Hochschild Mining PLC

LSE:HOC

Earnings Call Transcript 2018-Q3

[Operator]

Hello, and welcome to today's Q3 production results call. [Operator Instructions] Just to remind you, this conference call is being recorded.Today, I'm pleased to present Ignacio Bustamante, CEO. Please go ahead with your meeting.

[Ignacio Bustamante, CEO & Director]

Thank you very much. Good afternoon, and welcome to our third quarter production conference call. Here in Lima, we have myself, Ignacio Bustamante, CEO; and with me is Ramón Barúa, our CFO; and in London is Charlie Gordon, our Head of Investor Relations.Before I discuss today's announcement, let me remind you that on 7th November, we will be having a detailed company presentation at our Capital Markets Day in London. It will, of course, include comprehensive analysis on how our brownfield program is progressing. So if you would like to attend, please contact Charlie, or if you are not in the U.K., certainly try to catch the webcast.So to the Q3 performance. As you can see, our mines have delivered another robust quarter, and we have, therefore, now delivered a record 9 months of production. The operational performance has actually been strong enough that we have upgraded our production forecast for the year to 38.5 million silver equivalent ounces and have also reduced our cost guidance for the year to between $12.7 and $13.1 per silver equivalent ounce, or for those who're thinking gold, between $940 and $970 per gold equivalent ounce.So to a little bit more of the detail. Third quarter production -- attributable production was 62,000 ounces of gold and 5.1 million ounces of silver, which combined makes 131,000 gold equivalent ounces or 9.7 million silver equivalent ounces. Our year-to-date figure is now 29.5 million ounces, which is 5% ahead of the rate last year.Inmaculada is enjoying a great year, and another robust period has been delivered with almost 58,000 gold equivalent ounces produced. This missed just over 196,000 ounces for the 9 months, which is some 9% ahead over where we were last year. Remember that I stated at the end of the first and second quarters that we did have some ounces which were in the processing stage as the year turned. So the one-off boost to production is clearly not present this second half, hence a slightly lower production rate versus the previous 2 quarters.At the Pallancata mine, production is well on track to meet its 9.5 million ounce target for the year. Pablo is ramping up nicely and should be reaching a 2,800 tonnes per day rate during the fourth quarter, and you can see that, as expected, grades are falling down as expected, Pablo grade, and that tonnage is increasing significantly. Of course, all this has meant that the 9 months total of 6.8 million silver equivalent ounces is 17% ahead of the total for the same period of 2017.In Argentina, San Jose has continued its consistent trend with production of 3.3 million silver equivalent ounces, and this, therefore, amounts to a 9-month half total of 9.7 million silver equivalent ounces, very much in line with the same period of last year. As you may know, one of the key developments in Q3 has been the severe economic disruption in Argentina. You may have seen that export taxes have had to be temporarily reinstated in the country, and we can confirm that the rate that applies to us will be 3 pesos per dollar. However, we expect that the resulting negative effect will actually be fully offset by unit cost savings related to the very significant year-to-date currency devaluation. Remember, the peso has actually fallen by around 100% over the year.Arcata's performance this quarter continued to be very much in line with our expectations, again producing 1.1 million silver equivalent ounces and bringing the 9-month total to 3.2 million ounces, and therefore well on track to hit the full year on our forecast of just over 4 million ounces. As I have stated before, we are making every effort to improve the mine's cost position through efficiencies and through the current aggressive drilling program. However, given the current pricing environment, we are, of course, assessing the medium-term operational viability of the mine as well. At our Capital Markets Day next month, we will give you an idea of our current thinking with regards to the brownfield program, and then in January, you will, as usual, receive our production forecast for the year ahead by mine.Our brownfield program in the third quarter has again been focused on Inmaculada and Arcata, with San Jose only restarting in September after tough winter weather. Over at Pallancata, it is worth highlighting that we have made very good progress with the necessary permits for the exciting 2019 drilling program at the Pablo Sur, Cochaloma and Palca zones. Third quarter drilling at Inmaculada continues, adding more inferred resources to the asset resource base, close to the existing mine infrastructure. This period, we executed 27,000 meters of resource drilling on new veins, including Millet, Divina, Lola and Lady. I'm fully expecting at the Capital Markets Day to be able to give you an updated inferred resource figure following the 800,000 ounces we disclosed in August. So a very exciting time for this flagship asset.At Arcata, in Q3, we have continued with 15,000 meters of drilling in the Pamela New, Ruby, Rosalia, Pablito and Frida veins, among others. Our focus has been on the first and fourth quadrants, close to the current mine infrastructure, where there are resources we believe have strong potential to be quickly added to the short-term mine plan. As I said just a moment ago, we will aim to give you a further update on our progress at the Capital Markets Day.On the financial side, our cash balance at the end of September is around $143 million and net debt now is down to only $63 million. This balance reflects the payments of the dividend, a few strategic investments, our investment in the hydraulic backfill project at San Jose and increasing our investment in our brownfield program and a little bit of debt repayment in Argentina. Of course, prices have fallen substantially since June, so that has had an effect as well.To sum up, we're having another strong year and are well on course to deliver our revised production target for the year of 520,000 ounces of gold equivalent ounces or 38.5 million silver equivalent ounces, and also to meet our revised all-in sustaining cost forecast of between $940 and $970 per gold equivalent ounce.I look forward to seeing you at the Capital Markets Day next month. And with that, I would like to open up to any questions that you may have. So Sarah, we can proceed with the questions.

[Operator]

[Operator Instructions] And our first question comes from the line of Daniel Major from UBS.

[Daniel Edward Major, Director and Analyst]

Few questions. Firstly, at Arcata, assuming at these kind of prices the mine is cash negative. Can you give us an update on how long you intend to keep this sort of situation going before you would take a decision on whether to close the asset, I guess, in view of the exploration activities going on there? Second question. You indicated that you expect to update the market in terms of inferred resources at Inmaculada at the Capital Markets Day. Would you expect to see any other updates across the portfolio in terms of reserves and resources? And then the final question, also relating to Inmaculada. Assuming you can deliver further increases in reserves and resources, what is the near-term focus that you'll be sort of communicating or intention to use those resources for, increasing the life of mine or potentially increasing the plant capacity to the next sort of stage of 4,200 tonnes a day?

[Ignacio Bustamante, CEO & Director]

Sure. Thank you, Daniel, for the questions. So the first one, Arcata, for how long. I would say, a -- as we said at the beginning of the year, 2018 was a critical year for Arcata because for some time, we couldn't drill because of the -- a permitting situation in Peru. Now we have been able to drill, but we're facing a situation in which Arcata had a lack of drilling in the past, and this was critical because we're drilling significantly to try to come up with new geological success that could allow us to continue operating the asset. So I would say, the exploration program for the year has been performing well. We are finding interesting things, particularly what we call Quadrant IV, which is an area that is relatively close to the current operation. So as I said, from a geological standpoint, we're finding interesting things. But the problem that we've seen is that silver prices have gone down from around $17 that were at the beginning of the year to around $14, which are today, and Arcata is mostly a silver asset. So I would say, an additional loss that will appear in the middle of the year that is putting us in a position that we need to continue reassessing Arcata. So how long would that take, I would say, between now and the end of the year, we should be completing the drilling program and based on the results that we obtain, between -- or for the full year, I would say -- and the price situation at that point in time, we're going to have to make a decision on whether to continue operating it or put it into a temporary stoppage. So it's something that is going to be permanently -- constantly monitored between now and the end of the year, and we expect that by the end of the year, we're going to be making a decision. In the second question, regarding Inmaculada's inferred resources, I would say our top priority now is to increase our life of mine, in general, and that goes for all our assets. We have committed to reach a 5-year life of mine in terms of reserves and 5-year life of mine in terms of inferred resources. And I believe that with the success that we're having in Inmaculada, we're going to be reaching -- getting very close to our target in terms of life of mine of resources. And we, obviously, expect that, that is -- that work is going to continue, and we're going to continue adding resources more so getting into 2019. So we're making very good progress, and the priority is going to be life of mine. In terms of potentially increasing the capacity of Inmaculada, I would say that is going to be probably something that we're going to be evaluating later on. First, we need to understand exactly how much do we have in our resource base surrounding the Angela vein, which is where most of the exploitation is being done right now. And also we need to understand what are the best alternatives that we have to mine those veins in the most efficient manner. And as we have also mentioned in the past, we're evaluating, for instance, things like ore sorting, which is a technology that would allow us to eliminate the -- within the vein, the areas that are not rich in minerals, so that would allow us to significantly improve the average grade of the deposit and improve the production rate without even having to increase the capacity of the plant. And that would be significantly more efficient than increasing the capacity of the plant in terms of CapEx as well. So we're going to be evaluating the geological situation and also the different technological alternatives that we have, and based on what we find, we're going to be making a decision. So -- but that's not going to happen in 2018. I would say that's going to be a 2019 target. In the meantime, we're going to continue adding as many resources as possible to the point that we have even increased our budget for drilling in Inmaculada for this year, with a goal of coming up with more potential resources and more meters drilling based on the potential that we're seeing in order to accelerate our drilling program and come up with new resources. And on the final question, in terms of the near-term focus, in the case of -- sorry, the other question is -- was about other inferred resources in our other operations for the Capital Markets Day. I can tell you that we're going to be updating the market in terms of new resources for Inmaculada in the Capital Markets Day. We're most likely also going to be updating the market in terms of what we have found in Arcata also for the year and all the encouraging areas that we're seeing from a geological standpoint as well in Arcata for the long term. And we're going to be updating the market also in terms of the things that we're seeing in San Jose. I will say, in the case of San Jose, most likely are going to be more in terms of potential ideas because we had just finished the bad weather season in Argentina. So we have not been able to drill much in the past 6 months. But we have a lot of potential areas that we like to present to the market and discuss. And finally, regarding Pallancata, as you may recall, Pallancata is not necessarily a 2018 drilling story, it's more of a 2019 story. We -- the critical issues that we're facing for Pallancata in this year were to get the permits to the very encouraging areas that we have in Palca, Cochaloma and Pablo Sur, and we have done very good progress in obtaining the community permits. So we have now started the environmental permits with a goal of being able to drill all those 3 targets and hopefully a few more getting into the end of Q1 2019. So we're very excited with the progress that we have done in the community front. We're doing very good progress also on the permitting front, and we're doing very good trying to drill probably as much as we have drilling in Inmaculada this year, but in Pallancata in the full year of 2019. And as we have said in the past also, probably the most encouraging targets that we have in the entire company are also present in Pallancata as well. So we're very excited with that. And that's pretty much what you should be expecting from the Capital Markets Day.

[Operator]

[Operator Instructions] Now our next question comes from the line of James Bell from RBC Capital Markets.

[James Andrew Keith Bell, Analyst]

Just 2 questions. Firstly, on Argentina. Obviously, the devaluation is helping costs a lot in the short term. I just wondered, in your experience with previous devaluations in Argentina, how long it takes for inflation, particularly in labor costs, to sort of catch up with the devaluation? Are we talking 6 months, 12 months? And what could we maybe expect into 2019 on the inflation front? And then maybe just secondly, on the exploration project side. Obviously, there's a lot of focus on the portfolio in Peru, but I noticed you signed a deal with Skeena in Canada for -- that goes around $4 million on a property there. I just wondered how the non-Peruvian exploration fits into the strategy here, given the focus, obviously, from investors on mine life and the Peruvian assets.

[Ignacio Bustamante, CEO & Director]

Sure, James. Thank you very much. Regarding Argentina, what I can tell you is that based on our experience, the way that this inflation is captured in our financial results is basically, I mean, the most important part of our cost is labor. Around 60% or so is labor. And the way that this is being captured is we have -- we negotiate with the unions, which most of the mining companies in Argentina they do in a 2-stage process. So we first give an increase in salaries somewhere around March or April of next year, and then by September, October of the year, we give our revision of the inflation and decide on an additional increase in labor rate. So far, I would say, devaluation has been significantly ahead of inflation. We expect that for the year. That is going to continue being the case. However, we're expecting that, that situation is going to get somewhat corrected, not fully, but somewhat corrected getting into 2019. So far the indications that we have are that devaluation is probably going to be around the 15% range and inflation is going to be around the 22% range. But as you know, I mean, Argentina is a country that is difficult to predict on that front. So we need to see. But we do expect that there's going to be some correction, but it's going to be more or less kind of relatively minor offset compared to the big improvement that we have seen this year. Regarding exploration, obviously, Peru continues to be a very important target for us to drill and to come up with new greenfield projects. However, as you know, greenfield is a risky business, and in order for us to be successful, we believe that we have to maximize our chances of success. One of the advantages that we are seeing outside of Peru is that the permitting time is significantly quicker than the permitting time in Peru. Even though in Peru, it's improving, it still lags compared to other countries in the region. So in addition to Peru, we're taking a look at other countries that offer a good combination of good geological potential with also the fact that they're in a stable political and economical jurisdiction. Because of that, we're focusing also on other countries, such as Chile, such as the United States, such as Canada. We're also open to other countries. Certain areas in Mexico are very appealing to us. Colombia is also an interesting country. So we're opening up the different jurisdictions that could be attractive to us. And also, we're looking at things that would play to our competitive advantages, things that based on our expertise of operating fairly narrow vein and/or run deposits that we could translate those skills into deposits that are relatively similar. So that's the focus. We're looking at a few alternatives. We're drilling a few projects in Chile and in Nevada this year. We have made investment in the Skeena Company that you just mentioned. That is, in our view, an interesting investment in an area that is encouraging in the Golden Triangle. There is one project in particular that is attractive to us, which is called the Snip project. And with this stake that we have built in this company of around 8%, we have also acquired an option to take control of the asset within a certain period of time of about 3 years, in which we have to evaluate and see it in further detail how the asset continues performing. By this, I would say an asset and an area that keeps us interested in discussing and an area where we believe there's significant potential to grow and establish and evaluate the potential opportunities for growth there as well.

[James Andrew Keith Bell, Analyst]

Okay. And then maybe just one quickly for Ramón. In terms of the balance sheet, obviously, not a lot of changes this quarter on the cash side. But in terms of your debt level, is this the sort of level you would see running into '19? Or are you expecting to pay down your gross debt in Q4?

[Ramón Barúa, Chief Financial Officer]

I think we have $50 million to be repaid in December. Our expectation would be to repay that debt. Banks here continue to be very aggressive with us, trying to offer us very cheap rates for refunding or refinancing those facilities or even taking more debt. We haven't pulled the trigger on that. So as I mentioned also before, right now the cost of the debt is very similar to the returns that we're obtaining in our cash. So we're not too worried about a negative carry there. And we'd like to maintain the relatively high cash levels in the balance sheet. So to answer your question more directly, probably we'll repay $50 million at the end of the year, but it's not going to make a huge difference for the company.

[Operator]

[Operator Instructions] And as we have no more questions registered, I now hand back to our speakers for any closing comments.

[Ignacio Bustamante, CEO & Director]

Thank you, Sarah. Thank you very much to everyone participating in the call. Should you have any additional questions, please feel free to contact Charlie Gordon directly. And I look forward to seeing all of you very soon in our Capital Markets Day on November 7 in London. Thank you very much. Have a great day. Bye.

[Operator]

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