Hochschild Mining PLC

LSE:HOC

Earnings Call Analysis

Strong Year-End and Upcoming Gold Pour

The company concluded the year robustly, with significant advancements at Mara Rosa, where the first full gold pour is imminent. The team successfully hedged half of Inmaculada's 2024 gold production, ensuring stable cash flow with a floor price of $2,000 per ounce and potential upside to $2,252 per ounce.

Strong Operational Performance and Strategic Hedging Initiatives

The company reported a robust quarter, with production surpassing expectations. Group production reached over 82,000 gold equivalent ounces, leading to just over 300,000 ounces for the year, which sits comfortably within the upper end of the company's revised guidance. Notably, this achievement is coupled with an exceptional safety and environmental record. Inmaculada led this performance, exceeding targets with its most productive quarter of the year. The company's strategic foresight was evident in its hedging strategy; they engaged in a zero-cost collar with JPMorgan to protect 100,000 ounces of their 2024 gold production at a floor of $2,000 per ounce and a cap of $2,252 per ounce.

Mara Rosa Construction Project Nears Completion

The company is in the final stages of its Mara Rosa construction project, which remains on budget and is slated for initial production in the first half of this year. The project has already achieved a milestone of 5 million hours without a lost time accident. The crushing and screening areas were commissioned last quarter, with full project commissioning expected this quarter. The corporate team and technical service team, armed with significant expertise from previous ventures, are on-site to oversee the process. There's confidence in the rapport with local authorities and in acquiring the operational permit, which would enable commercial production to start after reaching 70% plant capacity, anticipated to be within 60 to 80 days post the first gold pour.

Reduced Leverage and Prudent Capital Allocation

Financially, the company is on a stronger footing, having lowered its net debt-to-EBITDA ratio from 1.12x to 0.97x over the quarter, signifying a net debt of $252 million. The company does not anticipate increasing its hedge positions, indicating contentment with current arrangements and a focus on maintaining upside potential in the gold market. Discussions on dividend reinstatements are forthcoming, with the Board meeting in March expected to address this topic, further emphasizing the company's prudent approach to capital allocation.

Earnings Call Transcript 2023-Q4

[Operator]

Good day, and welcome to the Hochschild Mining production report conference call. At this time, I would like to turn the conference over to Eduardo Landin, CEO. Please go ahead.

[Eduardo Landin, executive]

Good afternoon, and welcome to our conference call to discuss our full year production results. I'm here in Lima, and we also have in the line, Eduardo Noriega, our CFO; and Charlie Gordon, our Head of Investor Relations.

I'll turn first to the operational performance and then cover progress at Mara Rosa and an overview of our financial position. Group production in the quarter was just over 82,000 gold equivalent ounces or 6.8 million silver equivalent ounces, which is slightly stronger than Q3. Therefore, for the year as a whole, Hochschild produced just over 300,000 gold equivalent ounces, which is in the upper end of our revised guidance, due to the better-than-expected performance at Inmaculada.

I am also pleased to report that this strong operational performance has been underpinned by an impressive environmental and safety record backed up by historically low full year result with respect to the injury frequency rate and the Accident Severity Index.

Inmaculada delivered its strongest quarter of the year with better-than-expected tonnage and grades from new mining areas offsetting lower recoveries.

Production was just over 39,000 ounces of gold and 1.5 million ounces of silver, which is a gold equivalent total of 57,420 ounces. Overall, Inmaculada output in 2023 has been just short of 2,000 -- no, 204,000 ounces of gold, which is slightly above the revised guidance given to the market in August.

In Argentina, San Jose finished the year strongly. Output was a little under 3.3 million silver equivalent ounces in Q4, which therefore give us 11.1 million ounces of -- for the year as a whole.

Over the Pallancata, production was as expected, much lower than the previous quarter as we had stopped operations and put the mine on care and maintenance. In Q4, Pallancata produced 300,000 ounces of silver and 1,200 ounces of gold, bringing the silver equivalent production to 390,000 ounces overall. Overall, in 2023, Pallancata produced 2.4 million ounces of silver equivalent ounces, which is slightly above the revised forecast.

In terms of costs, I am pleased to say that we remain on track to hit our revised guidance which, if you remember, is between 1,490 and 1,580 per gold equivalent ounces, of course, [indiscernible] to us.

Turning to our Mara Rosa construction project, we are in the final stages, and I'm happy to report that the project remains on budget and on track to achieve first production in this half. I'm equally impressed, we are able to achieve 5 million hours on the project without any lost time accident. The crushing and the screening areas of the processing plant were commissioned during the quarter, and we are on track for full project commissioning this quarter.

With regards to infrastructure, the Pequi water reservoir is fully operational and is now sufficient to meet the needs of our 2024 production, well, the administration building and the dry stack are also being completed during Q4.

In relation to permitting, the commissioning of the -- was authorized during Q4. And in December, we organized a site visit with the local authorities to support our operational license process, which is expected to come through in February.

On Brownfield exploration, we performed around 900 meters of drilling at both Inmaculada and San Jose, and we have shared with you selective drilling results including some very promising grades at Nicolas vein at Inmaculada and the Suspiro vein at San Jose.

On the financial side, we have approximately $89 million of cash, which translate to a net debt of $252 million. Our net debt-to-EBITDA ratio was reduced from 1.12x in September 2023 to 0.97x in December 2023. In addition to a stabilized cash flow from Inmaculada, the company secured a zero cost collar with JPMorgan for 100,000 ounces of our 2024 gold production with an average floor of $2,000 per ounce and an average cap of $2,252 per ounce.

So to sum up, a robust end of the year with continued good progress at Mara Rosa where the first full pour is expected in the coming weeks, a very exciting prospect. And with that, I would like to open for questions you may have for me and the team. Thank you very much.

[Operator]

[Operator Instructions] First question comes from the line of Marina Calero from RBC Capital Markets.

[Marina Calero Ródenas, analyst]

I have a question about your strategy around hedging production. Are you happy with the level of production that you have now after its hedges announced? Or do we expect further production to be hedged in the future?

[Eduardo Landin, executive]

Yes. I pass this question to Eduardo Noriega, our CFO.

[Eduardo Noriega, executive]

Thank you Eduardo. Thank you, Marina. We are happy with the production that we did that Eduardo mentioned, we're basically hedging only 0.5% -- only half of our production for Inmaculada in 2024 at very good levels. We're protecting -- we're ensuring a stable cash flows with a floor of $2,000 per ounce, and we think we can gain from the upside of the gold price with a ceiling at $2,252 per ounce.

[Marina Calero Ródenas, analyst]

Okay. That's what I had. So would you expect to hedge more production this year? Or are you comfortable with those levels?

[Eduardo Noriega, executive]

We don't expect to hedge more at this point, Marina. I think we are -- we will protect it and still have upside.

[Operator]

The next question comes from the line of Richard Hatch from Berenberg.

[Richard Hatch, analyst]

Congratulations on a really nice set of numbers. Just a couple of questions from me. The first one is just on Mara Rosa. Can you perhaps just help us a little bit with the ramp-up schedule. Should we expect to see any gold finding its way into Q2? Or is it more of an H2 story? I see you've said that you expect commercial production in the second quarter, first pour in February, but is that recordable, or does it all drip into the second half? That's the first one.

[Eduardo Landin, executive]

Yes. Well, we expect -- as I said, on Q1 2024, we expect to reach the first pour -- gold pour. And as I said, in Q2, we expect to reach commercial production. If this is the case, we will be able to report some production on Q2. And I feel quite confident on these dates.

[Richard Hatch, analyst]

Okay. And then I mean you also note that you've made -- you had the Brazilian sort of government personnel just to the site for permitting and such like. Are you confident that you've -- you're going to get your operating license in February, no sort of concerns there. And if you don't get the operating license in February, what does that mean?

[Eduardo Landin, executive]

No, I believe that our relationship is optimal with the local authorities -- with the [indiscernible] authorities. And I believe that we will need -- I mean, we will not have any problem to get the operational permit. As soon as we finish the plant, I mean the plant reflects exactly the engineering that has been approved during the environmental permit and the construction permit. So I believe that we are not going to have any problems.

[Operator]

[Operator Instructions] The next question comes from the line of Tim Huff from Canaccord.

[Timothy Huff, analyst]

Yes. I just had two quick questions. One is very similar to Richard's on the commissioning of Mara Rosa. You've mentioned in the processing plant section that the full project commissioning is expected in the first quarter. And as you just indicated, you're expecting hopefully to have some commercial production in the second quarter. Are you looking at a very short 3-month ramp-up period because it sounds to me like you're expecting that first gold pour next month.

And then the ramp-up directly from the first gold pour to full production by the end of the second quarter. I don't know if that's about what you are thinking, but that would tend to match with some of the commentary in the release today and also your guidance for the year. So I was just wondering if you could sort of help me through the thinking from first gold pour at the end of the second quarter.

[Eduardo Landin, executive]

Yes. Thank you very much. I mean to reach commercial production, we need to ramp up the plant up to 70%. So it doesn't mean that we have to go up to 100%. But I believe that, I mean, getting the first pour in February, I'm taking maybe between 60 and 80 days, we, for sure, we can get to 70% of the capacity and start recording commercial production.

We have done that before at Inmaculada. Inmaculada, I remember that in 2015, we had 90 days of ramp-up, and we did it in 30 days. So we have a lot of expertise, and I believe that we will do exactly the same. We have all the corporate team, the technical service team that is going to be at the site for this process. We have very good people -- very good technical people that will have the Brazilian team that also is very well prepared. I mean, we have been preparing this stage 6 months ago, and we have several documents, operational procedures and everything in place for this moment. So let's hope that we have some luck and no rain, and we will be able to achieve those targets.

[Timothy Huff, analyst]

Okay. That sounds great. Yes. No, that's sort of what it sounded like you were expecting something much shorter, and I was hoping to hear the 70% level for commercial production. So that's great.

And then the second question was just a quick one. Net debt at year-end, obviously, was a little bit lower than I was expecting, so that's great news. But I was just wondering if you could even comment whether any of that was due to working cap influx, I know you typically have a first half, second half working cap influx. I didn't know if you could comment anything about working cap movements at year-end.

[Eduardo Landin, executive]

Thank you very much. I put this question to Eduardo Noriega, our CFO.

[Eduardo Noriega, executive]

Thank you, Eduardo. Thank you, Tim, for your question. I will say we have unusual changes in working capital. We kept some inventory by the end of the year, but nothing material. So there are no big changes in working capital. So the reduction in net debt is mainly due and the operational performance of our mines as well as the good prices that we're seeing.

[Operator]

We currently have no questions coming through. [Operator Instructions] The next question comes from the line of Anthony Boon from Stapleton Capital.

[Anthony Boon, analyst]

On your dividend payments, can you update investors what your thoughts are? Obviously, you've got the permits and [ St. Maria ], but you talked about it in the last conference calls, what is the current policy and the next Board meetings to decide possibly reinstating the dividend?

[Eduardo Landin, executive]

I pass this question to Eduardo Noriega, our CFO.

[Eduardo Noriega, executive]

Thank you, Eduardo. As we -- thank you, Anthony, as well. As we have discussed in our previous conversations, we are right now focused on putting Mara Rosa into production start generating internal gas from our new mine, started -- continuing to see our indebtness coming down. And I think the discussion on deals will be held in our coming board meetings. And so we'll update you with more information after March.

[Operator]

There are no further questions, so I'll hand you back to Eduardo Landin to conclude today's conference.

[Eduardo Landin, executive]

Well, I would like to thank you all for being here at this call, and thank you very much. I hope I'll see you very soon. Thank you. Good afternoon.

[Operator]

Thank you for joining today's call. You may now disconnect your lines. Host, please turn the line and wait for the instruction.