Hochschild Mining PLC

LSE:HOC

Earnings Call Transcript 2021-Q1

[Operator]

Good day, and welcome to the Hochschild Mining Conference Call. At this time, I would like to turn the conference over to Ignacio Bustamante, Chief Executive Officer. Please go ahead.

[Ignacio Bustamante, CEO & Director]

Thank you, Dana. Hello, and welcome to the first quarterly conference call of the year. As usual, I'm here in Lima, and also on the line is Ramón Barúa, our CFO; and in London is Charlie Gordon, our Head of Investor Relations. The year has started well for us with all our mines operating as normal in the first quarter of the year and in which our group production was just under 86,000 gold equivalent ounces or 7.4 million silver equivalent ounces. We are firmly on track to meet our 2021 target of between 360,000 and 372,000 gold equivalent ounces or between 31 million and 32 million equivalent ounces. At Inmaculada, we had a good quarter with tonnages slightly higher than expectations and better-than-expected grade. Production was just short of 40,000 ounces of gold and 1.4 million ounces of silver, which is gold equivalent production of nearly 56,000 ounces. Over Pallancata, tonnage and grades were slightly lower-than-expected for the quarter, with a mine producing 1.2 million silver equivalent ounce. However, this was mostly due to the temporary effect of a change in work schedule at the mine, and we should see an increase in the second quarter. In Argentina, we decided to have the [ annual ] 2-week holidays at the start of the year, given the COVID situation in the country and the fact that the unit was coming off as disrupted fourth quarter anyway. The mine itself subsequently ramped up and operated in line with expectations for the rest of the period, producing 1 million ounces of silver and around 19,000 ounces of gold, which makes 2.7 million silver equivalent ounces. In terms of costs, we remain on track with our 2021 guidance, which if you remember was between $1,210 and $1,250 per gold equivalent ounce or between $14.1 and $14.5 per silver equivalent ounce. As you know, since the end of 2020, our balance sheet has been in a net cash position. And currently, we have $245 million in cash, which gives net cash at the end of March of $38 million. That compares to the cash position at the end of 2020, which was $232 million compared to the $245 million that we have today. Finally, our $34 million 2021 brownfield program got going during the quarter, and we are already seeing some good results, especially at Inmaculada. We have concentrated drilling at the Angela North vein, and you may have seen some very exciting intercepts, including one of almost 10 meters with 92 grams per tonne of gold and just over 3 kilos per tonne of silver, fantastic drill hole. We fully expect to be able to add a significant amount of these high-grade resources to the mine's resource base and hope to be able to update on our progress at the interim results in August. Drilling has also commenced elsewhere across our portfolio in this quarter. At San Jose, we have seen further good results in the areas surrounding the current mine, whilst in the Pallancata region, we are currently drilling at the Corina, Cochaloma and Palca targets and close to the current mine at the Pallancata and Pablo veins. So to sum up, we have had an encouraging start to the year after the disruption of 2020 and with strong precious metal prices continuing and lots of exciting targets in our brownfield program, we can look forward to a busy second quarter with further robust cash flow generation. And with that, I would like to open up to any questions that you may have.

[Operator]

[Operator Instructions] And we will take our first question from Marina Calero with RBC Capital Markets.

[Marina Calero Ródenas, Associate]

Just wanted to get your view on the COVID situation? And how are you seeing the results of the elections is impacting mining industry in general and Hochschild in particular?

[Ignacio Bustamante, CEO & Director]

Yes. This is complicated question, Marina. As you may have seen, we are -- we finished the first round of elections in Peru, and we have 2 candidates getting to a second round of elections. One of the candidates, the leading candidate so far is a gentleman, Pedro Castillo, and he represents left policy government as well as very strong views against democracy. And the other candidate is Keiko Fujimori, who is more center right candidate and who has consistently repeated her firm believes in maintaining the democracy in the country and obviously, betting for more liberal and pro business economic model. So I would say it's still so far early to tell in politics anything can change within a couple -- within a matter of days. The elections are expected to be held on June 6 and so we have 1.5 months or so to go. And we need to follow those all results very closely. I believe that in terms of -- for the benefit of the country and for the benefit of the mining sector, in particular, and the business sector, in general, the proposals that Keiko Fujimor presents are, by far, the best ones. And clearly, a potential election of Pedro Castillo is something that we need to monitor closely because he clearly has a completely different views on where the country should go and where the businesses should go. So it's still early to say. The good thing -- and depending on how you see the good thing and the bad thing is the fact that in the first round of the election, the Congress was elected. And the result in Congress is already very much known and is composed by about 11 different parties, none of them holding a majority. You can see a slightly larger representation of center right parties there. So the good thing is that any kind of bad or radical negative proposals led by the executive branch will need to go through Congress, and that should prevent any of those negative reforms we implemented. The bad part of it is that all the positive reforms in case if Keiko Fujimore were elected are also going to have to go through the same automized and diverse Congress. So this is still going to be a certain kind of a barrier of protection, but we need to monitor those elections very closely. And again, it is still very, very early tell.

[Operator]

[Operator Instructions] We will take our next question from Tim Huff with Peel Hunt.

[Timothy Alan Huff, Analyst]

Sorry to ask another nonoperating related question. But the other, I guess, non-Hochschild specific issue, I guess, outstanding improved right now is, obviously, the rise in the cases, the COVID-related cases that we've seen in Peru in recent weeks, similar to that of Chile. I was just wondering, I mean, in the past couple of days, we've seen a couple of reports out from Chile just talking about mines like Escondida, Los Pelambres, and so forth who have seen restricted logistics very early in this wave with varying impacts on production, some of them not much impact at all. I was just wondering, in Peru, are you guys -- are you either seeing miners start to take or start to have any type of logistics restrictions? Or are you taking any precautions? And also, I guess, are you anticipating or planning for any delays in permits like we saw last year?

[Ignacio Bustamante, CEO & Director]

Thank you, Tim. That's another great, great question and very pertinent as well. So yes, what I can tell is that in the case of Peru, the COVID situation is probably at its worst moment either, even worse than the peaks that we saw during 2020. However, even with that situation, we believe that the protocols that we have put in place are having a fantastic impact in preventing a major event happening in any of our operations. So even in the worst time, we are seeing no material impact in terms of our operations. The protocols are working, and we need to continue pushing very hard for that to happen. We have seen a few eventualities happening in some of our mines. And as a result of that, we have had to put people in quarantine time and separate them, isolate them. Fortunately, with no major consequences for any type, either from a health standpoint or from an operating standpoint. And we are managing those isolated situations very carefully. But I believe, in general, that the situation in the country is going to continue being tough for some time, and we need to continue making sure that our protocols are followed very, very closely and continue making sure that people respect and self respect each other and respect all the rules that we have put in place. And with that, we shouldn't expect anything major from happening. So hopefully, we can continue on that path. So at this point in time, we are not anticipating any impact in terms of production or operations or anything material at least, at the current time. Something also important is that in as Peru opposed to some of the other countries is that the hospital situation is very critical. So in Peru, we cannot afford taking any kind of chances because the hospitals are completely saturated. So again, another reason why we need to follow all the protocols really, really closely and make sure that we stick to them. In terms of permitting, what I can tell you that so far, the permits are moving along pretty well, pretty well. We have no concerns yet as of that point. However, we need to take into account that elections are currently ongoing. And there going to be a change of president in July. So we need to monitor very closely and try to make sure that we do as much as we can prior to the changing government. And obviously, once the new government gets elected, we need to make sure that we work very closely in order for those pending permits to be put again on the same track that we have before in about giving the priority to be able to obtain at the time that we have planned.

[Timothy Alan Huff, Analyst]

Okay. That's really helpful. I was just going to say at Pallancata, in particular, the permits that you have right now, will they allow drilling all throughout 2021? Or are there still some pending that would -- that you would need approved for late year drilling at Pallancata?

[Ignacio Bustamante, CEO & Director]

So we have in Pallancata 2 targets -- 2 types of targets. The short-term targets and the medium- to long-term target. For the medium- to long-term targets being Palca, Cochaloma, Corina, we have all the permits that we require, and we're doing at full speed. In the case of the permits for the short-term target, we have also permits valid and permits in place that -- which are the ones that we're currently using to drill the potential continuation of the Pallancata vein, Pablo, Pablo Sur, Pallancata Central and all those targets. So those permits we already have. We are missing 1 in the current operation area that should be available at the end of this year, at the end of 2021, so that's going to allow us to drill during 2022 as well, which is in the San Cayetano area. And there's also another permit that we're chasing, which is the second half of the Pablo Sur permit, and that's also another permit that we're expecting for 2022. So in an asset, we still have permit valid for short-term and long-term targets. We are going to be drilling. We're going to be aggressively drilling during 2021. However, we still have a few other permits pending that we expect to get so that we can continue drilling in 2022 as well.

[Operator]

[Operator Instructions] We will now take our next question from Ryan Thompson with BMO.

[Ryan Thompson, Analyst]

Ignacio, thanks for the update. Could you just give us an update on where things are at with your rare earth project in Chile? And just some general comments on the rare earth market in general?

[Ignacio Bustamante, CEO & Director]

Ryan, let me pass this over to Ramón Barúa.

[Ramón Barúa, Chief Financial Officer]

Thank you, Ignacio. Thank you, Ryan, for the question. Look, our project is progressing very, very well. We are doing a lot of work on the geology or from a brownfield day standpoint, we continue to first replicate the full resource. We're remodeling the full resource that we obtained, and that has progressed quite substantially. We continue to find additional resources in the property also. So we're excited about that. We're also doing a lot of work on recoveries. As you know, we have different quarries, rare earth quarries or clay quarries in the property, and all of them behave slightly different. So we're doing all the metallurgical work to have a complete view of the resource. And finally, we're doing also a lot of work with [indiscernible] to put all of these together and have an appropriate engineering study to present to you and market. So right now, there is a lot of work. Lots of parties involved, and the project is progressing nicely. In terms of the market, in general, what we have seen is also quite an impressive increase in rare earth's prices, I would say, primarily in the permanent magnet. This has to do probably with COVID disruptions with the situation in China and more substantially of all the enormous prospects of the growth in demand coming from electric vehicles, wind turbines and potentially drones as well. I would say if those are the main drivers, the market remains very, very hot and the interest in these metals continues to be as strong as ever.

[Ryan Thompson, Analyst]

That's great. That's very helpful, Ramón. Do you have a time line as to when you think the engineering study is going to be out in the marketplace?

[Ramón Barúa, Chief Financial Officer]

Yes. Look, as we offer to the market, we should have something to communicate to you at the end of the half of this year. I do not offer for that day to have the proper engineering study completely ready because, as I mentioned to you, we are dealing with new resources appear in new metallurgy that require quite a substantial amount of work. But in any case, it will not be too long after the half of the year when we will publish these studies. Having said that, again, let me repeat. So at the half, we will have some guidance for you in terms of how those studies are going to be looking like.

[Ryan Thompson, Analyst]

Perfect. And maybe if I could just ask a follow-up question, switching gears a bit to Inmaculada. You put out a pretty flashy hole there. I think it was 9 meters at north of 80 grams per tonne gold and a lot of silver as well. Can you just put a little bit more color around that hole? Is it close to existing sort of mine infrastructure? How should we be thinking about that particular hole?

[Ignacio Bustamante, CEO & Director]

So, Ryan. So yes, this is very close to the current operational area. We are doing the drilling to confirm that this is a potential continuation of the Angela vein, the original Inmaculada vein. We are still getting many drill holes, and it's still not possible to give a more complete answer to that. But what I can tell you that there was a long time since we hadn't seen as many good intercepts in that area. You mentioned that one that is probably one of the reason we have ever seen in the company with almost over 90 grams of gold and over 3 kilos of silver. And in addition to that, one, we have seen other ones that are in the same table that I have here, which are 9.1 meters with 40 grams of gold and 1.6 kilos of silver. We're also seeing 5.6 meters with 12.6 grams of gold and almost 0.5 kilo of silver. So we're seeing a lot of those drill holes. We're also seen obviously also others that are of lower weight and lower grades. But in general, the continuity and the amount of positive intercepts in terms of again of weight and grade that we're seeing in this area is something that we hadn't seen since we originally worked on the Angela vein. So this is highly encouraging, not only the Angela North being, Ryan, but very close to Angela vein, we are working also on another structure called Juliana that is also looking encouraging. So our goal is to try to come up with an additional increase in inferred resources very quickly. So hopefully, by the end of H1, we are able to give a more complete answer on that and hopefully announce the addition or the material addition of resources of good quality in this area.

[Operator]

[Operator Instructions] We will now take a next question from Kieron Hodgson with Panmure Gordon.

[Kieron John Hodgson]

Most of my questions have been asked, but I've just got a couple of quick ones. Following on from Tim, could you just confirm that there's no concerns on permitting with regards to Inmaculada. And then really, more about the balance sheet as you continue to generate significant amounts of cash within the group, just help me think about how that capital allocation decisions continue to evolve? You've obviously got project pipeline and development assets and just sort of if you can tie the ends for those 2, that would be very helpful.

[Ignacio Bustamante, CEO & Director]

Kieron, so let me cover the Inmaculada question, and then I'll pass it over to Ramón to talk about the balance sheet. So in the case of Inmaculada, the permission that we are facing this year, Kieron, is that we are doing all the drilling work in very narrow area, which is the only area that remains permitted to be drilled which is in this Angela North area. So that is why we not to drill the Angela Northeast structure, the Juliana, the Shakira veins and not much more than that. The good thing is that we have been able to find a lot of resources and high-quality resources, as I mentioned, in that area. So we are in parallel working for the permitting of additional areas. So what we are expecting now is by midyear, we're going to be getting the permit to drill the area called Minascucho, which is a little bit to the west of the Angela vein. And that is also showing encouraging geological potential. So hopefully, by the beginning of Q3, we are in a position that we can drill in Minascucho as well. And the other area that we are looking to get in the permits is north of the Angela vein in the area called San Francisco or has many names. The permitting goes by the San Francisco or [indiscernible] the permitting goes by the San Francisco permit. And that one should follow the Minascucho permit by 2 or 3 months. So right now, what we are expecting is that by June, July, we're going to be able to drill Minascucho. And by, hopefully, August or September, we're going to be able to drill the San Francisco area. So the good thing again is that maybe even without the Minascucho and the San Francisco permits, we are in a good position to add many, many resources in 2021 only with Angela North area. But again, we want to try to get everything and maximize the amount of new inferred resources as much as we can.

[Ramón Barúa, Chief Financial Officer]

In terms of the balance sheet, I think we agree with you at these gold and sever prices, cash is piling up at the balance sheet. We plan to continue first deploying as much capital as possible to our brownfield and in the exploration programs. As Ignacio mentioned, we're being quite successful in all of our mines. So we're excited about that. But really we're doing that right now and the cash continues to pile. So we're looking at our projects. As you know, we're investing in BioLantanidos at the time. We're also quite excited about the prospectivity of our investment in Snip. We will have to make a decision later on the year to invest or not in this project. But I mean, the results -- these pressure results that we're seeing look very encouraging. At this point, it's a realistic project to us. We still need to make a final decision, but that could be also an area for capital deployment for us. And finally, we continue to look for opportunities where we can acquire early stage projects. Despite the pandemic, we continue to be very active on this front. We are even increasing our team, we're all making it more robust in order to look for more opportunities, we believe that still there are opportunities to capture value in this rather early stage opportunity. In terms of debt, we have a $200 million facility. We should start making amortizations on that facility next year in 2022. Although we are in constant dialogue with our banks in Peru, what we can say is that low-cost lines of credit are still very available to us. So should we want to increase the tenure of those facilities, I think that opportunity would be available for us. Again, should we have investment opportunities like the ones that I mentioned before.

[Operator]

[Operator Instructions] We have a follow-up question from Tim Huff with Peel Hunt.

[Timothy Alan Huff, Analyst]

Just a follow-up on a couple of the questions that have been asked. At Inmaculada, just with respect to that really stand out drill hole that you guys reported today. I guess -- I mean, you've mentioned that you want to work it into the resource base as soon as you can. But ideal world, is this going to be quite simply just life of mine extension? Or would you like to try and working into the life of mine plan sooner, the existing life of mine plan? That was the first question. Maybe I'll just stick with that for now, and then I have 2 questions on the pipeline.

[Ignacio Bustamante, CEO & Director]

Sure. The idea first is to quantify how much we have there, Tim. And then based on that, we're going to be doing our life of mine plan again and see how we can see. The idea, as you know, is always to try to balance and average of the resources that we have. So ideally, that should get into the pile of resource that we have and be part of the mix that we're going to be planning on mining in the upcoming years.

[Timothy Alan Huff, Analyst]

Okay. No, that's fair enough. And then I guess also, BioLantanidos, obviously, that sounds like it's going to be delayed. Is the delay going to be mainly due to work that you are conducting, obviously, around the resource? Or is that mainly bottlenecks from the[indiscernible] side? And then the last bit is on that question on where you deploy your cash, and you're noting that you're looking at possibly a pipeline?Just within that pipeline of targets that you're looking at, are you looking at more longer-dated projects? Or are you looking at near production projects? And the reason I ask is, obviously, remember the initial reaction when you announced BioLantanidos.

[Ignacio Bustamante, CEO & Director]

Yes. Let me start with that one first.So the type of things that we're looking at, Tim, are things that, first of all, that fits our -- fits to our skills and that are things that could help us towards our goal of growing -- continued growing production of the company. So I'm sure the type of things that we're looking is at a relatively early stage, but the time to production shouldn't be too long. So things that ideally are either in production, but could be ramped up or things that could put into production within the next 2, 3 years. Or that I would say that the range of things that we're looking at not more than that.

[Ramón Barúa, Chief Financial Officer]

And on the rare earth's team as much as I would like to blame it on someone else, I don't think it's the case. I think what we're dealing here with is a quite enormous amount of data that we are generating data that is quite sensitive. In terms of the -- what we call of the dissolvable reverse, this means that the geological model needs to be built, not based on the total rare earth, but on the rare earth will that react to our metallurgical process, which is a double disruption with ammonium sulfate. Now the labs that are available in Chile and Peru are not very used and polarized with rare earth and the certainties around it. So the labs that where most of these tests are is either in Canada or in Australia, meaning that there are some long lead times also in dealing with these results. And those results go back and feed the model, and there are quite a few iterations in order to optimize and fine tune this. You can imagine that next step is also building a mine plan that also needs to take into account all those features. And as we mentioned before, the amount of tonnage that we're going to be moving here, it's quite substantial. And the concentrations of rare earths [indiscernible] these are parts per million. So the model is extremely sensitive and again, going through all this work and detailed work that requires all these different parties to be involved, it will be taking quite some time. But the good thing is that our expectation is that, at the end, we should have a model that is quite robust, and that can give us, you know, a quite fair, the idea of what we can produce. Having said that, I think right now, given the time constraints and given that we want to be in the market as quickly as possible with information, we are not challenging many of the assumptions on the possibilities that this deposit has. What I'm trying to say is that when we look at the overall recoveries, for example, that we're obtaining on rare earth, we continue to believe that those numbers are rather small. Now with those small recoveries, we're obtaining very positive numbers. What I'm trying to say is that there will still -- once we publish the numbers, there will still be and it will become very obvious to you, a lot of opportunities to further increase and optimize the resource and the possibilities that we have here. Let me stop here to see if you have any follow-up questions.

[Timothy Alan Huff, Analyst]

Yes, I was going to say, it sounds to me, I mean, just put in -- just being skeptical on the whole thing is that a soon into Q3 sort of release, will still carry, as you pointed out, metallurgical process risks as well as material movement risks in it? So there's probably a lot more refinement to do even after we get the initial report. Is that fair?

[Ignacio Bustamante, CEO & Director]

No. Let me overturn that. I wouldn't say that we have a metallurgical risk. I would say that -- I mean we have a solid metallurgy that works, but we do not believe that it's fully optimized. So what we will give you is a metallurgy that totally works. And we'll give you the numbers that go with that. And I think -- I mean the numbers are going to look good. But what we're going to tell you also is that through time, we're going to be working more on optimizing the metallurgy.Main reason behind this is that, if you recall, when we bought these assets, the previous owner had already started going through the permitting process. And in order to start the permitting process, they chose those assumptions with ammonium sulfate, okay? And we decided to work on top of that and not change it because that would have brought a permitting situation back to zero, and we would have lost around -- probably around a couple of years of work that these guys have moved forward. So we said let's go with that double disruption and let's obtain the permits, let's exist as a business, as a cash flow generating business, and we have so much resources, not only here in Banco, but also in the overall property that we have that through time, there will be further opportunities to increase recoveries and improve metallurgies and use other -- also other metals. So the way I would see it, again, just to summarize this, I will say risk, the metallurgy is quite simple, it's quite straightforward, but I see there's a lot of opportunity going forward. In terms of rare earth movement, I don't think that is the case also is not a risk. But it's a matter of -- I mean, we're moving parts per million, all the quarries do not -- are not -- I mean, they are homogeneous in terms of the content of rare earth, but they're not homogeneous in the content, for example, of impurities. So we need to have a 3D model that allows us to optimize a place that we do transfer to the plant and the ones that we do not. Remember that our -- I think I mentioned this before, but our most important cost year is going to be hauling the clay from the quarry to the plant and then back to the quarry once we taken the rare earth. So that is the process that we also need to optimize carefully. In order to do that, the recoveries are important because, again, we're using -- we're modeling dissolvable grade, not total grade. So there's an iteration there that requires a lot of work, and that's where we are.

[Operator]

And it appears there are no further questions at this time. So I would like to turn the conference back to Ignacio Bustamante for any additional or closing remarks.

[Ignacio Bustamante, CEO & Director]

Thank you, Dana. Thank you very much, everyone, for participating in the call. And again, should you have any additional questions, please feel free to contact Charlie Gordon directly on our London office. Have a great day. Bye-bye.

[Operator]

Ladies and gentlemen, this concludes today's call. Thank you for your participation. You may now disconnect.