Hochschild Mining plc (HOC) Earnings Call Transcript & Summary

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

Thank you, Margaret. Hello, and welcome to our Fourth Quarter Production Conference Call. As usual, I'm here in Lima, and also on the line is Ramón Barúa, our CFO; and locked down in London is Charlie Gordon, our Head of Investor Relations. The fourth quarter of 2020 has been a successful one for us, with both the Peruvian mines operating as normal. And despite another stoppage at San Jose, we were able to meet our output target there for the period. For 2020 as a whole, we have delivered on our revised production forecast with 289,000 gold equivalent ounces, or 24.9 million silver equivalent ounces produced. In the fourth quarter, group production was just over 94,000 gold equivalent ounces or 8.1 million silver equivalent ounces. At Inmaculada, unsurprisingly, tonnage increased versus impacted third quarter, with grades line with expectations. Production was just over 43,000 ounces of gold and almost 1.4 million ounces of silver, which is gold equivalent production of nearly 60,000 ounces. Overall, with such a disruptive year for the operation, Inmaculada has delivered a touch over 176,000 gold equivalent ounces. Pallancata vein operated in line with the revised mine plan throughout the quarter, with short tonnage rise and grades have been lower. The mine produced 1.6 million silver equivalent ounces, which, therefore, makes 4.8 million ounces for the year as a whole. In Argentina, as we already announced, San Jose was stopped again due to COVID from 15th November to 5th December, before we were given permission to restart with a reduced level of staff on-site to complete our output target for the year. In the fourth quarter, the revised mine plan continued to incorporate the necessity to access lower grade areas with the operations reaching 1.1 million ounces of silver and around 17,800 ounces of gold, which makes 2.6 million silver equivalent ounces. Overall in 2020, San Jose produced 9.7 million ounces. The situation in Argentina with regards to COVID remains delicate. We gave our staff their annual holidays slightly earlier this year in late December through into January, and the mine is now slowly ramping up to full production, in line with our conservative mine plan. In terms of costs, I should emphasize that we are expecting to be in line with our revised cost guidance, which, if you remember, we lowered it in November to between $1,200 and $1,250 per gold equivalent ounce or between $14 and $14.5 per silver equivalent ounce. Our balance sheet is now in a net cash position, which shows the extent of our current cash flow generation. And remember, the quarterly [ dividend ] of $21 million dividend payment as well. We have $231 million in cash, which gives a net cash position of $21 million as of the end of December. That compares to a cash position at the end of the third quarter, which was $196 million. Finally, our $37 million brownfield -- 2020 brownfield program continued in the quarter, and we are seeing some positive results. At Inmaculada, we are just in the process of completing our infill drill program but we do expect a substantial increase in reserves to be announced next month. Although the work in 2021 will obviously not be included in the 2020 year-end audited reserve and resource statement. We have also carried out a second drilling campaign at the Corina deposit to the north of the Selene plant. And again, it is showing exciting key results. We are aiming to achieve a major resource of the deposit in the next few months, so we will update the market in the near future. In addition, we have had some promising potential drilling results in the Saavedra area in San Jose, close to where we are currently mining. Finally, the early results from Arcata drilling program has looked good, as you can see from the release. Our drilling program has focused on quadrants 3 and 4 to the West and northwest, where we were mining up until January 2019. We are aiming to complete the first stage of our campaign in March, and then we will report back on what the next program will involve. So to sum up, we have had a strong fourth quarter with very solid production results, which has meant we have easily hit our revised annual target. Our net cash balance sheet position and some really encouraging results from our brownfield exploration program leaves us in a very robust position to start 2021. And with that, I would like to open up for any questions that you may have.

[Operator Instructions] Please go ahead. First caller, Tim Huff from Peel Hunt.

Well done on a great end to the year. Just 2 questions, really. The first one was centered mostly around throughput. You had a really strong quarter, both Inmaculada and Pallancata in terms of throughput. The best we've seen in probably the better part of a year or so. I was just wondering if you could give us an idea of how sustainable you think those stronger throughput rates are going into 2021? Or do you think we're going to dip back a bit in the first half, see some normal seasonality? Because, I guess, we already know where the guidance is. But my guess is, you'll probably have a lot more seasonality in '21 in terms of throughput than necessarily we saw in the fourth quarter. Is that about right?

Tim, thank you for the comment. Yes, we have seasonality. So I can -- what I can guide you regarding for 2021, you should follow the revised guidance that we have provided that we have given rise between 30.5 million and 31.5 million ounces. In the case of Inmaculada, we are expected to roughly treat an average of 300 -- 3,850 tonnes per day. Because of Pallancata, we're expecting to treat roughly, in average, about 1,500 tons per day. The grades that are expected for Inmaculada are around 4 grams and 165 for gold and silver, respectively. And in the case of Pallancata, of around 1 gram for gold and around 265 for silver. So that should give you an idea of what we expect for the year. But I would say that the most conservative way or the most reasonable way to project is just taking into account the guidance that we gave to the market a few weeks ago.

Yes. Okay. That's helpful. And then the second question was just on -- was on drilling. You guys have had some good successes over the past quarter, but noted that Pallancata was left out of the highlights. It's sort of where I'm focusing in terms of results. So I was surprised, it was left out. It looks like you're doing a lot of drilling there. Can you give us any sort of flavor as to how things are going? And whether things are going according to plan? Or whether they need to be stepped up in the coming year?

Sure. Sure, sure, Tim. So the best way to look at Pallancata is Pallancata is only a mine operation, and it has a processing facility in the Selene, where the Selene mine was. So all the minerals from Pallancata gets hold into Selene, and it's processed there. So the way we look at this is we look at alternatives to continue producing at the Selene plant. One of the alternatives is through Pallancata itself. And in the case of Pallancata, we have done extensive drilling in 2020. We have not come up with an additional infill resource yet. We continue following certain leads that we have. The most encouraging ones are the potential continuation of the Pallancata, original Pallancata vein, and another -- following another positive intercept that we found in the structure that we call the Northeast structure that is between the Pallancata vein and Pablo. So -- and you should already have all the [ works ] that we are following. Again, in 2020, we couldn't come up with an infill resource, but we continue having targets in Pallancata itself for the year 2021. Now on top of that, we also have 3 other targets that should allow us to continue -- to continue using the Selene facility which are Palca, Cochaloma and Corina. In the case of Palca, we have done extensive drilling during the year. Unfortunately, the results are not there yet. We have seen a lot of delays in the lab results because of the COVID situation in the country, but we expect to have them within the next month or so. So we did a lot of drilling in Palca, waiting for the results. In the case of Cochaloma, we were up to a late start because of final community agreements. However, those have already been finalized and have already started drilling in Cochaloma. We have not finished any drilling, but that's going to be something that is going to be ongoing in the first quarter of the year. So we expect to update the market relatively quickly on what we find in Cochaloma. But by far, the most encouraging one is Corina, which also is the closest one to Selene plant. In Corina, as you may recall, we had some positive infill [ sets ] from the 2019 campaign. And we have started the 2020 campaign also obtaining very positive results, as you have probably seen in the release already. So we do expect that we're going to come up in a position that we're going to be announcing fairly soon a maiden resource for the Corina plant -- for the Corina mine, and that is something that should be fit for Pallancata. One caveat is that timing, is that will be a new mine facility, timing is going to be relatively later. So while we're looking at that, we can put that into production, we're looking at probably 3 to 4 years. But it still gives us a very positive signal into what should come into Pallancata in the medium term. So we are going to continue focusing on that and focusing on the new resources in Pallancata, in Cochaloma and in Palca, so that we are in a position that we can maximize the potential resources available to use the Selene facility in the short and in the medium and long terms.

And for our next question comes from Ian Rossouw from Barclays.

Just a follow-up from Tim's questions. Just if you could give me a similar sort of throughput and grade expectations at San Jose. And maybe then just -- I mean, talking around the COVID situation, which obviously is still an issue, and you mentioned labor. Could you give us a sense of what you've assumed within the guidance for COVID? I mean have you assumed sort of the plant starts to ramp up to full capacity? Or have you assumed these issues persist for the whole year? Maybe that in Argentina and also Peru, just to get a sense of how conservative these numbers are.

Sure. Thank you, Ian. So what we are expecting in San Jose, roughly, the full capacity of the plant is at 1,650 tonnes per day. We're expecting grades of about [ 6.5 and 3.60 ] for gold and silver, respectively, roughly, that's a rough estimation. What we are doing is we are giving a guide, a range of guidance, though, which is between [ 30.5 million to 31.5 million ], and that takes into account some potential issues regarding to COVID. So obviously, the upper part of the projection is assuming that there's no material COVID impact in the lower parties assume that there is some impact on COVID. I would say in the case of Peru, the situation is looking -- so far, it's looking very positive, I would say. We continue having a very small number of infections, and the operations continue operating pretty much as normal. Protocols continue in place. People are complying with those protocols. And situation continues normal at it has been the case for the past 3 or 4 months. So far, things are looking improved in Peru, and we do not expect, in the near future, any potential impact from COVID in the upcoming weeks or months. In the case of Argentina, it's a bit different because in Argentina, particularly in the region where we operate in San Jose, the COVID situation started later than in Peru. So the issues that we saw in Peru, sort of like in the middle part of the year, we saw in Argentina in the last part of the year. Having said that, we are already operating at pretty much full capacity. We have to advance the vacation period. Typically, we started in January. Now we started in December to accommodate for the situation. But people are already back into work and operating there, and so far, things are normal. But the situation is a little bit more risky than in Peru because of the timing difference in which the bigger outbursts of [ contagions ] on COVID appeared in San Jose. But having said that, we are right now in a good situation. And so far, we have no indication that we're not going to be within this range.

Maybe just to follow up on what you've said at Pallancata. So is the -- I guess, what you've seen so far from Corina and the other targets, is there expectations that you can maintain production at Pallancata? Or is there an expectation that, over the next couple of years, maybe you see production dip a little bit and then you start to pick up once Corina is in production? Are you confident enough that you will find other material to keep Pallancata sort of decent throughput?

We still do not have that situation figured out, Ian. So what we now see -- in Pallancata, we see material that we will have for the next 12, maybe a little bit more months. And Corina, as I mentioned, is something that should come in the next 3 to 4 years. So we still have a gap for years 2 and 3, let's say, that we are trying to bridge. And for that, is that we are doing a very extensive drilling work in the Pallancata target itself. As I mentioned, the potential continuation of the Pallancata vein and [indiscernible] structure and other targets at Pallancata. We have also added a very aggressive target for that in the first quarter of 2021. And we are also doing the work in [ Palca ] and Cochaloma to see if we can come up with this, let's say, short- to medium-term part of the production platform years 2 and 3. So Corina, I would say, it looks like it's going to be able to take care of the medium to long term, but we're still looking at ways in which we can take care of the shorter term.

And our next question comes from Mark Hendricks from Sagil.

Just discussed by the previous guys. But just as a follow-up, perhaps on the grades. If we look going forward, you've mentioned the grades for Inmaculada and Pallancata. They're all slightly lower than what we've seen over the past few years. Is there a view that your low grading with the prices going up? Is that -- so you can extend mine life? I don't know if -- or is this just natural evolution of the grade is going down as you're kind of getting to certain parts of the mine? I'm thinking Pallancata where the mine's been going for some time.

Yes. In the case of Pallancata, as I mentioned, in the resources that we have inside, we are finding all the resources that are economic that we have for the next year, 1.5 years. So that's what we have in there. So that -- those are the resources left. In the case of Inmaculada, the resourcing a bit different because it's a combination of, first, the fact that we are already incorporating into our plants the new resources that have been added during 2018 and 2019, and also the fact that we want to extend the life of mine, and we are now mining certain areas of the mine that may not have been profitable with much lower prices, but that now have become positive. So we are planned -- they're part of our mining plan now. It's a little bit of both.

And our next question comes from Kieron Hodgson from Panmure Gordon.

Just a quick one from me. In addition to Arcata, is there any chance you could sort of give us a sense of what you're thinking about the asset with regards to the resource, the requirements for you to bring the asset back online, potentially, the costs involved, time lines, et cetera? And the second question, if I may, is regards to the fact that you are generating significant amounts of cash. And do you think a more formal return of capital policy, i.e., a dividend, would benefit investors' understanding of the story?

Sure. Thank you for the question. So in the case of Arcata, the short answer is that we are still too early to answer that question. So we are very, very encouraged by the results that we are seeing in these new structures, fast in the potential continuation of the [indiscernible]. So it is looking very positive. But the final is going to depend on a few factors. The first one is, we're still evaluating, which is the depth of the mineralization. And that's going to sort of give us an indication of what the business with watches that. If the mineralization is deeper than we are currently seeing, we might be able to access it from other areas. And the excess time and CapEx will be shorter. If the mineralization is more in the upper part of the level, it may require a different access to the mine, and it will take us some additional time. But on one hand, on the other hand, we are working on the environmental permits for that area, and we already have selected an area that is on a relatively fast track to be put into production. So part of the reasons that we're seeing are within that area. And part of the results that we're seeing are in another area that would require an additional environmental design. So what we're now trying to focus is on find the resources in the area that is already in the process of being permitted so we can -- to see if we can fast track that production. But still, it's too early to say. We need to do a lot more drilling, and if the mineralization deepens, and if we are able to find more in the area that is already being permitted, then the potential production and restart of Arcata could be much quicker. There was a scenario will be that most of it is outside of the area in permitted and the mineralization doesn't deepen too much, then it could take us some more time. So I would say we're looking at a horizon of, let's say, between 2, 3 years or so, depending on which -- the final outcome of the resource of the drilling is. Regarding cash, what I can tell you is that regarding -- what I can tell you that we just paid a very important dividend. And when you take into account the dividend yield of our company compared to most of our peers, our dividend yields continue being very, very strong. And dividend are a very important part of our internal policies, and we are going to be evaluating the possibility to continue paying an important dividend getting into 2021. We need to account our good financial and balance sheet position so that -- that's it.

And our next question comes from Daniel Major from UBS.

So I guess quite a few have already been asked. But I guess a question on kind of capital allocation, I guess. And you, obviously, got -- the balance sheet is now net cash and cash generation at these kind of prices is strong. Is there -- but on the other hand, I guess you've got mine life issues, particularly at Pallancata. Is there any scope to lift that exploration budget any higher than you have this year? What is the -- well, higher than you've guided to? What is the main bottleneck there? And is there any scope to push any more resource towards drilling, et cetera? First question.

Sure. So that's a very good question, Dan. What I can tell you is that right now with the budget that we have said for the year, we're taking into account all the drilling targets that we have. So all the projects that we have already done geological work on it. So those are targets that have already been studied and our targets that are within our -- the permits that we already have and the permit that we're expecting to get into 2021. So that has been, I would say, the bottleneck is the geological work that has been done and the permit. It has not been the financial restriction on that -- the financing has not been a bottleneck there. We will be happy to dedicate more budget to that. But for that, we need to wait first for the results that we obtain from these drilling campaigns. And we are positive, we're not going to hesitate on allocating more budget to that to continue pursuing that. Or we get a permit that we're expecting for 2022, if we can get them ahead of time in 2021, that could also be another [indiscernible] for more budget. So rest assured this is -- definitely. for us, it's our top priority. And we're really looking to get the best value and where we can generate the biggest return for our investment. So those conditions are basic, we get more permits, or we get positive results that justify doing additional brownfield work, we're going to be happy to use it.

Okay. And I guess a follow-up to that. Is the -- in terms of permitting, what is the significant permits required during the course of 2021 to hit your targeted kind of exploration spend? Or you still got things outstanding or are the permits mainly beyond that, that you need?

Yes. I would say the permitting situation in Peru has been -- I would not say improved, but normalized. And we have already adopted -- companies in Peru have already adapted to these new regulations and new requirements. So what I can tell you is that so far, we don't see a point of concern in terms of permitting for the year. We actually, in 2020, obtained certain permits ahead of time as is the case in Arcata and as is the case in Crespo. So right now, what we have in our plan is that we're going to be in certain permits that are important for Inmaculada, that's important in [indiscernible] permits. We are thinking that we're going to be getting those in March and May. So far, it means that we're going to get them on time. And some are not only for [indiscernible] to continue evaluating the potential expansion of the [indiscernible]. There's certain permits that are targeted to be obtained during, I would say, mostly the first half of the year. But so far, we believe that those are going to be achieved on time and, hopefully, sooner. So we had no major points of concern regarding permits this year to be able to comply with our drilling plants.

Okay. And then a follow-up on the kind of maybe summarizing your discussions around the drilling activity. When we look forward to the reserve and resource statement in the financial results, sounds like you'll deliver growth in reserves and resources. Inmaculada probably don't replace Pallancata, and San Jose is something stable. Is that the right way we should be interpreting the sort of preliminary results of the drilling activity? And I guess, will that likely yield a net increase in group reserves and resources year-on-year?

That's a good summary, Dan. What I can say, in Inmaculada, we are targeting to materially increase the reserves. We are also targeting to increase the resources. In the case of Pallancata, we have not been able to increase the resources. So we're not to see the depletion of the year production. But again, as I mentioned, with certain interesting findings, particularly with what we've seen in Corina, it will be amazing. So we're very excited with that. Now we need to focus more on the short term. And in the case of San Jose, we have -- we're probably going to see, yes, something similar, maybe want to be replenishing a little bit less than the production of the year because of the shift on the COVID restriction that we saw in the last quarter of the year. So maybe it's going a bit less than replenishing the resources. But I would say we're very encouraging signs for 2021, particularly this new drill hole that we are drilling in the Saavedra area. Saavedra is an area that was more characterized by a [ bridge ] of [ 60 ] relatively low grades and we have found this interesting that it is very, very thick, and the grades are also very high. So we're very encouraged with that as well as in many other targets, as I said, in Saavedra itself, [indiscernible] and certain other instructions within the mine. So we do expect that 2021 is going to be a year in which we can see an increase in our referred resource rating capital so as well. And we can turn that quickly into measure indicated and into reserves.

Okay. So hopefully, we'll see positive progression on a group basis.

[Operator Instructions] There are no -- I beg your pardon. We have one question from Ian Rossouw from Barclays.

Maybe just to follow up on the deal on [indiscernible]. Could you maybe just give us an update on the expectations on the feasibility study there? Is that still expected in Q2?

Absolutely. Well, I mean, I ask Ramón to cover that question.

Thank you, Ignacio. Thank you, Ian. What I can tell you, yes, is that the project is progressing very nicely. We are seeing -- most of the challenges with the time line that we are having are due to positive things. We have found additional resources very close to the original pit. So we're doing the work to try to incorporate them into the feasibility as well. We've made also significant breakthroughs during the month of December in the metallurgical process that could result in material improvement in the recovery, remembering that we are innovating here and developing a metallurgical process that doesn't exist really outside of China. So we're trying to be pioneers on that front, digging the type of deposit that we have on this [indiscernible]. We are also working with Ausenco to help us put together the overall feasibility study. So all very positive things. In addition to that, we've seen the increase in prices in [indiscernible], particularly [indiscernible] that is also helping a lot the results. And you have seen also recently China issuing new regulations, internal regulations that are also very supportive of higher long-term prices. And we hope that those are incorporated also by analysts soon. But to answer your question, you're right, we should be able to have towards the end of the first quarter of 2021 material information to share with you. Even if we don't have the feasibility ready and the feasibility could be laid low a couple of months, but our commitment to share material information with you in terms of CapEx, OpEx, size, et cetera will be met. So yes, you should expect to have very material information at the end of Q1 of this year.

Okay. Great. And just on the sort of new additional resources close to the sort of current deposit. Is that all within the permitting sort of regions? You don't need to sort of change permitting or extend permitting to be able to access that? Or it doesn't matter. You can just add it on towards the end of the life?

That is correct. We have both. We have found both. We have found an additional greenfield potential. We have also flown a geometry very close to the mine with potential for additional resources close to the permitted area. And we have found also additional resources inside the area that we are asking for permitting. So for those initial resources, those who would be part of the feasibility study, they are incorporated within the permitted area.

There are no for questions at this time. I would now like to turn the call back to Ignacio for any closing remarks.

Thank you very much, Margaret, and thank you very much, everybody, for participating in the call. Should you have any additional questions or comments, please feel free to contact directly Charlie Gordon at our London office. Have a great day. Goodbye.

Thank you. That concludes today's conference. Thank you for your participation, ladies and gentlemen. You may now disconnect.