Hochschild Mining PLC

LSE:HOC

Earnings Call Transcript 2020-Q1

[Operator]

Good day, and welcome to the Hochschild Mining production report conference call. At this time, I'd like to turn the conference over to Ignacio Bustamante, CEO. Please go ahead.

[Ignacio Bustamante, CEO & Director]

Thank you very much. Hello and welcome to our first quarter production conference call. Here in Lima, we have myself, Ignacio Bustamante, CEO; and also on the line is Ramón Barúa, our CFO; and in London, as usual, is Charlie Gordon, our Head of Investor Relations.Clearly, the last few weeks have been very challenging for everyone. Here at Hochschild, as you know, we suspended our 2 Peruvian mines in mid-March, following the introduction of the nationwide quarantine. Our priority has always been the health and safety of our employees and stakeholders, and they have all been vital in helping us to weather the situation. I thank them for their dedication in what has been a tough time for all of them. We have been working with the authorities on a potential plan for our mobilization and ramping the mines back up to production, and we hope to be able to update you in the near future.In Argentina, we have already been given permission to restart the San Jose operation following its own suspension, but with movement restrictions still in place in the country, we expect the ramp-up to be slow and steady.Let's turn to the operations. Before the suspensions, we had a solid start to the year, producing 8.1 million silver equivalent ounces or 94,100 gold equivalent ounces and was in line with our expectations. Actually, if we hadn't stopped, we would have produced about 8.9 million ounces of silver equivalent material, which is pretty much in line to our guidance for the year.First quarter, our total production was 69,400 ounces of gold and 3 million ounces of silver. Inmaculada was, of course, the key asset and had another good period. Grades were in line with our budget. And like this time last year, there were some ounces which were in the processing stage as the year turned, which also boosted production, helping out to just over 46,000 ounces of gold and about 1.4 million ounces of silver.At Pallancata, production was 1.3 million silver equivalent ounces, with grades and tonnage lower than expectations, but grade is expected to recover in Q2 and Q3 once operation restarts. In Argentina, San Jose had a solid quarter despite the customary annual leave taken in February, with gold grades a little higher than expectations. Production which was stopped on March 19 was 2.7 million silver equivalent ounces. As I have already mentioned, we are currently in the process of slowly bringing the mine back into production. As you may imagine, with 2 of our mines still suspended and uncertainty remaining as to the future developments of the COVID-19 pandemic, we have decided to withdraw our guidance for the year. We will, of course, issue an updated set of forecast once our operations are fully up and running again, and we have a clear idea of the impact so far from the outbreak and resulting stoppages.On the exploration side, our brownfield program did manage to make a start despite it being the raining season in Peru with drilling carried out in Inmaculada, Pallancata and San Jose, all our 3 operations. However, as you may expect, all work was halted in mid-March, so there were few results to report with the bulk of the campaign to come.On the financial side, we have entered this period of crisis with a very strong cash balance of approximately $178 million at the end of March, a net debt at only $36 million. I should point out that our debt includes a slight increase in Argentinian debt to approximately $14 million, which has provided accretion for the operation there and help to mitigate the potential effects of this stoppage.In addition, we announced last week that the Board has decided to put a proposal to pay the 2019 final dividend in line with our focus on cash conservation in these uncertain times. We also emphasize that the company can revisit the level of shareholder distribution once we are in a position to assess the overall financial impact of the crisis.So to sum up, a difficult period for everyone, but we remain hopeful that we will be able to safely restart our operations in the next few weeks. We have been working very hard on a series of comprehensive crisis-related protocols and safety measures, which we're implementing throughout the organization. This, we hope will ensure protection for all our employees and stakeholders as and when we are fully remobilized.And with that, I would like to open up to any questions that you may have.

[Operator]

[Operator Instructions] We will now take our first question from Justin Chan from Numis.

[Justin Chan, Analyst]

Thanks very much for providing the update. My first one is on the state of discussions with the government. What, if any, criteria have they provided and can you give us a sense of the overall framework that they're using and you're using to evaluate when might be the right time? Is it number of cases? Or I guess, what externally can we look at to give us a better sense?

[Ignacio Bustamante, CEO & Director]

Absolutely, Justin. So the government is paying a close attention to the actual amount of cases and how the curve develops. I can say that the government in Peru took very strong, decisive and quick actions and that have helped mitigate the situation. And it has also taken a lot of efforts to do a lot of tests. So I think from the region, we're one of the countries, if not the entire country that is doing the most amount of testing per capita in the region. So that's good. That's positive. So we're certainly doing a lot of testing, a lot of cases continue being identified. So we are seeing that, that curve could be flattening a little bit, but it's still going up. So one key point that government is now taking into account is how that is behaving. And the amount of extreme or emergency cases compared to the installed medical, clinical capacity in the country. So far, the indication that the government has given is that the state of emergency is going to last until this Sunday, so the 26. However, probably today or tomorrow, we're going to be getting an additional update.We cannot discard that -- what the government is going to do is start a gradual beginning or restarting of the economy, giving priority to certain areas that create the least problems or dangers -- potential dangers for the population. So for instance, industries that are more technologically related, more capital and less people-intensive activities that have a very positive impact on the economic side of the country who are not jeopardizing a material amount of the population. So hopefully, we're going to start seeing some of that coming into next week. I think it's very difficult for a total listing of the set primarily. I think that's not going to be an option now. But it's an option for certain activity to start activities in a guarded manner. We have been working very closely with the sector in National Mining Chamber and also with the government to develop a protocol that would allow us to safely get back into operation. Most likely it's going to be Arcata to be starting. We have shared that with the government where we are pretty much already aligned with that protocol, and we're going to do as much as we can to be one, if not among the first industries to get back into operation. It could be next week, could be probably -- if it is not next week, could be week after next, but we believe it's a question of weeks, not months, and most likely that is going to be gradual. It's going to depend a lot on mostly the restrictions that the government continues having in terms of traveling and moving between regions. We don't have any concerns regarding supplies. We see that the supply chain is already working. It's already operating. We have a lot of stocks in the mine. And the critical supplies that we might be little low in stocks are already underway with industries that are already being -- have already been freed. So the least concern is in amount of availability of people. Machinery is already in place including drilling machines. So the question is how quickly we can mobilize safely the people that we need to restart our operations. And for sure, we're going to have more lights in the upcoming days, but I believe that we are in the right direction. The government understands the importance of putting mining back into operating and the joint therefore is working well.So I would say, as soon as we start seeing that curve flattening, which hopefully will be within the next few days, we should be looking at gradually starting our operations.

[Justin Chan, Analyst]

Okay. Thanks for many, many reasons. We all hope that the curve flatten soon and everything resumes as soon as possible. In terms of the realistic, I guess, production ramp-up time line. Could you give us a sense of how long it takes or how long you estimate it would take to get back to normal production levels? And I guess what the curve looks like with that respect once operations do resume?

[Ignacio Bustamante, CEO & Director]

Yes, it's tough to estimate that, Justin, because obviously it's going to depend on the people. Supplies, no problem. If we are able to take all the people at once, which is not going to be the case, but assuming that we were able to take all the people at once, we estimate that the ramp-up time could be around 5 days. So it should be relatively quickly, 4 to 5 days. But since that is most likely not going to happen, we anticipate that most likely we're going to start first trying to work -- obviously, prioritizing first the key activities for the operation, which are, at this point in time brownfield work, so operating exploration and mine development, preparation and production. Those are the most critical because in some of our operations, we have spare capacity in the plant. So the first thing that needs to get back into drilling brownfields and mine preparation, development and production. So we're going to give priority to that, probably starting with, let's say, 1 -- instead of 2 shifts and then start mobilizing the second shift on the following week. So taking on a gradual state. But I would say the base case scenario is going to be 1 week or so and worst case scenario could be 3 to 4 weeks. But those 3 to 4 weeks will not be easy. We'll be gradually ramping up.

[Justin Chan, Analyst]

Okay. And in terms of the state of, I guess, mine development and pre-grade control drilling, do you have some stopes and some material that you can use to mine quickly and try to catch up production? Or is -- I guess, what is the situation there?

[Ignacio Bustamante, CEO & Director]

Sure. Sure. Yes, the mine was already in the right cycles and the mines stopped all at once. So we are back and to start exploiting and extracting mineral as soon as we have the people there. So it's going to be great time for development and exploitation. The mine is already developed following the regular cycle. So we would expect that production will get back into producing the actual ounces relatively quickly.

[Justin Chan, Analyst]

Okay. Just last one for me. I know I've taken up the line for a while. Last one is just on production. Do you expect or anticipate that you might push production levels once you're able to restart to try to catch up production this year? Or when you restart, would you kind of keep your regular guidance in terms of volumes or the grades that you're mining at?

[Ignacio Bustamante, CEO & Director]

No. We -- I mean we would keep -- we will keep our -- the idea will be to return to production levels. So the net impact on production is going to be affected with the total amount of days that we had to stop, but it's not that we are going to be catching up or not because that would imply high grading or going against the mining cycles, and we don't want to do that. So it's safe to assume that the production is going to be basically adjusted depending on the amount of days that we have to stop.

[Operator]

We'll now go to our next question today from Richard Hatch from Berenberg.

[Richard James Hatch, Analyst]

First one, can I just ask a question on the balance sheet? Net debt movement of $3 million for the quarter. But can you just -- perhaps just add a little bit more meat on to the bone to that? Is there any working capital tailwind you had there? And kind of what's the, say, monthly cash burn rate at this point?

[Ignacio Bustamante, CEO & Director]

Sure. I'll pass that question to Ramón, Richard.

[Ramón Barúa, Chief Financial Officer]

Richard, yes, you are right. From a balance sheet perspective, we're in a very healthy position. As you remember, in December, we were able to refinance $200 million of debt to a -- into a 5-year loan with a 2-year wait period. So we don't have any immediate financial obligations. The rate that we fixed was around 2.5%. So also from an interest rate perspective, our coverage is plenty. From a working capital standpoint, we don't have any major issues. As you recall, we stopped operations and activities 9 days before the coverage finished. So we did have some material that was ready to ship that took a little bit longer. We had some dore in Inmaculada, which is being shipped next week. We had some concentrate from Pallancata that was shipped during the first week of April. And we had also some dore and concentrate in Argentina, which has also been shipped already. So that is quickly catching up. And of course, we will experience a break in our cycle because of this quarantine.Still, having said that, the cash at the end of the quarter was $178 million. So we remain in a very healthy position. In terms of burn rate, in the case of Peru, including Inmaculada, Pallancata and our administrative expenses without making any real adjustments, our fixed cost is around $12 million per month. So with the cash position that we have, that allows us to continue paying that fixed cost well into 2021. In the case of Argentina, what we tried to do is we try not to send a fresh capital into Argentina because of the differentiations of exchange rate and other difficulties that you are aware and taxes to dividends. So what we try is, for Argentina, to sustain on a stand-alone basis. The cash burden is around $6.5 million to $7 million per month. And as such, we have taken around $14 million of debt in Argentina with the credit lines that we have with local banks in Argentina that we believe those $40 million are going to be enough. Ignacio already mentioned that we are restarting operations at half of the capacity these days. So we're optimistic about the self -- the ability to self-sustain of Argentina. Thank you.

[Richard James Hatch, Analyst]

Okay. Very helpful, Ramón. Can I then just ask -- so just to be clear, so San Jose operating -- ramping up to roughly half, so would it be a reasonable working assumption to assume that perhaps by the end of May, you get up and running to your full rates and safely, Inmaculada and Pallancata are perhaps sort of into June that we should expect some form of kind of normalization of operations? Is that a fair working assumption based on what we know at the moment?

[Ignacio Bustamante, CEO & Director]

I would say, Richard, it is still based on -- any answer I can give you is going to be speculative. We still don't know the specific answer. In the case of San Jose, actually, it's even hard to predict because even though we're already back into producing and extracting, the movement of people is still very restrictive. So we can only work with the people that is very close to operation. We started the first week with about 300 tonnes per day, then we had to stop because people needed to get back to their town and more people couldn't come. So even San Jose, for which the permit is in place, we are having ups and downs. So it's very hard to predict. I would say -- as I mentioned to Justin before, I would say the base case scenario could be that within a week or so, we could be already starting to produce roughly half capacity and ramping that up in the coming 2 to 3, 4 weeks during the entire month of May. I would say that's an optimistic case. If it gets delayed, it could be delayed and getting into June. But those are the type of restrictions that I could see, not more than that. But I can tell you that as soon as we get restrictions lifted, there's going to be movement. That movement is 20%, 50% or 70% is a bit hard to predict because it's going to be dependent on a lot of other variables that are still uncertain.

[Richard James Hatch, Analyst]

Okay. That's helpful. And then my last one is just on Pallancata. So you mentioned in the commentary that the grades were below your expectation. What was the driver of that? And can you just explain a bit more? And just on Pallancata, how are you thinking about tonnes filling the plant over the -- into 2021, just based on the fact that the rigs aren't turning at the moment and just need to add those resources in order to fill the plant?

[Ignacio Bustamante, CEO & Director]

Yes, sure. So in the case of Pallancata, I would say the variation in grades is typical. It's nothing particularly wrong or special there in our type of deposits based on the nature of our structures. In some cases, you see lower grades, in some cases you see higher grades. So this is following the main plan, and that's what we guide. And we expect that, that is going to be compensated during the rest of the year. And I don't know concerns on that front. In terms of guidance, I would say, before the COVID-19 hit the entire world, we were thinking roughly that while we need time to -- the brownfield team to catch up following on the permit that we just received and the exploration -- aggressive exploration plan that we have for the year, we're estimating to have production of 7 million ounces this year and 7 million ounces getting into 2021 as well. And that is not changing. We continue expecting that, that production on a sustained basis, again, absent COVID-19 issues, it should be in the run rate of 7 million for the next couple of years and while we give time for the explorations team to come back and produce. So we should expect that current production throughput should be maintained over the next -- probably next 2 years. And hopefully, by that time, we're going to have already results from our exploration plan and start ramping up.

[Operator]

We'll go to our next question now from James Bell from Royal Bank of Canada Capital Markets.

[James Andrew Keith Bell, Mining Analyst]

Just 2 questions for me. So firstly, sort of continuing on the exploration theme. Assuming you can get exploration back up and running sort of more rapidly than the operations, is there any prospect of prioritization or accelerating exploration in certain regions to try and prove up mine life, say, at Pallancata? Or do you feel like you're going to stick with the same plan in terms of your drilling targets, et cetera, for 2020? And then secondly, just on BioLantanidos, should we expect a lower spend this year in terms of sort of on the project given the circumstances and what's going on with the rest of the business?

[Ignacio Bustamante, CEO & Director]

Sure. Let me cover the question on exploration, and then I'll pass it over to Ramón for BioLantanidos. So in the case of exploration, the good thing, James, is that we were already in a very accelerated plan. So we're planning on trying to complete as much as possible before June. We already had a lot of machines over there, and we're going at pretty much full speed. And we're still waiting for a few other permits for the second half of the year. So what this is going to -- and basically, there could have been a gap between the 2 drilling periods. So what we would expect now is that -- I mean to accelerate in terms of machine is going to be hard. We are pretty much at full capacity there. So the time that we have lost to the COVID-19 situation is what I believe is going to be a late decision between the 2 campaigns, and it's going to allow us to work full speed that we are not going to see the first earning campaign in June or we want to see in July or August, but still within the year, well within the year. And it's going to give time for the next permits to be in place and continue with the remainder of the building campaign right after that. Also I would say our total exploration plans for the year are at this pint already intact. So there shouldn't have an impact for 2020, which is very positive. Also another very good thing is that a lot of the critical timing with exploration is regarding finding the machines and mobilizing the machines. And in this case, we already have the machines there, and we don't need to mobilize them because the machines were kept in the mines during the entire quarantine, which is very positive. So as soon as restrictions are lifted, we'll send the people, and we are ready to start drilling. So the ramp-up on brownfield in particular will be very, very good. And Ramón, on BioLantanidos?

[Ramón Barúa, Chief Financial Officer]

Yes. On BioLantanidos, what I can tell you, James, is that we are doing a lot of progress. We have hired a CEO in Chile. And he has taken a full control of our activities down there. We have reviewed our dates and commitments, and we believe that we can still meet the commitment that we have made with the market of supplying a feasibility study for the project by the end of Q1 of next year. I mean clearly, there are still a lot of moving parts in Chile. Activities have not been resumed as normal, not only in Chile, but also with other of the suppliers that are helping us to prepare this feasibility study. But at this point in time, we believe that we will continue to spend the budget as anticipated and meet the commitment to the market as well.

[James Andrew Keith Bell, Mining Analyst]

Okay. Very clear. And then maybe just one on CapEx following on from the previous questions about sort of operational ramp-ups. Should we think about ratio and CapEx to your production? Or is there some CapEx that's being spent currently, which is sort of out with production, so the sort of discount to CapEx for the year might be lower than we might expect by just looking at the sort of potential production profiles?

[Ramón Barúa, Chief Financial Officer]

Yes. I mean the CapEx is...

[Ignacio Bustamante, CEO & Director]

Essentially -- sorry, go ahead Ramón.

[Ramón Barúa, Chief Financial Officer]

No, I was just going to say that, yes, there are some things that we are considering that we are able to postpone just because we will not be able to fully finish them during this year. So yes, there might be some CapEx that is not completed this year. But eventually, that should be reassessed next year.

[Ignacio Bustamante, CEO & Director]

Yes. A lot of our CapEx, remember, James, is related to mine development. So -- and this is retained as much as we can every month. So we say that everything related to mine development should be proportionately moved into 2021.

[Operator]

We will now go to our next question from Daniel Major from UBS.

[Daniel Edward Major, Director and Analyst]

Couple of questions. First, just a follow-up to be entirely clear on the exploration. Assuming that things normalize by the mid to late Q2, are you -- am I correct in assuming that you think you can achieve all of your planned drilling campaigns and being just as good a position to deliver an increase in group reserves and resources or reserves or resources this year as you had planned at the start of the year?

[Ignacio Bustamante, CEO & Director]

We're going to be able to complete all our plans. If we are able to restart in the next, I would say, 2 months, we should be able to complete our entire exploration plan for the year, which is very good. Pretty much in all our -- in Pallancata, Inmaculada and San Jose. So we're going to be able to complete our drilling plan. So that's good.

[Daniel Edward Major, Director and Analyst]

That's really encouraging. Just a quick and I know you've got a large net cash position, which you've quite very clearly communicated can absorb quite a lot of cash burn. Do you have any additional undrawn secured credit facilities in Peru or Argentina on top of that, which would increase the liquidity further?

[Ramón Barúa, Chief Financial Officer]

Yes. The answer is yes. We have been in close contact with our banks. In the case of Peru, as you know, we don't have a committed credit lines, like in other countries, but we do have what is called approved credit line by the different risk committees from banks. We have been in close contact, again, with all of our banks. And what I can tell you is that they have shown a lot of commitment and willingness to deploy further capital with Hochschild Mining for working capital or for any other purposes that we need. We have also reviewed with them our situation vis-à-vis the covenants and what I can say is that with the view that we have today in terms of how long this could last, we have no issues in complying with all of our covenants. So that is a very positive aspect. So the answer is yes, we do have a lot of additional credit lines. Although if they are approved, certainly, we would probably need to go through the risk committees, again, given the situation that we are in. But to answer your question directly, should we need to increase our liquidity lines, we have that opportunity. Although we don't need it because we have again $178 million in cash and no immediate either financial or other type of commitments in the short to medium term.

[Daniel Edward Major, Director and Analyst]

Great. I think -- actually, just finally, I think, and just again to reiterate the previous comments. With respect to San Jose, based on -- I appreciate that the ramp-up time line is uncertain. But given the gradual schedule, your base case would be mid to late kind of Q2 that you'd be back up at full production. Is that a fair working assumption at this point?

[Ignacio Bustamante, CEO & Director]

Yes, that's the assumption we're using right now and we're working towards that. Again, a lot of things that aren't under our control basically that's the problem, people in the region. But that's I would say an assumption that we're currently working.

[Operator]

[Operator Instructions] It appears we have no further questions at the moment.

[Ignacio Bustamante, CEO & Director]

Thank you very much. Okay. So thank you very much to everybody for participating in the call. And should you have any additional questions, you can always contact Charlie Gordon for any particular request that you may have. So thanks again. Have a great day, and speak soon. Bye.

[Ramón Barúa, Chief Financial Officer]

Thank you.

[Operator]

Thank you. That will conclude the Hochschild Mining production report conference call.