Hochschild Mining PLC

LSE:HOC

Earnings Call Transcript 2023-Q1

[Operator]

Good day, and welcome to the Hochschild Mining Quarter 1 2023 Production Results. At this time, I would like to turn the conference over to Ignacio Bustamante, the line is open. Thank you.

[Ignacio Bustamante, executive]

Thank you, Caroline. Hello, and welcome to our conference call to discuss our first quarter production results. I'm here in Lima with Eduardo Noriega, our CFO; and in London, is Charlie Gordon, our Head of Investor Relations.

Obviously, it has not been that long since our full year results, so I will keep this short and then open up to questions. Group production in the quarter was just over 64,000 gold equivalent ounces or 5.4 million silver equivalent ounces. At Inmaculada, it was just over 31,000 ounces of gold and 1.3 million ounces of silver, which is a gold equivalent total of 46,600 ounces.

The timing of the approval of operations Modified Environmental Impact, as anticipated, impacted mine development in the first quarter. And as you know, we also had some local and national disruption, but there was an offset from better-than-expected grades. To repeat what we said 3 weeks ago, we continue to expect a prudent government decision on the Modified Environmental Impact Assessment in this quarter and subject to an approval, we remain confident that the mine will meet its guidance for the year as it has done every year since commissioning.

In Argentina, the first quarter always contains the personnel seasonal vacations and consequently tonnage through the mill was lower in the period as well as some lower-than-expected grades. Output was 1.9 million silver equivalent ounces, which is a big improvement on the results from last year when we still had COVID as well as a fire in the crushing area. This mine has always been weighted towards the remaining quarter-over-the-quarter through the year, and we expect the same in 2023.

Over at Pallancata, production was 514,000 silver equivalent ounces, which reflects the long-term decline in silver grade profile and a mining area that is close to completion. As we have previously indicated, we expect to place the mine on care and maintenance later in the year. In terms of costs, I am pleased to say that we are reiterating our 2023 guidance, which if you remember is within $13.70 and $14.50 per gold equivalent ounce.

Turning to our Mara Rosa construction project. We have had a good start to the year with a total project progress now at 77%. Detailed engineering is 99% complete and deliveries of key project equipment are all on schedule, while civil works for the processing plant area is 86% finished.

Finally, the power supply for the mine is expected to be completed in July. We remain on time and on budget, and it's exciting to remind you that commissioning is on track for the first half of next year. I'm not going to say too much on exploration as the timing on the brownfield program in Peru is subject to the approval of Inmaculada Modified Environment Impact Assessment. We have made a start to drilling in Argentina and expect resources to start coming through over the next few months.

On the financial side, we have approximately $103 million of cash, which translates to net debt of $218 million and our net debt to the last 12 months EBITDA of around 0.95. The cash balance obviously reflects capital expenditure at Mara Rosa and temporary working capital variations, including tax payments among others.

So to sum up, we are reiterating our guidance for the year, even though the first quarter will be the weakest of the 4, and we are making further good progress with our Mara Rosa project in Brazil. Finally, and most importantly, we expect Inmaculada's Modified Environmental Impact Assessment process to be completed by the end of the current quarter. And with that, I would like to open up to any questions that you may have.

[Operator]

[Operator Instructions]

We will take the first question from Ian Rossouw from Barclays.

[Ian Rossouw, analyst]

Ignacio, just wanted to dig a bit more into your comments around production being second half weighted. Presumably, if the MEIA, the permitting has sort of delayed development in Q1. Should we expect that to happen into Q2 as well? And then if you can maybe give us a sense of what should we expect for the H1, H2 split for the various operations, if you can give us maybe a percentage or full year, et cetera, would be great.

[Ignacio Bustamante, executive]

Sure. So as a general guidance, Ian, typically, our production in the first quarter of the year is the weakest as mentioned. That is particularly notorious in San Jose, which the personnel goes on vacation for an important part of the period and those things change during the rest of the year. But the second quarter for Inmaculada should be better than the first one because of the mine planning for the year. So it has been scheduled to be that way. So operation is going to start building up. So we should expect an increase in production in the second quarter.

But getting into the second half of the year where we should expect to see the biggest increases in grades because we're going to be accessing the newer areas of the mine assuming that the decision of the Modified Environment Impact Assessment is obtained as guidance in the second quarter of the year. So second quarter should be better than the first one. And then the remaining 2 quarters of the year, third and fourth quarter of the year should be even better.

In the case of Pallancata, no, it's a little bit more unpredictable because we are in the last stages of the mine, we are pretty much mining material that is in the border that has a lot of variability. But having said that, we still expect also that the grades should start improving in the remaining part of the year. But with more uncertainty because of the variability in the grades in the border areas.

At San Jose, even though it was better than the first quarter of last year because of the reasons that I mentioned, the COVID situation last year and incident in the crushing area. Also, the grades are lower than what we are expecting for the rest of the year because of mine planning program in scheduling. So we should expect to see also an improvement getting into the remaining quarters for the year. So in short, we should expect to see a better second quarter in production and an even much better second half of the year in our operations in general.

[Operator]

We will take the next question from Daniel Major from UBS.

[Daniel Major, analyst]

First question just on the approval of the environmental permit at the final full year results, you talked to 3 outcomes, worst case, long protracted delay, short delay and approval. Can you tell us, one, if you get any indication of what the critical path item is preventing the approval, if there is one? And two, in terms of probabilities, where are you sitting on those 3 outcomes as we stand today?

[Ignacio Bustamante, executive]

Sure. Sure, Dan. No. So basically, we are reiterating what we said 3 weeks ago when we announced our full year results. So the 3 scenarios are still present. We believe that, by far, the highest chances are on the first one, which is the one that we are presenting to the market, which is [indiscernible] by the end of the second quarter of the year, so before the end of June, and our expectation is that, that is going to be a positive decision.

As you know, this is dependent on the government decision, but we see no reason why this should get denied or why it should get delayed based on the information that we have as of today. So that's the main assumption that we're currently working on and where we believe the highest chances currently are.

[Daniel Major, analyst]

Okay. And can you give us any -- I mean, is there something specific that's outstanding that prevents the approval? What is the -- is there a certain item or...

[Ignacio Bustamante, executive]

There has nothing material pending. I would say it's more to complete the work and to complete the review of the observations that were made in the reviews by the government entity, which is SENACE, and going through any additional questions that they may have. So this is going to be a period in which there should be a lot of interaction with organizations in charge of granting the permits. As you can imagine, this is a top priority for us. So all the resources of the company are dedicated in answering the potential remaining questions. But so far, no, I would say just going through the administrative work of reviewing the final observations and complete the projects.

[Daniel Major, analyst]

Okay. And then -- the next one on your balance sheet and in the downside scenario, the Inmaculada is closed at the end of the year. On your internal assessments at this current gold and silver price, would you have a sufficient amount of EBITDA generation on a look-forward basis from Mara Rosa and San Jose to prevent a covenant breach in second half '24?

[Ignacio Bustamante, executive]

Yes. Let me pass that question to our CFO, Eduardo Noriega, who is also with me, Dan.

[Eduardo Noriega, executive]

Thank you, Dan. So certainly in a situation in which we don't get the MEIA, we have to put Inmaculada into care and maintenance. We'll have to take internal measures to adjust the size of the company to the new reality of having for a period of time Mara Rosa and San Jose. So we will take measures to adjust the company to a size and be able to ensure the continuity of the company.

In terms of the covenants that we have, we should be thankful for this year. And the positive thing here is that we are in close contact with our lenders, and we have developed a good relationship with them. So we are -- and they are ready to react in case of an unexpected scenario as the one which you described. And then having the banks, the banks that the company has are in this field, so they are very well aware of the current status of the permitting process, Dan.

[Daniel Major, analyst]

Thanks. Good luck with the final approval of the permit.

[Operator]

[Operator Instructions] We will take the next question from Richard Hatch from Berenberg.

[Richard Hatch, analyst]

Ignacio and Eduardo, hope you well. Just wonder if I can drill a bit into San Jose. So the grade obviously came off quite a lot quarter-on-quarter and year-on-year. Just wonder whether you might be able to give us a bit of color on how we should think about the grade progression for San Jose as we go through. And then just looking at McEwen's results, they were talking about negative grade reconciliation to the model. And I just wonder whether you might just be able to talk a bit about that. That's the first one.

[Ignacio Bustamante, executive]

Sure. So regarding the first part regarding grade reconciliation, I mean that is obviously something relatively typical in this type of operations and underground veins with such variability. So no production really that should be materially concerning for us. If there are differences, they tend to be reconciled or they need to be identified.

So we would expect that part of the differences with the model are going to be recovered during the rest of the year. So that's something that is in progress. And in terms of grades, roughly we have been in the case of gold, I would say, as an average of 4 grams or so and in the case of silver in the 220, 230 in the first quarter of the year, oscillating in January, February and March.

We would expect that for the second quarter of the year, we're going to be somewhere around low 5s for gold and around high 290s or low 300s for silver. And for the third and fourth quarter of the year, we should be more in the low to mid-5s for gold. And in the case of silver, we should be around 350, 360 grades in average for the second half of the year. So that's the way you should see the grades moving for the rest of the year.

[Richard Hatch, analyst]

Okay. I mean just doing that while you speak points to you having to push some throughput. I mean I think the plant was a little bit light, wasn't it Q1? But that's seasonal. Is the plan therefore to run the plant as hard as you can? That 150,000 tonnes a quarter, is that where you head's at to really try and make it -- squeeze a bit higher and that's how you make up that softer grade in the first quarter?

[Ignacio Bustamante, executive]

The biggest tonnage issues in the first quarter of the year were related to the vacations of the personnel. This is something that happens once a year. So the idea is that for the remainder of the year, Richard, we're going to be using the plant at full capacity.

[Richard Hatch, analyst]

Okay. Cool. And then just on Pallancata, can you just remind us when we should see volumes coming out of that mine? And perhaps just -- it's only been a few weeks, but on Royropata, can you just give us an update on what you're seeing there? Recent drill results, I don't know if we've got any drill results in this release. But is there -- how is that coming along? And is it progressing as you'd expect?

[Ignacio Bustamante, executive]

Sure. So in the case of Pallancata, what we're currently targeting is a potential condition of operations by the end of this year. Final timing is going to depend on a cost of variable among those silver prices, grade reconciliation and of course, the results of some additional brownfield work that we are doing in the operational area. So much harder to anticipate, but so far, the best guidance that we can give is that is going to be towards the end of this year.

And I think the grade, we believe, that are going to be highly dependent on the reconciliation of the model. There's a lot of variability in there. And the second part of your question was we are in Royropata. Royropata, we will not be doing any additional work at this point in time. We already have a very large resource base and over 50 million ounces with grades of only 850 and 5-meter width. So it's looking really encouraging, and it has a lot of potential to increase because we have drilled up to the maximum that we can drill from the current permitted area.

So now we need to wait for additional permits to be able to drill more and to other regions. So -- but what we have already, we have more than enough to project the growth of the mine and start working on the permit for that part of the mine. And the permitting process has already started. We have already started the work. So we continue targeting that this is a process that could take us around 3 years, and we are going to be rushing as much as we can.

And hopefully, the government also works along the same lines on ways to improve the timing of the permitting process for the entire sector in the country, which is something that is really needed, and we can optimize those timings further more. But I would say it's looking very encouraging and plenty of geological potential, and we have already started the permitting process and we're moving at full speed.

[Operator]

There's no further question at this time. I will hand it back over to your host for closing remarks.

[Ignacio Bustamante, executive]

Thank you, Caroline, and thank you very much, everybody, for participating in today's call. And as usual, should you have any additional questions or comments, please feel free to contact Charlie Gordon at our London office. Thank you very much, and have a nice day.

[Operator]

Thank you for participating. You may now disconnect.