Hochschild Mining PLC

LSE:HOC

Earnings Call Transcript 2019-Q1

[Operator]

Hello, and welcome to the Hochschild Q1 Production Results Call. [Operator Instructions] Just to remind you, this conference call is being recorded. Today, I'm pleased to present Ignacio Bustamante, CEO. Please go ahead with your meeting.

[Ignacio Bustamante, CEO & Director]

Thank you, Alexandra. Hello, and welcome to our first quarter production conference call. Here in Lima, we have myself, Ignacio Bustamante, CEO. And as usual, with me is Ramón Barúa, our CFO; and in London is Charlie Gordon, our Head of Investor Relations. As you may have read this morning, we have, once again, had another good start to the year producing 9.8 million silver equivalent ounces or 121,000 gold equivalent ounces. This is a little ahead of the run rate of our production forecast for the year of 37 million silver equivalent ounces or 457,000 gold equivalent ounces. We have also stated that we are on track to meet our all-in sustaining cost guidance for the year of $960 to $1,000 per gold equivalent ounce or between $11.8 to $12.3 per silver equivalent ounce. So to a little bit more of the detail. First quarter, as you know, production was 67,400 ounces of gold and 4.4 million ounces of silver. Inmaculada was, of course, the key asset and had another good period. Grades remained strong. Unlike this time last year, there were some ounces which were in the processing stage as the year turned, which also boosted production, helping outlook to almost 49,000 ounces of gold and 1.4 million ounces of silver. At Pallancata, production was 2.4 million silver equivalent ounces with grades and tonnage in line with our expectations and production now all from the Pablo Vein and, therefore, some 30% up on this time last year. In Argentina, San Jose enjoyed a good quarter despite the customary annual leave taken in February with tonnage slightly lower than the corresponding period of 2018, but offset by higher grades, resulting in production of 3.2 million silver equivalent ounces. As you know, in February, we announced that we're placing Arcata on current maintenance. We still have some production from the mine up until then, some 400,000 silver equivalent ounces. We have made very good progress on the closure of the operation, and you will notice that redundancy payments are reflected already in our period-end cash balance. Our brownfield program has already started despite it being the rainy season in Peru, with drilling carried out at Inmaculada, Pallancata and also at Arcata. In addition, we have continued to drill the Aguas Vivas polymetallic deposit to the northwest of our San Jose mine. Of course, the key news for initial initiatives for this year are the campaigns to the south of Pallancata at Pablo Sur, Cochaloma and Palca. I am pleased to confirm that we have recently received the drilling permits for Palca and therefore can start [ moving ] dirt towards the end of the quarter. We also have the necessary environmental permits for Pablo Sur and Cochaloma, and we'll start the campaigns there in Q3. It is said to be an exciting few months. On the financial side, our cash balance at the end of the period was around $88 million, with net debt now at only $68 million. I should point out that this balance reflects a few things, such as first payments resulting from care and maintenance at Arcata, as I have already mentioned, a temporary increase in working capital of $7 million and some early investments in our 2019 brownfield program. To sum up, we have had another good start to the year, production-wise and are on track to meet our all-in sustaining cost forecast, while our 2019 brownfield exploration program is about to move into a new and exciting phase. And with that, I would like to open up to any questions that you may have.

[Operator]

[Operator Instructions] Our first question is from James Bell from RBC.

[James Andrew Keith Bell, Analyst]

Just a quick one on Arcata to start. Can you talk about if there's any ongoing care and maintenance costs there? And what that might be post the redundancy payments that you've disclosed in the release?

[Ignacio Bustamante, CEO & Director]

Sure, James. Yes, the guidance that we're giving in terms of care and maintenance costs for Arcata is the same one that we gave during our Capital Markets Day in London, which is around $3.5 million per year. Obviously, we want to try to work on trying to keep that number as low as possible, but so far, that's the best view that we have.

[James Andrew Keith Bell, Analyst]

And what is that actually entailing, that $3.5 million? Is that just securing the site? Is it pumping? Or what exactly is that going towards?

[Ignacio Bustamante, CEO & Director]

It involves some pumping. It involves security. It involves taking care of environmental ongoing activities. It takes care of the -- some accommodations, facilities, service people, the food service. So it's a total of $3.5 million including all those things. It's the cost of keeping it open with [indiscernible] being pumped and the continued maintenance that we need to keep to get to the facilities, so that they continue operating until the time that we said to restart Arcata again.

[James Andrew Keith Bell, Analyst]

Okay, that's good. And then, Ramón, just in terms of the refinancing and changeover facilities at the Scotiabank facility. I've had a couple of questions from investors as to the motivations for that. And then maybe as an extension, just in terms of going forward, should we think about you looking to try and pay that down over the period of the facilities? Or is it a case of you will look to roll and maintain some debt balance?

[Ramón Barúa, Chief Financial Officer]

Well, sure. Look, it's -- we always like to take a conservative position vis-á-vis the cash position basically because of fluctuations of prices, any additional activity that we might incur. You've seen that we have been very active not only in brownfield exploration, also in greenfield. So from a cash perspective, we would like to be always ready. The rates for refinancing are still very, very low, so that makes it a relatively easy decision for us. Also, we have some payments that are heavy on the first half of the year. You've seen in this first quarter, for example, we've had around $12 million regarding the Arcata layoffs, which is a one-off we have the payment of bonuses. And in the second quarter, we have a payment of taxes. So I mean, we'll see probably a heavier cash generation in the second half of the year. Typically, that's what happened in the previous years. And then we will consider probably, if nothing comes up, to repay some of that by then.

[Ignacio Bustamante, CEO & Director]

Sorry. In addition to that, Charlie was mentioning to me this morning that there were some of questions or concerns about these refinancings potentially having high-structured costs. So I know that people talk about that.

[Ramón Barúa, Chief Financial Officer]

Yes, I know. That's a great question. The reality is that there are 0 costs associated with the refinancing or refunding of these facilities. So it's relatively simple. It's done with the local banks. We continue to hold very attractive credit lines with them. So although we do not have a formal revolver, for which fees would be required, it is relatively easy and with 0 cost for us to retake and refund this debt. Good point.

[Ignacio Bustamante, CEO & Director]

And following up on Ramón's comment on Arcata, that's an important point to emphasize whether we -- for we have estimated that the total cost for terminating the workers of Arcata was going to be around $18 million. The reality is that number is going to somewhere between $12 million to $13 million. So that's also an important improvement compared to our initial estimations.

[Operator]

Our next question is from Richard Hatch from Berenberg.

[Richard James Hatch, Analyst]

First one is just on Pallancata. Are you able to give a little bit of granularity on your expectations for grades at Pallancata for the remainder of the year? And also, I just note that the recovery rates of silver dipped a little bit quarter-on-quarter, and I suspect that was probably a function of the grade, but are you able just to give us a little bit of guidance on your expectations for silver recovery and for the remainder of the year and thereafter, please?

[Ignacio Bustamante, CEO & Director]

Sure, absolutely. So first of all, in terms of tonnage for Pallancata, the best estimate is that we're going to be mining roughly around 2,800 tonnes per day. So that's a good estimate. In terms of grades, what we are anticipating for the year is that rates are going to be, in the case of gold, at around 1.1 grams per tonne and in the case of silver are going to be somewhere between 290 or around, let's say, 295 as an average for the year. In terms of recoveries, what we are seeing in the first quarter is a recovery of around 89% for silver, and we expect that recovery, again, in the case of silver, to be maintained during the year. And that's, I would say, fairly similar to what we have obtained in the past.

[Richard James Hatch, Analyst]

Okay. And then while I've got you, and just on grades again, are you able to give a little bit of color on your expectations for your silver grade at Inmaculada for the remainder of the year?

[Ignacio Bustamante, CEO & Director]

Sure. What we are estimating is roughly around -- you know these type of deposits present a lot of volatility. But what we're estimating roughly are that gold's [indiscernible] for the full year are going to be around 4.2 grams per tonne. And in the case of silver, they are going to be around 150 grams per tonne.

[Richard James Hatch, Analyst]

Okay. And then just 2 more. First one is just on the tax bill as a follow-up. Ramón, are you able just to remind us how much cash tax you expect to be paying in the second quarter?

[Ramón Barúa, Chief Financial Officer]

How much tax -- I mean, it will depend heavily on what prices are by then, no? But the reality is that, in Peru, that number is expected to be very low. In royalties, last year, we paid around $7 million for the full year. And in Argentina, last year, we paid around $17 million for the full year.

[Richard James Hatch, Analyst]

Okay. The -- am I right in saying that your 2018 tax bill gets settled in Q2? Or am I wrong?

[Ignacio Bustamante, CEO & Director]

No. What happens is that in Q2, what you pay is a regularization vis-á-vis what you have been paying throughout the year on a monthly basis. And if there are differences, then you have to pay any differences, no? So without major changes in prices year-on-year, there shouldn't be any major differences.

[Richard James Hatch, Analyst]

Okay, sure. And then my last one, just I suppose a bit of a follow-up on your Investor Day and strategy. And obviously, with the business being pretty stable in terms of its cash flow generation, and you have talked about adding potential acquisitions at certain points. I mean, what's your thoughts on that at the moment? Is there -- with Arcata transitioning on to care and maintenance and you mainly focusing on exploration, is now potentially the time to [ start ] considering whether another project is -- merits adding to the portfolio?

[Ignacio Bustamante, CEO & Director]

Yes, we're constantly looking for growth opportunities, no? And we have -- as we mentioned in our Capital Markets Day, we have 4 different pillars, which we are looking for that growth. One is brownfield that we know we're very active at, and that's the most important pillar of our strategy. The second one is greenfield, in which we are already also very active. We're targeting to drill 3 projects in Chile and Nevada in the next few months. And hopefully, we're going to be drilling 4 to 6 projects for the full year. So that's also very interesting. The other front is that we have our advanced projects that we're going to -- we're looking at ways in which we can put them into value, namely Arcata -- sorry, Azuca, Crespo and Volcan. And also with the Arcata added, that would continue being part of our search for putting them into value. And finally, we have what we call a business development or a joint venture for acquisition opportunities. And we have -- again, permanently looking at opportunities there. And our key priority is to look into opportunities in which we can partner with a company that already has a very good resource base, ideally with significantly more geological potential. And we partner with them with our expertise, with our balance sheet. And we take care of the production, put it into production and operating the asset. So that's our top priority. And yes, we are constantly evaluating opportunities, and we're going to be updating the market if we make any progress on them.

[Operator]

And our next question is from James Bell from RBC.

[James Andrew Keith Bell, Analyst]

Yes. Just a quick follow-up guide. Just at Inmaculada, obviously, you talked about the ore sorting at the Capital Markets Day last year. Can you remind us if we're going to get any updates on how the tests work or how the development is going this year? Or is this something that we don't expect to hear news on in early 2020 with your full year '19 results?

[Ramón Barúa, Chief Financial Officer]

Sure, James. This is Ramón. You should hear from this year we have completed some preliminary tests in Germany with 2 suppliers with TOMRA and Steinert with, in the case of Steinert already with very positive results. For the case of Inmaculada, the mineral for the bulk testing arrived this week in Germany. And in the case of Steinert, we're going to be conducting it next week. In TOMRA, it will take a few weeks extra. But with that information, we will be able to put -- if the results are positive, of course, we're going to be able to put some engineering on top of that and figure an economic model, no? So that should happen in the second half of the year. We will have to put the permits required on top of it to fully understand timing. But at this time, if the project works, we should have plenty of time to address the new veins that have been discovered at Inmaculada since last year. So the answer -- concrete answer is yes. Towards the end of this year, you should have very clear information on what the potential of applying ore sorting to Inmaculada is.

[Operator]

And our next question is from Daniel Major, UBS.

[Daniel Edward Major, Director and Analyst]

A couple of questions. Firstly, on the drilling programs, you've got Pallancata. At what stage do you think, assuming you achieve good results, you'll be communicating that to the market? And would see scope to provide an interim update to the reserves and resources anywhere across the portfolio during the year? Or will that likely come through in the annual resource and reserve update in early 2020? And then secondly, can you remind us on what drilling programs you're doing at Inmaculada this year and what the strategies and the progress there?

[Ignacio Bustamante, CEO & Director]

Sure. So already in Pallancata, we're going to be starting to drill Palca in the second quarter of the year. We have already all the permits that we need. We are just in the process of finishing the road works and installing the cams and that sort of things and mobilizing the equipment. So we expect that by May -- sometime at the end of May we're going to start drilling. In the case of Cochaloma and Pablo Sur, that is going to be starting in Q3. So we would expect that by the time that we -- or sometime in Q3, we're going to start having some results on Palca. And in Q3 and Q4, we're going to be having some results on Pablo Sur and Cochaloma. So I would say for the second half of the year, we are going to start showing and giving the market some updates in terms of what we find in these 3 areas. In terms of a reserves and resource update, we only give them once a year, unless there's some material increase in the resources as was the case with the Inmaculada resources last year that we may decide to give them ahead of time if they become too material. So it's going to be highly dependent on what we find there, the fact that we could give an update earlier on. In the case of Inmaculada, we are going through a plan that is very interesting. We are focusing right now on the east side of the Angela vein, where we found most of our resources. But the focus is being given to the area in the north part of that, which is just the continuation of the Angela vein and the extensions of the Barbara, Keyla structures. We are also doing all the infill drilling for the Divina, Millet area veins that were the most promising ones from the inferred resource work that we did last year. And I would say, so far, the results are looking very positive. And we're also focusing on the southern part of the east side of the Angela vein, where we're going to be drilling 2 very long drill holes to test also that area. In addition to that, where we have done a very extensive geophysics works, and we are also doing a long drill hole destined at deeper areas of the deposit, we are already advancing. We have already got the structure. We don't have still the grades, but it looks also that even farther below the areas where we're having mining the structure continue, which is also very positive news. So it's an ongoing program. It's going to go all the way from now until the end of the year. And also as soon as we start having results, we're going to be updating those to the market. So that should also represent a continuous flow of information.

[James Andrew Keith Bell, Analyst]

Okay. Just to clear on Inmaculada. I mean, is the strategy to expand inferred resources this year or to focus on sort of upgrading and proving up the inferred resource that you have?

[Ignacio Bustamante, CEO & Director]

It's both. It's both. We're targeting also to have also material increases in our inferred resources in Inmaculada while, at the same time, we confirm we take them to a more proven category, our resources in the areas that we found this year.

[Operator]

[Operator Instructions] And there seem to be no further questions at this time, so I will hand over back to speakers for any final comments.

[Ignacio Bustamante, CEO & Director]

Thank you, Alexandra, and thank you, everybody, for participating into this call. and should you have any additional questions, please feel free to contact Charlie Gordon directly at our London office. Have a great day, and talk to you soon. Bye.

[Operator]

This now concludes our conference call. Thank you all for attending. You may now disconnect your lines.