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Hello, and welcome to today's Hochschild Q4 Production Results Call. [Operator Instructions] Just to remind you, this call is being recorded. Today, I'm pleased to pass you over to Ignacio Bustamante, Chief Executive Officer. Please begin.
Thank you very much. Good morning from Lima, and welcome to our fourth quarter production conference call. I'm Ignacio Bustamante, CEO; and with me is Ramón Barúa, our CFO; and in London is Charlie Gordon, our Head of Investor Relations.As we normally do, I will give you a few summary words on this morning's announcement, and then I will open up for questions. I'm delighted to report that we have delivered a fifth consecutive year of increased production and are also set to report costs in line with our guidance when we report our financial results next month. We have also today disclosed the first exciting results from our surface drilling campaign at Inmaculada. More on that later on. So looking at a little more detail at our operational performance. Fourth quarter attributable production was 66,000 ounces of gold and 4.9 million ounces of silver, which, combined, make 132,000 gold equivalent ounces or 9.8 million silver equivalent ounces. So overall, in 2017, we have produced 513,000 gold equivalent ounces, which is 38 million silver equivalent ounces, which comfortably beats our target of 37 million ounces. Our key asset, Inmaculada, has had another record year. Grades again remained strong in the fourth quarter, and this helped production to almost 42,000 ounces of gold and 1.4 million ounces of silver, which amounts to gold equivalent production of around 60,000 ounces, a pleasing improvement on the same period of 2016. Inmaculada has, therefore, finished the year 5% ahead of 2016, with gold equivalent production of 239,000 ounces. We expect that this world-class mine will deliver a similar performance in 2018 of approximately 245,000 gold equivalent ounces at an all-in sustaining cash cost of between $700 to $750 per gold equivalent ounce. At Pallancata, production, as expected, declined from its high level of the third quarter, when the high-grade Pablo Pisos were being accessed. However, production continued to be very strong versus the same period of 2016, with 1.5 million ounces of silver and over 6,000 ounces of gold, which makes a silver equivalent total of 1.9 million ounces. Overall, 2017 had been a very significant year for the operation, with 7.7 million silver equivalent ounces produced, over double last year's output, and this has been managed despite the stoppage at the mine at the beginning of the year. In 2018, we can look forward to Pablo ramping up in the first half of the year and a forecast of 7.5 million ounces of silver and 27,000 ounces of gold, which equates to a silver equivalent total of 9.5 million ounces. Costs will be between $13 and $13.50 per silver equivalent ounce, which reflects the increased tonnage but lower grades from the main Pablo vein versus the high-grade Pablo Piso veins. The San Jose mine in Southern Argentina delivered a strong performance in the fourth quarter, with 30,000 ounces of gold and 1.9 million ounces of silver produced, bringing the full year total to almost exactly 100,000 ounces of gold and 6.4 million silver ounces or 13.9 million silver equivalent ounces in total, which is actually a record for this operation. This reflects very consistent tonnage and higher gold grades, offset by slightly lower silver grades. We fully expect San Jose to deliver a similar year of production in 2018, although costs are rising a little to between $14.50 to $15 per silver equivalent ounce as the effects of the continuing high inflation in the country are felt without an offsetting currency devaluation. As you know, Arcata is a complex, dispersed deposit and is currently experiencing more challenging mining conditions. In the fourth quarter, it produced 1.4 million silver equivalent ounces, making the total for the year 5.5 million ounces. Lower tonnage and grades have resulted from a revision of the mine plan earlier in the year to accommodate fewer stopes and narrower veins. We remain focused on stabilizing Arcata's cost position by increasing the quality of resources through exploration and are optimistic that recent drilling results provide evidence that a recovery is achievable towards the end of the year. Nevertheless, 2018 is set to be a tough year for the operation, with a forecast of just over 4 million ounces of silver equivalent production at a cost of between $18 and $18.50 per silver equivalent ounce. Clearly, we will be making every effort to improve our cost position through efficiencies and, as I said, through our aggressive drilling program. Moving to our brownfield drilling program. We have seen some really encouraging results across all our deposits, which showed that the long-term aims we outlined 18 months ago are beginning to bear fruit even though the permitting situation in Peru hindered us to begin with. It would be probably 2018 and '19 when you will start to see meaningful increases in reserves and resources. Most importantly, we announced today the results from our first drill holes at Inmaculada. We have not actually drilled there for 6 years but have always been very excited by the potential in the area surrounding the Angela vein, and these intercepts have confirmed the presence of 9 new veins close to the current mine infrastructure. In particular, we have confirmed the existence of the Millet vein with some good grades at widths up to 38 meters. This district is already proven to be very rich, and we believe that with the campaign continuing through 2018, we will soon be able to report significant resource additions and being in a good position to make a decision on our future planned expansion. At San Jose, in the fourth quarter, we carried out further drill holes at the Aguas Vivas area, and we'll be able to assess the nature of this ore body when we have completed the campaign in the current period. However, as you can see from the release, we have also had some good results from our resource drilling close to the mine at the Molle and Frea structures. Meanwhile, drilling at Arcata in the fourth quarter has been encouraging, with some positive results from the Alexia, Ruby, Tunel 4 and Paralela veins, and we're in good shape to improve the quality and quantity of resources at the deposit. On the financial side, you can see that we are now in a very robust position. As we announced in December, we are now days away from completing the redemption of our remaining senior notes, which, as we disclosed, is being financed by some much lower-rate debt from local institutions in Peru. The cash balance of $256 million at the end of the year reflected our first drawdown of some of that debt and, of course, some decent cash generation from our operations. Once again, I want to remind you that we were paying 7.75% on our bonds and have refinanced at rates a long way below that. You will see that reflected in a significant reduction in our interest payments going forward. Turning to the outlook. We expect production this year to be 514,000 gold equivalent ounces or 38 million silver equivalent ounces, comfortably ahead of the base level of around 470,000 gold equivalent ounces or 35 million silver equivalent ounces that we set 18 months ago at the Capital Markets Day and in line with 2017. In addition, I should remind you that we have considerable spare capacity at our plans in Peru, so this may provide a very high-value short-term opportunity. Our cost forecast of between $960 to $990 dollars per gold equivalent ounce or $13 to $13.4 per silver equivalent ounce includes a considerable one-off investment of around $14 million in a highly value accretive hydraulic backfill project at San Jose and further costs for developing the Pablo vein. Our sustaining and development capital expenditure budget for this year is approximately between $125 million to $135 million and includes those one-off expenditure items at San Jose and Pallancata that I mentioned just now. We also have a brownfield exploration budget for the year at $17 million. It's finally worth pointing out that we will be spending some $10 million on greenfield projects this year, and this will include drilling at 4 projects in 3 different countries in the Americas. With that, I would like to open up for any questions that you may have.
[Operator Instructions] Our first question is over the line of James Bell at Bank of America Merrill Lynch.
Just on your all-in sustaining cost guidance. The projections are higher than my forecast and quite a bit above the base level costs that you outlined at the Capital Markets Day back in London back in September 2016. I just wondered, when I actually modeled it out, it looks like you're maybe being a bit conservative with your targets, so I just wondered if you could talk through the efficiencies you mentioned or anything else you think could get those all-in sustaining costs to the low end of guidance.
Sure, James. Thanks for the question. Yes, the costs are showing an increase. I can say that those increases are mostly driven by a couple of one-offs issues that we're going to be -- or investments that we're going to be having in 2018. Those are basically the hydraulic backfill project at San Jose, which is $14 million, and also the development cost at Pablo that we got delayed because of the permits in 2017. So we're doing pretty much all the mine development getting into 2018. So after that, getting into 2019, those development costs will go down significantly, and there will be no expense at the backfill plant in San Jose. So the CapEx figures total should get reduced significantly. Regarding efficiencies, I would say the most important ones are going to be coming from the geological front. So as we get success in our exploration programs, we can put that additional resources or -- and reserves into production very quickly with the spare capacity that we have, and thus you have significant efficiencies. Though, I would say, that would be our main target during 2018 because of the potential impact that, that can have. Having said that, we'll also continue looking at ways in which we can improve our mining methods, continue reducing dilution, continue looking for additional productivity from our people and equipment, looking at better ways to extract the mineral. And as I mentioned, this hydraulic backfill plant in San Jose said is going to have significant impact going forward. It's going to be an investment that is going to be recovered within a year. So it's going to start generating us about $1 million in savings per month. So that's also the type of things that we're going to be looking at all of our other operations.
Okay. And then just on the exploration front. Can you give some details on the split of the spend between resource conversion and new target drilling? Just I understand your reserves are probably going to be down year-on-year. And then basically, does that mean you're still on track for your 5-year life of mine and reserves target that you gave back at the Investor Day in 2016? Is that going to be still the target by 2020?
Sure. That continues to be our target, and we'll continue doing as much as we can to make that happen. And we believe that the resource that we're seeing so far are highly encouraging, so we're on the right track. And regarding the total expenses, roughly we have a brownfield budget of around $17 million. Of those about, $8 million are CapEx and $9 million are OpEx. So let's say half and half between -- of the brownfield project should be CapEx and OpEx. And we have -- in addition to that, we have around $9 million greenfield budget, which is fully expensed. Also, when you combine the total $26 million, $27 million between brownfield and greenfield, you are looking at around 30% of that is going to be capitalized and 70% is going to the expensed.
We now go to the line of Richard Hatch at RBC.
Just off the back of your commentary around production, I just want to sort of get a bit more color on the exploration at Inmaculada and potentially how quickly you could bring some of those veins into the '18 mine plan and, therefore, sort of implying that your guidance is conservative. I think this is the fifth year you've beaten your guidance. And then secondly, just a question on Arcata. First part of it is, can you explain why your production guidance is lower year-on-year for that mine? And secondly, I mean, you mentioned about the challenges that you're seeing there in terms of costs and you were trying to sort of work around it. But I mean, at what point do you look at this operation seriously and say it's losing money and dragging down the remainder of the group and potentially this needs to be an asset placed on care and maintenance?
Sure, Richard. Let me start with the Arcata question. So Arcata is going to be having ore production because that's the most efficient way to have the most optimal possible all-in sustaining cash cost, focusing only on the areas that require the lowest CapEx, and those are going to have the most efficient all-in sustaining costs. So that's the focus, and that's the reason why it's going down. We do continue to believe that there's a significant exploration potential. We started to do some work in 2017. We're going to continue doing more work in 2018. And if we're successful and if that success comes from areas close to our current operations, which is what we are prioritizing in our exploration campaign, those ounces could be put into production quickly, and that could be the biggest source of productivity and efficiencies. And that could significantly result in a turnaround situation for Arcata. So that's what we are aiming through 2018. In terms of timing, what I can tell you is that 2018 is going to be a very critical year. Because of the work that we did in 2017 and the work that we're going to be doing in 2018, we should cover pretty much all the most critical potential areas in Arcata. So we'll say we're going to wait until we complete the full production for the full 2018. And depending on the results that we get there, is -- that we should be making any additional decisions. But we'll continue aiming for positive results in 2018 and a very intensive drilling campaign in many different areas with many different and interesting geological hypothesis. Regarding Inmaculada, what I can tell you is that we are really, really encouraged by the results that we have seen in an area that we hadn't drilled and in an area where, as you know, we had significant delays in permits in 2017, having found 9 structures. And the type of intercepts that we have found in Millet are highly encouraging. So we are going to continue at full speed. Actually, as we speak, we are drilling. We expect to have a continuous result from now until, I would say, the end of the first quarter. And then the end of the second quarter, if we are successful and we continue getting similar results to the ones that we're getting, I would say that by the end of the first half of the year, we should have a very complete assessment of that area, Millet and all the other 9 and -- 8 structures. And if those results are positive and are a success, then we could be starting to evaluate the possibility of increasing the capacity of Inmaculada, provided that everything goes well. And the amount of work that we're going to be doing is pointing towards that, or towards making sure that we get at least an inferred resource in which we can base our decision. So this should move very quickly. And in the particular case of Inmaculada, as I say, the first quarter and the second quarter should come with a significant news regarding the geological results of that drilling campaign.
I'll go to the line -- over the line of Luke Nelson at JPMorgan.
Can you just please break out, just give more detail around the cash movements in the quarter? It was down from $147 million to $97 million at period-end. So quite strong. Just particularly any key movements around working capital, tax, interests and the like.
Sure. Luke, this is Ramón. No, I mean, we had a very strong cash generation from operations at around $60 million. We had exploration expenses of around $6 million, corporate expenses in line with what we report on a yearly basis of around $12 million. But also, remember that we had a positive inflow from the loan from BBVA of $50 million, getting ready to the repayment of the bonds in the coming days. We had a positive variance of working capital of around $20 million, which is in line with us, as we mentioned in our latest Q3 call, that we had some delays that were going to be recovered in the fourth quarter of -- primarily having to do with logistics around selling off of concentrates and doré, but mainly concentrates. And we paid also some dividends out of Argentina both to ourselves down to McEwen. So there's $5 million outflow from Argentina. So that is -- those are the general numbers that explain the increase from $156 million that we had at the end of Q3 to the $256 million that we've had at Q4, at the end of the year.
And then also, just going forward from a working capital perspective, if there's any large, significant movement that we should expect going forward?
No, no, no. Again, I think we've had this question before, but we made -- last year, in 2016, we made a very important and great effort to reduce the working capital. I think we are in very good shape. We continue to push for improvements. I see that there could be some, but they're not going to be as material as we had in 2016. And the expectation is that the working capital remains a -- remains at -- where you see it at the end of this year. Now remember that during the year, we -- we're going to be experiencing fluctuations, especially having to do with the delays in logistics that are normal in terms of boats, availability at the ports, et cetera. So there are going to be variations. But they're going to be only temporary measures, and the working capital should stay, on average, where we're seeing it at the end of the year in 2017.
[Operator Instructions] Okay, we're back to the line of James Bell at Bank of America Merrill Lynch.
Yes, just a quick follow-up. How do we think about dividends? And how do they fit into your capital allocation framework given the increase in one-off spend in exploration CapEx, et cetera?
Yes. Sure. No. clearly, we're going to be generating important cash flows going forward, James. As you can see by the structure of the debt that we have taken to refinance the bonds, which is very short term oriented, our intention will be to try to reduce that debt going forward. Of course, if we have the opportunity of investing in a project or acquiring something that is interesting to us, we'll look to raise that debt again. But right now, what I can tell you is that the primary objective continues to be to reducing that debt. The cash for us is very dear because as you know, Eduardo Hochschild holds 51% of the shares, and he likes to keep it that way. So equity is never a huge option for us. In the past, we've made equity raises of around $100 million. That has been the last 2, the ballpark of the last 2. So cash and debt are really the instruments that we have to fund growth. So for us, it's very important to pay a dividend. And as soon as we recover from the low price environment, that's one of the top things that we want to do. We think that we have a -- we're part of an important club of companies that do pay dividends. I think we have a decent dividend yield. But the intention right now would be summarizing -- going back to repaying debt and maintaining the cash and our debt capacity basically to fund growth rather than to change the capital structure and pay more dividends.
Okay. We -- actually, so we now go over to Richard Hatch again at RBC.
I just wanted to say -- ask just a bit -- for a bit more clarification on your reasons for the adjustment in the backfill method at San Jose. Was it purely the -- you run the numbers, and so there was a good cost saving opportunity here? And then perhaps if you can just talk to the technical risks around this, please.
Sure, absolutely. In the case of San Jose, San Jose was the only operation that we shut that didn't have any kind of hydraulic or an automated feeding system and -- basically because those systems required the usage of water and in San Jose the sources of water were not as clear as in our other operations. So the field work was done in a very conventional manner using equipments and using the scoops and that sort of things, which required to have big tunnels and using material that was in a rock form rather than in a paste or a hydraulic fill form. So we have been evaluating many alternatives for years to try to come up with an alternative that works. And finally, we came across a new technology that is -- works very well to filter the water. And we use the water we have in our operations for the hydraulic fill. So we have the intensity need during 2017. We did our first test in the first half of 2017. It worked very well. We decided, because of the technological risk, to repeat the test, and we did it and we got still at -- very amazing results. So we have a good operation together. We have already started the project, and what that is going to allow us is to -- instead of having to go and build big tunnels, to have scoops to put the material in and having to get waste rock material, put them back into the mine, which is going to be used in this automated system to take the tailings and mix with a -- in a liquid form and put it back into each of those stopes to fill it up. That's going to allow us to reduce the development costs. That's going to allow us to accelerate significantly all our mining cycles. And it's going to allow us to have a very clear floor in each of the stopes. So when you're picking up the material that you just blasted, you know very well when the floor finishes because you're going to have these sand-type material rather than all the rocks coming from waste, which created some contamination of the material. So -- and that is going to become even more attractive once we start mining narrower stopes that we have in our resource base in San Jose. So this project, I mean, based on this new technology, is a no-brainer. It pays off in a little bit more than a year. And I would say at this point in time, it's more an executional risk than a technological risk because the technology is -- has been already significantly tested and with very positive results. And we feel comfortable that this is going to be beginning to operate in the mid-part of the year by the end of Q2, and we are going to start seeing the positive results in the second half of the year.
Okay. Ignacio, as that was the final question in today's call, may I please pass it back to you for any closing comments at this stage?
Thank you very much. I appreciate everybody's time to participate in today's call. And you -- should you have any additional questions, feel free to contact Charlie Gordon directly at our London office. Thank you again, and we'll talk soon. Goodbye.
This now concludes today's call. So thank you all very much for attending. And you may now disconnect your lines.