MEIA is a huge area. And it's been a huge effort from the company. I mean, to get 20 years permits, we cannot compare the land package of Inmaculada, with Royropata is much smaller. And of course, we have applied the lesson learned from Inmaculada [Ph].Of course, a I mean, we can we can say that we expect to have around three years. Yes. But that really depends. I mean, it depends on our work, but also depends on the Peruvian government. We've been talking to the Peruvian government, and they have the best attitude with us. And they know that we are pursuing that permit. But at the end of the day is something that they will they will play a fundamental role on this permit. So our best estimation is three years. And we believe that is achievable. But let me say that I mean, again, I mean, it's dependent on us, we'll do our best. We already implemented every single thing to do the best we can. But it really depends on the government. So I will say that that's the that's the current situation.
Okay, good luck with it. Thank you. The next one, just on Volcan and just on the one and a half percent royalty for $15 million that you signed with Franco? Just to clarify when should we expect that to hit the bank? And is that just an example of you just trying to create a bit of value from this non-core asset?
Let me pass this question to Eduardo Noriega please.
Good morning Richard and thank you for that question. On Volcan the money is already in escrow so we're just waiting for the registrar's in Chile to register the royalty and it should be fairly shortly that will receive that cash.
Okay, cool. And then what? Well, I've got you Eduardo, in my last question. Just on Mara Rosa CapEx. Can you just help me with the math on it? So, you spent $65 million in the first half of this year? I think the results say $54 million remaining CapEx expenditure in H2, but I think the guidance is unchanged 100 to 110. So, on my maths that means that your H2 spent should be 40 million not 54. Can you just help me square that please?
Thank you, thank you Richard. No from the CapEx that we recorded in Mara Rosa $65 million. Actually construction CapEx is $58 roughly. The rest is capitalized expenditures is expense is mainly a finance expenses that we can capitalize according to IFRS rules. So the remaining CapEx for this year is around between 13 to 24, sorry, between $47 million and $58 million that we would be expecting to incur in the second half of the year. The remaining will be completed in 2024.
Understood, brilliant, thank you guys. Have a nice day. And thanks for your time.
Thank you.
The next question comes from Ian Rossouw from Barclays. Please go ahead.
Morning. And just a question on Pallancata. Could you give us an estimate what the sort of one off closure cost would be that you expect to incur this year and then what the on-going care and maintenance costs would be going forward until you restart?
Thank you on Pallancata, our estimated annual current maintenance cost is close to $6 million per year. And then we expect closure costs meaning a temporary closure cost mainly of $8 million, roughly.
Okay, thank you. And will all of that $8 be incurred that year if you declare the assets?
The $8 million is the $6 million? No, it's and one. So it will be only a portion of it that will impact the 2022 and 2023 results.
Okay. Perfect, understood. And then just on? How should we think about the costs down the line instead of 33 years for the license at Royropata? I mean, how should we think about potential restart costs? I mean, obviously, mine development, but is there any incremental cost for the plant that's required etcetera -- apart from working capital?
The -- I mean, the fact that we are going to spend $6 million on current maintenance, that will mean that we'll maintain the mine, I mean, ready for operation. That would include maintenance for the plant, and also the dewatering [Ph] the mine. So I don't expect to have any extra costs to reinstall the mine. Of course, once we finish the engineering, we'll have the amount of developments, all the infrastructure that has to be done in order to get to production. But that will be part of the information that will I mean, present, during the capital market day is something that is, I mean, the engineering is under development. And we don't have we don't have the figures yet. But I expect to have that in November. But what I can say is that, I mean with that great with that with lease, it will be very, very attractive cost.
Okay, alright, right. Thank you. Yes, I think that's all from me. I'll sort of follow up offline. Thank you.
Thank you very much for your questions.
Thank you. There are currently no further questions in the queue. [Operator Instructions] And we have a follow up question from Ian Rossouw from Barclays. Please go ahead.
Thanks. Just one on Argentina. Could you perhaps just give us an update on what the sort of current situation is around exchange controls? Gets the ability to take funds out? I mean, what’s the sort of losses you're currently incurring to take money out of the country, if you need to buy government bonds.
Thank you, Ian. So in Argentina, what we have seen in the last couple of years is a net net inflation situation. Now where inflation local inflation has been higher than devaluation. And that certainly has put the country in, in a difficult situation. And for us, of course, costs have been increasing in the last in the last years due to that that situation. Right now the cash that we are generating in Argentina, we are using it to repay a local debt that we have working capital debt, know we who are generating a cash a we're not converting we're not buying a dollars to send them out of the country so far this year. That -- to do that you need to access the secondary market now, which we haven't done, but we know that that cost to do that is goes close to 50% of the amount that you are planning to send out. Now, there are elections as you probably know there are elections coming and the market is expecting a change, a significant change. All of the candidates have expressed in their plans their interest to resolve it to have a more permanent solution to a situation in Argentina and we have different flavors within those candidates. I guess in the best case scenario for exporters like us know devaluation is expected strong devaluation is expected in the coming months or years. But again, that will depend on the results of the election. No, we will see upside in Argentina if when the no one a new government take takes place.
Thanks. That's very clear. Thank you very much.
Thank you. And as there are no further questions in the phone queue, I will hand the call back over to Charles by any web questions. Thank you.
There were no questions yet on the webcast currently.
Okay, thank you very much for your time and your attendance. Let me say that we will be on the capital market day in November. We'll present the growth strategy of the company. In the next months we are going to work very hard on our budget and our strategy on an operational plan. Again, thank you.