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Welcome to the Hochschild Q4 production results conference call. [Operator Instructions] Just to remind you, this conference is being recorded.I'll now hand the call to our host, CEO, Ignacio Bustamante. Please begin.
Thank you very much. Hello and welcome to our customary production conference call for the fourth quarter of 2019.As usual, with me in Lima is Ramón Barúa, our CFO; and in London is Charlie Gordon, our Head of Investor Relations. I will give you a short summary of the statement, and then we can open up the call up to Q&A.Before I start, let me remind you that full year results will be presented in London on 19th February, and we will send out invitations very soon. So I hope to see you there.We have once again had another strong operational quarter, producing 9 million silver equivalent ounces or around 111,000 gold equivalent ounces. This has, therefore, meant that with the full year outlook totaling 38.7 million silver equivalent ounces, we have beaten our forecast for the year of 37 million silver equivalent ounces. We have also today confirmed that we are in line to meet our all-in sustaining cost guidance for the year of between $960 to $1,000 per gold equivalent ounce or between $11.3 -- $11.8 to $12.3 per silver equivalent ounce.At Inmaculada, higher-than-expected grades drove another strong quarter. The mine produced just over 60,000 gold equivalent ounces. And therefore, for the full year, the mine's output was almost exactly 260,000 gold equivalent ounces, another record for the mine and a 6% improvement on last year's previous record.At Pallancata, production was 2 million silver equivalent ounces. For the year as a whole, the mine's output was almost 9.4 million ounces, in line with 2018 and reflects a full year's contribution from the lower grade but wider Pablo vein.In Argentina, San Jose delivered another robust quarter with consistent tonnage in grades, in line with expectations. And this led to production of approximately 4.1 million silver equivalent ounces and resulting in full year figure of 15.4 million ounces, a record for the mine and a 10% increase on 2018.Turning to exploration. The team have continued their successful year at Inmaculada with the discovery of the new high-grade base to the west of the Angela vein. These are likely to add substantial additional deferred resources, and we expect to report the audited number at the full year results next month. I'm also happy to report that we have received exploration permits for the Cochaloma and Pablo Sur zones close to Pallancata, and that really will begin very soon.Over in Argentina, the brownfield program has involved drilling around the current operations to add resources and we're also soon to begin drilling at the Telken North target close to Cerro Negro, along with further work at Aguas Vivas. In addition, we have been executing a number of long-drill holes as well as some Titan geophysical work.Our balance sheet is in a strong position with a cash balance at the end of the period at $166 million and net debt of only $34 million. The cash figure reflects the fact that we have refinanced all of our $150 million of short-term debt with a new $200 million debt 5-year loan at LIBOR plus 1.15%. This loan also includes a 2-year grace period. As well as that, we have seen significant free cash flow generation resulting from our solid production, good cost control and, of course, a strong pricing environment in the fourth quarter. We already disclosed the 2020 guidance in the release in late November. And I should just add that the outlook in today's press release includes equivalent figures at the average ratio for 2019, which was 86x. So the production forecast for the year is approximately 36 million silver equivalent ounces or 422,000 gold equivalent ounces.And with that, I would like to open up to any questions that you may have.
[Operator Instructions] Our first question comes from the line of James Bell at RBC Capital Markets.
Yes. My first one is on the balance sheet and capital allocation. Given you've expanded your credit facility to $200 million from $150 million, should we expect you to be drawing -- kind of spending this? And I guess also, is there a minimum cash balance we should be thinking about when we look at sort of net debt on a go-forward basis?
Sure. Hi, James. This is Ramón. We do not have a definitive allocation for the additional capital that we have taken -- for the additional debt that we have taken. We were in the process of renegotiating our credit lines short term, and we believe that the money that we were offered and the rate that we were offered was extremely competitive. So certainly, as you know, as part of our strategy, we are looking to allocate more capital into other assets. So it was a good opportunity to capture a good moment in the market with a very low cost of funding. We are also achieving around 2% return on our cash investments here with the local banks in Peru, so the carry is relatively small. So that was the rationale behind it.
Okay, that makes sense. And then on permitting, obviously, good to see the Pallancata permits coming through. But can you talk about if there's any other requirements you have from a permitting perspective to complete your 2020 program? And maybe also if you've already begun applications for 2021, just to see if there's any risks around further delays there?
Sure. That's very positive news, James. They came really at a great time. And in the case of particularly Cochaloma and Pablo Sur, they are located in an area in which we can do the drilling even during the rainy season, which is now, as you know. So we're going to be able to start very soon. We're actually targeting to begin drilling on January 18 on both areas, Pablo Sur and Cochaloma, so that's very good.For the first half of the year, we already have all the permits that we need. In the case of Inmaculada, there are certain other permits that we require for our plan for the second half of the year, but so far, they remain in track to be achieved at the right moment. In Pallancata, we have all we need. And in San Jose, we have all the permits that we need. And also, we are working for the permits for the 2021 and the '22 campaigns already.
Okay, good stuff. And so we should expect those permits for the second half to be coming through by interim results time or by Q2 production? What are you targeting at this stage?
Yes, around the interims.
Our next question comes from the line of Justin Chan at Numis.
Just one fairly simple one for me. Just looking at the grade and tonnage figures at Inmaculada versus production in Q4, it looks like metal produced was a little bit lower. I'm just wondering if either there's a recovery issue or if there's some metal in circuit that should come through in Q1 or if there's a third explanation that's neither of those and if you could give some color on that?
Yes, sure. No, there's -- as happened in the past couple of years, there's some material left in the process in the form of precipitate that could not make it to the process during the year, and those are going to be put into production in the beginning of the year. So you should expect that in the Q1 production results.
Okay. And so just to be fairly fulsome on this, so I guess, recoveries for Q4 in actuality should be relatively in line with the rest of the year and just add the extra metal in Q1? Is that the right treatment?
Yes.
[Operator Instructions] The next question in the queue comes from Richard Hatch at Berenberg.
Can I just first start on the balance sheet? So net debt was much lower quarter-on-quarter, and it feels to me that after -- just the first point of clarification, did you spend the full $56 million for BioLantanidos in the quarter? And therefore, what is driving that stronger net debt position? Is there a -- perhaps a working capital movement that's driven the better net debt movement in the -- into year-end?
Sure. Hi, Richard. This is Ramón. Yes, the $57 million that we have paid for the acquisition of the BioLantanidos company, no, so that was, yes, a one-off. I think we closed it on October 2. And the cash generation, yes, was very strong during the period because of prices, of course, because of the strong production. There's, of course, an additional debt taken, no? We had $150 million. It went up to $200 million, the gross debt position. And there's an improvement of working capital, yes, for the quarter; no, for the year. And also, if you compare -- I mean, I don't have the financials of 2019 ready, but my expectation is that when you compare working capital at the end of this year vis-à-vis at the end of 2018, there will not be any material movement. When you compare the closing of this year with September, there is going to be an improvement because in September we had a couple of logistical issues, both in Peru and in Argentina. So I would say that there is an improvement vis-à-vis September of around $15 million.
Okay. And just a question, I mean, just in terms of your exploration spend and your CapEx spend because of the slowing of the permitting in the -- you got in Q4, did that impact the Capex? So should we expect to see CapEx come in a little bit like this guidance? Or are you still comfortable with guidance?
We're very comfortable with the guidance that we have given, Richard.
Okay. Cheers, Ignacio. Can I also ask, I mean, just a point on your comment around Angela and the West Angela and the drilling there. Should we, therefore, kind of take from your comment that the life of mine at Angela could potentially be extended by a little bit of time and you're able to put a kind of handle on hopes for life of mine extension kind of time period? I think, by memory, it's about 2022 is when it rolls over and you would need to transition into Millet?
Yes. When we talk about -- those are newer structures to the west of Angela, so it's not Angela itself, no? So its newest structure is close to the Angela vein. So what you should expect for this year is new resources coming from new veins that are very close to the Angela vein, but not the Angela vein itself.In the case of the Angela vein itself, we continue drilling at certain areas to test -- they are many hypotheses there, that the vein could be going to the east, that the vein could be going further north. So we still need to know if one of those structures that we have intercepted is the continuation of the Angela vein, no? But those structures are still open and we still need to continue doing the geological work.
Okay. And then just lastly, just on grades, as I kind of move -- as we move into 2020, sort of I kind of feel -- the last time we spoke, we were looking at a sharply higher grades potentially at Pallancata really, that's why I've kind of got it in my expectations -- guidance. So are we still fair at about 300, 310 grams of silver and 1.1 grams of gold? Or is that a bit rich?
No. No, that's a good estimate.
Okay. And we should hit that in Q1 because it is kind of a -- it's quite sharp uptick versus Q4?
Yes, yes. I mean, that would -- as you know, with this type of mining, you have variations, no, because of the nature of our deposits. But what we are targeting is that the average of the year is going to be around, yes, 300 to 310 for silver and around 1.1 for gold.
[Operator Instructions] And we do have a couple more questions coming through. The first is from the line of Tim Huff at Peel Hunt.
The working cap question was asked by Hatch, so that one's behind. But just on drilling, just I'm looking through what you guys have done in the past quarter or 2. Is it fair to say that Millet is coming in a little bit better than you expected and Ares may be coming in a little bit light? I was just taking a look at a lot of them. Any color you could sort of shed on that would be really helpful.
Sorry, Tim. You said that Millet was coming at a bit better and what else? Sorry, I missed that part.
Ares was looking a bit on the light side if I was looking at the drilling there, not only in terms of grade, but in terms of width.
No, but it is -- in Ares, we have a campaign that we're testing several different areas. As you know, Ares is not in production. We're looking for potential that could justify a potential reopening.
That's right.
So we have started drilling and we are finding interesting clues. I would say, in general, we're getting to areas that we are finding grades, but not necessarily the widths that we're looking for, but this is still good indications that we are in the right area or in the right spots. So we're going to continue our drilling program in Ares for the year.
Okay. Can I just interrupt for 1 second? Just looking at that, where you have new structures, are those various new structures? Or is that a single new structure?
You mean in the case of Inmaculada?
No, in terms of Ares, where you're talking about where you do the -- you do the breakout in the quarterly -- present in the quarterly report put out today, and it says under new structure. There's got a bunch of -- it's got a bunch of widths and hits. And I was just wondering, is that a single new structure that you've hit? Or is that something -- or is that various different drill holes that you're putting in, in very different areas?
No. It's basically what is in there, no? So one is in a new life structure and the other one is in a single new structure.
Single new structure, okay, great.Okay. And on Millet? Because Millet, those results look pretty good.
Yes. For Millet, we're getting a -- all the infill drilling program completed, no? And we do expect that the grade of Millet is going to go up, but we still are doing the whole infill drilling program not only for Millet, but for Divina, for many other structures. And we expect to come back with a final results by the time we announce our final year-end results.
Sounds good. I'll wait for that.
And we have a follow-up from Richard Hatch at Berenberg.
Just following on from the question on capital allocation. I mean, obviously, with a very underlevered balance sheet, and I know you guys are a bit conservative, but a special dividend consideration here? Or is M&A a consideration here? Or do you think that the valuations that we're seeing in the public markets are too elevated following the gold price move? Can you just have a -- just give us your kind of view on growth or whether you need -- you feel that you need to do growth externally? It would be much appreciated.
Yes, Richard. As you know, we like to have the cash flexibility to deliver on our growth strategy. Our growth strategy has many different pillars. One is brownfield, one is greenfield, the other one is our advanced projects and the other one is potential acquisitions, no? We are seeing opportunities in all those 4 different programs. We would like to continue having the optionality of the cash in hand to be able to act as soon as one of them becomes attractive to us. So the flexibility is going to continue.And regarding dividends or special dividends, that's something that we have not discussed yet and that certainly is going to be -- probably going to be discussed in our upcoming Board meeting in February in terms of how are we going to be managing our dividend policy, no? But what I can tell you is that, as we have said in the past, cash is important to us because of the optionality of executing our growth plan.
So there is some potential scope for that to be discussed in your upcoming Board meeting, the dividend policy?
Well, dividend policy, again, is discussed in -- twice a year whenever -- before we declare our dividend, no? So that's something that is going to be discussed in our upcoming Board meeting as we do every year.
[Operator Instructions] There seems to be no further questions at this time. So I'll pass back to Ignacio for the closing comments.
Thank you very much, Mark. Thank you very much, everybody, for participating in the call, for your very good questions. And should you have any additional questions that you would like to make, please feel contact to -- feel free to contact directly Charlie Gordon. And otherwise, I look forward to seeing you soon in February in London for our full year presentation. Thank you and goodbye.