Hochschild Mining PLC

LSE:HOC

Earnings Call Analysis

Strong Performance and Future Growth Plans

In the first half of 2024, the company achieved a significant 25% revenue increase to $392 million and a 79% EBITDA rise to $178 million. Net profit also climbed to $52.1 million. All-in sustaining costs were in line with the expected $1,510-$1,550 per ounce. Key projects like Mara Rosa and Inmaculada contributed to a healthy margin of 45%. The balance sheet remains strong with cash at $89 million and net debt at $271 million. Future plans include increasing production to over 500,000 ounces of gold annually by 2028 and potentially restarting dividends based on full-year results.

Strong Revenue Growth and Profitability

In the first half of 2024, the company reported impressive revenue of approximately $392 million, a 25% increase compared to the same period in 2023. Attributable net profit also saw a notable rise to $52.1 million, marking an improvement over last year's figures. Adjusted EBITDA surged to $177 million, reflecting a gain of $77.6 million year-over-year. These outstanding results can be attributed to favorable market conditions, particularly higher gold and silver prices, coupled with enhanced production from the company's mining operations.

Healthy Cash Flow and Balance Sheet

The balance sheet remains robust, with cash levels maintaining at $89 million as of June 2024. The company displayed strong cash generation capabilities from its two operational assets, Inmaculada and San Jose. Cash generated was strategically deployed to complete the construction of the Mara Rosa project while also advancing the Royropata project. The company's net debt stands at $271 million, with an improved net debt-to-EBITDA ratio of 0.8x, comfortably within the preferred range of 0.5x to 1.5x.

Operational Efficiency and Cost Management

The company achieved an all-in sustaining cost of $1,510 per ounce of gold, which aligns with the annual guidance estimated to fall between $1,510 and $1,550 per ounce. Furthermore, the EBITDA margin for H1 2024 is reported at 45%, reflecting a significant increase compared to the previous years. The ramp-up of the Mara Rosa mine also promises to contribute positively to these metrics, with expectations of producing between 70,000 and 75,000 ounces from the asset this year.

Growth Initiatives and Future Prospects

Looking ahead, the company envisions a production target between 340,000 and 375,000 ounces of gold in the upcoming two years. The cost profile is expected to decrease from the current levels, projected to fall between $1,100 and $1,200 per ounce. The Royropata project is anticipated to deliver 100,000 ounces of annual production starting in 2028, while ongoing drilling at Monte do Carmo aims to verify resources up to or beyond 1 million ounces, suggesting significant growth potential for the company.

Strategic Focus on Brownfield Exploration

The company's strategic approach emphasizes brownfield exploration, which has historically provided strong returns on investment. Specifically, past developments at Inmaculada demonstrate the potential for resource expansion and efficiency improvements. The recent drilling efforts at Pallancata and the exploration of new targets could add significant quantities of precious metals to the reserve base, reinforcing the company's long-term sustainability and profitability.

Potential Dividend Reinstatement

The company is presently evaluating the feasibility of reinstating dividend payments, eyeing a decision by the end of 2024 based on the full year results. This potential return of capital to shareholders indicates management's confidence in the firm's cash flow generation and operational stability moving forward.

Conclusion: A Strong Investment Case

With resilient performance metrics, ongoing operational enhancements, and significant growth initiatives, the company positions itself favorably within the mining sector. The prospects for increased production, reduced costs, and a potential dividend reinstatement contribute to a compelling case for investors looking for sound investments in gold and silver mining.

Earnings Call Transcript 2024-Q2

[Operator]

Good morning, and welcome to the Hochschild Mining plc Investor Presentation. [Operator Instructions] Before we begin, I'd like to submit the following poll. And I'd now like to hand you over to Eduardo Landin, CEO. Good morning to you, sir.

[Eduardo Landin, executive]

Good morning, everyone, and welcome to our retail presentation related to H1 results 2024. I mean the main takeaways of 2024 for the first 6 months is that we continue with a very strong ESG performance, especially on safety. Our revenues went up 25%, up to $392 million. The EBITDA went up 79% to $178 million. Our rolling is $1,510, which is the lowest part of the range in our 2024 guidance.

In terms of growth, Mara Rosa mine in Brazil is ramped up and is in production. Monte do Carmo project in Brazil, the option was secured by the approval of their shareholders. And the Royropata project in Peru is progressing with the permitting process.

In terms of capital discipline, we have $89 million at the end of June. Our net debt is $271 million, and we are focused on debt repayment, growth and capital return.

Continuing with ESG. As I said, safety results are very encouraging. I mean, we are not confident with these results. We will keeping -- we will keep working to reduce this to 0. But I have to say that for underground miners to be in a frequency rate of 1.09 is good. Also, on the environmental performance, we have been very good. Our ECO score is 4.85 out of 6. And also, we are continuing working in decreasing the consumption of water.

If we go to the next page, this is just a reminder of our strategy, the one, what we presented on the Capital Market Day back in November. We focus our growth on brownfields. We believe the brownfield generates long-term value. It will extend our life of mine that is something that the market required. And also, this brownfield exploration will be focused on only on mineable resources.

Operational efficiency is another part of our strategy we want to implement, and we are in the way to implement a lean philosophy across the company. We have been working on process optimization that you'll see the results at Inmaculada. And also, as we have demonstrate in Inmaculada back in 2015 and today with Mara Rosa implementation, we are very good on development projects on time, on budget.

ESG, I have already comment, but we want to drive responsibility and respect across the company with a world-class safety performance. And the final part of this strategy, the disciplined capital allocation where we come through our balance sheet funding the organic growth, we can pay the debt, we can make capital returns. And of course, as we have demonstrate in Mara Rosa and probably, we will do in Monte do Carmo, create value-accretive M&A.

This is the production projections that we presented back in November. So as you can see in the next 2 years, we can -- we will be producing between 340,000 and 375,000 ounces of gold. And the cost profile, it will go down from $1,500 to 1,000 -- let's say, $1,100 -- between $1,100 and $1,200.

Inmaculada, this semester, has beaten our expectations. The series that we have implemented with the help of our consultant improved project -- improving project of the mining cycle. And that's -- this mining cycle incorporate ventilation improvements, mine support, incorporating marginal and cutoffs, shift chain optimization, ore control and blasting lengths. So the production, we expect to have a better production than the guidance for Inmaculada.

And as you probably remember, in the actual all-in sustaining cash cost of 2024 is including $45 million of CapEx that includes the TSF expansion, waste rock facility, implementation and new reverse osmosis plant and also the mine development that we were pending from year 2022 and 2023, where we had -- we had the lack of a permit.

In terms of brownfield program at Inmaculada, we are doing extremely well. We have very promising results at Tesoro, Nicolas and Kari. We believe that we will be -- I mean, we have the possibility to add between 0.7 million and 0.85 million ounces of gold equivalent at the end of this year as inferred resources. But also -- I mean, our priority is to maximize the life of mine. We have a full year plan in place where we put that around 0.5 million ounces per year with very good grades, around 500 grams per tonne.

Going to Mara Rosa. Well, let me say that I think we have done a very good job in this project -- within this project on time, on budget. It took us something like 90 days to ramp up the project. On May 13, we declare a commercial production. And of course, as business as usual, we have some issues during the ramp-up. Today, we have the plant totally stable, producing between 8,000 and 10,000 ounces per month. Unfortunately, we were a little bit optimistic at the beginning of the year, but I think we will be producing between 70,000 and 75,000 ounces this year from Mara Rosa with very good all-in sustaining cash costs.

We continue looking for opportunities to identify new resources to stabilize the mine. And of course, the plant that has a nominal capacity of 7,000, we believe that during the stabilization process, we could go up to 8,000.

In terms of Mara Rosa near-mine exploration, as you can see on the same mineralization trend of Posse, which is the small yellow dot there, we have Pastinho, we have Passo South. We have many, many seats where we can increase resources. And the idea is to double the initial resource in the next few years.

In Pallancata, this is the Royropata new project. As you know, in the last 2 years, we have been able to add 15 million ounces. We believe that we can add another 30 million to 35 million ounces of silver equivalents. And we continue drilling Pablo, Cantera and Erika with very good results. We have many other areas that we will explore during 2024 and 2027. So that means that the potential of the new Royropata project is very, very impressive. And as you know, we are in the process to get the new permits. I believe that -- I mean, to start the process with the -- I mean, to finish the baselines, we need to finish with the easements, with the communities and we are in that way.

San Jose, let me say that we believe that we are exposed to a very good opportunity in terms of the possible devaluation that the government is planning from now until the end of the year that could mean an important reduction of costs for us. This year, we have been able to replace the production. We found some new resources at Frea. Frea was an old vein, and Odin and Maura. And of course, we will continue drilling around Cerro Negro project -- operation because we have many properties around, and we believe that we could find extension of their veins in our mining property.

Monte do Carmo, the option is secure. This is a new project in Brazil that we secure an option. We paid $50 million. This project is in Tocantins, north of Goias. I mean the state of Tocantins is a very friendly mining jurisdiction. I was there a couple of weeks ago. I was with the authorities. I mean these authorities are totally welcome for new investors. I mean this project has a feasibility study. It's an open pit. It has the environmental license. As you know, it has the most complicated license. So if we execute the project, we need only the installation license.

It has a very good infrastructure like paved roads, airports, water, electricity. So we believe that it's a very good project that fits really well with our current operations in Brazil. While we are waiting to exercise the option is we are doing some drilling. That drilling was twin drilling to make sure that variability of the deposit is the correct one. We have confirmed that it is. And also, we are drilling some new resources in order to bring 100,000 ounces additional resource to make sure that a consensus prices is a profitable project for us in line with our capital discipline policy that we established in our strategy.

I pass the presentation now to Eduardo Noriega, our CFO, to give you some comments on the profit and loss accounts. Thank you, Eduardo.

[Eduardo Noriega, executive]

Thank you very much, Eduardo. I am very happy to present to you a strong set of results for the first half of 2024.

As you can see, our revenue numbers at around $392 million for the first 6 months came very strong, higher than what we had in 2023. I would also like to point out the attributable net profit, which was $52.1 million, again, higher than the results that we had in H1 2023. Adjusted EBITDA was at $177 million, very strong, $77.6 million higher than what we show in 2023. These results and improvements versus the first half of the previous year are mainly a result not only of strong market conditions reflected in better gold and silver prices, but also are a result of stronger production from our mines. So again, very, very good results for the first 6 months.

In terms of balance sheet evolution, I would just highlight that we have 80 -- we started with $89 million of cash in 2023 -- December 2023, and we finalized with a similar amount, $89 million as of June 2024. You can see the strong cash generation capacity of our two assets producing in H1 2024, Inmaculada and San Jose. And the cash that we generated was mainly used to complete the construction of Mara Rosa and also invest in the Monte do Carmo option that we acquired as well as advancing our Royropata -- the permit of the Royropata project in Peru. So again, very, very healthy balance sheet that will allow us to advance in our growth plans as well as on repaying our financial obligations.

In terms of all-in sustaining cost, in 2024, we had an all-in sustaining cost of $1,510 per ounce of gold, which is a number that was below what we had in 2023 and pretty much on track to achieve the annual guidance of between $1,510 and $1,550 per ounce of gold. So again, pretty much -- pretty good results and in line with our guidance for the year.

In terms of capital expenditures, sustaining CapEx was at $79 million for all our operations. That number was above the CapEx that we had in H1 2023, where we were delaying some of the CapEx as explained by Eduardo Landin due to Hochschild waiting for an important permit in Inmaculada, which was secured in the second half of 2023. So we're catching up with some capital expenditures and mainly Inmaculada, and as a result of that, as I said, we had $79 million all-sustaining CapEx for the first 6 months. And we're pretty much in line with our guidance for the year, which is between $171 million and $178 million for the full 12 months.

In terms of project CapEx, as you can see in the bottom, Mara Rosa, we're very proud to say that we completed the construction of this important asset for the group on time and on budget. And the total construction CapEx that we're reporting is $205 million, again, fully executed. And we now have Mara Rosa, a fantastic asset, already commercial production. And we will show that the impact of that asset in H2 2024.

Margin-wise, our EBITDA margin for H1 2024 was 45%, show an important increase versus the results that we had in the previous 2 years. And there, our peer groups -- peer group show us as EBITDA margin. Again, this is a result, not only of very good market conditions, but also the impact -- or the good production and cost controls that we have in all our operations. I just would like to highlight again that in H2, in addition to the production that we show in the first 6 months, we will have the full impact of Mara Rosa, an asset with low all-in sustaining costs.

The company is -- has a strong balance sheet and is well positioned to repay financial obligations, but also fund its short-term growth strategy. With cash at $89 million and a total debt of $360 million, our net debt was $271 million for the first 6 months. Net debt to EBITDA also improved, and it is at 0.8x, well within the range that we have indicated, that market we'd like to be in, which is between 0.5x and 1.5x. We're now heading to the lower part of that range. We have cadence in place that we placed when we were completing the -- we're building Mara Rosa mainly to secure some minimum cash flows to complete the construction, but also to pay down our financial obligations. Finally, I would just like to highlight that the company is thinking on -- is evaluating on restarting its dividends. This is something that we are evaluating right now, but it will be review with the full year 2024 results.

Finally, a slide that shows the compelling arguments of our valuation metrics. So we -- I think there's a strong case to believe that there is still a lot of upside in our share price value, as you can see from the analysis presented in this slide where we're comparing relevant metrics with our peers.

Back to you, Eduardo.

[Eduardo Landin, executive]

Thank you very much, Eduardo. Very impressive results. Well, as a conclusion, let me say that on H2 2023, we define a strategy that I just show you with these four pillars and H1 has been the semester to implement -- to start implementing this strategy. I mean, we continue to focus on the core business, we are totally focused on increasing production and also lowering cost.

As I said, we have a world-class ESG performance, especially on safety. Today, we have a new low-cost Brazil mining production. Inmaculada is outperforming with a lot of efficiency projects implemented already, that it won't be there forever. Also we have secured a very important option in Brazil to add a new project in the pipeline. We believe that we have a very strong H1 brownfield progress and resources will be presented at the end of the year. Royropata is to deliver 100,000 ounces per year from 2028. And of course, we have this disciplined capital allocation strategy implemented.

As a summary, I would say that today, the company is producing around 350,000 ounces of gold. And we have a plan in place with Royropata and with Monte do Carmo to become a company that could produce 500,000 ounces or more than 500,000 ounces of gold from 2028 onwards with a long life of mine in each site.

So that's, as a conclusion, thank you very much. And now we are here to answer your questions. Thank you very much.

[Operator]

[Operator Instructions] I'd like to remind you the recording of this presentation, along with a copy of the slides and the published Q&A can be accessed via Investor dashboard.

Charles, at this point, if I could hand over to you to chair the Q&A, that would be great, and then I'll pick up on you at the end.

[Charles Gordon, executive]

Thank you very much. The first question will -- actually, there's been a couple of questions on this, but let me read this one, and I think it should cover the same subjects.

Eduardo, can you give more details on drilling at Monte do Carmo? Is the aim to get the resource to 1 million ounces? Will you announce these drilling results? And is drilling confined to the area where the resource is already defined? The final part of that -- I can read this back again, but the final part is, if the option is taken up, would you expect to start construction next year?

[Eduardo Landin, executive]

Yes, it's a good question. Well, basically, as I said, in Monte do Carmo, we have done an important drilling campaign to make sure that the variability of the asset is the correct one. And we have done that and it's proven, and we have our geological model. We are trying to bring some ounces in the next -- I mean, we have been drilling for 3 months. We are trying to bring some ounces, as I said, to make sure that the project is profitable at very low prices.

Then we will continue drilling because the good news about Monte do Carmo is that it has 83,000 hectares with a lot of targets defined. So we believe that -- I mean, we can reach that 1 million ounces or even more. So that's the reason we believe that it's a very, very interesting project.

I mean in terms of the timeline, let's imagine that we exercised the option from now until the end of the year, so 2025 will be a year where we'll be doing all the detailed engineering and getting the installation license. That could take between 12 months, 10 months. So I would say that I could see -- if we exercise this option, I could see the company building Monte do Carmo probably beginning -- at the end of 2025 or at the beginning of 2026.

We have to remember that there is a rainy season -- an important rainy season in Brazil and probably January, February and March is not the best time to start construction. So if we are not able to start construction in October, November, December, probably will be March, April 2026.

[Charles Gordon, executive]

Great. Thank you. The next question, how significant could the brownfield exploration program be to delivering growth in the medium term?

[Eduardo Landin, executive]

Well I believe that we have a huge potential on brownfield exploration. I believe this is the most profitable way to grow. Once we have initial resource, we have demonstrate always that we are able to increase those resources, and the best sample is Inmaculada. Inmaculada, we start the project with 80 million ounces of silver back in 2015. And today, we have tripled that. With the new environmental permit that we got last year for 20 years, we have many, many targets. And I mean, the potential of growth is huge at Inmaculada.

If we go to Pallancata, it's exactly the same. Royropata shows the possibility to add 2 million ounces of gold. We have many, many targets. And that's the reason we are doing the environmental -- the new environmental permit to be able to bring all those ounces in Royropata.

If we go into San Jose, San Jose has been replacing their resources since 2008. And this year, with the extension of Frea, we have been able to extend 1 more year of production. So it's always like that. And we believe that the properties around Cerro Negro has a lot of potential.

And Mara Rosa, we've already found some resources at the bottom of the pit, but there is also many, many places with potential brownfield exploration.

And Monte do Carmo, I have already mentioned that we believe that it has huge potential because 83,000 hectares, we define targets already from Cerrado Gold, mean that -- I mean, possibilities are there. So I will say that brownfield is one of the main part of our strategy because I believe a lot on brownfield exploration. And we are very good.

[Charles Gordon, executive]

Thanks very much. The next question is, Brazil seems to be a great market to be operating in with lower cost projects and diversifying your risk. Will you pursue further projects in Brazil?

[Eduardo Landin, executive]

Well, at the end of the day, I mean, this business depends on how good is your asset. So we have to be with eyes open to new projects. Brazil looks like the perfect place to be. It's true that Brazil really depends on the state because there is a state that is very difficult to do mining, let's say, Pará, for example, but Tocantins and Goias are very good places.

So we have an M&A team that is looking for opportunities. And of course, if there is opportunities in Brazil, we will pursue them because we have the right team there -- we have the Brazilian right team, which I think is extremely important to operate in Brazil. So yes, the answer is yes.

[Charles Gordon, executive]

Thank you very much. The next question, Inmaculada seems to have performed better than expectations in the first half of the year. What was this due to?

[Eduardo Landin, executive]

Well, basically, remember that during 2022 and 2023, that we didn't get the permit. We were not able to develop the mine. Once we got the permit last year, in August, we began to do developments and that gives you a lot of flexibility in the mine. Also, we decide to hire a consultant. And together with our internal team, we have implement an efficient -- very efficient improvements in different ways like in the mining cycle, the blastings, the equipments, ore control, the shift change.

So that mean that today, we have a very efficient mine. And those improvements is not one time. I mean, it's one-off. It's not one-off. It's something that it will stay there. But let me remember everyone that we said that we will continue producing around 200,000 ounces in Inmaculada, and that's the idea. I mean to extend life of mine and produce these 200,000 ounces with a very good cause for an underground mine.

[Charles Gordon, executive]

Okay. Thank you. The next question, I think we did cover, but let's emphasize this. Eduardo, when can we expect a return of the dividend?

[Eduardo Noriega, executive]

Thank you, Charlie. We are having internal discussions to evaluate returning to dividend payments by the end of the year. So as you know, we -- our strategy consider first to reduce our maintenance levels. We are executing on that first. And once we see the full year results of 2024, we will consider that again.

[Charles Gordon, executive]

Okay. Thank you very much. The next question is, as far as I have seen, the political situation seems to have stabilized in both Peru and Argentina. Is this a correct reading of the situation?

[Eduardo Landin, executive]

I would say that, yes, it's a correct reading. The situation in Peru is -- I mean there is an equilibrium between the Congress and the government, and we believe that, that equilibrium will stay until election on 2026.

And in Argentina, I would say that President Milei is implementing measures, that they are difficult measures, but they are giving some results. The opportunity for us in Argentina is that if the currency devaluates from now until the end of the year, and they are talking about 30% devaluation without inflation because inflation is going down very quickly, that would mean a very good cost reduction for the -- our Argentina operation.

[Charles Gordon, executive]

Thanks very much. And then this question is, do you have any long-term strategy with regards to having an ideal split between gold and silver?

[Eduardo Landin, executive]

Well, as I said, we like to be exposed on silver. We like gold because gold is very good metal. But as I said -- I mean, the most important thing in this mining business is the asset quality. So we are open to cooperate and to develop projects with gold and silver. I'm very happy to say that Royropata is a project that is nearly 100% silver. So that will increase the exposure of silver for Hochschild.

And the fundamentals of -- for silver today in terms of supply and demand based on the new technologies are pretty good. So -- I mean, with the current split of, I don't know, if we are 70-30, 70% gold, 30% silver, we could go up to 60-40, we feel quite good.

[Charles Gordon, executive]

Okay. This question, is there any evidence of a silver squeeze caused by the physical buying from India and China now or in the near future?

[Eduardo Landin, executive]

Well, to tell the truth, I'm not a specialist on that. And I don't know. I don't have the answer for that. But what I know is that silver, in terms of demand and supply, there is a lot of demand for silver based on new technologies. So I believe that we are bullish on silver as well as gold.

[Charles Gordon, executive]

And then Eduardo, on the supply side, not too many new silver mines coming on the primary side of that either.

[Eduardo Landin, executive]

Exactly. Exactly. I mean Royropata is one of the biggest silver producers that could come up to the market in 2028, producing between 10 million and 12 million ounces of silver. So that's very good for us.

[Charles Gordon, executive]

Okay. Thank you very much. That's all the questions there are at the moment.

[Operator]

Perfect. Thank you very much for answering those questions you can from investors. Of course, the company can review all the questions submitted today, and we'll publish those responses on the Investor Meet Company platform.

But just before redirect investors prior to their feedback, which is particularly important to the company, Eduardo, could I just ask you for a few closing comments.

[Eduardo Landin, executive]

Well, I would like to thank everyone for being in this presentation. As I said, we have a company that produced 350,000 ounces with a low cost compared with the current prices. Of course, we will continue doing efficiency [indiscernible] to try to be as much competitive as possible. And also, we have a growth story in place that could mean a 60% growth in the next 3, 4 years. So we believe that -- I mean, to have our share is a very good bet for the future if you want to be in the gold and silver industry. Thank you very much for your time.

[Operator]

Thank you once again for updating us today. Could I please ask investors not to close the session as you'll now be automatically redirected to provide your feedback in order the management team can better understand your views and expectations. This will only take a few moments to complete, which I'm sure will be greatly valued by the company.

On behalf of the management team of Hochschild Mining plc, we'd like to thank you for attending today's presentation, and good morning to you all.