Gold and Silver Mining

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Hochschild Mining plc (LON:HOC) have today provided Preliminary Results for the year ended 31 December 2019.

Robust 2019 financial performance

  • Revenue up 7% at $755.7 million (2018: $704.3 million)[1]
  • Adjusted EBITDA up 28% at $343.3 million (2018: $268.0 million)[2]
  • Profit before income tax (pre-exceptional) up 89% at $103.4 million (2018: $54.7 million)
  • Profit before income tax (post-exceptional) up 100% at $76.8 million (2018: $38.4 million)
  • Basic earnings per share (pre-exceptional) up 80% at $0.09 (2018: $0.05)
  • Basic earnings per share (post-exceptional) up 100% to $0.06 (2018: $0.03)
  • Cash and cash equivalent balance of $166.4 million as at 31 December 2019 (2018: $79.7 million)
  • Net debt reduced by 57% to $33.2 million as at 31 December 2019 (2018 $77.4 million)
  • Final proposed dividend up 19% at 2.335 cents per share ($12.0 million) bringing the full-year total dividend to $22.2 million (2018: $20.0 million)

Strong 2019 operational delivery[3]

  • All-in sustaining costs (AISC) from operations down to $965 per gold equivalent ounce (2018: $973) or $11.9 per silver equivalent ounce (2018: $12.0) comfortably in line with full year cost guidance of $960-$1,000 per gold equivalent ounce or $11.8-12.3 per silver equivalent ounce[4]
  • Full year attributable production of 477,400 gold equivalent ounces (38.7 million silver equivalent ounces) exceeding full year attributable production guidance of 457,000 gold equivalent ounces (37.0 million silver equivalent ounces)
  • Record production at Inmaculada up 6% to 260,126 gold equivalent ounces (2018: 244,445 ounces)
  • Record production at San Jose up 10% to 15.4 million silver equivalent ounces (2018: 14.0 million ounces)
  • Inmaculada brownfield drilling programme added further 46 million silver or 0.5 million gold equivalent ounces of inferred resources in 2019 (calculated using a gold/silver ratio of 86:1) at a grade of 475 grams per tonne silver equivalent
  • Permits received for key Pablo Sur and Cochaloma exploration targets close to Pallancata with drilling campaign already started at Pablo Sur

2020 outlook[5]

  • Attributable production target of 422,000 gold equivalent ounces (36.0 million silver equivalent ounces)
  • Total sustaining and development capital expenditure expected to be approximately $115-130 million including $22 million expansion of tailings storage facility (TSF) at Inmaculada
  • AISC from operations expected to be $1,040-$1,080 per gold equivalent ounce ($12.1-12.5 per silver equivalent ounce)
  • AISC from operations excluding Inmaculada TSF expansion expected to be $1,000-$1,040 per gold equivalent ounce ($11.6-12.0 per silver equivalent ounce)
  • 2020 brownfield exploration budget expected to be $36 million with greenfield and advanced project budget set at an additional $8 million
$000 unless stated Year ended 31 Dec 2019 Year ended31 Dec 2018 % change
Attributable silver production (koz) 16,808 19,700 (15)
Attributable gold production (koz) 270 260 4
Revenue 755,676 704,290 7
Adjusted EBITDA 343,332 268,010 28
Profit from continuing operations (pre-exceptional) 60,083 18,225 230
Profit from continuing operations (post-exceptional) 41,439 6,701 518
Basic earnings per share (pre-exceptional) $ 0.09 0.05 80
Basic earnings per share (post-exceptional) $ 0.06 0.03 100

_____

Ignacio Bustamante, Hochschild Mining Chief Executive Officer said:

“In 2019, we have delivered some strong financial results which reflect another robust year of production including records at two of our operations and good cost control. Improved precious metals prices in the second half of the year combined with strong free cashflow generation saw us reduce leverage further and finish the year with net debt at $33 million. We have again discovered a significant amount of resource additions at Inmaculada and anticipate another year of ambitious exploration with exciting drill targets at all our current operations and projects throughout our entire southern Peru cluster. In addition, we can look forward to progressing our portfolio of greenfield opportunities and strategic alliances.”

CHAIRMAN’S STATEMENT

2019 was another busy year for Hochschild Mining and I believe we have delivered further strong progress. Our team continued to drive a responsible and innovative mining strategy that aims to combine world class operational performance with exploration-led growth in a safe and environmentally friendly manner. In this regard, I am pleased to report that our delivery in these key areas has been very encouraging. Upholding the Company’s high standards is not only critical to our operational success, but to our reputation with our communities, host governments and investors. I also believe that we are continuing to create a stimulating, inclusive and forward-thinking workplace environment where our people can grow their careers and develop new skills and expertise.

2019 was a year in which the efforts of the management team in the design and implementation of our Safety Culture Transformation Plan bore fruit. I am delighted to report that we had our safest year on record. Our key indicators, the accident frequency index and accident severity index were at their lowest and saw year-on year reductions of 40% and 94% respectively. The wide-ranging transformation plan which, in addition to incorporating the traditional elements of training and internal communications, also saw technology play a key role in monitoring day-to-day activities and the safe transportation of our personnel.

The Group has performed well with regards to environmental management, exceeding our target ECO Score for the year. It is also a matter of pride that I can report that the ECO Score itself has won an international award for its innovative approach to sustainability, raising environmental awareness across the entire organisation and its potential application to other industries. Moreover, following on from the successful Safety Culture Transformation Plan, we intend to launch a similar initiative recognising our responsibilities with regards to the environment.

Our people are crucial to our success and therefore it is incumbent on the Board and management to attract and retain a diverse pipeline of talent. An internal study revealed that although Hochschild’s gender diversity is better than the average among our peers in Peru, it is a stark fact that women remain significantly under-represented. In order to tackle this imbalance, a working group has been established and an action plan has been developed to achieve the Group’s target of increasing workforce diversity. Further details on this and all of the activities mentioned above can be found in the Sustainability section of the 2019 Annual Report.

Turning to our operations, we delivered a strong year of production despite the decision to place our Arcata mine on temporary care and maintenance in the first quarter. We saw record performances at Inmaculada and San Jose and we were able to once again meet our cost targets. Furthermore, with precious metal prices recovering significantly in the second half of the year, our business generated strong free cashflow allowing us to strengthen our balance sheet, further invest in our exploration initiatives and add value accretive projects to our portfolio. Towards the end of the year, we also augmented our strong financial position by refinancing our existing $150 million of short-term debt with a new $200 million five year loan at a highly competitive rate.

Brownfield exploration remains the focus for our Company and we made good progress in the year with substantial resource additions at Inmaculada and encouraging results at the Palca and Corina zones close to our Pallancata mine. In addition, although there were some delays in the permitting process in Peru for our exciting Cochaloma and Pablo Sur targets, we did receive the requisite approvals in January 2020 and can now look forward to an early start to this year’s programme at these two sites. We are confident that there remains a wide array of promising targets, not only surrounding all our operations but also at our early stage projects and at former operations such as Arcata, Ares and Selene. Many of these are expected to be drilled during 2020 and 2021.

Technology is all pervasive and can help drive efficiencies, improve performance and provide insights on a wide range of activities at Hochschild. In the last few years, we have implemented a plan to build a more progressive organisation which drives innovation and also looks to capitalise on our existing skillsets. For example, we have made substantial progress in 2019 with the implementation of our mine digitalisation programme as well as the introduction of our Innova platform across the Group to facilitate efficiency ideas. But in the last few years, we have also aimed to leverage off the talent and experience within the Company and explore the potential for investment in other minerals where we believe we can create shareholder value and where the future demand characteristics are strong. I believe that the acquisition of the unique Biolantanidos rare earth deposit in Chile in October is a key example of this. It brings the Company optionality in an exciting market that benefits from a more technological and environmentally friendly world.

Outlook

2019 was a strong year for precious metals, particularly gold, which was driven by declining U.S. interest rates and heightening geopolitical and global trade risk and represented the largest annual year-end gain since 2010. This was almost matched by silver which rose by around 15%. Such a supportive environment has reinforced our belief in our long-term strategy: a central focus on low cost brownfield exploration; selective greenfield initiatives across the Americas; further development of our numerous early stage projects; and a targeted approach to acquisitions. Consequently, in light of such a solid strategic and financial position the Board is pleased to recommend a final dividend of 2.335 cents per share ($12 million).

The Company will continue to be governed by a financially disciplined approach, emphasising a high quality portfolio and managing risk in a way that protects value, while our assets will be supported by operational practices that meet the highest safety and environmental standards. Finally, I would like to thank all of Hochschild’s people, who work with such determination and give their very best to contribute to making Hochschild a success.

Eduardo Hochschild, Chairman

18 February 2020

CHIEF EXECUTIVE OFFICER’S STATEMENT

I am pleased to report that 2019 was another year of achievement for Hochschild. Our safety performance was considerably improved and our environmental performance delivered another robust year, which helped create strong operational reliability leading to solid production, precise cost control and impressive cashflow generation. Our exploration programme was again a key focus and we made encouraging steps in our aim to add low cost resources and to deliver long-term growth opportunities. We believe that our portfolio is well positioned to further transform our business and deliver value and returns for our shareholders.

Operations

Hochschild’s operational results were once again able to surpass forecasts, producing 477,400 gold equivalent ounces (38.7 million silver equivalent ounces) which improved on our 2019 target of 457,000 ounces (37.0 million silver equivalent ounces). This represented only a 5% reduction versus 2018 (2018: 503,640 gold equivalent ounces or 40.8 silver equivalent ounces) despite the decision to place our Arcata mine on temporary care-and-maintenance in the first quarter and included record production results from both Inmaculada and San Jose. All-in sustaining costs were in line with expectations at $11.9 per silver equivalent ounce ($965 per gold equivalent ounce). Inmaculada was again the cornerstone with production of 260,126 gold equivalent ounces at $798 per gold equivalent ounce whilst San Jose delivered another strong year with production of 15.4 million silver equivalent ounces at $13.8 per silver equivalent ounce. This was achieved despite a complex economic environment in Argentina. At Pallancata, production was broadly similar to 2018 at 9.4 million silver equivalent ounces (2018: 9.6 million ounces) at a cost of $13.5 per silver equivalent ounce.

Exploration

Our ambitious brownfield exploration programme continued in 2019 with the key highlight being the 46 million silver equivalent ounces of additional resources discovered at Inmaculada close to the Angela vein and at approximately 456 grams per tonne silver equivalent. Furthermore, we also carried out a comprehensive infill drilling programme on the veins discovered in 2018. At San Jose, we have continued to evaluate the Aguas Vivas polymetallic deposit to the north west of existing operations as well as preparing to drill the Telken zone which we believe could form the extension to veins from Newmont’s Cerro Negro mine in the south. Long hole drilling also started towards the end of the year close to the mine as well as our first use of Titan geophysics in the area. At Pallancata, drilling campaigns commenced at Palca to the south east and Corina to the north. Encouraging mineralisation was found in both zones with further campaigns scheduled in 2020. We experienced delays in receiving exploration permits for two other key targets close to the operation, Pablo Sur and Cochaloma, and have finally received them in early 2020. As a result, we have reduced production at Pallancata for 2020 in order to extend its life of mine and recalibrate our exploration to production cycle as well as recognising an impairment of $14.7 million.

Business Development

Our team worked on a number of business development initiatives which balanced early stage opportunities including greenfield drilling and project options with the focus on stable jurisdictions in the Americas. In this regard, we carried out selective drilling campaigns in Chile, Canada and the United States. Results from the Corina deposit in Peru were encouraging, and, towards the end of the year, we saw some notable drill holes at the Snip mine in Canada from our partner, Skeena Resources. Further preparatory work has also been carried out at our existing near term projects including Arcata, Ares, Azuca, Crespo and Condor and an exciting drill campaign is scheduled for 2020 and 2021 at a number of these sites across southern Peru subject to the receipt of the relevant exploration permits.

In October, we announced the acquisition of the remaining 94% of the Biolantanidos rare earth deposit in Chile for $56 million. We believe that this acquisition in an attractive mining jurisdiction provides unique optionality for our shareholders and was the direct result of an extensive long-term effort to identify commodities with very strong growth characteristics. The project consists of ionic clay resources, similar to those found in China, but very different from most other rock-based rare earth projects worldwide. The process is environmentally friendly with no requirements for the use of explosives, no tailings dams and no potentially harmful chemicals. Capital and operational expenditure is projected to be low and we are also excited by the strong geological upside potential. Although Hochschild remains focused on precious metals, this diversification gives us a unique deposit in a key industry with expected exponential growth. We intend to deliver a revised feasibility study in 2021 and will thereafter decide on the appropriate path to development to maximise value for shareholders.

Financial position

We have continued to strengthen our balance sheet through the year with strong free cashflow especially in the second half and in December with the refinancing of our $150 million short term debt with a new $200 million five year loan at Libor + 1.15%. We ended the year with a strong cash balance of $166 million (2018: $80 million) and net debt therefore fell to $33.2 million (2018: $77.4 million).

Financial results

The average gold price received in 2019 was 12% higher than the previous year with the silver price rising 8% and therefore, combined with a rise in gold sales, revenue increased by 7% to $756 million (2018: $704 million). The operational all-in sustaining cost of $11.9 per silver equivalent ounce (2018: $12.0 per ounce) was at the better end of forecasts and reflected ongoing cost efficiencies offset by a budgeted increase in exploration expenses investment as well as selling expenses due to the export taxes in Argentina. The combination of the revenue increase and tight cost control led to Adjusted EBITDA rising strongly by 28% to $343 million (2018: $268 million) with Profit from continuing operations before income tax increasing by 79% to $103.4 million (2018: $54.7 million). Adjusted earnings per share was higher at $0.09 per share (2018: $0.05 per share) resulting from the higher profitability and lower interest costs and partially offset by the above-mentioned increase in selling expenses and a rise in mine closure provisions for our former operations at Ares and Sipan ($13.6 million).

Outlook

We expect attributable production in 2020 of 422,000 gold equivalent ounces (36 million silver equivalent ounces) assuming the silver to gold ratio of 86:1 (the average ratio for 2019). This will be driven by: 252,000 gold equivalent ounces from Inmaculada; a contribution of 14.5 million silver equivalent ounces from San Jose; and 7.2 million ounces from Pallancata. All-in sustaining costs for operations are expected at between $1,040 to $1,080 per gold equivalent ounce ($12.1 to $12.5 per silver equivalent ounce). This forecast includes a $22 million investment to expand the tailings storage facility at Inmaculada. Excluding this project, all-in sustaining costs for operations are expected at between $1,000 to $1,040 per gold equivalent ounce ($11.6 to $12.0 per silver equivalent ounce).

The budget for brownfield exploration has increased to approximately $36 million with the greenfield and advanced project budget set at approximately $8 million plus approximately $7 million for advancing the Biolantanidos project. We are also furthering our innovation drive to aid in the delivery of upside in our operations and projects. Finally, we recognise that the management of environmental, social and governance (“ESG”) issues is of increasing significance to investors and stakeholders in general, particularly for those operating in the resources sector. This year, we will embark on a process of enhancing our level of ESG reporting and, in particular, in relation to the Company’s environmental and social performance.

Although the year has started with relatively high precious metal prices, cost control continues to be a top priority. Our 2020 brownfield programme has already begun at Pablo Sur and we look forward to further results from another ambitious year of exploration both around our existing operations and further afield. I firmly believe that we have set a good course for the future with a focus on low cost growth and a determination to further increase the life-of mine across the Group. All the elements of our strategy will be targeted on delivering sustainable long-term value to those most closely interested in our Company: our shareholders, our communities and our people.

Ignacio Bustamante, Chief Executive Officer

18 February 2020

[1]Revenue presented in the financial statements is disclosed as net revenue and is calculated as gross revenue less commercial discounts plus services revenue

[2]Please see the Financial Review page 19 for a definition of Adjusted EBITDA

[3]2019 and 2018 (restated) equivalent figures calculated using the previous Company gold/silver ratio of 81x. All 2020 forecasts assume the average gold/silver ratio of 86x.

[4]All-in sustaining cost per (AISC) silver equivalent ounce: Calculated before exceptional items and includes cost of sales less depreciation in production cost and change in inventories, administrative expenses (excl depreciation), brownfield exploration, operating and exploration capex and royalties (presented with income tax) divided by silver equivalent ounces produced, plus commercial deductions and selling expenses divided by silver equivalent ounces sold using a gold/silver ratio of 81:1. The Arcata operation is excluded from the calculation of the AISC from operations in 2019.

[5]2019 and 2018 (restated) equivalent figures calculated using the previous Company gold/silver ratio of 81x. All 2020 forecasts assume the average gold/silver ratio of 86x.

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2020-02-19